FirstCity Financial Corporation
(Exact name of registrant as specified in its charter)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $.01		The NASDAQ Stock Market LLC

Indicate by check mark if the registrant: is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant: is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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 o No ý

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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)

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, based upon the closing price of the common stock on the Nasdaq National Market System as of June 30, 2006, was $104,695,227.

The number of shares of common stock outstanding at July 9, 2007, was 10,789,137.


PART I
Item 1.		Business
Item 1A.		Risk Factors
Item 1B.		Unresolved Staff Comments
Item 2.		Properties
Item 3.		Legal Proceedings
Item 4.		Submission of Matters to a Vote of Security Holders
PART II
Item 5.		Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.		Selected Financial Data
Item 7.		Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk
Item 8.		Financial Statements and Supplementary Data
Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.		Controls and Procedures
Item 9B.		Other Information
PART III
Item 10.		Directors and Executive Officers of the Registrant
Item 11.		Executive Compensation
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.		Certain Relationships and Related Transactions and Director Independence
Item 14.		Principal Accountant Fees and Services
PART IV
Item 15.		Exhibits and Financial Statement Schedules
Signatures

Some of the statements in this report constitute forward-looking statements by words such as "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," "estimate," "predict," "potential," or "continue" or other similar expressions. Under "Item 1A. Risk Factors", we discuss certain factors that affect our business and operations and factors that may cause our actual results to differ materially from these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.

FirstCity Financial Corporation (the "Company," "FirstCity," "we" or "us"), a Delaware corporation, is a financial services company headquartered in Waco, Texas with offices throughout the United States and Mexico and a presence in Europe and South America. The Company began operating in 1986 as a specialty financial services company focused on acquiring and resolving distressed loans and other assets purchased at a discount relative to the aggregate unpaid principal balance of the loans or the appraised value of the other assets ("Face Value"). To date the Company has acquired, for its own account and through various affiliated partnerships, pools of assets or single assets (collectively referred to as "Portfolio Assets" or "Portfolios") with a Face Value of approximately $9.5 billion. The Company's servicing expertise, which it has developed largely through the resolution of distressed assets, is a cornerstone of its growth strategy. Today the Company is engaged in one reportable business segment—Portfolio Asset acquisition and resolution. See Note 8 of the Company's Consolidated Financial Statements for certain financial information about this segment of the Company. The Company's consumer lending operations have been discontinued as of September 21, 2004. The only asset remaining from discontinued mortgage operations is an investment security resulting from the retention of a residual interest in a securitization transaction. See Note 3 of the Consolidated Financial Statements.

FirstCity makes available free of charge on or through its website at www.fcfc.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information releases including all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). Also, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at www.sec.gov.

The Company's core business is the acquisition, management, servicing and resolution of Portfolio Assets. Key elements of the Company's overall business strategy include:

The Company began operating in the financial service business in 1986 as a purchaser of distressed assets from the Federal Deposit Insurance Corporation ("FDIC") and the Resolution Trust Corporation ("RTC"). From its original office in Waco, Texas, with a staff of four professionals, the Company's asset acquisition and resolution business grew to become a significant participant in an industry fueled by the problems experienced by banks and thrifts throughout the United States. In the late 1980s, the Company also began acquiring assets from healthy financial institutions interested in eliminating nonperforming assets from their portfolios. The Company began its relationship with Cargill in 1991. Since that time, the Company and Cargill have formed a series of Acquisition Partnerships through which they have jointly acquired over $7.8 billion in Face Value of Portfolio Assets.

In July 1995, the Company acquired by merger (the "Merger") First City Bancorporation of Texas, Inc. ("FCBOT"), a former bank holding company that had been engaged in a proceeding under Chapter 11 of the United States Bankruptcy Code since November 1992. As a result of the Merger, the Common Stock of the Company became publicly held. In addition, as a result of the Merger, the Company retained FCBOT's rights to approximately $596 million in NOLs, which the Company uses to offset taxable income generated by the Company and its consolidated subsidiaries.

In July 1997, the Company acquired Harbor Financial Group, Inc. and its subsidiaries (collectively referred to as "Mortgage Corp.") and expanded into related niche financial services markets, such as mortgage conduit banking, conducted through one of its subsidiaries, FC Capital Corp. ("Capital Corp."), and consumer finance, conducted through another of its subsidiaries, FirstCity Consumer Lending Corporation ("Consumer Corp."). In 1999, the Company formally adopted plans to discontinue the operations of Mortgage Corp. and Capital Corp. As a result, the operations of such entities have ceased and the results of historical operations for Mortgage Corp. and Capital Corp. have been reflected as discontinued mortgage operations.

As a result of the liquidity constraints created by the discontinued operations of Mortgage Corp. and Capital Corp., in the third quarter of 2000, Consumer Corp. completed the sale of a 49% equity interest in its automobile finance operation to IFA Drive GP Holdings LLC ("IFA-GP") and IFA Drive LP Holdings LLC ("IFA-LP"), wholly-owned subsidiaries of BoS(USA), Inc. ("BoS(USA)"), a wholly-owned subsidiary of Bank of Scotland, for a purchase price of $15 million cash and resulted in a gain of $12.1 million ($4 million was deferred and recognized in the December 2002 recapitalization discussed below).

In December 2002, FirstCity completed a recapitalization in which holders of FirstCity's redeemable preferred stock, par value $.01 per share ("New Preferred Stock"), representing 89.3% of the shares previously outstanding, exchanged 1,092,210 shares of New Preferred Stock for 2,417,388 shares of common stock and $10.5 million. On December 30, 2004, FirstCity redeemed all of the outstanding shares of its New Preferred Stock at a total redemption price of $21.525 per share. The redemption price represented the liquidation preference of the New Preferred Stock plus the final normal quarterly dividend of $.525 per share. FirstCity also recognized the $4 million gain (previously deferred) from the release of its guaranty of Drive's indebtedness to BoS(USA), Inc. ("BoS(USA)"). BoS(USA)'s warrant to purchase 1,975,000 shares of non-voting common stock was cancelled. FirstCity also acquired the minority interest in FirstCity Holdings held by Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom were Senior Vice Presidents of FirstCity, by issuing 400,000 shares of common stock of the Company and a cash flow note which was settled for $310,000 in 2006 as part of the transaction with American International Group, Inc. ("AIG"), which is discussed below.

On November 1, 2004, FirstCity and certain of its subsidiaries completed the sale of its remaining 31% beneficial ownership interest in Drive Financial Services LP ("Drive") and its general partner, Drive GP LLC, to IFA Drive GP Holdings LLC ("IFA-GP"), IFA Drive LP Holdings LLC ("IFA-LP") and Drive Management LP ("MG-LP") for a total purchase price of $108.5 million in cash, which

resulted in distributions and payments to FirstCity and Consumer Corp. in the aggregate amount of $86.8 million in cash from various sources.

On December 30, 2004, FirstCity redeemed all of the outstanding shares of its New Preferred Stock at a total redemption price of $21.525 per share. The redemption price represented the liquidation preference of the New Preferred Stock plus the final normal quarterly dividend of $.525 per share.

During the third quarter of 2006, FirstCity completed a total restructure of its investments in Mexico in a transaction which aligned FirstCity with AIG. The Company received $1.9 million in incentive service fees related to the sale of certain assets in Mexico which occurred as a result of the restructure. The details of the restructure are provided in Note 6 to the Consolidated Financial Statements. In addition, the Company recorded a gain on the sale of equity investments of $2.5 million. This gain consisted of: 1) one domestic equity investment resulting in a gain of $1.3 million and; 2) a partial sale of Mexico equity investments in connection with a restructure with AIG resulting in a gain of $1.2 million.

In the Portfolio Asset acquisition and resolution business, FirstCity primarily acquires loans in groups or portfolios that have experienced deterioration of credit quality between origination and the Company's acquisition of the loans. The amount paid for a loan reflects FirstCity's determination that it is probable the Company will be unable to collect all amounts due according to the loan's contractual terms.

On January 1, 2005, FirstCity adopted the provisions of Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3"). For loan portfolios acquired prior to January 1, 2005, FirstCity designated these loans as non-performing Portfolio Assets or performing Portfolio Assets. Such designation was made at the acquisition of the pool and does not change even though the actual performance of the loans may change. FirstCity accounts for all loans acquired after 2004 in accordance with SOP 03-3. See Note 1 of the consolidated financial statements for discussion of the impact of SOP 03-3, on FirstCity's accounting for Portfolio Assets in 2006.

Portfolios are either acquired for FirstCity's own account or through investment entities formed with one or more other co-investors (each such entity, an "Acquisition Partnership"). To date, FirstCity and the Acquisition Partnerships have acquired over $9.5 billion in Face Value of assets, with FirstCity's equity investment being $533 million.

In the early 1990s large quantities of nonperforming assets were available for acquisition from the RTC and the FDIC. Since 1993, sellers of nonperforming assets have included private sellers as well as government agencies such as the Small Business Administration. Private sellers include financial institutions, insurance companies, and other institutional lenders, both in the United States and in various foreign countries. As a result of mergers, acquisitions and corporate downsizing efforts, other business entities frequently seek to dispose of excess real estate or other financial assets not meeting the strategic needs of a seller. Sales of such assets improve the seller's balance sheet, reduce overhead costs, reduce staffing requirements and avoid management and personnel distractions associated with the intensive and time-consuming task of resolving loans and disposing of real estate. Consolidations within a broad range of industries, especially banking, have augmented the trend of financial institutions and other sellers packaging and selling asset portfolios to investors as a means of disposing of nonperforming loans or other surplus or non-strategic assets.

FirstCity acquires and manages Portfolio Assets, which are generally purchased at a discount to Face Value by FirstCity or through Acquisition Partnerships. The Portfolio Assets are generally nonhomogeneous assets, including loans of varying qualities that are unsecured or secured by diverse collateral types and real estate. Some of the secured Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based either on real estate, business assets or other collateral cash flow.

FirstCity seeks to resolve Portfolio Assets through (i) a negotiated settlement with the borrower in which the borrower pays all or a discounted amount of the loan, (ii) conversion of the loan into a performing asset through extensive servicing efforts followed by either a sale of the loan to a third party or retention of the loan by FirstCity or the Acquisition Partnerships or (iii) foreclosure and sale of the collateral securing the loan.

FirstCity has substantial experience acquiring, managing and resolving a wide variety of asset types and classes. As a result, it does not limit itself as to the types of Portfolios it will evaluate and purchase. FirstCity's willingness to acquire Portfolio Assets is generally determined by factors including the information that is available regarding the assets in a Portfolio, the price at which the Portfolio can be acquired and the expected net cash flows from the resolution of such assets. FirstCity and the Acquisition Partnerships have acquired Portfolio Assets in virtually all 50 states, the Virgin Islands, Dominican Republic, Puerto Rico, Chile, France, Germany, Japan, Mexico, and Argentina. FirstCity believes that its willingness to acquire nonhomogeneous Portfolio Assets without regard to geographic location provides it with an advantage over certain competitors that limit their activities to either a specific asset type or geographic location.

FirstCity also seeks to capitalize on emerging opportunities in foreign countries in which the market for nonperforming loans of the type generally purchased by FirstCity is less efficient than the market for such assets in the United States. FirstCity has a 20.43% effective interest in MCS et Associes ("MCS"), a French asset servicing company. FirstCity is, in conjunction with MCS and Cargill, actively pursuing opportunities to purchase pools of Portfolio Assets in France and other areas of Western Europe. In addition, FirstCity has offices in Guadalajara and Mexico City, Mexico that facilitate FirstCity's participation in acquisition of Portfolios in Mexico. Since 2004, FirstCity has also participated in Portfolio acquisitions in Germany and South America, primarily in Argentina and Chile.

The following table presents selected data for the Portfolio Assets acquired by FirstCity:

	Year ended December 31,
	2006		2005		2004
	(Dollars in thousands)
Face Value	$	855,633	$	330,390	$	842,920
Total purchase price	$	296,990	$	146,581	$	174,139
Total invested (1)	$	298,515	$	134,085	$	139,850
FirstCity invested (2)	$	144,048	$	71,405	$	59,762
Total number of Portfolio Assets		392,208		28,839		323,111

			Year ended December 31,
			2006		2005		2004
			(Dollars in thousands)
Purchase price
	Domestic		$	136,596	$	93,410	$	91,300
	Europe			102,158		37,172		9,837
	Latin America			58,236		15,999		73,002

		Total	$	296,990	$	146,581	$	174,139

FirstCity invested
	Domestic		$	103,467	$	58,558	$	47,681
	Europe			32,893		10,638		2,213
	Latin America			7,688		2,209		9,868

		Total	$	144,048	$	71,405	$	59,762

FirstCity develops its Portfolio Asset opportunities through a variety of sources. Since the activities or contemplated activities of expected sellers are generally publicized in industry publications and through other similar sources, FirstCity monitors such publications and similar sources. FirstCity also maintains relationships with a variety of parties involved as sellers or as brokers or agents for sellers. Many of the brokers and agents concentrate by asset type and have become familiar with FirstCity's acquisition criteria and periodically approach FirstCity with identified opportunities. In addition, business referrals from other investors in Acquisition Partnerships, repeat business from previous sellers, focused marketing by FirstCity and the nationwide presence of FirstCity are important sources of business.

FirstCity identifies investment opportunities in foreign markets in much the same manner as in the United States. In varying degrees of volume and efficiency, the markets of Europe, Asia, and Latin America all include sellers of nonperforming assets. In some countries, such as Mexico, the government has taken a very active role in the management and orderly disposition of these types of assets. FirstCity's established presence in Mexico and France provides a strong base for the identification, valuation, and acquisition of assets in those countries, as well as in adjacent markets. FirstCity continues to identify partners who have contacts within various foreign markets and or can assist in locating Portfolio Asset opportunities with FirstCity.

Prior to making an offer to acquire any Portfolio, FirstCity performs an extensive evaluation of the assets that comprise the Portfolio. If, as is often the case, the Portfolio Assets are nonhomogeneous, FirstCity will evaluate all individual assets determined to be significant to the total of the proposed purchase. If the Portfolio Assets are homogenous in nature, a sample of the assets comprising the Portfolio may be selected for evaluation. The evaluation of individual assets generally includes analyzing the credit and collateral file or other due diligence information supplied by the seller. Based upon such seller-provided information, FirstCity will undertake additional evaluations of the asset, that, to the extent permitted by the seller, will include site visits to, and environmental reviews of the property securing the loan or the asset proposed to be purchased. FirstCity will also analyze relevant local economic and market conditions based on information obtained from its prior experience in the market or from other sources, such as local appraisers, real estate principals, realtors and brokers.

The evaluation includes an analysis of an asset's projected cash flow and sources of repayment, including the availability of third party guarantees. FirstCity values loans (and other assets included in a portfolio) on the basis of its estimate of the present value of estimated cash flow to be derived in the resolution process. Once the cash flow estimates for a proposed purchase and the financing and partnership structure, if any, are finalized, FirstCity can complete the determination of its proposed purchase price for the targeted Portfolio Assets. Purchases are subject to purchase and sale agreements between the seller and the purchasing affiliate of FirstCity.

The analysis and underwriting procedure in foreign markets follows the same extensive diligence philosophy as that employed by the Company domestically. Additional risks are evaluated in foreign markets, including economic factors (inflation or deflation), currency strength, short and long-term market stability and political concerns. These risks are evaluated and priced into the cost of the acquisition.

After a Portfolio is acquired, FirstCity assigns the Portfolio Assets to account servicing officers who are independent of the personnel that performed the due diligence evaluation in connection with the purchase of the Portfolio. Portfolio Assets are serviced either at the Company's headquarters or in one of FirstCity's other offices. FirstCity may establish servicing operations in locations in close proximity to significant concentrations of Portfolio Assets. Such offices are reviewed for closing after the assets in the geographic region surrounding the office are substantially resolved. The assigned account servicing officer develops a business plan and budget for each asset based upon an independent review of the cash flow projections developed during the investment evaluation, physical inspections of assets or collateral underlying the related loans, evaluation of local market conditions and discussions with the relevant borrower. Budgets are periodically reviewed and revised as necessary. FirstCity employs loan-tracking software and other operational systems that are generally similar to systems used by commercial banks, but which have been enhanced to track both the collected and the projected cash flows from Portfolio Assets.

FirstCity services, in all material respects, the Portfolio Assets owned for its own account, the Portfolio Assets owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, FirstCity generally earns a servicing fee, which is a percentage of gross cash collections generated rather than a management fee based on the Face Value of the asset being serviced. The rate of servicing fee charged is generally a function of the average Face Value of the assets within each pool being serviced (the larger the average Face Value of the assets in a Portfolio, the lower the fee percentage within the prescribed range), the type of assets and the level of servicing required on each asset. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. The Company also has certain consulting contracts with its Mexican investment entities pursuant to which the Company is entitled to additional compensation for servicing once a specified return to the investors has been achieved. The Acquisition Partnerships in France are serviced by MCS in which the Company maintains a 20.4% direct and indirect equity interest.

Portfolio Assets are either acquired for the account of a subsidiary of FirstCity or through the Acquisition Partnerships. Portfolio Assets owned directly by a subsidiary of FirstCity may be funded with loans made by FirstCity to its subsidiaries, equity financing provided by an affiliate of Cargill, the Bank of Scotland or other third parties and secured debt that is recourse only to the Acquisition Partnership.

Each Acquisition Partnership is a separate legal entity, (generally a limited partnership, but may instead be a limited liability company, trust, corporation or other type of entity). FirstCity and an investor typically form a corporation to serve as the corporate general partner of each Acquisition Partnership. Generally, for domestic Acquisition Partnerships, FirstCity and another investor each own 50% of the general partner and a 49.5% limited partnership interest in the domestic Acquisition Partnership (the general partner owns the other 1% interest). Cargill or its affiliates are the investor in the vast majority of the Acquisition Partnerships currently in existence. See "Relationship with Cargill." Certain institutional investors have also held limited partnership interests in the Acquisition Partnerships and may hold interests in the related corporate general partners.

The Acquisition Partnerships are generally financed by debt, secured only by the assets of the individual entity, and are nonrecourse to the Company, its co-investors and the other Acquisition Partnerships. FirstCity believes that this legal structure insulates the Company and the other Acquisition Partnerships from certain potential risks, while permitting FirstCity to share in the economic benefits of each Acquisition Partnership.

Senior secured acquisition financing by Bank of Scotland and Cargill provides the majority of the funding for the purchase of Portfolios. Senior acquisition financing is obtained at variable interest rates with negotiated spreads to the base rates. The terms of the senior acquisition debt of the Acquisition Partnerships often allow, under certain conditions, distributions to equity partners before the debt is repaid in full.

Prior to maturity of the senior acquisition debt, the Acquisition Partnerships typically refinance the senior acquisition debt with long-term debt secured by the assets of the partnership. Such long-term debt generally accrues interest at a lower rate than the senior acquisition debt, has collateral terms similar to the senior acquisition debt, and permits distributions of excess cash flow generated by the Acquisition Partnership to the equity partners so long as the partnership is in compliance with applicable financial covenants.

In foreign markets, FirstCity conducts analysis with respect to the establishment of ownership structures. Prior to investment, FirstCity, in conjunction with its co-investors, performs significant due diligence and planning on the tax, licensing, and other ownership issues of the particular country. As in the United States, each foreign Acquisition Partnership is a separate legal entity, generally formed as the equivalent of a limited liability company or a liquidating trust.

Cargill, a diversified financial services company, is a wholly owned subsidiary of Cargill, Incorporated, which is generally regarded as one of the world's largest privately held corporations and has offices worldwide. Cargill and its affiliates have historically provided significant debt and equity financing to the Acquisition Partnerships. In addition, FirstCity, while not dependent on Cargill, believes its relationship with Cargill enhances FirstCity's credibility as a purchaser of Portfolio Assets and facilitates its ability to expand into related businesses and foreign markets.

Prior to 2006, the Company, FirstCity Servicing Corporation, Cargill and its wholly owned subsidiary CFSC Capital Corp. II ("CFSC"), under the terms of Right of First Refusal Agreement, were parties to a Right of First Refusal Agreement and Due Diligence Reimbursement Agreement effective as of January 1, 1998, as amended (the "Right of First Refusal Agreement") from 1992 through February 1, 2006. Pursuant to the Right of First Refusal Agreement, if the Company received an invitation to bid on or otherwise obtain an opportunity to acquire Portfolio Assets in the United States, Mexico, Central America or South America within certain thresholds, CFSC had the option to participate in the proposed purchase through an Acquisition Partnership.

The Right of First Refusal Agreement did not prohibit the Company from holding discussions with entities other than CFSC regarding potential joint purchases of interests in loans, receivables, real estate or other assets, provided that any such purchase was subject to CFSC's right to participate in the Company's share of the investment. The Right of First Refusal Agreement further provided that, subject to certain conditions, CFSC would pay to the Company a monthly amount to cover due diligence expense, plus 50% of the third party due diligence expenses incurred by the Company in connection with proposed asset purchases. The Right of First Refusal Agreement was a restatement and extension of a similar agreement entered into among the Company, certain members of the Company's management and Cargill in 1992.

On August 8, 2006, Strategic Mexican Investment Partners, L.P. ("SMIP"), an affiliate of the Company, and AIG formed Bidmex Holding, LLP for the purpose of acquiring certain Mexican Portfolios by purchasing the interests of Cargill and SMIP. As result, AIG and the Company acquired 85% and 15%, respectively, of the ownership interest in Bidmex Holding, LLP.

AIG and the Company have expressed a mutual interest in pursuing other business opportunities in Latin America. The Company is not dependent on AIG for future liquidity or funding.

FirstCity has had a significant relationship with Bank of Scotland and The Governor and The Company of the Bank of Scotland ("BoS-UK") and their subsidiaries since September 1997. FirstCity and its wholly-owned subsidiaries have entered into loan agreements with Bank of Scotland and its affiliates, BoS (USA) Inc. and BoS-UK from time to time since 1997.

On November 1, 2006, FirstCity Financial Corporation ("FirstCity") and Bank of Scotland, as agent for the lenders, entered into an Amendment No. 4 to Revolving Credit Agreement, dated as of October 31, 2006 (the "Amendment"). The Amendment amended the existing $96,000,000 revolving credit facility entered into on November 12, 2004, to increase the revolving credit facility to $175,000,000 that matures on November 12, 2010. The Amendment made the following changes to the existing loan facility that is used to finance the senior debt and equity portion of portfolio and asset purchases made by FirstCity and to provide for the issuance of letters of credit and working capital loans: (i) increased the maximum outstanding amount of loans and letters of credit issued under the loan facility that may be outstanding under the loan facility to $175,000,000; (ii) reduced the available interest rates under the loan facility by 0.5% per annum; (iii) increased the maximum value for assets that can be included in the borrowing base from the acquisition of portfolio assets in certain countries as follows (a) Mexico increased to $30,000,000, (b) Brazil increased to $5,000,000, (c) Chile to $10,000,000, and (d) Argentina or Uruguay to $6,000,000; (iv) increased the limit for Loans that can be borrowed in Euros under the loan facility to $50,000,000; (v) increased the maximum amount of letters of credit that can be issued under the loan facility to $40,000,000; (vi) increased the maximum amount of working capital loans that can be outstanding under the loan facility to $35,000,000; (vii) provided for an additional upfront fee paid to Bank of Scotland in the amount of $830,000; (viii) amended the requirement for the ratio of EBITDA to Interest Coverage to be not less than 1.50 to 1.00 for each twelve month period, and added a new covenant that FirstCity must maintain a ratio of Cumulative Current Recovered and Projected Collections to Cumulative Original Projected Collections of not less than 0.90 to 1.00; and (ix) extended the maturity date for the loan facility to November 12, 2010. The obligations of FirstCity under the Revolving Credit Agreement are guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and are secured by security interests in substantially all of the assets of FirstCity and its wholly-owned subsidiaries.

On December 14, 2006, the Company and Bank of Scotland, as agent for the lenders, entered into an Amendment No. 5 to Revolving Credit Agreement, dated as of December 14, 2006 (the "Amendment"). The Amendment amended the existing $96,000,000 revolving credit facility entered into on November 12, 2004, to (i) increase the borrowing base availability from 60% to 70%, and (ii) to increase the margin for LIBOR loans from 2.25% to 2.50% at any time that the loan to value ratio is greater than 1.20 to 2.00.

On June 29, 2007, the Company and Bank of Scotland, as agent for the lenders, entered into an Amendment No. 9 to Revolving Credit Agreement, dated as of June 29, 2007 and effective as of March 31, 2007 (the "Amendment"). The Amendment amended the existing $96,000,000 revolving credit facility entered into on November 12, 2004, to provide that the ratio of Indebtedness to Tangible Net Worth should be equal to or less than 3.5 to 1.00 for the last day of the fiscal quarter. See "Liquidity and Capital Resources" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

In August 2005, FH Partners, L.P., an indirect wholly-owned affiliate of FirstCity, and Bank of Scotland, acting through its New York branch, as agent for itself as lender, entered into a Revolving Credit Agreement that provides a $50 million revolving portfolio acquisition facility for FH Partners, L.P. to be secured by all of the assets of FH Partners, L.P. The loan facility is used to finance portfolio and asset purchases. The facility (i) allows loans to be made for the acquisition of Portfolio Assets in the United States, (ii) provides that each loan may be in an amount of up to 70% of the net present value of the assets being acquired with the proceeds of the loan, (iii) provides that the aggregate outstanding balances of all loans will not exceed 65% of the net present value of the assets securing the loan facility, (iv) provides for an interest rate of LIBOR plus 2.0%, (v) provides for an annual commitment fee of 0.20% of the unused balance of the revolving acquisition facility, (vi) provides for a utilization fee of 0.75% of the amount of each loan made under the loan facility, (vii) provides for an upfront fee of $350,000, (viii) provides for facility fees of $100,000, for the period commencing on the Effective Date to but excluding the first anniversary thereof, $75,000, for the period commencing on the first anniversary of the Effective Date to but excluding the second anniversary thereof, and $50,000, for each subsequent one-year period, and (ix) provides for a maturity date of November 12, 2008. The obligations of FH Partners, L.P. under the Revolving Credit Agreement are guaranteed by FirstCity and the primary wholly-owned subsidiaries of FirstCity.

On June 29, 2007, FH Partners, L.P., and Bank of Scotland entered into an Amendment No. 1 to the Revolving Credit Agreement, dated as of June 29, 2007 (the "Amendment"). The Amendment amended the existing $50 million revolving credit facility entered into on August 26, 2005, to provide that all other financial covenants will mirror the key covenants of the facility that FirstCity has with Bank of Scotland.

FirstCity has obtained consents from the Bank of Scotland to the delivery of its annual audited financial statements for Fiscal Year 2006, its monthly financial statements for January 2007 through June 2007, the Annual Report on Form 10-K for the year ended December 31, 2006 and the Form 10-Q for the period ending March 31, 2007, by not later than July 31, 2007. The extensions were granted under the terms of both FirstCity's revolving credit facility and the revolving acquisition facility provided to FH Partners L.P., to allow FirstCity and FH Partners, L.P. to continue to utilize those loan facilities in the normal course of business.

BoS(USA) has a warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share. BoS(USA) is entitled under certain circumstances to additional warrants in connection with the existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. The warrant will expire on August 31, 2010, if it is not exercised prior to that date.

Historically, FirstCity has leveraged its expertise in asset resolution and servicing by investing in a wide variety of asset types across a broad geographic scope. FirstCity continues to follow this investment strategy and seeks expansion opportunities into new asset classes and geographic areas when it believes it can achieve attractive risk adjusted returns. The following items are significant elements of FirstCity's business strategy in the portfolio acquisition and resolution business:

On September 21, 2004, FirstCity and certain of its subsidiaries entered into a definitive agreement to sell the remaining 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP for a total purchase price of $108.5 million in cash, resulting in distributions and payments to FirstCity in the aggregate amount of $86.8 million in cash, from various sources. The sale was completed on November 1, 2004, and the net cash proceeds from these transactions were primarily used to pay off debt.

Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the consolidated financial statements have been reclassified for all periods presented to reflect the operations, assets and liabilities of the consumer business segment as discontinued operations. The assets and liabilities of such operations have been classified as "Discontinued Consumer Assets Held for Sale" and "Liabilities from Discontinued Consumer Operations."

Certain aspects of the Company's Portfolio Asset acquisition and resolution business are subject to regulation under various foreign, federal, state and local statutes and regulations that impose requirements and restrictions affecting, among other things, disclosures to obligors, the terms of secured transactions, collection, repossession and claims handling procedures, multiple qualification and licensing requirements for doing business in various jurisdictions, and other trade practices.

The Portfolio Asset acquisition business is highly competitive. Some of the Company's principal competitors are substantially larger and better capitalized than the Company. Because of these resources, these companies may be better able than the Company to acquire Portfolio Assets, to pursue new business opportunities or to survive periods of industry consolidation. Generally, there are three aspects of the distressed asset business: due diligence, Portfolio management, and servicing. The Company is a major participant in all three areas. In comparison, certain of its competitors (including certain securities and banking firms) have historically competed primarily as portfolio purchasers and have customarily engaged other parties to conduct due diligence on potential Portfolio purchases and to service acquired assets, and certain other competitors (including certain banking and other firms) have historically competed primarily as servicing companies.

The Company believes that its ability to acquire Portfolios for its own account and through Acquisition Partnerships will be an important component of the Company's overall future growth. Acquisitions of Portfolios are often based on competitive bidding, which involves the danger of bidding too low (which generates no business), or bidding too high (which could result in the purchase of a Portfolio at an economically unattractive price).

The Company had 208 employees as of December 31, 2006. No employee is a member of a labor union or party to a collective bargaining agreement. The Company believes that its relations with its employees are good.

We have investments in various Acquisition Partnerships and servicing entities in Europe and Central and South America. Revenues outside of the U.S. are a material part of our business, and they accounted for more than 40% of our consolidated revenues in each year in the three-year period ended December 31, 2006. See Note 8 to the Consolidated Financial Statements for the year ended December 31, 2006.

In maintaining foreign operations, our business is exposed to risks inherent in such operations, including those of currency fluctuations. Information on currency exchange risk appears in Part II, Item 7A of this Annual Report on Form 10-K, which information is incorporated herein by reference.

Financial information about geographic areas, including net sales and assets, for the years in the period ended December 31, 2006 appears in Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, which information is incorporated herein by reference.

This section highlights specific risks that could affect our Company and its businesses. You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our Company. However, the risks and uncertainties our Company faces are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

If any of the following risks and uncertainties develops into actual events or the circumstances described in the risks and uncertainties occur, these events or circumstances could have a material

adverse effect on our business, financial condition or results of operations. These events could also have a negative effect on the trading price of our securities.

Long-term cycles in the general economy affect the business of acquiring and resolving Portfolio Assets. We cannot predict our future annual acquisition volume of Portfolio Assets. Moreover, our future purchase of Portfolio Assets will depend on the availability of Portfolios offered for sale, the availability of capital and our ability to submit successful bids to purchase Portfolio Assets. Due to the highly competitive environment of the business of acquiring Portfolio Assets in the United States, we may be required to acquire Portfolio Assets at higher prices lowering our profit margins on the resolution of such Portfolios. To offset these changes in the domestic arena, we continue to develop our presence in other markets. Under certain circumstances, we may choose not to bid for Portfolio Assets that we believe cannot be acquired at attractive prices. As a result of all the above factors, we may be materially adversely affected by variations on our Portfolio Asset purchases, and the revenue derived from the resolution of such Portfolio Assets.

