UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

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

Commission file number: 0-26906

ASTA FUNDING, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		22-3388607 (IRS Employer Identification No.)
210 Sylvan Ave., Englewood Cliffs, New Jersey (Address of Principal Executive Offices)		07632 (Zip Code)

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A

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 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

As of May 9, 2011, the registrant had 14,634,122 common shares outstanding.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

Part I. Financial Information			3
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and September 30, 2010			3
Condensed Consolidated Statements of Operations for the three and six month periods ended March 31, 2011 and 2010 (unaudited)			4
Condensed Consolidated Statement of Stockholders’ Equity for the six month period ended March 31, 2011 (unaudited)			5
Condensed Consolidated Statements of Cash Flows for the six month periods ended March 31, 2011 and 2010 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			36
Item 4. Controls and Procedures			36
Part II. Other Information			37
Item 6. Exhibits			37
Signatures			38
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

ASTA FUNDING, INC. AND SUBSIDIARIES

		March 31,				September 30,
		2011				2010
		(Unaudited)
ASSETS
Cash and cash equivalents		$	91,787,000			$	84,235,000
Restricted cash			1,428,000				1,304,000
Consumer receivables acquired for liquidation (at net realizable value)			130,904,000				147,031,000
Due from third party collection agencies and attorneys			2,576,000				3,528,000
Prepaid and income taxes receivable			—				196,000
Furniture and equipment, net			411,000				338,000
Deferred income taxes			17,850,000				18,762,000
Other assets			4,574,000				3,770,000
Total assets		$	249,530,000			$	259,164,000
LIABILITIES
Debt		$	76,860,000			$	90,483,000
Subordinated debt — related party			—				4,386,000
Other liabilities			1,497,000				2,105,000
Dividends payable			293,000				292,000
Income taxes payable			2,662,000				—
Total liabilities			81,312,000				97,266,000
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding — none			—				—
Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding — 14,634,122 at March 31, 2011 and 14,600,423 at September 30, 2010			146,000				146,000
Additional paid-in capital			74,025,000				72,717,000
Retained earnings			93,962,000				89,026,000
Accumulated other comprehensive income, net of tax			85,000				9,000
Total stockholders’ equity			168,218,000				161,898,000
Total liabilities and stockholders’ equity		$	249,530,000			$	259,164,000

See accompanying notes to condensed consolidated financial statements

ASTA FUNDING, INC. AND SUBSIDIARIES

		Three Months				Three Months				Six Months				Six Months
		Ended				Ended				Ended				Ended
		March 31, 2011				March 31, 2010				March 31, 2011				March 31, 2010
Revenues:
Finance income, net		$	11,137,000			$	11,181,000			$	21,896,000			$	22,155,000
Other income			97,000				19,000				176,000				98,000
			11,234,000				11,200,000				22,072,000				22,253,000
Expenses:
General and administrative			5,651,000				5,274,000				11,132,000				10,903,000
Interest (Related party — Period ended March 31, 2011 — Three months, $0; Six months, $86,000; Period ended March 31, 2010 — Three months, $168,000; Six months, $298,000)			739,000				1,087,000				1,618,000				2,346,000
Impairments of consumer receivables acquired for liquidation			49,000				—				49,000				—
			6,439,000				6,361,000				12,799,000				13,249,000
Income before income tax			4,795,000				4,839,000				9,273,000				9,004,000
Income tax expense			1,940,000				1,964,000				3,752,000				3,654,000
Net income		$	2,855,000			$	2,875,000			$	5,521,000			$	5,350,000
Net income per share:
Basic		$	0.20			$	0.20			$	0.38			$	0.37
Diluted		$	0.19			$	0.20			$	0.37			$	0.37
Weighted average number of common shares outstanding:
Basic			14,633,655				14,498,161				14,619,917				14,384,050
Diluted			14,876,437				14,504,398				14,825,060				14,570,901

See accompanying notes to condensed consolidated financial statements

ASTA FUNDING, INC. AND SUBSIDIARIES

																		Accumulated
										Additional								Other
										Paid-in				Retained				Comprehensive
		Shares				Amount				Capital				Earnings				Income				Total
Balance, September 30, 2010			14,600,423			$	146,000			$	72,717,000			$	89,026,000			$	9,000			$	161,898,000
Restricted common stock			32,765
Exercise of options			934								5,000												5,000
Stock based compensation expense											1,303,000												1,303,000
Dividends															(585,000	)							(585,000	)
Accumulated Other comprehensive income, net of tax																			76,000				76,000
Net income															5,521,000								5,521,000
Balance, March 31, 2011			14,634,122			$	146,000			$	74,025,000			$	93,962,000			$	85,000			$	168,218,000

Comprehensive income (loss) is as follows:

		Six Months				Six Months
		Ended				Ended
		March 31, 2011				March 31, 2010
Net income		$	5,521,000			$	5,350,000
Other comprehensive income (loss), net of tax — foreign currency translation			76,000				(58,000	)
Comprehensive income		$	5,597,000			$	5,292,000

See accompanying notes to condensed consolidated financial statements

ASTA FUNDING, INC. AND SUBSIDIARIES

		Six Months				Six Months
		Ended				Ended
		March 31, 2011				March 31, 2010
Cash flows from operating activities:
Net income		$	5,521,000			$	5,350,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			125,000				546,000
Deferred income taxes			912,000				5,770,000
Impairments of consumer receivables acquired for liquidation			49,000				—
Stock based compensation			1,303,000				763,000
Changes in:
Other assets			(816,000	)			(440,000	)
Due from third party collection agencies and attorneys			952,000				(184,000	)
Income taxes payable and receivable			2,858,000				(1,700,000	)
Other liabilities			(532,000	)			(658,000	)
Net cash provided by operating activities			10,372,000				9,447,000
Cash flows from investing activities:
Purchase of consumer receivables acquired for liquidation			(5,003,000	)			(3,271,000	)
Principal collected on receivables acquired for liquidation			20,955,000				31,140,000
Principal collected on receivable accounts represented by account sales			152,000				1,795,000
Foreign exchange effect on receivables acquired for liquidation			(26,000	)			(17,000	)
Capital expenditures			(186,000	)			(75,000	)
Net cash provided by investing activities			15,892,000				29,572,000
Cash flows from financing activities:
Proceeds from exercise of options			5,000				863,000
Tax benefit arising from vesting of restricted stock awards			—				51,000
Change in restricted cash			(124,000	)			868,000
Dividends paid			(584,000	)			(571,000	)
Repayments of debt, net			(18,009,000	)			(29,969,000	)
Net cash used in financing activities			(18,712,000	)			(28,758,000	)
Net increase in cash and cash equivalents			7,552,000				10,261,000
Cash at the beginning of period			84,235,000				2,385,000
Cash and cash equivalents at end of period		$	91,787,000			$	12,646,000
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest (fiscal year 2011 Related Party — $122,000; 2010 Related Party — $387,000)		$	1,689,000			$	2,532,000
Income taxes		$	33,000			$	—

See accompanying notes to condensed consolidated financial statements.

