10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

Commission File Number 0-21639

NCO GROUP, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA
(State or other jurisdiction of incorporation or organization) 23-2858652
(IRS Employer Identification Number)

507 Prudential Road, Horsham, Pennsylvania
(Address of principal executive offices)
19044
(Zip Code)

215-441-3000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Yes No

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

Large accelerated filer Accelerated filer Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No .

The number of shares outstanding of each of the issuer’s classes of common stock as of August 7, 2006 was: 32,403,082 shares of common stock, no par value.

NCO GROUP, INC.

INDEX

			PAGE
PART I - FINANCIAL INFORMATION
	Item 1.	FINANCIAL STATEMENTS (Unaudited)
		Consolidated Balance Sheets - June 30, 2006 and December 31, 2005	1
		Consolidated Statements of Income - Three and six months ended June 30, 2006 and 2005	2
		Consolidated Statements of Cash Flows - Three and six months ended June 30, 2006 and 2005	3
		Notes to Consolidated Financial Statements	4
	Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
	Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37
	Item 4.	CONTROLS AND PROCEDURES	37
PART II – OTHER INFORMATION			38
	Item 1.	LEGAL PROCEEDINGS
	Item 1A.	RISK FACTORS
	Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	Item 3.	DEFAULTS UPON SENIOR SECURITIES
	Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 5.	OTHER INFORMATION
	Item 6.	EXHIBITS
SIGNATURES			40

Part I. Financial Information

Item 1. Financial Statements

NCO GROUP, INC.

Consolidated Balance Sheets

(Amounts in thousands)

	June 30, 2006 (Unaudited)		December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	20,493	$	23,716
Accounts receivable, trade, net of allowance for doubtful accounts of $8,687 and $8,079, respectively		132,761		143,019
Purchased accounts receivable, current portion, net of allowance for impairment of $2,382 and $1,192, respectively		96,187		102,779
Deferred income taxes		7,260		10,918
Prepaid expenses and other current assets		47,657		42,854
Total current assets		304,358		323,286
Funds held on behalf of clients
Property and equipment, net		135,742		131,370
Other assets:
Goodwill		674,973		668,832
Other intangibles, net of accumulated amortization		36,063		41,695
Purchased accounts receivable, net of current portion		144,212		135,028
Deferred income taxes		3,546		4,737
Other assets		25,587		23,014
Total other assets		884,381		873,306
Total assets	$	1,324,481	$	1,327,962
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Long-term debt, current portion	$	42,004	$	45,600
Income taxes payable		12,239		4,531
Accounts payable		8,288		12,372
Accrued expenses		56,563		59,167
Accrued compensation and related expenses		27,874		26,120
Deferred revenue, current portion		4,864		3,909
Total current liabilities		151,832		151,699
Funds held on behalf of clients
Long-term liabilities:
Long-term debt, net of current portion		265,328		321,834
Deferred revenue, net of current portion		174		1,078
Deferred income taxes		63,871		57,709
Other long-term liabilities		16,014		17,885
Minority interest		51,105		34,643
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value, 5,000 shares authorized, no shares issued and outstanding		—		—
Common stock, no par value, 50,000 shares authorized, 32,388 and 32,176 shares issued and outstanding, respectively		477,678		477,238
Other comprehensive income		21,252		13,892
Deferred compensation		—		(4,658	)
Retained earnings		277,227		256,642
Total shareholders’ equity		776,157		743,114
Total liabilities and shareholders’ equity	$	1,324,481	$	1,327,962

See accompanying notes.

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NCO GROUP, INC.

Consolidated Statements of Income

(Unaudited)

(Amounts in thousands, except per share data)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Services	$	248,307		$	219,148		$	509,589		$	451,375
Portfolio		43,888			28,041			89,415			56,159
Portfolio sales		4,020			5,258			8,958			5,262
Total revenues		296,215			252,447			607,962			512,796
Operating costs and expenses:
Payroll and related expenses		153,660			122,524			315,050			250,255
Selling, general and administrative expenses		104,462			91,313			213,191			184,350
Restructuring charge		1,387			—			5,774			—
Depreciation and amortization expense		12,920			10,920			26,115			21,678
Total operating costs and expenses		272,429			224,757			560,130			456,283
Income from operations		23,786			27,690			47,832			56,513
Other income (expense):
Interest and investment income		727			726			1,590			1,460
Interest expense		(6,793	)		(4,867	)		(13,804	)		(10,042	)
Other income		—			(599	)		—			(506	)
Total other income (expense)		(6,066	)		(4,740	)		(12,214	)		(9,088	)
Income before income tax expense		17,720			22,950			35,618			47,425
Income tax expense		6,362			8,814			13,004			18,018
Income before minority interest		11,358			14,136			22,614			29,407
Minority interest		(1,313	)		(1	)		(2,029	)		(9	)
Net income	$	10,045		$	14,135		$	20,585		$	29,398
Net income per share:
Basic	$	0.31		$	0.44		$	0.64		$	0.92
Diluted	$	0.31		$	0.42		$	0.62		$	0.86
Weighted average shares outstanding:
Basic		32,348			32,101			32,294			32,090
Diluted		33,335			36,099			34,790			36,136

See accompanying notes.

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NCO GROUP, INC

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	For the Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	20,585		$	29,398
Adjustments to reconcile income from operations to net cash provided by operating activities:
Depreciation		20,253			17,422
Amortization of intangibles		5,862			4,256
Stock-based compensation		1,065			655
Amortization of deferred training asset		2,592			1,782
Provision for doubtful accounts		1,589			1,752
Allowance and impairment of purchased accounts receivable		1,190			642
Noncash interest		2,161			3,651
Gain on sale of purchased accounts receivable		(8,958	)		(5,258	)
Loss on disposal of property and equipment		351			—
Changes in non-operating income		—			(230	)
Minority interest		2,029			9
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash		—			900
Accounts receivable, trade		8,493			(17,602	)
Deferred income taxes		9,490			8,827
Bonus receivable		—			10,325
Other assets		(18,085	)		12,208
Accounts payable and accrued expenses		(7,636	)		7,966
Income taxes payable		19,765			141
Deferred revenue		51			(18,807	)
Other long-term liabilities		183			(209	)
Net cash provided by operating activities		60,980			57,828
Cash flows from investing activities:
Purchases of accounts receivable - see note 13		(56,416	)		(16,888	)
Collections applied to principal of purchased accounts receivable		49,263			31,408
Proceeds from sales and resales of purchased accounts receivable		13,659			6,374
Purchases of property and equipment		(24,326	)		(15,692	)
Net distribution from joint venture		—			1,140
Proceeds from notes receivable		591			615
Investment in subsidiary by minority interest		15,691			—
Distributions to minority interest		(2,283	)		—
Net cash paid for acquisitions and related costs		(2,972	)		(10,804	)
Net cash used in investing activities		(6,793	)		(3,847	)
Cash flows from financing activities:
Repayment of notes payable		(33,235	)		(20,511	)
Borrowings under notes payable		16,067			—
Repayment of borrowings under revolving credit agreement		(83,600	)		(37,500	)
Borrowings under revolving credit agreement		163,500			—
Repayment of convertible notes		(125,000	)		—
Payment of fees to acquire debt		(3	)		(1,279	)
Issuance of common stock		3,554			190
Net cash used in financing activities		(58,717	)		(59,100	)
Effect of exchange rate on cash		1,307			(614	)
Net decrease in cash and cash equivalents		(3,223	)		(5,733	)
Cash and cash equivalents at beginning of the period		23,716			26,334
Cash and cash equivalents at end of the period	$	20,493		$	20,601

See accompanying notes.

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NCO GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Operations:

NCO Group, Inc. is a holding company and conducts substantially all of its business operations through its subsidiaries (collectively, “the Company” or “NCO”). NCO is a leading global provider of business process outsourcing solutions, primarily focused on accounts receivable management (“ARM”) and customer relationship management (“CRM”). NCO provides services through approximately 100 offices in the United States, Canada, the United Kingdom, India, the Philippines, the Caribbean, and Panama. The Company provides services to more than 22,000 active clients including many of the Fortune 500, supporting a broad spectrum of industries, including financial services, telecommunications, healthcare, utilities, retail and commercial, transportation/logistics, education, technology and government services. These clients are primarily located throughout the United States, Canada, the United Kingdom, Europe, and Puerto Rico. The Company’s largest client during the six months ended June 30, 2006 was in the financial services sector and represented 9.8 percent of the Company’s consolidated revenue for the six months ended June 30, 2006. The Company also purchases and manages past due consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, utilities, healthcare companies, and other consumer-oriented companies.

The Company’s business consists of four operating divisions: ARM North America, CRM, Portfolio Management and ARM International.

2. Accounting Policies:

Interim Financial Information:

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals, except as otherwise disclosed herein) considered necessary for a fair presentation have been included. Because of the seasonal nature of the Company’s business, as well as the announced restructuring plan, operating results for the three-month and six-month periods ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Principles of Consolidation:

The consolidated financial statements include the accounts of the Company and all affiliated subsidiaries and entities controlled by the Company. All intercompany accounts and transactions have been eliminated.

Revenue Recognition:

ARM Contingency Fees:

ARM contingency fee revenue is recognized upon physical receipt of funds by NCO or its client.

ARM Contractual Services:

Fees for ARM contractual services are recognized as services are performed and earned under service arrangements with clients where fees are fixed or determinable and collectibility is reasonably assured.

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2. Accounting Policies (continued):

Revenue Recognition (continued):

CRM Hourly:

Revenue is recognized based on the billable hours of each CRM representative as defined in the client contract. The rate per billable hour charged is based on a predetermined contractual rate, as agreed in the underlying contract. The contractual rate can fluctuate based on certain pre-determined objective performance criteria related to quality and performance, reduced by any contractual performance penalties the client may be entitled to, both as measured on a monthly basis. The impact of the performance criteria and penalties on the rate per billable hour is continually updated as revenue is recognized.

CRM Performance-Based:

Under performance-based arrangements, the Company is paid by its customers based on achievement of certain levels of sales or other client-determined criteria specified in the client contract. The Company recognizes performance-based revenue by measuring its actual results against the performance criteria specified in the contracts. Amounts collected from customers prior to the performance of services are recorded as deferred revenues.

Training Revenue:

In connection with the provisions of certain inbound and outbound CRM services, the Company incurs costs to train its CRM representatives. Training programs relate to both program start-up training in connection with new CRM programs (“Start-up Training”) and on-going training for updates of existing CRM programs (“On-going Training”). The Company bills certain of its customers for the costs incurred under these training programs based on the terms in the contract. Training revenue is integral to the CRM revenue being generated over the course of a contract and cannot be separated as a discrete earning process under SEC Staff Accounting Bulletin No. 104. Start-up Training and On-going Training revenues are initially deferred and recognized over the shorter of the term of the customer contract, or the period to be benefited. Direct costs associated with providing Start-up Training and On-going Training, which consist of salary, benefit and travel costs, are also deferred and amortized over a time period consistent with the deferred training revenue. When a business relationship is terminated with one of the Company’s customers, the unamortized deferred training revenue and unamortized deferred direct costs associated with that customer are immediately recognized. At June 30, 2006, the balance of deferred training revenue was $5.0 million and the balance of deferred training costs was $4.0 million. All other un-reimbursed training costs, such as training due to attrition, are charged to expense as incurred.

Purchased Accounts Receivable:

The Company applies American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-3, “Accounting for Loans or Certain Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual versus expected cash flows over an investor’s initial investment in certain loans when such differences are attributable, at least in part, to credit quality.

The Company has maintained historical collection records for all of its purchased accounts receivable since 1991, as well as debtor records since 1986, which provides a reasonable basis for the Company’s judgment that it is probable that it will ultimately collect the recorded amount of its purchased accounts receivable plus a premium or yield. The historical collection amounts also provide a reasonable basis for determining the timing of the collections. The Company uses all available information to forecast the cash flows of its purchased accounts receivable including, but not limited to, historical collections, payment patterns on similar purchases, credit scores of the underlying debtors, seller’s credit policies, and location of the debtor.

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2. Accounting Policies (continued):

Revenue Recognition (continued):

Purchased Accounts Receivable (continued):

The Company acquires accounts receivable in groups or portfolios that are initially recorded at cost, which includes external costs of acquiring portfolios. Once a portfolio is acquired, the accounts in the portfolio are not changed, unless replaced, returned or sold. All acquired accounts receivable have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts receivable, and the amount paid for a portfolio of accounts receivable reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to each loan’s contractual terms. As such, the Company determines whether each portfolio of accounts receivable is to be accounted for individually or whether such accounts receivable will be aggregated based on common risk characteristics. The Company considers expected collections, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each portfolio of accounts receivable and subsequently aggregated pools of accounts receivable. The Company determines non-accretable difference, or the excess of the portfolio’s contractual principal over all cash flows expected at acquisition as an amount that should not be accreted. The remaining amount represents accretable yield, or the excess of the portfolio’s cash flows expected to be collected over the amount paid, and is accreted into earnings over the remaining life of the portfolio.

At acquisition, the Company derives an internal rate of return (“IRR”) based on the expected monthly collections over the estimated economic life of each portfolio of accounts receivable (typically up to seven years, based on the Company’s collection experience) compared to the original purchase price. Collections on the portfolios are allocated to revenue and principal reduction based on the estimated IRR for each portfolio of accounts receivable. Revenue on purchased accounts receivable is recorded monthly based on applying each portfolio’s effective IRR for the quarter to its carrying value. Over the life of a portfolio, the Company continues to estimate cash flows expected to be collected. The Company evaluates at the balance sheet date whether the present value of its portfolios determined using the effective interest rates has decreased, and if so, records an expense to establish a valuation allowance to maintain the original IRR established at acquisition. Any increase in actual or estimated cash flows expected to be collected is first used to reverse any existing valuation allowance for that portfolio, or aggregation of portfolios, and any remaining increases in cash flows are recognized prospectively through an increase in the IRR. The updated IRR then becomes the new benchmark for subsequent valuation allowance testing.

Portfolio Sales:

The Company accounts for proceeds from sales of portfolios of purchased accounts receivable above the remaining carrying value under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Revenue, net of associated costs, from these sales is recognized when the receivables are sold.

The Company applies a financial components approach. Generally, that approach focuses on control of each of the various retained or sold interests or liabilities in a given financial asset sale to conclude when a sale has actually occurred as compared to a mere financing, and the accounting for any related rights retained and/or duties committed to on an ongoing basis, including servicing. Under that approach, after a transfer of financial assets, an entity allocates a portion of its original cost of the assets to the assets sold in determining any gain or loss, and to any servicing assets it retains, such as servicing rights or rights to residual interests. Gain or loss is reported in the period of the transfer, and net of any liabilities it has incurred or will incur in the future. Assets retained are amortized over the appropriate useful life of the asset. If control has not been adequately transferred to the other party, the proceeds received are treated as financing and no gain or loss is recorded at the time of the transfer.

-6-

2. Accounting Policies (continued):

Credit Policy:

Management carefully monitors its client relationships in order to minimize the Company’s credit risk and assesses the likelihood of collection based on a number of factors including the client’s collection history and credit-worthiness. The Company maintains a reserve for potential collection losses when such losses are deemed to be probable.

The Company has two types of arrangements under which it collects its ARM contingency fee revenue. For certain clients, the Company remits funds collected on behalf of the client net of the related contingency fees while, for other clients, the Company remits gross funds collected on behalf of clients and bills the client separately for its contingency fees.

The Company generally does not require collateral and it does not charge finance fees on outstanding trade receivables. In many cases, in the event of collection delays from ARM clients, management may, at its discretion, change from the gross remittance method to the net remittance method. The Company also maintains a reserve for deposits on debtor accounts that may ultimately prove to have insufficient funds. Trade accounts receivable are written off to the allowances when collection appears unlikely.

Goodwill:

Goodwill represents the excess of purchase price over the fair market value of the net assets of the acquired businesses based on their respective fair values at the date of acquisition. Goodwill is tested for impairment each year on October 1, and as triggering events occur. The goodwill impairment test is performed at the reporting unit level and involves a two-step approach; the first step identifies any potential impairment and the second step measures the amount of impairment, if applicable. The first test for potential impairment uses a fair value based approach, whereby the implied fair value of a reporting unit’s goodwill is compared to its carrying amount; if the fair value is less than the carrying amount, the reporting unit’s goodwill would be considered impaired. Fair value estimates are based upon the discounted value of estimated cash flows. The Company does not believe that goodwill was impaired as of June 30, 2006 (note 8).

