##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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Form 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|           |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934        
|          
|           |  | For the fiscal year ended December 31,
    2003                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission file number 033-19694



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FirstCity Financial Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 76-0243729                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|6400 Imperial Drive, Waco, TX                                      |  | 76712                                   
|(Address of Principal Executive
    Offices)                       |  | (Zip Code)                              

(254) 751-1750

(Registrants Telephone
Number, Including Area Code)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Title of Each Class


Common Stock, par value $.01


Adjusting Rate Preferred Stock, par value
$.01


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 þ          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.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

The number of shares of common stock outstanding
at March 17, 2004 was 11,193,687. As of such date, 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, was
approximately $56,619,552.



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FIRSTCITY FINANCIAL CORPORATION

TABLE OF CONTENTS


|                                             |  |                                                                                                        |  |      |     | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                             |  |                                                                                                        |  | Page
|                                             |  |                                                                                                        |  |     
|PART I                                      
|Item 1.                                      |  | Business                                                                                               |  |      | 2   | 
|Item 2.                                      |  | Properties                                                                                             |  |      | 12  | 
|Item 3.                                      |  | Legal Proceedings                                                                                      |  |      | 12  | 
|Item 4.                                      |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 12  | 
|                                            
|PART II                                     
|Item 5.                                      |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |  |      | 13  | 
|Item 6.                                      |  | Selected Financial Data                                                                                |  |      | 13  | 
|Item 7.                                      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |      | 15  | 
|Item 7A.                                     |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  |      | 47  | 
|Item 8.                                      |  | Financial Statements and
    Supplementary Data                                                        |  |      | 50  | 
|Item 9.                                      |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 134 | 
|Item 9A.                                     |  | Controls and Procedures                                                                                |  |      | 134 | 
|PART III                                    
|Item 10.                                     |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 134 | 
|Item 11.                                     |  | Executive Compensation                                                                                 |  |      | 134 | 
|Item 12.                                     |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |      | 134 | 
|Item 13.                                     |  | Certain Relationships and
    Related Transactions                                                     |  |      | 134 | 
|Item 14.                                     |  | Principal Accountant Fees
    and Services                                                             |  |      | 134 | 
|PART IV                                     
|Item 15.                                     |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |  |      | 134 | 
|Subsidiaries of the Registrant              
|Consent of KPMG LLP                         
|Consent of KPMG LLP                         
|Consent of KPMG LLP                         
|Consent of KPMG LLP                         
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906



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FORWARD LOOKING INFORMATION

This Annual Report on Form 10-K may contain
forward-looking statements. The factors identified under
Risk Factors contained in Managements
Discussion and Analysis of Financial Condition and Results of
Operations are important factors (but not necessarily all
of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking
statement made by, or on behalf of, FirstCity Financial
Corporation (the Company or FirstCity).

When any such forward-looking statement includes
a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while such
assumptions or bases are believed to be reasonable and are made
in good faith, assumed facts or bases almost always vary from
actual results, and the differences between assumed facts or
bases and actual results can be material, depending upon the
circumstances. When, in any forward-looking statement, the
Company, or its management, expresses an expectation or belief
as to future results, such expectation or belief is expressed in
good faith and is believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief
will result or be achieved or accomplished. The words
believe, expect, estimate,
project, anticipate and similar
expressions identify forward-looking statements.




PART I






|        |         
|------- | --------
|Item 1. | Business

General

FirstCity, a Delaware corporation, is a financial
services company headquartered in Waco, Texas with offices
throughout the United States and Mexico and a presence in France
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 $7.5 billion. The
Companys servicing expertise, which it has developed
largely through the resolution of distressed assets, is a
cornerstone of its growth strategy. Today the Company is engaged
in two principal businesses: (i) Portfolio Asset
acquisition and resolution and (ii) consumer lending
through the Companys minority investment in Drive
Financial Services, LP (Drive). See Note 8 of
the Companys Consolidated Financial Statements for certain
financial information about these two segments of the Company.

Business Strategy

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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increasing the Companys investments in
    Portfolio Assets acquired from financial institutions and
    government agencies, both for its own account or through
    investment entities formed with Cargill Financial Services
    Corporation (Cargill, CFSC or
    Cargill Financial) or one or more other
    co-investors, thereby capitalizing on the expertise of partners
    whose skills complement those of the Company.
|
| |  | Identifying and acquiring, through
    non-traditional niche sources, distressed assets that meet the
    Companys investment criteria, which may involve the
    utilization of special acquisition structures.                                                                                                                                                                                                                          
|
| |  | Acquiring, managing, servicing and resolving
    Portfolio Assets in certain international markets, either
    separately or in partnership with others, including Cargill.                                                                                                                                                                                                                                                                
|
| |  | Capitalizing on the Companys servicing
    expertise to enter into new markets with servicing agreements
    that provide for reimbursement of costs of entry and operations
    plus an incentive servicing fee after certain thresholds are met
    without requiring substantial equity investments.                                                                                                                                   

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| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | Retaining a minority interest investment in Drive.                                                                                     
|
| |  | Maximizing growth in operations, thereby
    permitting the utilization of the Companys net operating
    loss carryforwards (NOLs).

Background

The Company began operating in the financial
service business in 1986 as a purchaser of distressed assets
from the Federal Deposit Insurance Corporation
(FDIC) and the Resolution Trust Corporation
(RTC). From its original office in Waco, Texas, with
a staff of four professionals, the Companys asset
acquisition and resolution business grew to become a significant
participant in an industry fueled by the problems experienced by
banks and thrifts throughout the United States. In the late
1980s, the Company also began acquiring assets from healthy
financial institutions interested in eliminating nonperforming
assets from their portfolios. The Company began its relationship
with Cargill in 1991. Since that time, the Company and Cargill
have formed a series of acquisition partnerships through which
they have jointly acquired over $6.6 billion in face value
of Portfolio Assets.

In July 1995, the Company acquired by merger (the
Merger) First City Bancorporation of
Texas, Inc. (FCBOT), a former bank holding
company that had been engaged in a proceeding under
Chapter 11 of the United States Bankruptcy Code since
November 1992. As a result of the Merger, the common stock of
the Company became publicly held and the Company received
$20 million of additional equity capital and entered into
an incentive-based servicing agreement to manage approximately
$300 million in assets for the benefit of the former equity
holders of FCBOT. In addition, as a result of the Merger, the
Company retained FCBOTs rights to approximately
$596 million in net operating loss carry forwards
(NOLs), which the Company believes it can use to
offset taxable income generated by the Company and its
consolidated subsidiaries.

Following the Merger, the Company adopted a
growth and diversification strategy designed to capitalize on
its servicing and credit expertise to expand into additional
financial service businesses. To that end, in July 1997 the
Company acquired Harbor Financial Group, Inc. and its
subsidiaries (collectively referred to as Mortgage
Corp.), a company engaged in the residential and
commercial mortgage banking business since 1983. During 1997,
the Company also expanded into related niche financial services
markets, such as mortgage conduit banking, conducted through FC
Capital Corp. (Capital Corp.), a subsidiary of the
Company, and consumer finance, conducted through FirstCity
Consumer Lending Corporation (Consumer Corp.), a
subsidiary of the Company.

Effective during the third quarter of 1999,
management of the Company adopted formal plans to discontinue
the operations of Mortgage Corp. and Capital Corp. These
entities comprised the operations that were previously reported
as the Companys mortgage banking operations. Because the
Company formally adopted plans to discontinue the operations of
Mortgage Corp. and Capital Corp., and operations at each such
entity have ceased, the results of historical operations have
been reflected as discontinued operations.

On October 14, 1999, Harbor Financial
Group, Inc. (Harbor Parent), Harbor Financial
Mortgage Corporation (Harbor) and four subsidiaries
of Harbor filed voluntary petitions under Chapter 11 of the
United States Bankruptcy Code. On December 14, 1999, these
bankruptcy proceedings were converted to liquidation proceedings
under Chapter 7 of the United States Bankruptcy Code.
John H. Litzler, the Chapter 7 Trustee in the
bankruptcy proceedings (the Trustee), initiated
adversary proceedings on May 25, 2001 against FirstCity and
various current and former directors and officers of FirstCity
and Mortgage Corp. alleging breach of fiduciary duties,
mismanagement, and self-dealing by FirstCity and Harbor
directors and officers, and improper transfer of funds from the
Harbor related entities to FirstCity. The claims also included
fraudulent and preferential transfer of assets of the Harbor
entities, fraud and conspiracy. The Trustee, FirstCity, the
other defendants and the insurers providing Directors and
Officers Insurance coverage for FirstCity and its
subsidiaries (the Insurers) settled the claims
brought in the adversary proceedings with the approval of the
Bankruptcy Court. Under the terms of the settlement agreement,
the Trustee released the defendants, their affiliates and
subsidiaries from any and all claims which were brought or could
have been

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brought by the Trustee against any of the
defendants, any past and present officers and directors of
FirstCity or any affiliates or subsidiaries of FirstCity.


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 (together with BoS(USA), the Senior
Lenders), for a purchase price of $15 million cash.
The transaction generated $75 million in cash and resulted
in a gain of $12.1 million ($4 million was deferred
and recognized in the December 2002 recapitalization discussed
below). Simultaneously, the Senior Lenders and the Company
completed a debt restructure whereby the Company reduced the
outstanding debt under its senior and subordinate facilities
from $113 million to approximately $44 million. The
Company also retired approximately $6.4 million of debt
owed to other lenders.

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
1,222,901 shares previously outstanding, exchanged
1,092,210 shares of New Preferred Stock for
2,417,388 shares of common stock and $10.5 million.
Upon the completion of the recapitalization, 130,691 shares
of New Preferred Stock remained outstanding. As a result, common
equity was increased by $18.9 million. FirstCity also
recognized the $4 million gain (previously deferred) from
the release of its guaranty of Drives indebtedness to
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 are Senior Vice
Presidents of FirstCity, by issuing 400,000 shares of
common stock of the Company and a note payable with an imputed
balance of $1.3 million at December 31, 2003. This
note is to be paid from incentive servicing fees received from
the Mexican Acquisition Partnerships, with an aggregate payout
to the note holders not to exceed $3.2 million.

As a part of the recapitalization, 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 Senior Lenders. The
$16 million loan is secured by a 20% interest in Drive
(64.51% of FirstCitys remaining 31% interest in Drive) and
certain other assets of Consumer Corp. for the sole purpose of
allowing BoS(USA) to realize upon the 20% Drive interest in the
event of default by FirstCity. In connection with the
$16 million loan, FirstCity is 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.

Portfolio Asset Acquisition and
Resolution

In the Portfolio Asset acquisition and resolution
business, FirstCity acquires and resolves portfolios of
performing and nonperforming commercial and consumer loans and
other assets that are generally acquired at a discount to Face
Value. Purchases may be in the form of pools of assets or single
assets. Performing assets are those as to which debt service
payments are being made in accordance with the original or
restructured terms of such assets. Nonperforming assets are
those as to which debt service payments are not being made in
accordance with the original or restructured terms of such
assets, or as to which no debt service payments are being made.
Portfolios are designated as nonperforming unless substantially
all of the assets comprising the Portfolio are performing. Once
a Portfolio has been designated as either performing or
nonperforming, such designation is generally not changed for
accounting purposes regardless of the performance of the assets
comprising the Portfolio. Portfolios are either acquired for
FirstCitys own account or through investment entities
formed with Cargill or one or more other co-investors (each such
entity, an Acquisition Partnership). See
 Relationship with Cargill. To date,
FirstCity and the Acquisition Partnerships have acquired over
$7.5 billion in Face Value of assets, with FirstCitys
equity investment being $258 million.

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| |                           
| | --------------------------
| | Sources of Assets Acquired

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.



| |                 
| | ----------------
| | Portfolio 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. Consumer loans may be secured (by real or personal
property) or unsecured. Portfolio Assets may be designated as
performing or nonperforming. FirstCity generally expects to
resolve Portfolio Assets within five years after purchase.

To date, a substantial majority of the Portfolio
Assets acquired by FirstCity have been designated as
nonperforming. FirstCity seeks to resolve nonperforming
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 Partnership 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, Puerto Rico, Chile, France, Germany, Japan and
Mexico. 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. Through December 31, 2003, FirstCity has acquired,
with Cargill and a local French partner, eighteen Portfolios in
France consisting of approximately 32,000 assets for an
aggregate purchase price of approximately $389 million.
These assets had a Face Value of approximately
$1.6 billion. FirstCitys share of the equity interest
in the Portfolios acquired in France ranges from 10% to 33.5%
and FirstCity has made a total equity investment in these
Portfolios of approximately $38 million. FirstCity owns a
10% interest in MCS et Associates (MCS), a French
asset servicing company, and FirstCity is, in conjunction with
MCS and Cargill, actively pursuing opportunities to purchase
additional pools of Portfolio Assets in France and other areas
of Western Europe. In addition, FirstCity owns 100% of a Mexican
asset servicing company, which has offices in Guadalajara and
Mexico City, Mexico, that facilitates FirstCitys
participation in acquisition of Portfolios in Mexico. Through
December 31, 2003, FirstCity and its various partners have
acquired ten Portfolios in Mexico consisting of an aggregate of
approximately 51,000 assets for

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an aggregate purchase price of approximately
$432 million. These assets had a Face Value of
approximately $2.3 billion. FirstCitys share of the
equity interest in the Portfolios acquired in Mexico ranges from
3.2% to 25%, and FirstCity has made a total investment in these
Portfolios of approximately $32 million.