Our ability to manage risks associated with growth and entry into new businesses and foreign markets may be limited.

We have entered into new business related to the Portfolio Asset acquisition business and new foreign markets in the Portfolio Asset acquisition business. We have also recently entered into the business of originating and servicing loans as a small business lending company through our ninety-six percent (96%) investment in American Business Lending, Inc. ("ABL") and acquisition by ABL of unguaranteed portions of certain business loans, certain loan servicing rights and obligations including certain fees to be earned on the portion of such loans that are guaranteed by the U.S. Small Business Administration. Additionally, we have entered into a special situations platform that will buy or finance distressed debt and companies, originate junior and senior bridge loans, and execute lower middle market buyouts through our eighty percent (80%) investment in FirstCity Crestone. We are also expanding operations in Latin America and Europe.

The entry into these new businesses and foreign markets has resulted in increased demands on our personnel and systems. The development and integration of the new businesses and operations in foreign venues requires the investment of additional capital and the continuous involvement of our senior management. We also must manage a variety of businesses and operations in foreign venues with differing markets, customer bases, financial products, systems and managements. An inability to develop, integrate and manage our businesses and operations in foreign venues could have a material adverse effect on our financial condition, results of operations and business prospects. Risks related to the start up of a business or entry into a new foreign market, including the ability to implement the new business plan and strategy to generate sufficient revenues necessary to avoid losses common to start up companies, the availability of opportunities for investment in the markets to be entered, the dependency of new businesses for liquidity and our ability to support and manage continued growth is dependent upon, among other things, our ability to attract and retain senior management for each of our businesses, to hire, train, and manage our workforce and to continue to develop the skills necessary for us to compete successfully in our existing and new businesses and operations in foreign venues . There can be no assurance that we will successfully meet all of these challenges.

It is likely that our actual experience will not be consistent with the assumptions underlying our Portfolio Asset performance and that the differences may be material and adverse.

We determine the purchase price and carrying value of Portfolio Assets acquired by us by estimating expected future cash flows from such assets. We develop and revise such estimates based on our historical experience and current market conditions, and based on the discount rates that we

believe are appropriate for the assets comprising the Portfolios. In addition, many obligors on Portfolio Assets have impaired or poor credit history, low income or other adverse credit events. We are subject to various risks associated with these borrowers, including, but not limited to, the risk that the borrowers will not satisfy their debt service obligations and that the realizable value of the assets securing their loans will not be sufficient to repay the borrowers' debt. If our Portfolio Asset performance differs from our assumptions and estimates, we may be materially adversely affected.

Investments in and revenues from our foreign operations are subject to the risks associated with transactions involving foreign currencies.

We have acquired, and manage and resolve, Portfolio Assets located in Europe and Latin America and are actively pursuing opportunities to purchase additional pools of distressed assets in these locations. Foreign operations are subject to various special risks, including currency translation risks, currency exchange rate fluctuations, exchange controls and different political, social and legal environments within such foreign markets. To the extent future financing in foreign currencies is unavailable at reasonable rates, we will be further exposed to currency translation risks, currency exchange rate fluctuations and exchange controls. In addition, earnings of foreign operations may be subject to foreign income taxes that reduce cash flow available to meet debt service requirements and our other obligations, which may be payable even if we have no earnings on a consolidated basis. Fluctuation in our reported results from operations in foreign countries could materially adversely affect us.

Most of our borrowings are at variable rates of interest. We will be materially impacted by fluctuations in interest rates.

In addition, a substantial and sustained decline in interest rates may adversely impact the amount of distressed assets available for purchase by us. The value of our interest-earning assets and liabilities may be directly affected by the level of and fluctuations in interest rates, including the valuation of any residual interests in securitizations that would be severely impacted by increased loan prepayments resulting from declining interest rates.

The successful execution of our business strategy depends on our continued access to financing. In addition, we must also have access to liquidity to invest as equity or subordinated debt to meet our capital needs. We rely upon access to the capital markets and the cash flow from our subsidiaries to fund asset growth and to provide sources of liquidity. Our ability to issue and sell common equity (including securities convertible into, or exercisable or exchangeable for, common equity) is limited as a result of the tax laws relating to the preservation of the NOLs available to us as a result of the Merger. There can be no assurance that our funding relationships with commercial banks, investment banks and financial services companies (including the Bank of Scotland) will continue past their respective current maturity dates. If these credit facilities are not extended and we cannot find alternative funding sources on satisfactory terms, or at all, we may be materially adversely affected. See "Liquidity and Capital Resources."

We may be materially adversely affected by the decline in value of collateral securing loans acquired for resolution.

The value of the collateral securing loans acquired for resolution, as well as real estate or other acquired distressed assets, is subject to various risks, including uninsured damage, change in location or

decline in value caused by use, age or market conditions. We may be materially adversely affected by any material decline in the value of such collateral.

We believe that, as a result of the Merger, approximately $596 million of NOLs were available to us to offset future taxable income as of December 31, 1995. Since December 31, 1995, we have generated an additional $131 million in tax operating losses, utilized $46 million of NOLs, written-off $84 million of NOLs, and had expiring NOLs of $36 million in 2005 and $179 million in 2006. Accordingly, as of December 31, 2006, we believe that we have approximately $382 million of NOLs available to offset future taxable income. Out of the total $382 million of NOLs, we estimate that we will be able to utilize $57 million, which equates to a $20 million deferred tax asset on our books and records. However, because our position in respect of the $596 million NOLs resulting from the Merger is based upon factual determinations and upon legal issues with respect to which there is uncertainty and because no ruling has been obtained from the Internal Revenue Service (the "IRS") regarding the availability of the NOLs to us, there can be no assurance that the IRS will not challenge the availability of such NOLs and, if challenged, that the IRS will not be successful in disallowing this portion of our NOLs, with the result that our $20 million deferred tax asset would be reduced or eliminated.

Some of the NOLs may be carried forward to offset our future federal taxable income through the year 2021; however, the availability of some of the NOLs began to expire beginning in 2005. Our ability to utilize such NOLs will be severely limited if there is a more than 50% ownership change at our company during a three-year testing period within the meaning of section 382 of the Internal Revenue Code of 1986, as amended (the "Tax Code").

If we were unable to utilize our NOLs to offset future taxable income, we would lose our ability to generate capital to support our expansion plans on a tax-advantaged basis, to offset our pretax income and our consolidated subsidiaries' pretax income, and to have access to the cash flow that would otherwise be represented by payments of federal tax liabilities.

It is possible that our actual experience will not be consistent with the assumptions regarding recognition of deferred tax asset and that the differences may be material and adverse.

As noted above, we have NOLs available for federal income tax purposes to offset future federal taxable income, if any, through the year 2021. A valuation allowance is provided to reduce the deferred tax assets to a level, which, more likely than not, will be realized. Realization is determined based on our management's expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the net operating loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset, net of the allowance, will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The change in valuation allowance represents a change in the estimate of the future taxable income during the carryforward period since the prior year-end and utilization of net operating loss carryforwards since the Merger. Our ability to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly. See "Discussion of Critical Accounting Policies—Deferred Tax Asset."

We may incur significant costs relating to removal of hazardous substances or waste from real property in its Portfolio Assets.

We acquire through our subsidiaries and affiliates real property in our Portfolio Asset acquisition and resolution business. There is a risk that properties acquired by us could contain hazardous

substances or waste, contaminants or pollutants. We may be required to remove such substances from the affected properties at our expense, and the cost of such removal may substantially exceed the value of the affected properties or the loans secured by such properties. Furthermore, we may not have adequate remedies against the prior owners or other responsible parties to recover our costs, either as a matter of law or regulation, or as a result of such prior owners' financial inability to pay such costs. We may find it difficult or impossible to sell the affected properties either prior to or following any such removal.

We may not be able to successfully compete in the business in which we operate.

The business in which we operate is highly competitive. Some of our principal competitors are substantially larger and better capitalized than us. Because of their resources, these companies may be better able than us to acquire Portfolio Assets, to pursue new business opportunities or to survive periods of industry consolidation. Access to and the cost of capital are critical to our ability to compete. Many of our competitors have superior access to capital sources and can arrange or obtain lower cost of capital, resulting in a competitive disadvantage to us with respect to such competitors.

In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow these competitors to establish lower margin requirements and pricing levels than those established by us. In the event a significant number of competitors establish pricing levels below those established by us, our ability to compete would be materially adversely affected.

We may be adversely affected by a general deterioration in economic conditions.

Periods of economic slowdown or recession, or declining demand for commercial real estate or commercial or consumer loans may adversely affect our business. Periods of economic slowdown or recession, whether general, regional or industry-related, may adversely affect the resolution of Portfolio Assets, lead to a decline in prices or demand for collateral underlying Portfolio Assets, or increase the cost of capital invested by us and the length of time that capital is invested in a particular Portfolio. All or any one of these events could decrease the rate of return and profits to be realized from such Portfolio and materially adversely affect our consolidated financial position, results of operations and business prospects.

We may be adversely affected by the regulated environment in which we operate.

Some aspects of our business are subject to regulation, examination and licensing under various federal, state and local statutes and regulations that impose requirements and restrictions affecting, among other things, credit activities, maximum interest rates, finance and other charges, disclosures to obligors, the terms of secured transactions, collection, repossession and claims handling procedures, multiple qualification and licensing requirements for doing business in various jurisdictions, and other trade practices. We believe to be currently in compliance in all material respects with applicable regulations, but there can be no assurance that we will be able to maintain such compliance. Failure to comply with, or changes in, these laws or regulations, or the expansion of our business into jurisdictions that have adopted more stringent regulatory requirements than those in which we currently conduct business, could have an adverse effect on our company by, among other things, limiting the income we may generate on existing and additional loans, limiting the states in which we may operate or restricting our ability to realize on the collateral securing its loans. See "Item 1—Business—Government Regulation."

Periodically, our company, our subsidiaries, our affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business.

We may be adversely affected by a termination of our relationship with Cargill.

Our relationship with Cargill is material in a number of respects. Cargill, a subsidiary of Cargill, Incorporated, a privately held, multi-national agricultural and financial services company, has provided equity and debt financings for some of the Acquisition Partnerships. Cargill beneficially owns approximately 2.28% of our outstanding Common Stock, and a Cargill designee, Jeffery Leu, is a member of our Board of Directors. We believe that our relationship with Cargill significantly enhances our credibility as a purchaser of Portfolio Assets and facilitates its ability to expand into other businesses and foreign markets.

Although our management believes that our relationship with Cargill is excellent, there can be no assurance that such relationship will continue in the future. As we have begun to acquire more portfolios on our own or with other partners and have secured alternative sources of financing, our dependence on Cargill has diminished. There can be no assurance that such alternative financing will continue to be available. Any termination of such relationship could have a material adverse effect on our consolidated financial position, results of operations and business prospects.

We may be adversely affected by a termination of employment of certain key personnel.

We are dependent on the efforts of our senior executive officers, particularly James T. Sartain (President and Chief Executive Officer). We are also dependent on several of the key members of our management who are instrumental in developing and implementing the business strategy for the Company. In addition, our borrowing facilities include key personnel provisions. These provisions generally provide that if certain key personnel are no longer employed and suitable replacements are not found within a defined time limit, certain facilities become due and payable. We may be adversely affected by the inability or unwillingness of one or more of these individuals to continue in his present role. There can be no assurance that any of the foregoing individuals will continue to serve in his current capacity or for what time period such service might continue. We do not maintain key person life insurance for any of its senior executive officers.

Our directors and executive officers may effectively control any vote of stockholders of our company.

Our directors and executive officers collectively beneficially own 15.83% of the Common Stock. Although there are no agreements or arrangements with respect to voting such Common Stock among such persons, they, if acting together, may effectively be able to control any vote of our stockholders and thereby exert considerable influence over the affairs of our company. James T. Sartain, President and Chief Executive Officer of our company, is the beneficial owner of 5.68% of the Common Stock. There can be no assurance that the interests of management or the other entities and individuals will be aligned with our other stockholders.

Restrictions on transfer of shares may prevent certain holders of our Common Stock from transferring such stock.

Our Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") contains provisions restricting the transfer of its securities that are designed to delay, defer or prevent a change of control of our company by deterring unsolicited tender offers or other unilateral takeover proposals and compelling negotiations with our Board of Directors rather than non-negotiated takeover attempts even if such events may be in the best interests of our stockholders. Our Certificate of Incorporation also contains certain provisions restricting the transfer of securities in our company that are designed to prevent ownership changes that might limit or eliminate our ability to use our NOLs resulting from the Merger. Such restrictions may prevent certain holders of Common Stock from transferring such stock even if such holders are permitted to sell such stock without restriction under the Securities Act of 1933, as amended, and may limit our ability to sell Common Stock to certain

existing holders of Common Stock at an advantageous time or at a time when capital may be required but unavailable from any other source.

The revenue of our company and Acquisition Partnerships is based on proceeds realized from the resolution of the Portfolio Assets, which proceeds have historically varied significantly and likely will continue to vary significantly from period to period. Consequently, our period-to-period revenue and results of operations have historically varied, and are likely to continue to vary, correspondingly. Such variances, alone or with other factors, such as conditions in the economy or the financial services industries or other developments affecting us, may result in significant fluctuations in our reported operations and in the trading prices of our securities, particularly the Common Stock.

We originate and acquire financial assets, the value and income potential of which are subject to influence by foreign regulations, various state and federal tax, monetary and fiscal policies in effect from time to time. The nature and direction of such policies are entirely outside our control, and we cannot predict the timing or effect of changes in such policies. Changes in such policies could have a material adverse effect on our consolidated financial position, results of operations and business prospects.

We have in the past been able to establish with reasonable accuracy the estimated future cash receipts over the life of a purchased asset pool. Changes in economic conditions, fluctuations in interest rates, deterioration of collateral values, and other factors described in this section could cause the estimates of future cash flows to be materially different than actual cash receipts.

The effects of an increase in the estimated future cash receipts would generally increase revenues from Portfolio Assets by increasing gross profit on a non-performing or real estate pool and increasing the effective yield on a performing or SOP 03-3 Portfolio while a decrease in future cash receipts would generally have the effect of reducing revenues by reducing gross profit on a non-performing or real estate pool and decreasing the effective yield on a performing or SOP 03-3 Portfolio. In some cases a reduction in the total future cash receipts by collecting those cash receipts sooner than expected could have a positive impact on our revenues from Portfolio Assets due to reduced interest expense and other carrying costs associated with the Portfolio Assets. Although such trend is a generally positive trend, we may be adversely affected by the higher levels of interest expense and other carrying costs of the Portfolios negating any potentially positive effects.

The Company occupies approximately 61,000 square feet of office space, all of which is leased. The Company leases its current headquarters building under a noncancellable operating lease, which expires December 31, 2011 with an option to renew for an additional five years. All leases of the other offices of the Company and subsidiaries expire prior to 2015. Such office space is suitable and adequate

for the Company's current needs. The following is a list of the Company's principal physical properties leased as of December 31, 2006.

Location	Function	Business Segment
Waco, Texas	Executive Offices	Corporate/Commercial
Richmond, Virginia	Servicing Offices	Commercial
Guadalajara, Mexico	Servicing Offices	Commercial
Mexico City, Mexico	Servicing Offices	Commercial
Salt Lake City, Utah	Servicing Offices	Commercial
Dallas, Texas	Servicing Offices	Commercial
Sao Paulo, Brazil	Servicing Offices	Commercial

On January 19, 2005, Prudential Financial, Inc. ("Prudential") filed a petition in interpleader seeking to interplead 321,211 shares of Prudential common stock and any associated dividends arising from the demutualization of Prudential in December 2000. The shares of Prudential common stock related to group annuity contracts purchased by First-City National Bank of Houston, as trustee of the First City Bancorporation Employee Retirement Trust (the "Trust") to fund obligations to participants in the First City Bancorporation Employee Retirement Plan (the "'Plan") in connection with termination of the Plan and the Trust in 1987. FirstCity, FCLT Loans Asset Corp. ("FCLT"), an alleged assignee of the FirstCity Liquidating Trust, JP Morgan Chase Bank, National Association ("JP Morgan"), and First-City National Bank of Houston as trustee of the Trust were made defendants in the suit as claimants to the Prudential common stock and dividends. An agreed order dated January 27, 2005, was entered by the court providing that the Prudential common stock be transferred to JP Morgan as record owner and that JP Morgan sell the stock. The January 27, 2005 order also provided that the proceeds from the sale be held by JP Morgan pending resolution, by agreement or court order, of all conflicting claims to the proceeds. JP Morgan advised that the Prudential common stock was sold on January 28, 2005 for total proceeds of approximately $17.5 million. JP Morgan also received funds in the amount of approximately $489,000, which were dividend payments related to the Prudential common stock. The proceeds are being held by JP Morgan pending resolution of the conflicting claims. JP Morgan filed a third party action naming Mr. Blair as a third party defendant with an alleged interest in the demutualization proceeds. On October 1, 2005, the court certified a class represented by Mr. Blair.

FirstCity, FCLT and Mr. Blair each filed motions for summary judgment asserting ownership of the proceeds of the common stock and the dividends and accrued income. On March 21, 2006, FirstCity received notice that the 152nd District Court, Harris County, Texas granted FirstCity's motion for partial summary judgment. The order granting FirstCity's motion for partial summary judgment rendered judgment in favor of FirstCity as to the ownership of the demutualization proceeds. The court's summary judgment order also denied the claims to ownership of the demutualization proceeds by FCLT and Mr. Blair, individually and as representative of the proposed class of employee beneficiaries. The motions submitted to the court prior to its order dated March 21, 2006 did not address all matters pending in the lawsuit. Mr. Blair, as class representative, filed a motion for new trial to set aside the summary judgment in favor of FirstCity and for reconsideration of granting Mr. Blair's motion for summary judgment. FCLT filed a motion for the court to reconsider its order granting the partial summary judgment for FirstCity. FirstCity moved for summary judgment on all remaining claims and for entry of a final judgment on May 12, 2006. On August 14, 2006, the court entered an order (i) finding that FirstCity is the sole owner of the "demutualization proceeds" being the proceeds from the sale of the 321,211 shares of Prudential Financial, Inc. stock, the dividends on

such shares and all accrued interest and income arising there from, (2) granting FirstCity's motion for summary judgment against FCLT's claims for breach of contract and tortious interference, (3) providing that JP Morgan continue to hold the demutualization proceeds until the appellate process has been completed, (4) denying the request by FirstCity that FCLT or Mr. Blair be required to post bond or other form of security on appeal, and (5) denying all other claims for relief. FCLT and Mr. Blair filed notices of appeal to the First or Fourteenth Court of Appeals of the State of Texas. The appeal has been assigned to the First Court of Appeals and all parties have filed their briefs with the court. The parties participated in court ordered mediation on February 13, 2007 which was unsuccessful. FirstCity cannot give any assurances as to the time period for the appeal of the final judgment or the timing of receipt or ultimate amount of proceeds to be received, if any.

In the trial court, FCLT filed a counterclaim against FirstCity claims for damages related to alleged breaches of contract by FirstCity related to failure to assign the proceeds to FCLT and FirstCity's assertion of a claim to the proceeds and a claim for tortious interference by FirstCity as a result of FirstCity's claim for the proceeds. In connection with that claim, FCLT seeks to recover attorney's fees and other damages related to the assertion by FirstCity of an interest in the shares of Prudential common stock. No amount has been asserted by FCLT Loans Asset Corp. and the company does not believe that its actions give rise to a claim by FCLT Loans Asset Corp. The trial court denied these claims of FCLT in its orders resolving claims with respect to the motions for summary judgment filed by each of the parties. The appeal by FCLT seeks to overturn the summary judgment rendered against it with respect to these claims. FirstCity believes that the claims of FCLT are without merit and that it has valid defenses to these claims.

Periodically, FirstCity, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. While the outcome of the ordinary course legal proceedings, and the related activities, are not certain, based on present assessments, management does not believe that they will have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

No matters were submitted to a vote of security holders during the quarter ended December 31, 2006.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock, $.01 par value per share ("Common Stock") is traded on the Nasdaq Global Select Market under the symbol FCFC. The number of holders of record of Common Stock on July 9, 2007 was approximately 740, as provided by American Stock Transfer, the Company's transfer agent. High and low stock prices for the Common Stock in the two years ended December 31, 2006 and December 31, 2005 are displayed in the following table:

	2006 Market Price				2005 Market Price
Quarter Ended	2006 Market Price				2005 Market Price
Quarter Ended	High		Low		High		Low
March 31	$	12.25	$	10.25	$	13.35	$	9.92
June 30		12.05		10.35		13.25		11.00
September 30		11.20		8.53		12.75		10.74
December 31		11.10		9.76		12.40		10.50

The Company has never declared or paid a dividend on the Common Stock. The Company currently intends to retain future earnings to finance its growth and development and therefore does not anticipate that it will declare or pay any dividends on the Common Stock in the foreseeable future. Any future determination as to payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors that the Board of Directors deems relevant. Certain loan facilities to which the Company and its subsidiaries are parties contain restrictions relating to the payment of dividends and other distributions.

The following tables set forth selected consolidated financial information regarding the Company's results of operations and balance sheets. The data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 and with the related Consolidated Financial Statements and Notes thereto under Item 8 of this Annual Report on Form 10-K, respectively.

In December 2002, FirstCity completed a recapitalization in which holders of the New Preferred Stock exchanged 1,092,210 shares of New Preferred Stock, for 2,417,388 shares of common stock and $10.5 million. During 2003, 4,400 shares of New Preferred Stock were redeemed for 8,200 shares of common stock, leaving 126,291 shares outstanding at December 31, 2003. On December 30, 2004, FirstCity redeemed all of the outstanding shares of its New Preferred Stock at a total redemption price of $21.525 per share. The redemption price represented the liquidation preference of the New Preferred Stock plus the final normal quarterly dividend of $.525 per share. In addition, FirstCity issued 400,000 shares of common stock as part of a transaction to acquire the minority interest in FirstCity Holdings, Inc. from Terry R. DeWitt, G. Stephen Fillip and James C. Holmes.

In December 2004, FirstCity redeemed all of the outstanding shares of its New Preferred Stock at a total redemption price of $21.525 per share. The redemption price represented the liquidation preference of the New Preferred Stock plus the fourth quarter 2004 dividend of $.525 per share. FirstCity completed the sale of its 31% investment in Drive in November 2004. As a result, the consumer lending segment conducted through Drive was no longer considered a principal reportable segment and is treated as a discontinued operation. The results of historical operations have been reflected as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this Annual Report on Form 10-K.

FirstCity is a financial services company engaged in the acquisition and resolution of portfolios of assets or single assets (collectively referred to as "Portfolio Assets"). The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such portfolios in an effort to maximize the present value of the ultimate cash recoveries.

During 2006, the Company recorded earnings to common stockholders on a diluted basis of $9.8 million or $0.83 per common share. The operating contribution from the Portfolio Asset acquisition and resolution segment was $15.1 million compared with $13.8 million for 2005. The Company was able to invest $144.0 million in portfolio acquisitions of $297.0 million during 2006 of which $103.4 million was invested in the United States, $32.9 million in Europe, and $7.7 million in Latin America. In addition to the portfolio acquisitions during 2006, FirstCity invested $9.2 million in partnerships as well as $19.0 million in the form of loans to unrelated entities. As a result, earning assets (equity investments, inventory, loans receivable, and interest receivable) increased to $250.4 million in 2006 compared to $153.4 million in 2005. The 2006 investment level of $144 million represents the highest amount invested in a single year in the history of the Company's Portfolio Asset acquisition and resolution business.

During the third quarter of 2006, FirstCity completed a total restructure of its investments in Mexico in a transaction which aligned FirstCity with AIG. The Company received $1.9 million in incentive service fees related to the sale of certain assets in Mexico which occurred as a result of the restructure. The details of the restructure are provided in Note 6 to the Consolidated Financial Statements. In addition, the Company recorded a gain on the sale of equity investments of $2.5 million. This gain consisted of: 1) one domestic equity investment resulting in a gain of $1.3 million and 2) a partial sale of Mexico equity investments in connection with a restructure with AIG resulting in a gain of $1.2 million.

Management remains positive on the outlook of the Company. The acquisitions for 2006 contributed to a $97 million net increase in the primary earning assets base of the Company and FirstCity is currently evaluating 25 different transactions representing over $1.5 billion in face value of assets.

In November 2006, the Company was able to secure an increase in its revolving line of credit with the Bank of Scotland up to a maximum of $175 million. The original line of credit was $96 million and, in accordance with the terms of the agreement, had been reduced to $90.7 million.

In November 2006, the Company, through its subsidiary American Business Lending, Inc., acquired a license from the U.S. Small Business Administration (the "SBA") to originate and service SBA 7(a) loans. In addition, a $25 million revolving loan facility was obtained from Wells Fargo Foothill, Inc. ("WFF") to assist in the financing of these loans. In February 2007, this facility was increased to $40 million.

In the fourth quarter of 2004, FirstCity sold its 31% beneficial ownership interest in Drive. This sale generated a $53.3 million net gain ($54.4 million gain, net of $1.1 million in taxes) which was reflected in the 2004 results of the Company as "earnings from discontinued operations." The $86.8 million proceeds from the sale were primarily used to retire debt. Following the sale, FirstCity and Bank of Scotland restructured the then-existing $50 million revolving credit facility into a

$96 million revolving acquisition facility, which has subsequently been amended to a $175 million facility that matures in November 2010.

The Company's financial results are affected by many factors including levels of and fluctuations in interest rates, fluctuations in the underlying values of real estate and other assets, the timing of and ability to liquidate assets, and the availability and prices for loans and assets acquired in all of the Company's businesses. The Company's business and results of operations are also affected by the availability of financing with terms acceptable to the Company and the Company's access to capital markets, including the securitization markets.

As a result of the significant period to period fluctuations in the revenues and earnings of the Company's Portfolio Asset acquisition and resolution business, period to period comparisons of the Company's results of continuing operations may not be meaningful.

The Audit Committee of the Board of Directors conducted an independent investigation to review whether FirstCity and its subsidiaries received inadequate compensation, or other improprieties occurred, with respect to the sale of a loan portfolio to a third party, and FirstCity's compliance with laws applicable to its foreign operations as a result of allegations against an officer of an affiliate of FirstCity regarding matters that occurred prior to the individual's becoming an officer of that affiliate. The Audit Committee engaged an outside law firm to act as independent counsel and conduct the investigation. Independent counsel worked with external forensic accountants to conduct its review.

The Independent Investigation found that the loan portfolio sale was initiated by other portfolio investors, who owned a majority investment in the portfolio, and that the portfolio appeared to have been sold for the best price available at the time. The Independent Investigation found no evidence indicating that FirstCity or any officer, manager or full-time employee personally benefited from the transactions relating to the portfolio sale. The Independent Investigation concluded that the sales price received by FirstCity and the other portfolio investors was reasonable based upon the information that was available at the time of the sale.

The Independent Investigation concluded that it was unable to complete its review of the issues relating to allegations against the officer of an affiliate of FirstCity due to its inability to access certain documentation outside FirstCity's custody and control. FirstCity has reviewed these issues, performed on-site procedures at the affiliate location and has determined that no adjustment to FirstCity's financial statements is required in connection with this issue.

The Independent Investigation recommended improvements designed to provide additional assurances for accurate financial reporting, particularly with respect to FirstCity's Latin American operations, and to improve FirstCity's internal control structure. The Independent Investigation also recommended changes in FirstCity's approach to foreign business relationships. In addition, the Independent Investigation made a number of recommendations aimed at improving FirstCity's compliance practices and procedures. FirstCity has already begun taking steps to implement the foregoing recommendations.

FirstCity has not identified any material adjustment to its financial statements that is required in connection with the results of the Independent Investigation. The costs associated with the investigation through July 6, 2007 were approximately $2.0 million, with $1.2 million reflected in the first quarter 2007 results and approximately $800,000 to be reflected in the second quarter 2007 results.

Net earnings to common stockholders were $9.8 million in 2006 compared to $8.2 million in 2005. On a per share basis, diluted net earnings to common stockholders were $.83 in 2006 compared to $.69 in 2005. The Company reported earnings from continuing operations of $9.9 million in 2006 compared to $8.1 million in 2005. Losses from discontinued operations were $75,000 in 2006 compared to earnings of $153,000 in 2005. Following is a discussion of the Portfolio Asset acquisition and resolution segment and other corporate overhead as presented in note 8 of the consolidated financial statements.

The operating contribution from the Portfolio Asset acquisition and resolution business of $15.1 million in 2006 increased from $13.8 million in 2005. FirstCity purchased $297.0 million of Portfolio Assets during 2006 ($206 million through the Acquisition Partnerships) compared to $146.6 million in acquisitions in 2005. FirstCity's investment in these acquisitions was $144.0 million and $71.4 million in 2006 and 2005, respectively. FirstCity's year-end investment in wholly-owned Portfolio Assets was $108.7 million at December 31, 2006 compared to $49.3 million at December 31, 2005.

Servicing fee revenues. Servicing fee revenues increased by 9.8% to $12.9 million in 2006 from $11.8 million in 2005. Service fees from the Latin American partnerships (including incentive service fees) increased by $1.3 million or 16.3% as a result of a $1.9 million incentive service fee resulting from the restructure of the Mexican Investment Platform offset by efforts to reduce operating costs in Mexico. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from domestic Acquisition Partnerships decreased by $.18 million or 5% due to a lower service fee rate produced based on the mix of collections.

Income from Portfolio Assets. Income from Portfolio Assets increased 33.0% to $11.0 million in 2006 compared to $8.3 million in 2005, primarily due to increased resolution of portfolio assets. FirstCity's average investment in wholly-owned domestic portfolio assets was $60.1 million and $40.9 million during 2006 and 2005, respectively.

Interest income from affiliates. Interest income from affiliates decreased slightly to $1.5 million in 2006 from $1.8 million in 2005.

Interest income from loans receivable—other. Interest income from loans receivable—other was $.6 million in 2006 and relates to loans originated in the latter half of 2006 which included loans to a Canadian real estate company, and two domestic real estate companies.

Other income. Other income was $1.6 million in 2006 compared to $1.7 million in 2005, primarily due to a reduction in the estimated carrying value of loans payable to certain members of management by $.3 million. See further discussion related to these loans in note 2 of the consolidated financial statements.

Expenses. Operating expenses were $26.4 million in 2006 compared to $21.7 in 2005. The following is a discussion of the major components.

Interest and fees on notes payable increased to $8.3 million in 2006 compared to $4.0 million in 2005. The average debt for the period increased to $100.3 million in 2006 from $56.4 million in 2005 and the average cost of borrowing increased to 8.3% in 2006 from 7.1% in 2005.

Salaries and benefits decreased to $11.4 million in 2006 from $12.1 million in 2005. Total personnel within the Portfolio Asset acquisition and resolution segment were 176 and 184 at December 31, 2006 and 2005, respectively.

The provision for loan and impairment losses was $271,000 in 2006 and $212,000 in 2005. See note 1(e) of the consolidated financial statements for a detailed discussion on FirstCity's allowance for loan losses.

Occupancy, data processing, communication and other expenses increased by 23% to $6.5 million in 2006 from $5.3 million in 2005 primarily due to higher servicing and legal and accounting fees.