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Business and Basis of Presentation

Business

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), VATIV Recovery Solutions LLC (“VATIV”) and other subsidiaries, not all wholly owned, and not considered material (the “Company”, “we” or “us” ) is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged-off receivables, semi-performing receivables and performing receivables. The primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Performing receivables are accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of the Company’s distressed consumer receivables are MasterCard(R), Visa(R), other credit card accounts, and telecommunication accounts which were charged-off by the issuers for non-payment. The Company acquires these portfolios at substantial discounts from their face values. The discounts are based on the characteristics (issuer, account size, debtor residence and age of debt) of the underlying accounts of each portfolio.

Basis of Presentation

The condensed consolidated balance sheet as of March 31, 2011, the condensed consolidated statements of operations for the six and three month periods ended March 31, 2011 and 2010, the condensed consolidated statement of stockholders’ equity as of and for the six months ended March 31, 2011 and the condensed consolidated statements of cash flows for the six month periods ended March 31, 2011 and 2010, are unaudited. The September 30, 2010 financial information included in this report has been extracted from our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position at March 31, 2011 and September 30, 2010, the results of operations for the six and three month periods ended March 31, 2011 and 2010 and cash flows for the six month periods ended March 31, 2011 and 2010 have been made. The results of operations for the six and three month periods ended March 31, 2011 and 2010 are not necessarily indicative of the operating results for any other interim period or the full fiscal year.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and note disclosures required under generally accepted accounting principles. The Company suggests that these financial statements be read in conjunction with the financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2010 filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates including management’s estimates of future cash flows and the resulting rates of return.

Recent Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 generally represents a revision to former FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities”, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. ASU 2009-17 is effective for fiscal years beginning after November 15, 2009 and for interim periods within the first annual reporting period. The Company adopted ASU 2009-17 as of October 1, 2010, which did not have a significant effect on its financial statements.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the Condensed Balance Sheet date of March 31, 2011, for items that should potentially be recognized or disclosed in these financial statements. The Company did not identify any items which would require disclosure in or adjustment to the Financial Statements.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 1: Business and Basis of Presentation (continued)

Reclassifications

Certain items in the prior period’s financial statements have been reclassified to conform to the current period’s presentation.

Note 2: Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Note 3: Consumer Receivables Acquired for Liquidation

Accounts acquired for liquidation are stated at their net estimated realizable value and consist primarily of defaulted consumer loans to individuals throughout the country and in Central and South America.

The Company accounts for its investments in consumer receivable portfolios, using either:

	•		the interest method; or
	•		the cost recovery method.

The Company accounts for its investment in finance receivables using the interest method under the guidance of FASB Accounting Standards Codification (“ASC”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision.

Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant increases in actual or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be impaired, or written down to maintain the then current IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio’s cost. Revenue arising from collections in excess of anticipated amounts attributable to timing differences is deferred until such time as a review results in a change in the expected cash flows. The estimated future cash flows are reevaluated quarterly.

The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In such case, all cash collections are recognized as revenue when received.

The Company has liquidating experience in the fields of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, litigation-related medical accounts, and auto deficiency receivables. The Company uses the interest method for accounting for asset acquisitions within these classes of receivables when it believes it can reasonably estimate the timing of the cash flows. In those situations where the Company diversifies its acquisitions into other asset classes in which the Company does not possess the same expertise or history, or the Company cannot reasonably estimate the timing of the cash flows, the Company utilizes the cost recovery method of accounting for those portfolios of receivables. At March 31, 2011, approximately $38.8 million of the consumer receivables acquired for liquidation are accounted for using the interest method, while approximately $92.1 million are accounted for using the cost recovery method, of which $84.4 million is concentrated in one portfolio, a $300 million portfolio purchase in March 2007 (the “Portfolio Purchase”).

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 3: Consumer Receivables Acquired for Liquidation (continued)

The Company aggregates portfolios of receivables acquired sharing specific common characteristics which were acquired within a given quarter. The Company currently considers for aggregation portfolios of accounts, purchased within the same fiscal quarter, that generally meet the following characteristics:

	•		same issuer/originator;
	•		same underlying credit quality;
	•		similar geographic distribution of the accounts;
	•		similar age of the receivable; and
	•		same type of asset class (credit cards, telecommunication, etc.)

The Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. This analysis includes the following variables:

	•		the number of collection agencies previously attempting to collect the receivables in the portfolio;
	•		the average balance of the receivables, as higher balances might be more difficult to collect while low balances might not be cost effective to collect;
	•		the age of the receivables, as older receivables might be more difficult to collect or might be less cost effective. On the other hand, the passage of time, in certain circumstances, might result in higher collections due to changing life events of some individual debtors;
	•		past history of performance of similar assets;
	•		time since charge-off;
	•		payments made since charge-off;
	•		the credit originator and its credit guidelines;
	•		our ability to analyze accounts and resell accounts that meet our criteria for resale;
	•		the locations of the debtors, as there are better states to attempt to collect in and ultimately the Company has better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as favorable and that is factored into our cash flow analysis;
	•		financial condition of the seller;
	•		jobs or property of the debtors found within portfolios. In our business model, this is of particular importance. Debtors with jobs or property are more likely to repay their obligation and, conversely, debtors without jobs or property are less likely to repay their obligation; and
	•		the ability to obtain timely customer statements from the original issuer.

The Company obtains and utilizes, as appropriate, input, including, but not limited to, monthly collection projections and liquidation rates from our third party collection agencies and attorneys, as further evidentiary matter, to assist in evaluating and developing collection strategies and in evaluating and modeling the expected cash flows for a given portfolio.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 3: Consumer Receivables Acquired for Liquidation — (continued)

The following tables summarize the changes in the balance sheet of the investment in receivable portfolios during the following periods.