Other Intangible Assets:

Other intangible assets consist primarily of customer relationships that are amortized over five years using the straight-line method (note 8).

Stock Options:

Effective January 1, 2006, the Company adopted FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and supercedes APB Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123R requires that the cost of all share-based payments to employees, including stock option grants, be recognized in the financial statements over the vesting period based on their fair values. The standard applies to newly granted awards and previously granted awards that are not fully vested on the date of adoption. The Company adopted SFAS 123R using the modified prospective method, which requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS 123R. Accordingly, no prior periods have been restated.

As a result of adopting SFAS 123R on January 1, 2006, the Company’s income before income taxes and net income for the three months ended June 30, 2006 are $148,000 and $94,000 lower, respectively, than if it had continued to account for share based compensation under APB 25. The Company’s income before income taxes and net income for the six months ended June 30, 2006 are $254,000 and $160,000 lower, respectively, as a result of adopting SFAS 123R, which had a minimal impact on basic and diluted earnings per share for the three months ended June 30, 2006 and for the six months ended June 30, 2006. Also, in connection with the adoption of SFAS 123R, the unearned stock-based compensation balance of $4.7 million was reclassified to common stock as of January 1, 2006.

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2. Accounting Policies (continued):

Stock Options (continued):

Prior to January 1, 2006, the Company accounted for stock option grants in accordance with APB 25 and related interpretations. Under APB 25, because the exercise price of the stock options equaled the fair value of the underlying common stock on the date of grant, no compensation cost was recognized. In accordance with SFAS 123, “Accounting for Stock-Based Compensation,” the Company did not recognize compensation cost based on the fair value of the options granted at the grant date. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date, net income and net income per share would have been reduced to the pro forma amounts indicated in the following table (amounts in thousands, except per share amounts):

	For the Three Months Ended June 30, 2005		For the Six Months Ended June 30, 2005
Net income – as reported	$	14,135	$	29,398
Pro forma compensation cost, net of taxes		594		1,178
Net income – pro forma	$	13,541	$	28,220
Net income per share – as reported:
Basic	$	0.44	$	0.92
Diluted	$	0.42	$	0.86
Net income per share – pro forma:
Basic	$	0.42	$	0.88
Diluted	$	0.40	$	0.83

During the three and six months ended June 30, 2005, compensation expense of $313,000 and $655,000, respectively was recorded for restricted stock units.

On December 29, 2005, the Company accelerated the vesting of outstanding unvested stock options that have an exercise price equal to or greater than $17.25 per share, referred to as Eligible Options. Any shares received upon the exercise of Eligible Options are restricted and may not be sold prior to the date on which the Eligible Options would have been exercisable under the original terms. As a result of the acceleration, options to purchase 944,308 shares of our common stock became immediately exercisable. All other terms and conditions applicable to the Eligible Options remain unchanged. All terms and conditions of all options that are not Eligible Options remain unchanged. The purpose of the acceleration was to eliminate future compensation expense associated with the Eligible Options of approximately $3.9 million, net of taxes, that would have otherwise been recognized subsequent to our adoption of SFAS 123R on January 1, 2006. 

Income Taxes:

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Deferred taxes have not been provided on the cumulative undistributed earnings of foreign subsidiaries because such amounts are expected to be reinvested indefinitely.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

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2. Accounting Policies (continued):

Use of Estimates (continued):

In the ordinary course of accounting for purchased accounts receivable, estimates are made by management as to the amount and timing of future cash flows expected from each portfolio. The estimated future cash flow of each portfolio is used to compute the IRR for the portfolio, both in the case of any increases in expected cash flows, or to compute impairment or allowances, in the case of decreases in expected cash flows. The IRR is used to allocate collections between revenue and principal reduction of the carrying values of the purchased accounts receivable.

On an ongoing basis, the Company compares the historical trends of each portfolio to projected collections. Future projected collections are then increased or decreased based on the actual cumulative performance of each portfolio. Management reviews each portfolio’s adjusted projected collections to determine if further upward or downward adjustment is warranted. Management regularly reviews the trends in collection patterns and uses its reasonable best efforts to improve the collections of under-performing portfolios. However, actual results will differ from these estimates and a material change in these estimates could occur within one reporting period (note 6).

Derivative Financial Instruments:

The Company selectively uses derivative financial instruments to manage interest costs and minimize currency exchange risk. The Company does not hold derivatives for trading purposes. While these derivative financial instruments are subject to fluctuations in value, these fluctuations are generally offset by the value of the underlying exposures being hedged. The Company minimizes the risk of credit loss by entering into these agreements with major financial institutions that have high credit ratings. The Company accounts for its derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) which requires companies to recognize all of their derivative instruments as either assets or liabilities in the balance sheet at fair value.

The Company is exposed to foreign currency fluctuations relating to its operations in Canada, the United Kingdom and the Philippines. In order to partially hedge cash flow exposure, the Company periodically enters into forward exchange contracts in order to minimize the impact of currency fluctuations on transactions and cash flows. The Company is exposed to interest rate fluctuations relating to its long-term debt. To manage this interest rate risk, the Company enters into interest rate caps. These contracts are designated as cash flow hedges and recorded at their fair value on the accompanying balance sheets. Changes in the fair value of a cash flow hedge, to the extent that the hedge is effective, are recorded, net of taxes, in other comprehensive income, until earnings are affected by the variability of the hedged cash flows. Cash flow hedge ineffectiveness, defined as the extent that the changes in fair value of the derivative exceed the variability of cash flows of the forecasted transaction, is recorded currently in the statement of income (note 12).

The Company has certain non-recourse debt relating to its purchased accounts receivable operations that contain embedded derivative instruments. The embedded derivatives are not hedge instruments and, accordingly, changes in their estimated fair value are reported as other income (expense) in the accompanying statements of income. The embedded derivatives are included in long-term debt on the accompanying balance sheets because they are not separable from the notes payable and they have the same counterparty (note 9).

Reclassifications:

Certain amounts for the three and six months ended June 30, 2005 have been reclassified for comparative purposes.

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3. Restructuring Charges:

In conjunction with the acquisition of Risk Management Alternatives Parent Corp. (“RMA”) (note 4) and streamlining the cost structure of the Company’s legacy operations, the Company recorded total restructuring charges of $15.4 million over the twelve month period ended June 30, 2006, of which $1.4 million and $5.8 million were recorded during the three and six months ended June 30, 2006, respectively. These charges primarily related to the elimination of certain redundant facilities and severance costs. The Company expects to take additional charges of approximately $2.1 million to $2.6 million in the remainder of 2006, which are expected to be recorded in the ARM North America and ARM International segments.

The following presents the activity in the accruals recorded for restructuring charges (amounts in thousands):

	Leases			Severance			Total
Balance at December 31, 2005	$	4,325		$	1,591		$	5,916
Accruals		5,089			685			5,774
Cash payments		(4,761	)		(885	)		(5,646	)
Leasehold improvement write-off		(298	)		—			(298	)
Balance at June 30, 2006	$	4,355		$	1,391		$	5,746

4. Business Combinations:

The following acquisitions have been accounted for under the purchase method of accounting. As part of the purchase accounting, the Company recorded accruals for acquisition-related expenses. These accruals included professional fees related to the acquisition, severance costs, lease costs and other acquisition-related expenses.

On September 12, 2005, the Company acquired substantially all of the operating assets, including purchased portfolio assets, of RMA, a provider of accounts receivable management services and purchaser of accounts receivable, for $117.6 million in cash and the assumption of certain liabilities. The Company funded the purchase principally with financing from its senior credit facility. The purchase price included approximately $51.0 million for RMA’s purchased portfolio assets, which was funded with $35.7 million of non-recourse financing. In conjunction with the acquisition, on July 7, 2005, RMA and all of its domestic subsidiaries filed for protection under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court for the Northern District of Ohio Eastern Division. The transaction was consummated under Sections 363 and 365 of the U.S. Bankruptcy Code. The Company allocated $16.3 million of the purchase price to the customer relationships and recorded goodwill of $39.2 million, which is deductible for tax purposes, based on preliminary estimates. From December 31, 2005, through June 30, 2006, the Company revised its allocation of the fair market value of the acquired assets and liabilities, which resulted in an increase in goodwill of $1.7 million. The Company has not finalized its purchase accounting related to the RMA acquisition, and has used estimates in determining certain allocations including the value of customer relationships, property and equipment, and certain assumed liabilities. In connection with the RMA acquisition, the Company recorded restructuring liabilities of $8.7 million under an exit plan the Company began to formulate prior to the acquisition date. These liabilities principally relate to severance costs related to certain redundant personnel who were scheduled to be terminated upon completion of the acquisition. As a result of the acquisition, the Company expects to expand its current customer base, strengthen its relationship with certain existing customers, expand its portfolio base, and reduce the cost of operations through economies of scale. Therefore, the Company believes the preliminary allocation of a portion of the purchase price to goodwill is appropriate.

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4. Business Combinations (continued):

The following is a preliminary allocation of the purchase price to the RMA assets acquired and liabilities assumed (amounts in thousands):

Purchase price	$	117,558
Transaction costs		3,143
Accounts receivable		(25,151	)
Purchased accounts receivable		(50,954	)
Customer relationships		(16,250	)
Property and equipment		(10,011	)
Deferred tax asset		(4,629	)
Other assets		(3,306	)
Accrued expenses and other liabilities		19,892
Accrued acquisition costs		8,747
Foreign currency translation of goodwill		144
Goodwill	$	39,183

The following presents the activity in the accruals recorded for RMA acquisition related expenses (amounts in thousands):

	Severance			Other			Total
Balance at December 31, 2005	$	2,988		$	10		$	2,998
Cash payments		(1,799	)		(2	)		(1,801	)
Balance at June 30, 2006	$	1,189		$	8		$	1,197

On September 1, 2005, the Company acquired the stock of seven wholly owned subsidiaries of Marlin Integrated Capital Holding Corporation (“Marlin”), a company that specializes in purchasing accounts receivable in the healthcare and utility sectors, for $89.9 million in two transactions. The first transaction included the acquisition of a portfolio of purchased accounts receivable for $66.3 million. The second transaction included the acquisition of certain portfolio related assets for approximately $22.1 million. A $3.0 million payment was deferred pending the renewal of certain forward-flow agreements. One renewal occurred in December 2005, resulting in an additional payment of $1.5 million. The second renewal was completed in the first quarter of 2006, resulting in a final payment of $1.5 million.

The acquisition of the purchased accounts receivable portfolio was structured as an equity sharing arrangement with the Company’s non-recourse lender under the Company’s non-recourse credit facility. The lender originally invested $32.0 million in the acquisition, representing a 50 percent interest in the purchased accounts receivable portfolio assets. The Company granted an option to the lender to purchase up to 50 percent of the other non-portfolio assets and liabilities acquired from Marlin. The option was exercised and the transaction was completed in the first quarter of 2006. The Company received $12.7 million for the 50 percent interest in the non-portfolio assets and liabilities. The Company funded its 50 percent portion of the acquisition with financing from its senior credit facility. By design, the Company controls the primary activities of the entity and as such has recorded a minority interest on its balance sheet for the lender’s equity interest. The Company has consolidated the results of operations and recorded the portion of the results of the Marlin acquisition it does not own as a minority interest, net of taxes, on the statement of income.

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4. Business Combinations (continued):

The Company allocated $5.0 million of the purchase price to the customer relationships and recorded goodwill of $19.2 million, which is deductible for tax purposes, based on preliminary estimates. The Company is in the process of obtaining a third party appraisal, which involves time needed for information gathering, verification and review. The Company does not expect to finalize the appraisal until the third quarter of 2006. From December 31, 2005, through June 30, 2006, the Company revised its allocation of the fair market value of the acquired assets and liabilities, which resulted in an increase in goodwill of $1.6 million. This increase was principally due to a deferred purchase payment. As a result of the acquisition, the Company expects to expand its portfolio base and its presence in the healthcare and utility sectors, and reduce the cost of operations through economies of scale. Therefore, the Company believes the allocation of a portion of the purchase price to goodwill is appropriate. The following is a preliminary allocation of the purchase price to the assets acquired and liabilities assumed (amounts in thousands):

Purchase price	$	89,929
Purchased accounts receivable		(66,276	)
Customer relationships		(5,000	)
Other assets		(4,247	)
Accrued expenses		4,812
Goodwill	$	19,218

Prior to the acquisition, Portfolio Management had a 50 percent ownership interest in a joint venture, InoVision-MEDCLR NCOP Ventures, LLC (“the Joint Venture”) with IMNV Holdings, LLC (“IMNV”), one of the acquired subsidiaries of Marlin. The Joint Venture was established in 2001 to purchase utility, medical and various other small balance accounts receivable. In connection with the acquisition, the Joint Venture was terminated and the Company’s interest was included in the purchase accounting for the entity.

On May 25, 2005, the Company acquired Creative Marketing Strategies (“CMS”), a provider of CRM services, for $5.9 million. The purchase price included the contribution of a note receivable for $5.2 million that the Company received in 2000 in consideration for assets sold to a management-led group as part of a divestiture. The Company allocated $5.9 million of the purchase price to the customer relationships and did not record goodwill.

On April 2, 2004, the Company completed the acquisition of RMH Teleservices, Inc. (“RMH”) a provider of CRM services. In connection with the RMH acquisition, the Company originally recorded restructuring liabilities of $36.9 million under an exit plan the Company began to formulate prior to the acquisition date. During the six months ended June 30, 2006, the Company made payments of $978,000, and the balance of liabilities outstanding at June 30, 2006 was $6.1 million. The Company expects to pay the remaining balance through 2012.

The following summarizes the unaudited pro forma results of operations, assuming the RMA acquisition described above occurred as of January 1, 2005. The pro forma information presented does not include the CMS and Marlin acquisitions because they were not considered significant business combinations. The pro forma information is provided for informational purposes only. It is based on historical information, and does not necessarily reflect the actual results that would have occurred, nor is it indicative of future results of operations of the consolidated entities (amounts in thousands, except per share data):

	For the Three Months Ended June 30, 2005		For the Six Months Ended June 30, 2005
Revenue	$	301,294	$	619,237
Net income	$	8,727	$	22,885
Earnings per share – basic	$	0.27	$	0.71
Earnings per share – diluted	$	0.27	$	0.68

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5. Comprehensive Income:

Comprehensive income consists of net income from operations plus certain changes in assets and liabilities, including the effects of intercompany transactions, that are not included in net income but are reported as a separate component of shareholders’ equity. The Company’s comprehensive income was as follows (amounts in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
Net income	$	10,045		$	14,135		$	20,585		$	29,398
Other comprehensive income (loss):
Foreign currency translation adjustment		4,315			(1,747	)		4,229			(2,350	)
Change in fair value of foreign currency cash flow hedges, net of taxes		4,396			218			4,411			(11	)
Change in fair value of interest rate cap, net of taxes		76			—			76			—
Net gains on foreign currency cash flow hedges reclassified into earnings, net of taxes		(919	)		(49	)		(1,356	)		(41	)
Comprehensive income	$	17,913		$	12,557		$	27,945		$	26,996

The foreign currency translation adjustment was attributable to changes in the exchange rates used to translate the financial statements of the Company’s Canadian, United Kingdom and Philippine operations into U.S. dollars. During the three months ended June 30, 2006 and 2005, the Company recognized a pre-tax net gain of $6.9 million and $337,000, respectively, related to the foreign currency cash flow hedges. During the six months ended June 30, 2006 and 2005, the Company recognized a pre-tax net gain of $7.0 million and $20,000, respectively, related to the foreign currency cash flow hedges.

