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 ý No o

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, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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, 2007, was $95,343,164.

The number of shares of common stock outstanding at March 13, 2008, was 10,481,907.

Part III incorporates certain information by reference to the earlier filed of (i) an amendment to this annual report on Form 10-K or (ii) the definitive proxy statement for the 2008 Annual Meeting of Stockholders.

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	22
	PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	24
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements and Supplementary Data	48
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	132
Item 9A.	Controls and Procedures	132
Item 9B.	Other Information	132
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	133
Item 11.	Executive Compensation	133
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	133
Item 13.	Certain Relationships and Related Transactions, and Director Independence	133
Item 14.	Principal Accounting Fees and Services	133
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	134
Signatures	138

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 $10.0 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.

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 services 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. In 1991, the Company began its relationship with certain affiliates of Cargill, Incorporated (collectively, "Cargill")—a privately-held, multi-national agricultural and financial services company. Since that time, the Company and Cargill have formed a series of Acquisition Partnerships (as defined below) through which they have jointly acquired over $7.9 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 Company's common stock, $.01 par value per share ("Common Stock") 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. FirstCity also recognized the $4 million gain (previously deferred) from the release of its guaranty of Drive Financial Services LP ("Drive") 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 and its general partner, Drive GP LLC, to IFA-GP, 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.

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 $10.0 billion in Face Value of assets, with FirstCity's equity investment being $660 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 equity interests in certain European servicing companies (MCS and HMCS), and in conjunction with these servicing entities and Cargill, the Company actively pursues opportunities to purchase pools of Portfolio Assets in France, Germany and other areas of Western Europe. First City also partners with American International Group, Inc. ("AIG"), a leading international insurance organization, to actively pursue mutual business opportunities to purchase pools of Portfolio Assets in Latin America.

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

	Year ended December 31,
	2007		2006		2005
	(Dollars in thousands)
Face Value	$	514,413		$	855,633	$	330,390
Total purchase price	$	214,333		$	296,990	$	146,581
Total invested(1)	$	213,881		$	298,515	$	134,085
FirstCity invested(2)	$	126,714		$	144,048	$	71,405
Total number of Portfolio Assets		82,537			392,208		28,839

			Year ended December 31,
			2007		2006		2005
			(Dollars in thousands)
Purchase price
	Domestic		$	121,679	$	136,596	$	93,410
	Europe			23,199		102,158		37,172
	Latin America			69,455		58,236		15,999

		Total	$	214,333	$	296,990	$	146,581


FirstCity invested
	Domestic		$	108,532	$	103,467	$	58,558
	Europe			7,902		32,893		10,638
	Latin America			10,280		7,688		2,209

		Total	$	126,714	$	144,048	$	71,405

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 evaluates 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 undertakes additional evaluations of the asset, that, to the extent permitted by the seller, include site visits to, and environmental reviews of the property securing the loan or the asset proposed to be purchased. FirstCity also analyzes 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.

The Company does not recognize capitalized servicing rights related to its Portfolio Assets 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. 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 Europe and South America are serviced by various entities in which the Company maintains an equity interest in the servicing entities. In all cases, service fees are recognized as they are earned in accordance with the servicing agreements.

In connection with the Company's lending activities relative to U.S. Small Business Administration ("SBA") loan programs, the Company recognizes servicing assets when rights are acquired or through the sale of SBA loans it originates or purchases. Generally, purchased servicing assets are capitalized at cost to acquire the rights and are carried at the lower of cost, net of accumulated amortization, or fair value. For sales of SBA loans in which the Company retains the servicing rights, a portion of the cost or originating the loan is allocated to the servicing right based on relative fair value. Subsequent to the date of sale, the Company accounts for the servicing assets by using the amortization method, which amortizes servicing assets in proportion to, and over the period of, estimated net servicing income. The amortization of the servicing assets is analyzed periodically and adjusted to reflect changes in prepayment rates and other estimates. See Note 18 of the Consolidated Financial Statements for more information on servicing rights related to SBA loans.

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 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 generally regarded as one of the world's largest privately held corporations and has offices worldwide. Cargill and certain of its affiliates have historically provided significant debt and equity financing to the Acquisition Partnerships. Cargill and certain of its affiliates are investors in the vast majority of our domestic Acquisition Partnerships at December 31, 2007. While not dependent on Cargill, FirstCity believes its relationship with Cargill enhances the Company's credibility as a purchaser of Portfolio Assets and facilitates its ability to expand into related businesses and foreign markets. FirstCity is not dependent on Cargill or its affiliates for future liquidity or funding.

American International Group, Inc. ("AIG") is a leading international insurance organization with operations in over 130 countries and jurisdictions. AIG and FirstCity have partnered together on several Latin American investments. FirstCity, while not dependent on AIG, believes its relationship with AIG enhances the Company's credibility as a purchaser of Portfolio Assets and facilitates its ability to expand into related businesses and foreign markets. AIG and FirstCity continue to pursue other mutual 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.

Bank of Scotland provides FirstCity and its subsidiaries a loan facility under a revolving credit agreement to finance the senior debt and equity portion of portfolio and asset purchases and working capital loans. The maximum available commitment under this revolving credit facility was $225.0 million at December 31, 2007. This facility is secured by substantially all of the assets of FirstCity and certain of its wholly-owned subsidiaries and guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity.

In September 2007, FirstCity and BoS (USA) Inc. entered into a subordinated delayed draw credit agreement which may be used to finance equity investments in new ventures, equity investments made in connection with portfolio and asset purchases and loans made by FirstCity and its subsidiaries to acquisition entities, provide for the issuance of letters of credit, and for working capital loans. This credit agreement was effective on November 16, 2007 and is guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and secured by substantially all of the assets of FirstCity and its wholly-owned subsidiaries

Since August 2005, the Bank of Scotland has provided financing to FH Partners LLC, a wholly-owned affiliate of FirstCity, to finance portfolio and asset purchases made by FH Partners LLC. The maximum available commitment under this revolving credit facility has grown to $100.0 million at

December 31, 2007 from $50.0 million at its origination in 2005. This facility is secured by all assets of FH Partners LLC and guaranteed by FirstCity and certain of its wholly-owned subsidiaries.

Refer to Note 2 of the Consolidated Financial Statements for additional detail and terms underlying the Company's loan facilities with the Bank of Scotland.

BoS(USA) has a warrant to purchase 425,000 shares of the Company's 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 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 included in other assets and liabilities in the Consolidated Financial Statements.

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 241 employees as of December 31, 2007 compared with 208 employees at December 31, 2006. The Company believes that it has been successful in attracting quality employees and that employee relations 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 37% of our consolidated revenues and equity in earnings of investments in each year in the three-year period ended December 31, 2007. See Note 8 to the Consolidated Financial Statements for the year ended December 31, 2007.

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, 2007 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, which will lower 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 $52 million in net tax operating losses, utilized $95 million of NOLs, and had expiring NOLs of $321 million. Accordingly, as of December 31, 2007, we believe that we have approximately $232 million of NOLs available to offset future taxable income. Out of the total $232 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 original $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.

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 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, general business and market 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 that we are 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 2.38% 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 our 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 16.36% 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 6.0% 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 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.

We may incur significant credit losses due to downward trends in the economy and in the real estate market.

We originate and underwrite loans to affiliated entities (including Acquisition Partnerships) and non-affiliated entities, and purchase and originate SBA loans. The repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral, and distributions made from affiliated entities. While we evaluate all of our loans for impairment on a regular basis by reviewing the collectibility of the loans in light of various factors, worsening economic conditions increase the risk that our borrowers will not be able to repay our loans, and worsening real estate market conditions increase the risk that the value of the properties securing certain of our loans will be insufficient to repay amounts owing to us in the event our borrowers default on the loans.

The Company occupies approximately 56,000 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. 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, 2007.

Location	Function	Business Segment
Waco, Texas	Executive Offices	Corporate/Commercial
Guadalajara, Mexico	Servicing Offices	Commercial
Mexico City, Mexico	Servicing Offices	Commercial
Dallas, Texas	Servicing Offices	Commercial
Greenwood Village, Colorado	Servicing Offices	Commercial

FirstCity and certain of its subsidiaries and affiliates (including Acquisition Partnerships) are involved in various claims and legal proceedings arising in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of pending legal actions and proceedings, the Company cannot state with certainty the eventual outcome of any such proceedings. Based on current knowledge, management does not believe that liabilities, if any, arising from any single ordinary course proceeding will have a material adverse effect on the consolidated financial condition, operations, results of operations or liquidity of the Company.

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. 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.

On March 21, 2006, FirstCity received notice that the 152^nd 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 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.

On March 20, 2007, Superior Funding, Inc., Wave Tec Pools, Inc. and Nations Pool Supply, Inc. (collectively "Plaintiffs") filed a First Amended Petition adding FH Partners LLC (formerly FH Partners, L.P.) and FirstCity Servicing Corporation, each an indirectly wholly-owned subsidiary of FirstCity, and FirstCity Financial Corporation as defendants in a suit filed by Plaintiffs against State Bank and Cole Harmonson before the 98^th Judicial District Court of Travis County, Texas. FirstCity Financial Corporation was served with Plaintiff's Notice of Nonsuit Without Prejudice in the suit on April 25, 2007. In the First Amended Petition the Plaintiffs sought unspecified damages for breach of contract and conversion related to alleged breaches by FH Partners LLC ("FH Partners") and FirstCity Servicing Corporation in connection with a loan agreement related to a loan from State Bank to Plaintiffs that was purchased by FH Partners from State Bank on December 22, 2006. The Plaintiffs also raised other claims solely against the other defendants. The Plaintiffs allege that they entered into a loan or line of credit with State Bank and that due to an error by State Bank the Plaintiffs borrowed more on the line of credit than was allowed under the borrowing base. The Plaintiffs further allege that State Bank entered in an agreement with Plaintiffs that the default by Plaintiffs would be cured if the Plaintiffs pledged additional property to secure the loans and that the Plaintiffs would be allowed to borrow under the line of credit. Plaintiffs allege that State Bank, and subsequently FH Partners, have refused to honor the agreement by State Bank concerning the pledge of the additional property. On July 25, 2007, counsel for FH Partners received a Second Amended Petition in which the Plaintiffs allege that they have sustained actual damages of $165 million as a result of the joint actions of State Bank, Cole Harmonson, FH Partners and FirstCity Servicing Corporation. The Plaintiffs assert claims against FH Partners and FirstCity Servicing Corporation for breach of contract, conversion, civil conspiracy, tortious interference with prospective economic relationships and usury related to FH Partners and FirstCity Servicing Corporation treating the loans that FH Partners purchased from State Bank as being in default, retaining payments delivered to the lockbox for the loan, retaining mortgage loan files that the Plaintiffs allege were unrelated to the loan agreement, interfering with contracts and relationships of the Plaintiffs by such actions, and charging interest higher than the maximum amount allowed under the Texas Finance Code. The Plaintiffs additionally seek recovery of statutory penalties under the Texas Finance Code and attorney's fees. The Plaintiffs have made additional claims against the other defendants alleging promissory estoppel, fraud and business disparagement. On or about October 5, 2007, Plaintiffs' counsel suggested that his clients were considering non-suiting their claims against FH Partners and FirstCity Servicing Corporation. Therefore, instead of counter-claiming against the Plaintiffs in the same suit for the indebtedness owed under the loan, on October 9, 2007, FH Partners filed a separate collection suit against the Plaintiffs and guarantors Jason Herring and Kimberly Herring, now known as Kimberly McCormick. Plaintiffs' counsel has subsequently indicated that he had misunderstood the positions of the parties, that a non-suit is not likely to occur and that he will probably seek to consolidate the collection suit with the original action. All defendants in the collection suit have answered. Prosperity Bank, FH Partners and FirstCity Servicing Corporation filed motions for summary judgment in the original suit based upon a General Release and Indemnity Agreement. Shortly before the hearing on the summary judgment motions, the Plaintiffs filed their third amended petition to add Grandview Homes, Inc. as an additional plaintiff, to allege some of the previous claims against FH Partners and FirstCity Servicing Corporation as well as Prosperity Bank and to state additional claims for negligent misrepresentation, tortious interference with property rights,

fraud in the inducement, duress, lack of consideration, unconscionability, estoppel and waiver. Since these additional parties and claims were not addressed by the summary judgment motions, the hearings were postponed. On or about December 14, 2007, Plaintiffs filed their fourth amended petition, which added the claim that the general release is invalid for lack of mutuality of obligation and for failure to meet the express negligence test. One deposition has been taken and Plaintiffs have engaged in written discovery with Prosperity Bank and sent written discovery to FH Partners and FirstCity Servicing Corporation, but have suspended the deadlines to respond while the parties are discussing settlement. FirstCity does not have sufficient information to estimate any potential liability or probability of liability, but is unaware of any factual or legal basis for liability. If a settlement is not reached, FirstCity intends to contest the case vigorously.

The Company held its annual meeting of stockholders (the "Annual Meeting") on November 15, 2007. The following items for business were considered at the Annual Meeting.