		For the Six Months Ended March 31, 2011
						Cost
		Interest				Recovery
		Method				Method				Total
Balance, beginning of period		$	46,348,000			$	100,683,000			$	147,031,000
Acquisitions of receivable portfolios, net			4,530,000				473,000				5,003,000
Net cash collections from collection of consumer receivables acquired for liquidation			(32,281,000	)			(10,479,000	)			(42,760,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation			(243,000	)			—				(243,000	)
Impairment			(49,000	)			—				(49,000	)
Effect of foreign currency translation			—				26,000				26,000
Finance income recognized (1)			20,509,000				1,387,000				21,896,000
Balance, end of period		$	38,814,000			$	92,090,000			$	130,904,000
Finance income as a percentage of collections			63.1	%			13.2	%			50.9	%

		For the Six Months Ended March 31, 2010
						Cost
		Interest				Recovery
		Method				Method				Total
Balance, beginning of period		$	70,650,000			$	137,611,000			$	208,261,000
Acquisitions of receivable portfolios, net			3,043,000				228,000				3,271,000
Net cash collections from collection of consumer receivables acquired for liquidation			(37,976,000	)			(14,370,000	)			(52,346,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation			(2,740,000	)			(4,000	)			(2,744,000	)
Effect of foreign currency translation			—				17,000				17,000
Finance income recognized (1)			21,398,000				757,000				22,155,000
Balance, end of period		$	54,375,000			$	124,239,000			$	178,614,000
Finance income as a percentage of collections			52.6	%			5.3	%			40.2	%

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 3: Consumer Receivables Acquired for Liquidation — ( continued )

		For the Three Months Ended March 31, 2011
						Cost
		Interest				Recovery
		Method				Method				Total
Balance, beginning of period		$	43,338,000			$	96,241,000			$	139,579,000
Acquisitions of receivable portfolios, net			1,871,000				249,000				2,120,000
Net cash collections from collections of consumer receivables acquired for liquidation			(16,702,000	)			(5,108,000	)			(21,810,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation			(88,000	)			—				(88,000	)
Impairment			(49,000	)			—				(49,000	)
Effect of foreign currency translation			—				15,000				15,000
Finance income recognized (1)			10,444,000				693,000				11,137,000
Balance, end of period		$	38,814,000			$	92,090,000			$	130,904,000
Finance income as a percentage of collections			62.2	%			13.6	%			50.9	%

		For the Three Months Ended March 31, 2010
						Cost
		Interest				Recovery
		Method				Method				Total
Balance, beginning of period		$	61,776,000			$	130,350,000			$	192,126,000
Acquisitions of receivable portfolios, net			895,000				76,000				971,000
Net cash collections from collections of consumer receivables acquired for liquidation			(18,929,000	)			(6,584,000	)			(25,513,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation			(147,000	)			—				(147,000	)
Effect of foreign currency translation			—				(4,000	)			(4,000	)
Finance income recognized (1)			10,780,000				401,000				11,181,000
Balance, end of period		$	54,375,000			$	124,239,000			$	178,614,000
Finance income as a percentage of collections			56.5	%			6.1	%			43.6	%

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 3: Consumer Receivables Acquired for Liquidation — ( continued )

As of March 31, 2011, the Company had $130,904,000 in Consumer Receivables acquired for Liquidation, of which $38,814,000 are being accounted for on the accrual basis. Based upon current projections, net cash collections, applied to principal for accrual basis portfolios will be as follows for the twelve months in the periods ending:

September 30, 2011 (six months ending)		$	10,138,000
September 30, 2012			16,668,000
September 30, 2013			7,941,000
September 30, 2014			3,945,000
September 30, 2015			1,039,000
September 30, 2016			751,000
September 30, 2017			188,000
Subtotal			40,670,000
Deferred revenue			(1,856,000	)
Total		$	38,814,000

Accretable yield represents the amount of income the Company can expect to generate over the remaining life of its existing portfolios based on estimated future net cash flows as of March 31, 2011. The Company adjusts the accretable yield upward when it believes, based on available evidence, that portfolio collections will exceed amounts previously estimated. Changes in accretable yield for the six months and three months ended March 31, 2011 and 2010 are as follows:

		Six Months				Six Months
		Ended				Ended
		March 31, 2011				March 31, 2010
Balance at beginning of period		$	15,255,000			$	25,875,000
Income recognized on finance receivables, net			(20,510,000	)			(21,398,000	)
Additions representing expected revenue from purchases			1,238,000				1,080,000
Reclassifications from nonaccretable difference			16,359,000				14,956,000
Balance at end of period		$	12,342,000			$	20,513,000

		Three Months				Three Months
		Ended				Ended
		March 31, 2011				March 31, 2010
Balance at beginning of period		$	13,874,000			$	23,656,000
Income recognized on finance receivables, net			(10,445,000	)			(10,780,000	)
Additions representing expected revenue from purchases			506,000				271,000
Reclassifications from nonaccretable difference			8,407,000				7,366,000
Balance at end of period		$	12,342,000			$	20,513,000

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 3: Consumer Receivables Acquired for Liquidation — ( continued )

During the three and six month periods ended March 31, 2011, the Company purchased $6.1 million and $13.7 million, respectively, of face value of charged-off consumer receivables at a cost of $2.1 million and $5.0 million, respectively. During the second quarter of fiscal year 2011, most of the portfolios purchased were classified under the interest method.