Equity in earnings of investments. Equity in earnings of investments decreased slightly to $11.8 million in 2006 compared to $12.0 million in 2005. Equity earnings in Acquisition Partnerships decreased by 3.9% to $10.9 million in 2006 from $11.4 in 2005. Equity in earnings of servicing entities increased by 28.9% to $.8 million in 2006 from $.6 million in 2005. Following is a discussion of equity earnings in Acquisition Partnerships by geographic region. See note 6 to the consolidated financial statements for a summary of revenues and earnings of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships.

Gain on sale of equity investments. Gain on sale of equity investments of $2.5 million was recorded in 2006. This gain primarily consisted of: 1) one domestic equity investment resulting in a gain of $1.3 million; and 2) a partial sale of twelve Latin American equity investments to AIG resulting in a gain of $1.2 million in accordance with the restructuring of the Mexican Investment Platform.

The following items affect the Company's overall results of operations and are not directly allocated to the Portfolio Asset acquisition and resolution business discussed above.

Corporate interest and overhead. Net corporate overhead expenses (excluding taxes) decreased from $5.6 million in 2005 to $5.2 million in 2006, primarily due to increased management fee income from acquisition partnerships, from $.5 million in 2005 to $.7 million in 2006. Other expenses increased due to recording $.4 million in stock option expense beginning 2006 in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, offset by decreased legal and accounting fees from $1.3 million in 2005 to $1.0 million in 2006.

Income taxes. Provision for income taxes was $186,000 in 2006 compared to $250,000 in 2005, and taxes in both years related primarily to state income taxes. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in 2006 and 2005.

Discontinued Operations. The Company recorded a provision of $75,000 in 2006 for additional losses from discontinued mortgage operations compared to $356,000 in 2005. At December 31, 2006, the only asset remaining from discontinued mortgage operations was an investment security resulting from the retention of a residual interest in a securitization transaction. This security is in "run-off," and the Company is contractually obligated to service the underlying asset. The assumptions used in the valuation model consider both industry as well as the Company's historical experience. As the security "runs off," assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary.

Earnings from discontinued consumer operations were zero in 2006 compared to $509,000 in 2005. On November 1, 2004, FirstCity completed the sale of its remaining 31% interest in Drive and recognized a net gain of $53.3 million. In 2005, an estimated tax provision of $.6 million was reversed due to lower than anticipated state income taxes related to the sale.

Net earnings to common stockholders were $8.2 million in 2005 compared to $63.6 million in 2004. On a per share basis, diluted net earnings to common stockholders were $.69 in 2005 compared to $5.37 in 2004. The Company reported earnings from continuing operations of $8.1 million in 2005

compared to $5.0 million in 2004. Earnings from discontinued operations were $153,000 in 2005 and $58.6 million in 2004.

The operating contribution from the Portfolio Asset Acquisition and Resolution business of $13.8 million in 2005 decreased from $14.4 million in 2004. FirstCity purchased $147 million of Portfolio Assets during 2005 ($115 million through the Acquisition Partnerships) compared to $174 million in acquisitions in 2004. FirstCity's investment in these acquisitions was $71.4 million and $59.8 million in 2005 and 2004, respectively. FirstCity's year-end investment in wholly-owned Portfolio Assets was $49.3 million at December 31, 2005 compared to $38.0 million at December 31, 2004.

Servicing fee revenues. Servicing fee revenues decreased by 14% to $11.8 million in 2005 from $13.7 million in 2004. Service fees from the Latin American partnerships (including incentive service fees) decreased by $.7 million or 8% as a result of efforts to reduce operating costs in Mexico. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from domestic Acquisition Partnerships decreased by $1.3 million or 26% due to lower collections.

Income from Portfolio Assets. Income from Portfolio Assets increased to $8.3 million in 2005 compared to $2.5 million in 2004, primarily due to increased resolution of portfolio assets. FirstCity's average investment in wholly-owned domestic portfolio assets was $40.9 million and $17.6 million during 2005 and 2004, respectively.

Interest income from affiliates. Interest income from affiliates decreased to $1.8 million in 2005 from $2.3 million in 2004.

Other income. Other income was $1.7 million in 2005 compared to $2.1 million in 2004. This decrease was primarily due to a reduction in 2004 of the estimated carrying value of loans payable to certain members of management, which increased other income by $.8 million. See further discussion related to these loans in note 2 of the consolidated financial statements. In 2005, the decrease was offset in part by an increase in reimbursements of due diligence expenses which will vary from period to period.

Expenses. Operating expenses were $21.7 million in 2005 compared to $21.0 in 2004.

Interest and fees on notes payable increased slightly to $4.0 million in 2005 compared to $3.8 million in 2004. The average debt for the period increased to $56.4 million in 2005 from $43.6 million in 2004; however, the average cost of borrowing declined to 7.1% in 2005 from 8.71% in 2004.

Salaries and benefits decreased slightly to $12.1 million in 2005 from $12.4 million in 2004. Total personnel within the Portfolio Asset acquisition and resolution segment were 184 and 204 at December 31, 2005 and 2004, respectively.

The provision for loan and impairment losses was $212,000 in 2005 and $30,000 in 2004. See note 1(e) of the consolidated financial statements for a detailed discussion on FirstCity's allowance for loan losses.

Occupancy, data processing, communication and other expenses increased by 12% to $5.3 million in 2005 from $4.7 million in 2004 primarily due to higher property protection expenses.

Equity in earnings of investments. Equity in earnings of investments decreased by 19% to $12.0 million in 2005 compared to $14.9 million in 2004. Equity earnings in Acquisition Partnerships

decreased by 19% to $11.4 million in 2005 from $14.0 in 2004. Equity in earnings of servicing entities decreased by 32% to $.6 million in 2005 from $.9 million in 2004. Following is a discussion of equity earnings in Acquisition Partnerships by geographic region. See note 6 to the consolidated financial statements for a summary of revenues and earnings of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships.

The following items affect the Company's overall results of operations and are not directly allocated to the Portfolio Asset acquisition and resolution business discussed above.

Corporate interest and overhead. Company level interest expense was zero in 2005 compared to $3.4 million in 2004 as a result of the payoff of corporate debt in November 2004 from proceeds received on the sale of the Company's 31% beneficial interest in Drive. Other net corporate overhead expenses (excluding taxes) decreased to $5.6 million in 2005 from $5.9 million in 2004.

Income taxes. Provision for income taxes was $250,000 in 2005 and related primarily to state income taxes. Taxes in 2004 were $75,000 and related primarily to federal alternative minimum taxes. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in 2005 and 2004.

Discontinued Operations. The Company recorded a provision of $.4 million in 2005 for additional losses from discontinued mortgage operations compared to $3.8 million in 2004. At December 31, 2005, the only asset remaining from discontinued mortgage operations was an investment security resulting from the retention of a residual interest in a securitization transaction. This security is in "run-off," and the Company is contractually obligated to service the underlying asset. The assumptions used in the valuation model consider both industry as well as the Company's historical experience. As the security "runs off," assumptions are reviewed in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary.

Earnings from discontinued consumer operations were $.5 million in 2005 compared to $62.5 million in 2004. On November 1, 2004, FirstCity completed the sale of its remaining 31% interest in Drive and recognized at net gain of $53.3 million. During the third quarter of 2005, an estimated tax provision of $.6 million was reversed due to lower than anticipated state income taxes related to the sale.

In 2006 the Company invested $144 million in Portfolios acquired through Acquisition Partnerships and subsidiaries. Acquisitions by the Company over the last five years are summarized as follows:

	Purchase Price		FirstCity Investment
	(In thousands)
1st Quarter	$	42,351	$	23,341
2nd Quarter		25,201		18,936
3rd Quarter		91,521		31,504
4th Quarter		137,917		70,267

Total 2006		296,990		144,048
Total 2005		146,581		71,405
Total 2004		174,139		59,762
Total 2003		129,192		22,944
Total 2002		171,769		16,717

Revenues with respect to the Company's Portfolio Asset acquisition and resolution segment consist primarily of (i) servicing fees from Acquisition Partnerships for the servicing activities performed related to the assets held in the Acquisition Partnerships, (ii) interest income on performing Portfolio Assets and loans receivable, and (iii) gains on disposition of assets. The Company also records equity in earnings of affiliated Acquisition Partnerships and servicing entities.

The Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to entities formed with other investors to acquire Portfolios ("Acquisition Partnerships") and other investments. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, borrowings from revolving lines of credit and other credit facilities, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

FirstCity has a $175 million revolving acquisition facility with Bank of Scotland as most recently amended on June 29, 2007, used to finance the senior debt and equity portion of portfolio and asset purchases made by FirstCity and to provide for the issuance of letters of credit and working capital loans. The obligations of FirstCity under this facility are guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and are secured by security interests in substantially all of the assets of

FirstCity and its wholly-owned subsidiaries. An additional upfront fee was paid to Bank of Scotland in the amount of $830,000. The primary terms and key covenants of this facility are as follows:

FH Partners, L.P., an indirect wholly-owned affiliate of FirstCity, has a revolving loan facility with Bank of Scotland, as most recently amended on June 29, 2007, that provides for a $50 million revolving Portfolio acquisition facility for FH Partners, L.P. to be secured by all of the assets of FH Partners, L.P. The loan facility will be used to finance Portfolio and asset purchases. The facility (i) allows loans to be made for the acquisition of Portfolio Assets in the United States, (ii) provides that each loan may be in an amount of up to 70% of the net present value of the assets being acquired with the proceeds of the loan, (iii) provides that the aggregate outstanding balances of all loans will not exceed 65% of the net present value of the assets securing the loan facility, (iv) provides for an interest rate of LIBOR plus 2.0%, (v) provides for an annual commitment fee of 0.20% of the average daily unused balance of the revolving acquisition facility, (vi) provides for a utilization fee of 0.75% of the amount of each loan made under the loan facility, (vii) provides for an upfront fee of $350,000, (viii) provides for facility fees of $100,000, for the period commencing on the effective date and ending the day before the first anniversary thereof, $75,000, for the period commencing on the first anniversary of the effective date and ending the day before the second anniversary thereof, and $50,000, for each subsequent one-year period, (ix) provides that all other financial covenants will mirror the key covenants of the facility that FirstCity has with Bank of Scotland, and (x) provides for a maturity date of November 12, 2008. The obligations of FH Partners, L.P. under the facility are guaranteed by FirstCity and the primary wholly-owned subsidiaries of FirstCity.

carrying value of the designated net equity investments. The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($2.5) million for the year ended December 31, 2006, $1.3 million for 2005, and ($.3) million for 2004.

On September 22, 2006, FirstCity NPL S.A., a Chilean affiliate of FirstCity Chile Ltda and FirstCity, entered into a revolving line of credit with a maximum loan amount in Chilean pesos equivalent to $10.0 million U.S. Dollars with CORPBANCA Sociedad Anónima Bancaria ("CB") to finance the purchase of delinquent and due accounts. The revolving line of credit was structured by Corpbanca Asesorías Financieras S.A. ("CAF"). Pursuant to the terms of the credit facility, FirstCity NPL S.A. was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the loan balance upon demand. At December 31, 2006, FirstCity had a letter of credit in the amount of $6.3 million from Bank of Scotland under the terms of FirstCity's revolving acquisition facility with Bank of Scotland. In the event that a demand is made under the $6.3 million letter of credit, FirstCity is required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

On November 29, 2006, FirstCity Mexico SA de CV, a Mexican affiliate of FirstCity, entered into a revolving line of credit with a maximum loan amount in Mexican pesos equivalent to $13.4 million U.S. Dollars with Banco Santander, S.A. The proceeds were used to pay down the acquisition facility with the Bank of Scotland. Pursuant to the terms of the credit facility, FirstCity Mexico SA de CV was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the loan balance upon demand. At December 31, 2006, FirstCity had a letter of credit in the amount of $14.1 million from Bank of Scotland under the terms of FirstCity's revolving acquisition facility with Bank of Scotland. In the event that a demand is made under the $14.1 million letter of credit, FirstCity is required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

On December 20, 2006, American Business Lending, Inc. ("ABL"), a subsidiary of FirstCity, and Wells Fargo Foothill, Inc., entered into a Credit Agreement dated effective as of December 15, 2006 that provides for a $25 million revolving loan facility for ABL which is secured by substantially all of the assets of ABL. The revolving loan facility, (i) allows advances in the maximum amount of $25 million to be made under the Credit Agreement for the purpose of paying fees and expenses in connection with the closing of the Credit Agreement and financing loans made by ABL, a portion of which are guaranteed by the U.S. Small Business Administration, (ii) provides that the aggregate outstanding principal amount of the advances made to ABL under the Credit Agreement may not exceed the amount by which (a) the sum of (1) up to one hundred percent (100%) of the net eligible SBA guaranteed loans made by ABL, plus (2) up to eighty percent (80%) of the net eligible non-guaranteed loans made by ABL (or portion thereof), exceeds (b) the sum of (1) any reserves for obligations of ABL related to the bank products, plus (2) the aggregate amount, if any, of loan reserves then established and outstanding, plus (3) the aggregate amount of any other reserves established by WFF, (iii) provides for an interest rate of LIBOR plus 2.625% or, alternatively, the greater of (x) the Wells Fargo prime rate or (y) seven and one-half percent (7.50%) per annum, (iv) provides for a closing fee of $125,000, being one-half of one percent (0.50%) of the Maximum Credit Line available under the Credit Agreement, (v) provides for an unused credit line fee in an amount equal to one-quarter of one percent (0.25%) per annum of the average daily difference during the month in question (or portion thereof) between (i) the Maximum Credit Line and (ii) the aggregate outstanding principal amount of the advances outstanding under the Credit Agreement for such month (or portion thereof), (vi) provides in the event of the termination of the Credit Agreement by ABL for a prepayment fee of three percent (3.0%) of the Maximum Credit Line if paid prior to December 14, 2007, two percent (2.0%) of the Maximum Credit Line if paid during the period beginning December 15, 2007 and ending December 14, 2008, and one percent (1.0%) of the Maximum Credit Line if paid during the period beginning December 15, 2008 and ending December 13, 2009, and

(vii) provides for a maturity date of December 14, 2009. At December 31, 2006, the balance of this facility was zero. In February 2007 American Business Lending, Inc., an affiliate of FirstCity, and Wells Fargo Foothill, Inc., amended the Credit Agreement to increase the revolving credit facility to a maximum credit line of $40 million that matures on December 13, 2009. In connection with this amendment, FirstCity provided Wells Fargo Foothill, Inc. with an unconditional guaranty of the obligations under the loan facility on behalf of ABL up to a maximum of $5 million. This guaranty will remain in effect for the life of the loan facility.

The Credit Agreement has covenants that are customary for a facility of this type, including maximum capital expenditure levels and financial covenants related to indebtedness to tangible net worth ratio, earnings before interest, taxes, depreciation and amortization, and tangible net worth for ABL. The Credit Agreement contains representations and warranties by ABL, events of default and other provisions that are customary for a facility of this type. The security agreement executed by ABL to secure the obligations under the Credit Agreement grants a security interest to WFF in all of the assets of ABL except (a) the unguaranteed portions of any SBA-guaranteed loan originated by AMRESCO SBA Holdings, Inc. ("ASBA") and transferred to ABL pursuant to the Asset Purchase Agreement dated as of June 30, 2006, by and among NCS I, LLC and ASBA, as sellers, ABL, as the purchaser, and FirstCity Business Lending Corporation and FirstCity pursuant to which ABL acquired those SBA loans, and any other assets transferred by ASBA to ABL pursuant to that Asset Purchase Agreement, including, the Small Business Lending Corporation license. The security agreement also contains other provisions that are customary for a facility of this type. Pursuant to the terms in the Asset Purchase Agreement, the Sellers retained control over the loan assets transferred.

BoS (USA) has a warrant to purchase 425,000 shares of the Company's voting Common Stock at $2.3125 per share. BoS (USA) is entitled to additional warrants in connection with this existing warrant for 425,000 shares under certain specific situations to retain its ability to acquire approximately 4.86% of the Company's voting Common Stock. The warrant will expire on August 31, 2010, if it is not exercised prior to that date.

Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, as of December 31, 2006, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $292 million and outstanding borrowings of $188 million.

Management believes that the Bank of Scotland facilities, the related fees generated from the servicing of assets, equity distributions from existing Acquisition Partnerships and wholly-owned portfolios, as well as sales of interests in equity investments, will allow the Company to meet its obligations as they come due during the next twelve months.

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's consolidated financial position and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

On January 1, 2005, FirstCity adopted the provisions of SOP 03-3 (as defined under "Effect of New Accounting Standards"). For loan portfolios acquired prior to January 1, 2005, FirstCity

designated these loans as non-performing Portfolio Assets or performing Portfolio Assets. Such designation was made at the acquisition of the pool and does not change even though the actual performance of the loans may change. FirstCity accounts for all nonperforming loans acquired after 2004 in accordance with SOP 03-3. Following is a description of each classification and the related accounting policy accorded to each Portfolio type.

Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets, such as foreclosed upon collateral. Accounting for non-performing portfolios is on a pool basis as opposed to an individual asset-by-asset basis. Prior to January 1, 2005, Portfolio Assets were designated as non-performing if a majority of all of the loans in the Portfolio were significantly under performing in accordance with the contractual terms of the underlying loan agreements at the date of acquisition. Net gain on resolution of non-performing Portfolio Assets is recognized as income to the extent that proceeds collected exceed a pro rata portion of allocated cost from the pool. Cost allocation is based on a proration of actual proceeds divided by total estimated proceeds of the pool. No interest income is recognized separately on non-performing Portfolio Assets. All proceeds, of whatever type, are included in proceeds from resolution of Portfolio Assets in determining the gain on resolution of such assets.

All non-performing Portfolio Assets are purchased at discounts from their outstanding legal principal amount, the total of the aggregate of expected future sales prices and the total payments to be received from obligors. Subsequent to acquisition, the adjusted cost of non-performing Portfolio Assets is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the non-performing pool. Once it is determined that there is impairment, a valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. The Company recorded no allowance for impairment in 2006 and 2005 and $16,000 in 2004.

The actual future proceeds of the pool could vary materially from the estimated proceeds of the pool due to changes in economic conditions, deterioration of collateral values, deterioration in the borrower's financial condition and other conditions described in the risk factors discussed earlier in this document. In the event that the actual future proceeds of the pool exceed the current estimates, the reported future results of the Company could be higher than anticipated and would result in a higher net gain on resolution of non-performing Portfolio Assets. In the event that actual future proceeds of the pool are less than current estimates, the reported future results of the Company could be lower than anticipated and would result in lower net gain on resolution of non-performing Portfolio Assets or possibly require the Company to recognize impairment in the value of the pool.

Performing Portfolio Assets consist primarily of portfolios of loans acquired at a discount from the aggregate amount of the borrowers' obligation. Prior to January 1, 2005, performing Portfolio Assets were accounted for using the interest method—acquisition discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated life of the Portfolio. Performing Portfolio Assets are carried at the unpaid principal balance of the underlying loans, net of acquisition discounts and allowance for loan losses. Significant increases in expected future cash flows may be recognized prospectively through an upward adjustment of the internal rate of return ("IRR") over a portfolio's remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Income on performing Portfolio Assets is accrued monthly based on each loan pool's effective IRR.

Cash flows greater than the interest accrual will reduce the carrying value of the pool. Likewise, cash flows that are less than the accrual will increase the carrying balance. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company's proprietary collection model. Gains are recognized on the performing Portfolio Assets when sufficient funds are received to fully satisfy the obligation on loans included in the pool, either from funds from the borrower or sale of the loan. The gain recognized represents the difference between the proceeds received and the allocated carrying value of the individual loan in the pool.

The actual future cash flows of the pool could vary materially from the expected future cash flows of the pool due to changes in economic conditions, changes in collateral values, deterioration in the borrowers financial condition, restructure or renewal of individual loans in the pool, sale of loans within the pool and other conditions described in the risk factors discussed earlier in this document. In the event that the actual future cash flows of the pool exceed the current estimates, the reported future results of the Company could be higher than anticipated and would result in a higher level of interest income due to greater amounts of discount accretion being included in revenue derived from the performing Portfolio Assets as well as higher gains recognized on the sale of individual loans from a pool. In the event that actual future cash flows of the pool are less than current estimates, the reported future results of the Company could be lower than anticipated and would result in a lower level of interest income and reduced gains from the sale of assets from a pool, lower levels of interest income as a result of lower amounts of discount accretion being included in revenue derived from performing Portfolio Assets or possibly require the Company to recognize impairment in the value of the pool due to a decline in the present value of the expected future cash flows.

Management's best estimate of IRR as of January 1, 2005, is the basis for subsequent impairment testing. If it is probable that all cash flows estimated at acquisition plus any changes to expected cash flows arising from changes in estimates after acquisition would not be collected, the carrying value of a pool would be written down to maintain the then current IRR. Prior to January 1, 2005, impairment charges would be taken to the income statement with a corresponding write-off of the receivable balance. Consequently, no allowance for loan loss was recorded prior to January 1, 2005. The Company recorded provisions for impairment of loans in the amounts of $62,000 in 2006, $132,000 in 2005 and $13,000 in 2004.

A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method when timing and amount of collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the Portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above.

At acquisition, FirstCity reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that FirstCity will be unable to collect all amounts due according to the loan's contractual terms. If both conditions exist, FirstCity determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics (including loan type, collateral type, geographical location, performance status and borrower relationship).

FirstCity considers expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan and each subsequently aggregated pool of loans. FirstCity determines the excess of the loan's or pool's scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted ("nonaccretable difference"). The excess of the loan's cash flows expected to be collected at acquisition over the initial investment in the loan or pool is accreted into interest income over the remaining life of the loan or pool ("accretable yield").

Over the life of the loan or pool, FirstCity continues to estimate cash flows expected to be collected. FirstCity evaluates at the balance sheet date whether the present value of its loans determined using the effective interest rates has decreased below book value and if so, a valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. The present value of any subsequent increase in the loan's or pool's actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan or pool. Any remaining increases in the present value of cash flows expected to be collected will be used to recalculate the amount of accretable yield recognized on a prospective basis over the pool's remaining life.

FirstCity establishes valuation allowances for all acquired loans subject to SOP 03-3 to reflect only those losses incurred after acquisition—that is, the present value of cash flows expected at acquisition that are not expected to be collected. The Company established a valuation allowance of $132,000 in 2006 and none in 2005 on these loans.

Loans acquired without evidence of credit deterioration at acquisition for which FirstCity has the positive intent and ability to hold for the foreseeable future are classified as held for investment and reported at their unpaid principal balance net of unamortized purchase discounts or premiums.

Interest accrual ceases when payments become 90 days contractually past due. An allowance for loan losses is established when a loan becomes impaired. A loan is impaired when full payment under the loan terms is not expected. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan balance is confirmed. The Company established a valuation allowance of $49,000 in 2006 and $31,000 in 2005 on these loans.

Real estate portfolios consist of real estate acquired from a variety of sellers. Such Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs relating to the development and improvement of real estate for its intended use are capitalized, whereas those relating to holding assets are charged to expense. Income or loss is recognized upon the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to acquisition, the amortized cost of real estate portfolios is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, net of costs to sell, which represents the net realizable value of the real estate portfolio. Impairment losses are charged to operations in the period the impairment is identified. The Company recorded impairment losses of $28,000, $49,000, and $1,000 as of December 31, 2006, 2005 and 2004, respectively.

As a part of the process of preparing its consolidated financial statements, the Company is required to calculate its income taxes in each of the jurisdictions in which it operates. This process involves calculating the Company's current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future changes in tax laws or changes in tax rates are not anticipated. The measurement of deferred tax assets, if any, is reduced by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

As a result of the Merger, the Company has substantial federal NOLs that can be used to offset the tax liability associated with the Company's pre-tax earnings until the earlier of the expiration or utilization of such NOLs. The Company accounts for the benefit of the NOLs by recording the benefit as an asset and then establishing an allowance to value the net deferred tax asset at a value commensurate with the Company's expectation of being able to utilize the recognized benefit in the foreseeable future. Such estimates are reevaluated on a quarterly basis with the adjustment to the allowance recorded as an adjustment to the income tax expense generated by the quarterly operating results. Significant events that change the Company's view of its currently estimated ability to utilize the tax benefits result in substantial changes to the estimated allowance required to value the deferred tax benefits recognized in the Company's periodic consolidated financial statements. The Company's analysis resulted in no change in 2006, 2005 and 2004.

The Company has a net deferred tax asset of $20.1 million in the consolidated balance sheet as of December 31, 2006, which is composed of a gross deferred tax asset of $118.9 million net of a valuation allowance of $98.8 million. As discussed in note 3 of the consolidated financial statements, FirstCity sold its remaining 31% interest in Drive in November 2004. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations prior to expiration of the net operating loss carryforwards. Although realization is not assured, management believes that the deferred tax asset, net of allowance, has been carried at low levels, and thus, the sale of Drive has no impact on FirstCity's ability to realize all of the deferred tax asset, net of allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly. See "Item 1A. Risk Factors."

FirstCity accounts for its investments in Acquisition Partnerships and their general partners using the equity method of accounting. This accounting method generally results in the pass-through of its pro rata share of earnings from the partnerships' activities as if it had a direct investment in the underlying Portfolio Assets held by the partnerships. The revenues and earnings of the partnerships are determined on a basis consistent with the accounting methodology applied to Portfolio Assets as described in the preceding paragraphs. FirstCity has ownership interests in the various partnerships that range from 2% to 50%. The Company also holds investments in servicing entities that are accounted for under the equity method.

Distributions of cash flow from the Acquisition Partnerships are a function of the terms and covenants of the loan agreements related to the secured borrowings of the Acquisition Partnerships.

Generally, the terms of the underlying loan agreements permit some distribution of cash flow to the equity partners so long as loan to cost and loan to value relationships are in compliance with the terms and covenants of the applicable loan agreement. Once the secured borrowings of the Acquisition Partnerships are fully paid, all cash flow in excess of operating expenses is available for distribution to the equity partners.

Discontinued operations are comprised of two components previously reported as the Company's residential and commercial mortgage banking business and the consumer lending business conducted through FirstCity's minority interest investment in Drive. In November 2004, FirstCity completed the sale of its interest in Drive, and as of December 31, 2004, the Company had zero assets remaining from the discontinued consumer operations, but certain income realized from such operations.

The only asset remaining from discontinued mortgage operations is an investment security resulting from the retention of a residual interest in a securitization transaction. This security is in "run-off," and the Company is contractually obligated to service this asset. Prior to the fourth quarter of 2004, FirstCity classified these securities as held to maturity and considered the estimated future gross cash receipts for such investment securities in the computation of the value of such investment securities. In the fourth quarter of 2004, FirstCity's management elected to pursue a strategy to liquidate these assets and carry them as held for sale. Consequently, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the remaining security is recorded at the lower of their carrying value or fair value less cost to sell. The cash flows are collected over a period of time and are valued using a discount rate of 18% and prepayment assumptions of 32% for fixed rate loans and 33% for variable rate loans. Overall loss rates are estimated at 14% of collateral. The assumptions used in the valuation model consider both industry as well as the Company's historical experience and are reviewed quarterly in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary. The Company recorded provisions of $75,000 in 2006, $356,000 in 2005 and $3.8 million in 2004 for additional losses from discontinued mortgage operations. In 2004, the provision primarily relates to FirstCity adjusting the carrying value of the residual interests to fair value. The additional provision in 2005 primarily related to a decrease in the estimated future gross cash receipts on residual interests in securitizations as a result of the actual losses exceeding the losses projected by the valuation model.

The Company uses estimates to determine future cash receipts from Portfolio Assets. These estimates of future cash receipts from acquired Portfolio Asset pools are utilized in four primary ways:

The Company uses a proprietary asset management software program to manage the Portfolio Assets it owns and services. Each asset within a pool is analyzed by an account manager who is responsible for analyzing the characteristics of each asset within a pool. The account manager projects

future cash receipts and expenses related to each asset and the sum of which provides the total estimated future cash receipts related to a particular purchased asset pool. These estimates are routinely monitored by the Company to determine reasonableness of the estimates provided.

The Company has in the past been able to establish with reasonable accuracy the estimated future cash receipts over the life of a purchased asset pool. Changes in economic conditions, fluctuations in interest rates, deterioration of collateral values, and other factors described in the risk factors section could cause the estimates of future cash flows to be materially different than actual cash receipts.

The effects of an increase in the estimated future cash receipts would generally increase revenues from Portfolio Assets by increasing gross profit on a non-performing or real estate pool and increasing the effective yield on a performing or SOP 03-3 portfolio while a decrease in future cash receipts would generally have the effect of reducing revenues by reducing gross profit on a non-performing or real estate pool and creating impairment on a performing or SOP 03-3 portfolio. In some cases a reduction in the total future cash receipts by collecting those cash receipts sooner than expected could have a positive impact on the Company's revenues from Portfolio Assets due to reduced interest expense and other carrying costs associated with the Portfolio Assets. Likewise an increase in future cash receipts, although generally a positive trend, could have a negative impact on future revenues of the Company if collected over a longer period, resulting in higher levels of interest expense and other carrying costs of the portfolios negating any potentially positive effects.

In addition to consolidating entities in which FirstCity has a direct or indirect controlling financial interest, FirstCity evaluates the consolidation of entities to which common conditions of consolidation, such as voting interests and board representation, do not apply. FirstCity performs this evaluation pursuant to FASB Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R provides that, in the absence of clear control through voting interests, board representation or similar rights, a company's exposure, or variable interest, to the economic risks and potential rewards associated with its interest in the entity is the best evidence of control.

In connection with FIN 46R, when evaluating an entity for consolidation, FirstCity first determines whether an entity is within the scope of FIN 46R and if it is deemed to be a variable interest entity ("VIE"). If the entity is considered to be a VIE, FirstCity determines whether it would be considered the entity's primary beneficiary. FirstCity consolidates those VIEs for which it has determined that it is the primary beneficiary. Generally, FirstCity will consolidate an entity not deemed either a VIE upon a determination that its ownership, direct or indirect, exceeds fifty percent of the outstanding voting shares of an entity and/or that it has the ability to control the financial or operating policies through its voting rights, board representation or other similar rights. For entities where FirstCity does not have a controlling interest (financial or operating), the investments in such entities are accounted for using the equity. FirstCity applies the equity method of accounting when it has the ability to exercise significant influence over operating and financial policies of an investee in accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.

Equity earnings in most of the foreign Acquisition Partnerships are recorded on a one-month lag due to the timing of FirstCity's receipt of those financial statements.

The following tables present contractual cash obligations and commercial commitments of the Company as of December 31, 2006. See Notes 7, 13 and 15 of the Notes to Consolidated Financial Statements (dollars in thousands).

		Amount of Commitment Expiration Period
		Unfunded Commitments		Less than One Year		One to Three Years		Four to Five Years		After Five Years
Commercial Commitments		$	1,051		$	1,051		$	—		$	—		$	—

In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 ("SFAS 159") SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for the Company on January 1, 2008. The Company is currently evaluating the impact SFAS 159 will have on its financial statements.