The following individuals were elected as directors to serve as members of the Company's Board of Directors until the Company's 2008 annual meeting of stockholders. The number of votes cast for each nominee was as follows:

Nominee	Votes For	Votes Against	Abstained
Richard E. Bean	9,342,737	536,570	—
C. Ivan Wilson	9,341,487	537,820	—
James T. Sartain	9,841,971	37,336	—
Dane Fulmer	9,842,064	37,243	—
Robert E. Garrison II	9,842,074	37,233	—
D. Michael Hunter	9,842,074	37,233	—
Jeffery D. Leu	9,840,824	38,483	—
F. Clayton Miller	9,842,074	37,233	—

A proposal to ratify the Board of Directors' appointment of KPMG LLP as the Company's independent auditors for 2007 was approved by the stockholders. The number of votes for the proposal: 9,856,372; votes against: 20,013; abstentions: 2,922.

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

The Company's Common Stock is traded on the Nasdaq Global Select Market under the symbol FCFC. The number of holders of record of Common Stock on March 13, 2008 was approximately 725, as provided by American Stock Transfer and Trust Company, the Company's transfer agent. High and low stock prices for the Common Stock in the two years ended December 31, 2007 and December 31, 2006 are displayed in the following table:

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 summarizes purchases of Common Stock during the fourth quarter 2007:

Month	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October	—	$	—	—
November	1,700	$	8.18	1,700
December	38,700	$	8.04	38,700

Total	40,400	$	8.05	40,400	419,500

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 November 2004, FirstCity completed the sale of its 31% investment in Drive. 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 in Part II, Item 8 of this Annual Report on Form 10-K.

FirstCity is a financial services company engaged in the acquisition and resolution of portfolios of loans, real estate and other assets or similar single-asset investments (collectively referred to as "Portfolio Assets"). The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to their legal principal balance or appraised value, and servicing and resolving such assets in an effort to maximize the present value of the ultimate cash recoveries.

During 2007, the Company recorded net earnings to Common Stockholders on a diluted basis of $2.2 million or $0.19 per common share. The operating contribution from the Portfolio Asset acquisition and resolution segment was $11.4 million for 2007 compared with $15.1 million for 2006. The Company was involved in $214.3 million of portfolio acquisitions in 2007—of which FirstCity's investment share was $126.7 million. FirstCity's global distribution of its 2007 investments includes $108.5 million in the United States, $7.9 million in Europe, and $10.3 million in Latin America. In addition to its portfolio acquisitions in 2007, FirstCity invested $4.0 million in a Chilean servicing company; $5.9 million in a domestic railroad company; and $12.1 million in the form of loans receivable to domestic and foreign entities. Earning assets (Portfolio Assets, equity investments, loans receivable and entity-level earning assets) remained relatively level at $243.6 million in 2007 compared to $250.4 million in 2006. FirstCity's total investment level of $148.7 million in 2007 represents the second-highest amount invested in a single year in the Company's history (the Company's highest investment level was $172.2 million in 2006).

The Company's investments in 2007 include the purchase of $36.8 million of SBA loans and servicing assets, and another $2.2 million of SBA loan originations and advances through its majority-owned subsidiary American Business Lending, Inc. ("ABL"). The Company believes that the ability to purchase and originate these types of loans provides the diversity to create an attractive growth opportunity within the domestic market.

In addition, the Company's 2007 investments include $5.6 million and $5.9 million in the form of loans receivable and a railroad business acquisition, respectively, under its new special situations platform—FirstCity Crestone—which was formed in April 2007. This special situations platform focuses on constructive investing in restructurings, turnarounds, businesses with robust market positions, and other special situations; and provides the Company the ability to acquire or finance distressed businesses, originate junior- and senior-bridge loans, and execute lower middle-market buyouts.

The Company's earnings in 2007 were negatively impacted by $6.4 million of net provisions—comprised of $2.1 million recorded to our wholly-owned portfolios and $4.3 million as our share recorded to portfolio assets held in our partnership interests. The provisions in 2007 were necessary as a result of increased delays in the collection of certain assets and deterioration of the domestic residential and commercial real estate market. The impairment provisions were identified in connection with management's regular evaluation of the collectibility of the Company's Portfolio Assets and loans. Management's evaluation is inherently subjective as it requires estimates that are susceptible to revision in future periods as more information becomes available.

Considering the recent deterioration of credit quality experienced by many banks, management remains positive on the outlook of the Company. Management believes that the current market conditions will not hinder FirstCity's ability to grow its business, and that acquisition opportunities at attractive margins are on the rise. FirstCity's total investment level approximated $150.0 million in 2007, and the Company is currently evaluating 27 different transactions representing over $1.8 billion in

face value of assets, although there can be no assurance that FirstCity will be able to consummate any of these transactions on acceptable terms.

In addition, in light of current market conditions that are creating liquidity constraints primarily as a result of the deterioration in the subprime mortgage industry and tightening credit standards in the marketplace, management believes that the current market conditions will not impact FirstCity's ability to obtain financing for its operations—as evidenced by recent increases totaling $125.0 million in the Company's credit facilities commitments (discussed below).

In August 2007, FirstCity increased its borrowing capacity by $100.0 million. FirstCity secured a $50.0 million increase in its revolving credit facility commitment with the Bank of Scotland from $175.0 million to $225.0 million; and FH Partners, LLC (a wholly-owned affiliate of FirstCity) secured a $50.0 million increase in its revolving credit facility commitment with Bank of Scotland from $50.0 million to $100.0 million. The Company uses the credit facilities, along with other financing arrangements, to finance equity investments and portfolio and asset purchases, and to provide for the issuance of letters of credit and working capital loans.

Effective November 2007, FirstCity increased its borrowing capacity another $25.0 million through a subordinated credit agreement with Bank of Scotland. This arrangement provides the Company with a $25.0 million loan facility to finance equity investments in new ventures, the senior debt and equity portion of portfolio and asset purchases, and to provide for the issuance of letters of credit working capital loans.

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 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 in 2007 ("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, and independent counsel worked with external forensic accountants to conduct its review.

The Independent Investigation (completed in July 2007) 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 are required in connection with the results of the Independent Investigation. The costs associated with the investigation approximated $2.2 million in 2007.

Net earnings to Common Stockholders were $2.2 million in 2007 compared to $9.8 million in 2006. On a per share basis, diluted net earnings to Common Stockholders were $0.19 in 2007 compared to $.83 in 2006. The Company reported earnings from continuing operations of $2.2 million in 2007 compared to $9.9 million in 2006.

The operating contribution from the Portfolio Asset acquisition and resolution business of $11.4 million in 2007 decreased from $15.1 million in 2006. FirstCity was involved in $214.3 million of Portfolio Asset acquisitions in 2007 ($106.6 million in wholly-owned portfolios and $107.7 million through Acquisition Partnerships), compared to $297.0 million in 2006 ($91.0 million in wholly-owned portfolios and $206.0 million through Acquisition Partnerships). FirstCity's investment share in these Portfolio Asset acquisitions (including SBA loans) was $126.7 million in 2007 compared to $144.0 million in 2006—which includes investments in wholly-owned portfolios of $104.9 million in 2007 and $82.5 million in 2006. Additional investments (loan originations and business acquisitions) backed by FirstCity totaled $22.0 million in 2007 compared to $28.2 million in 2006.

Servicing fee revenues. Servicing fee revenues decreased to $10.4 million in 2007 from $12.9 million in 2006. Servicing fee revenues in 2006 include $1.9 million of incentive service fees resulting from the restructure of Mexican Investment Platform. This contributed to the decrease in service fees from Latin American partnerships to $7.8 million in 2007 from $9.5 million in 2006. Service fees from domestic Acquisition Partnerships totaled $2.6 million in 2007 compared to $3.4 million in 2006. Also contributing to the overall decrease in servicing fees is a decline in collections from loans held by domestic and Latin American Acquisition Partnerships to $123.3 million in 2007 from $188.0 million in 2006. Since a majority of the Portfolio acquisitions over the past two years were purchased through wholly-owned Portfolios instead of investments in Acquisition Partnerships, the Company expects income from wholly-owned Portfolio Assets to off-set the decline in servicing fee revenues (which are generated primarily from loan portfolios held by Acquisition Partnerships).

Income from Portfolio Assets. Income from Portfolio Assets increased to $22.8 million in 2007 compared to $11.0 million in 2006, primarily due to increased purchases of wholly-owned domestic Portfolio Assets. FirstCity's average investment in wholly-owned Portfolio Assets increased to $117.0 million for 2007 from $62.5 million for 2006. Refer to Note 8 to the Consolidated Financial Statements for a summary of income from Portfolio Assets.

Gain on sale of SBA loans held for sale. The Company recorded net gains on SBA loan sales of $0.7 million in 2007. The Company's basis in SBA loans sold in 2007 approximated $17.8 million. Gains on SBA loan sales reflect the Company's participation in the SBA 7(a) guaranteed loan program. Under the program, SBA guarantees up to 85 percent of the principal of a qualifying loan. The Company generally sells the guaranteed portion of the loan into the secondary market and retains the unguaranteed portion.

Interest income from SBA loans. Interest income from SBA loans was $2.1 million in 2007 as a result of the SBA portfolio acquisition and SBA loan originations in 2007.

Interest income from affiliates. Interest income from affiliates decreased $0.6 million in 2007 from $1.5 million in 2006 primarily due to the conversion of $21.3 million of affiliated loans to equity as part of the Company's restructure of its Mexican investments in 2006—which significantly reduced the amount of affiliated loans outstanding and the corresponding interest income.

Interest income from loans receivable—other. Interest income from loans receivable—other increased to $3.8 million in 2007 from $0.6 million in 2006. The income increase is attributed to the Company's increased level of investments in the form of loan originations to domestic entities in 2007—primarily through FirstCity's new special situations platform (FirstCity Crestone) that was formed in April 2007. FirstCity's average investment in loans receivable—other approximated $22.0 million in 2007 and $4.8 million in 2006.

Other income. Other income increased to $2.8 million in 2007 from $1.6 million in 2006 primarily due to $1.0 million of revenues generated from the Company's majority-owned domestic railroad company that was acquired in August 2007.

Expenses. Operating expenses were $42.7 million in 2007 compared to $26.4 in 2006. The following is a discussion of the major components of operating expenses:

Interest and fees on notes payable increased to $18.1 million in 2007 compared to $8.3 million in 2006. The average debt for the period increased to $212.9 million in 2007 from $100.3 million in 2006, and the average cost of borrowing increased to 8.5% in 2007 from 8.3% in 2006. The increase in the Company's debt level is a result of increased limits on existing credit facilities and the addition of a new loan facility the Company secured in 2007 to accommodate its growth and investment acquisitions.

Salaries and benefits increased to $13.3 million in 2007 from $11.4 million in 2006—primarily due to additional salaries and benefits of $1.6 million in 2007 attributed to ABL (new SBA lending program) and FirstCity Crestone (new special situations platform). Total personnel within the Portfolio Asset acquisition and resolution segment were 206 and 176 at December 31, 2007 and 2006, respectively.

Provisions for loan and impairment losses totaled $2.1 million in 2007 compared to $0.3 million in 2006. The increase in loan and impairment provisions from 2006 to 2007 is attributed to increased net provisions of $1.6 million to wholly-owned portfolios and $0.2 million of net provisions to SBA loans in 2007. See Notes 1(e), 1(f), 4 and 5 of the Consolidated Financial Statements for a detailed discussion on FirstCity's impairment evaluation processes.

Occupancy, data processing, property protection and other expenses increased to $9.2 million in 2007 from $6.5 million in 2006. The increase is attributed primarily to additional operating expenses of $1.0 million from ABL and FirstCity Crestone and additional asset-level costs (i.e. property protection costs) of $2.2 million related to the Company's wholly-owned portfolios in 2007.

Equity in earnings of investments. Equity in earnings of investments decreased slightly to $10.9 million in 2007 compared to $11.8 million in 2006. Equity in earnings of Acquisition Partnerships decreased to $9.5 million in 2007 from $10.9 million in 2006, while equity in earnings of servicing

entities increased to $1.4 million in 2007 from $0.8 million in 2006. The following is a discussion of equity in earnings from the Company's Acquisition Partnerships by geographic region. Refer to Note 6 of the Consolidated Financial Statements for a summary of revenues, earnings and equity in earnings of FirstCity's equity investments by region.

Gain on sale of subsidiaries and equity investments. Gain on sale of subsidiaries of $0.2 million was recorded in 2007, which consists of the sale of two Latin American subsidiaries. Gain on sale of equity investments of $2.5 million was recorded in 2006. This gain primarily consisted of the following: (1) sale of a domestic equity investment resulting in a gain of $1.3 million; and (2) 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) increased to $8.7 million in 2007 from $5.2 million in 2006, primarily due to increased legal and accountings costs of $2.6 million (including $2.2 million related to the Independent Investigation authorized by the audit committee) and director fees of $0.2 million incurred in 2007.