The following table summarizes collections on a gross basis as received by our third-party collection agencies and attorneys, less commissions and direct costs for the six and three month periods ended March 31, 2011 and 2010, respectively:

		For the Six Months Ended March 31,
		2011				2010
Gross collections (1)		$	67,007,000			$	83,762,000
Commissions and fees (2)			24,004,000				28,672,000
Net collections		$	43,003,000			$	55,090,000
		For the Three Months Ended March 31,
		2011				2010
Gross collections (1)		$	33,623,000			$	40,035,000
Commissions and fees (2)			11,725,000				14,375,000
Net collections		$	21,898,000			$	25,660,000

Note 4: Furniture and Equipment

Furniture and equipment consist of the following as of the dates indicated:

		March 31,				September 30,
		2011				2010
Furniture		$	310,000			$	310,000
Equipment			3,010,000				2,855,000
Software			180,000				153,000
Leasehold improvements			90,000				86,000
			3,590,000				3,404,000
Less accumulated depreciation			3,179,000				3,066,000
Balance, end of period		$	411,000			$	338,000

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 5: Debt and Subordinated Debt — Related Party

The Company’s debt and subordinated debt — related party at March 31, 2011 and September 30, 2010 are summarized as follows:

										March 31, 2011								September 30, 2010
										Stated				Average				Stated				Average
		March 31,				September 30,				Interest				Interest				Interest				Interest
		2011				2010				Rate				Rate (1)				Rate				Rate
Receivables Financing Agreement		$	76,860,000			$	90,483,000				3.76	%			3.77	%			3.76	%			3.77	%
Subordinated debt — related party		$	—			$	4,386,000				—				10.0	%			10.00	%			8.69	%

Receivables Financing Agreement

In March 2007, Palisades XVI entered into a receivables financing agreement (the “Receivables Financing Agreement”) with the Bank of Montreal (“BMO”), as amended in July 2007, December 2007, May 2008, February 2009 and October 2010 in order to finance the Portfolio Purchase. The Portfolio Purchase had a purchase price of $300 million (plus 20% of net payments after Palisades XVI recovers 150% of its purchase price plus cost of funds, which recovery has not yet occurred). Prior to the modifications, discussed below, the debt was full recourse only to Palisades XVI and accrued interest at the rate of approximately 170 basis points over LIBOR. The original term of the agreement was three years. This term was extended by each of the Second, Third Fourth and Fifth Amendments to the Receivables Financing Agreement as discussed below. Proceeds received as a result of the net collections from the Portfolio Purchase are applied to interest and principal of the underlying loan. The Portfolio Purchase is serviced by Palisades Collection LLC, a wholly owned subsidiary of the Company, which has engaged unaffiliated subservicers for a majority of the Portfolio Purchase.

Since the inception of the Receivables Financing Agreement amendments have been signed to revise various terms of the Receivables Financing Agreement. The following is a summary of the material amendments:

Second Amendment — Receivables Financing Agreement, dated December 27, 2007 revised the amortization schedule of the loan from 25 months to approximately 31 months. BMO charged Palisades XVI a fee of $475,000 which was paid on January 10, 2008. The fee was capitalized and is being amortized over the remaining life of the Receivables Financing Agreement.

Third Amendment — Receivables Financing Agreement, dated May 19, 2008 extended the payments of the loan through December 2010. The lender also increased the interest rate from 170 basis points over LIBOR to approximately 320 basis points over LIBOR, subject to automatic reduction in the future if additional capital contributions are made by the parent of Palisades XVI.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5: Debt and Subordinated Debt — Related Party (continued)

Receivables Financing Agreement (continued)

Fourth Amendment — Receivables Financing Agreement, dated February 20, 2009, among other things, (i) lowered the collection rate minimum to $1 million per month (plus interest and fees) as an average for each period of three consecutive months, (ii) provided for an automatic extension of the maturity date from April 30, 2011 to April 30, 2012 should the outstanding balance be reduced to $25 million or less by April 30, 2011 and (iii) permanently waived the previous termination events. The interest rate remained unchanged at approximately 320 basis points over LIBOR, subject to automatic reduction in the future should certain collection milestones be attained.

As additional credit support for repayment by Palisades XVI of its obligations under the Receivables Financing Agreement and as an inducement for BMO to enter into the Fourth Amendment, the Company provided BMO a limited recourse, subordinated guaranty, secured by the assets of the Company, in an amount not to exceed $8.0 million plus reasonable costs of enforcement and collection. Under the terms of the guaranty, BMO cannot exercise any recourse against the Company until the earlier of (i) five years from the date of the Fourth Amendment and (ii) the termination of the Company’s existing senior lending facility or any successor senior facility.

On October 26, 2010, Palisades XVI entered into the Fifth Amendment to the Receivables Financing Agreement (the “Fifth Amendment”). The effective date of the Fifth Amendment was October 14, 2010. The Fifth Amendment (i) extended the expiration date of the Receivables Financing Agreement to April 14, 2014; (ii) reduced the minimum monthly payment to $750,000; (iii) accelerated the Company’s guaranty credit enhancement of $8,700,000, which was paid upon the execution of the Fifth Amendment; (iv) eliminated the Company’s limited guaranty of repayment of the loans outstanding by Palisades XVI; and (v) revised the definition of “Borrowing Base Deficit”, as defined in the Receivables Financing Agreement, to mean the excess, if any, of 105% of the loans outstanding over the borrowing base.

In connection with the Fifth Amendment, on October 26, 2010, the Company entered into the Omnibus Termination Agreement (the “Termination Agreement”). The Termination Agreement provides that, upon payment of $8,700,000 to the Lender and execution of the Fifth Amendment, the following agreements, which were entered into by the Company and certain of its affiliated entities in connection with the guaranty of the outstanding loans under the Receivables Financing Agreement, were terminated: (i) the Subordinated Limited Recourse Guaranty Agreement, dated February 20, 2009, among the Company, its subsidiaries and BMO; (ii) the Subordinated Guarantor Security Agreement, dated February 20, 2009; (iii) the Limited Recourse Guaranty Agreement, dated as of February 20, 2009; and (iv) the Intercreditor Agreement, dated February 20, 2009. The Termination Agreement was effective as of October 14, 2010.

The aggregate minimum repayment obligations required under the Fifth Amendment, including interest and principal, for fiscal years ending September 30, 2011 through 2013, is $9 million annually, and, for the fiscal year ending September 30, 2014, is approximately $5 million (seven months).

On March 31, 2011 and 2010, the outstanding balance on this loan was approximately $76.9 million, and $96.5 million, respectively. The applicable interest rate at March 31, 2011 and 2010 was 3.76% and 3.73%, respectively. The average interest rate of the Receivable Financing Agreement was 3.77% and 3.75% for the six-month periods ended March 31, 2011 and 2010, respectively.