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

Portfolio Assets

|                                 |  |                         |         |      |  |      |         |  |  |   |         | 
|-------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                 |  |                        
|                                 |  | Year Ended December 31,
|                                 |  |                        
|                                 |  | 2003                    |         | 2002 |  | 2001
|                                 |  |                         |         |      |  |     
|                                 |  |                        
|                                 |  | (Dollars in thousands) 
|Face Value                       |  | $                       | 386,895 |      |  | $    | 702,019 |  |  | $ | 766,904 | 
|Total purchase price             |  | $                       | 129,192 |      |  | $    | 171,769 |  |  | $ | 224,927 | 
|Total equity invested            |  | $                       | 64,303  |      |  | $    | 66,932  |  |  | $ | 139,273 | 
|FirstCity equity invested(1)     |  | $                       | 22,944  |      |  | $    | 16,717  |  |  | $ | 24,319  | 
|Total number of Portfolio Assets |  |                         | 10,056  |      |  |      | 11,453  |  |  |   | 8,099   | 



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|    |                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes investments made in the form of equity
    and notes receivable from the Acquisition Partnerships payable
    to affiliates of the Company.



| |                            
| | ---------------------------
| | Sources of Portfolio Assets

FirstCity develops its Portfolio Asset
opportunities through a variety of sources. The activities or
contemplated activities of expected sellers are publicized in
industry publications and through other 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, repeat business referrals from Cargill or other
co-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.



| |                                    
| | -----------------------------------
| | Asset Analysis and
    Underwriting

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

The evaluation further 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

6



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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 property value
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.



| |          
| | ---------
| | Servicing

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

FirstCity services all of the Portfolio Assets
owned for its own account, all of the Portfolio Assets owned by
the Acquisition Partnerships and, to a very limited extent,
certain Portfolio Assets owned by third parties. In connection
with the Acquisition Partnerships in the United States,
FirstCity generally earns a servicing fee, which is a percentage
of gross cash collections generated rather than a management fee
based on the Face Value of the asset being serviced. The rate of
servicing fee charged is generally a function of the average
Face Value of the assets within each pool being serviced (the
larger the average Face Value of the assets in a Portfolio, the
lower the fee percentage within the prescribed range), the type
of assets and the level of servicing required on each asset. For
the Mexican Acquisition Partnerships, FirstCity earns a
servicing fee based on costs of servicing plus a profit margin.
The Company also has certain consulting contracts with its
Mexican investment entities pursuant to which the Company is
entitled to additional compensation for servicing once a
specified return to the investors has been achieved. The
Acquisition Partnerships in France are serviced by MCS in which
the Company maintains a 10% equity interest.



| |                                                         
| | --------------------------------------------------------
| | Structure and Financing of Portfolio Asset
    Purchases

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, BoS(USA) 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.

7



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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 currently
provides the majority of the funding for the purchase of
Portfolios. FirstCity and the Acquisition Partnerships have
relationships with a number of senior lenders including Cargill.
Senior acquisition financing is obtained at variable interest
rates ranging from LIBOR to prime based pricing with negotiated
spreads to the base rates. The final maturity of the senior
secured acquisition debt is normally two years from the date of
funding of each advance under the facility. 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. Over the
years, FirstCity has cultivated successful relationships with
several investors in its international acquisitions.



| |                          
| | -------------------------
| | Relationship with Cargill

Cargill, a diversified financial services
company, is a wholly owned subsidiary of
Cargill, Incorporated, which is generally regarded as one
of the worlds largest privately held corporations and has
offices worldwide. Cargill and its affiliates provide
significant debt and equity financing to the Acquisition
Partnerships. In addition, FirstCity believes its relationship
with Cargill significantly enhances FirstCitys credibility
as a purchaser of Portfolio Assets and facilitates its ability
to expand into related businesses and foreign markets.

Under a Right of First Refusal Agreement and Due
Diligence Reimbursement Agreement effective as of
January 1, 1998, as amended (the Right of First
Refusal Agreement) among the Company, FirstCity Servicing
Corporation, Cargill and its wholly owned subsidiary CFSC
Capital Corp. II (CFSC), if the Company
receives an invitation to bid on or otherwise obtains an
opportunity to acquire interests in loans, receivables, real
estate or other assets located in the United States, Canada,
Latin America, or the Caribbean in which the aggregate amount to
be bid exceeds $4 million, or $500 thousand for consumer
assets, the Company is required to follow a prescribed notice
procedure pursuant to which CFSC has the option to participate
in the proposed purchase by requiring that such purchase or
acquisition be effected through an Acquisition Partnership
formed by the Company and Cargill (or an affiliate). The Right
of First Refusal Agreement does not prohibit the Company from
holding discussions with entities other than CFSC regarding
potential joint purchases of interests in loans, receivables,
real estate or other assets, provided that any such purchase is
subject to CFSCs right to participate in the
Companys share of the investment. The Right of First
Refusal Agreement further provides that, subject to certain
conditions, CFSC will pay to the Company a monthly amount to
cover due diligence expense, plus 50% of the third party due
diligence expenses incurred by the Company in connection with
proposed asset purchases. The Right of First Refusal Agreement
is a restatement and extension of a similar agreement entered
into among the Company, certain members of the Companys
management and Cargill in 1992. The Right of First Refusal
Agreement has a termination date of February 1, 2006 and
will renew automatically for an additional year on an annual
basis thereafter unless either party gives notice to the other
of its desire to discontinue the arrangement six months prior to
the termination date.

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Future increases in the Companys
investments in Portfolio Assets acquired from institutions and
government agencies may be obtained through investment entities
formed with Cargill, whereby Cargill shares a general partner
interest, thereby capitalizing on the expertise of Cargill whose
skills complement those of the Company.



| |                  
| | -----------------
| | Business Strategy

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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Traditional markets.FirstCity believes it will continue to invest in Portfolio
    Assets acquired from financial institutions and government
    agencies, both for its own account or through investment
    entities formed with Cargill or one or more other co-investors.                                                                                                                                                                                                                                                                                                                                            
|
| |  | Niche markets.FirstCity believes it will continue to pursue profitable private
    market niches in which to invest. The niche investment
    opportunities that FirstCity has pursued to date include
    (i) the acquisition of improved or unimproved real estate,
    including excess retail sites, and (ii) periodic purchases
    of single financial or real estate assets from banks and other
    financial institutions with which FirstCity has established
    relationships, and from a variety of other sellers that are
    familiar with the Companys reputation for acting quickly
    and efficiently.
|
| |  | Foreign markets.FirstCity believes that the foreign markets for Portfolio Assets
    are less developed than the U.S. market, and therefore
    provide a greater opportunity to achieve attractive risk
    adjusted returns. FirstCity has purchased Portfolio Assets in
    France, Japan (sold in 1999) and Mexico and expects to continue
    to seek purchase opportunities outside of the United States.                                                                                                                                                                                                           

Consumer Lending

The Company historically conducted all of its
consumer receivable origination activities through Consumer
Corp. Consumer Corp.s focus had been on the origination
and servicing of sub-prime consumer automobile loans. Such loans
are extended to borrowers who evidence an ability and
willingness to repay credit, but have experienced an adverse
event, such as a job loss, illness or divorce, or have had past
credit problems, such as delinquency, bankruptcy, repossession
or charge-offs. In the third quarter of 2000, Consumer Corp.
formed Drive and transferred the entire operations of its
automobile finance platform to Drive. Consumer Corp. sold a 49%
equity interest in Drive to IFA-GP and IFA-LP, subsidiaries of
BoS(USA), a wholly owned subsidiary of Bank of Scotland. See
Background for additional information related to
formation and structure of Drive. As a result of the sale, the
majority of Consumer Corp.s operations have been accounted
for under the equity method since August 1, 2000.

Drive is a specialized consumer finance company
engaged in the purchase, securitization, and servicing of retail
installment contracts originated by automobile dealers. Drive
acquires retail installment contracts principally from
manufacturer-franchised dealers in connection with their sale of
used and new automobiles and light duty trucks to
sub-prime customers with limited credit histories or
past credit problems. At the present, Drive does not extend
credit directly to consumers, nor does it purchase retail
installment contracts from other financial institutions.

During 2002, Drive elected not to use gain on
sale treatment when assets were securitized. Instead, Drive
pursued a strategy to grow the balance sheet and record interest
income from loans and interest expense on the related debt as
incurred to build an earnings stream over time.

Government Regulation

Portfolio Asset Acquisition and
Resolution Certain aspects
of the Companys Portfolio Asset acquisition and resolution
business are subject to regulation under various federal, state
and local statutes and

9



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##### Table of Contents



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.


Consumer Lending Numerous federal and state consumer
protection laws and related regulations impose substantial
requirements upon lenders and servicers involved in consumer
finance. These laws include the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Federal Trade Commission Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Magnuson-Moss Warranty Act, the Federal Reserve
Boards Regulations B and Z, state adaptations of the
National Consumer Act and of the Uniform Consumer Credit Code,
and state motor vehicle retail installment sales acts, retail
installment sales acts and other similar laws. Also, state laws
impose finance charge ceilings and other restrictions on
consumer transactions and require contract disclosures in
addition to those required under federal law. These requirements
impose specific statutory liabilities upon creditors who fail to
comply with their provisions.

In addition, as an affiliate of BoS(USA), Drive
is subject to regulatory oversight by the Federal Reserve Bank
and the Office of the Comptroller of Currency, who may
periodically review the operations of Drive when examining the
safety and soundness of BOS(USA)s and Bank of
Scotlands operations in the United States.

Competition

Portfolio Asset Acquisition and
Resolution 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).

Consumer Lending The automobile finance industry is the
second largest consumer finance market in the United States. The
vast majority of automobile financing is provided by captive
finance subsidiaries of major auto manufacturers, banks, and
credit unions for vehicles purchased by A credit
consumers or prime consumers. Primary lenders tend
to avoid or do not consistently serve the sub-prime market, in
which predominantly used automobiles are purchased by borrowers
with B, C, or D credit. The
sub-prime consumer market estimated at approximately
$100 billion per year is served mainly by independent
finance companies such as Drive.

The Company believes that the sub-prime, consumer
automobile market is growing because of a number of factors
including (i) economic trends, (ii) the extension of
the average useful life of automobiles, and (iii) the
increasing number of late model used automobiles being offered
for sale including former rental cars and off-lease vehicles.

The Company believes Drive is well positioned to
maximize on this opportunity due to its talented management
team, strong financial partner in BoS(USA), growth of market
saturation, consistent record of success of its business model
and an attractive net margin environment, assisted by the low
wholesale interest market.

10



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Drive is currently represented in 28 states
with concentrations in the Texas, California, Georgia and North
Carolina markets. Drive originated $485 million in
receivable contracts in 2003, which represents a fraction of 1%
of the potential market. The Company believes there is ample
room to grow both in current markets and in new markets not yet
serviced. Sub-prime competition varies from market to market,
but the largest competitors seen in most markets include
Americredit Corporation, Household Finance, WFS Finance and
Capital One. Each of these competes in a different credit sector
within Drives market and all are currently moving upwards
in the credit cycle as the economy changes. Drive believes it
has opportunities to grow its market share, at the lowest end of
the credit spectrum, through controlled use of its business
model.

Employees

The Company had 267 employees as of
December 31, 2003. No employee is a member of a labor union
or party to a collective bargaining agreement. The Company
believes that its employee relations are good.

Relationship with the Bank of
Scotland

FirstCity has had a significant relationship with
the Bank of Scotland or its subsidiaries since September 1997.
In connection with the recapitalization, FirstCity and the
Senior Lenders entered into a loan agreement that refinanced the
Companys existing debt with the Senior Lenders
($40 million outstanding at December 31, 2003). The
Senior Lenders also provided new financing to FirstCity, with a
total commitment of up to $59 million, consisting of
(a) a $5 million revolving credit loan and (b) an
acquisition term loan in an amount up to $54 million. The
outstanding balances at December 31, 2003 on the new
financings were $1.1 million and $3.0 million,
respectively. The aggregate amount of outstanding loans under
the total commitment by the Senior Lenders for the refinancing
and the new financing at any time may not exceed
$77 million.

As a part of the recapitalization, 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 Senior Lenders. The
$16 million loan is secured by a 20% interest in Drive
(64.51% of FirstCitys remaining 31% interest in Drive) and
other assets of Consumer Corp. In connection with the
$16 million loan, FirstCity is 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.
Management of the Company believes the value of FirstCitys
20% ownership interest of Drive does not exceed $16 million
as of December 31, 2003.

BoS(USA) has a warrant to purchase
425,000 shares of the Companys voting Common Stock at
$2.3125 per share. BoS(USA) is entitled under certain
circumstances to additional warrants in connection with the
existing warrant for 425,000 shares to retain its ability
to acquire approximately 4.86% of the Companys voting
Common Stock.

Drive has a warehouse line of credit with
BoS(USA), which provides borrowings up to $300 million
(increased from $250 million in February 2004).
Drives obligation under this arrangement at
December 31, 2003 was $178 million. The debt is
secured by Drives retail installment contracts and has
been extended to February 2005.

In addition, with respect to Drive, BoS(USA) has
entered into certain agreements with Drive (the Sponsor
Agreements) that require BoS(USA), under certain
circumstances to (a) purchase nonconforming contracts in
the event that the seller, the servicer, or the related
originator fails to repurchase any contract that is required to
be repurchased, (b) pay certain premiums and other
expenses, (c) indemnify the collateral agent and the
insurance provider from certain types of losses, and (d) to
make certain secondary servicer advances. BoS(USA) has required
FirstCity to indemnify BoS(USA) for 31% (the amount of its
direct and indirect ownership in Drive) of any losses resulting
under the terms of the Sponsor Agreements. To date, FirstCity
has not paid any amounts in connection with its obligations
pursuant to the Sponsor Agreements.