Income taxes. Provision for income taxes was $0.8 million in 2007 compared to $0.2 million in 2006, and taxes in both years related primarily to state income taxes. Refer to Note 11 of the Consolidated Financial Statements for a detailed description of the Company's income tax components.

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 in 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 $0.18 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 $0.6 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 $0.3 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 $21.6 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, property protection 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 $0.8 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 subsidiaries and 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 $0.5 million in 2005 to $0.7 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 $173,000 in 2006 compared to $292,000 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.

In 2007 the Company invested $126.7 million in Portfolios acquired through Acquisition Partnerships and subsidiaries. Acquisitions by the Company over the last five years are summarized as follows:

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, repurchase of the Company's Common Stock, 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.

In August 2007, FirstCity obtained an increase from $175.0 million to $225.0 million in its revolving credit facility with Bank of Scotland that matures in November 2010. The revolving loan facility 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. 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. The primary terms and key covenants of the $225.0 million revolving credit facility, as amended, are as follows:

In August 2007, FH Partners, LLC, an indirect wholly-owned affiliate of FirstCity, obtained an increase from $50.0 million to $100.0 million on its revolving loan facility with Bank of Scotland that provides financing for Portfolio and asset purchases by FH Partners, LLC. This revolving loan facility matures in November 2010, and is secured by all assets of FH Partners, LLC and a guaranty by FirstCity and certain of its wholly-owned subsidiaries. The primary terms and key covenants of the $100.0 million revolving loan facility, as amended, are as follows:

On September 5, 2007, FirstCity and BoS (USA), Inc. ("BoS (USA)") entered into a Subordinated Delayed Draw Credit Agreement (the "Subordinated Credit Agreement") which may be used to finance equity investments in new ventures, equity investments made in connection with portfolio and asset purchases and loans made by FirstCity and its subsidiaries to acquisition entities, provide for the issuance of letters of credit, and for working capital loans. The Subordinated Credit Agreement was effective as of November 16, 2007. The primary terms and key covenants of this $25.0 million loan facility are as follows:

The obligations of FirstCity under the Subordinated 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. The Subordinated Credit Agreement provides that any failure to make a payment or acceleration of debt under the revolving credit facility entered into between FirstCity and Bank of Scotland on November 12, 2004, is a default under the Subordinated Credit Agreement and provides for other events of default and other provisions that are customary for a facility of this type.

At December 31, 2007, the Company had $41.5 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 ($2.4) million for the year ended December 31, 2007, ($2.5) million for 2006, and $1.3 million for 2005.

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 of 148,096,800 Mexican pesos with Banco Santander, S.A., which was equivalent to $13.5 million U.S. dollars at December 31, 2007. 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, 2007, 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.

American Business Lending, Inc. ("ABL"), a subsidiary of FirstCity, has a $40.0 million revolving loan facility with Wells Fargo Foothill, LLC ("WFF"), as most recently amended on July 30, 2007, for the purpose of financing and acquiring SBA loans. The obligations under this facility are secured by substantially all of the assets of ABL. In connection with the first amendment to this facility on February 27, 2007, FirstCity provided WFF with an unconditional guaranty, up to a maximum of $5 million plus enforcement cost, of the obligations of ABL under the loan facility that relate to funds in the amount of $31.7 million advanced by WFF to ABL in connection of a portfolio of SBA loans in February 2007. This guaranty will remain in effect until the obligations incurred in connection with the advance related to the acquisition of the portfolio of SBA loans are paid in full. The primary terms and key covenants of the $40.0 million revolving loan facility, as amended, are as follows:

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.

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, 2007, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $408.8 million and outstanding borrowings of $177.3 million.

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, and 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.

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 AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3"). SOP 03-3 addresses accounting differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans acquired in a transfer if those difference are attributable, at least in part, to credit quality. SOP 03-3 requires impaired loans be recorded at fair value and prohibits "carrying over" or the creation of valuation allowances in the initial accounting of loans acquired in a transfer that are within the scope of SOP 03-3. Under SOP 03-3, the excess cash flows expected at purchase over the purchase price is recorded as interest income over the life of the loan.

For loan portfolios acquired prior to January 1, 2005, FirstCity designated such 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. The 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 income from 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.

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 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 net impairment provisions of $2,000 in 2007, $62,000 in 2006 and $132,000 in 2005.

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 recorded net impairment provisions of $1.4 million in 2007, $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 recorded net impairment provisions of $58,000 in 2007, $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 net impairment losses of $407,000, $28,000, and $49,000 in 2007, 2006 and 2005, respectively.

Loans receivable consist of loans made to affiliated entities (including Acquisition Partnerships) and non-affiliated entities, and purchased and originated SBA loans. The repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral (i.e. loan pools), and distributions made from affiliated entities. Interest is accrued when earned in accordance with the contractual terms of the loans. Loan origination fees and costs as well as premiums and discounts are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans.

The Company evaluates all loans receivable for impairment on regular basis by reviewing the collectibility of the loans in light of various factors, as applicable, such as estimated future cash receipts of the borrower or underlying collateral, historical experience, estimated value of underlying collateral, prevailing economic conditions, and industry concentrations. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired if it is probable that the Company will not ultimately collect all principal or interest amounts contractually due. Loans that experience insignificant payment shortfalls generally are not classified as impaired. When a loan is determined to be impaired, unpaid interest is reversed against interest income and the Company ceases to accrue interest on the note. When ultimate collectibility of the impaired note is in doubt, all cash receipts are generally applied to reduce the principal amount of such notes until the principal has been recovered, and are recognized as interest income thereafter. Impairment losses are charged against an allowance account through provisions charged to operations in the period impairment is identified. Loans are written-off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote.

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 2007, 2006 and 2005.

The Company has a net deferred tax asset of $20.1 million in the consolidated balance sheet as of December 31, 2007, which is composed of a gross deferred tax asset of $81.1 million net of a valuation allowance of $61.0 million. 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 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 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 no provisions in 2007, $75,000 in 2006 and $356,000 in 2005 for additional losses from discontinued mortgage operations. The 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, 2007. 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		$	301		$	301		$	—		$	—		$	—

In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141R, Business Combinations ("SFAS 141R") and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment to ARB No. 51 ("SFAS 160"). SFAS 141R and 160 require most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at "full fair value" and require non-controlling interests (previously referred to as "minority interests") to be reported as a component of equity, which changes the accounting for transactions with non-controlling interest holders. Both SFAS 141R and 160 are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141R will be applied to business combinations occurring after the effective date. SFAS 160 will be applied prospectively to all non-controlling interests, including any that arose before the effective date. The Company is currently evaluating the impact of adopting SFAS 141R and 160 on its financial condition and results of operations.

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's 2008 fiscal year. The Company is currently evaluating the impact the adoption of SFAS 159 could have on its financial condition, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). 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 enhances disclosures about fair value measurements. SFAS 157 does not require any new fair value measures. SFAS 157 is effective for the Company on January 1, 2008. SFAS 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In February 2008, the FASB decided to defer SFAS 157's fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The Company is currently evaluating the impact the adoption of SFAS 157 will have on its financial condition and results of operations.

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the financial statement recognition and disclosure requirements 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 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and derecognition of tax positions taken or expected to be taken in a tax return. Furthermore, FIN 48 provides related guidance on measurement, classification, interest and penalties, and disclosure. See Note 11 to the Consolidated Financial Statements for the impact of adopting FIN 48 on the Company's results of operations and financial position.

Effective January 1, 2007, the Company adopted 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. The Company elected to measure the servicing assets, subsequent to the date of sale, by using the amortization method which amortizes servicing assets in proportion to and over the period of estimated net servicing income and assesses servicing assets for impairment based on fair value at each reporting date. 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 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 periods 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.

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.

SBA loans receivable were $14.4 million at December 31, 2007, of which $0.1 million were related to the guaranteed portion of these loans. The guaranteed portion is backed by the full faith and credit of the U.S. Small Business Administration, and is generally sold into the secondary market. Virtually all of the SBA loans have variable interest rates. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate change in interest rates would have a minimal effect on interest income from SBA loans for 2007. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet, and other business developments that could affect a net increase (decrease) in assets. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate.

FirstCity had $177.3 million in debt outstanding at December 31, 2007. The Company is exposed to interest rate risk primarily through its variable rate debt, which totaled $146.0 million or 82% 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 $0.9 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 $225 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, 2007, the Company had $41.5 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 of 148,096,800 Mexican pesos. At December 31, 2007, the Company had 148,096,800 in Mexican peso-denominated debt, which was equivalent to $13.5 million U.S. dollars. 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.

			Estimated decline in valuation of investments resulting from incremental depreciation of foreign currency of (dollars in thousands)
		One U.S. dollar equals
		One U.S. dollar equals	5%		10%
Europe	EUR	0.68	$	2,104	$	4,027
Mexico	MXN	10.87	$	1,918	$	3,702
Argentina	ARS	3.15	$	61	$	119
Dominican Republic	DOP	33.75	$	19	$	36
Chile	CLP	497.70	$	159	$	303
Canada	CAD	0.98	$	18	$	35

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME

(Dollars in thousands)

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

FirstCity Financial Corporation (the "Company" or "FirstCity") is a financial services company with offices throughout the United States and Mexico, and a presence in France, Germany, Brazil, Argentina and Chile. FirstCity was formed on July 3, 1995 by the merger of J-Hawk Corporation and First City Bancorporation of Texas, Inc. (the "Merger").

At December 31, 2007, 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 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. Material estimates that are particularly susceptible to significant change in the near-term relate to 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; prepayment speeds and valuation of servicing assets; and valuation of loans receivable (including loans receivable held in securitization trusts). Actual results could differ materially from those estimates.

The accompanying consolidated financial statements include the accounts of FirstCity and all of its majority owned subsidiaries (collectively, the "Company"). In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46(R), Consolidation of Variable Interest Entities ("FIN 46R"), the Company also consolidates any variable interest entities ("VIE") of which it is the

primary beneficiary, as defined. Furthermore, the Company consolidates entities not deemed to be VIEs in which it holds, directly or indirectly, more than 50% of the voting interests or where it exercises control in accordance with ARB No. 51, Consolidated Financial Statements. 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 of accounting since the Company has the ability to exercise significant influence over the 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 of accounting and held at December 31, 2007:

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	%
CVI GVF (Lux) Securitisation S.a.r.l. acting in the name and on behalf of its Compartment, "Sprockhövel"	30.00	%
CVI GVF (Lux) Securitisation S.a.r.l. acting in the name and on behalf of its Compartment, "Marktheidenfeld"	30.00	%
CVI GVF (Lux) Securitisation S.a.r.l. acting in the name and on behalf of its Compartment, "Voreifel"	32.00	%
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. Developpement, SAS	45.75	%
First B Realty, LP	49.00	%
WAMCO XX, Ltd	49.00	%
WAMCO XXIV, Ltd	49.00	%
WAMCO 30, Ltd	49.47	%
FirstVal 1, Ltd	49.50	%
WAMCO 32, Ltd	49.50	%
FCS Creamer, Ltd	49.75	%
FCS Wildhorse, Ltd	49.75	%

FCS Wood, Ltd	49.75	%
Servicios Integrales de Cobranza SA	50.00	%
Calibat Fund, LLC	50.00	%
FCS Creamer GP Corp	50.00	%
FCS Wildhorse GP Corp	50.00	%
FCS Wood GP Corp	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 32 of Texas, Inc	50.00	%

Investments in less than 20% owned affiliates are also accounted for on the equity method of accounting. FirstCity has the ability to exercise significant influence over operating and financial policies of these entities, despite its comparatively smaller ownership 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 of accounting and held at December 31, 2007:

Affiliate	Percentage Ownership
TB 1 Private Financial Trust	2.09	%
WAMCO XXVII, Ltd	4.07	%
BMX Holding II, LLC	8.00	%
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. Developpement, 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.

For loan Portfolios acquired prior to January 1, 2005, FirstCity designated such 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 non-performing loans acquired after 2004 in accordance with SOP 03-3. The following is a description of each classification and the related accounting policy accorded to each Portfolio type:

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 income from 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.

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 operations with a corresponding write-off of the receivable balance. Consequently, no allowance for loan loss was recorded prior to January 1, 2005.

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.

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 loans acquired with credit deterioration 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.

Interest accrual ceases when payments become 90 days contractually past due. An allowance for loan losses is established when a loan becomes impaired through provisions charged to operations. 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.

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 of loans made to affiliated entities (including Acquisition Partnerships) and non-affiliated entities, and purchased and originated U.S. Small Business Administration ("SBA") loans. The repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral, and distributions made from affiliated entities. Interest is accrued when earned in accordance with the contractual terms of the loans. Loan origination fees and costs as well as premiums and discounts are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans.

Property and equipment are carried at cost, less accumulated depreciation, and are included in other assets. Depreciation is provided using the 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.