The Company’s average debt obligation (excluding the subordinated debt — related party) for the six and three month periods ended March 31, 2011, was approximately $80.3 million and $77.9 million, respectively. The average interest rate for the six and three month periods ended March 31, 2011 was 3.77% and 3.79%, respectively.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5: Debt and Subordinated Debt — Related Party (continued)

Bank Leumi Credit Agreement

On December 14, 2009, the Company and its subsidiaries other than Palisades XVI, entered into a revolving credit agreement with Bank Leumi (the “Leumi Credit Agreement”), which permitted maximum principal advances of up to $6 million. This agreement expired on December 31, 2010. The interest rate was a floating rate equal to the Bank Leumi Reference Rate plus 2%, with a floor of 4.5%. The loan was secured by collateral consisting of all of the assets of the Company other than those of Palisades XVI. In addition, other collateral for the loan consisted of a pledge of cash and securities by GMS Family Investors, LLC, an investment company owned by members of the Stern family. There were no financial covenant restrictions. On December 14, 2009, approximately $3.6 million of the Bank Leumi credit line was drawn and used to reduce to zero the remaining balance on the IDB Credit Facility described below. The balance outstanding on the Leumi Credit Agreement was reduced to zero on January 14, 2010 and remained at zero until its expiration on December 31, 2010. Currently, the Company does not have a new agreement in place, and there can be no assurance that a new agreement will be reached, but the Company has maintained ongoing discussions with Bank Leumi regarding entering into a new and more substantial credit agreement.

IDB Credit Facility

The Eighth Amendment to the IDB Credit Facility, entered into on July 10, 2009, granted an initial $40 million line of credit from a consortium of banks (the “Bank Group”) for portfolio purchases and working capital and was scheduled to reduce to zero by December 31, 2009. The IDB Credit Facility accrued interest at the lesser of LIBOR plus an applicable margin, or the prime rate minus an applicable margin based on certain leverage ratios, with a minimum rate of 5.5% per annum. The IDB Credit Facility was collateralized by all assets of the Company, other than those of Palisades XVI and contained financial and other covenants. The IDB Credit Facility’s commitment termination date was December 31, 2009. This IDB facility was repaid in full on December 14, 2009.

Subordinated Debt — Related Party

On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated promissory note from an entity (the “Family Entity”). The Family Entity is a greater than 5% shareholder of the Company and is beneficially owned and controlled by Arthur Stern, a Director of the Company, Gary Stern, the Chairman, President and Chief Executive Officer of the Company, and members of their families. The loan was in the aggregate principal amount of approximately $8.2 million, accrued interest at a rate of 6.25% per annum and was payable interest only each quarter until its maturity date of January 9, 2010, subject to prior repayment in full of the IDB Credit Facility. The subordinated loan was incurred by the Company to resolve certain issues related to the activities of one of the subservicers utilized by Palisades Collection LLC under the Receivables Financing Agreement. Proceeds from the subordinated loan were initially used to further collateralize the Company’s IDB Credit Facility and to reduce the balance due on that facility as of May 31, 2008. In December 2009, the subordinated debt-related party maturity date was extended through December 31, 2010. In addition the interest rate was changed to 10% per annum effective January 2010. Approximately $3.8 million of the loan was repaid in fiscal year 2010, with the remaining $4.4 million repaid during the first quarter of fiscal year 2011, including the final payment of $2.4 million on December 30, 2010, reducing the balance to zero.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6: Commitments and Contingencies

Employment Agreements

In January 2007, the Company entered into an employment agreement (the “Employment Agreement”) with Gary Stern, its Chairman, President and Chief Executive, which expired on December 31, 2009. This Employment Agreement was not renewed and Mr. Stern is continuing in his current roles at the discretion of the Board of Directors until a new agreement is signed. The Company intends to negotiate a new employment agreement with Mr. Stern during fiscal year 2011.

On November 30, 2009, the Company entered into a consulting services agreement with Cameron Williams, its former Chief Operating Officer. Under the terms of the agreement, the Company paid Mr. Williams a monthly fee of $20,833.33 for the one year period ended December 31, 2010 in exchange for certain consulting services. In addition, in exchange for a release of all claims and liabilities, the Company paid Mr. Williams a fee of $100,000, reimbursed his COBRA costs up to $1,000 per month, and accelerated vesting of 16,667 stock options held by Mr. Williams, exercisable at $2.95 per share. Also Mr. Williams signed another release in favor of the Company and was paid $20,833.37 at the end of this consulting term in December 2010.

Leases

The Company leases its facilities in Englewood Cliffs, New Jersey and Houston, Texas. Please refer to our consolidated financial statements and notes thereto in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for additional information.

Litigation

In the ordinary course of its business, the Company is involved in numerous legal proceedings. The Company regularly initiates collection lawsuits against consumers, using its network of third party law firms. In addition, consumers occasionally initiate litigation against the Company, alleging that the Company has violated a federal or state law in the process of collecting their account. The Company does not believe that these matters are material to its business and financial condition. The Company is not involved in any material litigation in which it was a defendant.

Note 7: Income Recognition and Impairments

Income Recognition

The Company accounts for its investment in consumer receivables acquired for liquidation using the interest method under the guidance of ASC 310. In ASC 310 static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision.

Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310 initially freezes the internal rate of return (“IRR”), estimated when the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Under ASC 310, rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current IRR.

Finance income is recognized on cost recovery portfolios after the carrying value has been fully recovered through collections or amounts written down.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 7: Income Recognition and Impairments (continued)

Impairments

The Company accounts for its impairments in accordance with ASC 310, which provides guidance on how to account for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. Increases in expected cash flows are recognized prospectively through an adjustment of the internal rate of return while decreases in expected cash flows are recognized as impairments. ASC 310 makes it more likely that impairment losses and accretable yield adjustments for portfolios’ performances which exceed original collection projections will be recorded, as all downward revisions in collection estimates will result in impairment charges, given the requirement that the IRR of the affected pool be held constant. There was an impairment of $49 thousand recorded during the three and six month periods ended March 31, 2011. No impairments were recorded during the three and six month periods ended March 31, 2010. Finance income is not recognized on cost recovery method portfolios until the cost of the portfolio is fully recovered. Collection projections are performed on both interest method and cost recovery method portfolios. With regard to the cost recovery portfolios, if collection projections indicate the carrying value will not be recovered a write down in value is required.