In September 2006, Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, was issued. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November, 15, 2007. The Company is currently evaluating the impact SFAS 157 will have on its financial statements.

assets and liabilities as of the beginning of the year, with the offsetting balance to retained earnings. The Company adopted SAB 108 and adjusted its opening retained earnings for the year ended December 31, 2006 by approximately $327 thousand, all of which relates to the Company's investments in certain Acquisition Partnerships accounted for under the equity method of accounting. Approximately $152 thousand reflects a correction to write off cumulative translation adjustments related to certain foreign investments during the period 2002 through 2005, and approximately $106 thousand reflects a correction in a Partnership's accounting for property taxes in 2005. The remaining $69 thousand reflects the Company's 2005 correction of accounting for equity earnings on a pro-rata basis recorded in an acquired investment subsequent to the acquisition date. The Company reviewed the annual amount of reduced equity earnings incurred in prior periods for these corrections and considered the effects to be immaterial to prior periods both individually and in the aggregate.

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes ("FIN No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this adoption on the Company's consolidated financial position or earnings.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specified situations. Such servicing assets or liabilities would be initially measured at fair value, if practicable, and subsequently measured at amortized value or fair value based upon an election of the reporting entity. SFAS 156 also specifies certain financial statement presentations and disclosures in connection with servicing assets and liabilities. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS 156 by the Company on January 1, 2007 did not have a significant impact on the Company's consolidated financial position or earnings.

On January 1, 2006, FirstCity adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions, as the Company formerly did, using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in the consolidated statement of operations. FirstCity adopted SFAS 123(R) using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The consolidated financial statements as of and for the year ended December 31, 2006, reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company adopted the provisions of FSP 115-1 on January 1, 2006, which did not have a significant impact on the Company's consolidated financial statements.

Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's operations are materially impacted by net gains on sales of loans and net interest margins. The level of gains from loan sales the Company achieves is dependent on demand for the products originated. Net interest margins are dependent on the Company's ability to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following describes each component of interest bearing assets held by the Company and how each could be affected by changes in interest rates.

The Company invests in Portfolio Assets both directly through consolidated subsidiaries and indirectly through equity investments in Acquisition Partnerships. Portfolio Assets consist of investments in pools of non-homogenous assets that predominantly consist of loan and real estate assets. Earnings from these assets are based on the estimated future cash flows from such assets and recorded when those cash flows occur. The underlying loans within these pools bear both fixed and variable rates. Due to the non-performing nature and history of these loans, changes in prevailing benchmark rates (such as the prime rate or LIBOR) generally have a nominal effect on the ultimate future cash flow to be realized from the Portfolio Assets.

Loans receivable consist of investment loans made to Acquisition Partnerships and other unrelated entities, and bear interest at predominately fixed rates. The collectibility of these loans is directly related to the underlying Portfolio Assets of those Acquisition Partnerships, which are non-performing in nature. Therefore, changes in benchmark rates would have minimal effect on the collectibility of these loans.

FirstCity had $188 million in debt outstanding at December 31, 2006. The Company is exposed to interest rate risk primarily through its variable rate debt, which totaled $185 million or 99% of the Company's total debt. A 50 basis point change in interest rates would increase or decrease FirstCity's annual interest expense by approximately $.9 million annually.

The Company currently has loans and equity investments in Europe, Latin America (i.e. Mexico, Argentina, Dominican Republic and Chile) and Canada.

In Europe and in Mexico, the Company's investments are primarily in the form of equity and represent a significant portion of the Company's total equity investments. As previously discussed, the revolving acquisition facility with Bank of Scotland for $175 million allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to $50 million U.S. dollars. At December 31, 2006, the Company had $48.3 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe. In November 2006 the Company acquired a line of credit facility with Banco Santander, S.A. that allows loans to be made in Mexican pesos up to a maximum that is equivalent to $13.4 million U.S. dollars. At December 31, 2006, the Company had $13.4 million in Mexican peso-denominated debt. Management of the Company feels that these loan agreements will help reduce the risk of adverse effects of currency changes on these investments.

A sharp change in the foreign currencies related to the investments in Europe, Latin America and Canada relative to the U.S. dollar could materially adversely affect the financial position and results of operations of the Company. A 5% and 10% incremental depreciation of these currencies would result in an estimated decline in the valuation of the Company's foreign investments and are indicated in the following table. These amounts are estimates; consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company's consolidated financial position or results of operations.

		One U.S. dollar equals	Estimated decline in valuation of investments resulting from incremental depreciation of foreign currency of (dollars in thousands)
			5%		10%
Europe	EUR	0.76	$	2,915	$	5,573
Mexico	MXN	10.88	$	1,454	$	2,803
Argentina	ARS	3.07	$	112	$	217
Dominican Republic	DOP	34.44	$	37	$	70
Chile	CLP	532.55	$	2	$	3
Canada	CAD	1.17	$	111	$	216

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

On July 3, 1995, FirstCity Financial Corporation (the "Company" or "FirstCity") was formed by the merger of J-Hawk Corporation and First City Bancorporation of Texas, Inc. (the "Merger"). The Company's merger with Harbor Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 was accounted for as a pooling of interests.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. Significant estimates include the estimation of future collections on purchased Portfolio Assets used in the calculation of income from Portfolio Assets, interest rate environments, valuation of the deferred tax asset, and prepayment speeds and collectibility of loans held in inventory, securitization trusts and for investment. Actual results could differ materially from those estimates.

The Company is a financial services company with offices throughout the United States, Mexico and Brazil, with a presence in France, Germany, Argentina and Chile. At December 31, 2006, the Company was engaged in one principal reportable segment—Portfolio Asset acquisition and resolution. In the Portfolio Asset acquisition and resolution business, the Company acquires and resolves portfolios of performing and nonperforming commercial and consumer loans and other assets (collectively, "Portfolio Assets" or "Portfolios"), which are generally acquired at a discount to their legal principal balance or appraised value. Purchases may be in the form of pools of assets or single assets. The Portfolio Assets are generally aggregated, including loans of varying qualities that are secured or unsecured by diverse collateral types and foreclosed properties. Some Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based either on real estate, business assets or other collateral cash flow. Portfolio Assets are acquired on behalf of the Company or its wholly owned subsidiaries, and on behalf of legally independent domestic and foreign partnerships and other entities ("Acquisition Partnerships" or "WAMCO Partnerships") in which a partially owned affiliate of the Company is the general partner and the Company and other investors (including but not limited to Cargill) are limited partners.

The Company services, manages and ultimately resolves or otherwise disposes of substantially all of the assets it, its Acquisition Partnerships, or other related entities acquire. The Company services such assets until they are collected or sold and normally does not manage assets for non-affiliated third parties.

The accompanying consolidated financial statements include the accounts of all majority owned subsidiaries of the Company. Furthermore, variable interest entities in which the Company has an interest have been consolidated where the company is identified as the primary beneficiary. All

significant intercompany transactions and balances have been eliminated in consolidation. Investments in 20% to 50% owned affiliates are accounted for on the equity method since the Company has the ability to exercise significant influence over operating and financial policies of those affiliates. The following is a listing of the 20% to 50% owned affiliates accounted for on the equity method and held at December 31, 2006:

Affiliate		Percentage Ownership
CRY Limited		20.00%
CTY Limited		20.00%
UHR Limited		20.00%
WOX Limited		20.00%
FG Portfolio Limited		22.50%
SAI Societe Auxiliaire Immobiliere		22.50%
WOD Limited		22.50%
WOL Limited		22.50%
BIDMEX 6, LLC		22.56%
NEVVS Limited		25.00%
HMCS-GEN Limited		30.00%
HMCS-SIG Limited		30.00%
HMCS-ECK Limited		32.00%
EHCTY Limited		33.00%
MinnTex Investment Partners LP		33.00%
Santiago Asset Acquisition Company One, SA		33.00%
Brazos River Partnership One, LP		33.33%
P.R.L. Development, SAS		43.50%
First B Realty, LP		49.00%
WAMCO XX, Ltd		49.00%
WAMCO XXIV, Ltd		49.00%
WAMCO 30, Ltd		49.32%
FirstVal 1, Ltd		49.50%
WAMCO 31, Ltd		49.50%
WAMCO 32, Ltd		49.50%
WAMCO 33, Ltd		49.50%
WAMCO 34, Ltd		49.50%
WAMCO 35, Ltd.		49.50%
FCS Creamer, Ltd		49.75%
FCS Wildhorse, Ltd		49.75%
FCS Wood, Ltd		49.75%
Calibat Fund, LLC		50.00%
FCS Creamer GP Corp		50.00%
FCS Wildhorse GP Corp		50.00%
FCS Wood GP Corp		50.00%
FirstCity Recovery, SA		50.00%
FirstCity South America, LLC		50.00%
FirstVal 1 GP Corp		50.00%

Inversiones Crediticias SA		50.00%
MinnTex GP Corp		50.00%
WAMCO XX of Texas, Inc		50.00%
WAMCO XXIV of Texas, Inc		50.00%
WAMCO XXVII of Texas, Inc		50.00%
WAMCO 30 of Texas, Inc		50.00%
WAMCO 31 of Texas, Inc		50.00%
WAMCO 32 of Texas, Inc		50.00%
WAMCO 33 of Texas, Inc		50.00%
WAMCO 34 of Texas, Inc		50.00%
WAMCO 35 of Texas, Inc		50.00%

Investments in less than 20% owned affiliates are also accounted for on the equity method. FirstCity has the ability to exercise significant influence over operating and financial policies of these entities, despite its comparatively smaller equity percentage, due primarily to its active participation in the policy making process as well as its involvement in the day-to-day management activities. These partnerships are formed to share in the risks and rewards in developing new markets as well as to pool resources. Following is a listing of the less than 20 percent owned affiliates accounted for on the equity method and held at December 31, 2006:

Affiliate		Percentage Ownership
TB 1 Private Financial Trust		2.09%
WAMCO XXVII, Ltd		4.07%
Renova Financial Trust		10.00%
TR I Private Financial Trust		10.00%
WHBE Limited		10.00%
El Consorcio Recovery FirstCity BNV, SA		11.09%
MCS et Associes, SA		11.89%
Bidmex Holding, LLC		15.00%
HMCS Investment GmbH		16.30%
ResMex, LLC		19.45%

Equity earnings in the foreign investments, with the exception of P.R.L. Development, SAS, and MCS et Associes, SA, are recorded on a one-month lag due to the timing of FirstCity's receipt of those financial statements.

The Company has loans receivable from certain Acquisition Partnerships (see note 1(f)). In situations where the Company is not required to advance additional funds to the Acquisition Partnership and previous losses have reduced the equity investment to zero, the Company continues to report its share of equity method losses in its consolidated statements of operations to the extent of and as an adjustment to the adjusted basis of the related loan receivable in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee ("EITF 98-13") (See Note 5).

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits.

FirstCity primarily acquires loans in groups or portfolios that have experienced deterioration of credit quality between origination and the Company's acquisition of the loans. The amount paid for a loan reflects FirstCity's determination that it is probable the Company will be unable to collect all amounts due according to the loan's contractual terms.

On January 1, 2005, FirstCity adopted the provisions of SOP 03-3. For loan Portfolios acquired prior to January 1, 2005, FirstCity designated these loans as non-performing Portfolio Assets or performing Portfolio Assets. Such designation was made at the acquisition of the pool and does not change even though the actual performance of the loans may change. FirstCity accounts for all loans acquired after 2004 in accordance with SOP 03-3.

Following is a description of each classification and the related accounting policy accorded to each Portfolio type:

Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets, such as foreclosed upon collateral. Prior to January 1, 2005, Portfolio Assets were designated as non-performing if a majority of all of the loans in the Portfolio were significantly under performing in accordance with the contractual terms of the underlying loan agreements at the date of acquisition. Net gain on resolution of non-performing Portfolio Assets is recognized as income to the extent that proceeds collected exceed a pro rata portion of allocated cost from the pool. Cost allocation is based on a proration of actual proceeds divided by total estimated proceeds of the pool. No interest income is recognized separately on non-performing Portfolio Assets. All proceeds, of whatever type, are included in proceeds from resolution of Portfolio Assets in determining the gain on resolution of such assets. Accounting for non-performing Portfolios is on a pool basis as opposed to an individual asset-by-asset basis.

Performing Portfolio Assets consist primarily of Portfolios of consumer and commercial loans acquired at a discount from the aggregate amount of the borrowers' obligation. Prior to January 1, 2005, performing Portfolio Assets were accounted for using the interest method—acquisition discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated life of the Portfolio. Performing Portfolio Assets are carried at the unpaid principal balance of the underlying loans, net of acquisition discounts and allowance for loan losses. Significant increases in expected future cash flows may be recognized prospectively through an upward adjustment of the internal rate of return ("IRR") over a portfolio's remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Income on performing Portfolio Assets is accrued monthly based on each loan

pool's effective IRR. Cash flows greater than the interest accrual will reduce the carrying value of the pool. Likewise, cash flows that are less than the accrual will increase the carrying balance. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company's proprietary collection model. Gains are recognized on the performing Portfolio Assets when sufficient funds are received to fully satisfy the obligation on loans included in the pool, either from funds from the borrower or sale of the loan. The gain recognized represents the difference between the proceeds received and the allocated carrying value of the individual loan in the pool.

A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method when timing and amount of collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above.

Real estate Portfolios consist of real estate acquired from a variety of sellers. Such Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs relating to the development and improvement of real estate for its intended use are capitalized, whereas those relating to holding assets are charged to expense. Income or loss is recognized upon the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to acquisition, the amortized cost of a real estate Portfolio is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, which represents the net realizable value of the real estate Portfolio. Impairment losses are charged to operations in the period the impairment is identified.

Loans receivable consist primarily of loans made to third parties and Acquisition Partnerships, the repayment of which is generally dependent upon future cash flows and distributions made from those entities. Interest is accrued when earned in accordance with the contractual terms of the loans. The evaluation for impairment is determined based on the review of the estimated future cash receipts of the underlying nonperforming Portfolio Assets of each related Acquisition Partnership. The Company recorded no allowance for impairment in 2006, 2005 and 2004.

Property and equipment are carried at cost, less accumulated depreciation and are included in other assets. Depreciation is provided using straight-line method over the estimated useful lives of the assets.

Intangible assets includes (1) the excess of purchase price over fair value of assets acquired in connection with purchase transactions (goodwill) (2) a franchise granted by the Small Business Administration to originate and service loans as a small business lending company, and (3) the purchase price of future service fee revenues, all of which are included in other assets. Goodwill and intangible assets with indefinite useful lives are tested for impairment in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.

The Company has no capitalized servicing rights because servicing is not contractually separated from the underlying assets by sale or securitization of the assets with servicing retained or separate purchase or assumption of the servicing. The Company services, in all material respects, the Portfolio Assets owned for its own account, the Portfolio Assets owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, the Company generally earns a servicing fee, which is a percentage of gross cash collections generated rather than a management fee based on the Face Value of the asset being serviced. The rate of servicing fee charged is generally a function of the average Face Value of the assets within each pool being serviced (the larger the average Face Value of the assets in a Portfolio, the lower the fee percentage within the prescribed range), the type of assets and the level of servicing required on each assets. For the Mexican Acquisition Partnerships, the Company earns a servicing fee based on costs of servicing plus a profit margin. The Acquisition Partnerships in Europe and South America are serviced by various entities in which the Company maintains an equity interest. In all cases, service fees are recognized as they are earned in accordance with the servicing agreements.

The Company currently has certain servicing contracts with its Mexican investment entities whereby the Company is entitled to additional compensation for servicing once a specified return to the investors has been achieved. The Company recognizes revenue related to these contracts when the investors receive the required level of returns specified in the contracts and the Mexican investment entity receives cash in an amount greater than the required returns. There is no guarantee that the required level of returns to the investors will be achieved or that any additional compensation to the Company related to the contracts will be realized. The amount of these fees recognized by the Company was $2.2 million in 2006 which included $1.9 million for incentive service fees from the sale of certain equity investments in Latin America, $359 in 2005 and $332 in 2004.

The Mexican investment entities record an accrued expense for these contingent fees provided that these fees are probable and reasonably estimable.

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), established standards for reporting and displaying comprehensive income (loss) and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 also requires the accumulated balance of other comprehensive income (loss) to be displayed separately in the equity section of the consolidated balance sheet. The Company's other

comprehensive income (loss) consists of foreign currency transactions and unrealized gains (losses) on securitization transactions.

The Company has determined that the local currency is the functional currency for its operations outside the United States (primarily Europe and Latin America). Assets and liabilities denominated in foreign functional currencies are translated at the exchange rate as of the balance sheet date. Translation adjustments are recorded as a separate component of stockholders' equity in accumulated other comprehensive income (loss). Revenues, costs and expenses denominated in foreign currencies are translated at the weighted average exchange rate for the period. An analysis of the changes in the cumulative adjustments during 2006, 2005 and 2004 follows (dollars in thousands):

Increases or decreases in expected functional currency cash flows upon settlement of a foreign currency transaction are recorded as foreign currency transaction gains or losses and included in the results of operations in the period in which the transaction is settled. Aggregate foreign currency transaction gains included in the consolidated statements of operations for 2006, 2005 and 2004 were $783, $848 and $678 respectively.

The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($2,509) for 2006, $1,348 for 2005 and ($297) for 2004.

The Company files a consolidated federal income tax return with its 80% or greater owned subsidiaries. The Company records all of the allocated federal income tax provision of the consolidated group in the parent corporation.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effects of future changes in tax laws or changes in tax rates are not anticipated. The measurement of deferred tax assets, if any, is reduced by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Basic net earnings per common share calculations are based upon the weighted average number of common shares outstanding. Potentially dilutive common share equivalents include warrants and employee stock options in the diluted loss per common share calculations.

Basic and diluted earnings from continuing operations per share were determined as follows:

(o) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company assesses the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

FirstCity adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), using the modified prospective transition method beginning January 1, 2006. Accordingly, during 2006, the Company recorded stock-based compensation expense for awards granted prior to, but not yet vested as of January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS 123, Accounting for Stock-Based Compensation, were in effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, the Company recognized compensation expense using the straight-line amortization method. For stock-based awards granted after January 1, 2006, the Company uses the Black-Scholes valuation model to recognize compensation expense based on the estimated grant date fair value method using a straight-line amortization method. As SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for 2006 has been reduced for estimated forfeitures. When estimating forfeitures, FirstCity considers voluntary termination behaviors as well as trends of actual option forfeitures.

In September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N, Financial Statements—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be evaluated when determining the materiality of misstatements in the current year financial statements. SAB 108 requires materiality to be determined by considering the effect of prior year misstatements on both the current year balance sheet and income statement, with consideration of their carryover and reversing effects. SAB 108 also addresses how to correct material misstatements. The provisions of SAB 108 are effective for the year ending December 31, 2006. The cumulative effect of the initial application of SAB 108 must be reported in the carrying amounts of assets and liabilities as of the beginning of the year, with the offsetting balance to retained earnings. The Company adopted SAB 108 and adjusted its opening retained earnings for the year ended December 31, 2006 by approximately $327 thousand, all of which relates to the Company's investments in certain Acquisition Partnerships accounted for under the equity method of accounting. Approximately $152 thousand reflects a correction to write off cumulative translation adjustments related to certain foreign investments during the period 2002 through 2005, and approximately $106 thousand reflects a correction in a Partnership's accounting for property taxes in 2005. The remaining $69 thousand reflects the Company's 2005 correction of accounting for equity earnings on a pro-rata basis recorded in an acquired investment subsequent to the acquisition date. The Company reviewed the annual amount of reduced equity earnings incurred in prior periods for these corrections and considered the effects to be immaterial to prior periods both individually and in the aggregate.

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes ("FIN No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a

tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this adoption on the Company's consolidated financial position or earnings.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specified situations. Such servicing assets or liabilities would be initially measured at fair value, if practicable, and subsequently measured at amortized value or fair value based upon an election of the reporting entity. SFAS 156 also specifies certain financial statement presentations and disclosures in connection with servicing assets and liabilities. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS 156 by the Company on January 1, 2007 did not have a significant impact on the Company's consolidated financial position or earnings.

In November 2005, the FASB issued FASB Staff Position SFAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("FSP 115-1"). FSP 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impaired loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company adopted the provisions of FSP 115-1 on January 1, 2006, which did not have a significant impact on the Company's consolidated financial statements.

Certain amounts in the consolidated financial statements for prior years have been reclassified to conform with current consolidated financial statement presentation. In 2006, the Company reclassified gain on resolution of Portfolio Assets and loan interest income as income from Portfolio Assets. These items were reported separately in prior periods.

In all reporting prior to December 31, 2006, FirstCity reported loans receivable advances and loans receivable payments in cash flows from operating activities on the Consolidated Statements of Cash

Flows. Beginning with this report, the Company is now reporting these items in cash flows from investing activities. Prior year amounts reported on the Consolidated Statements of Cash Flows have been adjusted to conform to this treatment which is required under GAAP. The total amounts thus reclassified were $1.7 and $3.4 million for the years ended December 31, 2005 and 2004, respectively. Management believes that the changes in the Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 are immaterial relative to the financial statements taken as a whole. These reclassifications have the following impact on the financial statements:

		Year ended December 31,
		2005			2004
Statement of Cash Flows:
	Cash flows from operating activities (as reported)	$	(13,892	)	$	(49,137	)
	Impact of reclassification on loans receivable advances		1,790			9,474
	Impact of reclassification on loans receivable payments		(3,507	)		(6,076	)

	Cash flows from operating activities (as corrected)	$	(15,609	)	$	(45,739	)

	Cash flows from investing activities (as reported)	$	(16,443	)	$	14,140
	Impact of reclassification on advances of loans receivable		(1,790	)		(9,474	)
	Impact of reclassification on payments of loans receivable		3,507			6,076

	Cash flows from investing activities (as corrected)	$	(14,726	)	$	10,742

The Company requires liquidity to fund its operations, working capital, payment of debt, equity for acquisition of Portfolio Assets, investments in and advances to entities formed to acquire Portfolios ("Acquisition Partnerships"), retirement of and dividends on preferred stock, and other investments. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, borrowings from revolving lines of credit and other credit facilities, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

In December 2002, FirstCity completed a recapitalization in which holders of the New Preferred Stock exchanged 1,092,210 shares of New Preferred Stock, for 2,417,388 shares of common stock and $10.5 million. During 2003, 4,400 shares of New Preferred Stock were redeemed for 8,200 shares of common stock, leaving 126,291 shares outstanding at December 31, 2003. On December 30, 2004, FirstCity redeemed all of the outstanding shares of its New Preferred Stock at a total redemption price of $21.525 per share. The redemption price represented the liquidation preference of the New Preferred Stock plus the final normal quarterly dividend of $.525 per share. In addition, FirstCity issued 400,000 shares of common stock and a note payable, to be periodically redeemed by the Company for an aggregate of up to $3.2 million out of certain cash collections from servicing income from Portfolios in Mexico, as part of a transaction to acquire the minority interest in FirstCity Holdings, Inc. from Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom were Senior Vice Presidents

of FirstCity. In 2006, this cash flow note was settled for $310 as part of the transaction with American International Group, Inc. ("AIG"), which is more fully discussed below and in note 6.

As a part of the recapitalization, BoS(USA), Inc. ("BoS(USA)") provided a non-recourse loan in the amount of $16 million to FirstCity which was used to pay the cash portion of the exchange offer to the holders of the New Preferred Stock, to pay expenses of the exchange offer and recapitalization, and to reduce FirstCity's debt to the Bank of Scotland. In connection with the $16 million loan, FirstCity was obligated to pay an arrangement fee to BoS(USA) equal to 20% of all amounts received by FirstCity in excess of $16 million from any sale or other disposition of FirstCity's 20% interest in Drive and all dividends and other distributions paid by Drive or its general partner on FirstCity's 20% interest in Drive. This arrangement was settled as part of the Drive Sale discussed below.

On November 1, 2004, FirstCity completed the sale of the Company's 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, which resulted in net proceeds of $86.8 million. A portion of the proceeds were used to pay off debt. As a result of the sale, FirstCity owed the Bank of Scotland an arrangement fee of $8.0 million relating to the $16 million loan to FirstCity discussed above. This fee was paid in January 2005.

During the period from December 1998 to March 2005, FirstCity Mexico, Inc. and Strategic Mexican Investment Partners, L.P. ("SMIP"), each affiliates of FirstCity and Cargill Financial Services International, Inc. ("CFSI") and, in some instances, other investors, acquired 12 residential and commercial non-performing loan portfolios from financial institutions in Mexico (the "Mexican Portfolios"). Each portfolio was acquired by a Mexican limited liability company (each a "Mexican SRL") that was owned by a Delaware limited liability company formed by each investor group. On August 8, 2006, SMIP and National Union Fire Insurance Company of Pittsburgh, Pa., American General Life Insurance Company and American General Life and Accident Insurance Company, affiliates of AIG Global Asset Management Holdings Corp. (collectively the "AIG Entities") formed Bidmex Holding, LLP for the purpose of acquiring the Mexican Portfolios by purchasing the interests of Cargill and SMIP in eleven of the Mexican limited liability companies (the "LLCs") and purchasing the loan portfolio of one of the Mexican limited liability companies (the "Purchased Portfolio") for an aggregate purchase price of $119.3 million U.S. Dollars as of that date (the "Aggregate Purchase Price"). SMIP acquired 15% of the membership interests in Bidmex Holding, LLC. A 9% interest acquired by SMIP is of equivalent standing to membership interests held by the AIG affiliates representing 85% of the membership interests. The remaining 6% membership interest acquired by SMIP is subordinate to the other owners of interests in Bidmex Holding, LLC, who will receive the return of and a return on their contribution equivalent to an 9% internal rate of return with respect to their interests prior to SMIP receiving the return of and a return on its capital contribution equivalent to a 9% internal rate of return with respect to its 6% interest.

Also on August 8, 2006, an Interest Purchase and Sale Agreement was entered into by and among Bidmex Holding, LLC ("Buyer"), as buyer, and SMIP and CFSI (collectively, the "Sellers"), as seller, and eleven of the LLCs and the AIG entities as additional parties. In the Interest Purchase and Sale Agreement, the Sellers and the LLCs made various representations and warranties concerning (i) the existence and ownership of the LLCs and the related Mexican SRLs, (ii) the assets and liabilities of the LLCs, (iii) taxes related to periods prior to August 8, 2006, and (iv) the operations of the LLCs and SRLs. The Sellers agreed to indemnify the Buyer and AIG Entities from damages resulting from a breach of any representation or warranty contained in the Interest Purchase and Sale Agreement on a several and not joint basis according to their respective ownership percentages in each LLC as to any matter related to a particular LLC, or on the basis of 80% to CFSI and 20% to SMIP as to any matter

that could not be identified to a particular LLC. The indemnity obligation under the Interest Purchase and Sale Agreement survives for a period of the statute of limitations for matters related to taxes, existence and authority, capitalization and good standing of the LLCs and SRLs and for a period of two years from August 8, 2006, the closing date with respect to all other representations and warranties. The Sellers are not required to make any payments as a result of the indemnity provisions of the Interest Purchase and Sale Agreement until the aggregate amount payable under that agreement and the Asset Purchase Agreement exceeds $250 thousand; however, claims related to taxes and fraud are not subject to this $250 thousand threshold. The Interest Purchase and Sale Agreement limits the liability of the Sellers for indemnifiable losses under the Interest Purchase and Sale Agreement and the Asset Purchase Agreement to the Aggregate Purchase Price (without duplication of amounts recovered pursuant to the terms of the Asset Purchase Agreement).

Also on August 8, 2006, Bidmex Holding, LLC entered into an Agreement for the Onerous Transfer of Loans and Litigious Rights (the "Asset Purchase Agreement") between and among Residencial Oeste, S. de R.L. de C.V., as seller (the "Asset Seller"), an affiliate of CFSI and SMIP, Residencial Oeste 2, S. de R.L. de C.V., as purchaser (the "Asset Purchaser"), and CFSI, SMIP, and Bidmex Acquisition, LLC, the parent of the Asset Purchaser, as additional parties. The Asset Purchase Agreement provides for the sale of the loan portfolio owned by the Seller to the Purchaser for a purchase price of $10.1 million U.S. Dollars on the closing date, which purchase price is part of the Aggregate Purchase Price. In the Asset Purchase Agreement, the Asset Seller and the Sellers made various representations and warranties concerning (i) the existence and ownership of the Seller, (ii) the ownership of the loan portfolio, (iii) taxes related to periods arising prior to the closing date, and (iv) the existence of the loans comprising the loan portfolio and other matters related to the loan portfolio. The Asset Seller agreed to indemnify the Asset Purchaser from damages resulting from a breach of any representation or warranty. The indemnity obligation under the Asset Purchase Agreement survives for a period of the statute of limitations for matters related to existence and ownership of the Seller, ownership of the loans, and taxes for periods prior to August 8, 2006, and for a period of two years from August 8, 2006, with respect to all other representations and warranties. The Seller is not required to make any payments as a result of the indemnity provisions of the Asset Purchase Agreement until the aggregate amount payable under that Agreement exceeds $25 thousand; however, claims related to taxes and fraud are not subject to this $25 thousand threshold. The Interest Purchase and Sale Agreement limits the liability of the Sellers for indemnifiable losses under the Asset Purchase Agreement to the Aggregate Purchase Price.

In connection with the Interest Purchase and Sale Agreement, Recuperación de Carteras Mexicanas, S. de R.L. de C.V., as optionor ("RCM"), an affiliate of SMIP and CFSI, granted a put option dated August 8, 2006 to Bidmex Holding, LLC, as optionee, pursuant to the terms of a Put Option Agreement by and among RCM, Bidmex Holding, LLC, and Bidmex 6, LLC, the parent entity of RCM and SMIP. RCM granted a put option to Bidmex Holding, LLC related to the purchase of any loan of Solución de Activos Residenciales, S. de R.L. de C.V. or Solución de Activos Comerciales, S. de R.L. de C.V., each a Mexican SRL, if any borrowing on a loan made by those entities has filed or files a challenge in a legal proceeding related to any such loan based on, in addition to any other defense claims, a claim on grounds related to the Mexican Supreme Court Ruling that has put into issue the actions required for transfer of loans by Mexican financial institutions after August 2003, provided that any such challenge is asserted on or before the earlier of (i) the reversal of the Supreme Court Ruling, or (ii) February 1, 2008. The purchase price for any loan under the put option is to be the allocated purchase price set by the parties for the loan, plus certain expenses related to the transfer and collection of the loan, plus any taxes paid or payable with respect to the cash flow from each loan, reduced by any cash flow received by Bidmex Holding, LLC with respect to the loan.

Also in connection with the Interest Purchase and Sale Agreement, FirstCity entered executed a Guaranty dated as of August 8, 2006, in favor of Bidmex Holding, LLC, Asset Purchaser, and the AIG Entities, pursuant to which FirstCity guaranteed that FirstCity would cause and enable SMIP to perform its obligations under the Interest Purchase and Sale Agreement and Asset Purchase Agreement, that SMIP would perform and fulfill its obligations under those agreements and also that the payments provided for in those agreements would be promptly paid when due. FirstCity's obligations under the Guaranty are subject to any beneficiary obtaining judgment against SMIP regarding the performance of any obligation for which such beneficiary is seeking FirstCity's guaranty.