In connection with the Company's SBA lending activities, the Company recognizes servicing assets in a purchase or through the sale of originated or purchased loans when servicing rights are retained. Servicing assets are initially measured at fair value—purchased servicing assets are capitalized at the cost to acquire the rights; whereas servicing rights retained from SBA loan sales are capitalized at the origination cost allocated to the servicing rights based on relative fair value. The Company subsequently measures the servicing assets by using the amortization method, which amortizes servicing assets in proportion to, and over the period of, estimated net servicing income. The amortization of the servicing assets is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates. See Note 18 for more information on servicing rights related to SBA loans.

The Company does not recognize capitalized servicing rights related to its Portfolio Assets 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 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, and $359 in 2005.

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 2007, 2006 and 2005 follows (dollars in thousands):

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
	Aggregate adjustment for the year resulting from translation adjustments and gains and losses on certain hedge transactions		474

Balance, December 31, 2007		$	1,846

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 2007, 2006 and 2005 were $984, $935 and $848, respectively.

The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($2,365) for 2007, ($2,509) for 2006 and $1,348 for 2005.

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.

Beginning with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 ("FIN 48") as of January 1, 2007, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of FIN 48, the Company generally recognized the effect of income tax positions only if such positions were probably of being sustained.

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:

		Year ended December 31,
		2007		2006		2005
Earnings from continuing operations		$	2,185	$	9,877	$	8,078

Weighted average outstanding shares of common stock (in thousands)			10,786		11,125		11,285
Dilutive effect of:
	Warrants		322		335		342
	Employee stock options		284		299		385

Weighted average outstanding shares of common stock and common stock equivalents			11,392		11,759		12,012

Earnings from continuing operations per share:
	Basic	$	0.20	$	0.89	$	0.72

	Diluted	$	0.19	$	0.84	$	0.68

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 123R"), 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 123R requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for 2007 has been reduced for estimated forfeitures. When estimating forfeitures, FirstCity considers voluntary termination behaviors as well as trends of actual option forfeitures.

In February 2007, the FASB issued 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's 2008 fiscal year. The Company is currently evaluating the impact the adoption of SFAS 159 could have on its financial condition, results of operations and cash flows.

attribute for the financial statement recognition and derecognition of tax positions taken or expected to be taken in a tax return. Furthermore, FIN 48 provides related guidance on measurement, classification, interest and penalties, and disclosure. See Note 11 for the impact of adopting FIN 48 on the Company's results of operations and financial position.

On December 31, 2006, the Company adopted SEC 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 and it also addresses how to correct material misstatements. The Company's adoption of SAB 108 resulted in an adjustment to 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 periods 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.

Certain amounts in the consolidated financial statements for prior years have been reclassified to conform with the 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 net principal collections (advances) on loans receivable in cash flows from operating activities on the Consolidated Statements of Cash Flows. 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 generally accepted accounting principles. The total amount thus reclassified was $1.7 million for the year ended December 31, 2005. Management believes that the changes in the Consolidated Statement of Cash Flows for the year ended December 31, 2005 are not significant relative to the financial statements taken as a whole.

In all reporting prior to December 31, 2007, FirstCity reported payments of debt issuance costs and loan fees in cash flows from operating activities on the Consolidated Statements of Cash Flows. The Company is now reporting these items in cash flows from financing activities. Prior year amounts reported on the Consolidated Statements of Cash Flows have been adjusted to conform to this treatment which is required under generally accepted accounting principles. The total amount thus reclassified was $1.3 million for the year ended December 31, 2005 and $1.7 million for the year ended December 31, 2006. Management believes that the changes in the Consolidated Statement of Cash Flows for the years ended December 31, 2005 and 2006 are not significant relative to the financial statements taken as a whole.

		Year Ended December 31,
		2006			2005
Statement of Cash Flows:
	Cash flows from operating activities (as reported)	$	(65,030	)	$	(13,892	)
	Impact of reclassification on net principal collections (advances) on loans receivable		—			(1,717	)
	Impact of reclassification on payments of debt issuance costs and loan fees		1,723			1,357

	Cash flows from operating activities (as corrected)	$	(63,307	)	$	(14,252	)

	Cash flows from investing activities (as reported)	$	(19,623	)	$	(16,443	)
	Impact of reclassification on net principal collections (advances) on loans receivable		—			1,717

	Cash flows from investing activities (as corrected)	$	(19,623	)	$	(14,726	)

	Cash flows from financing activities (as reported)	$	90,244		$	40,661
	Impact of reclassification on payments of debt issuance costs and loan fees		(1,723	)		(1,357	)

	Cash flows from financing activities (as corrected)	$	88,521		$	39,304

Generally, 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 a transaction involving 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 $16.0 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; however, claims related to taxes and fraud are not subject to this $250 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; however, claims related to taxes and fraud are not subject to this $25 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.

FirstCity has a $225.0 million revolving acquisition facility with Bank of Scotland that matures in November 2010. The revolving loan facility 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. 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. The primary terms and key covenants of the $225.0 million revolving credit facility, as amended, are as follows:

FH Partners, LLC, an indirect wholly-owned affiliate of FirstCity, has a $100.0 million revolving loan facility with Bank of Scotland that provides financing for Portfolio and asset purchases by FH Partners, LLC. This revolving loan facility matures in November 2010, and is secured by all assets of FH Partners, LLC and a guaranty by FirstCity and certain of its wholly-owned subsidiaries. The primary terms and key covenants of the $100.0 million revolving loan facility, as amended, are as follows:

Effective November 2007, FirstCity and BoS (USA), Inc. ("BoS (USA)") entered into a Subordinated Delayed Draw Credit Agreement (the "Subordinated Credit Agreement") which may be used to finance equity investments in new ventures, equity investments made in connection with portfolio and asset purchases and loans made by FirstCity and its subsidiaries to acquisition entities, provide for the issuance of letters of credit, and for working capital loans. The obligations of FirstCity under the Subordinated 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. The Subordinated Credit Agreement provides that any failure to make a payment or acceleration of debt under the revolving credit facility entered into between FirstCity and Bank of Scotland on November 12, 2004, is a default under the Subordinated Credit Agreement and provides for other events of default and other provisions that are customary for a facility of this type. The primary terms and key covenants of this $25.0 million loan facility are as follows:

At December 31, 2007, the Company had $41.5 million in Euro-denominated debt with Bank of Scotland 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 ($2.4) million for the year ended December 31, 2007, ($2.5) million for 2006, and $1.3 million for 2005.

In November 2006, FirstCity Mexico SA de CV, a Mexican affiliate of FirstCity, entered into a revolving line of credit with a maximum loan amount of 148,096,800 Mexican pesos with Banco Santander, S.A., which was equivalent to $13.5 million U.S. dollars at December 31, 2007. 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, 2007, 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.

American Business Lending, Inc. ("ABL"), a subsidiary of FirstCity, has a $40.0 million revolving loan facility with Wells Fargo Foothill, LLC ("WFF"), as most recently amended in July 2007, for the purpose of financing and acquiring SBA loans. The obligations under this facility are secured by substantially all of the assets of ABL. In connection with this loan facility, FirstCity provided WFF with an unconditional guaranty, up to a maximum of $5 million plus enforcement cost, of the obligations of ABL under the loan facility that relate to funds in the amount of $31.7 million advanced by WFF to ABL in connection of a portfolio of SBA loans in February 2007. This guaranty remains in effect until the obligations incurred in connection with the advance related to the acquisition of the portfolio of SBA loans are paid in full. The primary terms and key covenants of the $40.0 million revolving loan facility, as amended, are as follows:

The security agreement executed by ABL to secure the obligations under its $40.0 million credit facility 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.

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 expires on August 31, 2010, if it is not exercised prior to that date.

of interests in equity investments, and 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, 2007, 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, 2007 only one investment security remained from discontinued mortgage operations. Discontinued mortgage assets of $133 at December 31, 2007 are included in other assets.

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 in 2006

and $356 in 2005 for additional losses from discontinued mortgage operations. No provisions for additional losses were recorded in 2007.

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 present 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, 2007 and 2006. The liabilities of such operations have been included in other liabilities on the consolidated balance sheets and consisted of state taxes payable as of December 31, 2007 and 2006 of $568 and $114, respectively.

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:

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, LLC and Bank of Scotland, which is guaranteed by FirstCity and the primary wholly-owned subsidiaries of FirstCity.

				December 31, 2007			December 31, 2006
Loan Portfolios
	Loans Acquired Prior to 2005
		Non-performing Portfolio Assets		$	4,177		$	6,163
		Performing Portfolio Assets			1,266			5,166
	Loans Acquired After 2004
		Loans acquired with credit deterioration			97,630			84,550
		Loans acquired with no credit deterioration			3,871			6,473

	Outstanding balance				106,944			102,352
		Allowance for loan losses			(1,723	)		(333	)

	Carrying amount of loans, net of allowance				105,221			102,019

Real Estate Portfolios					14,832			4,574
Other					1,948			2,103

			Portfolio Assets, net	$	122,001		$	108,696

				Year ended December 31,
				2007		2006		2005
Loan Portfolios
	Loans Acquired Prior to 2005
		Non-performing Portfolio Assets		$	1,780	$	2,962	$	4,407
		Performing Portfolio Assets			1,113		1,483		2,122
	Loans Acquired After 2004
		Loans acquired with credit deterioration			17,289		4,578		1,091
		Loans acquired with no credit deterioration			1,233		396		354
Real Estate Portfolios					1,108		1,325		197
Other					231		243		91

			Income from Portfolio Assets	$	22,754	$	10,987	$	8,262

During 2007, the Company recorded provisions for loan and impairment losses, net of recoveries, by a charge to income of $1,879—which is comprised of impairment charges on real estate portfolios of $407 and $1,472 to allowance for loan losses. During 2006, the Company recorded provisions for loan and impairment losses, net of recoveries, by a charge to income of $271—which is comprised of impairment charges on real estate portfolios of $28 and $243 to allowance for loan losses.

Changes in accretable yield at December 31, 2007 on loans acquired after 2004 with evidence of credit deterioration were as follows:

		Year ended December 31,
		2007			2006			2005
Beginning Balance		$	32,339		$	3,765		$	—
	Additions		26,327			33,210			6,101
	Accretion		(13,665	)		(4,025	)		(711	)
	Reclassification from (to) nonaccretable difference		(4,030	)		(109	)		(1,039	)
	Disposals		(5,102	)		(553	)		(586	)
	Translation adjustments		82			51			—

Ending Balance		$	35,951		$	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:

Loans receivable—affiliates, which are designated by management as held for investment, are summarized as follows:

Loans receivable—affiliates represent advances to Acquisition Partnerships and other affiliated entities to acquire portfolios of performing and nonperforming commercial and consumer loans and other assets. The loans are reported at their outstanding principal balances adjusted for net deferred loan origination and other capitalized costs and the allowance for loan losses. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loans receivable from affiliates are generally secured by the underlying collateral of the individual notes within the portfolios that were acquired with the loan proceeds, which is generally real estate and foreclosed properties. The 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 are 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. The Company recorded no provisions for impairment on loans receivable—affiliates in 2007, 2006 and 2005.

In August 2006, FirstCity completed a restructuring of its investments in Mexico in a transaction with American International Group, Inc. ("AIG"). As a result, FirstCity eliminated substantially all of its loans receivable approximately $21.3 million from its Mexico acquisition partnerships. Equity method losses were recorded to reduce the loans receivable from certain Mexican partnerships, 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, and EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses. Equity method losses were zero for 2007 and 2006, and $.1 million for 2005.

		Year ended December 31,
		2007			2006		2005
Beginning Balance		$	—		$	—	$	—
	Purchases of loans		18,355			—		—
	Originations and advances of loans		1,661			—		—
	Payments received		(1,655	)		—		—
	Loans sold		(17,276	)		—		—
	Premium amortization, net		(488	)		—		—
	Transferred to held for investment		(464	)		—		—

Ending Balance		$	133		$	—	$	—

Loans receivable—SBA held for sale represent SBA loans acquired by the Company in February 2007 (see Note 18) and SBA loan originations and advances made since such time. SBA loans held for sale represent the guaranteed portions of the loans, and are reflected at the lower of aggregate cost or estimated fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The carrying value of SBA loans held for sale is net of premiums as well as deferred origination fees and costs. Premiums and net origination fees and costs are deferred and included in the basis of the loans in calculating gains and losses upon sale. The Company generally sells the guaranteed portion of each loan to a third party and retains the servicing rights. The difference between the proceeds received and the allocated carrying value of the loans sold are recognized as net gains on sales of loans. The non-guaranteed portion is generally held in the portfolio and classified as held for investment. The Company recorded no write-downs of SBA loans held for sale below their cost in 2007.