6. Purchased Accounts Receivable:

Portfolio Management, ARM International and the Canadian division of ARM North America purchase defaulted consumer accounts receivable at a discount from the contractual principal balance. As of June 30, 2006, the carrying values of Portfolio Management’s, ARM International’s and ARM North America’s purchased accounts receivable were $234.8 million, $4.6 million and $1.0 million, respectively. The total outstanding balance due, representing the original undiscounted contractual amount less collections since acquisition, was $39.0 billion and $37.1 billion at June 30, 2006 and December 31, 2005, respectively. The following summarizes the change in the carrying amount of the purchased accounts receivable (amounts in thousands):

	For the Six Months Ended June 30, 2006			For the Year Ended December 31, 2005
Balance at beginning of period	$	237,807		$	138,857
Purchases:
Portfolios acquired in business combinations		—			117,230
Cash purchases		56,416			45,743
Non-cash purchases (note 13)		1,025			17,213
Collections		(137,440	)		(200,703	)
Proceeds from portfolio sales and resales applied to carrying value		(4,701	)		(3,723	)
Revenue recognized		88,177			131,138
Allowance and impairment		(1,190	)		(1,240	)
Dissolution of securitization		—			(6,399	)
Foreign currency translation adjustment		305			(309	)
Balance at end of period	$	240,399		$	237,807

-13-

6. Purchased Accounts Receivable (continued):

In the ordinary course of purchasing portfolios of accounts receivable, Portfolio Management may sell accounts from an acquired portfolio shortly after they were purchased. The proceeds from these resales are essentially equal to, and applied against, the carrying value of the accounts. Therefore, there is no gain recorded on these resales. For the three months ended June 30, 2006, proceeds from portfolio resales were $2.0 million, and there were no proceeds from portfolio resales during the three months ended June 30, 2005. For the six months ended June 30, 2006 and 2005, proceeds from portfolio resales were $3.7 million and $1.0 million, respectively.

In 2005, Portfolio Management began an on-going process to identify and sell certain aged and bankruptcy status portfolios of accounts receivable that have a low probability of payment under our collection platform. These portfolios have a low remaining carrying value. Proceeds from sales above the remaining carrying value are recorded as revenue. During the three months ended June 30, 2006 and 2005, Portfolio Management sold portfolios of accounts receivable for $4.2 million and $5.4 million with a carrying value of $156,000 and $107,000, and recorded revenue of $4.0 million and $5.3 million, respectively. During the six months ended June 30, 2006 and 2005, Portfolio Management sold portfolios of accounts receivable for $10.1 million and $5.4 million with a carrying value of $1.0 million and $107,000, and recorded revenue of $9.0 million and $5.3 million, respectively.

The following table presents the change in the allowance for impairment of purchased accounts receivable accounted for under SOP 03-3 (amounts in thousands):

	For the Six Months Ended June 30, 2006			For the Year Ended December 31, 2005
Balance at beginning of period	$	1,192		$	—
Additions		1,457			1,598
Recoveries		(279	)		(406	)
Foreign currency translation adjustment		12			—
Balance at end of period	$	2,382		$	1,192

Accretable yield represents the excess of the cash flows expected to be collected during the life of the portfolio over the initial investment in the portfolio. The following presents the change in accretable yield (amounts in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
Balance at beginning of period	$	281,593		$	163,073		$	288,935		$	160,083
Additions		43,311			22,174			61,479			29,836
Accretion recognized as revenue		(43,275	)		(27,598	)		(88,177	)		(55,319	)
Reclassifications from non-accretable difference		32,506			12,943			51,859			35,992
Foreign currency translation adjustment		158			(38	)		197			(38	)
Balance at end of period	$	314,293		$	170,554		$	314,293		$	170,554

During the three months ended June 30, 2006 and 2005, the Company purchased accounts receivable with a cost of $42.3 million and $20.6 million, respectively, that had contractually required payments receivable at the date of acquisition of $1.6 billion and $3.8 billion, respectively, and expected cash flows at the date of acquisition of $85.6 million and $42.8 million, respectively. During the six months ended June 30, 2006 and 2005, the Company purchased accounts receivable with a cost of $57.4 million and $29.2 million, respectively, that had contractually required payments receivable at the date of acquisition of $2.3 billion and $3.9 billion, respectively, and estimated cash flows at the date of acquisition of $119.0 million and $59.1 million, respectively.

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7. Funds Held on Behalf of Clients:

In the course of the Company’s subsidiaries’ regular business activities as a provider of accounts receivable management services, the Company receives clients’ funds arising from the collection of accounts placed with the Company. These funds are placed in segregated cash accounts and are generally remitted to clients within 30 days. Funds held on behalf of clients of $48.5 million and $52.3 million at June 30, 2006 and December 31, 2005, respectively, have been shown net of their offsetting liability for financial statement presentation.

8. Intangible Assets:

Goodwill:

SFAS 142 requires goodwill to be allocated and tested at the reporting unit level. The Company’s reporting units are ARM North America, CRM, Portfolio Management and ARM International, and had the following goodwill (amounts in thousands):

	June 30, 2006		December 31, 2005
ARM North America	$	540,529	$	539,733
CRM		91,187		89,799
Portfolio Management		35,160		33,572
ARM International		8,097		5,728
Total	$	674,973	$	668,832

The changes in ARM North America’s and ARM International’s goodwill balances from December 31, 2005 to June 30, 2006, were due principally to the exchange rate used for foreign currency translation, and changes in the allocation of the fair market value of the acquired assets and liabilities related to the RMA acquisition (note 4). The change in CRM’s goodwill balance was due principally to the exchange rate used for foreign currency translation. The change in Portfolio Management’s goodwill balance was due to a deferred purchase payment related to the Marlin acquisition (note 4). The allocation of the purchase price to goodwill related to the two acquisitions in September 2005 is tentative and may change.

Other Intangible Assets:

Other intangible assets consist primarily of customer relationships. The following represents the other intangible assets (amounts in thousands):

	June 30, 2006				December 31, 2005
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	55,916	$	20,206	$	55,917	$	14,614
Other intangible assets		398		45		1,297		905
Total	$	56,314	$	20,251	$	57,214	$	15,519

-15-

8. Intangible Assets (continued):

The Company recorded amortization expense for all other intangible assets of $2.9 million and $2.2 million during the three months ended June 30, 2006 and 2005, respectively, and $5.9 million and $4.3 million during the six months ended June 30, 2006 and 2005, respectively. The following represents the Company’s expected amortization expense from these other intangible assets over the next five years (amounts in thousands):

For the Years Ended December 31,	Estimated Amortization Expense
2006	$	11,263
2007		10,911
2008		9,511
2009		6,511
2010		3,499

9. Long-Term Debt:

Long-term debt consisted of the following (amounts in thousands):

	June 30, 2006			December 31, 2005
Senior credit facility	$	250,400		$	170,500
Convertible notes		—			125,000
Non-recourse credit facility		55,744			65,995
Other		1,188			5,939
Less current portion		(42,004	)		(45,600	)
	$	265,328		$	321,834

Senior Credit Facility:

In June 2005, the Company amended and restated its senior credit facility (“the Credit Facility”) with various participating lenders. The amended and restated Credit Facility is structured as a $300 million revolving credit facility with an option to allow the Company to increase its borrowing capacity to a maximum of $400 million, subject to obtaining commitments for such incremental capacity from existing or new lenders. The Credit Facility requires no minimum principal payments until June 18, 2010, the maturity date. At June 30, 2006, the balance outstanding on the Credit Facility was $250.4 million. The availability of the Credit Facility is reduced by any unused letters of credit ($4.3 million at June 30, 2006). As of June 30, 2006, the Company had $45.3 million of remaining availability under the Credit Facility.

All borrowings bear interest at a rate equal to either, at the option of the Company, the prime rate (8.25 percent at June 30, 2006) or LIBOR (5.35 percent at June 30, 2006) plus a margin of 0.75 percent to 1.50 percent, which is determined quarterly based upon the Company’s consolidated funded debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) ratio. The Company is charged a fee on the unused portion of the Credit Facility of 0.20 percent to 0.30 percent depending on the Company’s consolidated funded debt to EBITDA ratio. The effective interest rate on the Credit Facility was approximately 5.94 percent and 4.80 percent for the three months ended June 30, 2006 and 2005, respectively, and 5.72 percent and 4.76 percent for the six months ended June 30, 2006 and 2005, respectively.

-16-

9. Long-Term Debt (continued):

Senior Credit Facility (continued):

Borrowings under the Credit Facility are collateralized by substantially all the assets of the Company. The Credit Facility contains certain financial and other covenants such as maintaining net worth and funded debt to EBITDA requirements, and includes restrictions on, among other things, acquisitions, the incurrence of additional debt, investments, disposition of assets and transactions with affiliates. If an event of default, such as failure to comply with covenants, or change of control, were to occur under the Credit Facility, the lenders would be entitled to declare all amounts outstanding immediately due and payable and foreclose on the pledged assets. As of June 30, 2006, the Company was in compliance with all required financial covenants and the Company was not aware of any events of default. On July 13, 2006, the Company amended the Credit Facility to allow it to enter into the Merger Agreement (note 16).

Convertible Notes:

The Company had $125.0 million aggregate principal amount of 4.75 percent Convertible Subordinated Notes that were due April 15, 2006 (“the Notes”). The Notes were convertible into NCO common stock at a conversion price of $32.92 per share. Upon maturity, the Company repaid the Notes using borrowings under its senior credit facility.

Non-recourse Credit Facility:

On June 30, 2005, Portfolio Management amended and restated its non-recourse credit facility with a lender and extended its existing exclusivity agreement with such lender through June 30, 2009. The new agreement provides that all purchases of accounts receivable by Portfolio Management with a purchase price in excess of $1.0 million are first offered to the lender for financing at its discretion. If the lender chooses to participate in the financing of a portfolio of accounts receivable, the financing may be structured, depending on the size and nature of the portfolio to be purchased, either as a borrowing arrangement similar to the original agreement, or under various equity sharing arrangements ranging from 25 percent to 50 percent equity provided by the lender. The lender will finance non-equity borrowings at 70 percent of the purchase price, unless otherwise negotiated, with floating interest at a rate equal to LIBOR plus 2.50 percent. As additional return, the lender receives 28 percent of the residual cash flow, unless otherwise negotiated, which is defined as all cash collections after servicing fees, floating rate interest, repayment of the borrowing, and the initial investment by Portfolio Management, including interest. These borrowings are non-recourse to the Company and are due two years from the date of each respective loan. The Company may terminate the agreement at any time after June 2007, upon the change of control, for a cost of $250,000 for each remaining month under the agreement. The previous financing arrangement as described below remains in effect for outstanding loans as of June 30, 2005.

Under the prior agreement, Portfolio Management had a four-year exclusivity agreement with a lender that originally was to expire in August 2006. The agreement stipulated that all purchases of accounts receivable by Portfolio Management with a purchase price in excess of $4.0 million must be first offered to the lender for financing at its discretion. The agreement had no minimum or maximum credit authorization. If the lender chose to participate in the financing of a portfolio of accounts receivable, the financing was at 90 percent of the purchase price, unless otherwise negotiated, with floating interest at the prime rate (8.25 percent at June 30, 2006) plus 3.25 percent. Each borrowing is due two years after the loan was made. Debt service payments equal collections less servicing fees and interest expense. As additional return, the lender receives 40 percent of the residual cash flow on loans made pursuant to the prior agreement, unless otherwise negotiated, which is defined as all cash collections after servicing fees, floating rate interest, repayment of the note, and the initial investment by Portfolio Management, including interest.

Borrowings under these financing agreements are non-recourse to the Company, except for the assets within the entities established in connection with the financing agreement. These loan agreements contain a collections performance requirements, among other covenants, that, if not met, provides for cross-collateralization with any other portfolios financed through the agreements, in addition to other remedies.

-17-

9. Long-term Debt (continued):

Non-recourse Credit Facility (continued):

Total debt outstanding under this facility was $55.7 million and $66.0 million as of June 30, 2006 and December 31, 2005, respectively, which included $4.6 million and $5.6 million, respectively, of accrued residual interest. The effective interest rate on these loans, including the residual interest component, was approximately 19.9 percent and 22.0 percent for the three months ended June 30, 2006 and 2005, respectively, and 19.1 percent and 22.6 percent for the six months ended June 30, 2006 and 2005, respectively. As of June 30, 2006, Portfolio Management was in compliance with all required covenants.

As noted above, upon full satisfaction of the notes payable and the return of the initial investment by Portfolio Management, including interest, as it relates to each purchase of accounts receivable under the agreements, the Company is obligated to pay the lender a contingent payment amount equal to its residual interest in the collections received, typically ranging from 28 percent to 40 percent, net of servicing fees and other related charges. The contingent payment has been accounted for as an embedded derivative in accordance with SFAS 133. At issuance, the loan proceeds received were allocated to the note payable and the embedded derivative. The resulting original issue discount on the note payable is amortized to interest expense through maturity using the effective interest method. At June 30, 2006 and December 31, 2005, the estimated fair value of the embedded derivative was $4.6 million and $5.6 million, respectively. The embedded derivative for each portfolio purchase is subject to market rate revaluation each period. Absent a readily available market for such embedded derivatives, the Company bases its revaluation on similar current period portfolio purchases’ underlying yields. During the three months ended June 30, 2006, $30,000 was recorded as “other income” on the statement of income to reflect the revaluation of the embedded derivatives. During the six months ended June 30, 2006, $296,000 was recorded as “other income” on the statement of income to reflect the revaluation of the embedded derivatives.

As part of the exclusivity agreement described above, Portfolio Management has a joint venture agreement (“the Agreement”) with the lender of the non-recourse credit facility, whereby Portfolio Management owns 65 percent of the joint venture and is the managing member, and the lender owns the remaining 35 percent interest. Each party will finance the joint venture based on predetermined percentages as negotiated for each portfolio purchase. Cash flows from the joint venture are based on the mix of partner loans and equity contributions to the joint venture. The equity share of the new agreement replaces the residual cash flows under the former agreement. The Agreement was established to purchase accounts receivable at the discretion of Portfolio Management, and the joint venture is consolidated into the Company’s results of operations with a minority interest representing the lender’s equity ownership. At June 30, 2006 and December 31, 2005, the Company had $7.9 million and $5.8 million, respectively, of debt outstanding under the joint venture, which is included in the non-recourse credit facility debt outstanding disclosed above.

10. Earnings Per Share:

Basic earnings per share (“EPS”) was computed by dividing the net income for the three and six months ended June 30, 2006 and 2005, by the weighted average number of common shares outstanding. Diluted EPS was computed by dividing the adjusted net income for the three and six months ended June 30, 2006 and 2005, by the weighted average number of common shares outstanding plus all common share equivalents. Net income is adjusted to add back interest expense on the convertible debt, net of taxes, if the convertible debt is dilutive. The interest expense on the convertible debt, net of taxes, included in the diluted EPS calculation was $159,000 and $914,000 for the three months ended June 30, 2006 and 2005, respectively, and $1.1 million and $1.8 million for the six months ended June 30, 2006 and 2005, respectively. Outstanding options, warrants, and convertible securities have been utilized in calculating diluted amounts only when their effect would be dilutive. The convertible debt matured on April 15, 2006 (note 9).

-18-

10. Earnings Per Share (continued):

The reconciliation of basic to diluted weighted average shares outstanding was as follows (amounts in thousands):

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2006	2005	2006	2005
Basic	32,348	32,101	32,294	32,090
Dilutive effect of:
Convertible debt	626	3,797	2,211	3,797
Options and restricted stock units	334	100	266	147
Warrants	27	101	19	102
Diluted	33,335	36,099	34,790	36,136

11. Stock-based Compensation:

Stock Options:

The Company maintains stock option plans and an equity incentive plan for certain employees under which fixed price stock options may be granted and the option price is generally not less than the fair value of a share of the underlying stock at the date of grant (collectively, the “NCO Option Plans”). Under the NCO Option Plans, approximately 5.3 million shares of the Company’s common stock are reserved for issuance upon the exercise of options, including those outstanding at June 30, 2006. Option terms are generally 10 years, with options generally becoming exercisable ratably over three years, or one year for outside directors, from the date of grant.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the following table. Expected volatility is based on a blend of implied and historical volatility of the Company’s common stock. The Company uses historical data on exercises of stock options and other factors to estimate the expected term of the share-based payments granted. The risk free rate is based on the U.S. Treasury yield curve in effect at the date of grant. The fair value of each common stock option granted was estimated using the following weighted-average assumptions:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2006		2005		2006		2005
Risk-free interest rate	4.5	%	3.9	%	4.5	%	3.5	%
Expected life in years	5.4		5.4		5.4		5.4
Volatility factor	37.4	%	38.3	%	37.4	%	37.2	%
Dividend yield	None		None		None		None

-19-

11. Stock-based Compensation (continued):

Stock Options (continued):

The following summarizes the activity of the NCO Option Plans for the six months ended June 30, 2006 (amounts in thousands, except per share amounts):

	Number of Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2006	4,387		$	23.65
Granted	294			17.27
Exercised	(200	)		18.28
Forfeited	(60	)		23.86
Expired	(26	)		27.41
Outstanding at June 30, 2006	4,395		$	23.47	5.3 years	$	18,720
Vested or expected to vest at June 30, 2006	4,350		$	23.53	5.2 years	$	18,310
Exercisable at June 30, 2006	4,116		$	23.89	5.0 years	$	16,169

The weighted-average fair value at date of grant of a common stock option granted under the Company’s option plans during the three months ended June 30, 2006 and 2005 was $10.71 and $7.69, respectively, and during the six months ended June 30, 2006 and 2005 was $7.20 and $7.92, respectively. The total intrinsic value (market value on date of exercise less exercise price) of options exercised during the three and six months ended June 30, 2006 was $485,000 and $1.2 million, respectively. There was no excess cash tax benefit classified as a financing cash inflow for the six months ended June 30, 2006.