In August 2005, FH Partners, L.P., an indirect wholly-owned affiliate of FirstCity, and Bank of Scotland, acting through its New York branch, as agent for itself as lender, entered into a Revolving Credit Agreement, as most recently amended on June 29, 2007, that provides a $50 million revolving portfolio acquisition facility for FH Partners, L.P. to be secured by all of the assets of FH Partners, L.P. The loan facility will be used to finance portfolio and asset purchases. The facility (i) allows loans to be made for the acquisition of Portfolio Assets in the United States, (ii) provides that each loan may be in an amount of up to 70% of the net present value of the assets being acquired with the proceeds of the loan, (iii) provides that the aggregate outstanding balances of all loans will not exceed 65% of the net present value of the assets securing the loan facility, (iv) provides for an interest rate of LIBOR plus 2.0%, (v) provides for an annual commitment fee of 0.20% of the unused balance of the revolving acquisition facility, (vi) provides for a utilization fee of 0.75% of the amount of each loan made under the loan facility, (vii) provides for an upfront fee of $350 thousand, (viii) provides for facility fees of $100 thousand, for the period commencing on the Effective Date to but excluding the first anniversary thereof, $75 thousand, for the period commencing on the first anniversary of the Effective Date to but excluding the second anniversary thereof, and $50 thousand, for each subsequent one-year period, (ix) provides that all other financial covenants will mirror the key covenants of the facility that FirstCity has with Bank of Scotland, and (x) provides for a maturity date of November 12, 2008. The obligations of FH Partners, L.P. under the Revolving Credit Agreement are guaranteed by FirstCity and the primary wholly-owned subsidiaries of FirstCity.

At December 31, 2006, the Company had $48.3 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe. In general, the type of risk hedged relates to the foreign currency exposure of net investments in Europe caused by movements in Euro exchange rates. The Company entered into the hedging relationship such that changes in the net investments being hedged are expected to be offset by corresponding changes in the values of the Euro-denominated debt. Effectiveness of the hedging relationship is measured and designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the carrying value of the designated net equity investments. The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($2.5) million for the year ended December 31, 2006, $1.3 million for 2005, and ($.3) million for 2004.

FirstCity currently has a $175 million revolving acquisition facility with Bank of Scotland as most recently amended on June 29, 2007 (effective March 31, 2007), used to finance the senior debt and equity portion of portfolio and asset purchases made by FirstCity and to provide for the issuance of letters of credit and working capital loans. The obligations of FirstCity under this facility are guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and are secured by security interests in substantially all of the assets of FirstCity and its wholly-owned subsidiaries. An additional upfront fee was paid to Bank of Scotland in the amount of $830 thousand. The primary terms and key covenants of this facility as amended on June 29, 2007 are as follows:

$6.3 million from Bank of Scotland under the terms of FirstCity's revolving acquisition facility with Bank of Scotland. In the event that a demand is made under the $6.3 million letter of credit, FirstCity is required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

On December 20, 2006, American Business Lending, Inc. ("ABL"), a subsidiary of FirstCity, and Wells Fargo Foothill, Inc. ("WFF"), entered into a Credit Agreement dated effective as of December 15, 2006 that provides for a $25 million revolving loan facility for ABL which is secured by substantially all of the assets of ABL. The revolving loan facility, (i) allows advances in the maximum amount of $25 million to be made under the Credit Agreement for the purpose of paying fees and expenses in connection with the closing of the Credit Agreement and financing loans made by ABL, a portion of which are guaranteed by the U.S. Small Business Administration, (ii) provides that the aggregate outstanding principal amount of the advances made to ABL under the Credit Agreement may not exceed the amount by which (a) the sum of (1) up to one hundred percent (100%) of the net eligible SBA guaranteed loans made by ABL, plus (2) up to eighty percent (80%) of the net eligible non-guaranteed loans made by ABL (or portion thereof), exceeds (b) the sum of (1) any reserves for obligations of ABL related to the bank products, plus (2) the aggregate amount, if any, of loan reserves then established and outstanding, plus (3) the aggregate amount of any other reserves established by WFF, (iii) provides for an interest rate of LIBOR plus 2.625% or, alternatively, the greater of (x) the Wells Fargo prime rate or (y) seven and one-half percent (7.50%) per annum, (iv) provides for a closing fee of $125 thousand, being one-half of one percent (0.50%) of the Maximum Credit Line available under the Credit Agreement, (v) provides for an unused credit line fee in an amount equal to one-quarter of one percent (0.25%) per annum of the average daily difference during the month in question (or portion thereof) between (i) the Maximum Credit Line and (ii) the aggregate outstanding principal amount of the advances outstanding under the Credit Agreement for such month (or portion thereof), (vi) provides in the event of the termination of the Credit Agreement by ABL for a prepayment fee of three percent (3.0%) of the Maximum Credit Line if paid prior to December 14, 2007, two percent (2.0%) of the Maximum Credit Line if paid during the period beginning December 15, 2007 and ending December 14, 2008, and one percent (1.0%) of the Maximum Credit Line if paid during the period beginning December 15, 2008 and ending December 13, 2009, and (vii) provides for a maturity date of December 14, 2009. At December 31, 2006, the balance of this facility was zero. In February 2007 American Business Lending, Inc., an affiliate of FirstCity, and Wells Fargo Foothill, Inc., amended the Credit Agreement to increase the revolving credit facility to a maximum credit line of $40 million that matures on December 13, 2009. In connection with this amendment, FirstCity provided Wells Fargo Foothill, Inc. with an unconditional guaranty of the

obligations under the loan facility on behalf of ABL up to a maximum of $5 million. This guaranty will remain in effect for the life of the loan facility.

Management believes that the existing loan facilities, the related fees generated from the servicing of assets, equity distributions from existing Acquisition Partnerships and wholly-owned portfolios, sales of interests in equity investments, origination and sales of guaranteed portions of SBA 7(a) loans, will allow the Company to meet its obligations as they come due during the next twelve months.

Discontinued operations are comprised of two components previously reported as the Company's residential and commercial mortgage banking business ("Mortgage") and the consumer lending business conducted through the Company's minority interest investment in Drive ("Consumer"). Earnings (loss) from discontinued operations is summarized as follows:

Assets remaining from discontinued mortgage operations are investment securities resulting from the retention of a residual interest in a securitization transaction. These securities are in "run-off," and the Company is contractually obligated to service these assets. Prior to the fourth quarter of 2004, FirstCity classified these securities as held to maturity and considered the estimated future gross cash receipts for such investment securities in the computation of the value of such investment securities. In the fourth quarter of 2004, FirstCity's management elected to pursue a strategy to liquidate these assets and carry them as held for sale. Consequently, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), the securities are recorded at the lower of their carrying value or fair value less cost to sell.

In April 2005, the Company exercised an early purchase option on the 1998-1 securitization. Loans receivable were recorded at $6.1 million in accordance with EITF 02-9, Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold. FirstCity evaluated each loan at the acquisition date to determine whether there was evidence of credit deterioration since origination. At December 31, 2006, the acquired loans are included in Portfolio Assets in the consolidated balance sheet and classified as either "loans acquired with credit deterioration" or "loans acquired without credit deterioration." See note 1(e) for a description of the accounting policy for these loans. As of December 31, 2006 only one investment security remained from discontinued mortgage operations.

The assumptions used in the valuation model consider both industry as well as the Company's historical experience and are reviewed quarterly in light of historical evidence in revising the prospective results of the model. These revised assumptions could potentially result in either an increase or decrease in the estimated cash receipts. An additional provision is booked based on the output of the valuation model if deemed necessary. The Company recorded provisions of $75 thousand in 2006, $.4 million in 2005 and $3.8 million in 2004 for additional losses from discontinued mortgage

operations. In 2004, the provision primarily relates to FirstCity adjusting the carrying value of the residual interests to fair value.

In September 2004, FirstCity sold its 31% beneficial ownership interest in Drive Financial Services LP ("Drive") for a total purchase price of $108.5 million in cash, resulting in distributions and payments to FirstCity in the aggregate amount of $86.8 million in cash, from various sources. The sale was completed in November 2004, and net cash proceeds from these transactions were primarily used to pay off debt.

Pursuant to SFAS No. 144, the consolidated financial statements have been reclassified for all periods presented to reflect the operations, assets and liabilities of the consumer business segment as discontinued operations. There were no consumer assets held for sale as of December 31, 2006 and 2005. The liabilities of such operations have been classified as "Liabilities from discontinued consumer operations" on the consolidated balance sheets and consisted of state taxes payable as of December 31, 2006 and 2005.

The net earnings from discontinued consumer operations are classified on the consolidated statements as a component of "Earnings from discontinued operations." Summarized results of discontinued consumer operations are as follows:

		Year ended December 31,
		2006		2005			2004
Equity in earnings		$	—	$	—		$	17,662
Gain on sale of Drive			—		—			67,158
Interest and fees on notes payable to affiliate			—		—			(2,040	)
Other expenses			—		(121	)		(10	)
Income taxes			—		630			(1,759	)
Minority interest			—		—			(18,548	)

	Earnings from discontinued consumer operations	$	—	$	509		$	62,463

The net gain on sale of Drive of $53.3 million is comprised of $67.2 million gross gain on sale and adjustments to the Company's basis in Drive of $2.8 million of equity earnings for October 2004, $15.6 million in minority interest expense and $1.1 million in taxes.

The pro forma condensed consolidated statements of operations for the year ended December 31, 2004 illustrating the effects of the Drive sale as if it had occurred as of the beginning of the years is as follows:

Portfolio Assets are pledged to secure notes payable that are non-recourse to FirstCity or any affiliate other than the entity that incurred the debt. See Note 2 for a description of the Revolving Credit agreement between FH Partners, L.P. and Bank of Scotland, which is guaranteed by FirstCity and the primary wholly-owned subsidiaries of FirstCity.

				December 31, 2006			December 31, 2005
Loan Portfolios
	Loans Acquired Prior to 2005
		Non-performing Portfolio Assets		$	6,163		$	10,528
		Performing Portfolio Assets			5,166			12,029
	Loans Acquired After 2004
		Loans acquired with credit deterioration			84,550			12,703
		Loans acquired with no credit deterioration			6,473			3,976

	Outstanding balance				102,352			39,236
		Allowance for loan losses			(333	)		(163	)

	Carrying amount of loans, net of allowance				102,019			39,073

Real Estate Portfolios					4,574			8,018
Other					2,103			2,255

			Portfolio Assets, net	$	108,696		$	49,346

				Year ended December 31,
				2006		2005		2004
Loan Portfolios
	Loans Acquired Prior to 2005
		Non-performing Portfolio Assets		$	2,962	$	4,407	$	1,525
		Performing Portfolio Assets			1,483		2,122		947
	Loans Acquired After 2004
		Loans acquired with credit deterioration			4,578		1,091		—
		Loans acquired with no credit deterioration			396		354		—
Real Estate Portfolios					1,325		197		—
Other					243		91		—

			Income from Portfolio Assets	$	10,987	$	8,262	$	2,472

During 2006, the Company recorded provisions for loan and impairment losses net of recoveries by a charge to the income statement of $271 comprised of an impairment charge on real estate portfolios of $28, and a $243 allowance for loan losses. During 2005, the Company recorded provisions for loan and impairment losses net of recoveries by a charge to the income statement of $212 comprised of an impairment charge on real estate portfolios of $49 and a $163 allowance for loan losses. The Company previously had not recorded any other valuation allowances on its loans.

Changes in accretable yield at December 31, 2006 on loans acquired after 2004 with evidence of credit deterioration were as follows:

		Year ended December 31,
		2006			2005
Beginning Balance		$	3,765		$	—
	Additions		33,210			6,101
	Accretion		(4,025	)		(711	)
	Reclassification from (to) nonaccretable difference		(109	)		(1,039	)
	Disposals		(553	)		(586	)
	Translation adjustments		51			—

Ending Balance		$	32,339		$	3,765

Loans acquired during each period for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

	Year ended December 31,
	2006		2005
Face value at acquisition	$	300,481		$	25,656
Cash flows expected to be collected at acquisition		119,122			26,088
Basis in acquired loans at acquisition		85,912			19,987

Loans receivable from Acquisition Partnerships held for investment are summarized as follows:

There were no provisions recorded on these loans during 2006, 2005 and 2004. The loans receivable from the Acquisition Partnerships are secured by the assets/loans acquired by the partnerships with purchase money loans provided by the investors to the partnerships to purchase the asset pools held in those entities. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment were necessary.

Equity method losses, which were recorded to reduce the loans and interest receivable from the Mexican partnerships, were zero, $.1 million and $.3 million during 2006, 2005 and 2004, respectively, in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee. At December 31, 2006 and 2005, the balance of nonaccrual loans receivable was zero and $7.6 million, respectively.

There were no provisions recorded on these loans during 2006, 2005 and 2004. The loans receivable from these investments are secured by real estate. These loans are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each investment to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the investments will be sufficient to repay the loans and no allowances for impairment were necessary.

The Company has investments in Acquisition Partnerships and their general partners that are accounted for under the equity method. The Company also has investments in servicing entities that are accounted for on the equity method.

The condensed combined financial position and results of operations of the Acquisition Partnerships (excluding servicing entities), which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized as follows:

	December 31,
	2006		2005
Assets	$	457,173	$	444,825

Liabilities	$	100,973	$	340,881
Net equity		356,200		103,944

	$	457,173	$	444,825

Equity investments in Acquisition Partnerships	$	105,852	$	77,893
Equity investments in servicing entities		6,505		5,892

	$	112,357	$	83,785

			Year ended December 31,
			2006		2005			2004
Income from Portfolio Assets			$	86,732	$	82,320		$	107,258
Other income				2,171		899			3,257

	Revenues			88,903		83,219			110,515
Interest expense				13,624		15,063			18,495
	Average cost (annualized)			6.49%		4.86%			5.38%
Service fees				18,225		19,390			17,260
Provision for loan and impairment losses				857		8,888			12,027
Other operating costs				21,596		24,168			18,737
Foreign currency (gains) losses				10,502		(16,861	)		(957	)
Income taxes				1,194		1,105			1,970

	Expenses			65,998		51,753			67,532

		Net earnings	$	22,905	$	31,466		$	42,983

Equity in earnings of Acquisition Partnerships			$	10,927	$	11,370		$	13,970
Equity in earnings of servicing entities				829		643			943

			$	11,756	$	12,013		$	14,913

The assets and equity (deficit) of the Acquisition Partnerships and equity investments in those entities are summarized by geographic region below. The WAMCO Partnerships represent domestic

Texas limited partnerships and limited liability companies in which the Company has a common ownership with Cargill.

			December 31,
			2006		2005
Assets:
	Domestic:
		WAMCO Partnerships	$	116,634	$	166,213
		MinnTex Investment Partners LP		71		307
		Other		4,206		10,410
	Latin America			167,407		185,702
	Europe			168,855		82,193

			$	457,173	$	444,825

Equity (deficit):
	Domestic:
		WAMCO Partnerships	$	69,579	$	111,329
		MinnTex Investment Partners LP		62		283
		Other		2,614		5,485
	Latin America			126,402		(79,527	)
	Europe			157,543		66,374

			$	356,200	$	103,944

Equity investment in Acquisition Partnerships:
	Domestic:
		WAMCO Partnerships	$	34,203	$	51,772
		MinnTex Investment Partners LP		20		93
		Other		1,671		2,825
	Latin America			18,640		2,771
	Europe			51,318		20,432

			$	105,852	$	77,893

Revenues and earnings (loss) of the Acquisition Partnerships and equity in earnings (loss) of those entities are summarized by geographic region below.

			Year ended December 31,
			2006			2005			2004
Revenues:
	Domestic:
		WAMCO Partnerships	$	26,136		$	30,770		$	32,494
		MinnTex Investment Partners LP		1,492			4,766			8,796
		Other		351			948			75
	Latin America			37,652			23,359			22,658
	Europe			23,272			23,376			46,492

			$	88,903		$	83,219		$	110,515

Net earnings (loss):
	Domestic:
		WAMCO Partnerships	$	13,332		$	14,850		$	17,419
		MinnTex Investment Partners LP		1,345			4,286			7,850
		Other		(852	)		215			(730	)
	Latin America			(6,868	)		(3,687	)		(5,333	)
	Europe			15,948			15,802			23,777

			$	22,905		$	31,466		$	42,983

Equity in earnings (loss) of Acquisition
	Partnerships:
	Domestic:
		WAMCO Partnerships	$	6,431		$	6,403		$	7,519
		MinnTex Investment Partners LP		444			1,414			2,591
		Other		(373	)		224			(205	)
	Latin America			(189	)		(227	)		(992	)
	Europe			4,614			3,556			5,057

			$	10,927		$	11,370		$	13,970

FirstCity holds variable interests in certain Acquisition Partnerships which would be characterized as VIE's. However, FirstCity is not deemed to be the primary beneficiary of any of these entities. At December 31, 2006, FirstCity's maximum exposure to loss as a result of its involvement with the VIE's is $42.1 million.

Effectiveness of the hedging relationship is measured and designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the carrying value of

the designated net equity investments. The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($2,509) for 2006, $1,348 for 2005 and ($297) for 2004.

During the third quarter of 2006, FirstCity completed a total restructure of its investments in Mexico in a transaction which aligned FirstCity with American International Group, Inc. FirstCity received a payment of $1.9 million of incentive service fees and recorded a gain on sale of $1.2 million from the sale of certain assets by Cargill Financial Services International, Inc. and FirstCity affiliates as a result of this restructure. The net impact for the third quarter from this transaction was $2.2 million net of expenses and intercompany eliminations. Subsequent to this transaction, Bidmex Holding LLC now owns 100% of the related Mexican investments, and FirstCity has a 9% senior and 6% subordinated equity investment in Bidmex Holding LLC. The Company will evaluate the subordinated investment for impairment quarterly.

During the first quarter of 2005, FirstCity invested $2.0 million to increase its ownership percentage in MCS et Associes, S.A. ("MCS"), a French servicing company, from 10.00% to 11.89% and in PRL Development, SAS, a French Acquisition Partnership, from 33.50% to 43.50%. PRL Development, SAS increased its ownership percentage in MCS from 14.72% to 19.63% in 2005. These additional investments provided a combined direct and indirect ownership interest in MCS of 20.43%.

In 2005, MCS sold its investment in Common Stock of FirstCity resulting in a gain of $1.5 million. FirstCity accounted for its proportionate interest in this gain as an increase in the Company's carrying amount of its investment in MCS of $.3 million and an increase in additional paid-in capital.

Refer to Note 2 for a description of terms related to the Company's Senior Credit Facility at December 31, 2006 and other matters concerning the Company's liquidity.

Under terms of certain borrowings, the Company and its subsidiaries are required to maintain certain tangible net worth levels and debt to equity and debt service coverage ratios. The terms also restrict future levels of debt. At December 31, 2006, the Company was in compliance with the aforementioned covenants. The aggregate maturities of notes payable for the five years ending December 31, 2011 are as follows: $6,897 in 2007, $65,609 in 2008, zero in 2009, $114,275 in 2010, zero in 2011, and $1,030 thereafter.

The Company is engaged in one reportable segment—Portfolio Asset acquisition and resolution. The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to Face Value and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries. The following is a summary of results of operations for the Portfolio Asset acquisition and resolution segment and reconciliation to earnings from continuing operations.

				Year ended December 31,
				2006			2005		2004
Portfolio Asset Acquisition and Resolution:
	Revenues:
		Servicing fees		$	12,906		$	11,754	$	13,747
		Income from Portfolio Assets			10,987			8,262		2,471
		Interest income from affiliates			1,498			1,838		2,263
		Interest income from loans receivable—other			576			—		—
		Other income			1,555			1,737		2,056

			Total		27,522			23,591		20,537

	Expenses:
		Interest and fees on notes payable			8,311			4,002		3,798
		Salaries and benefits			11,428			12,065		12,403
		Provision for loan and impairment losses			271			212		30
		Occupancy, data processing, communication and other			6,516			5,326		4,745
		Minority interest			(97	)		53		63

			Total		26,429			21,658		21,039

	Equity in earnings of investments				11,756			12,013		14,913
	Gain on sale of interest in equity investments				2,459			—		—

	Operating contribution before direct taxes			$	15,308		$	13,946	$	14,411

	Operating contribution, net of direct taxes			$	15,104		$	13,780	$	14,437
Corporate Overhead:
	Corporate interest expense				—			—		3,378
	Salaries and benefits, occupancy, professional and other income and expenses, net				5,227			5,702		6,048

	Earnings from continuing operations			$	9,877		$	8,078	$	5,011

Revenues and equity in earnings of investments from the Portfolio Asset acquisition and resolution segment attributable to domestic and foreign operations are summarized as follows:

Total assets for each of the segments and a reconciliation to total assets are as follows:

			December 31, 2006		December 31, 2005
Cash			$	18,472	$	12,901
Portfolio acquisition and resolution assets:
	Domestic			158,147		105,938
	Latin America			28,883		19,764
	Europe			61,062		27,699
	Other			2,272		—
Deferred tax asset, net				20,101		20,101
Other non-earning assets, net				8,623		8,309
Discontinued mortgage assets				103		157

		Total assets	$	297,663	$	194,869

The average investment in Portfolio Assets and loans receivable and related income from those investments are as follows:

			Year ended December 31,
			2006		2005		2004
Average investment in Portfolio Assets and loans receivable:
	Domestic		$	66,381	$	42,567	$	19,028
	Latin America			12,479		18,068		16,568
	Europe			2,475		652		1,112
	Other			703		—		—

		Total	$	82,038	$	61,287	$	36,708

Income from Portfolio Assets and loans receivable:
	Domestic		$	11,392	$	8,506	$	2,653
	Latin America			1,377		1,559		2,017
	Europe			181		35		64
	Other			111		—		—

		Total	$	13,061	$	10,100	$	4,734

On July 17, 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission, which allows the Company to issue up to $250 million in debt and equity securities from time to time in the future. The registration statement became effective July 28, 1998. As of December 31, 2006, there have been no securities issued under this registration statement.

In connection with the recapitalization discussed in Note 2, 400,000 shares of Common Stock were issued to purchase a minority interest.

BoS(USA) is entitled to additional warrants in connection with its existing warrant for 425,000 shares to retain its ability to acquire approximately 4.86% of the Company's Common Stock.

The holders of shares of Common Stock are entitled to one vote for each share on all matters submitted to a vote of common stockholders. In order to preserve certain tax benefits available to the Company, transactions involving stockholders holding or proposing to acquire more than 4.75% of outstanding common shares are prohibited unless the prior approval of the Board of Directors is obtained.

The Board of Directors of the Company may designate the relative rights and preferences of the optional preferred stock when and if issued. Such rights and preferences can include liquidation preferences, redemption rights, voting rights and dividends and shares can be issued in multiple series with different rights and preferences. The Company has no current plans for the issuance of an additional series of optional preferred stock.

On August 14, 2006, FirstCity announced that the Board of Directors authorized a stock repurchase plan providing for the purchase of up to one million shares of the company's common stock, with purchases to be made over a period of twelve months. In 2006, FirstCity repurchased 530,300 shares of the Company's common stock on the open market for a total of $5.6 million.

The Company has stock option and award plans for the benefit of key individuals, including its directors, officers and key employees. The plans are administered by a committee of the Board of Directors and provide for the grant of up to a total of 800,000 shares (net of shares cancelled and forfeited) of Common Stock. The Company previously had a 1995 Stock Option and Award Plan, and a 1996 Stock Option and Award Plan, which provided for a grant of up to 700,000 shares. Both plans expired in 2005 pursuant to their terms, with existing options remaining in accordance with the terms of each grant. Stock option awards are granted with an exercise price equal to the market price of FirstCity's shares at the date of grant; those stock option awards generally vest 25% each year from the date of grant and have 10-year contractual terms. Certain stock options issued to non-employee directors were exercisable immediately.

FirstCity adopted SFAS 123(R) using the modified prospective transition method beginning January 1, 2006. Accordingly, during 2006, the Company recorded stock-based compensation expense for awards granted prior to, but not yet vested as of January 1, 2006, as if the fair value method

required for pro forma disclosure under SFAS 123 were in effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, FirstCity recognized compensation expense using the straight-line amortization method. For stock-based awards granted after January 1, 2006, the Company recognizes compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For these awards, FirstCity recognizes compensation expense using a straight-line amortization method. As SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for 2006 has been reduced for estimated forfeitures. When estimating forfeitures, FirstCity considers voluntary termination behaviors as well as trends of actual option forfeitures. The impact on the results of operations of recording stock-based compensation for 2006, 2005 and 2004 was as follows:

	Year ended December 31,
	2006		2005		2004
Amount of compensation cost recognized in income	$	651	$	—	$	—
Tax benefit recognized in income	$	—	$	—	$	—
Amount capitalized as part of an asset	$	—	$	—	$	—

SFAS 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. Cash received from options exercised during 2006, 2005 and 2004 was $68, $196 and $197, respectively.

The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on historical volatility of the Company's stock. The Company estimated the expected term of unvested options by taking the average of the vesting term remaining and the contractual term of the option, as illustrated in the Securities and Exchange Commission's Staff Accounting Bulletin No. 107. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options' expected life. The following table sets forth the weighted average assumptions used to calculate the fair value of the stock options for 2006, 2005 and 2004.

	Year ended December 31,
	2006		2005		2004
Weighted average grant date fair value	$	6.71	$	9.95	$	6.56
Volatility		82%		84%		90%
Risk-free interest rate		4.88%		4.50%		4.85%
Expected life in years		5		10		10
Dividend yield		Zero		Zero		Zero

The total intrinsic value of stock options exercised during 2006, 2005 and 2004 were $36, $377 and $351, respectively. As of December 31, 2006, there was approximately $1.1 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted average period of 2.0 years.

A summary of the status and changes of FirstCity's nonvested shares as of December 31, 2006, and changes during 2006 is presented below:

	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2006	253,525		$	6.58
Granted	35,000		$	6.71
Vested	(91,788	)	$	6.45
Forfeited	—			—

Nonvested at December 31, 2006	196,737		$	6.67

Prior to the adoption of SFAS No. 123(R), FirstCity provided the disclosures required under SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosures. Employee stock-based compensation expense recognized under SFAS 123(R) was not reflected in the results of operations for 2005 and 2004 for employee stock option awards, as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. Forfeitures of awards were recognized as they occurred. Previously reported amounts have not been restated.

		Year ended December 31,
		2005			2004
Net earnings to common stockholders, as reported		$	8,231		$	63,634
	Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(666	)		(346	)

Pro forma net earnings to common stockholders		$	7,565		$	63,288

Net earnings per common share:
Basic—as reported		$	0.73		$	5.67

Basic—pro forma		$	0.67		$	5.64

Diluted—as reported		$	0.69		$	5.37

Diluted—pro forma		$	0.63		$	5.35

The actual income tax expense attributable to earnings from continuing operations differs from the expected tax expense (computed by applying the federal corporate tax rate of 35% to earnings from continuing operations before income taxes, minority interest and accounting change) as follows:

		Year ended December 31,
		2006			2005			2004
Computed expected tax expense		$	(3,488	)	$	(2,933	)	$	(1,802	)
Reduction in income taxes resulting from:
	Change in valuation allowance		3,488			2,933			1,802
	Alternative minimum tax and state income tax		(186	)		(250	)		(75	)

		$	(186	)	$	(250	)	$	(75	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2006 and 2005 are as follows:

			December 31,
			2006			2005
Deferred tax assets (liabilities):
	Investments in Acquisition Partnerships, principally due to differences in basis for tax and financial reporting purposes		$	(347	)	$	(1,536	)
	State tax differences			(12	)		—
	Intangibles, principally due to differences in amortization			281			389
	Tax basis in fixed assets less than book			(76	)		(183	)
	Foreign non-repatriated earnings			(2,398	)		—
	Other			(9,032	)		(12,193	)
	Federal net operating loss carryforwards			130,528			198,038

		Net gross deferred tax assets		118,944			184,515
	Valuation allowance			(98,843	)		(164,414	)

		Net deferred tax assets	$	20,101		$	20,101

The Company has net operating loss carryforwards for federal income tax purposes of approximately $588 million from continuing operations and $9 million from discontinued operations at December 31, 2006, less expiring net operating loss for 2005 of $36 million and 2006 of $179 million, available to offset future federal taxable income, if any, through the year 2021. A valuation allowance is provided to reduce the deferred tax assets to a level, which, more likely than not, will be realized. During 2006, 2005 and 2004, the Company adjusted the previously established valuation allowance by $65.6 million, $16.3 million and $1.8 million, respectively. The adjustments in 2006 and 2005 to the valuation allowance included decreases of $62.1 million and $13.4 million, respectively, due to expired net operating losses.

Realization of the deferred tax asset is determined based on management's expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the net deferred tax asset is dependent upon generating sufficient taxable income from its

continuing operations prior to expiration of the net operating loss carryforwards. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly. Although realization is not assured, management believes that the deferred tax asset, net of allowance, has been carried at low levels, and thus, FirstCity will be able to realize all of the deferred tax asset, net of allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryforward period change.

The Company has a defined contribution 401(k) employee profit sharing plan pursuant to which the Company matches employee contributions at a stated percentage of employee contributions to a defined maximum. The Company's contributions to the 401(k) plan were $138 in 2006, $134 in 2005 and $143 in 2004.

The Company leases its current headquarters under a noncancellable operating lease. The lease calls for monthly payments of $12 thousand through its expiration in December 2011 and includes an option to renew for an additional five-year period. Rental expense under this lease was $122 for 2006, and $120 for 2005 and 2004. The Company also leases office space and equipment under operating leases expiring in various years prior to 2015. Rental expense under these leases for 2006, 2005 and 2004 was $588, $545 and $557, respectively. As of December 31, 2006, the future minimum lease payments under all noncancellable operating leases are: $771 in 2007, $503 in 2008, $417 in 2009, $378 in 2010, $378 in 2011, and $663 thereafter.

The Company has contracted with the Acquisition Partnerships and related parties as a third party loan servicer. Servicing fees totaling $12.6 million, $11.5 million and $13.5 million, for 2006, 2005 and 2004, respectively, and due diligence fees (included in other income) were derived from such affiliates.

J-Hawk I, Ltd., a limited partnership of which James R. Hawkins was formerly an affiliate, and FirstStreet Investments, LLC, an affiliate of FirstCity Financial Corporation, entered into a loan sale agreement dated June 30, 2004, pursuant to which J-Hawk I, Ltd. purchased from FirstStreet Investments, LLC, a promissory note executed on behalf of Combined Entertainment, Inc. (also an affiliate of Mr. Hawkins) as maker. The note was guaranteed by James R. Hawkins, Rick R. Hagelstein and J-Hawk Corporation (now FirstCity Financial Corporation). The purchase price for the note was $2.0 million, an amount equal to the outstanding principal balance of the promissory note plus all outstanding accrued interest due on the note. Pursuant to the loan sale agreement, J-Hawk I, Ltd., Park Central Recreation, Inc., Combined Entertainment, Inc. and James R. Hawkins released FirstCity, FirstStreet Investments, LLC, FirstCity Servicing Corporation, WAMCO IX, Ltd. and their affiliates and subsidiaries from all obligations under a guaranty of the promissory note and indemnified FirstCity, FirstStreet Investments, LLC, FirstCity Servicing Corporation, WAMCO IX, Ltd. and their subsidiaries and affiliates and all officers, directors, employees, agents and representatives of all such persons from any claims related to the promissory note, the guaranty and the ownership and servicing of the promissory note and guaranty. The sale was without representations or warranties except as to ownership of the promissory note.