		Year ended December 31,
		2007			2006		2005
Beginning Balance		$	—		$	—	$	—
	Purchases of loans		17,407			—		—
	Originations and advances of loans		554			—		—
	Payments received		(4,167	)		—		—
	Capitalized origination costs		4			—		—
	Provision for SBA loan losses		(151	)		—		—
	Discount accretion, net		155			—		—
	Charge offs		(32	)		—		—
	Transferred from held for sale		464			—		—

Ending Balance		$	14,234		$	—	$	—

Loans receivable—SBA held for investment represent SBA loans acquired by the Company in February 2007 (see Note 18) and SBA loan originations and advances made since such time. SBA loans held for investment are reported at their outstanding principal balances adjusted for unearned discounts, net deferred loan origination costs and the allowance for loan losses. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs as well as premiums and discounts are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. SBA loans held for investment are generally secured by the borrowing entities' assets such as accounts, property and equipment, and other assets. The loans are evaluated for impairment based upon performance of the loans and other portfolio characteristics, such as industry concentrations and loan collateral, which also impacts management's estimates of the impairment. The adequacy of the allowance for loan losses is reviewed by management on a regular basis and adjustments, if necessary, are reflected in operations during the periods in which they become known. Considerations in this evaluation include past and current loss experience, risks inherent in the current

portfolio, and evaluation of commercial and real estate collateral as well as current economic conditions.

Changes in the allowance for loan losses on loans receivable—SBA held for investment are as follows:

Loans receivable—other, which are designated by management as held for investment, are summarized as follows:

		Year ended December 31,
		2007			2006			2005
Beginning Balance		$	23,991		$	—		$	—
	Advances		9,246			18,298			—
	Payments received		(28,175	)		—			—
	Capitalized costs		518			—			—
	Other noncash adjustments		—			5,737			—
	Discount accretion, net		163			63			—
	Foreign exchange gains (losses)		252			(107	)		—

Ending Balance		$	5,995		$	23,991		$	—

Loans receivable—other include loans made to non-affiliated entities and are secured by the borrowing entities' assets such as accounts receivable, inventory, property and equipment, and other assets. Interest is accrued when earned in accordance with the contractual terms of the loans. The loans are reported at their outstanding principal balances adjusted for unearned discounts, loan origination fees, and the allowance for loan losses. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Management evaluates these loans for impairment by analyzing the expected future cash flows from the borrowing entity and the values of the underlying collateral to determine whether the Company expects to ultimately collect all contractual principal and interest. The results of this evaluation indicated that projected cash flows and underlying collateral are sufficient to repay the loans and no allowances for impairment were necessary. The Company recorded no provisions for impairment on loans receivable—other in 2007 and 2006.

The Company has investments in Acquisition Partnerships and their general partners that are accounted for under the equity method of accounting. 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:

			Year ended December 31,
			2007			2006			2005
Income from Portfolio Assets			$	96,475		$	86,732		$	82,320
Other income				1,103			2,171			899

	Revenues			97,578			88,903			83,219
Interest expense				11,413			13,624			15,063
	Average cost (annualized)			12.46	%		6.49	%		4.86	%
Service fees				21,185			18,225			19,390
Provision for loan and impairment losses				16,798			857			8,888
Other operating costs				20,250			17,573			24,802
Foreign currency (gains) losses				(689	)		10,502			(16,861	)
Income taxes				(1,837	)		5,217			471

	Expenses			67,120			65,998			51,753

		Net earnings	$	30,458		$	22,905		$	31,466

Equity in earnings of Acquisition Partnerships			$	9,542		$	10,927		$	11,370
Equity in earnings of servicing entities				1,402			829			643

			$	10,944		$	11,756		$	12,013

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,
			2007		2006
Assets:
	Domestic:
		WAMCO Partnerships	$	87,086	$	116,634
		Other		7,758		4,277
	Latin America			200,780		167,407
	Europe:
		P.R.L. Developpement, SAS		21,794		19,684
		Other		122,977		149,171

			$	440,395	$	457,173

Equity (deficit):
	Domestic:
		WAMCO Partnerships	$	44,309	$	69,579
		Other		4,237		2,676
	Latin America			168,108		126,402
	Europe:
		P.R.L. Developpement, SAS		19,728		13,797
		Other		62,583		143,746

			$	298,965	$	356,200

Equity investment in Acquisition Partnerships:
	Domestic:
		WAMCO Partnerships	$	22,065	$	34,203
		Other		2,064		1,691
	Latin America			21,555		18,640
	Europe:
		P.R.L. Developpement, SAS		9,085		6,002
		Other		21,309		45,316

			$	76,078	$	105,852

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,
			2007			2006			2005
Revenues:
	Domestic:
		WAMCO Partnerships	$	17,954		$	26,136		$	30,770
		Other		974			1,843			5,714
	Latin America			42,832			37,652			23,359
	Europe:
		P.R.L. Developpement, SAS		2,756			2,302			2,176
		Other		33,062			20,970			21,200

			$	97,578		$	88,903		$	83,219

Net earnings (loss):
	Domestic:
		WAMCO Partnerships	$	4,643		$	13,332		$	14,850
		Other		(19	)		493			4,501
	Latin America			7,029			(6,868	)		(3,687	)
	Europe:
		P.R.L. Developpement, SAS		4,071			3,612			2,832
		Other		14,734			12,336			12,970

			$	30,458		$	22,905		$	31,466

Equity in earnings (loss) of Acquisition
	Partnerships:
	Domestic:
		WAMCO Partnerships	$	2,343		$	6,431		$	6,403
		Other		(59	)		71			1,638
	Latin America			1,310			(189	)		(227	)
	Europe:
		P.R.L. Developpement, SAS		1,845			1,571			1,097
		Other		4,103			3,043			2,459

			$	9,542		$	10,927		$	11,370

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 ($2,365) for 2007, ($2,509) for 2006 and $1,348 for 2005.

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 Developpement, SAS, a French Acquisition Partnership, from 33.50% to 43.50%. P.R.L. Developpement, SAS ("PRL") 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 20.87%. 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 $0.3 million and an increase in additional paid-in capital.

			December 31,
			2007		2006
Notes payable—other:
	Senior Credit Facility, secured and with recourse to the Company:
		US Dollar denominated—LIBOR-indexed (4.865% at December 31, 2007) plus 2.0% to 2.5%, due November 2010	$	31,260	$	55,905
		US Dollar denominated—fixed rate at 7.86%, due November 2010		30,000		—
		Eurocurrency denominated—LIBOR-indexed (4.437% at December 31, 2007) plus 2.0% to 2.5%, due November 2010		41,510		48,335
		Prime (8.25% at December 31, 2007) plus .5%, due November 2010		—		10,035
	Subordinated Credit Facility of $25 million, secured and with recourse to the Company—option of LIBOR plus 5%, or prime plus 3%, or fixed rate, due November 2010			—		—
	Acquisition facility secured by assets of FH Partners, LLC and guaranteed by the Company, LIBOR-indexed (5.1025% at December 31, 2007) plus 2.00%, due November 2010			48,199		50,000
	Term loan secured by assets of FC Washington, L.P. and guaranteed by the Company, fixed rate at 5.625%, due 2008			1,337		2,580
	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			13,544		13,408
	Revolving loan facility secured by assets of American Business Lending, Inc., LIBOR plus 2.625% (7.225% at December 31, 2007), or the greater of Wells Fargo prime or 7.5%, due December 2009			7,594		—
	Term loan secured by assets of MPortfolio Corporation, LIBOR-indexed (4.9962% at December 31, 2007), plus 1.75%, due June 2010			3,100		—
	Other: Secured borrowing			785		1,030

Total notes payable—other			$	177,329	$	187,811

Refer to Note 2 for a description of terms related to the Company's Senior Credit Facility at December 31, 2007 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, 2007, the Company was in compliance with the aforementioned covenants. The aggregate maturities of Notes payable for the five years ending December 31, 2012 are as follows: $14,934 in 2008, $8,242 in 2009, $154,071 in 2010, $3 in 2011, $3 in 2012, and $76 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,
				2007			2006			2005
Portfolio Asset Acquisition and Resolution:
	Revenues:
		Servicing fees		$	10,390		$	12,906		$	11,754
		Income from Portfolio Assets			22,754			10,987			8,262
		Gain on sale of SBA loans held for sale, net			723			—			—
		Interest income from SBA loans			2,140			—			—
		Interest income from affiliates			560			1,498			1,838
		Interest income from loans receivable—other			3,822			576			—
		Other income			2,828			1,555			1,737

			Total		43,217			27,522			23,591

	Expenses:
		Interest and fees on notes payable			18,060			8,311			4,002
		Salaries and benefits			13,324			11,428			12,065
		Provision for loan and impairment losses			2,061			271			212
		Occupancy, data processing, property protection and other			9,221			6,529			5,284
		Minority interest			(1	)		(97	)		53

			Total		42,665			26,442			21,616

	Equity in earnings of investments				10,944			11,756			12,013
	Gain on sale of subsidiaries and equity investments				207			2,459			—

	Operating contribution before direct taxes			$	11,703		$	15,295		$	13,988

	Operating contribution, net of direct taxes			$	11,432		$	15,104		$	13,780
Corporate Overhead:
	Salaries and benefits, occupancy, professional and other income and expenses, net				9,247			5,227			5,702

	Earnings from continuing operations			$	2,185		$	9,877		$	8,078

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:

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

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, 2007, there have been no securities issued under this registration statement.

In connection with the recapitalization discussed in Note 2, 400,000 shares of the Company's 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 the Company's 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 1,000,000 shares of the Company's Common Stock, with purchases to be made over a period of twelve months. In 2007 and 2006, FirstCity repurchased 50,200 and 530,300 shares, respectively, of the Company's Common Stock on the open market for a total of $407 and $5.6 million, respectively. On February 6, 2008, the Board of Directors amended the stock repurchase plan to provide for the repurchase of an additional 500,000 shares (up to a total of 1,500,000 shares) and the plan was extended to August 30, 2009. Subsequent to December 31, 2007, the Company repurchased an additional 264,530 shares of its Common Stock on the open market for $2.1 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 123R 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 123R requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for 2007 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 2007, 2006 and 2005 was as follows:

SFAS 123R 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 2007, 2006 and 2005 was $35, $68 and $196, 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 its unvested options by taking the average of the vesting term remaining and the contractual term of the option ("simplified method"), as illustrated in SEC Staff Accounting Bulletin No. 107. The Company uses the simplified method of estimating the expected term of the share options since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to limited instances of key employees

and directors exercising their options. 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 2007, 2006 and 2005.

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
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
Granted	181,500			9.50
Exercised	(10,000	)		3.48
Expired	(37,950	)		27.25
Forfeited	(33,500	)		9.66

Outstanding at December 31, 2007	879,150		$	6.67	6.09	$	4,083

Exercisable at December 31, 2005	502,325		$	6.20

Exercisable at December 31, 2006	582,363		$	6.51

Exercisable at December 31, 2007	638,200		$	5.61	5.09	$	3,668

The total intrinsic value of stock options exercised during 2007, 2006 and 2005 was $56, $36 and $377, respectively. As of December 31, 2007, there was approximately $1.4 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 2.3 years.

A summary of the status and changes of FirstCity's nonvested shares as of December 31, 2007, and changes during 2007 is presented below:

Prior to the adoption of SFAS 123R, 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 123R was not reflected in the results of operations for 2005 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
Net earnings to common stockholders, as reported		$	8,231
	Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(666	)

Pro forma net earnings to common stockholders		$	7,565

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

Basic—pro forma		$	0.67

Diluted—as reported		$	0.69

Diluted—pro forma		$	0.63

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:

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2007 and 2006 are as follows:

			December 31,
			2007			2006
Deferred tax assets (liabilities):
	Investments in Acquisition Partnerships, principally due to differences in basis for tax and financial reporting purposes		$	3,732		$	(347	)
	Intangibles, principally due to differences in amortization			326			281
	Tax basis in fixed assets less than book			(16	)		(76	)
	Foreign non-repatriated earnings			(3,028	)		(2,398	)
	Other			2,090			(9,010	)
	Federal net operating loss carryforwards			78,028			130,528

		Net gross deferred tax assets		81,132			118,978
	Valuation allowance			(61,031	)		(98,877	)

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

The Company has net operating loss carryforwards for federal income tax purposes of approximately $544 million from continuing operations and $9 million from discontinued operations at December 31, 2007, less expired net operating losses of $321 million—leaving $232 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 2007, 2006 and 2005, the Company adjusted the previously established valuation allowance by $37.8 million, $65.6 million and $16.3 million, respectively. The adjustments in 2007 and 2006 to the valuation allowance included decreases of $36.8 million and $62.1 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 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 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 ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

On October 1, 2007 the Entrepreneurial Tax of Unique Rate (referred to by its Spanish acronym, IETU or "Flat Tax") in Mexico was published. The Flat Tax law was effective on January 1, 2008 and replaces the existing asset-based tax. The Flat Tax applies to a different tax base than the income tax and will be paid if the Flat Tax exceeds the income tax computed under existing law. In accordance with SFAS 109, Accounting for Income Taxes, the effects of the Flat Tax should be reflected in the consolidated financial statements. The Flat Tax has no impact on the Company's deferred tax assets recognized as of December 31, 2007.