Our analysis of the timing and amount of cash flows to be generated by our portfolio purchases are based on the following attributes:

	•		the type of receivable, the location of the debtor and the number of collection agencies previously attempting to collect the receivables in the portfolio. We have found that there are better states to try to collect receivables and we factor in both better and worse states when establishing our initial cash flow expectations;
	•		the average balance of the receivables influences our analysis in that lower average balance portfolios tend to be more collectible in the short-term and higher average balance portfolios are more appropriate for our law suit strategy and thus yield better results over the longer term. As we have significant experience with both types of balances, we are able to factor these variables into our initial expected cash flows;
	•		the age of the receivables, the number of days since charge-off, any payments since charge-off, and the credit guidelines of the credit originator also represent factors taken into consideration in our estimation process. For example, older receivables might be more difficult and/or require more time and effort to collect;
	•		past history and performance of similar assets acquired. As we purchase portfolios of like assets, we accumulate a significant historical data base on the tendencies of debtor repayments and factor this into our initial expected cash flows;
	•		our ability to analyze accounts and resell accounts that meet our criteria;
	•		jobs or property of the debtors found within portfolios. With our business model, this is of particular importance. Debtors with jobs or property are more likely to repay their obligation through the suit strategy and, conversely, debtors without jobs or property are less likely to repay their obligation. We believe that debtors with jobs or property are more likely to repay because courts have mandated the debtor must pay the debt. Ultimately, the debtor will pay to clear title or release a lien. We also believe that these debtors generally might take longer to repay and that is factored into our initial expected cash flows; and
	•		credit standards of issuer.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 7: Income Recognition and Impairments (continued)

Impairments (continued)

We acquire accounts that have experienced deterioration of credit quality between origination and the date of our acquisition of the accounts. The amount paid for a portfolio of accounts reflects our determination that it is probable we will be unable to collect all amounts due according to the portfolio of accounts’ contractual terms. We consider the expected payments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio, coupled with expected cash flows from accounts available for sales. The excess of this amount over the cost of the portfolio, representing the excess of the accounts’ cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the expected remaining life of the portfolio.

We believe we have significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying debtors. We acquire these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid, so that we believe our estimated cash flow offers us an adequate return on our acquisition costs after our servicing expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers with whom we have limited experience, we have the added benefit of soliciting our third party servicers for their input on liquidation rates and, at times, incorporate such input into the estimates we use for our expected cash flows. As a result of the recent and current challenging economic environment and the impact it has had on the collections, for portfolios purchases acquired since the beginning of fiscal year 2009, we have extended our time frame of the expectation of recovering 100% of our invested capital to within a 24-29 month period from an 18-28 month period, and the expectation of recovering 130-140% of invested capital to a period of 7 years, which is an increase from the previous 5-year expectation. Portfolios acquired during the first six months of fiscal year 2011 include semi-performing litigation-related medical accounts receivable portfolios whereby the Company is assigned the revenue stream. As a portion of the accounts are performing, the cost of the portfolio is higher than the traditional charged off non-performing assets. The expectation of recovering 130% of our investment is projected to be over a three year period. We routinely monitor expectations against the actual cash flows and, in the event the cash flows are below our expectations and we believe there are no reasons relating to mere timing differences or explainable delays (such as can occur particularly when the court system is involved) for the reduced collections, an impairment would be recorded as a provision for credit losses. Conversely, in the event the cash flows are in excess of our expectations and the reason is due to timing, we would defer the “excess” collection as deferred revenue.

Commissions and fees

Commissions and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort- generally court costs. The Company expects to continue to purchase portfolios and utilize third party collection agencies and attorney networks.

Note 8: Income Taxes

Deferred federal and state taxes principally arise from (i) recognition of finance income collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for impairments/credit losses; and (iii) stock based compensation for stock option grants and restricted stock awards recorded in the statement of operations for which no cash distribution has been made. Other components consist of state net operating loss (“NOL”) carryforwards. The provision for income tax expense for the three month periods ending March 31, 2011 and 2010, respectively, reflects income tax expense at an effective rate of 40.5% and 40.6%. The provision for income tax expense for the six month periods ending March 31, 2011 and 2010, reflects income tax expense at an effective rate of 40.5% for both periods.

The corporate federal income tax returns of the Company for 2006 through 2009 are subject to examination by the IRS, generally for three years after they are filed. The state income tax returns and other state filings of the Company are subject to examination by the state taxing authorities, for various periods generally up to four years after they are filed.

In April 2010, the Company received notification from the IRS the Company’s 2008 and 2009 federal income tax returns would be audited. This audit is currently in progress.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 9: Net Income Per Share

Basic per share data is determined by dividing net income by the weighted average shares outstanding during the period. Diluted per share data is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using the average market price for the period.

The following table presents the computation of basic and diluted per share data for the six and three months ended March 31, 2011 and 2010:

		Six Months Ended March 31,
		2011												2010
						Weighted				Per								Weighted				Per
		Net				Average				Share				Net				Average				Share
		Income				Shares				Amount				Income				Shares				Amount
Basic		$	5,521,000				14,619,917			$	0.38			$	5,350,000				14,384,050			$	0.37
Effect of Dilutive Stock							205,143				(0.01	)							186,851
Diluted		$	5,521,000				14,825,060			$	0.37			$	5,350,000				14,570,901			$	0.37

At March 31, 2011, 914,646 options at a weighted average exercise price of $13.55 were not included in the diluted earnings per share calculation as they were antidilutive.

At March 31, 2010, 694,683 options at a weighted average exercise price of $16.11 were not included in the diluted earnings per share calculation as they were antidilutive.

		Three Months Ended March 31,
		2011												2010
						Weighted				Per								Weighted				Per
		Net				Average				Share				Net				Average				Share
		Income				Shares				Amount				Income				Shares				Amount
Basic		$	2,855,000				14,633,655			$	0.20			$	2,875,000				14,498,161			$	0.20
Effect of Dilutive Stock							242,782				(0.01	)							6,237
Diluted		$	2,855,000				14,876,437			$	0.19			$	2,875,000				14,504,398			$	0.20

At March 31, 2011, 1,021,049 options at a weighted average exercise price of $12.93 were not included in the diluted earnings per share calculation as they were antidilutive.

At March 31, 2010, 756,671 options at a weighted average exercise price of $15.45 were not included in the diluted earnings per share calculation as they were antidilutive.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 10: Stock-based Compensation

The Company accounts for stock-based employee compensation under ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 requires that compensation expense associated with stock options and other stock based awards be recognized in the statement of operations, rather than a disclosure in the notes to the Company’s consolidated financial statements.