11



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##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

The Company leases all its office locations. The
Company leases its current headquarters building from a related
party under a noncancellable operating lease, which expires
December 31, 2006. All leases of the other offices of the
Company and subsidiaries expire prior to 2005. The following is
a list of the Companys principal physical properties
leased as of December 31, 2003.

|                         |  |                                     |  |                     
|------------------------ |  | ----------------------------------- |  | --------------------
|Location                 |  | Function                            |  | Business Segment    
|                         |  |                                     |  |                     
|Waco, Texas              |  | Executive Offices                   |  | Corporate/Commercial
|Golden Valley, Minnesota |  | Servicing Offices                   |  | Commercial          
|Richmond, Virginia       |  | Servicing Offices                   |  | Commercial          
|Guadalajara, Mexico      |  | Servicing Offices                   |  | Commercial          
|Mexico City, Mexico      |  | Servicing Offices                   |  | Commercial          
|Dallas, Texas            |  | Drive Executive & Servicing Offices |  | Consumer            






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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






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

The Company held its annual meeting of
stockholders (the Annual Meeting) on
November 18, 2003. The following items for business were
considered at the Annual Meeting.



|    |                      
|--- | ---------------------
|(a) | Election of Directors

The following were elected as directors to serve
as members of the Companys Board of Directors until the
Companys 2004 annual meeting of stockholders. The number
of votes cast for each nominee was as follows:

|                      |  |           |           |         |  |           |         |  |  |  |   | 
|--------------------- |  | --------- | --------- | ------- |  | --------- | ------- |  |  |  | - | 
|                      |  |           |           | Votes   |  |          
|Nominee               |  | Votes For |           | Against |  | Abstained
|                      |  |           |           |         |  |          
|James R. Hawkins      |  |           | 9,172,061 |         |  |           | 127,957 |  |  |  |  | 
|C. Ivan Wilson        |  |           | 9,157,140 |         |  |           | 142,878 |  |  |  |  | 
|James T. Sartain      |  |           | 9,172,140 |         |  |           | 127,878 |  |  |  |  | 
|Richard E. Bean       |  |           | 9,172,140 |         |  |           | 127,878 |  |  |  |  | 
|Dane Fulmer           |  |           | 9,172,140 |         |  |           | 127,878 |  |  |  |  | 
|Robert E. Garrison II |  |           | 9,172,140 |         |  |           | 127,878 |  |  |  |  | 
|Jeffery D. Leu        |  |           | 9,172,140 |         |  |           | 127,878 |  |  |  |  | 



|    |                                                               
|--- | --------------------------------------------------------------
|(b) | Approval of the Companys 2004 Stock
    Option and Award Plan

The stockholders approved the Companys 2004
Stock Option and Award Plan. The number of votes for the
proposal: 4,916,901; votes against: 314,841; abstentions: 89,123.



|    |                                            
|--- | -------------------------------------------
|(c) | Ratification of Appointment of
    Auditors

A proposal to ratify the Board of Directors
appointment of KPMG LLP as the Companys independent
auditors for 2003 was approved by the stockholders. The number
of votes for the proposal: 9,264,440; votes against: 16,023;
abstentions: 19,555.

12



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##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Common and Preferred Stock Data

The Companys common stock, $.01 par
value per share (Common Stock), and redeemable
preferred stock, par value $.01 per share (New
Preferred Stock) are listed on the Nasdaq National Market
System under the symbols FCFC and FCFCO, respectively. The
number of holders of record of Common Stock on March 19,
2004 was approximately 491. High and low stock prices for the
Common Stock and New Preferred Stock in 2003 and 2002 are
displayed in the following table:

|                     |              |              |   |              |  |      |   |       |  |  |   |       |  |  |   |      | 
|-------------------- | ------------ | ------------ | - | ------------ |  | ---- | - | ----- |  |  | - | ----- |  |  | - | ---- | 
|                     |              |              |   |             
|                     |              | 2003         |   | 2002        
|                     |              |              |   |             
|                     |              |              |   |             
|                     |              | Market Price |   | Market Price
|                     |              |              |   |             
|Quarter Ended        |              | High         |   | Low          |  | High |   | Low  
|                     |              |              |   |              |  |      |   |      
|Common Stock:        |              |              |   |              |  |      |   |       |  |  |   |       |  |  |   |     
|                     | March 31     |              | $ | 1.85         |  |      | $ | 1.10  |  |  | $ | 1.52  |  |  | $ | 1.07 | 
|                     | June 30      |              |   | 2.25         |  |      |   | 1.25  |  |  |   | 1.39  |  |  |   | 0.74 | 
|                     | September 30 |              |   | 4.85         |  |      |   | 2.17  |  |  |   | 1.30  |  |  |   | 0.40 | 
|                     | December 31  |              |   | 7.10         |  |      |   | 3.45  |  |  |   | 1.41  |  |  |   | 0.40 | 
|New Preferred Stock: |              |              |   |              |  |      |   |       |  |  |   |       |  |  |   |     
|                     | March 31     |              | $ | 25.00        |  |      | $ | 12.00 |  |  | $ | 10.30 |  |  | $ | 7.00 | 
|                     | June 30      |              |   | 23.00        |  |      |   | 18.00 |  |  |   | 10.50 |  |  |   | 5.30 | 
|                     | September 30 |              |   | 24.75        |  |      |   | 19.00 |  |  |   | 12.78 |  |  |   | 8.50 | 
|                     | December 31  |              |   | 26.25        |  |      |   | 22.45 |  |  |   | 14.60 |  |  |   | 9.00 | 

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.
The Companys loan facilities with the Senior Lenders and
certain other credit facilities to which the Company and its
subsidiaries are parties contain restrictions relating to the
payment of dividends and other distributions. In the third
quarter of 1999, dividends on the New Preferred Stock were
suspended. Given the continued high debt levels of the Company,
and managements priority of assuring adequate levels of
liquidity, the Company does not anticipate that dividends on
shares of New Preferred Stock will be paid in the foreseeable
future.

During 2002, FirstCity also acquired the minority
interest in FirstCity Holdings held by Terry R. DeWitt, G.
Stephen Fillip and James C. Holmes, each of whom are Senior Vice
Presidents of FirstCity by issuing 400,000 shares of
unregistered common stock of the Company and a note payable with
an imputed balance of $1.3 million at December 31,
2003. This note is to be paid down out of incentive servicing
fees received from the Mexican Acquisition Partnerships, with an
aggregate payout to the note holders not to exceed
$3.2 million. The sale of the 400,000 shares of Common
Stock was an exempt transaction pursuant to Section 4(2) of
the Securities Act of 1933, as amended.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

In December 2002, FirstCity completed a
recapitalization in which holders of the New Preferred Stock
exchanged 1,092,210 shares of New Preferred Stock,
representing 89.3% of the 1,222,901 shares previously
outstanding, for 2,417,388 shares of common stock and
$10.5 million. As a result, common equity was increased by
$18.9 million. Upon the completion of the recapitalization,
130,691 shares of New Preferred Stock remained outstanding.
During the first quarter of 2003, 4,400 shares of New
Preferred Stock were redeemed for 8,200 shares of common
stock and $50,000 in cash, leaving 126,291 shares
outstanding at

13



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##### Table of Contents



December 31, 2003. FirstCity also recorded a
$4 million gain from the release of its guaranty of
Drives indebtedness to BoS(USA). BoS(USA)s warrant
to purchase 1,975,000 shares of non-voting common stock was
cancelled in connection with the recapitalization. FirstCity
issued 400,000 shares of common stock to acquire the
minority interest in FirstCity Holdings Inc.


Simultaneously with the closing of the exchange
offer for New Preferred Stock in December 2002 and the other
transactions contemplated by the recapitalization, FirstCity and
the Senior Lenders entered into a loan agreement that refinanced
the Companys existing financings with the Senior Lenders.
The Senior Lenders also provided new financing to FirstCity,
with a total commitment by Bank of Scotland of up to
$59 million, consisting of (a) a $5 million
revolving credit loan and (b) an acquisition term loan in
an amount up to $54 million. The aggregate amount of
outstanding loans under the total commitment by the Senior
Lenders for the refinancing and the new financing at any time
may not exceed $77 million.

In the third quarter of 2000, Consumer Corp.
completed a sale of a 49% equity interest in its automobile
finance operation to IFA-GP and IFA-LP. As a result of this
sale, the Company no longer consolidates the financial
statements of its automobile finance operation since
August 1, 2000, but instead records its investment under
the equity method of accounting.

Effective during the third quarter of 1999,
management of the Company adopted formal plans to discontinue
the operations of Mortgage Corp and Capital Corp. These entities
comprise the operations that were previously reported as the
Companys residential and commercial mortgage banking
business. Because the Company formally adopted plans to
discontinue the operations of Mortgage Corp. and Capital Corp.,
and operations at each such entity have ceased, the results of
historical operations have been reflected as discontinued
operations.

On October 14, 1999, Harbor Financial
Group, Inc. (Harbor Parent), Harbor Financial
Mortgage Corporation (Harbor) and four subsidiaries
of Harbor filed voluntary petitions under Chapter 11 of the
United States Bankruptcy Code. On December 14, 1999, these
bankruptcy proceedings were converted to liquidation proceedings
under Chapter 7 of the United States Bankruptcy Code. John
H. Litzler, the Chapter 7 Trustee in the bankruptcy
proceedings (the Trustee), initiated adversary
proceedings on May 25, 2001 alleging various claims against
FirstCity and various current and former directors and officers
of FirstCity and Mortgage Corp. The Trustee, FirstCity, the
other defendants and the insurers providing Directors and
Officers Insurance coverage for FirstCity and its
subsidiaries (the Insurers) settled the all claims
brought in the adversary proceedings with the approval of the
Bankruptcy Court. Under the terms of the settlement agreement,
the Trustee released the defendants, their affiliates and
subsidiaries from any and all claims which were brought or could
have been brought by the Trustee against any of the defendants,
any past and present officers and directors of FirstCity or any
affiliates or subsidiaries of FirstCity. FirstCity did not
guarantee the indebtedness of Mortgage Corp. and has previously
reached agreement with its Senior lenders to permanently waive
any events of default related to Mortgage Corp., including
bankruptcy.

The Selected Financial 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.

14



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Selected Financial Data

|                                                                                           |                     |                                               |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |          |         |  
|------------------------------------------------------------------------------------------ | ------------------- | --------------------------------------------- | ------ | ------- |  | ---- | ------ | ------- | - | ---- | ------ | ------- | - | - | ------- | ------- | - | - | -------- | ------- | -
|                                                                                           |                     | 2003                                          |        | 2002    |  | 2001 |        | 2000    |   | 1999
|                                                                                           |                     |                                               |        |         |  |      |        |         |   |     
|                                                                                           |                     |                                              
|                                                                                           |                     | (Dollars in thousands, except per share data)
|Revenues                                                                                   |                     | $                                             | 42,729 |         |  | $    | 35,988 |         |   | $    | 38,411 |         |   | $ | 53,009  |         |   | $ | 58,928   |        
|Expenses                                                                                   |                     |                                               | 31,346 |         |  |      | 28,688 |         |   |      | 33,860 |         |   |   | 56,288  |         |   |   | 58,197   |        
|Earnings (loss) from continuing operations                                                 |                     |                                               | 9,707  |         |  |      | 5,943  |         |   |      | 2,171  |         |   |   | (10,900 | )       |   |   | (5,819   | )      
|Loss from discontinued operations                                                          |                     |                                               | (520   | )       |  |      | (9,714 | )       |   |      | (5,200 | )       |   |   | (5,000  | )       |   |   | (102,337 | )      
|Net earnings loss                                                                          |                     |                                               | 9,187  |         |  |      | (3,771 | )       |   |      | (3,029 | )       |   |   | (15,900 | )       |   |   | (108,156 | )      
|Redeemable preferred dividends                                                             |                     |                                               | 133    |         |  |      | 2,478  |         |   |      | 2,568  |         |   |   | 2,568   |         |   |   | 2,568    |        
|Net earnings (loss) to common stockholders(1)                                              |                     |                                               | 9,054  |         |  |      | (6,249 | )       |   |      | (5,597 | )       |   |   | (18,468 | )       |   |   | (110,724 | )      
|Earnings (loss) from continuing operations before
    accounting change per common share  |                     |                                               |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |          |        
|                                                                                           | Basic(1)            |                                               |        | 0.86    |  |      |        | 0.40    |   |      |        | (0.01   | ) |   |         | (1.61   | ) |   |          | (0.92   | )
|                                                                                           | Diluted(1)          |                                               |        | 0.85    |  |      |        | 0.40    |   |      |        | (0.01   | ) |   |         | (1.61   | ) |   |          | (0.92   | )
|Net earnings (loss) per common share                                                      |                     |                                               |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |          |        
|                                                                                           | Basic(1)            |                                               |        | 0.81    |  |      |        | (0.74   | ) |      |        | (0.67   | ) |   |         | (2.21   | ) |   |          | (13.33  | )
|                                                                                           | Diluted(1)          |                                               |        | 0.80    |  |      |        | (0.74   | ) |      |        | (0.67   | ) |   |         | (2.21   | ) |   |          | (13.33  | )
|Dividends per common share                                                                 |                     |                                               |       |         |  |      |       |         |   |      |       |         |   |   |        |         |   |   |         |        
|At year end:                                                                               |                     |                                               |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |          |        
|                                                                                           | Total assets        |                                               |        | 132,139 |  |      |        | 126,456 |   |      |        | 138,893 |   |   |         | 140,991 |   |   |          | 230,622 |  
|                                                                                           | Total notes payable |                                               |        | 91,060  |  |      |        | 96,673  |   |      |        | 91,209  |   |   |         | 93,764  |   |   |          | 169,792 |  
|                                                                                           | Preferred stock     |                                               |        | 3,846   |  |      |        | 3,705   |   |      |        | 32,101  |   |   |         | 29,533  |   |   |          | 26,965  |  
|Total common equity                                                                        |                     |                                               | 28,969 |         |  |      | 18,752 |         |   |      | 3,877  |         |   |   | 8,478   |         |   |   | 26,587   |        



---



|    |                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes deferred tax provisions of
    $7.0 million and $4.9 million, respectively, in 2000
    and 1999 related to the reduction of benefits to be realized
    from NOLs.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

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

Overview

The Company is a financial services company
engaged in Portfolio Asset acquisition and resolution, conducted
through FirstCity, and in consumer lending, through its
investment in Drive.