Cash received from option exercises under all share-based payment arrangements for the three months ended June 30, 2006 was $1.3 million and for the six months ended June 30, 2006 was $3.7 million. The actual tax benefit recognized for the tax deductions from option exercises under all share-based payment arrangements for the three months ended June 30, 2006 and 2005 were $115,000 and $8,000, respectively; and for the six months ended June 30, 2006 and 2005 were $385,000 and $25,000, respectively.

Compensation expense recognized related to stock option awards for the three and six months ended June 30, 2006 was $148,000 and $254,000, respectively.

At June 30, 2006, there was approximately $1.6 million of total unrecognized pre-tax compensation cost related to non-vested stock options, assuming an annual forfeiture rate of 5.1 percent. This cost is expected to be recognized straight-line over a weighted-average period of approximately three years.

Restricted Stock Units:

The Company maintains an equity incentive plan under which certain employees and directors (“Participant”) may be granted restricted share unit awards in the Company’s common stock (the “Restricted Stock Plan”). Awards of restricted share units are valued by reference to shares of common stock that entitle a Participant to receive, upon the settlement of the unit, one share of common stock for each unit. The awards vest over multiple cliff vesting periods and/or based on meeting performance-based targets, and do not have voting rights.

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11. Stock-based Compensation (continued):

Restricted Stock Units (continued):

The following summarizes the activity of the Restricted Stock Plan for the six months ended June 30, 2006 (shares in thousands):

	Number of Non-vested Share Unit Awards		Weighted Average Grant Date Fair Value
Unvested awards at January 1, 2006	278		$	21.34
Granted	17			25.69
Awards vested	(16	)		19.50
Forfeited	—			—
Unvested awards at June 30, 2006	279		$	21.71

Compensation expense recognized related to restricted share unit awards for the three months ended June 30, 2006 and 2005 was $433,000 and $313,000, respectively and for the six months ended June 30, 2006 and 2005 was $927,000 and $655,000, respectively.

At June 30, 2006, there was $4.2 million of total unrecognized pre-tax compensation cost related to non-vested restricted share unit awards. This cost is expected to be recognized straight-line over a weighted-average period of approximately three years.

12. Derivative Financial Instruments:

The Company enters into forward exchange contracts to minimize the impact of currency fluctuations on transactions and cash flows. These transactions are designated as cash flow hedges. The Company had forward exchange contracts for the purchase of $259.6 million of Canadian dollars outstanding at June 30, 2006, which mature throughout the remainder of 2006 and 2007. The Company also had a forward exchange contract for the purchase of $4.5 million of Australian dollars outstanding at June 30, 2006, which matured in July 2006. For the three and six months ended June 30, 2006, the Company had net gains of $4.4 million, of which gains of $1.4 million were reclassified into earnings. The impact of the settlement of the Company’s cash flow hedges was recorded in “payroll and related expenses” and “selling, general and administrative expenses” in the statement of income. At June 30, 2006, the fair market value of all outstanding cash flow hedges was an asset of $5.3 million, which is included in “other assets.” All of the accumulated income and loss in other comprehensive income related to cash flow hedges at June 30, 2006, is expected to be reclassified into earnings within the next 12 months.

The Company’s non-recourse credit facility relating to purchased accounts receivable contains contingent payments that are accounted for as embedded derivatives. The contingent payments are up to 40 percent of collections received after principal and interest, unless otherwise negotiated, net of servicing fees and other related charges. At issuance, the loan proceeds received were allocated to the note payable and the embedded derivative. The resulting original issue discount on the note payable is amortized to interest expense through maturity using the effective interest method. At June 30, 2006 and December 31, 2005, the estimated fair value of the embedded derivative was $4.6 million and $5.6 million, respectively. The embedded derivative for each portfolio purchase is subject to market rate revaluation each period. Absent a readily available market for such embedded derivatives, the Company bases its revaluation on similar current period portfolio purchases’ underlying yields. During the three and six months ended June 30, 2006, $30,000 and $296,000, respectively, was recorded as “other income” on the statement of income to reflect the revaluation of the embedded derivatives.

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12. Derivative Financial Instruments (continued):

The Company enters into interest rate cap contracts to minimize the impact of LIBOR fluctuations on transactions and cash flows. These transactions are designated as cash flow hedges. The Company had interest rate caps covering a notional amount of $160.0 million at June 30, 2006, with a weighted average LIBOR cap rate of 6.00%. The aggregate notional amount of the interest rate caps is subject to quarterly reductions that will reduce the notional amount to $100.0 million by maturity on January 6, 2009. The original cost of the interest rate caps is amortized on a straight-line basis over its term. For the three and six months ended June 30, 2006, the Company recorded $20,000 and $39,000, respectively, of interest expense from the amortization of the original cost the interest rate caps. The interest rate caps are adjusted to their fair market value each period and the difference, if any, is recorded on the balance sheet in “other comprehensive income.” For the three and six months ended June 30, 2006, the Company recorded $76,000, net of taxes, in “other comprehensive income” for the changes in the fair market value of the interest rate caps. As of June 30, 2006, the fair market value of all outstanding interest rate caps was $313,000, which is included as an asset in the balance sheet as of June 30, 2006.

13. Supplemental Cash Flow Information:

The following are supplemental disclosures of cash flow information (amounts in thousands):

	For the Six Months Ended June 30,
	2006		2005
Non-cash investing and financing activities:
Fair value of assets acquired	$	—	$	9,417
Liabilities assumed from acquisitions		—		2,884
Minority interest contributions		1,025		—
Non-recourse borrowings to purchase accounts receivable		—		12,403
Contribution of note receivable for acquisition		—		5,154
Disposal of fixed assets		—		1,128

14. Commitments and Contingencies:

Purchase Commitments:

The Company enters into non-cancelable agreements with various telecommunications companies, a foreign labor subcontractor in India and other vendors that require minimum purchase commitments. These agreements expire between 2006 and 2009. The following represents the future minimum payments, by year and in the aggregate, under non-cancelable purchase commitments (amounts in thousands):

2006	$	45,137
2007		42,324
2008		12,752
2009		1,967
	$	102,180

The Company incurred $16.6 million and $12.0 million of expense in connection with these purchase commitments for the three months ended June 30, 2006 and 2005, respectively, and $32.2 million and $23.6 million for the six months ended June 30, 2006 and 2005, respectively.

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14. Commitments and Contingencies (continued):

Forward-Flow Agreements:

As of June 30, 2006, the Company had four fixed price agreements, or forward-flows, that obligate the Company to purchase, on a monthly basis, portfolios of charged-off accounts receivable meeting certain criteria. The Company is obligated to purchase accounts receivable ranging from approximately $115,000 to $710,000 per month that expire between October 2006 and August 2008.

Aditionally, in connection with the Marlin acquisition, the Company acquired several forward-flows with institutions to purchase medical and utility portfolios of charged-off accounts receivable meeting certain criteria, aggregating approximately $2.2 million per month, that expire between September 2006 and January 2011. The terms of the agreements vary; they can be terminated with either 30 days, 60 days or 90 days written notice.

Litigation and Investigations:

The Company is party, from time to time, to various legal proceedings, regulatory investigations and tax examinations incidental to its business. The Company continually monitors these legal proceedings, regulatory investigations and tax examinations to determine the impact and any required accruals.

15. Segment Reporting:

As of June 30, 2006, the Company’s business consisted of four operating divisions: ARM North America, CRM, Portfolio Management and ARM International, each of which constitutes a segment for financial reporting purposes. The accounting policies of the segments are the same as those described in note 2, “Accounting Policies.”

ARM North America provides accounts receivable management services to consumer and commercial accounts for all market sectors including financial services, healthcare, retail and commercial, telecommunications, utilities, education, and government. ARM North America serves clients of all sizes in local, regional, and national markets in the United States and Canada. In addition to traditional accounts receivable collections, these services include developing the client relationship beyond bad debt recovery and delinquency management, and delivering cost-effective accounts receivable solutions to all market sectors. The Company’s acquisition of the operating assets of RMA located in North America was included in the ARM North America segment. ARM North America had total assets, net of any intercompany balances, of $812.0 million and $826.2 million at June 30, 2006 and December 31, 2005, respectively. ARM North America had capital expenditures of $15.4 million and $10.7 million for the six months ended June 30, 2006 and 2005, respectively. ARM North America also provides accounts receivable management services to Portfolio Management. ARM North America recorded revenue of $28.9 million and $20.1 million for these services for the three months ended June 30, 2006 and 2005, respectively, and $61.2 million and $36.6 million for the six months ended June 30, 2006 and 2005, respectively. Included in ARM North America’s intercompany revenue for the three months ended June 30, 2006 and 2005, was $1.5 million and $1.9 million, respectively, of commissions from the sale of portfolios by Portfolio Management, and $3.8 million and $1.9 million for the six months ended June 30, 2006 and 2005, respectively. Beginning in the second quarter of 2006, ARM North America provided accounts receivable management services to ARM International and recorded revenue of $267,000 for the three and six months ended June 30, 2006.

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15. Segment Reporting (continued):

The CRM division provides customer relationship management services to clients in the United States and Canada through offices in the United States, Canada, the Philippines, Panama and Barbados. CRM had total assets, net of any intercompany balances, of $208.2 million and $201.7 million at June 30, 2006 and December 31, 2005, respectively. CRM had capital expenditures of $8.1 million and $4.7 million for the six months ended June 30, 2006 and 2005, respectively.

Portfolio Management purchases and manages defaulted consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, utilities, healthcare companies and other consumer oriented companies. The Company’s acquisition of the purchased portfolio assets of RMA and the acquisition of Marlin was included in the Portfolio Management segment. Portfolio Management had total assets, net of any intercompany balances, of $285.0 million and $283.7 million at June 30, 2006 and December 31, 2005, respectively.

ARM International provides accounts receivable management services across the United Kingdom. The Company’s acquisition of the operating assets of RMA located in the United Kingdom was included in the ARM International segment. ARM International had total assets, net of any intercompany balances, of $19.3 million and $16.4 million at June 30, 2006 and December 31, 2005, respectively. ARM International had capital expenditures of $892,000 and $230,000 for the six months ended June 30, 2006 and 2005, respectively. ARM International also provides accounts receivable management services to Portfolio Management. ARM International recorded revenue of $44,000 and $79,000 for these services for the three months ended June 30, 2006 and 2005, respectively, and $95,000 and $152,000 for these services for the six months ended June 30, 2006 and 2005, respectively.

The following tables represent the revenue, payroll and related expenses, selling, general, and administrative expenses, and EBITDA for each segment. EBITDA is used by the Company’s management to measure the segments’ operating performance and is not intended to report the segments’ operating results in conformity with accounting principles generally accepted in the United States.

	For the Three Months Ended June 30, 2006 (amounts in thousands)
	Revenue			Payroll and Related Expenses			Selling, General and Admin. Expenses			Restructuring Charge		EBITDA
ARM North America	$	211,788		$	98,721		$	90,310		$	1,332	$	21,425
CRM		60,081			49,203			10,940			—		(62	)
Portfolio Management		47,601			2,105			30,494			—		15,002
ARM International		5,967			3,898			1,673			55		341
Eliminations		(29,222	)		(267	)		(28,955	)		—		—
Total	$	296,215		$	153,660		$	104,462		$	1,387	$	36,706

	For the Three Months Ended June 30, 2005 (amounts in thousands)
	Revenue			Payroll and Related Expenses		Selling, General and Admin. Expenses			EBITDA
ARM North America	$	192,496		$	86,707	$	81,220		$	24,569
CRM		43,787			32,489		8,263			3,035
Portfolio Management		33,021			1,211		21,038			10,772
ARM International		3,308			2,117		957			234
Eliminations		(20,165	)		—		(20,165	)		—
Total	$	252,447		$	122,524	$	91,313		$	38,610

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15. Segment Reporting (continued):

	For the Six Months Ended June 30, 2006 (amounts in thousands)
	Revenue			Payroll and Related Expenses			Selling, General and Admin. Expenses			Restructuring Charge		EBITDA
ARM North America	$	440,893		$	206,058		$	184,898		$	4,767	$	45,170
CRM		119,407			97,673			22,391			269		(926	)
Portfolio Management		97,740			4,263			63,773			—		29,704
ARM International		11,503			7,323			3,443			738		(1	)
Eliminations		(61,581	)		(267	)		(61,314	)		—		—
Total	$	607,962		$	315,050		$	213,191		$	5,774	$	73,947

	For the Six Months Ended June 30, 2005 (amounts in thousands)
	Revenue			Payroll and Related Expenses		Selling, General and Admin. Expenses			EBITDA
ARM North America	$	390,953		$	176,847	$	164,453		$	49,653
CRM		91,403			66,820		16,095			8,488
Portfolio Management		60,823			2,413		38,613			19,797
ARM International		6,370			4,175		1,942			253
Eliminations		(36,753	)		—		(36,753	)		—
Total	$	512,796		$	250,255	$	184,350		$	78,191

16. Subsequent Event:

On July 21, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Collect Holdings, Inc. (“Parent”), an affiliate of One Equity Partners (“OEP”), and Parent’s wholly-owned subsidiary, Collect Acquisition Corp. (“Acquisition Corp.”), pursuant to which Acquisition Corp. will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation. Michael J. Barrist, Chairman, President and Chief Executive Officer of the Company, has agreed to contribute a portion of his shares to Parent in exchange for capital stock of Parent and will continue as chief executive officer of the surviving corporation.

Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock, no par value, of the Company, other than any shares owned by the Company, Parent or Acquisition Corp., will be canceled and will be converted automatically into the right to receive $27.50 in cash, without interest.

The Merger is expected to be completed in the fourth quarter of 2006, subject to receipt of shareholder approval, closing of the debt financing and customary regulatory approvals as well as the satisfaction of other customary closing conditions.

The Company may terminate the Merger Agreement under certain circumstances, including if its board of directors determines in good faith that it has received an unsolicited bona fide Superior Proposal, and otherwise complies with certain terms of the Merger Agreement. In connection with such termination, the Company must pay a fee of $35 million to Parent. In certain other circumstances, the Merger Agreement provides for Parent or the Company to pay to the other party a fee of $35 million upon termination of the Merger Agreement. OEP has guaranteed the obligations of Parent to pay the termination fee, if applicable. The Company is also required to reimburse Parent for up to $5.0 million of its out-of-pocket expenses if the shareholders do not approve the Merger.