FirstCity Servicing Corporation and MCS, in which FirstCity Servicing Corporation is an 11.89% shareholder as of December 31, 2006, are parties to Consulting, License and Confidentiality Agreements dated June 30, 1999 pursuant to which FirstCity Servicing Corporation provides consultation services and personnel to be employed by MCS to assist in developing and managing due diligence and servicing systems. Pursuant to those agreements, MCS agrees to provide the supplied personnel with compensation, tax equalization payments, housing allowances, transportation allowance, tax preparation and MCS pays consulting fees to FirstCity Servicing Corporation and reimburses FirstCity Servicing Corporation for travel, hotel, airfare, and meal expenses paid by it related to the provision of the services. EuroTex Partners, Ltd., a subsidiary of FirstCity Commercial Corporation, purchased real and personal property used as a personal residence of the supplied employee in Paris, France for a purchase price of $2.2 million. FirstCity recorded $344, $364 and $255 in 2006, 2005 and 2004, respectively, from MCS as reimbursement fees included in other income.

Periodically, FirstCity, its subsidiaries, its affiliates and the Acquisition Partnerships are parties to or otherwise involved in legal proceedings arising in the normal course of business. FirstCity does not believe that there is any proceeding threatened or pending against it, its subsidiaries, its affiliates or the Acquisition Partnerships which, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

In August 2000, Consumer Corp. and Funding LP contributed all of the assets utilized in the operations of the automobile finance operation to Drive pursuant to the terms of a Contribution and Assumption Agreement by and between Consumer Corp. and Drive, and a Contribution and Assumption Agreement by and between Funding LP and Drive (collectively, the "Contribution Agreements"). Drive assumed substantially all of the liabilities of the automobile finance operation as set forth in the Contribution Agreements. In addition, pursuant to the terms of a Securities Purchase Agreement dated as of August 18, 2000 (the "2000 Securities Purchase Agreement"), by and among FirstCity, Consumer Corp., FirstCity Funding LP ("Funding LP"), and FirstCity Funding GP Corp. ("Funding GP"), IFA-GP and IFA-LP; FirstCity, Consumer Corp., Funding LP and Funding GP made various warranties concerning (i) their respective organizations, (ii) the automobile finance operation conducted by Consumer Corp. and Funding LP, and (iii) the assets transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and IFA-LP from damages resulting from a breach of any representation or warranty contained in the 2000 Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligation under the 2000 Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the "2000 Closing Date") with respect to tax-related representations and warranties and for thirty months from the 2000 Closing Date with respect to all other representations and warranties. Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the 2000 Securities Purchase Agreement until the aggregate amount payable exceeds $250 thousand, and then only for the amount in excess of $250 thousand in the aggregate; however certain representations and warranties are not subject to this $250 thousand threshold. Pursuant to the terms of the Contribution Agreements, Consumer Corp. and Funding LP have agreed to indemnify Drive from any damages resulting in a material adverse effect on Drive resulting from breaches of representations or warranties, failure to perform, pay or discharge liabilities

other than the assumed liabilities, or claims, lawsuits or proceedings resulting from the transactions contemplated by the Contribution Agreements. Pursuant to the terms of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and Funding LP for any breach of any representation or warranty by Drive, the failure of Drive to discharge any assumed liability, or any claims arising out of any failure by Drive to properly service receivables after August 1, 2000. Liability for indemnification pursuant to the terms of the Contribution Agreements will not arise until the total of all losses with respect to such matters exceeds $250 thousand and then only for the amount by which such losses exceed $250 thousand; however this limitation will not apply to any breach of which the party had knowledge at the time of the Closing Date or any intentional breach by a party of any covenant or obligation under the Contribution Agreements. Management of the Company believes that FirstCity will not have to pay any amounts related to these agreements.

On September 21, 2004, FirstCity, Consumer Corp., Funding LP and Funding GP entered into the a Securities Purchase Agreement to sell a 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP (the "2004 Securities Purchase Agreement"). In the 2004 Securities Purchase Agreement, FirstCity, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) their power and authority to enter into the 2004 Securities Purchase Agreement and the transactions contemplated therein, (iii) the ownership of the limited partnership interests in Drive by Funding LP, (iv) the ownership of membership interests in Drive-GP by Consumer Corp., and (iv) the capital structure of Funding LP. FirstCity, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS (USA), IFA-GP, IFA-LP and MG-LP from damages resulting from a breach of any representation or warranty contained in the 2004 Securities Purchase Agreement or otherwise made by FirstCity, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligations under the 2004 Securities Purchase Agreement survive for a maximum period of five (5) years from November 1, 2004. Neither FirstCity, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the 2004 Securities Purchase Agreement until the aggregate amount payable exceeds $250 thousand, and then only for the amount in excess of $250 thousand in the aggregate; however certain representations and warranties are not subject to this $250 thousand threshold. Management of the Company believes that FirstCity will not have to pay any amounts relating to these representations and warranties.

On August 8, 2006, an Interest Purchase and Sale Agreement was entered into by and among Bidmex Holding, LLC ("Buyer"), as buyer, and SMIP and CFSI (collectively, the "Sellers"), as seller, and eleven of the LLCs and the AIG entities as additional parties. In the Interest Purchase and Sale Agreement, the Sellers and the LLCs made various representations and warranties concerning (i) the existence and ownership of the LLCs and the related Mexican SRLs, (ii) the assets and liabilities of the LLCs, (iii) taxes related to periods prior to August 8, 2006, and (iv) the operations of the LLCs and SRLs. The Sellers agreed to indemnify the Buyer and AIG Entities from damages resulting from a breach of any representation or warranty contained in the Interest Purchase and Sale Agreement on a several and not joint basis according to their respective ownership percentages in each LLC as to any matter related to a particular LLC, or on the basis of 80% to CFSI and 20% to SMIP as to any matter that could not be identified to a particular LLC. The indemnity obligation under the Interest Purchase and Sale Agreement survives for a period of the statute of limitations for matters related to taxes, existence and authority, capitalization and good standing of the LLCs and SRLs and for a period of two years from August 8, 2006, the closing date with respect to all other representations and warranties. The Sellers are not required to make any payments as a result of the indemnity provisions

of the Interest Purchase and Sale Agreement until the aggregate amount payable under that agreement and the Asset Purchase Agreement exceeds $250 thousand; however, claims related to taxes and fraud are not subject to this $250 thousand threshold. The Interest Purchase and Sale Agreement limits the liability of the Sellers for indemnifiable losses under the Interest Purchase and Sale Agreement and the Asset Purchase Agreement to the Aggregate Purchase Price (without duplication of amounts recovered pursuant to the terms of the Asset Purchase Agreement). FirstCity does not believe that the potential liability would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

and collection of the loan, plus any taxes paid or payable with respect to the cash flow from each loan, reduced by any cash flow received by Bidmex Holding, LLC with respect to the loan.

FirstCity has minority interests in various limited-life partnerships with a carrying value of $.6 million at December 31, 2006. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at December 31, 2006 is $2.3 million.

Financial Security Assurance Inc. ("FSA"), in its capacity as certificate insurer under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"), relating to the FirstCity Capital Home Equity Loan Trust 1998-2 (the "Trust"), dated as of November 1, 1998 by and among FC Capital Corp., in its capacities as seller and master servicer, and The Bank of New York, in its capacity as trustee (the "Trustee"), made demand on FC Capital Corp. to repurchase certain loans that were subject to repurchase due to fraud of third parties in connection with the origination of the loans. FC Capital Corp. agreed to provide a letter of credit in the amount of the repurchase price for the loans in lieu of being required to purchase the loans from the Trust. FirstCity has obtained and delivered to FSA, for the benefit of FC Capital Corp., an irrevocable letter of credit in the amount of $510 thousand from the Bank of Scotland. Pursuant to the agreement with FSA, FC Capital Corp. will have the option to purchase the loans for $510 thousand prior to a call under the letter of credit.

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of its financial instruments. Fair value estimates, methods and assumptions are set forth below.

The carrying amount of cash and cash equivalents approximated fair value at December 31, 2006 and 2005.

The Portfolio Assets and loans receivable are carried at the lower of cost or estimated fair value. The estimated fair value is calculated by discounting projected cash flows on an asset-by-asset basis using estimated market discount rates that reflect the credit and interest rate risks inherent in the assets. The carrying value of the Portfolio Assets and loans receivable was $137.4 million and $69 million, respectively, at December 31, 2006 and 2005. The estimated fair value of the Portfolio Assets and loans receivable was approximately $149.6 million and $73.2 million, respectively, at December 31, 2006 and 2005.

Through December 31, 2003, residual interests in securitizations included in discontinued mortgage operations were carried at estimated future gross cash receipts. The estimated fair value was calculated using various assumptions regarding prepayment speeds and credit losses. Beginning in December 2004, the residual interests are carried at fair value. The carrying value of the residual interests was $.1 million and $.2 million at December 31, 2006 and 2005, respectively.

Management believes that the repayment terms for similar rate financial instruments with similar credit risks and the stated interest rates at December 31, 2006 and 2005 approximate the market terms for similar credit instruments. Accordingly, the carrying amount of notes payable is believed to approximate fair value.

The following are summarized quarterly financial data for the years ended December 31, 2006 and 2005:

We have audited the accompanying consolidated balance sheets of FirstCity Financial Corporation and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstCity Financial Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, as of January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, and as of December 31, 2006 the Company adopted the Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of FirstCity Financial Corporation's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 20, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that FirstCity Financial Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). FirstCity Financial Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that FirstCity Financial Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, FirstCity Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of FirstCity Financial Corporation and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated July 20, 2007 expressed an unqualified opinion on those consolidated financial statements.

COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(With Report of Independent Registered Public Accounting Firm)

We have audited the accompanying combined balance sheets of the WAMCO Partnerships as of December 31, 2006 and 2005, and the related combined statements of operations, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2006. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the WAMCO Partnerships as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the combined financial statements, as of December 31, 2006, the Company adopted the Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF OPERATIONS

Years Ended December 31, 2006, 2005 and 2004

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

Years Ended December 31, 2006, 2005 and 2004

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

(Dollars in thousands)

The combined financial statements represent domestic Texas limited partnerships and limited liability companies ("Acquisition Partnerships" or "Partnerships") and include the accounts of WAMCO III, Ltd. ("WAMCO III"); WAMCO XX, Ltd. ("WAMCO XX") (formerly WAMCO IX, Ltd. ("WAMCO IX")); WAMCO XXIV, Ltd. ("WAMCO XXIV"); WAMCO XXV, Ltd. ("WAMCO XXV"); WAMCO XXVI, Ltd.; WAMCO XXVII, Ltd.; WAMCO XXVIII, Ltd. ("WAMCO XXVIII"); WAMCO XXIX, Ltd.; WAMCO 30, Ltd. ("WAMCO 30"); WAMCO 31, Ltd. ("WAMCO 31"); WAMCO 32, Ltd. ("WAMCO 32"); WAMCO 33, Ltd. ("WAMCO 33"); WAMCO 34, Ltd. ("WAMCO 34"); WAMCO 35, Ltd. ("WAMCO 35"); FirstVal 1, Ltd. ("FirstVal"), SOWAMCO XXIX, Ltd. ("SOWAMCO XXIX"); Calibat Fund, LLC; First B Realty, Ltd.; FirstStreet Investments LLC ("FirstStreet"); and FC Properties, Ltd. ("FC Properties"). FirstCity Financial Corporation or its subsidiaries, FirstCity Commercial Corporation and FirstCity Holdings Corporation (together "FirstCity"), share limited partnership interests and participate as general partners in common with Cargill Financial Services, Inc. in all of the Partnerships. WAMCO 31 and WAMCO 33 are considered to be significant subsidiaries of FirstCity. The WAMCO 31 and WAMCO 33 partnerships recorded initial activity during 2003.

The Partnerships were formed to acquire, hold and dispose of Portfolio Assets acquired from the Federal Deposit Insurance Corporation, Resolution Trust Corporation and other nongovernmental agency sellers, pursuant to certain purchase agreements or assignments of such purchase agreements. In accordance with the purchase agreements, the Partnerships retain certain rights of return regarding the assets related to defective title, past due real estate taxes, environmental contamination, structural damage and other limited legal representations and warranties.

Generally, the partnership agreements of the Partnerships provide for certain preferences as to the distribution of cash flows. Proceeds from disposition of and payments received on the Portfolio Assets are allocated based on the partnership and other agreements which ordinarily provide for the payment of interest and mandatory principal installments on outstanding debt before payment of intercompany servicing fees and return of capital and restricted distributions to partners.

During 2005, WAMCO III merged with and into WAMCO IX with WAMCO IX being the surviving entity. The partnership agreement for WAMCO III provided for Class A and Class B Equity partners. The Class A Equity partners were WAMCO III of Texas, Inc., FirstCity Commercial Corporation and CFSC Capital Corp. II, and the Class B Equity partner was CFSC Capital Corp. II. The Class B Equity limited partner was allocated 20 percent net income or loss, excluding equity earnings in FirstStreet, recognized by the partnership prior to allocation of net income or loss to the Class A Equity partners. Net earnings in FirstStreet were allocated to the Class A Equity partners in proportion to their respective ownership percentages. Net income or loss was credited or charged to the Class A Equity partners' capital accounts in proportion to their respective capital account balances after the 20% allocation to the Class B Equity limited partner. Distributions were allocated using the same methodology as net income or loss. The Class B Equity limited partner was not required to make capital contributions. During 2005, WAMCO III was dissolved and had zero equity at December 31, 2005.

During 2006, WAMCO XXV and WAMCO XXVIII merged with and into WAMCO 30 with WAMCO 30 being the surviving entity. Also during 2006, WAMCO IX was renamed as WAMCO XX, and WAMCO XXX was renamed as WAMCO 30. In August 2006, FirstCity sold its ownership interest in FC Properties to Cargill for $2.2 million. As of the effective date of the sale, the effects of FC Properties are no longer combined in the WAMCO Partnerships Combined Financial Statements.

The Partnerships acquire and resolve portfolios of performing and nonperforming commercial and consumer loans and other assets (collectively, "Portfolio Assets" or "Portfolios"), which are generally acquired at a discount to their legal principal balance. Purchases may be in the form of pools of assets or single assets. The Portfolio Assets are generally non-homogeneous assets, including loans of varying qualities that are secured by diverse collateral types and foreclosed properties. Some Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based either on business or real estate or other collateral cash flow. Portfolio Assets are acquired on behalf of Acquisition Partnerships in which a corporate general partner, FirstCity and other investors are limited partners.

On January 1, 2005, FirstCity adopted the provisions of SOP 03-3. For loan portfolios acquired prior to January 1, 2005, FirstCity designated these loans as non-performing Portfolio Assets or performing Portfolio Assets. Such designation was made at the acquisition of the pool and does not change even though the actual performance of the loans may change. FirstCity accounts for all loans acquired after 2004 in accordance with SOP 03-3.

Following is a description of each classification and the related accounting policy accorded to each Portfolio type:

All non-performing Portfolio Assets were purchased at substantial discounts from their outstanding legal principal amount, the total of the aggregate of expected future sales prices and the total payments to be received from obligors. Subsequent to acquisition, the adjusted cost of non-performing Portfolio Assets is evaluated for impairment on a quarterly basis. A valuation allowance is established for any impairment identified through provisions charged to earnings in the period the impairment is identified. Impairments on non-performing Portfolio Assets were $1,221, $307, and $354 for 2006, 2005 and 2004, respectively.

Accounting for Portfolios is on a pool basis as opposed to an individual asset-by-asset basis.

Performing Portfolio Assets consist primarily of Portfolios of consumer and commercial loans acquired at a discount from the aggregate amount of the borrowers' obligation. Prior to January 1, 2005, Portfolios were classified as performing if a majority of all of the loans in the Portfolio is being repaid in accordance with the contractual terms of the underlying loan agreements at date of acquisition.

Performing Portfolio Assets are carried at the unpaid principal balance of the underlying loans, net of acquisition discounts. Interest is accrued when earned in accordance with the contractual terms of the loans. The accrual of interest is discontinued once a Portfolio becomes impaired. Acquisition discounts for the Portfolio as a whole are accreted as an adjustment to yield over the estimated life of the Portfolio. Accounting for these Portfolios is on a pool basis as opposed to an individual asset-by-asset basis.

Gains are recognized on the performing Portfolio Assets when sufficient funds are received to fully satisfy the obligation on loans included in the pool, either from funds from the borrower or sale of the loan. The gain recognized represents the difference between the proceeds received and the allocated carrying value of the individual loan in the pool.

Impairment on each Portfolio is measured based on the present value of the expected future cash flows in the aggregate discounted at the loans' risk adjusted rates, which approximates the effective interest rates, or the fair value of the collateral, less estimated selling costs, if any loans are collateral dependent and foreclosure is probable. Impairments on performing Portfolio Assets were $83, $654, and $1,196 for 2006, 2005 and 2004 respectively.

A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Partnerships use the cost recovery method when timing and amount of collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Partnerships have fully collected the cost of the portfolio, or until such time that the Partnerships consider the collections to be probable and estimable and begin to recognize income based on the interest method as described above.

The Partnerships consider expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan and each subsequently aggregated pool of loans. The Partnerships determine the excess of the loan's or pool's scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The excess of the loan's cash flows expected to be collected at acquisition over the initial investment in the loan or pool is accreted into interest income over the remaining life of the loan or pool (accretable yield).

Over the life of the loan or pool, the Partnerships continue to estimate cash flows expected to be collected. The Partnerships evaluate at the balance sheet date whether the present value of its loans determined using the effective interest rates has decreased below book value and if so, a valuation allowance is established for any impairment identified through provisions charged to operations in the period the impairment is identified. The present value of any subsequent increase in the loan's or

pool's actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan or pool. Any remaining increases in the present value of cash flows expected to be collected will be used to recalculate the amount of accretable yield recognized on a prospective basis over the pool's remaining life.

The Partnerships establish valuation allowances for all acquired loans subject to SOP 03-3 to reflect only those losses incurred after acquisition—that is, the present value of cash flows expected at acquisition that are not expected to be collected. The Partnerships recorded provisions of $396 in 2006 and $62 in 2005 on these loans.

Loans acquired without evidence of credit deterioration at acquisition for which the Partnerships have the positive intent and ability to hold for the foreseeable future are classified as held for investment and reported at their unpaid principal balance net of unamortized purchase discounts or premiums.

Real estate Portfolios consist of real estate acquired from a variety of sellers. Such Portfolios are carried at the lower of cost or fair value less estimated costs to sell. Costs relating to the development and improvement of real estate for its intended use are capitalized, whereas those relating to holding assets are charged to expense. Income or loss is recognized upon the disposal of the real estate. Rental income, net of expenses, on real estate Portfolios is recognized when received. Accounting for the Portfolios is on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to acquisition, the amortized cost of a real estate Portfolio is evaluated for impairment on a quarterly basis. The evaluation of impairment is determined based on the review of the estimated future cash receipts, net of costs to sell, which represents the net realizable value of the real estate Portfolio. Impairment losses are charged to operations in the period the impairment is identified. The Company recorded impairment losses on real estate of $103, $0, and $2 as of December 31, 2006, 2005 and 2004, respectively.

Assets are foreclosed when necessary through an arrangement with an affiliated entity whereby title to the foreclosed asset is held by the affiliated entity and a note receivable from the affiliate is held by the Partnerships. For financial statement presentation, the affiliated entity note receivable created by the arrangement is included in Portfolio Assets and is recorded at the lower of allocated cost or fair value less estimated cost to sell the underlying asset.

Under current Federal laws, partnerships are not subject to income taxes; therefore, no provision has been made for such taxes in the accompanying combined financial statements. For tax purposes, income or loss is included in the individual tax returns of the partners.

The preparation of combined financial statements in conformity with U.S. generally accepted accounting principles 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 combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Change in combined entities reflects the reduction in equity and cash due to the reduction of number of entities included in the combined and combining statements for 2006.

In September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N, Financial Statements—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be evaluated when determining the materiality of misstatements in the current year financial statements. SAB 108 requires materiality to be determined by considering the effect of prior year misstatements on both the current year balance sheet and income statement, with consideration of their carryover and reversing effects. SAB 108 also addresses how to correct material misstatements. The provisions of SAB 108 are effective for the year ending December 31, 2006. The cumulative effect of the initial application of SAB 108 must be reported in the carrying amounts of assets and liabilities as of the beginning of the year, with the offsetting balance to retained earnings. The Partnerships adopted SAB 108 and adjusted their opening retained earnings for the year ended December 31, 2006 by approximately $212 thousand, all of which relates to a correction in WAMCO 33's accounting for property taxes paid in 2005. The Partnerships reviewed the annual amount of earnings incurred in prior periods for this correction and considered the effect to be immaterial to prior periods both individually and in the aggregate.

WAMCO 31 and WAMCO 33 are considered to be significant subsidiaries of FirstCity. The WAMCO 31 and WAMCO 33 partnerships recorded initial activity during 2003. The following tables summarize the combining balance sheets of the WAMCO Partnerships as of December 31, 2006 and 2005, and the related combining statements of operations, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2006.

Combining Statements of Changes in Partners' Capital
Years Ended December 31, 2006, 2005 and 2004

In connection with the formation of FC Properties, an agreement was entered into which provided for potential payments to the project manager based on a percentage of total estimated sales. An equal amount of deferred profit participation and deferred compensation is recorded based on such estimates with the deferred profit participation being amortized into expense in proportion to actual sales realized. No profit participation was paid until the limited partners recognized a 20% return on their investment. This return threshold was met in 2001. As a result of the disposition of FC Properties in 2006, this obligation is no longer presented as of December 31, 2006, as discussed in Note 1 of the Combined Financial Statements. At December 31, 2005, the estimated liability for this profit participation was $14,539, and was reported as deferred compensation in the accompanying combined balance sheets. Additionally, amortization of $596, $4,088 and $1,610 was recognized during 2006, 2005 and 2004, respectively, and has been included in general, administrative and operating expenses in the accompanying combined statements of operations.

The achievement of the 20% return on investment resulted in payments of $396, $4,365 and $1,713 in deferred profit sharing and commissions in 2006, 2005, and 2004, respectively.

			2006		2005
London Interbank Offering Rate (LIBOR) (5.32188% at December 31, 2006) based:
	WAMCO 31 (LIBOR plus 2.5%)		$	4,559	$	11,530
	WAMCO 33 (LIBOR plus 2.35%)			3,818		18,111
	Other Partnerships (LIBOR plus 4% to 5%)—affiliate			—		2,061
	Other Partnerships (LIBOR plus 1.75% to 2.0%)			35,762		—
	Other Partnerships (LIBOR plus 5%, with floor 6.3%)—affiliate			—		1,806

		Total LIBOR based		44,139		33,508
Fixed rate:
	Other Partnerships (10.17%)—affiliate			—		4,000

			$	44,139	$	37,508

Collateralized loans are typically payable based on proceeds from disposition of and payments received on the Portfolio Assets.

Contractual maturities (excluding principal and interest payments payable from proceeds from dispositions of and payments received on the Portfolio Assets) of notes payable are as follows:

The loan agreements and master note purchase agreements, under which notes payable were incurred, contain various covenants including limitations on other indebtedness, maintenance of service agreements and restrictions on use of proceeds from disposition of and payments received on the Portfolio Assets. As of December 31, 2006, the Partnerships were in compliance with the aforementioned covenants.

In connection with notes payable, the Partnerships incurred origination and commitment fees. These fees are amortized over the stated maturity of the related notes and are included in interest and fees on notes payable. At December 31, 2006 and 2005, approximately $382 and $276, respectively, of origination and commitment fees are included in other assets, net.

Under the terms of the various servicing agreements between the Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds from resolution of the Portfolio Assets for processing transactions on the Portfolio Assets and for conducting settlement, collection and other resolution activities. Service fees to affiliates of approximately $3,659, $3,391, and $3,935 are reported on the accompanying combined statements of operations in 2006, 2005 and 2004, respectively.

During 2004, WAMCO III sold all of its remaining Portfolio Assets to FH Partners, LP, a wholly-owned subsidiary of FirstCity, for $475. WAMCO III recognized a gain of $165, included in gain on resolution of Portfolio Assets, on this transaction.

Also during 2004, WAMCO 31 sold one non-performing Portfolio Asset to WAMCO 32 for $3,145. WAMCO 31 recognized no gain on this transaction.

During 2005, WAMCO III was merged with and into WAMCO IX, with WAMCO IX being the surviving entity.

During 2006, WAMCO XXV and WAMCO XXVIII merged with and into WAMCO 30 with WAMCO 30 being the surviving entity. Also during 2006, WAMCO IX was renamed as WAMCO XX, and WAMCO XXX was renamed as WAMCO 30. In August 2006, FirstCity disposed of its ownership interest in FC Properties. This transaction is further discussed in Note 1 of the combined financial statements.

Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Partnerships disclose estimated fair values of their financial instruments. Fair value estimates, methods and assumptions are set forth below.

The carrying amount of cash and other liabilities approximates fair value at December 31, 2006 and 2005 due to the short-term nature of such accounts.

Portfolio Assets are carried at the lower of cost or estimated fair value. The estimated fair value is calculated by discounting projected cash flows on an asset-by-asset basis using estimated market discount rates that reflect the credit and interest rate risk inherent in the assets. The carrying value of Portfolio Assets was $108,215 and $140,050 at December 31, 2006 and 2005, respectively. The estimated fair value of the Portfolio Assets was approximately $119,952 and $176,868 at December 31, 2006 and 2005, respectively.

Management believes that for similar financial instruments with comparable credit risks, the stated interest rates at December 31, 2006 and 2005 approximate market rates. Accordingly, the carrying amount of notes payable is believed to approximate fair value. In addition, the majority of the partnerships' debt is at variable rates of interest.

The Partnerships are involved in various legal proceedings in the ordinary course of business. In the opinion of management, the resolution of such matters will not have a material adverse impact on the combined financial position, results of operations or liquidity of the Partnerships.

In 2001, WAMCO XXVIII entered into an interest rate swap contract in order to manage a portion of the interest rate risk associated with WAMCO XXVIII's long-term debt. This agreement matured on December 15, 2005. Under the swap agreement, WAMCO XXVIII paid fixed/floating rate interest and received floating rate interest at specified periodic intervals based on an agreed upon notional amount.

By using derivative financial instruments to hedge exposures to changes in interest rates, WAMCO XXVIII exposed itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract was positive, the counterparty owed WAMCO XXVIII, which created credit risk for WAMCO XXVIII. When the fair value of a derivative contract was negative, WAMCO XXVIII owed the counterparty and, therefore, it did not possess credit risk. WAMCO XXVIII minimized the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

Income or expense associated with these periodic payments was recorded on an accrual basis. WAMCO XXVIII recorded $133 and $431 of net swap expense for the years ended December 31, 2005 and 2004, respectively, associated with these periodic payments. Net swap expense is included in interest and fees expense—affiliate in the accompanying combined statements of operations.

Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The market risk associated with interest-rate, commodity-price, and foreign-exchange contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

WAMCO XXVIII had not met the criteria necessary to categorize its swap agreement as a hedging activity under the provisions of FASB No. 133, Accounting for Derivative Instruments and Hedging Activities; therefore, changes in fair value of the interest rate swap are reported in general, administrative and operating expenses and were $129 and $(421) during 2005 and 2004, respectively.

FINANCIAL STATEMENTS
December 31, 2006, 2005, and 2004
(With Report of Independent Registered Public Accounting Firm)

We have audited the accompanying balance sheets of MinnTex Investment Partners LP (a Texas limited partnership) as of December 31, 2006 and 2005, and the related statements of operations, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2006. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MinnTex Investment Partners LP as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

MINNTEX INVESTMENT PARTNERS LP
(A Texas Limited Partnership)

BALANCE SHEETS

December 31, 2006 and 2005

MINNTEX INVESTMENT PARTNERS LP
(A Texas Limited Partnership)

STATEMENTS OF OPERATIONS

Years Ended December 31, 2006, 2005 and 2004

MINNTEX INVESTMENT PARTNERS LP
(A Texas Limited Partnership)

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

Years Ended December 31, 2006, 2005 and 2004

MINNTEX INVESTMENT PARTNERS LP
(A Texas Limited Partnership)

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

MinnTex Investment Partners LP, a Texas limited partnership (the Partnership), was formed to acquire, hold, and dispose of the loan pool purchased from a nongovernmental agency seller, pursuant to certain purchase agreements. The Partnership began operations on March 11, 2002 and is scheduled to terminate on December 31, 2022.

Net income or loss is credited or charged to the partners' capital accounts in proportion to their respective capital account balances.

The partnership and other agreements governing the Partnership's affairs provide for certain preferences as to the distribution of cash flows from the Partnership. Proceeds from disposition of and payments received on the purchased loan pool are allocated in the following order, (1) to pay for tax and insurance escrow, (2) to pay fees payable under custodial and lockbox agreements, (3) to pay accrued interest on the notes payable, (4) to pay late charges, fees, and expenses, if any, on the notes payable, (5) to pay protective advances, if any, (6) to replenish an operating reserve, (7) to pay a servicing fee to FirstCity Servicing Corporation (FirstCity), an affiliate of a limited partner, (8) to pay shortfall amounts from prior month disbursements of items (1) through (7), (9) to pay principal on the notes payable, and (10) return of partners' capital.

The Partnership acquires and resolves a portfolio of performing and nonperforming loans to small businesses that are unsecured ("Portfolio Asset"). Accounting for the Portfolio Asset is on a pool basis as opposed to an individual asset-by-asset basis. At December 31, 2006 and 2005, the Portfolio Asset was designated as nonperforming as described more fully below.

The Partnership's Portfolio Asset is designated as nonperforming unless a majority of all of the loans in the pool are being repaid in accordance with the contractual terms of the underlying loan agreements. Such designation is made at the acquisition of the pool and does not change even though the actual mix of the loans may change. The pool is acquired on the basis of an evaluation of the timing and amount of cash flow expected to be derived from borrower payments on the loans. The carrying value of the nonperforming Portfolio Asset was zero and $12 at December 31, 2006 and 2005, respectively.

A nonperforming Portfolio Asset is purchased at a substantial discount from its outstanding legal principal amount, the total of the aggregate of expected future sales prices and the total payments to be received from obligors. Subsequent to acquisition, the adjusted cost of the nonperforming Portfolio Asset is evaluated for impairment on a quarterly basis. A valuation allowance is established for any impairment identified through provisions charged to earnings in the period the impairment is identified. No valuation allowance was required at December 31, 2006, 2005 or 2004.

Income from the Portfolio Asset is recognized as income to the extent that proceeds collected exceed a pro rata portion of allocated cost from the pool. Cost allocation is based on a proration of actual proceeds divided by total estimated proceeds of the pool. No interest income is recognized separately on the nonperforming Portfolio Asset. All proceeds, of whatever type, are included in proceeds from resolution of Portfolio Asset in determining the gain on resolution of such assets.

Under current Federal laws, partnerships are not subject to income taxes; therefore, no taxes are reflected in the accompanying financial statements. For tax purposes, income or loss is included in the individual tax returns of the partners.

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.

			2006			2005
Loans:
	Borrowers' obligations on outstanding balance of:
		Performing loans	$	514		$	1,241
		Nonperforming loans		23,224			31,973

				23,738			33,214
	Discount required to reflect the Portfolio Asset at unamortized cost			(23,738	)		(33,202	)

		Portfolio Assets, net	$	—		$	12

Under the terms of a servicing agreement, FirstCity receives a servicing fee based on proceeds from resolution of Portfolio Asset, for processing transactions on the Portfolio Asset and for conducting settlement and sale negotiations. Included in general, administrative, and operating expenses in the accompanying statement of operations is $130, $454 and $917 in servicing fees incurred in 2006, 2005, and 2004, respectively.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

The Company's management, including the Company's principal executive officer and principal financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Company's principal executive officer and principal financial officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.