The Company adopted the provisions of FIN 48 on January 1, 2007. Under FIN 48, income tax benefits are recognized and measured based upon a two-step model: (1) a tax position must be more-likely-than-not to be sustained based solely on its technical merits in order to be recognized; and (2) the benefit is measured as the largest dollar amount of that position that is more-likely-than-not to be sustained upon settlement. The difference between the benefit recognized for a position in accordance with this FIN 48 model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit ("UTB").

The gross amount of unrecognized tax benefits on uncertain tax positions as of December 31, 2007 totaled $579, which if recognized, would impact the Company's effective income tax rate. A reconciliation of unrecognized tax benefits for 2007 follows:

As of December 31, 2007, management is not aware of any tax positions for which it was reasonably possible that a change in the amount of unrecognized tax benefits during the next twelve months would significantly impact the Company's effective income tax rate. Interest and penalties related to income tax uncertainties of $167 are included in the provision for income taxes and income taxes payable.

The Internal Revenue Service is currently in the process of examining FirstCity's federal income tax return for 2004. In addition, FirstCity currently files tax returns in approximately 35 states and is currently being examined in four states for the year 2004. Tax year 1992 and subsequent years are open to federal examination, and tax year 2003 and subsequent years are open to state examination.

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 $149 in 2007, $138 in 2006 and $134 in 2005.

The Company leases its current headquarters under a noncancellable operating lease. The lease calls for monthly payments of $12 through its expiration in December 2011. Rental expense under this lease was $144 for 2007, and $122 for 2006 and $120 for 2005. The Company also leases office space and equipment under operating leases expiring in various years prior to 2015. Rental expense under these leases for 2007, 2006 and 2005 was $704, $588 and $545, respectively. As of December 31, 2007, the future minimum lease payments under all noncancellable operating leases are: $620 in 2008, $472 in 2009, $405 in 2010, $384 in 2011, $240 in 2012, and $441 thereafter.

FirstCity has financing and service arrangements with certain Acquisition Partnerships and financing arrangements with non-affiliated entities that are considered to be variable interest entities ("VIEs"). However, FirstCity is not determined to be the primary beneficiary of these entities. The Company could experience a loss in the event that cash flows from the VIEs or the underlying

collateral are not collected as expected. At December 31, 2007, the Company's maximum exposure to loss as a result of its involvement with the VIEs is $35.3 million.

The Company has contracted with the Acquisition Partnerships and related parties as a third party loan servicer. Servicing fees totaling $9.7 million, $12.6 million and $11.5 million, for 2007, 2006 and 2005, respectively, and due diligence fees (included in other income) were derived from such affiliates.

FirstCity Servicing Corporation and MCS, in which FirstCity Servicing Corporation is an 11.89% shareholder as of December 31, 2007, 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 $443, $344 and $364 in 2007, 2006 and 2005, respectively, from MCS as fees included in other income.

In February 2007, the Company, through its majority-owned subsidiary ABL, acquired a portfolio of SBA loans and servicing assets from Prosperity Bank for $36.8 million. FirstCity Directors, Robert E. Garrison II and D. Michael Hunter also serve as Directors of Prosperity Bank.

In April 2007, FirstCity 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 its 80% investment in FirstCity Denver Investment Corp. The other 20% interest in FirstCity Denver Investment Corp. is owned by Crestone Capital LLC, a Colorado limited liability company that is owned by Richard W. Horrigan and Stephen C. Schmeltekopf. Mr. Horrigan, President of FirstCity Denver Investment Corp., and Mr. Schmeltekopf, Senior Vice President of FirstCity Denver Investment Corp., are employees of FirstCity Denver Investment Corp. and have employment contracts with FirstCity Denver Investment Corp. Stephen Schmeltekopf is the brother of Andrew Schmeltekopf, Senior Vice President of FirstCity Servicing.

FirstCity and certain of its subsidiaries and affiliates (including Acquisition Partnerships) are involved in various claims and legal proceedings arising in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of pending legal actions and proceedings, the Company cannot state with any certainty the eventual outcome of any such proceedings. Based on current knowledge, management does not believe that liabilities, if any, arising from any single ordinary course proceeding will have a material adverse effect on the consolidated financial condition, operations, results of operations or liquidity of the Company.

to state additional claims for negligent misrepresentation, tortious interference with property rights, fraud in the inducement, duress, lack of consideration, unconscionability, estoppel and waiver. Since these additional parties and claims were not addressed by the summary judgment motions, the hearings were postponed. On or about December 14, 2007, Plaintiffs filed their fourth amended petition, which added the claim that the general release is invalid for lack of mutuality of obligation and for failure to meet the express negligence test. One deposition has been taken and Plaintiffs have engaged in written discovery with Prosperity Bank and sent written discovery to FH Partners and FirstCity Servicing Corporation, but have suspended the deadlines to respond while the parties are discussing settlement. FirstCity does not have sufficient information to estimate any potential liability or probability of liability, but is unaware of any factual or legal basis for liability. If a settlement is not reached, FirstCity intends to contest the case vigorously.

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.

On September 21, 2004, FirstCity, FirstCity Consumer Corporation ("Consumer Corp."), FirstCity Funding LP ("Funding LP") and FirstCity Funding GP ("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 $0.25 million, and then only for the amount in excess of $0.25 million in the aggregate; however certain representations and warranties are not subject to this $0.25 million 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 Strategic Mexican Investment Partners, L.P. ("SMIP"), an affiliate of the Company and Cargill Financial Services International, Inc. ("CFSI"), (collectively, the "Sellers"), as seller, and eleven U.S. limited liability companies ("LLCs") which invested in Mexican portfolio acquisition entities ("SRLs") 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 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 $0.25 million; however, claims related to taxes and fraud are not subject to this $0.25 million 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.

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 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; however, claims related to taxes and fraud are not subject to this $25 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. 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.

Financial Security Assurance Inc. ("FSA"), in its capacity as certificate insurer under 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, 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 $0.5 million from the Bank of Scotland. Pursuant to the agreement with FSA, FC Capital Corp. will have the option to purchase the loans for $0.5 million prior to a call under the letter of credit.

On November 5, 2007, Fondo de Inversion Privado NPL Fund One ("PIF1"), an equity investment of FirstCity Chile, Ltda., entered into a revolving line of credit with a maximum loan amount of $15.0 million with Banco Santander Chile, S.A. The proceeds were used to acquire a loan portfolio at face value from FirstCity NPL S.A. (a consolidated affiliate of FirstCity Chile, Ltda.) and to finance the purchase of other loan portfolios from non-affiliated parties. Pursuant to terms of the credit facility, FirstCity was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the maximum loan balance upon demand. At December 31, 2007, FirstCity had a letter of credit in the amount of $15.0 million from Bank of Scotland under the terms of FirstCity's revolving acquisition facility with Bank of Scotland, with Banco Santander Chile, S.A. as the letter of credit beneficiary. In the event that a demand is made under the $15.0 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 $13.5 million 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, 2007, 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.

ABL, a subsidiary of FirstCity, has a $40.0 million revolving loan facility with Wells Fargo Foothill, LLC ("WFF"), as most recently amended on July 30, 2007, for the purpose of financing and acquiring SBA loans. The obligations under this facility are secured by substantially all of the assets of ABL. At December 31, 2007, the balance of this facility was $7.6 million. In connection with the first amendment to this facility on February 27, 2007, FirstCity provided WFF with an unconditional guaranty, up to a maximum of $5 million plus enforcement cost, of the obligations of ABL under the loan facility that relate to funds in the amount of $31.7 advanced by WFF to ABL in connection of a portfolio of SBA loans in February 2007. This guaranty will remain in effect until the obligations incurred in connection with the advance related to the acquisition of the portfolio of SBA loans are paid in full.

FirstCity has minority interests in various limited-life partnerships with a net carrying value of ($271) at December 31, 2007. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at December 31, 2007 is $1.3 million.

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of its financial instruments. The fair value estimates as of December 31, 2007 and 2006 were based on pertinent information that was available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented.

The following describes the methods and assumptions used by the Company in estimating fair values.

The carrying amount of cash and cash equivalents approximated fair value at December 31, 2007 and 2006.

The Portfolio Assets and loans receivable are carried at the lower of cost or estimated fair value. Estimated fair values of Portfolio Assets and fixed-rate loans receivable are 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. For variable-rate loans receivable that generally re-price when market rates change and with no significant change in credit risk, fair values are based on carrying values. The carrying values of Portfolio Assets and loans receivable was $147.8 million and $137.4 million, respectively, at December 31, 2007 and 2006. The estimated fair values of Portfolio Assets and loans receivable was approximately $164.1 million and $149.6 million, respectively, at December 31, 2007 and 2006.

The Company relies primarily on a combination of a discounted cash flow model of future net servicing income and analysis of current market data to estimate the fair value of its servicing assets. The key assumptions used to calculate estimated fair value of the servicing assets include prepayment speeds and a market discount rate. The fair value estimate excludes the value of the servicing rights for loans sold in which the servicing rights have not been capitalized.

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 $0.2 million and $0.1 million at December 31, 2007 and 2006, respectively.

Management believes that the repayment terms for similar rate financial instruments with similar credit risks and the stated interest rates at December 31, 2007 and 2006 approximate the market terms for similar credit instruments. Accordingly, the carrying amount of notes payable is believed to approximate fair value.

In August 2007, the Company acquired through one of its consolidated subsidiaries 100% of the ownership interests of East Penn Railroad LLC ("East Penn") for $5.9 million in cash. East Penn owns and operates a short line freight railroad in the Northeastern United States. The acquisition has been accounted for as a purchase business combination. The results of East Penn's operations since the acquisition date have been included in the consolidated financial statements. The following table summarizes the calculation of estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

At December 31, 2007, the Company's consolidated balance sheet includes $8.2 million of property, equipment and other assets in "Other assets, net" and $2.5 million of deferred grant income and other liabilities in "Other liabilities" related to East Penn's accounts.

In February 2007, the Company, through its subsidiary American Business Lending, Inc. ("ABL"), acquired a portfolio of SBA loans for $36.8 million. Included in the purchase price were the rights to

service additional loans with an unpaid balance of $33.8 million. The Company recorded a servicing asset of $758 relating to these servicing rights. Additional servicing rights have been capitalized since the portfolio acquisition as a result of loans sold. Servicing rights are recognized as assets when the SBA loans are sold and the rights to service those loans are retained. The Company retains servicing responsibilities and receives servicing fees of approximately 1%.

Servicing assets are initially measured at fair value at the date of sale. Subsequent to the sale, the Company accounts for servicing assets by using the amortization method, which amortizes servicing assets in proportion to and over the period of estimated net servicing income. The Company periodically evaluates the possible impairment of servicing assets based on the difference between the carrying amount and current fair value of the servicing assets.

		Year ended December 31,
		2007			2006		2005
Beginning Balance		$	—		$	—	$	—
	Servicing Assets capitalized		1,058			—		—
	Servicing Assets amortized		(173	)		—		—

Ending Balance		$	885		$	—	$	—

Reserve for impairment of servicing assets:
Beginning Balance		$	—		$	—	$	—
	Impairments		(93	)		—		—
	Recoveries		51			—		—
	Charge Offs		—			—		—

Ending Balance		$	(42	)	$	—	$	—

Ending Balance (net of reserve)		$	843		$	—	$	—

Fair value of amortized servicing assets:
	Beginning balance	$	—		$	—	$	—
	Ending balance	$	843		$	—	$	—

The Company relies primarily on a discounted cash flow model to estimate the fair value of its servicing assets. The model calculates estimated fair value of the servicing assets using predominant risk characteristics of servicing assets such as discount rate, prepayment speed, weighted average life of the loans sold and the interest rate. The estimated fair value of servicing assets was determined using discount rates ranging from 9.75% to 11.19%, prepayment speeds of 15%, and weighted average lives ranging from 75 to 299 months. In the event future prepayments are significant or impairments are incurred and future expected cash flows are inadequate to cover the unamortized servicing assets, additional amortization or impairment charges would be recognized.

The following are summarized quarterly financial data for the years ended December 31, 2007 and 2006:

We have audited the accompanying consolidated balance sheets of FirstCity Financial Corporation and subsidiaries as of December 31, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in note 1 to the consolidated financial statements, as of January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, and the provisions of Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. 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), FirstCity Financial Corporation's internal control over financial reporting as of December 31, 2007, 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 March 17, 2008, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

We have audited FirstCity Financial Corporation's internal control over financial reporting as of December 31, 2007, 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 included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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 FirstCity Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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 subsidiaries as of December 31, 2007 and 2006, 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, 2007, and our report dated March 17, 2008, expressed an unqualified opinion on those consolidated financial statements.

WAMCO PARTNERSHIPS

COMBINED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(With Report of Independent Registered Public Accounting Firm)

We have audited the accompanying combined balance sheets of the WAMCO Partnerships as of December 31, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in note 2 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, 2007, 2006 and 2005

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

Years Ended December 31, 2007, 2006 and 2005

WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2007, 2006 and 2005

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 30 is considered to be a significant subsidiary of FirstCity. The WAMCO 30 partnership recorded initial activity during 2002.