During 2003 the Company continued to build on the
positive foundation of the recapitalization which was completed
in December 2002 which provided needed investment liquidity to
the Portfolio Asset acquisition and resolution business allowing
the Company to invest $22.9 million during the year up from
$16.7 million in 2002. Of the total invested during 2003,
$12.4 million was invested domestically, $9.4 million
was invested in France and $1.1 million was invested in
Mexico. It is the goal of management to increase the volume of
acquisitions each year and invest in a disciplined manner larger
amounts of equity as opportunities arise utilizing the new
liquidity currently available. The Portfolio Asset acquisition
and resolution business is the primary source of cash flow for
the Company and its subsidiaries for the repayment of debt and
operating expenses.

The gradual improvement in the domestic economy
during 2003 is reflected in the results of the Portfolio Asset
acquisition and resolution business and through the
Companys 31% investment in Drive, both segments

15



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had increased levels of earnings and investments
over 2002. The Companys investment in Drive also reflects
the first year of positive results since 2002 when management of
Drive changed the structure of its securitization transactions
as secured financings rather than as sales, correspondingly
building up the balance sheet and the income stream over time.
This change is reflected in the Companys 31% share of the
earnings of Drive which increased to $5.3 million in 2003
from $3.5 million in 2002. Drives results although
positive during 2003 have been negatively impacted since
September of 2001 by a decline in used car wholesale auction
values which has reduced the amount of cash recovery upon the
sale of repossessed cars, but Drives Management believes
that recent market conditions indicate initial signs of
improvement in used car wholesale auction values which should
have a positive impact on results in the future. The
Companys investment in Drive is cash neutral and generates
no operating cash flow nor are there any requirements to inject
additional cash into Drive other than to reinvest distributions
received from Drive.


Although the Companys primary revenues are
generated by the Portfolio Asset acquisition and resolution
business and the Companys investment in Drive, other items
such as interest expense, and the effects of discontinued
operations also have a significant impact on net income. During
2003 corporate interest and dividend expense declined to
$4.7 million down from $6.3 million during 2002 as a
result of lower interest rates and reduced levels of debt. The
Company also had reduced provisions from discontinued operations
of $520 thousand, down from $9.7 million in 2002.
Additionally, the Company received cash flow from the residual
interests held in discontinued operations of $1.5 million
during 2003.

Overall the Companys financial results
reflect renewed strength and positive growth trends while
operating in an environment of nationwide recession, high
unemployment, weak wholesale auction values, record personal
bankruptcies and record low interest rates all of which created
a challenging operating landscape during 2003.

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

As a result of the significant period to period
fluctuations in the revenues and earnings of the Companys
Portfolio Asset acquisition and resolution business, the sale of
the interest in the automobile finance operation, and the timing
of securitization transactions and structuring of Drive, period
to period comparisons of the Companys results of
continuing operations may not be meaningful.

Results of Operations



| |                      
| | ---------------------
| | 2003 Compared to 2002

The Company reported earnings from continuing
operations of $9.7 million in 2003 compared to
$5.9 million in 2002. Loss from discontinued operations was
$.5 million in 2003 and $9.7 million in 2002. Net
earnings to common stockholders were $9.1 million in 2003
compared to a loss of $6.2 million in 2002. On a per share
basis, diluted net earnings to common stockholders were $.80 in
2003 compared to a loss of $.74 in 2002.



| |                                               
| | ----------------------------------------------
| | Portfolio Asset Acquisition and
    Resolution

The operating contribution of $14.5 million
in 2003 increased by $3.3 million, or 29%, compared with
2002. FirstCity purchased $129 million of Portfolio Assets
during 2003 ($128 million through the Acquisition
Partnerships) compared to $172 million in acquisitions in
2002. FirstCitys investment in these acquisitions was
$22.9 million and $16.7 million in 2003 and 2002,
respectively. FirstCitys year-end investment in
wholly-owned Portfolio Assets decreased to $4.5 million
from $9.8 million at December 31, 2003 and 2002,
respectively, as a result of normal liquidation.

16



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##### Table of Contents



Servicing fee
revenues.Servicing fee revenues
increased by 19% to $15.1 million in 2003 from
$12.7 million in 2002. Service fees from the Mexican
partnerships (including incentive service fees) increased
$3.0 million or 42% from $7.2 million in 2002 to
$10.2 million in 2003 due to increased servicing
responsibilities in Mexico as a result of bringing the majority
of the servicing in-house and not using third-party servicers to
provide the servicing function for the Mexican partnerships. For
the Mexican Acquisition Partnerships, FirstCity earns a
servicing fee based on costs of servicing plus a profit margin.
Service Fees from the domestic Acquisition Partnerships
decreased $.6 million or 11% from $5.5 million in 2002
to $4.9 million in 2003. In June 2002, three domestic
Acquisition Partnerships completed a bulk loan sale of
performing and non-performing Portfolio Assets with a carrying
value of $59 million for proceeds of $71 million. As a
result of the sale, the Company recorded servicing fee revenues
of $.9 million. In June 2003, FirstCity and several
Acquisition Partnerships completed another loan sale of
performing and non-performing Portfolio Assets with a carrying
value of $8.3 million for proceeds of $10.0 million,
resulting in $.3 million of service fees.

Gain on resolution of Portfolio
Assets.The net gain on resolution of
Portfolio Assets increased from $1.1 million in 2002 to
$1.4 million in 2003. The gross profit percentage on the
resolution of Portfolio Assets in 2003 was 18% as compared to
27% in 2002 primarily as a result of a payoff of three
performing loans in July 2003 generating proceeds of
$1.5 million and no gain.

Equity in earnings of
investments.Equity in earnings of
Acquisition Partnerships increased 61% to $13.6 million in
2003 compared to $8.4 million in 2002. The Acquisition
Partnerships reflected net earnings of $15.1 million in
2003 compared to a net loss of $13.2 million in 2002.
Following is a discussion of equity earnings by geographic
region.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Domestic
    Equity in earnings of domestic Acquisition Partnerships was
    $13.5 million in 2003 compared to $10.0 million in
    2002. Equity in earnings in MinnTex Investment Partners LP,
    which began operations in April 2002, was $3.7 million in
    2003 compared to $1.8 million in 2002. Also, one real
    estate partnership realized a $2.9 million gain on sale in
    the fourth quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Mexico
    Equity in loss of Mexican Acquisition Partnerships was
    $4.0 million in 2003 compared to $3.5 million in 2002.
    These partnerships reflected a loss of $41.2 million in
    2003 compared to $56.5 million in 2002. The partnerships
    recorded foreign exchange losses of $30.0 million in 2003
    compared to $24.9 million in 2002. Interest expense of
    $17.0 million and $54.9 million were recorded 2003 and
    2002, respectively. This interest is owed to the investors of
    these partnerships, of which FirstCity recorded
    $2.5 million and $3.9 million, respectively, as
    interest income. Excluding effects of foreign currency
    transactions and interest expense, these partnerships reflected
    adjusted net earnings of $5.8 million in 2003 compared to
    $23.3 million in 2002, which is primarily due to the
    Mexican partnerships receiving $28.9 million or 34% less
    collections in 2003 compared to 2002. The Company continues to
    see opportunities to invest in Mexico that are favorable taking
    into consideration the currency risk and continues to monitor
    the foreign currency exposure on a daily basis and evaluate the
    advisability of hedging these investments through analysis of
    currency forecasts, the cost of hedging those investments and
    the available liquidity to do so.
|
| |  | France
    Equity in earnings of Acquisition Partnerships located in France
    increased 100% to $4.1 million in 2003 compared to
    $1.9 million in 2002. This increase is principally due to
    the addition of three French Partnerships during 2002 and two in
    2003, which accounted for $2.4 million in equity in
    earnings in 2003. In addition, the Company sold in June 2002 its
    investment in eight French Partnerships, which accounted for
    $.4 million in equity in earnings in 2002. During 2003,
    FirstCity also recorded $1.2 million in foreign currency
    transaction gains (included in other expenses) relating to
    investments in France as the euro relative to the dollar
    appreciated from 1.05 at December 31, 2002 to 1.26 at
    December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Interest income.Interest income decreased 35% from $5.1 million in 2002 to
$3.3 million in 2003 primarily due to the Company amending
three loan agreements with Acquisition Partnerships located in
Mexico to provide for no interest to be payable with respect to
periods after the effective date of the amendments. This change
had no impact on the consolidated net earnings as the effect is
offset through equity

17



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##### Table of Contents



earnings in these Partnerships. Also, the average
balances in wholly-owned Portfolio Assets and loans receivable
decreased from $31.6 million in 2002 to $23.6 million
in 2003.


Gain on sale of interest in equity
investments.During 2002, the Company
sold its investment in eight French Acquisition Partnerships to
existing investors in those entities. FirstCity received
proceeds of $3.4 million on the sale resulting in a gain of
$1.8 million.

Other income.Other
income decreased 45% from $2.2 million in 2002 to
$1.2 million in 2003 primarily due to a $.7 million
gain on the early extinguishment of debt recorded in 2002.

Expenses.Operating
expenses decreased $.2 million or 1%, primarily due to
reductions in minority interest expense, interest and other
expenses, offset by increases in salaries and benefits in Mexico.

Interest and fees on notes payable was flat from
year to year.

Salaries and benefits increased
$2.9 million, or 30%, due to increased servicing personnel
in Mexico. Total personnel within the Portfolio Asset
acquisition and resolution segment increased from 212 to 237 at
December 31, 2002 and 2003, respectively, with the
personnel in Mexico increasing from 137 to 170. FirstCity also
recorded additional servicing fee revenues with the increased
servicing responsibilities in Mexico.

The provision for loan and impairment losses was
$98,000 in 2003 and includes a $61,000 recovery on one real
estate Portfolio. The provision for loan and impairment losses
totaled $295,000 in 2002.

Minimal provisions were recorded in 2003 and 2002
for performing or non-performing Portfolios as the economic
conditions during that period did not negatively impact the
Companys expectation of future cash flows. Impairment on
performing Portfolio Assets is measured based on the present
value of the expected future cash flows in the aggregate
discounted at the loans 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. Impairment on
nonperforming Portfolios is evaluated by analyzing the expected
future cash flows from the underlying assets within each
Portfolio. The expected future cash flows are reviewed monthly
and adjusted as deemed necessary. Changes in various factors
including, but not limited to, economic conditions,
deterioration of collateral values, deterioration in the
borrowers financial condition and other conditions
described in the risk factors discussed later in this document,
could have a negative impact on the estimated future cash flows
of the Portfolio. Significant decreases in estimated future cash
flows can reduce a Portfolios present value to below the
Companys carrying value of that Portfolio, causing
impairment.

The Company recorded permanent valuation
impairments of $.2 million in 2002 on two real estate
Portfolios due to deterioration of property values and market
conditions, as well as additional expected disposal costs. For
real estate Portfolios, the evaluation of impairment is
determined quarterly based on the review of the estimated future
cash receipts less estimated costs to sell, which represents the
net realizable value of the real estate Portfolio. A valuation
allowance is established for any impairment identified through
provisions charged to operations in the period the impairment is
identified.

There were no provisions recorded on loans
receivable from Acquisition Partnerships during the third
quarter of 2003 and 2002. The loans receivable from the Mexican
partnerships are secured by the assets/loans acquired by the
Mexican partnerships with purchase money loans provided by
affiliates of the investors in the Mexican partnerships to
purchase the asset pools held in those entities. These loans are
evaluated for impairment by analyzing the expected future cash
flows from the underlying assets within each pool to determine
that the cash flows were sufficient to repay these notes. The
Company applies the asset valuation methodology consistently in
all venues and uses the same proprietary asset management system
to evaluate impairment on all asset pools. The results of this
evaluation indicated that cash flows from the pools will be
sufficient to repay the loans and no allowances for impairment
were necessary.

Occupancy, data processing and other expenses
declined $1.6 million or 24% primarily due to net foreign
currency gains of $1.1 million in 2003 compared to $146,000
in 2002.

18



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##### Table of Contents



Minority interest expense was $1.3 million
in 2002. In December 2002, FirstCity acquired the minority
interest in FirstCity Holdings as part of a recapitalization,
and in April 2003, acquired the minority interest of MCSFC LP.



| |                 
| | ----------------
| | Consumer Lending

FirstCitys consumer lending segment
consists of the Companys net investment in Drive. The
operating contribution for 2003 was $5.3 million compared
to $3.5 million in 2002.

Equity in earnings of
investment.FirstCity recorded equity
in earnings of Drive of $7.2 million in 2003 compared to
equity in loss of $.5 million in 2002. Drive recorded net
income of $19.0 million in 2003 compared to a loss of
$1.6 million in 2002. Drives inventory of retail
installments contracts has grown from $368 million at
December 31, 2002 to $623 million at December 31,
2003. Consequently, net interest margin after provision for
credit losses and impairments at Drive rose from
$52.8 million to $86.2 million during 2002 and 2003,
respectively. The provisions for impairment on residual assets
of $8.4 million were related to higher losses and
delinquencies as a result of market and general economic
conditions and are more prevalent in pools of loans originated
prior to 2002. Drives management believes that recent
market conditions indicate initial signs of improvement and
Drive Management continues to monitor trends in cash flow and
performance to determine the impact upon the need for additional
provisions. Net income from Drive continues to be positive as
originations and the volume of portfolio assets grow over time.
Based on information provided by Drive, the Company expects that
this positive trend will continue.