There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

The management of FirstCity Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2006.

FirstCity Financial Corporation's independent auditor, KPMG LLP, a registered public accounting firm, has issued an audit report on our management's assessment of our internal control over financial reporting, which is included in Part II, Item 8 of this Annual Report on Form 10-K.

Information concerning members of the Company's board of directors (the "Board") is set forth below:

Name	Age	Position
Richard E. Bean	63	Chairman of the Board
C. Ivan Wilson	79	Vice Chairman of the Board
James T. Sartain	58	President, Chief Executive Officer and Director
Dane Fulmer	57	Director
Robert E. Garrison II	65	Director
D. Michael Hunter	64	Director
Jeffery D. Leu	51	Director
F. Clayton Miller	43	Director

Richard E. Bean has been a Director of FirstCity since the July 1995 and Chairman of the Board since December 31, 2005. Since 1976, Mr. Bean has served as the Executive Vice President and a director of Pearce Industries, Inc., a privately held company that markets a variety of oilfield equipment and construction machinery. Mr. Bean served as Chief Financial Officer of Pearce Industries from 1976 to 2004. Mr. Bean served as a member of the Portfolio committee of the FirstCity Liquidating Trust from the Merger through the termination of the Trust in January 2004. Prior to the Merger, Mr. Bean was Chairman of the Official Committee of Equity Security Holders of First City Bancorporation of Texas, Inc. ("FCBOT"). Mr. Bean is currently a director, the Chairman of the Audit Committee, and a member of the Compensation Committee of WCA Waste Corporation, a publicly owned solid waste collection and disposal Company, and a director and the Chairman of the Audit Committee of Sanders Morris Harris Group Inc., a publicly owned financial services firm. Mr. Bean is also a stockholder and director of several closely held corporations. Mr. Bean is involved in numerous civic organizations such as the Houston Livestock Show and Rodeo where he serves as a director and Member of the Audit Committee. Mr. Bean received a M.B.A. in Accounting and a Bachelor of Business Administration in Finance from the University of Texas at Austin and has been a Certified Public Accountant licensed in the State of Texas since 1968.

C. Ivan Wilson has been Vice Chairman of the Board of FirstCity since the July 1995. From February 1998 to June 1998, Mr. Wilson was Chairman, President and Chief Executive Officer of Mercantile Bank, N.A., Corpus Christi, Texas, a national banking organization. Mr. Wilson was Chairman of the Board and Chief Executive Officer of FCBOT from 1991 to the Merger. Prior to 1991, Mr. Wilson was the Chief Executive Officer of FirstCity, Texas—Corpus Christi, one of FCBOT's banking subsidiaries.

James T. Sartain has been President of FirstCity since the July 1995 and Chief Executive Officer since January 2001 and has served as a Director of FirstCity since the Merger. Prior to January 2001, Mr. Sartain was President and Chief Operating Officer of FirstCity. From 1988 to the Merger, Mr. Sartain was President and Chief Operating Officer of J-Hawk.

Dane Fulmer has been a Director of FirstCity since May 1999. Mr. Fulmer is a consultant and provides risk management services. From August 1995 until January 2004, Mr. Fulmer served as Executive Vice President and director of risk management of John Taylor Financial Group, a broker/dealer and investment advisory firm that Mr. Fulmer co-founded in 1995. From July 1991 until

August 1996, Mr. Fulmer served as Executive Vice President of Merchants Investment Center of Fort Smith, a broker/dealer and investment advisory firm, and as portfolio manager for Merchants National, the parent company.

Robert E. Garrison II has been a Director of FirstCity since May 1999. Mr. Garrison is the President and a director of Sanders Morris Harris Group Inc. Previously, Mr. Garrison served as Executive Vice President and director of Harris Webb & Garrison and also served as Chairman, Chief Executive Officer, and director of Pinnacle Management & Trust Co. Mr. Garrison co-founded both of these companies in 1994. Both Harris Webb & Garrison and Pinnacle Management & Trust Co. are subsidiaries of Sanders Morris Harris Group Inc. In addition, Mr. Garrison serves as Chairman and director of Brava Therapeutics, a company that develops reagents (known as biomarkers) that are used to identify patients most likely to benefit from a specific drug for cancer treatment. Mr. Garrison serves as a director of Prosperity Bank and as a director of Crown Castle International (CCI), a public company that is a leading independent owner and operator of shared wireless infrastructures, including extensive networks of towers. Mr. Garrison is also a member of the Board of Directors of Memorial Hermann Hospital System where he serves on the audit, investment and compensation committees. He has over 39 years of experience in the investment business. Mr. Garrison is a Chartered Financial Analyst.

D. Michael Hunter has been as a Director of FirstCity since August 2005. Mr. Hunter is the Vice Chairman of the Board of directors of Prosperity Bancshares, Inc. and serves as a director of Prosperity Bank. Mr. Hunter previously served as Chairman, President and Chief Executive Officer and a director of First Capital Bankers, Inc. from 1995 until its merger with and into Prosperity Bancshares, Inc. on March 1, 2005. Mr. Hunter also served as Chairman and Chief Executive Officer of First Capital Bank from 1995 until March 2005. Prior to 1995, Mr. Hunter served as President and Chief Operating Officer of Victoria Bankshares, Inc. and Victoria Bank & Trust Company from 1988 to June 1994. Prior to 1988, Mr. Hunter served twenty four years with FirstCity Bancorporation of Texas, Inc. Mr. Hunter has served on the board of directors of an investment research company, First Financial Advisors, Inc., and a fast food franchiser, Whataburger, Inc.

Jeffery D. Leu has been a Director of FirstCity since December 2000. Mr. Leu is President and Senior Partner of CarVal Investors ("CVI"), an affiliate of Cargill, responsible for managing CVI's worldwide investment activities. Mr. Leu joined Cargill in 1981 in the Strategy and Business Development Group. He held several management positions in Cargill's equipment finance unit before managing the high-yield business in 1989. Mr. Leu became president of CVI in 1993. Mr. Leu received his MBA in Finance and B.A. in Agricultural Economics from the University of Wisconsin.

F. Clayton Miller has been a Director of FirstCity since February 2006. Mr. Miller is a founding partner at Stone Arch Capital, a private equity fund based in Minneapolis, Minnesota. From 1998 to 2004, Mr. Miller was the Managing Partner of Churchill Equity Partners, the private equity arm of Churchill Capital, Inc. From 1995 to 1998, Mr. Miller served with SCF Partners, a Houston, Texas-based private equity firm focused on the energy services market. While at SCF Partners, Mr. Miller participated in numerous similar transactions in the energy services industry throughout North America. Prior to his tenure at SCF Partners, Mr. Miller was a corporate M&A attorney with Shearman & Sterling, structuring, executing and advising on a broad range of acquisitions, divestitures and capital raising transactions in New York and London. Mr. Miller is a graduate of the University of Michigan (B.A.), Northwestern University School of Law (J.D., cum laude), and Harvard University (M.B.A., with honors).

The Board has reviewed the provisions of the Sarbanes-Oxley Act of 2002, the rules of the SEC and the NASDAQ Stock Market governance listing standards and determined that the Company is in

compliance with such standards. The Board has determined that Messrs. Bean, Fulmer, Garrison, Hunter, Miller and Wilson are independent Directors under the NASDAQ Stock Market Rules. Mr. Sartain, employee of the Company, and Mr. Leu, an executive officer of CVI (see "Certain Relationships and Related Transactions" for relationships of Cargill and CFSC Capital Corp. with the Company), were not deemed independent. Mr. C. Ivan Wilson, an independent Director, serves as Vice-Chairman and presides over executive sessions of the non-management Directors.

Board Meetings. During 2006, the Board of Directors held five meetings. Each of the directors that served for the full year attended more than 75% of such meetings held in 2006. All of the directors attended the Company's 2006 Annual Meeting of Stockholders. The Company has encouraged the attendance of all Directors at the annual meetings of stockholders and has scheduled its stockholders' meetings to achieve that goal. The Company has not adopted a formal policy related to the attendance of Directors at annual meetings of stockholders.

Committees. The Company's Board of Directors has the following standing committees: Executive Committee; Audit Committee; Compensation Committee; and a Nominating and Corporate Governance Committee. Members of these committees generally are elected annually at the regular meeting of the Board of Directors immediately following the annual meeting of stockholders. Further information concerning the Board's standing committees appears below.

Executive Committee. The Executive Committee consisted of Messrs. Bean (Chairman) and Sartain during 2006. Subject to certain limitations specified by the Company's Bylaws and the Delaware General Corporation Law, the Executive Committee is authorized to exercise the powers of the Board of Directors when the Board is not in session. During 2006, the Executive Committee held no meetings.

Audit Committee. The Audit Committee consists of Messrs. Bean (Chairman), Garrison and Wilson. The Audit Committee is a standing committee of the Board of Directors. The Board has determined that all members of the Audit Committee are independent Directors under the rules of the NASDAQ Stock Market and the rules and regulations of the SEC. The Board of Directors has determined that Mr. Bean qualifies as an "audit committee financial expert" under applicable SEC and NASDAQ regulations. The Audit Committee has a charter adopted by the Board of Directors that sets forth its membership requirements, authority and responsibilities. A copy of the Audit Committee Charter can be found in the "Investor Relations—Corporate Governance" Section of the Company's website at www.fcfc.com. During 2006, the Audit Committee held five meetings.

The Audit Committee meets with management to consider the adequacy of the internal controls of the Company and the objectivity of financial reporting. Its primary function is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing

The Audit Committee also meets with the independent auditors and with appropriate Company financial personnel about these matters. The functions of the Audit Committee also include recommending to the Board of Directors which firm of independent public accountants should be engaged by the Company to perform the annual audit, reviewing annually the Company's Audit Committee Charter, approving certain other types of professional service rendered to the Company by the independent public accountants and considering the possible effects of such services on the independence of such public accountants. The independent auditors periodically meet alone with the Audit Committee and always have unrestricted access to the Audit Committee.

Compensation Committee. The Compensation Committee consisted of Messrs. Wilson (Chairman), Fulmer, Garrison and Hunter during 2006. The Compensation Committee is a standing committee of the Board of Directors. The Board has determined that all members of the Compensation Committee are (i) "independent directors" under the listing standards of the NASDAQ Stock Market, (ii) "non-employee directors" within the meaning of Rule 16b-3 under the Exchange Act and (iii) "outside directors" within the meaning of Section 162(m) of the Internal Revenue Code. The Compensation Committee has a charter that has been adopted by the Board of Directors that sets forth its membership requirements, authority and responsibilities. A copy of the Compensation Committee Charter can be found in the "Investor Relations—Corporate Governance" section of the Company's website at www.fcfc.com. The functions of the Compensation Committee include making recommendations to the Board of Directors regarding compensation for executive officers, including the chief executive officer, of the Company and its subsidiaries. The Compensation Committee is responsible for all recommendations, reviews, modifications and approvals with respect to the Stock Option and Award Plans. During 2006, the Compensation Committee held seven meetings.

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee consisted of Messrs. Fulmer (Chairman), Garrison and Hunter during 2006. The Nominating and Corporate Governance Committee is a standing committee of the Board of Directors. The Board has determined that each of the members of the Nominating and Corporate Governance Committee qualified as an independent Director under the rules of the NASDAQ Stock Market and rules and regulations of the SEC. The Nominating and Corporate Governance Committee has a charter that has been adopted by the Board of Directors that sets forth its membership requirements, authority and responsibilities. The full text of the Charter of the Nominating and Corporate Governance Committee can be found in the "Investor Relations—Corporate Governance" section of the Company's website at www.fcfc.com. The Nominating and Corporate Governance Committee recommends the number of board positions to be filled in accordance with the Bylaws of the Company and the persons to be nominated to serve in those positions. In this regard, the Nominating Committee considers the performance of incumbent directors in determining whether such directors should be nominated to stand for reelection. The Nominating and Corporate Governance Committee also reviews the recommendations of the Chief Executive Officer related to the appointment of executive officers and proposed personnel changes related to such officers and is responsible for conducting an annual review of the Company's Code of Business Conduct and Ethics. During 2006, the Nominating and Corporate Governance Committee held one meeting.

The executive officers of the Company, who are elected by the Board of Directors of the Company and serve at its discretion, are as follows:

Name	Age	Position
James T. Sartain	58	President and Chief Executive Officer
J. Bryan Baker	46	Senior Vice President and Chief Financial Officer
Terry R. DeWitt	49	Senior Vice President
Joe S. Greak	58	Senior Vice President, Tax Director
James C. Holmes	50	Senior Vice President
Richard J. Vander Woude	52	Senior Vice President, General Counsel and Secretary

J. Bryan Baker has been Senior Vice President and Chief Financial Officer of FirstCity since June 2000. Previously, Mr. Baker served as Vice President and Treasurer from August 1999 to

June 2000, as Vice President and Controller of FirstCity from November 1996 to August 1999, and as Vice President and Assistant Controller from 1995 to November 1996. From 1990 to 1995, Mr. Baker was with Jaynes, Reitmeier, Boyd & Therrell, P.C., an independent public accounting firm, involved in both auditing and consulting. From 1988 to 1990, Mr. Baker was Controller of Heights Bancshares in Harker Heights, Texas. Mr. Baker is a certified public accountant licensed in the state of Texas.

Terry R. DeWitt has been Senior Vice President responsible for Due Diligence and Investment Evaluation of FirstCity since the Merger. Mr. DeWitt served as Senior Vice President responsible for Due Diligence and Investment Evaluation of J-Hawk from 1992 to the Merger. From 1991 to 1992, Mr. DeWitt was Senior Vice President of the First National Bank of Central Texas, a national banking association, and from 1989 to 1991, he was President of the First National Bank of Goldthwaite, a national banking association.

Joe S. Greak has been Senior Vice President and Tax Director of the Company since the Merger. Mr. Greak was the Tax Manager of FCBOT since 1993. From 1992 to 1993, Mr. Greak was the Tax Manager of New First City -Houston, N.A. Prior thereto, he was Senior Vice President and Tax Director of First City, Texas—Houston, N.A. Mr. Greak is a certified public accountant licensed in the state of Texas.

James C. Holmes has been Senior Vice President of FirstCity since the Merger. From the Merger to August 1999 Mr. Holmes served as Senior Vice President and Treasurer of the Company and held the same positions with J-Hawk from 1994 to the Merger. From 1988 to 1991, Mr. Holmes was a Vice President of MBank, Waco, a national banking association.

Richard J. Vander Woude has been General Counsel and Senior Vice President of FirstCity since January 1998 and has served as Secretary since June 2000. Prior thereto, Mr. Vander Woude was a director and stockholder in the law firm of Vander Woude & Istre, P.C., Waco, Texas from 1992 through 1997. From 1978 to 1992, Mr. Vander Woude was a director and stockholder of Sheehy, Lovelace & Mayfield, P.C., Waco, Texas.

Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10 percent of Common Stock, to file with the SEC certain reports of beneficial ownership of Common Stock. Based solely upon a review of copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all applicable Section 16(a) filing requirements were complied with by its directors, officers and 10 percent stockholders during 2006.

The Company has adopted a Code of Business Conduct and Ethics which is applicable to the directors, executive officers and all employees of the Company, including the principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is available in the "Investor Relations—Corporate Governance" section of the Company's website at www.fcfc.com.

The Compensation Committee of our Board of Directors has the responsibility for evaluating and developing the compensation policies applicable to our executive officers. The Compensation Committee's charter sets forth the following responsibilities, among others, for the committee:

In essence, the Compensation Committee's fundamental responsibility is to administer our compensation program for our executive officers and our other officers, which generally include those employees whose job responsibilities and policy-making authority are the broadest and most significant.

In general, our core business strategy is to acquire, manage, service, and resolve distressed assets and other assets that meet the Company's investment criteria. Our compensation program is designed to attract, motivate and retain employees with the execution of this strategy. Toward this end, the Company provides for competitive base salaries, annual variable performance incentives payable in cash for the achievement of financial performance goals, and long-term, stock-based incentives that strengthen the mutuality of interests between senior management and the Company's stockholders.

Our program is designed to reward performance that contributes to the achievement of the Company's objectives and the implementation of our strategy. It is also designed to reward exceptional organizational and individual performance that support's the Company's core values as well as the individual's level of responsibility.

Salaries. We intend to recognize each executive officer's unique value and historical contributions to the Company's success in light of salary norms in the industry and the general marketplace; to match competitors for executive talent; to provide executives with sufficient, regularly-paid income; and to reflect position and level of responsibility.

Bonuses. We believe that cash bonuses help to focus management on substantial achievement of our key corporate financial objectives and individual goals on a short-term basis.

Stock Options. We believes that stock options are critical in motivating and rewarding the creation of long-term stockholder value and have established a policy of awarding stock options each year based on the continuing progress of the Company as well as on individual performance.

Salaries. Salaries for the year 2006 for each of the Company's executive officers, including its Chief Executive Officer, were determined based upon such officer's level of responsibility, time with the Company, contribution to the Company and individual performance. The evaluation of these factors was subjective, and no fixed, relative weights were assigned thereto.

Bonuses. The executive bonus plan is designed to reward our executives for the achievement of shorter-term financial goals, primarily increases in net operating income per diluted share. Although each executive officer is eligible to receive an award under the plan, the granting of the awards to any individual or the officers as a group is entirely at the discretion of the Compensation Committee. The Compensation Committee may choose to award the bonus or not, and decide on the actual level of the award in light of all relevant factors after completion of the fiscal year.

At the beginning of 2006, the Compensation Committee adopted the 2006 executive bonus pool calculation. Under the terms of this calculation, the bonus pool available to the executive officers as a group was based on a minimum threshold of 50% of net operating income before bonus per diluted share in excess of $1.00 and not to exceed $1.20. In its discretion the Compensation Committee decided not to award bonuses to executive officers for 2006 based on the inability of the Company to achieve the minimum operating income threshold for the bonus pool calculation.

On August 11, 2006, the Compensation Committee of the Board of Directors of the Company approved a discretionary bonus of $50,000 be paid to Richard J. Vander Woude for his extensive involvement in FirstCity's restructure its investments in Mexican. See Note 2 to the consolidated financial statements for further discussion of this transaction.

Stock Options. We grant stock options to our executive officers and key employees based upon prior performance, the importance of retaining their services and the potential for their performance to help us attain our long-term goals. However, there is no set formula for the granting of awards to individual executive or employees. We considered the performance of individual executive officers and other key employees, taking into account the Company's performance, each individual's contributions thereto and specific accomplishments in each individual's area of responsibility. In 2006, we did not grant any stock options to executive officers.

How elements of our compensation program are related to each other and the Company's overall compensation objectives

We view the various components of compensation as related but distinct. Although our compensation committee does review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based in part, but not exclusively, on our view of internal equity and consistency, and other considerations we deem relevant, such as rewarding extraordinary performance. Our compensation committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.

Recommendations regarding compensation of the Company's executive officers (other than the compensation of the Chief Executive Officer) are made by the Chief Executive Officer to the Compensation Committee. The Compensation Committee reviews the recommendations of the Chief Executive Officer and determines the compensation of the Chief Executive Officer and the other executive officers. The compensation of the Chief Executive Officer and the other executive officers is

subject to the review, modification and approval of the Board of Directors, except that (1) the Chief Executive Officer does not participate in the review, modification or approval of the recommendations of the Compensation Committee, with respect to his compensation and (2) all recommendations, reviews, modifications and approvals with respect to awards under the Stock Option and Award Plans are made solely by the Compensation Committee.

Compensation of the Chief Executive Officer. The Compensation Committee determines the compensation of the Chief Executive Officer and makes a recommendation to the Board of Directors, which recommendation is subject to the review, modification and approval of the members of the Board of Directors, other than the Chief Executive Officer. Such recommendations, reviews, modifications and approvals for 2006 were based on the Chief Executive Officer's level of responsibility, time with the Company, contributions to the performance of the Company, maintenance of liquidity during the year to ensure the Company was able to continue to make investments and involvement in initiatives to strengthen corporate governance and comply with new regulations.

Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as amended (the "Code"), provides that no deduction for federal income tax purposes shall be allowed to a publicly held corporation for applicable employee remuneration with respect to any covered employee of the corporation to the extent that the amount of such remuneration for the taxable year with respect to such employee exceeds $1.0 million. For purposes of this limitation, the term "covered employee" generally includes the chief executive officer of the corporation and the four highest compensated officers of the corporation (other than the chief executive officer), and the term "applicable employee remuneration" generally means, with respect to any covered employee for the taxable year, the aggregate amount allowable as a federal income tax deduction for services performed by such employee (whether or not during the taxable year); provided, however, that applicable employee remuneration does not include, among other items, certain remuneration payable solely on account of the attainment of one or more performance goals ("performance based compensation"). It is the Company's general intention that the remuneration paid to its covered employees not exceed the deductibility limitation established by Section 162(m). Nevertheless, due to the fact that not all remuneration paid to covered employees may qualify as performance-based compensation, it is possible that the Company's deduction for remuneration paid to any covered employee during a taxable year may be limited by Section 162(m).

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company's Annual Report on Form 10-K for 2006.

The following table sets forth certain information concerning compensation for services during each of the last three years to (1) the Company's Chief Executive Officer during 2006, (2)) the

Company's Chief Financial Officer during 2006, and (3) the Company's other three most highly compensated executive officers during 2006 serving as such at the end of 2006 (collectively, the "Named Executive Officers").

Executive	401(k) Match($)		Supplement Life($)		Auto($)		Total($)
James T. Sartain	$	4,500	$	1,548	$	10,000	$	16,048
J. Bryan Baker		4,500		540		—		5,040
Terry R. DeWitt		4,500		540		—		5,040
James C. Holmes		4,500		540		—		5,040
Richard J. Vander Woude		4,500		828		—		5,328

There were no grants of stock options during 2006 to the Named Executive Officers.

The following table provides information on the holdings of stock options by the named executives as of the end of the last fiscal year. This table includes unexercised and unvested option awards. Each

equity grant is shown separately for each named executive. The vesting schedule for each grant is shown following this table, based on the option award grant date.

FirstCity has incentive stock plans under which the named executive officers have received stock options.

If a named executive officer's employment with FirstCity were terminated as a result of cause, the officer's stock options would immediately be forfeited and cancelled. Additionally, if a named executive officer terminated his or her employment for any reason (other than retirement), or if his or her employment were terminated, the executive's vested stock options would expire three months after the date of termination (or the expiration date of the option, whichever is earlier).

If a named executive officer's employment were to terminate as a result of death or disability, the officer's stock options would expire one year after the date of death or disability (or the expiration date of the option, whichever is earlier). Additionally, if there were a change in control of FirstCity, all outstanding options would become immediately vested and exercisable. The terms of the standard form of stock option agreement executed pursuant to FirstCity's incentive stock plans do not discriminate in scope, terms or operation in favor of FirstCity's executive officers.

Name	Fees Earned or Paid in Cash (1) ($)	Option Awards (2) ($)	Total ($)
Richard E. Bean	24,750	33,550	58,300
C. Ivan Wilson	25,250	33,550	58,800
Dane Fulmer	21,750	33,550	55,300
Robert E. Garrison II	24,000	33,550	57,550
D. Michael Hunter	21,500	33,550	55,050
Jeffery D. Leu	17,000	33,550	50,550
F. Clayton Miller	14,000	33,550	47,550

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

Messrs. Wilson (Chairman), Fulmer, Garrison and Hunter served as members of the Compensation Committee of the Board of Directors during 2006. No member of the Compensation Committee was an officer or employee of the Company or any of its subsidiaries or had any relationship requiring disclosure pursuant to Item 404 of Regulation S-K during the fiscal year ended December 31, 2006. No interlocking relationship exists between the members of the Company's Board of Directors, executive officers or Compensation Committee and the board of directors, executive officers and compensation committee of any other company, nor has any such interlocking relationship existed in the past.

The following graph compares the cumulative total stockholder return on a share of Common Stock, based on the market price thereof, with

for the period beginning on December 31, 2001 and ending on December 31, 2006. Cumulative total stockholder return is based on an annual total return, which assumes the reinvestment of all dividends for the period shown and assumes that $100 was invested on December 31, 2001 in each of Common Stock, the Nasdaq Market Index and the Nasdaq Industry Index.

The Company has not declared any dividends during this period. The results shown below are not necessarily indicative of future performance.

	2001	2002	2003	2004	2005	2006
FirstCity	100.00	114.17	508.33	840.00	960.83	923.33
Nasdaq Market Index	100.00	69.13	103.36	112.49	114.88	126.22
Nasdaq Industry Index	100.00	102.98	139.28	162.56	166.42	191.34

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information regarding the Common Stock owned on July 9, 2007 (the "Measurement Date") by (1) each person who is known by the Company to be the beneficial owner of more than five percent of the Common Stock as of such date, (2) each of the Company's directors, (3) each of the Named Executive Officers and (4) all directors and executive officers of the Company as a group. Except as otherwise indicated, all shares of the Common Stock shown in the table are held with sole voting and investment power.

Item 13. Certain Relationships and Related Transactions and Director Independence.

The Company owns equity interests in various purchased asset portfolios through limited partnerships and limited liability companies ("Acquisition Partnerships") in which a corporate affiliate of the Company is the sole general partner or managing member, and the Company and other non-affiliated investors are limited partners or members. Certain directors and executive officers of the Company may also serve as directors and/or executive officers of the general partner or managing member, but receive no additional compensation from or on behalf of such general partner or managing member for serving in such capacity. The Company provides asset servicing to such Acquisition Partnerships pursuant to servicing agreements between the Company and such Acquisition Partnerships. Service fees totaling $12.6 million for 2006 were derived from such affiliates.

The Company has loans receivable, totaling $4.8 million at December 31, 2006, made to certain Acquisition Partnerships. These loans are secured by the assets/loans acquired by the partnerships with purchase money loans provided by the investors to the partnerships to purchase the asset pools held in

those entities. Payments on these notes are dependent upon proceeds from the resolution of Portfolio Assets held by the Acquisition Partnerships.

FirstCity Servicing Corporation, an affiliate of the Company, and MCS, in which FirstCity Servicing Corporation is an 11.89% stockholder as of December 31, 2006, are parties to Consulting, License and Confidentiality Agreements dated June 30, 1999 pursuant to which FirstCity Servicing Corporation provides consultation services and personnel to assist MCS in developing and managing due diligence and servicing systems. Pursuant to those agreements, MCS agrees to provide the supplied personnel with compensation, tax equalization payments, housing allowances, transportation allowance and tax preparation. MCS also pays consulting fees to FirstCity Servicing Corporation and reimburses FirstCity Servicing Corporation for travel, hotel, airfare, and meal expenses paid by it related to the provision of the services. FirstCity recorded $344,000 in 2006 from MCS as reimbursement fees included in other income.

The Company had unsecured notes payable to Terry R. DeWitt, G. Stephen Fillip and James C. Holmes, each of whom were Senior Vice Presidents of FirstCity, in connection with the acquisition of the minority interest in FirstCity Holdings. The notes were to be periodically redeemed by the Company for an aggregate of up to $3.2 million out of certain cash collections from servicing income from Portfolios in Mexico. FirstCity valued the loans at the inception date using an imputed interest rate based on the Company's cost of funds. In August 2006, the Company settled for $310,000 on these notes.

The aggregate fees billed for professional services by KPMG LLP ("KPMG") in 2006 and 2005 for these various services were:

The Audit Committee has adopted policies and procedures for pre-approving all audit and non-audit services performed by the Company's independent auditor. Except as noted below, no audit services or non-audit services shall be provided to the Company by the independent auditor unless first pre-approved by the Audit Committee and unless permitted by applicable securities laws and the rules and regulations of the SEC. If the Audit Committee approves an audit service within the scope of the engagement of the independent auditor, such audit service shall be deemed to have been pre-approved.

Pre-approval shall not be required for non-audit services provided by the independent auditor, if (i) the aggregate amount of all such non-audit services provided to the Company constitutes not more

than the five percent (5%) of the total amount of revenues paid by the Company to the independent auditor during the fiscal year in which such non-audit services are provided, (ii) such non-audit services were not recognized by the Company at the time of the independent auditor's engagement to be non-audit services, and (iii) such non-audit services are promptly brought to the attention of the Audit Committee and approved by the Audit Committee prior to the completion of the audit.

The Audit Committee may delegate to one or more members of the Audit Committee the authority to grant pre-approval of certain non-audit services. The decision of any member to whom such authority is delegated to pre-approve non-audit services shall be presented to the full Audit Committee for its approval at its next scheduled meeting.

The consolidated financial statements of FirstCity, the combined financial statements of the WAMCO Partnerships (Acquisition Partnerships) and the financial statements of MinnTex Investment Partners L.P. are incorporated herein by reference to Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

Financial statement schedules have been omitted because the information is either not required, not applicable, or is included in Item 8, "Financial Statements and Supplementary Data."