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Item 2.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q, other than historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations there under), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, without limitation, statements as to the Company’s expected future results of operations, the Company’s growth strategy, fluctuations in quarterly operating results, the integration of acquisitions, the restructuring charges, the final outcome of the Company’s litigation with its former landlord, the effects of terrorist attacks, war and the economy on the Company’s business, expected increases in operating efficiencies, anticipated trends in the business process outsourcing industry, referred to as BPO, estimates of future cash flows and allowances for impairments of purchased accounts receivable, estimates of goodwill impairments and amortization expense of other intangible assets, the effects of legal proceedings, regulatory investigations and tax examinations, the effects of changes in accounting pronouncements, and statements as to trends or the Company’s or management’s beliefs, expectations and opinions. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this report, certain risks, uncertainties and other factors, including, without limitation, the risk that the Company will not be able to achieve expected future results of operations, the risk that the Company will not be able to implement its growth strategy as and when planned, risks associated with growth and acquisitions, including the acquisition of the assets of Risk Management Alternatives Parent Corp., referred to as RMA, and all of RMA’s subsidiaries, and the acquisition of subsidiaries from Marlin Integrated Capital Holding Corporation, referred to as Marlin, the risk that the Company will not be able to realize operating efficiencies in the integration of its acquisitions, fluctuations in quarterly operating results, risks related to the timing of contracts, risks related to purchased accounts receivable, risks related to possible impairment of goodwill and other intangible assets, risks related to union organizing efforts at the Company’s facilities, risks associated with technology, risks related to the implementation of the Company’s Enterprise Resource Planning system, referred to as ERP, risks related to the final outcome of the Company’s litigation with its former landlord, risks related to the Company’s litigation, regulatory investigations and tax examinations, risks related to past or possible future terrorist attacks, risks related to the threat or outbreak of war or hostilities, risks related to the domestic and international economies, the risk that the Company will not be able to improve margins, risks related to the Company’s international operations, risks related to the availability of qualified employees, particularly in new or more cost-effective locations, risks related to currency fluctuations, risks related to reliance on independent telecommunications service providers, risks related to changes in government regulations affecting the teleservices and telecommunications industries, risks related to competition from other outside providers of BPO services and the in-house operations of existing and potential clients, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements. The Company may not be able to complete the proposed merger transaction on the current terms or other acceptable terms, or at all, due to a number of factors, including the failure to obtain approval of its shareholders, regulatory approvals or to satisfy other customary closing conditions.

The Company disclaims any intent or obligation to update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur, or otherwise.

The Company’s website is www.ncogroup.com. The Company makes available, free of charge, on its website, its Annual Report on Form 10-K. In addition, the Company will provide additional paper or electronic copies of its Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission, without charge except for exhibits to the report. Requests should be directed to: Investor Relations, NCO Group, Inc., 507 Prudential Rd., Horsham, PA 19044.

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The information on the website listed above is not and should not be considered part of this Quarterly Report on Form 10-Q and is not incorporated by reference in this document. This website is and is only intended to be an inactive textual reference.

Overview

We are a holding company and conduct substantially all of our business operations through our subsidiaries. We are a global provider of business process outsourcing services, referred to as BPO, primarily focused on accounts receivable management, referred to as ARM, and customer relationship management, referred to as CRM, serving a wide range of clients in North America and abroad through our global network of approximately 100 offices. We also purchase and manage past due consumer accounts receivable from consumer creditors such as banks, finance companies, retail merchants, utilities, healthcare companies, and other consumer-oriented companies.

Effective January 1, 2006, we adopted FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” referred to as SFAS 123R. SFAS 123R requires that the cost of all share-based payments to employees, including stock option grants, be recognized in the financial statements based on their fair values. The standard applies to newly granted awards and previously granted awards that are not fully vested on the date of adoption. Prior to January 1, 2006, we accounted for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” referred to as APB 25, and related interpretations. Under APB 25, because the exercise price of the stock options equaled the fair value of the underlying common stock on the date of grant, no compensation cost was recognized.

We adopted SFAS 123R using the modified prospective method, which requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption. Compensation expense recognized related to stock options for the three and six months ended June 30, 2006 was $148,000 and $254,000, respectively. At June 30, 2006, there was $1.6 million of total unrecognized pre-tax compensation cost related to non-vested stock options, which is expected to be recognized straight-line over a weighted-average period of approximately three years.

On December 29, 2005, we accelerated the vesting of outstanding unvested stock options that have an exercise price equal to or greater than $17.25 per share, referred to as Eligible Options. Any shares received upon the exercise of Eligible Options are restricted and may not be sold prior to the date on which the Eligible Options would have been exercisable under the original terms. As a result of the acceleration, options to purchase 944,308 shares of our common stock became immediately exercisable. All other terms and conditions applicable to the Eligible Options remain unchanged. All terms and conditions of all options that are not Eligible Options remain unchanged. The purpose of the acceleration was to eliminate future compensation expense associated with the Eligible Options of approximately $3.9 million, net of taxes that would have otherwise been recognized subsequent to our adoption of SFAS 123R on January 1, 2006.

During the first half of 2006, in conjunction with the acquisition of Risk Management Alternatives Parent Corp., referred to as RMA, and streamlining the cost structure of our legacy operations, we recorded restructuring charges of $5.8 million. These charges primarily related to the elimination of certain redundant facilities and severance costs. We expect to take additional charges of approximately $2.1 million to $2.6 million in the remainder of 2006, which are expected to be recorded in the ARM North America and ARM International segments.

On September 12, 2005, we acquired substantially all of the operating assets, including purchased portfolio assets, of RMA, a provider of accounts receivable management services and purchaser of accounts receivable, for $117.6 million in cash and the assumption of certain liabilities. We funded the purchase principally with financing from our senior credit facility. The purchase price included approximately $51.0 million for RMA’s purchased portfolio assets, which was funded with $35.7 million of non-recourse financing. The transaction was consummated under Sections 363 and 365 of the U.S. Bankruptcy Code.

On September 1, 2005, we acquired the stock of seven wholly owned subsidiaries of Marlin Integrated Capital Holding Corporation, referred to as Marlin, a company that specializes in purchasing accounts receivable in the healthcare and utility sectors, for $89.9 million. The acquisition included purchased accounts receivable portfolio assets, several favorable forward-flow contracts and certain related operating assets. The acquisition was structured as an equity sharing arrangement under our non-recourse credit facility. We funded our 50 percent portion of the acquisition with financing from our senior credit facility. Prior to the acquisition, Portfolio Management had a 50 percent ownership interest in a joint venture, InoVision-MEDCLR NCOP Ventures, LLC with IMNV Holdings, LLC, a subsidiary of Marlin.

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On May 25, 2005, we acquired Creative Marketing Strategies, referred to as CMS, a provider of CRM services, for $5.9 million. The purchase price included the contribution of a note receivable for $5.2 million that we received in 2000 in consideration for assets sold to a management-led group as part of a divestiture.

On July 21, 2006, we entered into an Agreement and Plan of Merger, referred to as the Merger Agreement, with Collect Holdings, Inc., referred to as Parent, an affiliate of One Equity Partners, referred to as OEP, and Parent's wholly-owned subsidiary, Collect Acquisition Corp., referred to as Acquisition Corp., pursuant to which Acquisition Corp. will merge with and into the Company, referred to as the Merger, with the Company continuing as the surviving corporation. Michael J. Barrist, Chairman, our President and Chief Executive Officer, has agreed to contribute a portion of his shares to Parent in exchange for capital stock of Parent and will continue as chief executive officer of the surviving corporation.

Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of our common stock, no par value, other than any shares owned by the Company, Parent or Acquisition Corp., will be canceled and will be converted automatically into the right to receive $27.50 in cash, without interest.

The Merger is expected to be completed in the fourth quarter of 2006, subject to receipt of shareholder approval, closing of the debt financing and customary regulatory approvals as well as the satisfaction of other customary closing conditions.

Three Months Ended June 30, 2006, Compared to Three Months Ended June 30, 2005

Revenue. Revenue increased $43.8 million, or 17.3 percent, to $296.2 million for the three months ended June 30, 2006, from $252.4 million for the three months ended June 30, 2005.

Our operations are organized into four market specific divisions that include: ARM North America, CRM, Portfolio Management, and ARM International. For the three months ended June 30, 2006, these divisions accounted for $211.8 million, $60.1 million, $47.6 million, and $6.0 million of revenue, respectively. Included in ARM North America’s revenue was $29.2 million of intercompany revenue from Portfolio Management and ARM International, which was eliminated upon consolidation, and included in ARM International’s revenue was $44,000 of intercompany revenue from Portfolio Management, which was eliminated upon consolidation. For the three months ended June 30, 2005, the ARM North America, CRM, Portfolio Management and ARM International divisions accounted for $192.5 million, $43.8 million, $33.0 million and $3.3 million of revenue, respectively. Included in ARM North America’s revenue was $20.1 million of intercompany revenue from Portfolio Management, which was eliminated upon consolidation, and included in ARM International’s revenue was $73,000 of intercompany revenue from Portfolio Management, which was eliminated upon consolidation.

ARM North America’s revenue increased $19.3 million, or 10.0 percent, to $211.8 million for the three months ended June 30, 2006, from $192.5 million for the three months ended June 30, 2005. The increase in ARM North America’s revenue was primarily attributable to the acquisition of RMA and an increase in fees from collection services performed for Portfolio Management. Included in the intercompany service fees for the three months ended June 30, 2006 and 2005, was $1.5 million and $1.9 million, respectively, of commissions from the sale of accounts receivable by Portfolio Management.

Revenue for the CRM division increased $16.3 million, or 37.2 percent, to $60.1 million for the three months ended June 30, 2006, from $43.8 million for the three months ended June 30, 2005. The increase in CRM’s revenue was primarily due to the continuing implementation of new contracts that began during the second half of 2005 and into 2006. This was offset partially by the previously disclosed loss of business from a telecommunications client resulting from changes in the telecommunications laws in 2004.

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Portfolio Management’s revenue increased $14.6 million, or 44.2 percent, to $47.6 million for the three months ended June 30, 2006, from $33.0 million for the three months ended June 30, 2005. The increase primarily represents additional revenue from portfolio assets acquired throughout 2005 and the first half of 2006, including the RMA portfolio and Marlin portfolio acquisitions in September 2005. Portfolio Management’s collections, excluding all portfolio sales, increased $23.1 million, or 55.0 percent, to $65.1 million for the three months ended June 30, 2006, from $42.0 million for the three months ended June 30, 2005. Portfolio Management’s revenue represented 67 percent of collections, excluding all portfolio sales for the three months ended June 30, 2006, as compared to 66 percent of collections, excluding all portfolio sales for the three months ended June 30, 2005. The increase in collections was primarily attributable to the acquisitions of the RMA and Marlin portfolios.

In 2005, Portfolio Management began an on-going process to identify and sell certain aged portfolios of accounts receivable that have a low probability of payment on our platform and a low remaining carrying value. For the three months ended June 30, 2006 and 2005, Portfolio Management recorded $4.0 million and $5.3 million, respectively, of revenue in connection with these sales.

ARM International’s revenue increased $2.7 million, or 80.4 percent, to $6.0 million for the three months ended June 30, 2006, from $3.3 million for the three months ended June 30, 2005. The increase in ARM International’s revenue was primarily attributable to the acquisition of the international operations of RMA.

Payroll and related expenses. Payroll and related expenses increased $31.2 million to $153.7 million for the three months ended June 30, 2006, from $122.5 million for the three months ended June 30, 2005, and increased as a percentage of revenue to 51.9 percent from 48.5 percent.

ARM North America’s payroll and related expenses increased $12.0 million to $98.7 million for the three months ended June 30, 2006, from $86.7 million for the three months ended June 30, 2005, and increased as a percentage of revenue to 46.6 percent from 45.0 percent. Payroll and related expenses as a percentage of revenue increased primarily due to the additional payroll expense from the acquisition of RMA.

CRM’s payroll and related expenses increased $16.7 million to $49.2 million for the three months ended June 30, 2006, from $32.5 million for the three months ended June 30, 2005, and increased as a percentage of revenue to 81.9 percent from 74.2 percent. The increase in payroll and related expenses as a percentage of revenue was primarily attributable to the increased expenses associated with implementing new clients in advance of generating the resulting revenue.

Portfolio Management’s payroll and related expenses increased $894,000 to $2.1 million for the three months ended June 30, 2006, from $1.2 million for the three months ended June 30, 2005, and increased as a percentage of revenue to 4.4 percent from 3.7 percent. Portfolio Management outsources all of the collection services to ARM North America and, therefore, has a relatively small fixed payroll cost structure. The increase in payroll and related expenses was principally due to the acquisition of Marlin.

ARM International’s payroll and related expenses increased $1.8 million to $3.9 million for the three months ended June 30, 2006, from $2.1 million for the three months ended June 30, 2005, and increased as a percentage of revenue to 65.3 percent from 64.0 percent. The increase in payroll and related expenses as a percentage of revenue was primarily attributable to additional labor required to work on new placements, as well as additional collection efforts on existing purchased accounts receivable.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $13.2 million to $104.5 million for the three months ended June 30, 2006, from $91.3 million for the three months ended June 30, 2005, but decreased as a percentage of revenue to 35.3 percent from 36.2 percent.

ARM North America’s selling, general and administrative expenses increased $9.1 million to $90.3 million for the three months ended June 30, 2006, from $81.2 million for the three months ended June 30, 2005, and increased as a percentage of revenue to 42.6 percent from 42.2 percent. The increase in selling, general and administrative expenses as a percentage of revenue was primarily attributable to a $1.4 million federal excise tax refund, $478,000 of charges related to the proposed merger and $176,000 of charges related to the integration of RMA acquisition.

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CRM’s selling, general and administrative expenses increased $2.6 million to $10.9 million for the three months ended June 30, 2006, from $8.3 million for the three months ended June 30, 2005, but decreased as a percentage of revenue to 18.2 percent from 18.9 percent. The decrease in selling, general and administrative expenses as a percentage of revenue was primarily attributable to the increased utilization of call center capacity as a result of the continuing implementation of new contracts.

Portfolio Management’s selling, general and administrative expenses increased $9.5 million to $30.5 million for the three months ended June 30, 2006, from $21.0 million for the three months ended June 30, 2005, and increased as a percentage of revenue to 64.1 percent from 63.7 percent. The increase was due primarily to increased servicing fees from ARM North America related to the acquisitions of Marlin and RMA.

ARM International’s selling, general and administrative expenses increased $716,000 to $1.7 million for the three months ended June 30, 2006, from $957,000 for the three months ended June 30, 2005, but decreased slightly as a percentage of revenue to 28.0 percent from 28.9 percent. The decrease in selling, general and administrative expenses as a percentage of revenue was primarily attributable to the ongoing integration of the RMA acquisition. Partially offsetting this decrease were charges of $154,000 related to the integration of the RMA acquisition.

Restructuring charge. During the three months ended June 30, 2006, we incurred restructuring charges of $1.4 million related to the restructuring of our legacy operations to streamline our cost structure, in conjunction with the RMA acquisition. The charges consisted primarily of costs associated with the closing of redundant facilities and severance. We expect to record additional restructuring charges of approximately $2.1 million to $2.6 million during the remainder of 2006, which are expected to be recorded in the ARM North America and ARM International segments.

Depreciation and amortization. Depreciation and amortization increased to $12.9 million for the three months ended June 30, 2006, from $10.9 million for the three months ended June 30, 2005. The increase was attributable to the amortization of the customer relationships acquired in connection with acquisitions in 2005, as well as higher depreciation on additions to property and equipment during the latter half of 2005 and the first half of 2006.

Other income (expense). Interest expense increased to $6.8 million for the three months ended June 30, 2006, from $4.9 million for the three months ended June 30, 2005. The increase was attributable to higher principal balances as a result of borrowings made against the senior credit facility for the acquisitions in September 2005 and Portfolio Management’s additional non-recourse borrowings to purchase accounts receivable, as well as higher interest rates.

Income tax expense. Income tax expense for the three months ended June 30, 2006, decreased to $6.4 million, or 35.9 percent of income before income tax expense, from $8.8 million, or 38.4 percent of income before income tax expense, for the three months ended June 30, 2005. The decrease in the effective tax rate was primarily attributable to the increase in the percentage of earnings from the Portfolio Management division, which has a lower effective tax rate than the other divisions.

Six Months Ended June 30, 2006, Compared to Six Months Ended June 30, 2005

Revenue. Revenue increased $95.2 million, or 18.6 percent, to $608.0 million for the six months ended June 30, 2006, from $512.8 million for the six months ended June 30, 2005.

For the six months ended June 30, 2006, our ARM North America, CRM, Portfolio Management, and ARM International divisions accounted for $440.9 million, $119.4 million, $97.7 million, and $11.5 million of revenue, respectively. Included in ARM North America’s revenue was $61.5 million of intercompany revenue from Portfolio Management and ARM International, which was eliminated upon consolidation, and included in ARM International’s revenue was $95,000 of intercompany revenue from Portfolio Management, which was eliminated upon consolidation. For the six months ended June 30, 2005, the ARM North America, CRM, Portfolio Management and ARM International divisions accounted for $391.0 million, $91.4 million, $60.8 million and $6.4 million of revenue, respectively. Included in ARM North America’s revenue was $36.6 million of intercompany revenue from Portfolio Management, which was eliminated upon consolidation, and included in ARM International’s revenue was $152,000 of intercompany revenue from Portfolio Management, which was eliminated upon consolidation.