Gain on sale of interest in
Drive.FirstCity recognized a
$4 million deferred gain in the fourth quarter of 2002 as a
result of the release of FirstCitys guaranty of a
$60 million loan to Drive by BoS(USA). The guaranty was
released in connection with the closing of the Companys
recapitalization in December 2002.



| |                                 
| | --------------------------------
| | Other Items Affecting Operations

The following items affect the Companys
overall results of operations and are not directly allocated to
any one of the Companys businesses discussed above.

Corporate interest and
overhead.Company level interest
expense increased by 19% to $4.6 million in 2003 from
$3.9 million in 2002 due to increased effective interest
costs. Other corporate overhead expenses increased 10% to
$5.9 million in 2003 from $5.4 million in 2002
primarily due to increased salaries and benefits and other
operating expenses at the corporate level.

Income taxes.Provision for income taxes was $240,000 in 2003 and $153,000 in
2002 and 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 2003 and 2002.

Discontinued
Operations.The Company recorded a
provision of $.5 million in 2003 for additional losses from
discontinued operations compared to $9.7 million in 2002.
The additional provisions primarily relate to a decrease in the
estimated future gross cash receipts on residual interests in
securitizations. These securities are in run-off,
and the Company is contractually obligated to service these
assets. The assumptions used in the valuation model consider
both industry as well as the Companys historical
experience. The decrease in the estimated future gross cash
receipts is partially a result of the actual losses exceeding
the losses projected by the valuation model. In addition,
prepayment assumptions have increased to take into consideration
the lower market rates and higher than predicted actual
prepayments over the past quarter. As the securities run
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.

19



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##### Table of Contents





| |                      
| | ---------------------
| | 2002 Compared to 2001

The Company reported earnings from continuing
operations of $5.9 million, including a $4 million
gain from the release of its guaranty of Drives
indebtedness, in 2002 compared to $2.2 million in 2001.
Loss from discontinued operations was $9.7 million in 2002
and $5.2 million in 2001. Net loss to common stockholders
was $6.2 million in 2002 compared to $5.6 million in
2001. On a per share basis, basic and diluted net loss
attributable to common stockholders was $.74 in 2002 compared to
$.67 in 2001.



| |                                               
| | ----------------------------------------------
| | Portfolio Asset Acquisition and
    Resolution

The operating contribution of $11.2 million
in 2002 increased by $3.5 million, or 45%, compared with
2001. FirstCity purchased $172 million of Portfolio Assets
during 2002 through the Acquisition Partnerships compared to
$225 million in acquisitions in 2001. FirstCitys
investment in Portfolio Assets decreased to $9.8 million in
2002 from $14.2 million in 2001 as a result of normal
liquidation. FirstCity invested $16.7 million in equity in
Portfolio Assets in 2002 compared to $24.3 million in 2001.

Servicing fee
revenues.Servicing fee revenues
increased by 32% to $12.7 million in 2002 from
$9.6 million in 2001 primarily as a result of increased
collections in domestic Acquisition Partnerships. In June 2002,
three domestic Acquisition Partnerships completed a bulk loan
sale of performing and non-performing Portfolio Assets with a
carrying value of $59 million for proceeds of
$71 million. As a result of the sale, the Company recorded
servicing fee revenues of $.9 million. Also, FirstCity
received higher service fees on one portfolio acquired in 2002
due to the type of assets and level of servicing required on
each asset.

Gain on resolution of Portfolio
Assets.The net gain on resolution of
Portfolio Assets was flat from year to year.

Equity in earnings of
investments.Equity in earnings of
Acquisition Partnerships decreased 14% to $8.4 million in
2002 compared to $9.7 million in 2001. Net loss in the
combined Acquisition Partnerships was $13.2 million in 2002
compared to earnings of $14.2 million in 2001 due to
significant losses in Mexico, in which the Company has smaller
equity investments compared to investments in the United States
and France. See Note 6 of the Companys consolidated
financial statements for a comparison of earnings of the
Acquisition Partnerships and equity in earnings of those
entities summarized by geographic region. Equity in earnings of
Servicing Entities was $.8 million in 2002 compared to
$1.0 million in 2001.

Interest income.Interest income decreased $.7 million or 12% due to average
balances in Portfolio Assets and loans receivable decreasing to
$31.6 million in 2002 from $40.7 million in 2001.

Gain on sale of interest in equity
investments.During 2002, the Company
sold its investment in eight French Acquisition Partnerships to
existing investors in those entities. FirstCity received
proceeds of $3.4 million on the sale resulting in a gain of
$1.8 million. During 2001, the Company sold equity
investments in two domestic Acquisition Partnerships for
$7.6 million resulting in a gain of $3.3 million.

Operating expenses.Operating expenses decreased $3.9 million or 16% primarily
as a result of decreased debt costs and lower write-downs of
Portfolio Assets, offset by increased operating costs in Mexico.

Interest and fees on notes payable decreased
$1.2 million or 29% due to average debt for 2002 decreasing
to $28.9 million from $42.3 million in 2001. Also, the
average cost of borrowing decreased from 9.8% in 2001 to 9.2% in
2002.

Salaries and benefits increased $1.9 million
or 25% primarily due to increased servicing personnel in Mexico.
Total personnel within the Portfolio Asset acquisition and
resolution segment increased from 150 at year end 2001 to 212 at
year end 2002, with the personnel in Mexico increasing from 81
at year end 2001 to 137 at year end 2002.

The provision for loan and impairment losses was
$.3 million in 2002 compared to $3.3 million in 2001.
Minimal provisions were recorded in 2002 for performing and
non-performing Portfolios, as the economic conditions during
that period did not negatively impact the Companys
expectation of future cash flows. In 2001, provisions of
$1.6 million in four non-performing Portfolios and
$.6 million in two performing Portfolios

20



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##### Table of Contents



were recorded as estimated future collections
were reduced primarily due to the Company accepting discounted
payoffs in lieu of extended payouts. The Company recorded
permanent valuation impairments of $.2 million in 2002 and
$1.1 million in 2001 on one real estate Portfolio due to
deterioration of property values and market conditions, as well
as additional expected disposal costs. No impairment was
required in 2002 and 2001 as the estimated future cash flows
from the underlying Portfolio Assets of the Acquisition
Partnerships supported the pay-down of the loans receivable from
Acquisition Partnerships.


Occupancy, data processing and other expenses
decreased $2.1 million or 24% during the period due to a
decrease in servicing fee expense in Mexico of $2.9 million
offset by increases in foreign currency exchange rate expense of
$.5 million, occupancy expense of $.3 million and
travel expense of $.1 million. In 2001 fees to third party
servicers in Mexico were paid by the Company through August of
2001 from September 2001 to the present the Mexican Acquisition
Partnerships have paid third party servicers directly.

Minority interest expense increased 39% from
$.9 million in 2001 to $1.3 million in 2002 due
primarily to increased earnings in FirstCity Holdings, which was
80% owned by the Company. In December 2002, FirstCity acquired
the minority interest in FirstCity Holdings as part of a
recapitalization.



| |                 
| | ----------------
| | Consumer Lending

The operating contribution for 2002 was
$3.5 million compared to $4.4 million (net of a
$.3 million cumulative effect of accounting change) during
2001.

Equity in earnings of
investment.FirstCity recorded equity
in loss of Drive of $.5 million in 2002 compared to equity
in earnings of $5.9 million in 2001. Drive recorded a net
loss of $1.6 million in 2002 compared to earnings of
$14.5 million in 2001. In 2002, Drive structured its
securitizations as financings and did not use gain on sale
treatment when assets were securitized. Drive pursued a strategy
to grow the balance sheet and record interest income from loans
and interest expense on the related debt as incurred to build an
earnings stream over time.

Gain on sale of interest in
Drive.FirstCity recognized a
$4 million deferred gain in the fourth quarter of 2002 as a
result of the release of FirstCitys guaranty of a
$60 million loan to Drive by BoS(USA). The guaranty was
released in connection with the closing of the Companys
recapitalization in December 2002.

Operating expenses.Total operating expenses declined primarily as a result of
minority interest income of $.1 million in 2002 compared to
minority interest expense of $1.1 million in 2001. Minority
interest expense is directly attributable to earnings and losses
of Drive.



| |                                 
| | --------------------------------
| | Other Items Affecting Operations

The following items affect the Companys
overall results of operations and are not directly allocated to
any one of the Companys businesses discussed above.

Corporate overhead.Company level interest expense decreased by 17% to
$3.9 million in 2002 from $4.6 million in 2001 as a
result of lower levels of debt. Other corporate overhead
expenses were flat from year to year.

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 2002 and 2001.

21



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##### Table of Contents



Analysis of Revenues and Expenses

The following table summarizes the revenues and
expenses of each of the Companys business segments and
presents the contribution that each business makes to the
Companys operating margin.

Analysis of Revenues and Expenses

|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |        |        |        | 
|----------------------------------------------- | ------------------------------------------------- | ---------------------------------------------- | ----- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                |                                                   |                                               
|                                                |                                                   | Year Ended December 31,                       
|                                                |                                                   |                                               
|                                                |                                                   | 2003                                           |       | 2002   |        | 2001  
|                                                |                                                   |                                                |       |        |        |       
|                                                |                                                   |                                               
|                                                |                                                   | (In thousands, except per share data)         
|Portfolio Asset Acquisition and
    Resolution: |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Revenues:                                         |                                                |       |        |        |        |   |        |        |        |   |        |       
|                                                |                                                   | Servicing fees                                 |       | $      | 15,051 |        |   | $      | 12,665 |        |   | $      | 9,580  |       
|                                                |                                                   | Gain on resolution of Portfolio Assets         |       |        | 1,380  |        |   |        | 1,138  |        |   |        | 1,049  |       
|                                                |                                                   | Gain on sale of interest in equity investments |       |        |       |        |   |        | 1,779  |        |   |        | 3,316  |       
|                                                |                                                   | Equity in earnings of investments              |       |        | 14,174 |        |   |        | 9,212  |        |   |        | 10,771 |       
|                                                |                                                   | Interest income                                |       |        | 3,324  |        |   |        | 5,122  |        |   |        | 5,847  |       
|                                                |                                                   | Other                                          |       |        | 1,197  |        |   |        | 2,185  |        |   |        | 1,836  |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                |                                                   |                                                | Total |        |        | 35,126 |   |        |        | 32,101 |   |        |        | 32,399 | 
|                                                | Expenses:                                         |                                                |       |        |        |        |   |        |        |        |   |        |       
|                                                |                                                   | Interest and fees on notes payable             |       |        | 2,907  |        |   |        | 2,946  |        |   |        | 4,128  |       
|                                                |                                                   | Salaries and benefits                          |       |        | 12,537 |        |   |        | 9,611  |        |   |        | 7,679  |       
|                                                |                                                   | Provision for loan and impairment losses       |       |        | 98     |        |   |        | 295    |        |   |        | 3,277  |       
|                                                |                                                   | Occupancy, data processing and other           |       |        | 4,953  |        |   |        | 6,504  |        |   |        | 8,566  |       
|                                                |                                                   | Minority interest                              |       |        | (10    | )      |   |        | 1,311  |        |   |        | 937    |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                |                                                   |                                                | Total |        |        | 20,485 |   |        |        | 20,667 |   |        |        | 24,587 | 
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Operating contribution before direct taxes        |                                                | $     | 14,641 |        |        | $ | 11,434 |        |        | $ | 7,812  |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Operating contribution, net of direct taxes       |                                                | $     | 14,497 |        |        | $ | 11,214 |        |        | $ | 7,713  |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|Consumer Lending:                               |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Revenues:                                         |                                                |       |        |        |        |   |        |        |        |   |        |       
|                                                |                                                   | Equity in earnings (loss) of investments       |       | $      | 7,237  |        |   | $      | (532   | )      |   | $      | 5,923  |       
|                                                |                                                   | Interest income                                |       |        |       |        |   |        |       |        |   |        | 5      |       
|                                                |                                                   | Gain on sale of interest in Drive              |       |        |        |        |   |        | 4,000  |        |   |        |       |       
|                                                |                                                   | Other                                          |       |        |        |        |   |        | 1      |        |   |        | 9      |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                |                                                   |                                                | Total |        |        | 7,237  |   |        |        | 3,469  |   |        |        | 5,937  | 
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Expenses:                                         |                                                |       |        |        |        |   |        |        |        |   |        |       
|                                                |                                                   | Interest and fees on notes payable             |       |        | 360    |        |   |        | 18     |        |   |        |       |       
|                                                |                                                   | Occupancy, data processing and other           |       |        | 27     |        |   |        | 14     |        |   |        | 45     |       
|                                                |                                                   | Minority interest                              |       |        | 1,446  |        |   |        | (107   | )      |   |        | 1,124  |       
|                                                |                                                   | Cumulative effect of accounting change         |       |        |       |        |   |        |       |        |   |        | 304    |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                |                                                   |                                                | Total |        |        | 1,833  |   |        |        | (75    | ) |        |        | 1,473  | 
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Operating contribution before direct taxes        |                                                | $     | 5,404  |        |        | $ | 3,544  |        |        | $ | 4,464  |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Operating contribution, net of direct taxes       |                                                | $     | 5,349  |        |        | $ | 3,544  |        |        | $ | 4,448  |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       
|                                                | Total operating contribution, net of direct taxes |                                                | $     | 19,846 |        |        | $ | 14,758 |        |        | $ | 12,161 |       
|                                                |                                                   |                                                |       |        |        |        |   |        |        |        |   |       