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Delaware (State or other jurisdiction of incorporation or organization)		76-0243729 (I.R.S. Employer Identification No.)
6400 Imperial Drive, Waco, TX (Address of Principal Executive Offices)		76712 (Zip Code)
(254) 761-2800 (Registrant's Telephone Number, Including Area Code)

		Years ended December 31,
		2006			2005		2004		2003			2002
		(Dollars in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues		$	28,387		$	24,093	$	21,141	$	21,318		$	21,528
Expenses			32,636			27,725		30,905		30,959			28,656
Equity in earnings of investments			11,756			12,013		14,913		14,174			9,212
Gain on sale of interest in equity investments			2,459			—		—		—			1,779
Earnings from continuing operations			9,877			8,078		5,011		4,358			2,399
Earnings (loss) from discontinued operations			(75	)		153		58,623		4,829			(6,170	)
Net earnings (loss)			9,802			8,231		63,634		9,187			(3,771	)
Redeemable preferred dividends			—			—		—		(133	)		(2,478	)
Net earnings (loss) to common stockholders			9,802			8,231		63,634		9,054			(6,249	)
Earnings (loss) from continuing operations per common share—
	Basic		0.89			0.72		0.45		0.38			(0.01	)
	Diluted		0.84			0.68		0.42		0.37			(0.01	)
Net earnings (loss) per common share—
	Basic		0.88			0.73		5.67		0.81			(0.74	)
	Diluted		0.83			0.69		5.37		0.80			(0.74	)
Consolidated Balance Sheet Data:
Total assets			297,663			194,869		158,857		132,388			126,456
Total notes payable			187,811			90,259		51,303		75,060			80,673
Preferred stock			—			—		—		3,846			3,705
Total common equity			103,893			98,911		92,423		28,969			18,752

			December 31, 2006			December 31, 2005
ASSETS
Cash and cash equivalents			$	18,472		$	12,901
Portfolio Assets, net				108,696			49,346
Loans receivable from Acquisition Partnerships held for investment				4,755			19,606
Loans receivable—other				23,991			—
Equity investments				112,357			83,785
Deferred tax asset, net				20,101			20,101
Service fees receivable ($917 and $1,095 from affiliates, respectively)				928			1,103
Other assets, net				8,260			7,870
Discontinued mortgage assets				103			157

		Total Assets	$	297,663		$	194,869

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
	Notes payable other		$	187,811		$	89,653
	Notes payable to affiliates			—			606
	Minority interest			1,570			1,193
	Liabilities from discontinued consumer operations			114			121
	Other liabilities			4,275			4,385

		Total Liabilities		193,770			95,958
Commitments and contingencies (note 15)
Stockholders' equity:
	Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)			—			—
	Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 11,316,937 and 11,307,187, respectively; shares outstanding: 10,786,637 and 11,307,187, respectively)			113			113
	Treasury stock, at cost: 530,300 shares and zero shares, respectively			(5,571	)		—
	Paid in capital			100,562			99,843
	Retained earnings (accumulated deficit)			7,417			(2,058	)
	Accumulated other comprehensive income			1,372			1,013

		Total Stockholders' Equity		103,893			98,911

		Total Liabilities and Stockholders' Equity	$	297,663		$	194,869

				Year ended December 31,
				2006			2005			2004
Cash flows from operating activities:
	Net earnings			$	9,802		$	8,231		$	63,634
	Adjustments to reconcile net earnings to net cash used in operating activities:
		Net (earnings) loss from discontinued operations			75			(153	)		(58,623	)
		Purchase of Portfolio Assets, net			(96,493	)		(32,131	)		(38,942	)
		Proceeds applied to principal on Portfolio Assets			48,167			29,211			8,028
		Income from Portfolio Assets			(10,987	)		(8,262	)		(2,472	)
		Capitalized interest and costs on Portfolio Assets and loans receivable			(667	)		(278	)		(191	)
		Provision for loan and impairment losses			271			212			30
		Equity in earnings of investments			(11,756	)		(12,013	)		(14,913	)
		Gain on sale of interest in equity investments			(2,459	)		—			—
		Depreciation and amortization			693			834			725
		Stock-based compensation expense related to stock options			651			—			—
		Decrease (increase) in service fees receivable			175			528			(241	)
		Increase in other assets			(1,361	)		(325	)		(952	)
		Payments of dividends on preferred stock			—			—			(1,459	)
		Change in debt imputed value			(293	)		149			(759	)
		Increase (decrease) in other liabilities			(848	)		(1,612	)		396

			Net cash used in operating activities		(65,030	)		(15,609	)		(45,739	)

Cash flows from investing activities:
		Property and equipment, net			(598	)		(128	)		(2,307	)
		Proceeds from sale of interest in equity investments			9,433			—			—
		Loan receivable advances			(30,430	)		(1,790	)		(9,474	)
		Loan receivable payments			1,758			3,507			6,076
		Contributions to Acquisition Partnerships and Servicing Entities			(72,522	)		(40,539	)		(12,603	)
		Distributions from Acquisition Partnerships and Servicing Entities			72,736			24,224			29,050

			Net cash provided by (used in) investing activities		(19,623	)		(14,726	)		10,742

Cash flows from financing activities:
		Borrowings under notes payable—other			219,922			107,782			75,848
		Payments of notes payable to affiliates			(312	)		(34	)		(26	)
		Payments of notes payable—other			(123,863	)		(67,283	)		(99,965	)
		Repurchase of common stock			(5,571	)		—			—
		Payments for tender of redeemable preferred stock			—			—			(2,652	)
		Proceeds from issuance of common stock			68			196			197

			Net cash provided by (used in) financing activities		90,244			40,661			(26,598	)

			Net cash provided by (used in) continuing operations		5,591			10,326			(61,595	)
Cash flows from discontinued operations (Revised—see note 1(r)):
			Net cash provided by (used in) operating activities		(20	)		(8,452	)		67,832
			Net cash provided by investing activities		—			1,303			742

			Net cash provided by (used in) discontinued operations		(20	)		(7,149	)		68,574

Net increase in cash and cash equivalents					5,571			3,177			6,979
Cash and cash equivalents, beginning of period					12,901			9,724			2,745

Cash and cash equivalents, end of period				$	18,472		$	12,901		$	9,724

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
		Interest		$	6,878		$	2,944		$	7,520
		Income taxes, net of refunds received			128			430			823

	Payments Due by Period
Contractual Obligations	Total		Less than One Year		One to Three Years		Four to Five Years		After Five Years
Notes payable secured by Portfolio Assets, loans receivable and equity in Acquisition Partnerships	$	186,781	$	6,897	$	65,609	$	114,275	$	—
Unsecured notes		1,030		—		—		—		1,030
Operating leases		3,110		771		1,298		612		429
Unfunded Portfolio purchase obligation		—		—		—		—		—

	$	190,921	$	7,668	$	66,907	$	114,887	$	1,459

		Common Stock			Treasury Stock						Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income
		Common Stock			Treasury Stock				Paid in Capital								Total Stockholders' Equity
		Shares	Amount		Shares	Amount			Paid in Capital								Total Stockholders' Equity
Balances, December 31, 2003		11,193,687	$	112	—	$	—		$	99,168	$	(73,923	)	$	3,612		$	28,969
Exercise of common stock options		67,000		1	—		—			196		—			—			197
Comprehensive income:
	Net earnings for 2004	—		—	—		—			—		63,634			—			63,634
	Translation adjustments	—		—	—		—			—		—			(377	)		(377	)

Total comprehensive income																		63,257

Balances, December 31, 2004		11,260,687		113	—		—			99,364		(10,289	)		3,235			92,423
Exercise of common stock options		46,500		—	—		—			196		—			—			196
Additional paid-in capital arising from sale of shares by investee		—		—	—		—			283		—			—			283
Comprehensive income:
	Net earnings for 2005	—		—	—		—			—		8,231			—			8,231
	Translation adjustments	—		—	—		—			—		—			(2,222	)		(2,222	)

Total comprehensive income																		6,009

Balances, December 31, 2005		11,307,187		113	—		—			99,843		(2,058	)		1,013			98,911
Cumulative effect of adjustments resulting from the adoption of SAB No. 108 (Note 1(q))		—		—	—		—			—		(327	)		—			(327	)
Exercise of common stock options		9,750		—	—		—			68		—			—			68
Repurchase of common stock		—		—	530,300		(5,571	)		—		—			—			(5,571	)
Additional paid-in capital arising from stock option compensation expense		—		—	—		—			651		—			—			651
Comprehensive income:
	Net earnings for 2006	—		—	—		—			—		9,802			—			9,802
	Translation adjustments	—		—	—		—			—		—			359			359

Total comprehensive income																		10,161

Balances, December 31, 2006		11,316,937	$	113	530,300	$	(5,571	)	$	100,562	$	7,417		$	1,372		$	103,893

Balance, December 31, 2003		$	3,612
	Aggregate adjustment for the year resulting from translation adjustments and gains and losses on certain hedge transactions		(377	)

Balance, December 31, 2004			3,235
	Aggregate adjustment for the year resulting from translation adjustments and gains and losses on certain hedge transactions		(2,222	)

Balance, December 31, 2005			1,013
	Aggregate adjustment for the year resulting from translation adjustments and gains and losses on certain hedge transactions		359

Balance, December 31, 2006		$	1,372

		Year Ended December 31, 2004
		Historical		Pro Forma Adjustments (A)		Pro Forma
				(Unaudited)		(Unaudited)
Earnings from continuing operations		$	5,011	$	4,940	$	9,951

Earnings from continuing operations per common share
	Basic	$	0.45			$	0.89
	Diluted	$	0.42			$	0.84
Weighted average common shares outstanding
	Basic		11,230				11,230
	Diluted		11,840				11,840

				December 31,
				2006		2005
Notes payable—other:
	Senior Credit Facility, secured and with recourse to the Company:
		US Dollar denominated -LIBOR (5.35% at December 31, 2006) plus 2.0% to 2.5%, due November 2010		$	55,905	$	41,212
		Eurocurrency denominated -LIBOR (3.67% at December 31, 2006) plus 2.0% to 2.5%, due November 2010			48,335		20,264
		Prime (8.25% at December 31, 2006) plus .5%, due November 2010			10,035		79
	Acquisition facility secured by assets of FH Partners, L.P. and guaranteed by the Company, LIBOR (5.35% at December 31, 2006) plus 2.00%, due November 2008				50,000		24,466
	Term loan secured by assets of FC Washington, L.P. and guaranteed by the Company, fixed rate at 5.625%, due 2008				2,580		3,632
	Revolving line of credit secured by Bank of Scotland letter of credit, renewable every 30 days, rate based on monthly Chilean index rate plus .0625% per month				6,518		—
	Line of credit secured by Bank of Scotland letter of credit, rate based on 28 day Mexican index rate plus 1.5%, due November 2008				13,408		—
	Revolving loan facility secured by assets of American Business Lending, Inc., LIBOR plus 2.625%, or the greater of Wells Fargo prime or 7.5%, due December 2009				—		—
	Other: Secured borrowing				1,030		—

			Total notes payable—other		187,811		89,653

Notes payable—affiliates:
	Unsecured notes payable for purchase of minority interest in FirstCity Holdings, due 2011				—		606

			Total notes payable—affiliates		—		606

Total notes payable				$	187,811	$	90,259

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2004	614,500		$	7.59
Granted	264,500			7.46
Exercised	(67,000	)		2.94
Expired	—			—
Forfeited	(50,000	)		18.10

Outstanding at December 31, 2004	762,000		$	7.26
Granted	122,650			11.62
Exercised	(46,500	)		4.22
Expired	(67,300	)		20.00
Forfeited	(15,000	)		7.25

Outstanding at December 31, 2005	755,850		$	7.02
Granted	35,000			9.84
Exercised	(9,750	)		6.93
Expired	—			—
Forfeited	(2,000	)		27.25

Outstanding at December 31, 2006	779,100		$	7.10	6.01	$	3,923

Exercisable at December 31, 2004	490,000		$	7.40

Exercisable at December 31, 2005	502,325		$	6.20

Exercisable at December 31, 2006	582,363		$	6.51	5.30	$	3,440

	2006									2005
	First Quarter			Second Quarter		Third Quarter		Fourth Quarter		First Quarter		Second Quarter			Third Quarter		Fourth Quarter
	(Dollars in thousands, except per share data)
	(Unaudited)
Revenues	$	5,715		$	6,879	$	8,191	$	7,602	$	6,320	$	5,589		$	5,704	$	6,480
Expenses		7,119			7,081		8,631		9,805		7,036		6,314			6,719		7,656
Equity in earnings of investments (1)		3,634			1,387		3,023		3,712		3,401		3,690			1,783		3,139
Gain on sale of interest in equity investments		—			27		2,378		54		—		—			—		—
Earnings from continuing operations		2,097			1,263		4,967		1,550		2,549		2,820			692		2,017
Earnings (loss) from discontinued operations		(75	)		—		—		—		—		(97	)		319		(69	)
Net earnings to common stockholders		2,022			1,263		4,967		1,550		2,549		2,723			1,011		1,948
Earnings from continuing operations per common share—
Basic	$	0.19		$	0.11	$	0.45	$	0.14	$	0.23	$	0.25		$	0.06	$	0.18
Diluted	$	0.18		$	0.11	$	0.42	$	0.13	$	0.21	$	0.24		$	0.06	$	0.17

	2006			2005			2004
	(Dollars in thousands)
Income from Portfolio Assets	$	24,577		$	30,664		$	31,862
Other income, net		1,559			106			632

Revenues		26,136			30,770			32,494

Interest and fees on notes—affiliate		(467	)		(1,765	)		(2,352	)
Interest and fees on notes payable—other		(3,409	)		(2,371	)		(2,308	)
Provision for loan and impairment losses		(1,803	)		(1,024	)		(1,552	)
Servicing fees—affiliate		(3,659	)		(3,391	)		(3,935	)
General, administrative and operating expenses		(3,466	)		(7,369	)		(4,928	)

Expenses		(12,804	)		(15,920	)		(15,075	)

Net earnings	$	13,332		$	14,850		$	17,419

		Class A Equity						Class B Equity
		General Partners			Limited Partners			Limited Partners			General Partners			Limited Partners			Total
		(Dollars in thousands)
Balance at December 31, 2003		$	45		$	2,193		$	791		$	988		$	80,572		$	84,589
	Contributions		—			—			—			234			23,496			23,730
	Distributions		(76	)		(3,716	)		(59	)		(523	)		(40,131	)		(44,505	)
	Comprehensive income:
	Net earnings		31			1,523			57			195			15,613			17,419

	Total comprehensive income		31			1,523			57			195			15,613			17,419

Balance at December 31, 2004			—			—			789			894			79,550			81,233
	Contributions		—			—			—			523			51,274			51,797
	Distributions		(1	)		(43	)		(789	)		(347	)		(35,371	)		(36,551	)
	Comprehensive income:
	Net earnings		1			43			—			145			14,661			14,850

	Total comprehensive income		1			43			—			145			14,661			14,850

Balance at December 31, 2005			—			—			—			1,215			110,114			111,329
	Cumulative effect of adjustments resulting from the adoption of SAB No. 108 (Note 2(f))		—			—			—			(2	)		(210	)		(212	)
	Contributions		—			—			—			553			54,759			55,312
	Distributions		—			—			—			(1,108	)		(102,888	)		(103,996	)
	Change in combined entities		—			—			—			(31	)		(6,155	)		(6,186	)
	Comprehensive income:
	Net earnings		—			—			—			135			13,197			13,332

	Total comprehensive income		—			—			—			135			13,197			13,332

Balance at December 31, 2006		$	—		$	—		$	—		$	762		$	68,817		$	69,579

		WAMCO 31		WAMCO 33		Other Partnerships		Combined
ASSETS
Cash		$	1,236	$	1,503	$	5,270	$	8,009
Portfolio Assets, net			10,624		12,582		85,009		108,215
Investment in partnership			—		—		—		—
Deferred profit sharing			—		—		—		—
Other assets, net			4		61		345		410

		$	11,864	$	14,146	$	90,624	$	116,634

LIABILITIES AND PARTNERS' CAPITAL
Notes payable		$	4,559	$	3,818	$	35,762	$	44,139
Deferred compensation			—		—		—		—
Other liabilities			1,165		709		1,042		2,916

	Total liabilities		5,724		4,527		36,804		47,055
Partners' capital			6,140		9,619		53,820		69,579

		$	11,864	$	14,146	$	90,624	$	116,634

Other liabilities owed to affiliates included in above balances		$	459	$	618	$	722	$	1,799

		WAMCO 31		WAMCO 33		Other Partnerships		Combined
ASSETS
Cash		$	1,311	$	2,354	$	9,182	$	12,847
Portfolio Assets, net			19,408		30,807		89,835		140,050
Investment in partnership			—		—		1,295		1,295
Deferred profit sharing			—		—		11,725		11,725
Other assets, net			17		207		72		296

		$	20,736	$	33,368	$	112,109	$	166,213

LIABILITIES AND PARTNERS' CAPITAL
Notes payable		$	11,530	$	18,111	$	7,867		37,508
Deferred compensation			—		—		14,539		14,539
Other liabilities			817		682		1,338		2,837

	Total liabilities		12,347		18,793		23,744		54,884
Partners' capital			8,389		14,575		88,365		111,329

		$	20,736	$	33,368	$	112,109	$	166,213

Notes payable owed to affiliates included in above balances		$	—	$	—	$	7,866	$	7,866
Other liabilities owed to affiliates included in above balances			394		528		670		1,592

		WAMCO 31			WAMCO 33			Other Partnerships			Combined
Income from Portfolio Assets		$	2,186		$	4,868		$	17,523		$	24,577
Other income, net			44			65			1,450			1,559

Revenues			2,230			4,933			18,973			26,136

Interest and fees expense—affiliate			—			—			(467	)		(467	)
Interest and fees expense—other			(718	)		(942	)		(1,749	)		(3,409	)
Provision for loan and impairment losses			—			(75	)		(1,728	)		(1,803	)
Service fees—affiliate			(330	)		(737	)		(2,592	)		(3,659	)
General, administrative and operating expenses			(188	)		(454	)		(2,824	)		(3,466	)

Expenses			(1,236	)		(2,208	)		(9,360	)		(12,804	)

	Net earnings	$	994		$	2,725		$	9,613		$	13,332

		WAMCO 31			WAMCO 33			Other Partnerships			Combined
Income from Portfolio Assets		$	4,291		$	6,824		$	19,549		$	30,664
Other income, net			28			—			78			106

Revenues			4,319			6,824			19,627			30,770

Interest and fees expense—affiliate			—			(893	)		(872	)		(1,765	)
Interest and fees expense—other			(1,175	)		(940	)		(256	)		(2,371	)
Provision for loan and impairment losses			—			(655	)		(369	)		(1,024	)
Service fees—affiliate			(564	)		(807	)		(2,020	)		(3,391	)
General, administrative and operating expenses			(301	)		(554	)		(6,514	)		(7,369	)

Expenses			(2,040	)		(3,849	)		(10,031	)		(15,920	)

	Net earnings	$	2,279		$	2,975		$	9,596		$	14,850

		WAMCO 31			WAMCO 33			Other Partnerships			Combined
Income from Portfolio Assets		$	5,823		$	4,981		$	21,058		$	31,862
Other income, net			13			—			619			632

Revenues			5,836			4,981			21,677			32,494

Interest and fees expense—affiliate			(133	)		(1,076	)		(1,143	)		(2,352	)
Interest and fees expense—other			(1,462	)		—			(846	)		(2,308	)
Provision for loan and impairment losses			(100	)		—			(1,452	)		(1,552	)
Service fees—affiliate			(820	)		(725	)		(2,390	)		(3,935	)
General, administrative and operating expenses			(413	)		(441	)		(4,074	)		(4,928	)

Expenses			(2,928	)		(2,242	)		(9,905	)		(15,075	)

	Net earnings	$	2,908		$	2,739		$	11,772		$	17,419

		WAMCO 31			WAMCO 33			Other Partnerships			Combined
Balance at December 31, 2003		$	19,558		$	3,167		$	61,864		$	84,589
	Contributions		—			10,653			13,077			23,730
	Distributions		(9,580	)		(4,658	)		(30,267	)		(44,505	)
	Net earnings		2,908			2,739			11,772			17,419

	Total comprehensive income		2,908			2,739			11,772			17,419

Balance at December 31, 2004			12,886			11,901			56,446			81,233

	Contributions		—			2,144			49,653			51,797
	Distributions		(6,775	)		(2,445	)		(27,331	)		(36,551	)
	Net earnings		2,278			2,975			9,597			14,850

	Total comprehensive income		2,278			2,975			9,597			14,850

Balance at December 31, 2005			8,389			14,575			88,365			111,329

	Cumulative effect of adjustments resulting from the adoption of SAB No. 108 (Note 2(f))		—			(212	)		—			(212	)
	Contributions		—			—			55,312			55,312
	Distributions		(3,243	)		(7,469	)		(93,284	)		(103,996	)
	Change in combined entities		—			—			(6,186	)		(6,186	)
	Net earnings		994			2,725			9,613			13,332

	Total comprehensive income		994			2,725			9,613			13,332

Balance at December 31, 2006		$	6,140		$	9,619		$	53,820		$	69,579

				December 31, 2006
				WAMCO 31		WAMCO 33			Other Partnerships			Combined
Loan Portfolios
	Loans Acquired Prior to 2005
		Non-performing Portfolio Assets		$	7,432	$	6,884		$	8,069		$	22,385
		Performing Portfolio Assets			3,192		3,168			15,459			21,819
	Loans Acquired After 2004
		Loans acquired with credit deterioration			—		3,206			56,869			60,075
		Loans acquired with no credit deterioration			—		—			1,765			1,765

	Outstanding balance				10,624		13,258			82,162			106,044
		Allowance for loan losses			—		(676	)		(822	)		(1,498	)

	Carrying amount of loans, net of allowance				10,624		12,582			81,340			104,546

Real Estate Portfolios, net of allowance					—		—			3,669			3,669

			Portfolio Assets, net	$	10,624	$	12,582		$	85,009		$	108,215

	WAMCO 31		WAMCO 33		Other Partnerships		Combined
Year Ending December 31:
2007	$	4,559	$	3,818	$	—	$	8,377
2008		—		—		—		—
2009		—		—		28,146		28,146
2010		—		—		7,616		7,616

	$	4,559	$	3,818	$	35,762	$	44,139

	2006			2005			2004
	(Dollars in thousands)
Income from Portfolio Asset	$	1,488		$	4,756		$	8,792
Other income		4			10			4

Revenues		1,492			4,766			8,796

General, administrative, and operating expenses (note 4)		(147	)		(480	)		(946	)

Expenses		(147	)		(480	)		(946	)

Net income	$	1,345		$	4,286		$	7,850

	General Partner			Limited Partners
	MinnTex GP Corp.			FirstCity Holdings of Minnesota			CFSC Capital Corp. II			Lenders Trust			Total
	(Dollars in thousands)
Balance at December 31, 2003	$	14		$	468		$	468		$	468		$	1,418
Distributions		(84	)		(2,807	)		(2,807	)		(2,807	)		(8,505	)
Net income		77			2,591			2,591			2,591			7,850

Balance at December 31, 2004		7			252			252			252			763
Distributions		(47	)		(1,573	)		(1,573	)		(1,573	)		(4,766	)
Net income		44			1,414			1,414			1,414			4,286

Balance at December 31, 2005		4			93			93			93			283
Distributions		(15	)		(517	)		(517	)		(517	)		(1,566	)
Net income		13			444			444			444			1,345

Balance at December 31, 2006	$	2		$	20		$	20		$	20		$	62

Name and Principal Position	Year	Salary ($)	Bonus ($)	Option Awards (1)($)	All Other Compensation (2)($)	Total Compensation ($)
James T. Sartain President and Chief Executive Officer	2006	375,000	—	—	16,048	391,048
J. Bryan Baker Senior Vice President and Chief Financial Officer	2006	225,000	—	—	5,040	230,040
Terry R. DeWitt Senior Vice President	2006	275,000	—	—	5,040	280,040
James C. Holmes Senior Vice President	2006	275,000	—	—	5,040	280,040
Richard J. Vander Woude Senior Vice President, General Counsel and Secretary	2006	285,001	50,000	—	5,328	340,329

		Number of Shares Underlying Unexercised Options (#)
Name	Option Grant Date	Number of Shares Underlying Unexercised Options (#)		Option Exercise Price ($)		Option Expiration Date
Name	Option Grant Date	Exercisable	Unexercisable	Option Exercise Price ($)		Option Expiration Date
James T. Sartain	12/1/2000 12/20/2001 5/13/2004 10/12/2005	50,000 50,000 18,750 2,750	— — 18,750 8,250	$ $ $ $	2.00 3.06 7.25 11.33	12/1/2010 12/20/2009 5/13/2014 10/12/2015
J. Bryan Baker	2/27/1997 12/1/2000 12/20/2001 5/13/2004 10/25/2005	3,000 30,000 20,000 7,500 2,000	— — — 7,500 6,000	$ $ $ $ $	27.25 2.00 3.06 7.25 11.77	2/27/2007 12/1/2010 12/20/2009 5/13/2014 10/25/2015
Terry R. DeWitt	2/27/1997 12/20/2001 5/13/2004 10/25/2005	6,200 25,000 7,500 2,000	— — 7,500 6,000	$ $ $ $	27.25 3.06 7.25 11.77	2/27/2007 12/20/2009 5/13/2014 10/25/2015
James C. Holmes	2/27/1997 12/20/2001 5/13/2004 10/25/2005	6,000 22,000 7,500 2,000	— — 7,500 6,000	$ $ $ $	27.25 3.06 7.25 11.77	2/27/2007 12/20/2009 5/13/2014 10/25/2015
Richard J. Vander Woude	12/1/2000 12/20/2001 5/13/2004 10/25/2005	25,000 25,000 7,500 2,000	— — 7,500 6,000	$ $ $ $	2.00 3.06 7.25 11.77	12/1/2010 12/20/2009 5/13/2014 10/25/2015

Grant Date		Vesting Schedule
2/27/1997		25% vests in one year; 25% vests in two years; 25% vests in three years; 25% vests in four years
12/1/2000		25% vests in one year; 25% vests in two years; 25% vests in three years; 25% vests in four years
12/20/2001		50% vests on grant dates; 25% vests in one year; 25% vests in two years
5/13/2004		25% vests in one year; 25% vests in two years; 25% vests in three years; 25% vests in four years
10/12/2005		25% vests in one year; 25% vests in two years; 25% vests in three years; 25% vests in four years
10/25/2005		25% vests in one year; 25% vests in two years; 25% vests in three years; 25% vests in four years

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership (2)		Percent of Class
	Directors and Executive Officers (1):
Common Stock	James T. Sartain	619,909		5.68	%
Common Stock	Richard E. Bean	317,833		2.94	%
Common Stock	Dane Fulmer	86,150		*
Common Stock	Robert E. Garrison II	105,950		*
Common Stock	D. Michael Hunter	25,000		*
Common Stock	Jeffery Leu	5,000	(3)	*
Common Stock	F. Clayton Miller	5,000		*
Common Stock	C. Ivan Wilson	58,020		*
Common Stock	Terry R. DeWitt	193,132		1.78	%
Common Stock	James C. Holmes	168,585		1.56	%
Common Stock	Richard J. Vander Woude	68,685		*
Common Stock	J. Bryan Baker	64,366		*
Common Stock	All directors and executive officers as a group (13 persons)	1,783,880		15.83	%
	Certain Other Beneficial Owners:
Common Stock	Heartland Advisors, Inc. 789 N. Water St. Suite 500 Milwaukee, WI 53202	1,150,550	(4)	10.66	%
Common Stock	First Manhattan Co. 437 Madison Avenue New York, NY 10022	910,038	(4)	8.43	%
Common Stock	Dimensional Fund Advisors LP 1299 Ocean Avenue Santa Monica, CA 90401	628,160	(4)	5.82	%
Common Stock	F&C Asset Management plc. 80 George Street Edinburgh EH2 3BU, United Kingdom	549,670	(4)	5.09	%

			Voting		Investment
Name			Voting		Investment
Name	Schedule	Date	Sole	Shared	Sole	Shared
Heartland Advisors, Inc.	13G/A	12/31/2006	—	1,121,050	—	1,150,550
First Manhattan Co.	13G/A	12/31/2006	101,700	711,036	101,700	808,338
Dimensional Fund Advisors LP	13G/A	12/31/2006	628,160	—	628,160	—
F&C Asset Management plc.	13G	12/31/2006	549,670	—	549,670	—

Exhibit Number		Description of Exhibit
2.1	—	Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).
2.2	—	Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).
3.1	—	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).
3.2	—	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated December 30, 2005 filed with the Commission on December 30, 2005).
10.1	—	Contribution and Assumption Agreement by and between Funding LP and Drive dated as of August 18, 2000. (incorporated herein by reference to Exhibit 10.42 of the Company's Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).
10.2	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company's Form 10-Q dated May 14, 2004).
10.3	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-Q dated May 14, 2004).

10.4	—	Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 27, 2004).
10.5	—	Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-Q dated November 15, 2004).
10.6	—	1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Company's Schedule 14A, Definitive Proxy Statement, dated March 27, 1996).
10.7	—	1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Company's Schedule 14A, Definitive Proxy Statement, dated March 27, 1996).
10.8	—	2004 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company's Schedule 14A, Definitive Proxy Statement, dated October 21, 2003).
10.9	—	Revolving Credit Agreement, dated August 26, 2005, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 1, 2005).
10.10	—	Guaranty Agreement, dated August 26, 2005, executed by FirstCity Financial Corporation, FirstCity Commercial Corporation, FirstCity Europe Corporation, FirstCity Holdings Corporation, FirstCity International Corporation, FirstCity Mexico, Inc., and FirstCity Servicing Corporation for the benefit of Bank of Scotland, as agent, and lenders (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated September 1, 2005).
10.11	—	Sixth Amendment to Right Of First Refusal Agreement And Due Diligence Reimbursement Agreement dated effective as of February 1, 2006 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated February 6, 2006).
10.12	—	Asset Purchase Agreement, dated June 30, 2006, by and among FirstCity Financial Corporation and its subsidiaries, FirstCity Business Lending Corporation and American Business Lending, Inc.; and AMRESCO SBA Holdings, Inc. and NCS I, LLC (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated July 7, 2006).
10.13	—	2006 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company's Schedule 14A, Definitive Proxy Statement, dated June 26, 2006).
10.14	—	Interest Purchase and Sale Agreement, dated August 8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment Partners, L.P. and Cargill Financial Services International, Inc. and certain other parties (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-Q dated November 9, 2006).
10.15	—	Put Option Agreement dated August 8, 2006, by and among Bidmex Holding, LLC, Recuperacion de Carteras Mexicanas, S. de R.L. de C.V., Bidmex 6, LLC, Strategic Mexican Investment Partners 2, L.P. and Cargill Financial Services International, Inc. (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-Q dated November 9, 2006).

10.16	—	Guarantee dated August 8, 2006, executed by FirstCity Financial Corporation for the benefit of Bidmex Holding, LLC, Residencial Oeste 2 S. de R.L. de C.V., National Union Fire Insurance Company of Pittsburg, P.A., American General Life Insurance Company, and American General Life and Accident Insurance Company (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-Q dated November 9, 2006).
10.17	—	Amendment No. 4 to Revolving Credit Agreement, dated as of October 31, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated November 7, 2006).
10.18	—	Management Employment Contract dated November 30, 2006, between FirstCity Business Lending Corporation, American Business Lending, Inc., and Charles P. Bell, Jr. (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated December 7, 2006).
10.19	—	Management Employment Contract dated November 30, 2006, between FirstCity Business Lending Corporation, American Business Lending, Inc., and Joe N. Smith (incorporated herein by reference to Exhibit 10.3 of the Company's Form 8-K dated December 7, 2006).
10.20	—	Amendment No. 5 to Revolving Credit Agreement, dated as of December 14, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 20, 2006).
10.21	—	Loan Agreement, dated as of December 15, 2006 by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 28, 2006).
10.22 *	—	Amendment No. 1 to Loan Agreement, dated as of February 27, 2007, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender.
21.1*	—	Subsidiaries of the Registrant.
23.1*	—	Consent of KPMG LLP.
23.2*	—	Consent of KPMG LLP.
23.3*	—	Consent of KPMG LLP.
31.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Annual Report on Form 10-K for the year ended December 31, 2006.
32.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Annual Report on Form 10-K for the year ended December 31, 2006.

		FIRSTCITY FINANCIAL CORPORATION
		By:	/s/ JAMES T. SARTAIN James T. Sartain President and Chief Executive Officer

Signature	Title	Date

/s/ RICHARD E. BEAN Richard E. Bean	Chairman of the Board and Director	July 24, 2007
/s/ JAMES T. SARTAIN James T. Sartain	President, Chief Executive Officer and Director (Principal Executive Officer)	July 24, 2007
/s/ J. BRYAN BAKER J. Bryan Baker	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	July 24, 2007
/s/ C. IVAN WILSON C. Ivan Wilson	Vice Chairman of the Board and Director	July 24, 2007
/s/ DANE FULMER Dane Fulmer	Director	July 24, 2007
/s/ ROBERT E. GARRISON Robert E. Garrison	Director	July 24, 2007
/s/ D. MICHAEL HUNTER D. Michael Hunter	Director	July 24, 2007
/s/ JEFFERY D. LEU Jeffery D. Leu	Director	July 24, 2007
/s/ F. CLAY MILLER F. Clay Miller	Director	July 24, 2007