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ARM North America’s revenue increased $49.9 million, or 12.8 percent, to $440.9 million for the six months ended June 30, 2006, from $391.0 million for the six months ended June 30, 2005. The increase in ARM North America’s revenue was primarily attributable to the acquisition of RMA and an increase in fees from collection services performed for Portfolio Management. Included in the intercompany service fees for the six months ended June 30, 2006 and 2005, was $3.8 million and $1.9 million, respectively, of commissions from the sale of accounts receivable by Portfolio Management.

Revenue for the CRM division increased $28.0 million to $119.4 million for the six months ended June 30, 2006, compared to $91.4 million for the same period a year ago. The increase in CRM’s revenue was primarily due to the continuing implementation of new contracts that began during the second half of 2005 and into 2006. This was offset partially by the previously disclosed loss of business from a telecommunications client resulting from changes in the telecommunications laws in 2004.

Portfolio Management’s revenue increased $36.9 million, or 60.7 percent, to $97.7 million for the six months ended June 30, 2006, from $60.8 million for the six months ended June 30, 2005. The increase primarily represents additional revenue from portfolio assets acquired throughout 2005 and the first half of 2006, including the RMA portfolio and Marlin portfolio acquisitions in September 2005. Portfolio Management’s collections, excluding all portfolio sales, increased $50.7 million, or 59.2 percent, to $136.4 million for the six months ended June 30, 2006, from $85.7 million for the six months ended June 30, 2005. Portfolio Management’s revenue represented 65 percent of collections, excluding all portfolio sales, for the six months ended June 30, 2006 and 2005. The increase in collections was primarily attributable to the acquisitions of the RMA and Marlin portfolios.

In 2005, Portfolio Management began an on-going process to identify and sell certain aged portfolios of accounts receivable that have a low probability of payment on our platform and a low remaining carrying value. For the six months ended June 30, 2006 and 2005, Portfolio Management recorded $9.0 million and $5.3 million, respectively, of revenue in connection with these sales.

ARM International’s revenue increased $5.1 million, or 80.6 percent, to $11.5 million for the six months ended June 30, 2006, from $6.4 million for the six months ended June 30, 2005. The increase in ARM International’s revenue was primarily attributable to the acquisition of the international operations of RMA.

Payroll and related expenses. Payroll and related expenses increased $64.8 million to $315.1 million for the six months ended June 30, 2006, from $250.3 million for the six months ended June 30, 2005, and increased as a percentage of revenue to 51.8 percent from 48.8 percent.

ARM North America’s payroll and related expenses increased $29.3 million to $206.1 million for the six months ended June 30, 2006, from $176.8 million for the six months ended June 30, 2005, and increased as a percentage of revenue to 46.7 percent from 45.2 percent. Payroll and related expenses as a percentage of revenue increased primarily due to the additional payroll expense from the acquisition of RMA.

CRM’s payroll and related expenses increased $30.9 million to $97.7 million for the six months ended June 30, 2006, from $66.8 million for the six months ended June 30, 2005, and increased as a percentage of revenue to 81.8 percent from 73.1 percent. The increase in payroll and related expenses as a percentage of revenue was primarily attributable to the increased expenses associated with implementing new clients in advance of generating the resulting revenue.

Portfolio Management’s payroll and related expenses increased $1.9 million to $4.3 million for the six months ended June 30, 2006, from $2.4 million for the six months ended June 30, 2005, and increased as a percentage of revenue to 4.4 percent from 4.0 percent. Portfolio Management outsources all of the collection services to ARM North America and, therefore, has a relatively small fixed payroll cost structure. The increase in payroll and related expenses was principally due to the acquisition of Marlin.

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ARM International’s payroll and related expenses increased $3.1 million to $7.3 million for the six months ended June 30, 2006, from $4.2 million for the six months ended June 30, 2005, but decreased as a percentage of revenue to 63.7 percent from 65.5 percent. The decrease in payroll and related expenses as a percentage of revenue was primarily attributable to the effective management of labor following the restructuring activities in this division.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $28.8 million to $213.2 million for the six months ended June 30, 2006, from $184.4 million for the six months ended June 30, 2005, but decreased as a percentage of revenue to 35.1 percent from 35.9 percent.

ARM North America’s selling, general and administrative expenses increased $20.5 million to $185.0 million for the six months ended June 30, 2006, from $164.5 million for the six months ended June 30, 2005, but decreased as a percentage of revenue to 41.9 percent from 42.1 percent. The decrease in selling, general and administrative expenses as a percentage of revenue was primarily attributable to the higher revenue base allowing for a better leverage of our infrastructure. The decrease was partially offset by a $1.4 million federal excise tax refund, $906,000 of charges related to the integration of RMA acquisition and $478,000 of charges related to the proposed merger.

CRM’s selling, general and administrative expenses increased $6.3 million to $22.4 million for the six months ended June 30, 2006, from $16.1 million for the six months ended June 30, 2005, and increased as a percentage of revenue to 18.8 percent from 17.6 percent. The increase was primarily attributable to the implementation of new clients in this division. We incur the upfront expenses required to begin working for a new client, such as facilities and telephone expense, in advance of the revenue growth. The increase was partially offset by the increased utilization of call center capacity as a result of the continuing implementation of new contracts.

Portfolio Management’s selling, general and administrative expenses increased $25.2 million to $63.8 million for the six months ended June 30, 2006, from $38.6 million for the six months ended June 30, 2005, and increased as a percentage of revenue to 65.2 percent from 63.5 percent. The increase was due primarily to increased servicing fees from ARM North America related to the acquisitions of Marlin and RMA.

ARM International’s selling, general and administrative expenses increased $1.5 million to $3.4 million for the six months ended June 30, 2006, from $1.9 million for the six months ended June 30, 2005, but decreased as a percentage of revenue to 29.9 percent from 30.5 percent. The decrease in selling, general and administrative expenses as a percentage of revenue was primarily attributable to the ongoing integration of the RMA acquisition. Partially offsetting this decrease were charges of $449,000 related to the integration of the RMA acquisition.

Restructuring charge. During the six months ended June 30, 2006, we incurred restructuring charges of $5.8 million related to the restructuring of our legacy operations to streamline our cost structure, in conjunction with the RMA acquisition. The charges consisted primarily of costs associated with the closing of redundant facilities and severance. We expect to record additional restructuring charges of approximately $2.1 million to $2.6 million during the remainder of 2006, which are expected to be recorded in the ARM North America and ARM International segments.

Depreciation and amortization. Depreciation and amortization increased to $26.1 million for the six months ended June 30, 2006, from $21.7 million for the six months ended June 30, 2005. The increase was attributable to the amortization of the customer relationships acquired in connection with acquisitions in 2005, as well as higher depreciation on additions to property and equipment during the latter half of 2005 and the first half of 2006.

Other income (expense). Interest expense increased to $13.8 million for the six months ended June 30, 2006, from $10.0 million for the six months ended June 30, 2005. The increase was attributable to higher principal balances as a result of borrowings made against the senior credit facility for the acquisitions in September 2005 and Portfolio Management’s additional non-recourse borrowings to purchase accounts receivable, as well as higher interest rates. Other expense for the six months ended June 30, 2005, primarily included a $595,000 write-down of an investment.

Income tax expense. Income tax expense for the six months ended June 30, 2006, decreased to $13.0 million, and decreased as a percentage of income before income tax expense to 36.5 percent from 38.0 percent for the six months ended June 30, 2005. The decrease in the effective tax rate was partially attributable to the increase in the percentage of earnings from the Portfolio Management division and to the losses in the CRM division.

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Liquidity and Capital Resources

Historically, our primary sources of cash have been cash flows from operations, bank borrowings, non-recourse borrowings, and equity and debt offerings. Cash has been used for acquisitions, repayments of bank borrowings, purchases of equipment, purchases of accounts receivable, and working capital to support our growth.

We believe that funds generated from operations, together with existing cash and available borrowings under our senior credit facility and non-recourse credit agreement, will be sufficient to finance our current operations, planned capital expenditure requirements, and internal growth at least through the next twelve months. However, we could require additional debt or equity financing if we were to make any significant acquisitions for cash during that period.

The cash flow from our contingency collection business and our purchased portfolio business is dependent upon our ability to collect from consumers and businesses. Many factors, including the economy and our ability to hire and retain qualified collectors and managers, are essential to our ability to generate cash flows. Fluctuations in these trends that cause a negative impact on our business could have a material impact on our expected future cash flows.

Cash Flows from Operating Activities. Cash provided by operating activities was $61.0 million for the six months ended June 30, 2006, compared to $57.8 million for the six months ended June 30, 2005. The increase in cash provided by operating activities was primarily attributable to an $8.5 million decrease in accounts receivable compared to an increase of $17.6 million in the prior year. Also contributing to the increase was $18.8 million decrease in deferred revenue from the long-term collection contract during the six months ended June 30, 2005, offset in part by the $10.3 million transfer out of the bonus receivable related to the settlement of the long-term collection contract during the six months ended June 30, 2005. These items were offset in part by an $18.1 million increase in other assets during the six months ended June 30, 2006, compared to a $12.2 million decrease for the same period a year ago, primarily resulting from the subsequent use of a refund of prepaid taxes that was received during the six months ended June 30, 2005. In addition, net income was $20.6 million for the six months ended June 30, 2006, as compared to $29.4 million for the six months ended June 30, 2005.

Cash Flows from Investing Activities. Cash used in investing activities was $6.8 million for the six months ended June 30, 2006, compared to $3.8 million for the six months ended June 30, 2005. The increase was primarily attributable to an increase in the purchases of accounts receivable, offset partially by higher collections applied to purchased accounts receivable. Cash flows from investing activities for the six months ended June 30, 2005 did not include $17.2 million of Portfolio Management’s purchases of large accounts receivable portfolios financed through an agreement we have with a lender. The purchases were non-cash transactions as the lender sent borrowings directly to the seller of the accounts (see note 13 to our Notes to Consolidated Financial Statements). The increase was also attributable to additional purchases of property and equipment. Theses increases were partially offset by the 50 percent minority interest investment of $12.7 million in the non-portfolio assets and liabilities of the Marlin acquisition by our non-recourse lender, and a decrease in the amount of net cash paid for acquisitions and related costs.

Cash Flows from Financing Activities. Cash used in financing activities was $58.7 million for the six months ended June 30, 2006, compared to $59.1 million for the six months ended June 30, 2005. Cash flows from financing activities for the six months ended June 30, 2005 did not include $17.2 million of Portfolio Management’s borrowings under non-recourse debt, used to purchase large accounts receivable portfolios financed through an agreement we have with a lender. These borrowings were non-cash transactions as the lender sent borrowings directly to the seller of the accounts (see note 13 to our Notes to Consolidated Financial Statements). During the six months ended June 30, 2006, we repaid the $125 million of convertible notes with borrowings under our revolving credit agreement.

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Senior Credit Facility. In June 2005, we amended and restated our senior credit facility with various participating lenders. The amended and restated senior credit facility is structured as a $300 million revolving credit facility with an option to increase our borrowing capacity to a maximum of $400 million, subject to obtaining commitments for such incremental capacity from existing or new lenders. The senior credit facility requires no minimum principal payments until June 18, 2010, the maturity date. At June 30, 2006, the balance outstanding on the senior credit facility was $250.4 million. The availability of the revolving credit facility is reduced by any unused letters of credit ($4.3 million at June 30, 2006). As of June 30, 2006, we had $45.3 million of remaining availability under the senior credit facility.

Borrowings under the senior credit facility are collateralized by substantially all of our assets. The senior credit facility contains certain financial and other covenants, such as maintaining net worth and funded debt to earnings before interest, taxes, depreciation, and amortization, referred to as EBITDA, requirements, and includes restrictions on, among other things, acquisitions, the incurrence of additional debt, investments, disposition of assets, and transactions with affiliates. If an event of default, such as failure to comply with covenants or change of control, were to occur under the senior credit facility, the lenders would be entitled to declare all amounts outstanding under it immediately due and payable and foreclose on the pledged assets. As of June 30, 2006, we were in compliance with all required financial covenants and we were not aware of any events of default. On July 13, 2006, we amended t he senior credit facility to allow us to enter into the Merger Agreement (see note 16 to our Notes to Consolidated Financial Statements).

Convertible Notes. We had $125.0 million aggregate principal amount of 4.75 percent Convertible Subordinated Notes that were due April 15, 2006 (“the Notes”). The Notes were convertible into NCO common stock at a conversion price of $32.92 per share. Upon maturity, the Company repaid the Notes using borrowings under its senior credit facility.

Non-recourse Credit Facility. On June 30, 2005 Portfolio Management amended and restated its credit facility with a lender and extended its existing exclusivity agreement with such lender through June 30, 2009. The new agreement provides that all purchases of accounts receivable by Portfolio Management with a purchase price in excess of $1.0 million are first offered to the lender for financing at its discretion. If the lender chooses to participate in the financing of a portfolio of accounts receivable, the financing may be structured, depending on the size and nature of the portfolio to be purchased, either as a borrowing arrangement similar to the original agreement, or under various equity sharing arrangements ranging from 25 percent to 50 percent equity provided by the lender. The lender will finance non-equity borrowings at 70 percent of the purchase price, unless otherwise negotiated, with floating interest at a rate equal to LIBOR plus 2.50 percent. As additional return, the lender receives 28 percent of the residual cash flow, unless otherwise negotiated, which is defined as all cash collections after servicing fees, floating rate interest, repayment of the note, and the initial investment by Portfolio Management, including interest. These borrowings are non-recourse to us and are due two years from the date of each respective loan. We may terminate the agreement at any time after June 2007, upon the change of control, for a cost of $250,000 for each remaining month under the new agreement. The previous financing arrangement as described below remains in effect for outstanding loans as of June 30, 2005. Total debt outstanding under this facility as of June 30, 2006, was $55.7 million, including $4.6 million of accrued residual interest. As of June 30, 2006, Portfolio Management was in compliance with all of the financial covenants.

Under the prior agreement, Portfolio Management had a four-year financing agreement with the lender that originally was to expire in August 2006, to provide financing for larger purchases of accounts receivable at 90 percent of the purchase price, unless otherwise negotiated. The lender, at its sole discretion, had the right to finance any purchase of $4.0 million or more. This agreement had no minimum or maximum credit authorization. Borrowings carry interest at the prime rate plus 3.25 percent and are non-recourse to us, except for the assets financed through the lender. Debt service payments equal total collections less servicing fees and expenses until each individual borrowing is fully repaid and Portfolio Management’s original investment is returned, including interest. Thereafter, the lender is paid a residual of 40 percent of collections, less servicing costs, unless otherwise negotiated. Individual loans are required to be repaid based on collections, but not more than two years from the date of borrowing. This loan agreement contains a collections performance requirement, among other covenants, that, if not met, provides for cross-collateralization with any other portfolios financed through the agreement, in addition to other remedies.

As part of the exclusivity agreement described above, Portfolio Management has a joint venture agreement with the lender to purchase larger portfolios through a joint venture, whereby Portfolio Management owns 65 percent and the lender owns 35 percent of the joint venture. Each party finances the joint venture based on predetermined percentages as negotiated for each portfolio purchase. Cash flows from the joint venture are based on the mix of partner loans and equity contributions to the joint venture. The equity share of the new agreement replaces the residual cash flows under the former agreement. The joint venture has been consolidated into our results and a minority interest has been recorded for the lender’s equity ownership. At June 30, 2006, we had $7.9 million of debt outstanding under the joint venture, which is included in the non-recourse credit facility debt outstanding disclosed above.

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Contractual Obligations. We have four fixed price agreements, or forward-flows, that obligate us to purchase, on a monthly basis, portfolios of charged-off accounts receivable meeting certain criteria. We are obligated to purchase accounts receivable ranging from approximately $115,000 to $720,000 per month that expire between August 2006 and July 2008.