22



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|                                                                      |                                                                         |                                            |        |        |        |      |        |        |       |   |        |        |       |  
|--------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | ------ | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | -
|                                                                      |                                                                         |                                           
|                                                                      |                                                                         | Year Ended December 31,                   
|                                                                      |                                                                         |                                           
|                                                                      |                                                                         | 2003                                       |        | 2002   |        | 2001
|                                                                      |                                                                         |                                            |        |        |        |     
|                                                                      |                                                                         |                                           
|                                                                      |                                                                         | (In thousands, except per share data)     
|Corporate Overhead:                                                   |                                                                         |                                            |        |        |        |      |        |        |       |   |        |       
|                                                                      | Other revenue                                                           |                                            | $      | 366    |        |      | $      | 418    |       |   | $      | 75     |      
|                                                                      | Corporate interest expense                                              |                                            |        | (4,588 | )      |      |        | (3,858 | )     |   |        | (4,649 | )    
|Salaries and benefits, occupancy, professional
    and other expenses |                                                                         |                                            | (5,917 | )      |        |      | (5,375 | )      |       |   | (5,416 | )     
|                                                                      |                                                                         |                                            |        |        |        |      |        |        |       |   |        |       
|                                                                      | Earnings from continuing operations                                     |                                            |        | 9,707  |        |      |        | 5,943  |       |   |        | 2,171  |      
|                                                                      | Loss from discontinued operations                                       |                                            |        | (520   | )      |      |        | (9,714 | )     |   |        | (5,200 | )    
|                                                                      |                                                                         |                                            |        |        |        |      |        |        |       |   |        |       
|                                                                      | Net earnings (loss)                                                     |                                            |        | 9,187  |        |      |        | (3,771 | )     |   |        | (3,029 | )    
|                                                                      | Preferred dividends                                                     |                                            |        | (133   | )      |      |        | (2,478 | )     |   |        | (2,568 | )    
|                                                                      |                                                                         |                                            |        |        |        |      |        |        |       |   |        |       
|                                                                      | Net earnings (loss) to common stockholders                              |                                            | $      | 9,054  |        |      | $      | (6,249 | )     |   | $      | (5,597 | )    
|                                                                      |                                                                         |                                            |        |        |        |      |        |        |       |   |        |       
|Share data:                                                           |                                                                         |                                            |        |        |        |      |        |        |       |   |        |       
|                                                                      | Basic earnings (loss) per common share are as
    follows:              |                                            |        |        |        |      |        |        |       |   |        |        |      
|                                                                      | Earnings (loss) from continuing operations before
    accounting change |                                            | $      | 0.86   |        |      | $      | 0.40   |       |   | $      | (0.01  | )    
|                                                                      |                                                                         | Discontinued operations                    |        |        | (0.05  | )    |        |        | (1.14 | ) |        |        | (0.62 | )
|                                                                      |                                                                         | Cumulative effect of accounting change     |        |        |       |      |        |        |      |   |        |        | (0.04 | )
|                                                                      |                                                                         | Net earnings (loss)                        |        | $      | 0.81   |      |        | $      | (0.74 | ) |        | $      | (0.67 | )
|                                                                      |                                                                         | Weighted average common shares outstanding |        |        | 11,200 |      |        |        | 8,500 |   |        |        | 8,374 |  
|                                                                      | Diluted earnings (loss) per common share are as
    follows:            |                                            |        |        |        |      |        |        |       |   |        |        |      
|                                                                      | Earnings (loss) from continuing operations before
    accounting change |                                            | $      | 0.85   |        |      | $      | 0.40   |       |   | $      | (0.01  | )    
|                                                                      |                                                                         | Discontinued operations                    |        |        | (0.05  | )    |        |        | (1.14 | ) |        |        | (0.62 | )
|                                                                      |                                                                         | Cumulative effect of accounting change     |        |        |       |      |        |        |      |   |        |        | (0.04 | )
|                                                                      |                                                                         | Net earnings (loss)                        |        | $      | 0.80   |      |        | $      | (0.74 | ) |        | $      | (0.67 | )
|                                                                      |                                                                         | Weighted average common shares outstanding |        |        | 11,349 |      |        |        | 8,500 |   |        |        | 8,374 |  

23



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##### Table of Contents



Fourth Quarter

Net earnings for the fourth quarter of 2003 were
$3.5 million, or $.31 per share on a diluted basis.
The following table presents a summary of operations for the
fourth quarters of 2003 and 2002.

Condensed Consolidated Summary of
Operations

|                                        |  |                        |        |      |  |   |        |  
|--------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ------ | -
|                                        |  |                       
|                                        |  | Fourth Quarter        
|                                        |  |                       
|                                        |  | 2003                   |        | 2002
|                                        |  |                        |        |     
|                                        |  |                       
|                                        |  | (Dollars in thousands,
|                                        |  | except per share data)
|Revenues                                |  | $                      | 12,341 |      |  | $ | 11,324 |  
|Expenses                                |  |                        | 8,259  |      |  |   | 7,376  |  
|Earnings from continuing operations     |  |                        | 3,649  |      |  |   | 3,712  |  
|Loss from discontinued operations       |  |                        | (100   | )    |  |   | (2,014 | )
|                                        |  |                        |        |      |  |   |        |  
|Net earnings                            |  |                        | 3,549  |      |  |   | 1,698  |  
|                                        |  |                        |        |      |  |   |        |  
|Preferred dividends                     |  |                        |       |      |  |   | 552    |  
|                                        |  |                        |        |      |  |   |        |  
|Net earnings to common shareholders     |  | $                      | 3,549  |      |  | $ | 1,146  |  
|                                        |  |                        |        |      |  |   |        |  
|Net earnings per common share  basic   |  | $                      | 0.32   |      |  | $ | 0.13   |  
|Net earnings per common share  diluted |  | $                      | 0.31   |      |  | $ | 0.13   |  

Portfolio Asset Acquisition and
Resolution

In 2003 the Company invested $23 million in
portfolios acquired through Acquisition Partnerships and
subsidiaries. Acquisitions by the Company over the last five
years are summarized as follows:

|            |  |                |         |            |  |   |        | 
|----------- |  | -------------- | ------- | ---------- |  | - | ------ | 
|            |  | Purchase       |         | FirstCity 
|            |  | Price          |         | Investment
|            |  |                |         |           
|            |  |               
|            |  | (In thousands)
|1st Quarter |  | $              |        |            |  | $ |       | 
|2nd Quarter |  |                | 32,204  |            |  |   | 11,365 | 
|3rd Quarter |  |                | 39,304  |            |  |   | 3,930  | 
|4th Quarter |  |                | 57,684  |            |  |   | 7,649  | 
|            |  |                |         |            |  |   |        | 
|Total 2003  |  | $              | 129,192 |            |  | $ | 22,944 | 
|Total 2002  |  | $              | 171,769 |            |  | $ | 16,717 | 
|Total 2001  |  | $              | 224,927 |            |  | $ | 24,319 | 
|Total 2000  |  | $              | 394,927 |            |  | $ | 22,140 | 
|Total 1999  |  | $              | 210,799 |            |  | $ | 11,203 | 

The Company believes that prospects for
investment in distressed assets in 2004 continue to be positive.
In the U.S., opportunities remain strong as many sellers use the
sale of distressed assets as an ongoing balance sheet management
tool. Additionally, with the bank merger activity, acquiring
banks are using the sale of portfolios to facilitate their
acquisition activities. Additionally, in the foreign markets,
the availability of distressed assets in France and Mexico
remains strong. The Company is looking to expand its franchise
base into Central and South America as well as other parts of
Europe. To capitalize on these opportunities, FirstCity has
implemented marketing programs to identify new opportunities for
investment in Portfolio assets, both on a bid and negotiated
basis.

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) equity in earnings of affiliated Acquisition
Partnerships and servicing entities, (iii) interest income
on performing Portfolio Assets and loans receivable, and
(iv) gains

24



---



##### Table of Contents



on disposition of assets. The following table
presents selected information regarding the revenues and
expenses of the Companys Portfolio Asset acquisition and
resolution business.


Analysis of Selected Revenues and
Expenses

Portfolio Asset Acquisition and
Resolution


|                                           |                                                                  |                            |        |      |         |        |       |     |         |        |       |     |         |        |  
|------------------------------------------ | ---------------------------------------------------------------- | -------------------------- | ------ | ---- | ------- | ------ | ----- | --- | ------- | ------ | ----- | --- | ------- | ------ | -
|                                           |                                                                  |                           
|                                           |                                                                  | Year Ended December 31,   
|                                           |                                                                  |                           
|                                           |                                                                  | 2003                       |        | 2002 |         | 2001  
|                                           |                                                                  |                            |        |      |         |       
|                                           |                                                                  |                           
|                                           |                                                                  | (Dollars in thousands)    
|Income from Portfolio Assets and
    Loans |                                                                  |                            |        |      |         |        |       |     |         |        |       |    
|                                           | Receivable:                                                      |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           | Average investment in Portfolio Assets and loans
    receivable: |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           |                                                                  | Domestic                   |        | $    | 6,785   |        |       | $   | 13,068  |        |       | $   | 23,674  |       
|                                           |                                                                  | Mexico                     |        |      | 14,656  |        |       |     | 18,534  |        |       |     | 17,012  |       
|                                           |                                                                  | France                     |        |      | 2,120   |        |       |     |        |        |       |     |        |       
|                                           |                                                                  |                            |        |      |         |        |       |     |         |        |       |    
|                                           |                                                                  |                            | Total  |      | $       | 23,561 |       |     | $       | 31,602 |       |     | $       | 40,686 |  
|                                           |                                                                  |                            |        |      |         |        |       |     |         |        |       |    
|                                           | Income from Portfolio Assets and loans receivable:               |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           |                                                                  | Domestic                   |        | $    | 2,040   |        |       | $   | 2,208   |        |       | $   | 2,856   |       
|                                           |                                                                  | Mexico                     |        |      | 2,540   |        |       |     | 3,910   |        |       |     | 3,820   |       
|                                           |                                                                  | France                     |        |      | 96      |        |       |     |        |        |       |     |        |       
|                                           |                                                                  |                            |        |      |         |        |       |     |         |        |       |    
|                                           |                                                                  |                            | Total  |      | $       | 4,676  |       |     | $       | 6,118  |       |     | $       | 6,676  |  
|                                           |                                                                  |                            |        |      |         |        |       |     |         |        |       |    
|                                           | Average return:                                                  |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           |                                                                  | Domestic                   |        |      | 30.1    | %      |       |     | 16.9    | %      |       |     | 12.1    | %     
|                                           |                                                                  | Mexico                     |        |      | 17.3    | %      |       |     | 21.1    | %      |       |     | 22.5    | %     
|                                           |                                                                  | France                     |        |      | 4.5     | %      |       |     |        |        |       |     |        |       
|                                           |                                                                  |                            | Total  |      |         | 19.8   | %     |     |         | 19.4   | %     |     |         | 16.4   | %
|Servicing fee revenues:                    |                                                                  |                            |        |      |         |        |       |     |         |        |       |    
|                                           | Domestic partnerships:                                           |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           |                                                                  | $ Collected                |        | $    | 143,440 |        |       | $   | 188,081 |        |       | $   | 126,591 |       
|                                           |                                                                  | Servicing fee revenue      |        |      | 4,857   |        |       |     | 5,469   |        |       |     | 3,207   |       
|                                           |                                                                  | Average servicing fee %    |        |      | 3.4     | %      |       |     | 2.9     | %      |       |     | 2.5     | %     
|                                           | Mexico partnerships:                                             |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           |                                                                  | $ Collected                |        | $    | 56,372  |        |       | $   | 85,303  |        |       | $   | 147,540 |       
|                                           |                                                                  | Servicing fee revenue      |        |      | 9,860   |        |       |     | 6,592   |        |       |     | 5,965   |       
|                                           |                                                                  | Average servicing fee %(1) |        |      | 17.5    | %      |       |     | 7.7     | %      |       |     | 4.0     | %     
|                                           | Incentive service fees                                           |                            | $      | 334  |         |        | $     | 604 |         |        | $     | 408 |        
|                                           | Total Service Fees:                                              |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           |                                                                  | $ Collected                |        | $    | 199,812 |        |       | $   | 273,384 |        |       | $   | 274,131 |       
|                                           |                                                                  | Servicing fee revenue      |        |      | 15,051  |        |       |     | 12,665  |        |       |     | 9,580   |       
|                                           |                                                                  | Average servicing fee %    |        |      | 7.5     | %      |       |     | 4.6     | %      |       |     | 3.5     | %     
|Personnel:                                 |                                                                  |                            |        |      |         |        |       |     |         |        |       |    
|Personnel expenses                         |                                                                  | $                          | 12,537 |      |         | $      | 9,611 |     |         | $      | 7,679 |    
|                                           | Number of personnel (at period end):                             |                            |        |      |         |        |       |     |         |        |       |     |        
|                                           |                                                                  | Production                 |        |      | 25      |        |       |     | 25      |        |       |     | 23      |       
|                                           |                                                                  | Servicing                  |        |      | 212     |        |       |     | 187     |        |       |     | 127     |       

25



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##### Table of Contents



|                                                  |                  |                         |    |        |   |      |     |        |   |   |       |        |  
|------------------------------------------------- | ---------------- | ----------------------- | -- | ------ | - | ---- | --- | ------ | - | - | ----- | ------ | -
|                                                  |                  |                        
|                                                  |                  | Year Ended December 31,
|                                                  |                  |                        
|                                                  |                  | 2003                    |    | 2002   |   | 2001
|                                                  |                  |                         |    |        |   |     
|                                                  |                  |                        
|                                                  |                  | (Dollars in thousands) 
|Interest expense:                                 |                  |                         |    |        |   |      |     |        |   |   |       |       
|                                                  | Average debt     |                         | $  | 31,147 |   |      | $   | 31,960 |   |   | $     | 42,310 |  
|                                                  | Interest expense |                         |    | 2,907  |   |      |     | 2,946  |   |   |       | 4,128  |  
|                                                  | Average cost     |                         |    | 9.3    | % |      |     | 9.2    | % |   |       | 9.8    | %
|Provision for impairment on Portfolio
    Assets: |                  |                         |    |        |   |      |     |        |   |   |       |       
|                                                  | Non-performing   |                         | $  | 31     |   |      | $   | 97     |   |   | $     | 1,627  |  
|                                                  | Performing       |                         |    | 57     |   |      |     | 4      |   |   |       | 552    |  
|                                                  | Real estate      |                         |    | 10     |   |      |     | 194    |   |   |       | 1,098  |  
|                                                  |                  |                         |    |        |   |      |     |        |   |   |       |       
|                                                  |                  | $                       | 98 |        |   | $    | 295 |        |   | $ | 3,277 |       
|                                                  |                  |                         |    |        |   |      |     |        |   |   |       |       



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the Mexican Acquisition Partnerships, the
    Company earns a servicing fee based on costs of servicing plus a
    profit margin.