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.

In 2005, 2006 and 2007, several WAMCO Partnerships merged with and into other existing WAMCO Partnerships under common ownership. The results of these mergers did not affect the ownership structure and did not significantly impact the Partnerships' combined financial condition and results of operations. Refer to Note 7 for a description of the mergers.

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 AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3"). SOP 03-3 addresses accounting differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans acquired in a transfer if those difference are attributable, at least in part, to credit quality. SOP 03-3 requires impaired loans be recorded at fair value and prohibits "carrying over" or the creation of valuation allowances in the initial accounting of loans acquired in a transfer that are within the scope of SOP 03-3. Under SOP 03-3, the excess cash flows expected at purchase over the purchase price is recorded as interest income over the life of the loan.

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 unless a majority of all of the loans in the Portfolio was being repaid in accordance with the contractual terms of the underlying loan agreements at date of acquisition. Such Portfolios were acquired on the basis of an evaluation by the Partnerships of the timing and amount of cash flow expected to be derived from borrower payments or other resolution of the underlying collateral securing the loan.

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. Net impairment provisions recorded on non-performing Portfolio Assets were $500, $1,221, and $307 for 2007, 2006 and 2005, respectively.

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

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. Net impairment provisions recorded on performing Portfolio Assets were $749, $83, and $654 for 2007, 2006 and 2005, respectively.

Management's best estimate of the Portfolio's internal rate of return ("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 operations with a corresponding write-off of the receivable balance. Consequently, no allowance for loan loss was recorded prior to January 1, 2005.

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 net impairment provisions of $3,478 in 2007, $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.

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 net impairment losses on real estate of $156, $103, and $0 as of December 31, 2007, 2006 and 2005, 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. Material estimates that are particularly susceptible to significant change in the near-term relate to the estimation of future collections on Portfolio Assets used in the calculation of income from Portfolio Assets and estimation of interest rate environments. Actual results could differ from those estimates.

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.

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.

On December 31, 2006, the Partnerships adopted SEC 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 and it also addresses how to correct material misstatements. The Partnerships adoption of SAB 108 resulted in an adjustment to 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 30 is considered to be a significant subsidiary of FirstCity. The WAMCO 30 partnership recorded initial activity during 2002. The following tables summarize the combining balance sheets of the WAMCO Partnerships as of December 31, 2007 and 2006, 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, 2007.

		WAMCO 30		Other Partnerships		Combined
ASSETS
Cash		$	4,976	$	970	$	5,946
Portfolio Assets, net			39,720		40,605		80,325
Other assets, net			757		58		815

		$	45,453	$	41,633	$	87,086

LIABILITIES AND PARTNERS' CAPITAL
Notes payable			35,925	$	4,600	$	40,525
Other liabilities			1,998		254		2,252

	Total liabilities		37,923		4,854		42,777
Partners' capital			7,530		36,779		44,309

		$	45,453	$	41,633	$	87,086

Other liabilities owed to affiliates included in above balances		$	1,458	$	23	$	1,481

		WAMCO 30		Other Partnerships			Combined
ASSETS
Cash		$	6,497	$	1,512		$	8,009
Portfolio Assets, net			80,126		28,089			108,215
Other assets, net			337		73			410

		$	86,960	$	29,674		$	116,634

LIABILITIES AND PARTNERS' CAPITAL
Notes payable			36,523	$	7,616			44,139
Other liabilities			2,798		118			2,916

	Total liabilities		39,321		7,734			47,055
Partners' capital			47,639		21,940			69,579

		$	86,960	$	29,674		$	116,634

Other liabilities owed to affiliates included in above balances		$	1,805	$	(6	)	$	1,799

		WAMCO 30			Other Partnerships			Combined
Income from Portfolio Assets		$	12,505		$	5,259		$	17,764
Other income, net			184			6			190

Revenues			12,689			5,265			17,954

Interest and fees expense—other			(2,328	)		(454	)		(2,782	)
Provision for loan and impairment losses			(2,370	)		(2,513	)		(4,883	)
Service fees—affiliate			(1,639	)		(675	)		(2,314	)
General, administrative and operating expenses			(2,520	)		(812	)		(3,332	)

Expenses			(8,857	)		(4,454	)		(13,311	)

	Net earnings	$	3,832		$	811		$	4,643

		WAMCO 30			Other Partnerships			Combined
Income from Portfolio Assets		$	18,054		$	6,523		$	24,577
Other income, net			264			1,295			1,559

Revenues			18,318			7,818			26,136

Interest and fees expense—affiliate			(38	)		(429	)		(467	)
Interest and fees expense—other			(3,215	)		(194	)		(3,409	)
Provision for loan and impairment losses			(470	)		(1,333	)		(1,803	)
Service fees—affiliate			(2,902	)		(757	)		(3,659	)
General, administrative and operating expenses			(1,553	)		(1,913	)		(3,466	)

Expenses			(8,178	)		(4,626	)		(12,804	)

	Net earnings	$	10,140		$	3,192		$	13,332

Combining Statements of Changes in Partners' Capital
Years Ended December 31, 2007, 2006 and 2005

				December 31, 2007
				WAMCO 30			Other Partnerships			Combined
Loan Portfolios
	Loans Acquired Prior to 2005
		Non-performing Portfolio Assets		$	11,707		$	1,515		$	13,222
		Performing Portfolio Assets			7,593			8,225			15,818
	Loans Acquired After 2004
		Loans acquired with credit deterioration			22,484			30,184			52,668
		Loans acquired with no credit deterioration			300			—			300

	Outstanding balance				42,084			39,924			82,008
		Allowance for loan losses			(3,433	)		(2,207	)		(5,640	)

	Carrying amount of loans, net of allowance				38,651			37,717			76,368

Real Estate Portfolios, net of allowance					1,069			2,888			3,957

			Portfolio Assets, net	$	39,720		$	40,605		$	80,325

				December 31, 2006
				WAMCO 30			Other Partnerships			Combined
Loan Portfolios
	Loans Acquired Prior to 2005
		Non-performing Portfolio Assets		$	19,311		$	3,074		$	22,385
		Performing Portfolio Assets			11,096			10,723			21,819
	Loans Acquired After 2004
		Loans acquired with credit deterioration			49,126			10,949			60,075
		Loans acquired with no credit deterioration			1,765			—			1,765

	Outstanding balance				81,298			24,746			106,044
		Allowance for loan losses			(1,172	)		(326	)		(1,498	)

	Carrying amount of loans, net of allowance				80,126			24,420			104,546

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

			Portfolio Assets, net	$	80,126		$	28,089		$	108,215

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. 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 and $4,088 was recognized during 2006 and 2005, 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 and $4,365 in deferred profit sharing and commissions in 2006, and 2005, respectively.

In November 2007, $20.9 million of notes payable from WAMCO 30, WAMCO 31 and WAMCO 34 were renewed into a new note payable with WAMCO 30 in connection with a merger involving these entities. Refer to Note 7 for a description of the merger.

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, 2007, 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, 2007 and 2006, approximately $372 and $382, 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 $2,314, $3,659, and $3,391 are reported on the accompanying combined statements of operations in 2007, 2006 and 2005, respectively.

In November 2007, WAMCO 31, WAMCO 33, WAMCO 34, and WAMCO 35 merged with and into WAMCO 30 with WAMCO 30 being the surviving entity. In connection with the merger, WAMCO 30 entered into a $38.5 million note payable and used $21.0 million of the loan proceeds to pay-off then-existing notes payable ($20.9 million principal and $0.1 million interest) for WAMCO 30, WAMCO 31 and WAMCO 34. WAMCO 33 and WAMCO 35 did not have any notes payable outstanding at the time of the merger.

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.

During 2005, WAMCO III merged 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.

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of its financial instruments. The fair value estimates as of December 31, 2007 and 2006 were based on pertinent information that was available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented.

The following describes the methods and assumptions used by the Company in estimating fair values.

The carrying amount of cash and other liabilities approximates fair value at December 31, 2007 and 2006 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 $80,325 and $108,215 at December 31, 2007 and 2006, respectively. The estimated fair value of the Portfolio Assets was approximately $82,985 and $119,952 at December 31, 2007 and 2006, respectively.

Management believes that for similar financial instruments with comparable credit risks, the stated interest rates at December 31, 2007 and 2006 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.

WAMCO XXVIII was involved with an interest rate swap contract that matured in December 2005. WAMCO XXVII entered into the swap contract in 2001 in order to manage a portion of the interest rate risk associated with its long-term debt. Under the swap agreement, WAMCO XXVIII paid fixed and floating-rate interest and received floating-rate interest at specified periodic intervals based on an agreed upon notional amount. Income or expense associated with these periodic payments was recorded on an accrual basis. WAMCO XXVIII recorded $133 of net swap expense associated with these periodic payments for the year ended December 31, 2005. Net swap expense is included in interest and fees expense—affiliate in the accompanying combined statements of operations.

WAMCO XXVIII did not meet 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, change in fair value of the interest rate swap was reported in general, administrative and operating expenses and was $129 during 2005.

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.

KPMG LLP, the Company's independent registered public accounting firm, has audited our consolidated financial statements included with this report and has audited our internal control over financial reporting as of December 31, 2007. The report of KPMG LLP, which expresses an unqualified opinion on our internal control over financial reporting, is included in Part II, Item 8 of this Annual Report on Form 10-K.

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, 2007.

WAMCO 30, Ltd. and P.R.L. Developpement, SAS ("PRL") are considered to be significant subsidiaries of the Company under SEC Rule 3-09 under Regulation S-X ("Rule 3-09"). Rule 3-09 requires the Company to file separate company financial statements for its significant subsidiaries that are not consolidated with the Company's accounts. As such, separate company financial statements of WAMCO 30, Ltd. are presented in the WAMCO Partnerships combined financial statements as of December 31, 2007, 2006 and 2005 that are included in the Company's 2007 Annual Report—Financial Statements and Analysis. However, separate company financial statements for PRL are not included in this Annual Report. In accordance with Rule 3-09 for foreign equity method investments, Company management expects to file by amendment to this Annual Report any required financial statements with respect to PRL on or before June 30, 2008.

The information required by Item 10 of Form 10-K is hereby incorporated by reference from the earlier filed of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2008 Annual Meeting of Stockholders, which will be filed within 120 days after the Company's year end for the year covered by this report.

The information required by Item 11 of Form 10-K is hereby incorporated by reference from the earlier filed of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2008 Annual Meeting of Stockholders, which will be filed within 120 days after the Company's year end for the year covered by this report.

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

The information required by Item 12 of Form 10-K is hereby incorporated by reference from the earlier filed of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2008 Annual Meeting of Stockholders, which will be filed within 120 days after the Company's year end for the year covered by this report.

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

The information required by Item 13 of Form 10-K is hereby incorporated by reference from the earlier filed of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2008 Annual Meeting of Stockholders, which will be filed within 120 days after the Company's year end for the year covered by this report.

The information required by Item 14 of Form 10-K is hereby incorporated by reference from the earlier filed of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2008 Annual Meeting of Stockholders, which will be filed within 120 days after the Company's year end for the year covered by this report.