Aditionally, in connection with the Marlin acquisition, we acquired several forward-flows with institutions to purchase medical and utility portfolios of charged-off accounts receivable meeting certain criteria, aggregating approximately $2.2 million per month, that expire between June 2006 and January 2011. The terms of the agreements vary; they can be terminated with either 30 days, 60 days or 90 days written notice.

Post Merger. We expect the pending Merger of the Company to close during the fourth quarter of 2006, subject to receipt of shareholder approval, closing of the debt financing and customary regulatory approvals as well as the satisfaction of other customary closing conditions. Upon closing, there will be significant changes in the Company’s existing capital structure and leverage.

Market Risk

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in corporate tax rates, and inflation. We employ risk management strategies that may include the use of derivatives, such as interest rate cap agreements and foreign currency forwards to manage these exposures.

Foreign Currency Risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary currencies to which we are exposed include the Canadian dollar, the British pound and the Philippine peso. Due to the growth of the Canadian operations, we currently use forward exchange contracts to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such contracts will be adversely affected by changes in exchange rates. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection. A five percent increase or decrease in the Canadian exchange rate could have an annual impact of approximately $4.0 million on our business, excluding the impact of foreign currency hedges.

Interest Rate Risk. At June 30, 2006, we had $306.1 million in outstanding variable rate borrowings. A material change in interest rates could adversely affect our operating results and cash flows. A 25 basis-point increase in interest rates could increase our annual interest expense by $125,000 for each $50 million of variable debt outstanding for the entire year. We currently use interest rate cap agreements to limit potential losses from adverse interest rate changes.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe that the following accounting policies include the estimates that are the most critical and could have the most potential impact on our results of operations: goodwill, customer relationships, revenue recognition for purchased accounts receivable, allowance for doubtful accounts, notes receivable, income taxes, stock options and derivative financial instruments. These and other critical accounting policies are described in note 2 to these financial statements, and in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and note 2 to our 2005 financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2005. During the six months ended June 30, 2006, we did not make any material changes to our estimates or methods by which estimates are derived with regard to our critical accounting policies, except for the change in stock options due to our adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” referred to as SFAS 123R on January 1, 2006.

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SFAS 123R requires that the cost of all share-based payments to employees, including stock option grants, be recognized in the financial statements based on their fair values. This requires estimates and assumptions to be made, including the expected term of stock-based awards, stock price volatility and forfeitures. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on a blend of implied and historical volatility of our common stock. We use historical data on exercises of stock options and other factors to estimate the expected term of the share-based payments granted.

Recently Issued Accounting Pronouncements

FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” In December 2004, the FASB issued SFAS 123R, which requires that the cost of all share-based payments to employees, including stock option grants, be recognized in the financial statements based on their fair values. The standard applies to newly granted awards and previously granted awards that are not fully vested on the date of adoption. We adopted the standard on January 1, 2006 using the modified prospective method (see note 2 to our Consolidated Financial Statements).

FASB Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No.20 and FASB Statement No.3.” In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3”, referred to as SFAS 154, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS 154. We adopted SFAS 154 on January 1, 2006, and it did not have a material impact on our financial statements.

FASB Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.” In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments,” referred to as SFAS 155. This statement amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 permits fair value re-measurement for hybrid financial instruments that contain embedded derivatives that would require separate accounting. In addition, the statement establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain embedded derivatives. SFAS 155 is effective for all financial instruments acquired or issued beginning after an entity’s fiscal year beginning on September 15, 2006 with earlier adoption permitted. We are currently evaluating the statement and do not believe the adoption of SFAS 155 will have a material impact on our financial statements.

FASB Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets – an Amendment of FASB Statement No.140.” In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets – an Amendment of FASB Statement No. 140,” referred to as SFAS 156. This statement amends SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and provides two methods for the subsequent measurement for each class of separately recognized servicing assets and servicing liabilities. This statement is effective for fiscal years beginning after September 15, 2006. We are currently evaluating the statement and do not believe the adoption of SFAS 156 will have a material impact on our financial statements.

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FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” referred to as FIN 48, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we recognize in our consolidated financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. At this time, we have not completed our review and assessment of the impact of the adoption of FIN 48.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Included in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Report on Form 10-Q.

Item 4.

Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of June 30, 2006. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective in reaching a reasonable level of assurance that the (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our chief executive officer and chief financial officer, also conducted an evaluation of our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), to determine whether any changes occurred during the quarter ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no such changes during the quarter ended June 30, 2006.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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Part II. Other Information

Item 1. Legal Proceedings

For information regarding the Company’s Legal Proceedings, see the Company’s Form 10-K for the year ended December 31, 2005 and prior SEC filings by the Company.

The Company is involved in other legal proceedings, regulatory investigations and tax examinations from time to time in the ordinary course of its business. Management believes that none of these other legal proceedings, regulatory investigations or tax examinations will have a materially adverse effect on the financial condition or results of operations of the Company.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risk factors in the Company’s Annual Report on Form 10-K have not materially changed, other than the risk that the Company may not be able to complete the proposed merger transaction on the current terms or other acceptable terms, or at all, due to a number of factors, including the failure to obtain approval of its shareholders, regulatory approvals or to satisfy other customary closing conditions. These additional risk factors should be read in conjunction with the risk factors included in our Annual Report on Form 10-K. The risks described in the Company’s Annual Report on Form 10-K and the additional risks described above are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None - not applicable

Item 3. Defaults Upon Senior Securities

None - not applicable

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of the Company was held on May 16, 2006. At the Annual Meeting, the shareholders elected Michael J. Barrist and Leo J. Pound as directors to serve for a term of three years as described below:

	Number of Votes
Name	For	Withhold Authority
Michael J. Barrist	29,228,935	1,085,272
Leo J. Pound	29,448,750	865,457

In addition, the terms of the following directors continued after the Annual Meeting: William C. Dunkelberg, Ph. D., Ronald J. Naples, Eric S. Siegel, and Allen F. Wise.

At the Annual Meeting, the shareholders also ratified the appointment of Ernst & Young LLP as the Company’s independent registered public accountants for the fiscal year ending December 31, 2006 as follows:

For	Against	Abstain	Broker Non-Vote
29,846,778	425,886	41,543	1,992,861

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Item 5. Other Information

None - not applicable

Item 6. Exhibits

2.1 Agreement and Plan of Merger among Collect Holdings, Inc., Collect Acquisition Corp. and NCO Group, Inc. dated as of July 21, 2006 (incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2006).

10.1 Employment Agreement dated April 8, 2005, between the Company and John R. Schwab.

10.2 Third addendum, effective June 30, 2006, to the Employment Agreement dated September 1, 1996, as amended, between the Company and Michael J. Barrist (incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 19, 2006).

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under the Exchange Act.

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) promulgated under the Exchange Act.

32.1 Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Signatures

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

Date: August 9, 2006	By:	/s/ Michael J. Barrist
		Michael J. Barrist
		Chairman of the Board, President and Chief Executive Officer (principal executive officer)

Date: August 9, 2006	By:	/s/ John R. Schwab
		John R. Schwab
		Executive Vice President, Finance and Chief Financial Officer (principal financial and accounting officer)

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Exhibit Index

Exhibit No.	Description
2.1	Agreement and Plan of Merger among Collect Holdings, Inc., Collect Acquisition Corp. and NCO Group, Inc. dated as of July 21, 2006 (incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2006).
10.1	Employment Agreement dated April 8, 2005, between the Company and John R. Schwab.
10.2	Third addendum, effective June 30, 2006, to the Employment Agreement dated September 1, 1996, as amended, between the Company and Michael J. Barrist (incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 19, 2006).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under the Exchange Act.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) promulgated under the Exchange Act.
32.1	Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made this 8^th day of April, 2005, to be effective as of April 1, 2004 (the “Effective Date”) is by and between NCO Financial Systems, Inc., a Pennsylvania corporation, (“Company”), and John Schwab, an individual (“Employee”).

WITNESSETH:

WHEREAS, Company wishes to employ Employee and Employee agrees to accept employment and be employed by Company on the terms and conditions to be contained in this Agreement.

NOW, THEREFORE, in consideration of the facts, mutual promises and covenants contained herein, intending to be legally bound hereby, Company and Employee agree as follows:

1. Definitions. As used herein, the following terms shall have the meanings set forth below unless the context otherwise requires:

“Affiliate” shall mean a person who with respect to any entity, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such entity.

“Annual Bonus” shall mean the bonus payment referenced in Section 5, as such amount shall be determined by Company’s Board Compensation Committee.

“Base Compensation” shall mean the annual rate of compensation set forth in Section 5, as such amount may be adjusted, upon mutual agreement from time to time.

“Board” shall mean the Board of Directors of Company.

“Business” shall mean the business conducted by Company on the date of execution of this Agreement, including without limitation any business in the collection and/or management of accounts receivable, and/or any business in the customer relations management business (commonly known as “CRM” business) and including business activities in developmental stages, business activities which may be developed by Company, or any Subsidiary or corporate parent thereof or entity sharing a common corporate parent with Company, during the period of Employee’s employment by Company, and all other business activities which flow from a reasonable expansion of any of the foregoing, including any business engaged in by Company subsequent to the execution of this Agreement in which Employee participates.

“Cause” shall mean any one or more of the following:

(a) if Employee is convicted of a felony involving fraud, theft or embezzlement or has entered a plea of nolo contendere (or similar plea) to a charge of such an offense; or

(b) if Employee commits any act of fraud or deliberate misappropriation relating to or involving Company; or

(c) habitual intoxication or drug addiction; or

(d) if Employee commits a material breach of this Agreement, including, but not limited to, failure to comply with the rules and regulations of Company as defined in Company’s handbook, as modified from time to time, act of insubordination, or failure to perform the duties hereunder to Company’s reasonable satisfaction, which breach is not cured by Employee after thirty (30) days prior written notice and opportunity to cure.

“Commencement Date” shall be the Effective Date as specified in Section 4 hereof.

“Confidential Information” shall have the meaning specified in Section 14(c) hereof.

“Customer” shall mean any individual or entity to whom Company has provided goods or services and with whom Employee had, alone or in conjunction with others, Material Contact during the twelve (12) months prior to the termination of employee’s employment.

“Disability” shall mean Employee’s inability, for a period of 90 consecutive days, or more than 180 days in the aggregate over a consecutive period of eighteen months, to perform the essential duties of Employee’s position, with or without any reasonable accommodation required by law, due to a mental or physical impairment which substantially limits one or more major life activities.

“Restricted Area” shall have the meaning specified in Section 14(a) hereof.

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“Restricted Period” shall mean:

(a) For purposes of Section 14(a)(A), from the date hereof until one (1) year after the later of the date that (i) Employee’s employment is terminated by either Employee or Company for any reason whatsoever; or (ii) the final payment is made by Company to Employee pursuant to this Agreement or any other agreement between the parties hereto; and

(b) For purposes of Section 14(a)(B) and 14(c), for a period of two (2) years after the later of the date that (i) Employee’s employment is terminated by either Employee or Company for any reason whatsoever; or (ii) the final payment is made by Company to Employee pursuant to this Agreement or any other agreement between the parties hereto.

“Severance Payments” shall mean the severance payment due and payable employee in accordance with that terms of Section 10 of this Agreement.

“Signing Bonus” shall mean Ten Thousand Dollars ($10,000) payable to Employee with three (3) business days of Employee’s execution of this Agreement.

“Subsidiary” shall mean any corporation in which Company owns directly or indirectly 50% or more of the voting stock or 50% or more of the equity; or any other venture in which it owns either 50% or more of the voting rights or 50% or more of the equity.

“Term of Employment” shall mean the period specified in Section 4 hereof and any extension thereof and as the same may be modified in accordance with this Agreement.

2. Employment. Company hereby employs Employee and Employee hereby accepts employment by Company for the period and upon the terms and conditions specified in this Agreement.

3. Office and Duties.

(a) Employee’s corporate designation shall be Senior Vice President, Accounting, and he shall also service as Chief Accounting Officer of Company. In such capacity, Employee shall render such services as are necessary and desirable to protect and advance the best interests of Company, acting, in all instances, under the supervision of and in accordance with the directions issued by the Company’s Chief Financial Officer or his designee.

(b) For as long as Employee shall remain an employee of Company, Employee’s entire working time, energy, skill and best efforts shall be devoted to the performance of Employee’s duties hereunder in a manner which will faithfully and diligently further the business and interests of Company.

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(c) Employee’s services will be conducted at Company’s offices in Horsham, Pennsylvania and at such other places as Employee’s duties may require; provided however, that Employee shall not be required by Company to relocate his principal residence without his consent, and shall not be required to perform his normal duties hereunder in any location that is greater than fifty (50) miles from his principal residence, except in the course of normal daily business travel.

4. Term. Employee shall be employed by Company for a term of three (3) years (the “Term”), commencing on the Effective Date and ending on the third (3^rd) anniversary thereof, unless sooner terminated as hereinafter provided. Unless either party elects to terminate this Agreement at the end of the Term or any Additional Term (as hereinafter defined) by giving the other party written notice of such election at least sixty (60) days before the expiration of the Term or any Additional Term, the Term of Employment shall be deemed to have been extended for an additional term of one (1) year (“Additional Term”) commencing on the day after the expiration of the Term or any Additional Term and thereafter from year to year until terminated in accordance herewith.

5. Compensation and Benefits. For all of the service rendered by Employee to Company, Employee shall receive Base Compensation, Annual Bonus and any other compensation in accordance with the provisions set forth in Exhibit “A” attached hereto and made part hereof. Defined terms in Exhibit “A” have the same meaning when used in this Agreement.

6. Fringe Benefits. As part of his compensation, Employee shall be entitled to the benefits set forth below (the “Fringe Benefits”) during the Term of Employment:

(a) Employee shall be eligible to participate in any health, life, accident or disability insurance plan (including Death Benefit Only (DBO) plan [salary continuation at death], Tier II (50% of salary)), sick leave or other benefit plans or programs made available to other similarly situated employees of Company as long as they are kept in force by Company and provided that Employee meets the eligibility requirements and other terms, conditions and restrictions of the respective plans and programs.

(b) Employee shall be entitled to Employee shall be entitled to personal time off (PTO), including paid vacation and personal days during each year subject to Company’s generally applicable policies or a total of three (3) weeks, whichever is greater. Employee shall give oral or written notice prior to the commencement of any vacation in excess of five (5) business days. Employee may not carry over from one year to the next any unused vacation or personal days during the Term of this Agreement.

(c) Company will reimburse Employee for all reasonable expenses incurred by Employee in connection with the performance of Employee’s duties hereunder upon receipt of documentation therefore in accordance with Company’s regular reimbursement procedures and practices in effect from time to time. Payment to Employee will be made upon presentation of expense vouchers in such detail as Company may from time to time require.

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(d) Company shall provide Employee with a car to be used by Employee in connection with Employer’s business or a car allowance, which in total cost to Company shall not exceed One Thousand Dollars ($1000.00) per month. In the event Company does provide Employee with a car, Company shall pay for insurance and general maintenance for such car. Employee may at his option elect to receive a car allowance of One Thousand Dollars ($1000.00) per month in lieu of a company car.

7. Disability. If Employee suffers a Disability, Company may terminate Employee’s employment relationship with Company at any time thereafter by giving Employee ten (10) days written notice of termination. Thereafter, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit to Employee, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation accrued through the date of termination, (b) a pro rata portion of the Annual Bonus earned to the date of termination of employment, if any, to the extent payable hereunder and to the extent approved by the Board’s Compensation Committee for executive officers of Company. For determining the portion of the Annual Bonus, if any, payable under this Section or any other applicable Section in this Agreement, the parties agree that the initial calculation for the twenty percent (20%) level is subjective and payment thereof is discretionary and, therefore, will be treated as follows: Employee’s portion of the Annual Bonus, if payable, shall be no lower than the lowest amount and no greater than the greatest amount paid to an executive who is similarly situated and that amount shall be prorated to the date of termination of Employment. The portion of the Annual Bonus, in excess of twenty percent (20%), if payable, shall be determined accordance with the formula established by Company’s Compensation Committee. In the event that Annual Bonus calculation methodology is revised or amended, any payment due hereunder shall be determined in accordance with the then applicable formula, and (c) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment.