The following table presents selected information
regarding the revenues and expenses of the Acquisition
Partnerships.

Analysis of Selected Revenues and
Expenses

Acquisition Partnerships


|                                               |                                                               |                         |        |         |        |      |       |         |         |   |        |         |        | 
|---------------------------------------------- | ------------------------------------------------------------- | ----------------------- | ------ | ------- | ------ | ---- | ----- | ------- | ------- | - | ------ | ------- | ------ | 
|                                               |                                                               |                        
|                                               |                                                               | Year Ended December 31,
|                                               |                                                               |                        
|                                               |                                                               | 2003                    |        | 2002    |        | 2001
|                                               |                                                               |                         |        |         |        |     
|                                               |                                                               |                        
|                                               |                                                               | (Dollars in thousands) 
|Revenues:                                      |                                                               |                         |        |         |        |      |       |         |         |   |        |        
|                                               | Gain on resolution of Portfolio Assets                        |                         | $      | 98,126  |        |      | $     | 89,824  |         |   | $      | 103,599 |       
|                                               | Gross profit percentage on resolution of
    Portfolio Assets |                         |        | 38.4    | %      |      |       | 33.0    | %       |   |        | 41.6    | %     
|                                               | Interest income                                               |                         | $      | 9,631   |        |      | $     | 14,380  |         |   | $      | 24,473  |       
|                                               | Other income                                                  |                         |        | 1,749   |        |      |       | 2,348   |         |   |        | 2,929   |       
|Interest expense(1):                           |                                                               |                         |        |         |        |      |       |         |         |   |        |        
|                                               | Interest expense                                              |                         |        | 24,032  |        |      |       | 63,281  |         |   |        | 72,151  |       
|                                               | Average debt                                                  |                         |        | 380,101 |        |      |       | 418,075 |         |   |        | 472,987 |       
|                                               | Average cost (annualized)                                     |                         |        | 6.32    | %      |      |       | 15.14   | %       |   |        | 15.25   | %     
|Other expenses:                                |                                                               |                         |        |         |        |      |       |         |         |   |        |        
|                                               | Service fees                                                  |                         | $      | 18,520  |        |      | $     | 17,909  |         |   | $      | 13,735  |       
|                                               | Other operating costs                                         |                         |        | 22,960  |        |      |       | 16,689  |         |   |        | 22,203  |       
|                                               | Income taxes                                                  |                         |        | (1,111  | )      |      |       | (3,022  | )       |   |        | 12,139  |       
|                                               | Foreign currency losses (gains)                               |                         |        | 29,957  |        |      |       | 24,919  |         |   |        | (3,399  | )     
|                                               |                                                               |                         |        |         |        |      |       |         |         |   |        |        
|                                               |                                                               | Total other expenses    |        |         | 70,326 |      |       |         | 56,495  |   |        |         | 44,678 | 
|                                               |                                                               |                         |        |         |        |      |       |         |         |   |        |        
|                                               |                                                               | Net earnings (loss)     |        | $       | 15,148 |      |       | $       | (13,224 | ) |        | $       | 14,172 | 
|                                               |                                                               |                         |        |         |        |      |       |         |         |   |        |        
|Equity in earnings of Acquisition Partnerships |                                                               | $                       | 13,588 |         |        | $    | 8,418 |         |         | $ | 9,742  |        
|Equity in earnings of servicing entities       |                                                               |                         | 586    |         |        |      | 794   |         |         |   | 1,029  |        
|                                               |                                                               |                         |        |         |        |      |       |         |         |   |        |        
|                                               |                                                               | $                       | 14,174 |         |        | $    | 9,212 |         |         | $ | 10,771 |        
|                                               |                                                               |                         |        |         |        |      |       |         |         |   |        |        



---



|    |                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Interest expense for 2003, 2002 and 2001 includes
    interest on loans to the Acquisition Partnerships located in
    Mexico from affiliates of the investor groups. The rates on all
    but three of these loans range between 18% and 20%. The average
    cost on debt excluding the Mexican Acquisition Partnerships was

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.3%, 6.0% and 7.5% for 2003, 2002 and 2001,
    respectively. As noted above, beginning in 2003, FirstCity
    amended three loan agreements from Mexican Acquisition
    Partnerships to provide for no interest to be payable with
    respect to periods after the effective date of the amendment.
    This change had no impact on the consolidated net earnings as
    the effect is offset through equity earnings in these
    Partnerships.



| |                 
| | ----------------
| | Consumer Lending

FirstCity owns a 31% interest in Drive Financial
Services L.P., a sub prime auto lending company. Drive
originated $485 million of receivables during 2003 compared
to $416 million in 2002. Defaults and losses were 22.35%
and 11.83%, respectively, at December 31, 2003 compared to
20.14% and 10.26%, respectively, at December 31, 2002.
These statistics reflect continued weakness in the economy and
the resulting impact on used car prices. Delinquencies were
9.53% at December 31, 2003, up from 7.25% for the same
period last year as a result of the same economic trends.

During the fourth quarter 2003, Drive took a
$2 million provision on residual assets and an additional
$3.7 million provision on loans receivable in excess of the
normal monthly provisions. The provisions are related to higher
losses and delinquencies as a result of market and general
economic conditions and are more prevalent in pools of loans
originated prior to 2002. Drives management believes that
recent market conditions indicate initial signs of improvement
and Drive Management continues to monitor trends in cash flow
and performance to determine the impact upon the need for
additional provisions. Net income from Drive continues to be
positive as originations and the volume of portfolio assets grow
over time. Based on information provided by Drive, the Company
expects that this positive trend will continue.

The following table details this trend (dollars
in thousands):

|            |  |              |         |           |  |        |         |                    |  |                    |         |            |  |             |        |     |  |   |        |   |  |   |        |   |  |   |        |  
|----------- |  | ------------ | ------- | --------- |  | ------ | ------- | ------------------ |  | ------------------ | ------- | ---------- |  | ----------- | ------ | --- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|            |  |              |         |           |  |        |         | Income (Loss)      |  |                    |         |            |  |            
|            |  |              |         | Loan      |  | Total  |         | Before Provisions  |  | Provisions         |         | Net Income |  | FirstCitys
|            |  | Originations |         | Inventory |  | Assets |         | on Residual Assets |  | on Residual Assets |         | (Loss)     |  | 31% Share  
|            |  |              |         |           |  |        |         |                    |  |                    |         |            |  |            
|2003        |  |              |         |           |  |        |         |                    |  |                    |         |            |  |             |        |     |  |   |        |   |  |   |        |   |  |   |        |  
|4th Quarter |  | $            | 102,228 |           |  | $      | 623,389 |                    |  | $                  | 738,829 |            |  | $           | 6,308  | *** |  | $ | (2,087 | ) |  | $ | 4,221  |   |  | $ | 1,308  |  
|3rd Quarter |  |              | 128,688 |           |  |        | 577,974 |                    |  |                    | 700,760 |            |  |             | 9,132  |     |  |   | (3,904 | ) |  |   | 5,228  |   |  |   | 1,621  |  
|2nd Quarter |  |              | 127,706 |           |  |        | 511,212 |                    |  |                    | 619,269 |            |  |             | 8,251  |     |  |   | (1,240 | ) |  |   | 7,011  |   |  |   | 2,173  |  
|1st Quarter |  |              | 126,118 |           |  |        | 443,099 |                    |  |                    | 551,412 |            |  |             | 3,707  |     |  |   | (1,217 | ) |  |   | 2,490  |   |  |   | 689    |  
|           
|2002        |  |              |         |           |  |        |         |                    |  |                    |         |            |  |             |        |     |  |   |        |   |  |   |        |   |  |   |        |  
|4th Quarter |  |              | 101,102 |           |  |        | 368,379 |                    |  |                    | 472,553 |            |  |             | 3,207  |     |  |   | (3,303 | ) |  |   | (96    | ) |  |   | (29    | )
|3rd Quarter |  |              | 100,430 |           |  |        | 310,540 |                    |  |                    | 416,295 |            |  |             | 1,025  |     |  |   | (112   | ) |  |   | 913    |   |  |   | 282    |  
|2nd Quarter |  |              | 100,780 |           |  |        | 238,096 |                    |  |                    | 341,882 |            |  |             | 1,281  |     |  |   |       |   |  |   | 1,281  |   |  |   | 398    |  
|1st Quarter |  |              | 113,401 |           |  |        | 159,052 |                    |  |                    | 254,647 |            |  |             | (3,470 | )   |  |   |       |   |  |   | (3,470 | ) |  |   | (1,076 | )



---



|    |                                                                              
|--- | -----------------------------------------------------------------------------
|*** | Net of $3.7 million of additional provisions
    related to loans receivable.

Note: As of December 31, 2003 Drive holds on
its balance sheet residual interests with a book value of
$29.0 million compared with $63.2 million as of
December 31, 2002.


During 2003 and 2002, Drive structured its
securitizations as secured financings and did not use gain on
sale treatment when assets were securitized. Instead, Drive
pursued a strategy to grow the balance sheet and record interest
income from loans and interest expense on the related debt as
incurred to build an earnings stream over time. This change in
focus resulted in FirstCity recording a loss from the equity
interest in Drive, net of minority interest, of $.4 million
for 2002. However, in 2003, FirstCity began to realize the
effects of the

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increased loan inventory balance. FirstCity
recorded $5.8 million in net earnings of Drive during 2003.
The following table presents selected information regarding
consumer lending:


Analysis of Selected Data

Consumer Lending


|                                                                     |                                     |                         |         |         |   |      |         |         |   |   |         |         |  
|-------------------------------------------------------------------- | ----------------------------------- | ----------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                     |                                     |                        
|                                                                     |                                     | Year Ended December 31,
|                                                                     |                                     |                        
|                                                                     |                                     | 2003                    |         | 2002    |   | 2001
|                                                                     |                                     |                         |         |         |   |     
|                                                                     |                                     |                        
|                                                                     |                                     | (Dollars in thousands) 
|Retail installment contracts acquired $                              |                                     | $                       | 484,741 |         |   | $    | 415,713 |         |   | $ | 412,760 |        
|Origination characteristics                                          |                                     |                         |         |         |   |      |         |         |   |   |         |        
|                                                                     | Face value to wholesale value       |                         |         | 98.52   | % |      |         | 99.85   | % |   |         | 100.10  | %
|                                                                     | Weighted average coupon             |                         |         | 21.01   | % |      |         | 21.02   | % |   |         | 20.65   | %
|                                                                     | Purchase discount (% of face value) |                         |         | 17.49   | % |      |         | 15.54   | % |   |         | 15.19   | %
|Servicing portfolio Owned $                                          |                                     | $                       | 209,596 |         |   | $    | 255,174 |         |   | $ | 82,798  |        
|                                                                     | Securitized                         |                         |         | 623,876 |   |      |         | 428,098 |   |   |         | 472,381 |  
|                                                                     |                                     |                         |         |         |   |      |         |         |   |   |         |        
|                                                                     | Total $                             |                         | $       | 833,472 |   |      | $       | 683,272 |   |   | $       | 555,179 |  
|                                                                     |                                     |                         |         |         |   |      |         |         |   |   |         |        
|                                                                     | Owned  number of contracts         |                         |         | 18,505  |   |      |         | 20,806  |   |   |         | 7,416   |  
|                                                                     | Securitized  number of contracts   |                         |         | 60,391  |   |      |         | 40,521  |   |   |         | 40,862  |  
|                                                                     |                                     |                         |         |         |   |      |         |         |   |   |         |        
|                                                                     | Total number of contracts           |                         |         | 78,896  |   |      |         | 61,327  |   |   |         | 48,278  |  
|                                                                     |                                     |                         |         |         |   |      |         |         |   |   |         |        
|Defaults (% of total loans acquired)                                 |                                     |                         | 20.35   | %       |   |      | 20.14   | %       |   |   | 18.05   | %      
|Loss on defaults (% of original loan balance at
    time of default) |                                     |                         | 11.83   | %       |   |      | 10.26   | %       |   |   | 8.91    | %      
|Delinquencies (% of total serviced portfolio)                        |                                     |                         | 22.35   | %       |   |      | 7.25    | %       |   |   | 8.43    | %      



| |                                
| | -------------------------------
| | Liquidity and Capital Resources

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
the Acquisition Partnerships, retirement of and dividends on
preferred stock, and other investments by the Company. The
potential sources of liquidity are funds generated from
operations, equity distributions from the Acquisition
Partnerships, interest and principal payments on subordinated
intercompany debt and dividends from the Companys
subsidiaries, short-term borrowings from revolving lines of
credit, 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 New Preferred Stock
exchanged 1,092,210 shares of New Preferred Stock for
2,417,388 shares of common stock and $10.5 million in
cash. As a result, common equity was increased by
$18.9 million. During the first quarter of 2003,
4,400 shares of New Preferred Stock were redeemed for
8,200 shares of common stock and $50,000 in cash. FirstCity
also recorded a $4 million gain from the release of its
guaranty of Drives indebtedness to 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 are
Senior Vice Presidents of FirstCity, by issuing
400,000 shares of common stock of the Company and a note
payable, to be periodically redeemed by the Company for an
aggregate of up to $3.2 million in accordance with certain
cash collections from servicing income from Portfolio asset
acquisitions in Mexico.