The consolidated financial statements of FirstCity and the combined financial statements of the WAMCO Partnerships (Acquisition Partnerships) 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, 2007
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)

	2007 Market Price				2006 Market Price
Quarter Ended	2007 Market Price				2006 Market Price
Quarter Ended	High		Low		High		Low
March 31	$	11.35	$	10.03	$	12.25	$	10.25
June 30		10.30		9.00		12.05		10.35
September 30		11.07		7.37		11.20		8.53
December 31		10.04		7.46		11.10		9.76

		Years Ended December 31,
		2007		2006			2005		2004		2003
		(Dollars in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues		$	43,656	$	28,387		$	24,093	$	21,141	$	21,318
Expenses			51,842		32,649			27,683		30,845		30,959
Equity in earnings of investments			10,944		11,756			12,013		14,913		14,174
Gain on sale of interest in equity investments			207		2,459			—		—		—
Earnings from continuing operations			2,185		9,877			8,078		5,011		4,358
Earnings (loss) from discontinued operations			—		(75	)		153		58,623		4,829
Net earnings (loss)			2,185		9,802			8,231		63,634		9,187
Redeemable preferred dividends			—		—			—		—		(133	)
Net earnings (loss) to common stockholders			2,185		9,802			8,231		63,634		9,054
Earnings (loss) from continuing operations per common share—
	Basic		0.20		0.89			0.72		0.45		0.38
	Diluted		0.19		0.84			0.68		0.42		0.37
Net earnings (loss) per common share—
	Basic		0.20		0.88			0.73		5.67		0.81
	Diluted		0.19		0.83			0.69		5.37		0.80
Consolidated Balance Sheet Data:
Total assets			298,119		297,663			194,869		158,857		132,388
Total notes payable			177,329		187,811			90,259		51,303		75,060
Preferred stock			—		—			—		—		3,846
Total common equity			106,823		103,893			98,911		92,423		28,969

	Purchase Price		FirstCity Investment
	(In thousands)
1st Quarter	$	78,771	$	69,455
2nd Quarter		91,431		25,293
3rd Quarter		19,665		16,270
4th Quarter		24,466		15,696

Total 2007		214,333		126,714
Total 2006		296,990		144,048
Total 2005		146,581		71,405
Total 2004		174,139		59,762
Total 2003		129,192		22,944

	Payment Due by Period
Contractual Obligations	Total		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Notes payable secured by Portfolio Assets, loans receivable and equity in Acquisition Partnerships	$	176,544	$	14,881	$	161,663	$	—	$	—
Unsecured notes		785		53		650		6		76
Operating leases		2,563		620		1,262		481		200
Unfunded Portfolio purchase obligation		384		384		—		—		—

	$	180,276	$	15,938	$	163,575	$	487	$	276

			December 31, 2007			December 31, 2006
ASSETS
Cash and cash equivalents			$	23,546		$	18,472
Portfolio Assets, net				122,001			108,696
Loans receivable—affiliates				5,447			4,755
Loans receivable—SBA held for sale				133			—
Loans receivable—SBA held for investment, net				14,234			—
Loans receivable—other				5,995			23,991
Equity investments				87,622			112,357
Deferred tax asset, net				20,101			20,101
Service fees receivable ($785 and $917 from affiliates, respectively)				842			928
Servicing assets—SBA loans				843			—
Other assets, net				17,355			8,363

		Total Assets	$	298,119		$	297,663

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
	Notes payable other		$	177,329		$	187,811
	Minority interest			3,209			1,570
	Other liabilities			10,758			4,389

		Total Liabilities		191,296			193,770
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: 11,326,937 and 11,316,937, respectively; shares outstanding: 10,746,437 and 10,786,637, respectively)			113			113
	Treasury stock, at cost: 580,500 shares and 530,300 shares, respectively			(5,978	)		(5,571	)
	Paid in capital			101,240			100,562
	Retained earnings			9,602			7,417
	Accumulated other comprehensive income			1,846			1,372

		Total Stockholders' Equity		106,823			103,893

		Total Liabilities and Stockholders' Equity	$	298,119		$	297,663

		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, 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(r))		—		—	—		—			—		(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
Exercise of common stock options		10,000		—	—		—			35		—			—			35
Repurchase of common stock		—		—	50,200		(407	)		—		—			—			(407	)
Additional paid in capital arising from stock option compensation expense		—		—	—		—			643		—			—			643
Comprehensive income:
	Net earnings for 2007	—		—	—		—			—		2,185			—			2,185
	Translation adjustments	—		—	—		—			—		—			474			474

Total comprehensive income																		2,659

Balances, December 31, 2007		11,326,937	$	113	580,500	$	(5,978	)	$	101,240	$	9,602		$	1,846		$	106,823

	December 31,
	2007		2006
Assets	$	440,395	$	457,173

Liabilities	$	141,430	$	100,973
Net equity		298,965		356,200

	$	440,395	$	457,173

Equity investments in Acquisition Partnerships	$	76,078	$	105,852
Equity investments in servicing entities		11,544		6,505

	$	87,622	$	112,357

Income from Portfolio Assets and loans receivable:
	Domestic		$	27,452	$	11,392	$	8,506
	Latin America			1,990		1,377		1,559
	Europe			369		181		35
	Other			188		111		—

		Total	$	29,999	$	13,061	$	10,100

	Shares		Weighted- Average Grant-Date Fair Value
Nonvested at January 1, 2007	196,737		$	6.67
Granted	181,500		$	6.71
Vested	(104,662	)	$	6.14
Forfeited	(32,625	)	$	6.98

Nonvested at December 31, 2007	240,950		$	6.89

	2007
Balance at January 1, 2007	$	110
Additions based on tax positions of prior years		544
Payments and settlements		(75	)

Balance at December 31, 2007	$	579

Cash		$	274
Property and equipment			7,365
Other assets			645

	Total assets acquired		8,284

Deferred grant income			1,929
Other liabilities			382

	Total liabilities assumed		2,311

Net assets acquired		$	5,973

	2007										2006
	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	$	9,721		$	11,271	$	11,632	$	11,032		$	5,715		$	6,879	$	8,191	$	7,602
Expenses		12,503			13,666		11,276		14,397			7,129			7,094		8,636		9,790
Equity in earnings of investments		1,826			4,332		2,157		2,629			3,634			1,387		3,023		3,712
Gain on sale of subsidiaries and equity investments		—			—		207		—			—			27		2,378		54
Earnings (loss) from continuing operations		(915	)		1,806		2,654		(1,360	)		2,097			1,263		4,967		1,550
Loss from discontinued operations		—			—		—		—			(75	)		—		—		—
Net earnings (loss) to common stockholders		(915	)		1,806		2,654		(1,360	)		2,022			1,263		4,967		1,550
Earnings (loss) from continuing operations per common share—
Basic	$	(0.08	)	$	0.17	$	0.25	$	(0.14	)	$	0.19		$	0.11	$	0.45	$	0.14
Diluted	$	(0.08	)	$	0.16	$	0.23	$	(0.12	)	$	0.18		$	0.11	$	0.42	$	0.13

		Class A Equity						Class B Equity
		General Partners			Limited Partners			Limited Partners			General Partners			Limited Partners			Total
		(Dollars in thousands)
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
	Contributions		—			—			—			204			20,229			20,433
	Distributions		—			—			—			(540	)		(49,806	)		(50,346	)
	Comprehensive income:
	Net earnings		—			—			—			57			4,586			4,643

	Total comprehensive income		—			—			—			57			4,586			4,643

Balance at December 31, 2007		$	—		$	—		$	—		$	483		$	43,826		$	44,309

				2007			2006			2005
				(Dollars in thousands)
Cash flows from operating activities:
	Net earnings			$	4,643		$	13,332		$	14,850
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Amortization of loan origination and commitment fees			207			321			369
		Amortization of deferred profit sharing			—			596			4,088
		Provision for loan and impairment losses			4,883			1,803			1,024
		Income from Portfolio Assets			(17,764	)		(24,577	)		(30,664	)
		Purchase of Portfolio Assets			(20,434	)		(56,560	)		(60,551	)
		Advances net of receipts on Portfolio Asset lines of credit			(4,502	)		(9,442	)		(2,581	)
		Capitalized costs and interest on Portfolio Assets			(275	)		(757	)		(1,119	)
		Proceeds applied to principal on Portfolio Assets			65,508			112,783			95,823
		Excess of distribution over cost from partnership carried at cost			—			(1,274	)		—
		(Increase) decrease in deferred profit sharing			—			220			(1,213	)
		(Increase) decrease in other assets			(138	)		(444	)		186
		Increase (decrease) in deferred compensation			—			(220	)		1,213
		Deferred compensation and profit sharing paid			—			(396	)		(4,365	)
		Increase (decrease) in other liabilities			(664	)		386			(352	)

			Net cash provided by operating activities		31,464			35,771			16,708

Cash flows from investing activities:
		Distributions from partnership			—			2,570			—
		Change in combined entities			—			(1,126	)		—

			Net cash provided by investing activities		—			1,444			—

Cash flows from financing activities:
		Borrowing of debt—affiliate			—			27			9,056
		Borrowing of debt			38,500			46,500			29,100
		Repayment of debt—affiliate			—			(7,893	)		(38,735	)
		Repayment of debt			(42,114	)		(32,003	)		(32,263	)
		Capital contributions			20,433			55,312			51,797
		Capital distributions			(50,346	)		(103,996	)		(36,551	)

			Net cash used in financing activities		(33,527	)		(42,053	)		(17,596	)

Net decrease in cash					(2,063	)		(4,838	)		(888	)
Cash at beginning of year					8,009			12,847			13,735

Cash at end of year				$	5,946		$	8,009		$	12,847

		WAMCO 30			Other Partnerships			Combined
Income from Portfolio Assets		$	16,823		$	13,841		$	30,664
Other income, net			55			51			106

Revenues			16,878			13,892			30,770

Interest and fees expense—affiliate			(1,165	)		(600	)		(1,765	)
Interest and fees expense—other			(2,371	)		—			(2,371	)
Provision for loan and impairment losses			(822	)		(202	)		(1,024	)
Service fees—affiliate			(2,246	)		(1,145	)		(3,391	)
General, administrative and operating expenses			(1,701	)		(5,668	)		(7,369	)

Expenses			(8,305	)		(7,615	)		(15,920	)

	Net earnings	$	8,573		$	6,277		$	14,850

		WAMCO 30			Other Partnerships			Combined
Balance at December 31, 2004		$	46,189		$	35,044		$	81,233
	Contributions		51,797			—			51,797
	Distributions		(18,962	)		(17,589	)		(36,551	)
	Net earnings		8,573			6,277			14,850

	Total comprehensive income		8,573			6,277			14,850

Balance at December 31, 2005			87,597			23,732			111,329

	Cumulative effect of adjustments resulting from the adoption of SAB No. 108 (Note 2(f))		(212	)		—			(212	)
	Contributions		40,948			14,364			55,312
	Distributions		(90,834	)		(13,162	)		(103,996	)
	Change in combined entities		—			(6,186	)		(6,186	)
	Net earnings		10,140			3,192			13,332

	Total comprehensive income		10,140			3,192			13,332

Balance at December 31, 2006			47,639			21,940			69,579

	Contributions		—			20,433			20,433
	Distributions		(43,941	)		(6,405	)		(50,346	)
	Net earnings		3,832			811			4,643

	Total comprehensive income		3,832			811			4,643

Balance at December 31, 2007		$	7,530		$	36,779		$	44,309

		2007		2006
London Interbank Offering Rate (LIBOR) (4.6% at December 31, 2007) based:
	WAMCO 30 (LIBOR plus 1.65%)	$	35,925	$	—
	WAMCO 30 (LIBOR plus 2.0%)		—		28,146
	WAMCO 30 (LIBOR plus 2.35%)		—		3,818
	WAMCO 30 (LIBOR plus 2.5%)		—		4,559
	Other Partnerships (LIBOR plus 1.75%)		4,600		7,616

		$	40,525	$	44,139

	WAMCO 30		Other Partnerships		Combined
Year Ending December 31:
2008	$	—	$	—	$	—
2009		—		—		—
2010		35,925		4,600		40,525
2011		—		—		—

	$	35,925	$	4,600	$	40,525

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 (incorporated herein by reference to Exhibit 10.22 of the Company's Form 10-K dated July 24, 2007)
10.23	—	Amendment No. 9 to Revolving Credit Agreement, dated as of June 29, 2007, 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 10.23 of the Company's Form 10-Q dated August 10, 2007)
10.24	—	Amendment No. 1 to Revolving Credit Agreement, dated June 29, 2007, 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 10.24 of the Company's Form 10-Q dated August 10, 2007)
10.25	—	Amendment No. 2 to Loan Agreement, dated as of July 30, 2007, 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 August 3, 2007)
10.26	—	Amendment No. 10 to Revolving Credit Agreement, dated as of August 22, 2007, 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 August 28, 2007)
10.27	—	Amendment No. 3 and Consent to Revolving Credit Agreement, dated August 22, 2007, among FH Partners, L.L.C., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated August 28, 2007)

10.28	—	Subordinated Delayed Draw Credit Agreement, dated as of September 5, 2007, among FirstCity Financial Corporation, as Borrower, and the Lenders named therein, as Lenders, and BoS (USA), Inc., as agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 10, 2007)
10.29	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland extending time period for closing of subordinate credit facility to be provided by BoS (USA,) Inc. to October 2, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated September 10, 2007)
10.30	—	Letter agreement between FirstCity Financial Corporation and BoS (USA), Inc. extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to October 31, 2007 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated October 5, 2007)
10.31	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to October 31, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated October 5, 2007)
10.32	—	Letter agreement between FirstCity Financial Corporation and BoS (USA), Inc. extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to November 16, 2007 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated November 8, 2007)
10.33	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland which amended the Revolving Credit Agreement to extend time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to November 16, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated November 8, 2007)
21.1*	—	Subsidiaries of the Registrant
23.1*	—	Consent of KPMG LLP.
23.2*	—	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, 2007.
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, 2007.

		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	March 17, 2008
/s/ JAMES T. SARTAIN James T. Sartain	President, Chief Executive Officer and Director (Principal Executive Officer)	March 17, 2008
/s/ J. BRYAN BAKER J. Bryan Baker	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	March 17, 2008
/s/ C. IVAN WILSON C. Ivan Wilson	Vice Chairman of the Board and Director	March 17, 2008
/s/ DANE FULMER Dane Fulmer	Director	March 17, 2008
/s/ ROBERT E. GARRISON Robert E. Garrison	Director	March 17, 2008
/s/ D. MICHAEL HUNTER D. Michael Hunter	Director	March 17, 2008
/s/ JEFFERY D. LEU Jeffery D. Leu	Director	March 17, 2008
/s/ F. CLAY MILLER F. Clay Miller	Director	March 17, 2008