8. Death. If Employee dies during the Term of Employment, the Term of Employment and Employee’s employment with Company shall terminate as of the date of Employee’s death. Company shall have no obligation to Employee or Employee’s estate for Base Compensation, Annual Bonus, Fringe Benefits or any other form of compensation or benefit, except as otherwise required by law or by benefit plans provided at Company expense, other than (a) amounts of Base Compensation that have accrued through the date of Employee’s death, (b) a pro rata portion of the Annual Bonus (in accordance with the methodology set forth in Section 7 above) earned to the date of Employee’s death, if any, to the extent payable hereunder and to the extent approved by the Board’s Compensation Committee for executive officers of Company, and (c) reimbursement of appropriately documented expenses incurred by Employee before Employee’s death, to the extent that Employee would have been entitled to such reimbursement but for his death.

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9. Termination for Cause. Company may terminate Employee’s employment relationship with Company at any time for Cause. Upon termination of Employee under this Section 9, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or other form of compensation or benefits other than (a) amounts of Base Compensation through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment.

10. Termination without Cause. Company may terminate Employee’s employment relationship with Company at any time without Cause. Notwithstanding termination of Employee’s employment under this Section 10, Employee shall receive (a) amounts of Base Compensation, (b) Annual Bonus (in accordance with the methodology set forth in Section 7 above), (c) the Severance Payment (as fully described in Exhibit “A” attached hereto and made a part hereof by this reference), and (d) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment.

11. Termination by Employee. Employee may terminate his employment at any time upon at least forty-five (45) days prior written notice to Company. If Employee terminates his employment, Company shall have no obligation to Employee for Base Compensation, Annual Bonus, Fringe Benefits or other form of compensation or benefits other than (a) amounts of Base Compensation accrued through the date of termination, and (b) reimbursement of appropriately documented expenses incurred by Employee before the termination of employment, to the extent that Employee would have been entitled to such reimbursement but for the termination of employment.

12. Consideration. Employee agrees and acknowledges that Employee is agreeing to be bound by the terms of this Agreement, including without limitation the provisions of Sections 13 and 14, in consideration of Company’s agreement to pay in full all amounts due hereunder including the Signing Bonus, which consideration Employee agrees to be adequate consideration for Employee’s obligations hereunder.

13. Company Property. All advertising, sales and other materials or articles or information, including without limitation data processing reports, computer programs, software, customer information and records, business records, price lists or information, samples, or any other materials or data of any kind furnished to Employee by Company or developed by Employee on behalf of Company or at Company’s direction or for Company’s use or otherwise in connection with Employee’s employment hereunder, are and shall remain the sole property of Company, including in each case all copies thereof in any medium, including computer tapes and other forms of information storage. If Company requests the return of such materials at any time during Employee’s employment or after the termination of Employee’s employment, Employee shall deliver all copies of the same to Company immediately. Notwithstanding the foregoing, Employee may retain records relevant to the filing of Employee’s personal income taxes and Company shall grant Employee reasonable access during normal business hours, to business records of Company relevant to the discharge of Employee’s duties as an officer of Company or any other legitimate non-competitive business purpose.

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14. Non-Competition, Non-interference, Trade Secrets, Etc. Employee hereby acknowledges that, during and solely as a result of his employment by Company, Employee will have access to Confidential Information and business and professional contacts. In consideration of such special and unique opportunities afforded by Company to Employee as a result of Employee’s employment and the other benefits referred to in Section 12 of this Agreement, Employee hereby agrees as follows:

(a) For the duration of the Restricted Period, Employee shall not directly or indirectly (A) engage in (as a principal, shareholder, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating within the United States (the “Restricted Area”), which is involved in or any other business activities which are the same as, similar to or in competition with the Business at the time of the termination of Employee’s employment; provided however, that nothing contained in this Section 14 shall prevent Employee from holding for investment no more than three percent (3%) of any class of equity securities of a company whose securities are publicly traded on a national securities exchange or in a national market system (Notwithstanding the foregoing, upon termination of Employee’s employment, Employee shall be permitted to accept a position (as a shareholder, partner, employee, or otherwise) with a firm in the business of Accounting and/or Consulting services. However, in providing Accounting and/or Consulting Services to clients of said firm, Employee will comply with the requirements of Sections 14(a) and (c) of this Agreement for duration of the Restricted Period.); or (B) (i) solicit, divert, take away or attempt to solicit, direct or take away any Customer or potential customer of Company for the purpose of providing or selling products or services that are similar to or competitive with those provided by Company, if Company is then still engaged in the provision or sale of that type of good or service or in any way cause any such Customer or potential customer of Company to cease doing or reduce the amount of business it does with Company; or (ii) solicit for employment or in any other fashion hire, or induce or attempt to influence any employee to terminate his or her employment with Company.

(b) During the Term of Employment, Employee shall not, directly or indirectly, disclose or otherwise communicate to any of the Customers or potential customers of Company, its Affiliates or any Subsidiary thereof that he is considering terminating, or has decided to terminate, employment with Company. Following the termination of Employee’s employment, Company shall have sole discretion to determine who may on behalf of Company notify the clients, customers or accounts of Company of the termination of Employee’s employment, and the form, substance and timing of such notification. Company shall inform Employee of the identity of all persons or entities to be so notified and provide to Employee a copy of any written notice to such persons or entities at least ten business days prior to its dissemination to allow Employee to object to or otherwise challenge the content of the written notice and/or its dissemination.

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(c) Employee shall not use for Employee’s personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than Company, any “Confidential Information” which term shall mean any information regarding the business methods, business policies, policies, procedures, techniques, research or development projects or results, historical or projected financial information, budgets, trade secrets, or other knowledge or processes of or developed by Company or any names and addresses of customers or clients or any data on or relating to past, present or prospective Company customers or clients or any other confidential information relating to or dealing with the business operations or activities of Company as such relate specifically to collection and/or management of accounts receivable and the CRM business services, made known to Employee or learned or acquired by Employee while in the employ of Company, but Confidential Information shall not include information otherwise lawfully known generally by or readily accessible to the trade or the general public. All memoranda, notes, lists, records, files, documents and other papers and other like items (and all copies, extracts and summaries thereof) made or compiled by Employee or made available to Employee concerning the business of Company shall be Company’s property and shall be delivered to Company promptly upon the termination of Employee’s employment with Company or at any other time on request. The foregoing provisions of this Subsection 14(c) shall apply during and after the period when Employee is an employee of Company and shall be in addition to (and not a limitation of) any legally applicable protections of Company’s interest in confidential information, trade secrets and the like. At the termination of Employee’s employment with Company, Employee shall return to Company all copies of Confidential Information in any medium, including computer tapes and other forms of data storage. Notwithstanding the foregoing, Employee may retain records relevant to the filing of Employee’s personal income taxes and Company shall grant Employee reasonable access during normal business hours, to business records of Company relevant to Employee’s discharge of Employee’s duties as an officer of Company or other legitimate non-competitive business purpose.

(d) Any and all writings, inventions, improvements, processes, procedures and/or techniques which Employee may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time when Employee is an employee of Company, whether or not during working hours and whether or not at the request or upon the suggestion of Company, which relate to or are useful in connection with the Business or with any business now or hereafter during the time of Employee’s employment hereunder carried on or known by Employee to be contemplated by Company, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of Company. Employee shall make full disclosure to Company of all such writings, inventions, improvements, processes, procedures and techniques, and shall do everything necessary or desirable to vest the absolute title thereto in Company. Employee shall write and prepare all specifications and procedures regarding such inventions, improvements, processes, procedures and techniques and otherwise aid and assist Company so that Company can prepare and present applications for copyright or Letters Patent therefor and can secure such copyright or Letters Patent wherever possible, as well as reissues, renewals, and extensions thereof, and can obtain the record title to such copyright or patents so that Company shall be the sole and absolute owner thereof in all countries in which it may desire to have copyright or patent protection. Employee shall not be entitled to any additional or special compensation or reimbursement regarding any and all such writings, inventions, improvements, processes, procedures and techniques.

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(e) Employee acknowledges that the restrictions contained in the foregoing Subsections (a), (b), (c) and (d), in view of the nature of the business in which Company is engaged, are reasonable and necessary in order to protect the legitimate interests of Company, that their enforcement will not impose a hardship on Employee or significantly impair Employee’s ability to earn a livelihood, and that any violation thereof would result in irreparable injuries to Company. Employee therefore acknowledges that, in the event of Employee’s violation of any of these restrictions, Company shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which Company may be entitled.

(f) If the Restricted Period or the Restricted Area specified in Subsections (a) and (b) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such amount or the area shall be reduced by the elimination of such portion or both such reductions shall be made so that such restrictions may be enforced for such time and in such area as is adjudged to be reasonable. Employee hereby expressly consents to the jurisdiction of any court within the Commonwealth of Pennsylvania to enforce the provisions of this Section 14, and agrees to accept service of process by mail relating to any such proceeding. Company may supply a copy of Section 14 of this Agreement to any future or prospective employer of Employee or to any person to whom Employee has supplied information if Company determines in good faith that there is a reasonable likelihood that Employee has violated or will violate such Section.

15. Consent to Jurisdiction/Arbitration. Subject to the provisions of Subsection 14(e) regarding enforcement of non-competition provisions of this Agreement, any other dispute, controversy or claim arising out of or relating to this Agreement or the breach or alleged breach of this Agreement shall be settled by arbitration in Montgomery County, Pennsylvania in accordance with the commercial arbitration rules, then obtaining, of the American Arbitration Association, and judgment upon any such arbitration award rendered by the arbitrators may be entered in any state or federal court sitting in Pennsylvania. If the parties to any such dispute, controversy or claim are unable to agree upon an arbitrator or arbitrators, then three arbitrators shall be appointed by the American Arbitration Association, as it may determine, in accordance with the commercial arbitration rules and practices, then obtaining, of such Association. If the parties to any such dispute, controversy or claim shall agree upon two arbitrators, but such parties or such arbitrators shall be unable to agree upon a third arbitrator, then only such third arbitrator shall be appointed as aforesaid by the American Arbitration Association. Each of the parties and the arbitrators shall use its best efforts to keep confidential the existence of any dispute and arbitration proceedings and all information relating thereto or submitted in connection therewith and, in the event of judicial proceedings for the enforcement of this paragraph or any award pursuant thereto, shall cooperate to seal the record of any such arbitration or judicial proceedings.

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16. Miscellaneous.

(a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.

(b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman.

(c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when personally delivered, on the day specified for delivery when deposited with a recognized national or regional courier service for delivery to the intended addressee or five (5) days following the day when deposited in the United States mails, first class postage prepaid, addressed as set forth below:

If to Employee:

John Schwab

325 Rhoads Ave.

Haddonfield, NJ 08033

If to Company:

Steven L. Winokur, Chief Financial Officer

NCO Group, Inc.

507 Prudential Road

Horsham, PA 19044

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with a copy, given in the manner prescribed above, to:

Joshua Gindin

General Counsel

NCO Group, Inc.

507 Prudential Road

Horsham, PA 19044

In addition, notice by mail shall be by airmail if posted outside of the continental United States. Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice.

(d) Binding Nature of Agreement. This Agreement shall be binding upon Company and shall inure to the benefit of Company, its present and future Subsidiaries, Affiliates, successors and assigns including any transferee of the business operation, as a going concern, in which Employee is employed and shall be binding upon Employee, Employee’s heirs and personal representatives. None of the rights or obligations of Employee hereunder may be assigned or delegated, except that in the event of Employee’s death or Disability, any rights of Employee hereunder shall be transferred to Employee’s estate or personal representative, as the case may be. Company may assign its rights and obligations under this Agreement in whole or in part to any one or more Affiliates or successors, but no such assignment shall relieve Company of its obligations to Employee if any such assignee fails to perform such obligations.

(e) Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of who shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when such number of counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories.

(f) Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.

(g) Prior Agreements. Employee represents to Company that except as he otherwise previously disclosed to Company, there are no restrictions, agreements or understandings, oral or written, to which Employee is a party or by which Employee is bound that prevent or make unlawful Employee’s execution or performance of this Agreement.

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(h) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to the employment of Employee by Company, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. Notwithstanding the foregoing, nothing herein shall limit the application of any generally applicable Company policy, practice, plan or the terms of any manual or handbook applicable to Company’s employees generally, except to the extent the foregoing directly conflict with this Agreement, in which case the terms of this Agreement shall prevail.

(i) Section Headings. The Section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation.

(j) Number of Days. Except as otherwise provided herein, in computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday on which federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday.

(k) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate.

(l) Survival. All provisions of this Agreement which by their terms survive the termination of Employee’s employment with Company, including without limitation the covenants of Employee set forth in Sections 13 and 14 and the obligations of Company to make any post-termination payments under this Agreement, shall survive termination of Employee’s employment by Company and shall remain in full force and effect thereafter in accordance with their terms.

IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first above written.

NCO FINANCIAL SYSTEMS, INC.
By:
	Name:	Joshua Gindin
	Title:	EVP

John Schwab

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Exhibit “A”

EMPLOYMENT AGREEMENT OF JOHN SCHWAB

COMPENSATION SCHEDULE

A. Base Compensation: The Employee shall, during the Term, be paid a Base Compensation an annual base salary (the “Base Salary”) of Two Hundred Thirty Five Dollars ($235,000). The Base Salary shall be payable in installments, in arrears, in accordance with the Company’s regular payroll practices, but not less often than monthly. Employee’s Base Compensation shall be adjusted annually, commencing January 1, 2005, by not less than the prevailing Consumer Price Index (CPI) for the Philadelphia, Pennsylvania area.

B. Annual Bonus: In addition to the Base Compensation, so long as Employee satisfies the duties and obligations of his employment, including meeting individual annual goals and objectives and Company’s overall performance, Employee shall be entitled to receive an Annual Bonus determined in a fair and equitable method consistent among similarly situated executive officers of the Company. Employee’s Annual Bonus shall be in an amount up to seventy five percent (75%) of the Base Compensation (made up of eighty percent (80%) cash and twenty percent (20%) in deferred stock units, two (2) year unrestricted vesting). The Annual Bonus shall be paid out of a bonus pool of funds established by the Company’s Board Compensation Committee based on the Company’s economic performance and other extenuating circumstances, if any, together with input from the Chief Executive Officer of the Company. The foregoing notwithstanding, and subject to the provision applicable to Annual Bonus set forth in Section 7, the payment of the Annual Bonus shall be totally in the discretion of the Board’s Compensation Committee who may determine to pay a portion of or not to pay any Annual Bonus. For the purposes hereof, Employee shall be treated in a similar manner as Company’s executive officers.

C. Stock Option Plan: As additional compensation, Employee shall receive an option to purchase up to Twenty Five Thousand (25,000) shares of the common stock of NCO Group, Inc., parent company of Company, at the closing per share price on the date hereof. The options shall be subject to the terms and conditions of the Company’s Stock Option Plan as such is or may be amended from time to time.

D. Severance Payment: In the event that Employee’s employment is terminated by Company during the Term, Employee shall be entitled to receive severance payments, in accordance with Company’s standard payroll practices, as follows:

(a) Termination without cause during the Term: eighteen (18) months (the “Severance Period”) at Base Compensation; and

(b) Termination without cause during an Additional Term: for each extension of this Agreement for an Additional Term of one year, the Severance Period shall be reduced by three (3) months, i.e., the Severance Period shall be fifteen (15) months during the first (1^st) Additional Term, twelve (12) months during the second (2^nd) Additional Term, etc.

In addition to the foregoing severance payments for each month that the employee receives severance payments, Employee shall also be entitled to Fringe Benefits, at Company’s expense.

NCO FINANCIAL SYSTEMS, INC.
By:
	Name: Title:	Joshua Gindin EVP

JOHN SCHWAB

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael J. Barrist, Chief Executive Officer of NCO Group, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of NCO Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2006
	/s/ Michael J. Barrist
	Michael J. Barrist Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John R. Schwab, Chief Financial Officer of NCO Group, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of NCO Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2006
	/s/ John R. Schwab
	John R. Schwab Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), Michael J. Barrist, Chief Executive Officer of NCO Group, Inc. (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2006 (the “Report”) that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 9, 2006	/s/ Michael J. Barrist
	Michael J. Barrist Chief Executive Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), John R. Schwab; Chief Financial Officer of NCO Group, Inc. (the “Company”) does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2006 (the “Report”) that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 9, 2006	/s/ John R. Schwab
	John R. Schwab Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.