In March 2011, the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) granted 10,000 stock options to an employee. The exercise price of these options was at the market price on the date of the grant. The weighted average assumptions used in the option pricing model were as follows:

Risk-free interest rate			0.10	%
Expected term (years)			10.0
Expected volatility			106.2	%
Dividend yield			0.94	%

In December 2010, the Compensation Committee granted 324,800 stock options, of which 30,000 options were issued to each non-employee independent director for a total of 150,000 stock options. 60,000 stock options were awarded to the Chief Executive Officer and 30,000 stock options were awarded to the Chief Financial Officer and the Senior Vice President. The remaining 54,800 stock options were granted to full time employees of the Company, who had been employed at the Company for at least six months prior to the date of grant. The grants to employees excluded officers of the Company. The exercise price of these options was at the market price on the date of the grant. Additionally, in December 2010, the Compensation Committee issued 32,765 shares of restricted stock to the Chief Executive Officer. The exercise price of all stock options was at the market price on the date of the grant. The weighted average assumptions used in the option pricing model were as follows:

Risk-free interest rate			0.17	%
Expected term (years)			10.0
Expected volatility			106.9	%
Dividend yield			0.98	%

In December 2009, the Compensation Committee granted 25,000 stock options to each director of the Company other than the Chief Executive Officer, for a total of 150,000 options, and 8,900 stock options to full time employees of the Company who had been employed at the Company for at least six months prior to the date of grant. The grants to employees excluded officers of the Company. The exercise price of these options was at the market price on the date of the grant. The weighted average assumptions used in the option pricing model were as follows:

Risk-free interest rate			0.17	%
Expected term (years)			10.0
Expected volatility			110.2	%
Dividend yield			1.12	%

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 11: Stock Option Plans

Equity Compensation Plan

On December 1, 2005, the Board of Directors adopted the Company’s Equity Compensation Plan (the “Equity Compensation Plan”), approved by the stockholders of the Company on March 1, 2006. The Equity Compensation Plan was adopted to supplement the Company’s existing 2002 Stock Option Plan. In addition to permitting the grant of stock options as permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights. One million shares were authorized for issuance under the Equity Compensation Plan. The following description does not purport to be complete and is qualified in its entirety by reference to the full text of the Equity Compensation Plan, which is included as an exhibit to the Company’s reports filed with the SEC.

The general purpose of the Equity Compensation Plan is to provide an incentive to our employees, directors and consultants, including executive officers, employees and consultants of any subsidiaries, by enabling them to share in the future growth of our business. The Board of Directors believes that the granting of stock options and other equity awards promotes continuity of management and increases incentive and personal interest in the welfare of the Company by those who are primarily responsible for shaping and carrying out our long range plans and securing our growth and financial success.

The Board believes that the Equity Compensation Plan will advance our interests by enhancing our ability to (a) attract and retain employees, directors and consultants who are in a position to make significant contributions to our success; (b) reward employees, directors and consultants for these contributions; and (c) encourage employees, directors and consultants to take into account our long-term interests through ownership of our shares.

The Company has 1,000,000 shares of Common Stock authorized for issuance under the Equity Compensation Plan and 545,569 shares were available as of March 31, 2011. As of March 31, 2011, approximately 103 of the Company’s employees were eligible to participate in the Equity Compensation Plan.

2002 Stock Option Plan

On March 5, 2002, the Board of Directors adopted the Asta Funding, Inc. 2002 Stock Option Plan (the “2002 Plan”), which plan was approved by the Company’s stockholders on May 1, 2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants to, the Company. The following description does not purport to be complete and is qualified in its entirety by reference to the full text of the 2002 Plan, which is included as an exhibit to the Company’s reports filed with the SEC.

The 2002 Plan authorizes the granting of incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company(whether or not employees) and consultants of the Company.

The Company has 1,000,000 shares of Common Stock authorized for issuance under the 2002 Plan and 129,734 were available as of March 31, 2010. As of March 31, 2011, approximately 103 of the Company’s employees were eligible to participate in the 2002 Plan.

1995 Stock Option Plan

The 1995 Stock Option Plan expired on September 14, 2005. The plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants, to the Company. The following description does not purport to be complete and is qualified in its entirety by reference to the full text of the 1995 Stock Option Plan, which is included as an exhibit to the Company’s reports filed with the SEC.

The 1995 Stock Option Plan authorized the granting of incentive stock options (as defined in Section 422 of the Code) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company (whether or not employees) and consultants to the Company.

The Company authorized 1,840,000 shares of Common Stock for issuance under the 1995 Stock Option Plan. All but 96,002 shares were utilized. As of September 14, 2005, no more options could be issued under this plan.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Unaudited)

Note 11: Stock Option Plans (continued)

The following table summarizes stock option transactions under the plans:

		Six Months Ended March 31,
		2011								2010
						Weighted								Weighted
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
Outstanding options at the beginning of period			922,039			$	12.70				1,157,905			$	10.76
Options granted			334,800				6.94				158,900				8.07
Options exercised			(934	)			5.61				(325,767	)			2.65
Options forfeited			(1,400	)			5.79				(20,500	)			16.24
Outstanding options at the end of period			1,254,505			$	11.17				970,538			$	12.93
Exercisable options at the end of period			953,175			$	12.56				811,215			$	14.26

		Three Months Ended March 31,
		2011								2010
						Weighted								Weighted
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
Outstanding options at the beginning of period			1,245,439			$	11.18				1,316,705			$	10.44
Options granted			10,000				8.52				—				—
Options exercised			(934	)			5.61				(325,667	)			2.65
Options forfeited			—				—				(20,500	)			16.24
Outstanding options at the end of period			1,254,505			$	11.17				970,538			$	12.93
Exercisable options at the end of period			953,175			$	12.56				811,215			$	14.26

The Company recognized $1,015,000 and $163,000 of compensation expense related to stock options during the six month and three month periods ended March 31, 2011. The Company recognized $668,000 and $182,000 of compensation expense related to stock options during the six month and three month periods ended March 31, 2010. As of March 31, 2011, there was $1,405,000 of unrecognized compensation expense related to stock option awards. There is no intrinsic value of the outstanding and exercisable options as of March 31, 2011. The intrinsic value of the stock options exercised during the three month period ended March 31, 2011 was approximately $3,000.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

Note 11: Stock Option Plans (continued)

The following table summarizes information about the Plans outstanding options as of March 31, 2011:

		Options Outstanding												Options Exercisable
						Weighted
						Average				Weighted								Weighted
						Remaining				Average								Average
		Number				Contractual				Exercise				Number				Exercise
Range of Exercise Price		Outstanding				Life (in Years)				Price				Exercisable				Price
$2.8751 – $5.7500			197,834				4.6			$	3.91				168,168			$	4.08
$5.7501 – $8.6250			503,400				8.9				7.27				231,736				7.39
$14.3751 – $17.2500			198,611				2.6				14.88				198,611				14.88
$17.2501 – $20.1250			339,660				3.6				18.23				339,660				18.23
$25.8751 – $28.7500			15,000				5.7				28.75				15,000				28.75
			1,254,505				5.8			$	11.17				953,175			$	12.56

The following table summarizes information about restricted stock transactions:

		Six Months Ended March 31,
		2011								2010
						Weighted								Weighted
						Average								Average
						Grant								Grant
						Date Fair								Date Fair
		Shares				Value				Shares				Value
Unvested at the beginning of period			17,669			$	19.73				35,338			$	19.73
Awards granted			32,765				7.63				—				—
Vested			(28,591	)			15.11				(17,669	)			19.73
Forfeited			—				—				—				—
Unvested at the end of period			21,843			$	7.63				17,669			$	19.73

		Three Months Ended March 31,
		2011								2010
						Weighted								Weighted
						Average								Average
						Grant								Grant
						Date Fair								Date Fair
		Shares				Value				Shares				Value
Unvested at the beginning of period			21,843			$	7.63				17,669			$	19.73
Awards granted			—				—				—				—
Vested			—				—				—				—
Forfeited			—				—				—				—
Unvested at the end of period			21,843			$	7.63				17,669			$	19.73

The Company recognized $288,000 and $142,000 of compensation expense related to the restricted stock awards during the six-month and three month periods ended March 31, 2011. The Company recognized $94,000 and $22,000 of compensation expense related to restricted stock awards during the six and three month periods ended March 31, 2010. As of March 31, 2011, there was $238,000 of unrecognized compensation cost related to unvested restricted stock.

ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

Note 12: Stockholders’ Equity

For the six months ended March 31, 2011, the Company declared dividends of $585,000, or $.02 per share. Of this amount $292,000 was paid during the six months ended March 31, 2011 and $293,000 was accrued as of March 31, 2011 and paid May 2, 2011. As of March 31, 2011, stockholders’ equity includes an amount for other comprehensive income of $85,000, which relates to the Company’s investment in a company domiciled in South America.

Note 13: Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. Because there are a limited number of market participants for certain of the Company’s assets and liabilities, fair value estimates are based upon judgments regarding credit risk, investor expectation of economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment, which significantly affect the value of the estimates.

The carrying value of consumer receivables acquired for liquidation was $130,904,000 and $147,031,000 at March 31, 2011 and September 30, 2010, respectively. The Company computed the fair value of the consumer receivables acquired for liquidation using its forecasting model and the fair value approximated $156,373,000 and $179,730,000 at March 31, 2011 and September 30, 2010, respectively. The Company’s forecasting model utilizes a discounted cash flow analysis. The Company’s cash flows are an estimate of collections for all of our consumer receivables based on variables fully described in Note 3: Consumer Receivables Acquired for Liquidation. These cash flows are then discounted using our estimated weighted average cost of capital to determine the fair value.

The carrying value of debt and subordinated debt (related party) was $76,860,000 and $94,869,000 at March 31, 2011 and September 30, 2010, respectively. The majority of these loans are variable rate and short-term; therefore, the carrying amounts approximate fair value.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included or incorporated by reference in this annual report on Form 10-K, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended September 30, 2010.

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise any forward-looking statements.

Overview

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), VATIV Recovery Solutions LLC (“VATIV”) and other subsidiaries, not all wholly owned, and not considered material (the “Company,” “we” or “us”), primarily engaged in the business of acquiring, managing, servicing and recovering on portfolios of consumer receivables. These portfolios generally consist of one or more of the following types of consumer receivables:

	•		charged-off receivables — accounts that have been written-off by the originators and may have been previously serviced by collection agencies;
	•		semi-performing receivables — accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators; and
	•		performing receivables — accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past.

We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our acquisition costs and servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.

We purchase receivables from credit grantors and others through privately negotiated direct sales and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:

•

our relationships with industry participants, collection agencies, investors and our financing sources;

	•		brokers who specialize in the sale of consumer receivable portfolios; and
	•		other sources.

Critical Accounting Policies

We account for our investments in consumer receivable portfolios, using either:

	•		the interest method; or
	•		the cost recovery method.

As we believe our liquidating experience in certain asset classes such as distressed credit card receivables, telecom receivables, consumer loan receivables, litigation-related medical accounts and mixed consumer receivables has matured, we use the interest method when we believe we can reasonably estimate the timing of the cash flows. In those situations where we diversify our acquisitions into other asset classes and we do not possess the same expertise, or we cannot reasonably estimate the timing of the cash flows, we utilize the cost recovery method of accounting for those portfolios of receivables.

We account for our investment in finance receivables using the interest method under the guidance of FASB Accounting Standards Codification (“ASC”) 310, Receivables — Loans and Debt Securities Acquired with Deteriorating Credit Quality, (“ASC 310”). Static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. We currently consider for aggregation portfolios of accounts, purchased within the same fiscal quarter, that generally have the following characteristics:

	•		same issuer/originator
	•		same underlying credit quality
	•		similar geographic distribution of the accounts
	•		similar age of the receivable and
	•		same type of asset class (credit cards, telecommunications, etc.)

After determining that an investment will yield an adequate return on our acquisition cost after servicing fees, including court costs which are expensed as incurred, we use a variety of qualitative and quantitative factors to determine the estimated cash flows. As previously mentioned, included in our analysis for purchasing a portfolio of receivables and determining a reasonable estimate of collections and the timing thereof, the following variables are analyzed and factored into our original estimates:

	•		the number of collection agencies previously attempting to collect the receivables in the portfolio;
	•		the average balance of the receivables;
	•		the age of the receivables (as older receivables might be more difficult to collect or might be less cost effective);
	•		past history of performance of similar assets — as we purchase portfolios of similar assets, we believe we have built significant history on how these receivables will liquidate and cash flow;
	•		number of months since charge-off;
	•		payments made since charge-off;
	•		the credit originator and their credit guidelines;
	•		the locations of the debtors as there are better states to attempt to collect in and ultimately we have better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as good and that is factored into our cash flow analysis;
	•		financial wherewithal of the seller;