As a part of the recapitalization, 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 Senior Lenders. The
$16 million loan is secured by a 20% interest in Drive
(64.51% of FirstCitys remaining 31% interest in Drive) and
other assets of Consumer Corp. In connection with the
$16 million loan, FirstCity is

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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. Management of the
Company believes the value of FirstCitys 20% ownership
interest of Drive does not exceed $16 million as of
December 31, 2003.


In connection with the recapitalization, the
Senior Lenders refinanced the remainder of the Companys
debt facilities ($40 million outstanding at
December 31, 2003). The Senior Lenders also provided new
financing to FirstCity, with a total commitment of up to
$59 million, consisting of (a) a $5 million
revolving credit loan and (b) an acquisition term loan in
an amount up to $54 million ($20 million available at
December 31, 2003). The aggregate amount of outstanding
loans under the total commitment by the Senior Lenders for the
refinancing and the new financing at any time may not exceed
$77 million.

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 to retain its ability to acquire
approximately 4.86% of the Companys voting Common Stock.

Currently, the Company has approximately
126,291 shares of New Preferred Stock outstanding with
accrued and unpaid dividends of approximately $1.2 million.
The Companys loan agreement with the Senior Lenders
restricts the payment of dividends on these shares until it is
repaid in full. Given the continued high debt levels of the
Company, and managements priority of assuring adequate
levels of liquidity, the Company does not anticipate that
dividends on shares of New Preferred Stock will be paid in the
foreseeable future.

FirstCity has a $35 million loan facility
with CFSC Capital Corp. XXX, a subsidiary of Cargill. This
facility is being used exclusively to provide equity in new
Portfolio acquisitions in partnerships with Cargill and its
affiliates and matures in March 2005. At December 31, 2003,
approximately $27 million was outstanding under this
facility.

In September 2003, FirstCity entered into a
Portfolio acquisition facility line of credit with Greenwich
Capital Financial Products, Inc., which provides borrowings
up to $30 million. The facility obligation was zero at
December 31, 2003 and matures September 2004.

In June 2003, James R. Hawkins, Chairman of the
Board and James T. Sartain, President and Chief Executive
Officer executed a note purchase agreement relating to a loan to
a wholly-owned subsidiary of the Company, which obligated them
to purchase a note executed by the subsidiary to a bank in the
principal amount of $2.7 million if a default occurs under
the note within thirty days of written request by the bank. In
December 2003, this subsidiary borrowed an additional
$1.5 million from the same bank to purchase a portfolio of
loans. Messrs. Hawkins and Sartain executed another note
purchase agreement for the new funding under similar terms. At
December 31, 2003, the combined balance of this debt was
$2.3 million.

During 2003, the Company acquired the minority
interest in MCSFC, Ltd for $1.4 million. The book value of
the minority interest at the time of purchase was
$1.3 million. Also in 2003, the Company participated in the
purchase of an Acquisition Partnership from an affiliate of
Cargill for $9.4 million. FirstCitys total investment
in this partnership was $4.5 million comprising a
$4.1 million loan receivable and $.4 million equity
contribution.

During 2001, the Company sold equity investments
in two domestic Acquisition Partnerships to affiliates of
Cargill for $7.6 million resulting in a gain of
$3.3 million.

Drive has a warehouse line of credit with
BoS(USA), which provides borrowings up to $300 million.
Drives obligation under this arrangement at
December 31, 2003 was $178 million. The debt is
secured by Drives retail installment contracts purchased
with this facility and has been extended to February 2005.

Drive also has a warehouse line of credit
agreement with Variable Funding Capital Corporation, a
subsidiary of Wachovia Corporation, which provides borrowings up
to $100 million. Drives obligation under the
arrangement at December 31, 2003 was zero. The debt will be
secured by Drives retail installment contracts purchased
with this facility and terminates September 2004.

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The Company and each of its major operating
subsidiaries have entered into one or more credit facilities to
finance their respective operations. Each of the operating
subsidiary credit facilities is nonrecourse to the Company. The
Company has agreed to indemnify BoS(USA) for up to 31% of
losses, which might arise as a result of agreements BoS(USA)
executed as a sponsor in connection with the securitizations
completed by Drive. The Company acted as the sponsor and
provided certain indemnities in connection with securitizations
by Consumer Corp. prior to the acquisition by BoS(USA) of the
interest in Drive in August 2000. Management of the Company
currently does not believe it is likely that FirstCity will be
required to make payments on these indemnification agreements.

Excluding the term acquisition facilities of the
unconsolidated Acquisition Partnerships and the term and
warehouse facilities of Drive, as of December 31, 2003, the
Company and its subsidiaries had credit facilities providing for
borrowings in an aggregate principal amount of $154 million
and outstanding borrowings of $91 million.

Management believes that the BoS(USA) loan
facilities, along with the liquidity from the Cargill Facility,
the related fees generated from the servicing of assets, equity
distributions from existing Acquisition Partnerships and wholly
owned portfolios, as well as sales of interests in equity
investments, will allow the Company to meet its obligations as
they come due during the next twelve months.

The following table summarizes the material terms
of the credit facilities to which the Company, its major
operating subsidiaries, the Acquisition Partnerships and Drive
were parties to as of March 18, 2004, and the outstanding
borrowings under such facilities as of December 31, 2003.

Credit Facilities

|                           |                                   |                       |    |              |  |               |    |                            |  |                                          |                |                                                                                                    |  |                                                                 |                                                                
|-------------------------- | --------------------------------- | --------------------- | -- | ------------ |  | ------------- | -- | -------------------------- |  | ---------------------------------------- | -------------- | -------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | ---------------------------------------------------------------
|                           |                                   | Funded and            |    |              |  |               |    |                           
|                           |                                   | Unfunded              |    | Outstanding  |  |               |    |                           
|                           |                                   | Commitment            |    | Borrowings   |  |               |    |                           
|                           |                                   | Amount as of          |    | as of        |  |               |    |                           
|                           |                                   | March 18,             |    | December 31, |  |               |    |                           
|                           |                                   | 2004                  |    | 2003         |  | Interest Rate |    | Other Terms and Conditions
|                           |                                   |                       |    |              |  |               |    |                           
|                           |                                   |                       |    |              |  |              
|                           |                                   | (Dollars in millions) |    |              |  |              
|FirstCity                  |                                   |                       |    |              |  |               |    |                            |  |                                          |                |                                                                                                    |  |                                                                
|Company Senior Facility:   |                                   |                       |    |              |  |               |    |                            |  |                                          |                |                                                                                                    |  |                                                                
|                           | Revolving Line of Credit          |                       | $  | 5            |  |               | $  | 1                          |  |                                          | LIBOR + 2.75%  |                                                                                                    |  |                                                                 | Secured by the assets of the Company, matures
    December 2004
|                           | Portfolio Acquisition Loan (Term) |                       | 24 |              |  |               | 3  |                            |  | LIBOR + 2.75%                            |                |                                                                                                    |  | Secured by the assets of the Company, matures
    November 2006
|                           | Tranche I (Term)                  |                       |    | 28           |  |               |    | 28                         |  |                                          | Prime + 2.5%   |                                                                                                    |  |                                                                 | Secured by the assets of the Company, matures
    December 2006
|                           | Tranche II (Term)                 |                       |    | 12           |  |               |    | 12                         |  |                                          | Fixed at 8.77% |                                                                                                    |  |                                                                 | Secured by the assets of the Company, matures
    December 2007
|Commercial Corp.           |                                   |                       |    |              |  |               |    |                            |  |                                          |                |                                                                                                    |  |                                                                
|Term facility              |                                   |                       | 2  |              |  |               | 2  |                            |  | Bank prime + 0.50%                       |                |                                                                                                    |  | Secured by existing Portfolio Assets, matures
    December 2004
|Equity investment facility |                                   |                       | 35 |              |  |               | 27 |                            |  | Maximum of Fixed at 8.5% or LIBOR + 4.5% |                | Acquisition facility for the investment in future
    Acquisition partnerships, matures March 2005

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|                                                               |       |                       |     |              |  |               |     |                            |  |                                                                          |  |                                                            |  |                                                                                             | 
|-------------------------------------------------------------- | ----- | --------------------- | --- | ------------ |  | ------------- | --- | -------------------------- |  | ------------------------------------------------------------------------ |  | ---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | 
|                                                               |       | Funded and            |     |              |  |               |     |                           
|                                                               |       | Unfunded              |     | Outstanding  |  |               |     |                           
|                                                               |       | Commitment            |     | Borrowings   |  |               |     |                           
|                                                               |       | Amount as of          |     | as of        |  |               |     |                           
|                                                               |       | March 18,             |     | December 31, |  |               |     |                           
|                                                               |       | 2004                  |     | 2003         |  | Interest Rate |     | Other Terms and Conditions
|                                                               |       |                       |     |              |  |               |     |                           
|                                                               |       |                       |     |              |  |              
|                                                               |       | (Dollars in millions) |     |              |  |              
|                                                              
|Portfolio acquisition facility                                 |       |                       | 30  |              |  |               |    |                            |  | LIBOR + 4.0%                                                             |  |                                                            |  | Secured by Portfolio Assets purchased with The
    facility, matures September 2004        
|Unsecured loans payable to senior management                   |       |                       | 1   |              |  |               | 1   |                            |  | Fixed at 4.5% to 7.0%                                                    |  |                                                            |  | Matures December 2011                                                                      
|Other unsecured loans                                          |       |                       | 1   |              |  |               | 1   |                            |  | Fixed at 5.4% to 6.5%                                                    |  |                                                            |  | Matures 2004                                                                               
|                                                              
|Consumer Corp.                                                 |       |                       |     |              |  |               |     |                            |  |                                                                          |  |                                                            |  |                                                                                            
|Term loan                                                      |       |                       | 16  |              |  |               | 16  |                            |  | LIBOR + 1.0%                                                             |  |                                                            |  | Secured by equity interest in Drive, matures
    December 2007, non-recourse               
|                                                               | Total |                       | $   | 154          |  |               | $   | 91                         |  |                                                                          |  |                                                            |  |                                                                                             | 
|                                                               |       |                       |     |              |  |               |     |                            |  |                                                                          |  |                                                            |  |                                                                                            
|Unconsolidated Acquisition Partnerships Term
    Facilities(1) |       | $                     | 141 |              |  | $             | 141 |                            |  | Various rates                                                            |  |                                                            |  | Secured by Portfolio Assets, various maturities
    ($11 million due in 2004), non-recourse
|                                                               |       |                       |     |              |  |               |     |                            |  |                                                                          |  |                                                            |  |                                                                                            
|                                                              
|Unconsolidated Drive                                           |       |                       |     |              |  |               |     |                            |  |                                                                          |  |                                                            |  |                                                                                            
|Warehouse Facility                                             |       | $                     | 300 |              |  | $             | 178 |                            |  | Prime minus .75%                                                         |  |                                                            |  | Secured by warehouse inventory, matures February
    2005                                  
|Warehouse Facility                                             |       |                       | 100 |              |  |               |    |                            |  | Rate based on Commercial paper rates combined with Certain facility fees |  | Secured by warehouse inventory, matures September
    2004
|Bonds payable                                                  |       |                       | 449 |              |  |               | 449 |                            |  | Fixed at 1.09% To 4.09%                                                  |  |                                                            |  | Secured by retail installment Contracts, various
    maturities through October 2009       
|Subordinate capital Facility                                   |       |                       | 65  |              |  |               | 54  |                            |  | Fixed at 16%                                                             |  |                                                            |  | Secured by all assets of Drive, matures February
    2006                                  
|Term Facility                                                  |       |                       | 3   |              |  |               | 3   |                            |  | LIBOR + 1%;                                                              |  |                                                            |  | Secured by residual interests, matures March 2004                                          
|                                                               |       | $                     | 917 |              |  | $             | 684 |                            |  |                                                                          |  |                                                            |  |                                                                                            
|                                                               |       |                       |     |              |  |               |     |                            |  |                                                                          |  |                                                            |  |                                                                                            



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In addition to the term acquisition facilities of
    the unconsolidated Acquisition Partnerships, the Mexican
    Acquisition Partnerships also have term debt of approximately
    $234 million outstanding as of December 31, 2003 owed
    to affiliates of the investor groups. Of this amount, the
    Company has recorded approximately $13 million as Loans
    Receivable on the Consolidated Balance Sheets.

Discussion of Critical Accounting
Policies

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 of America. 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.

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| |                                                                           
| | --------------------------------------------------------------------------
| | Revenue Recognition: Performing,
    Non-performing and Real Estate Pools.

In its Portfolio Asset acquisition and resolution
business, FirstCity acquires Portfolio Assets that are
designated as non-performing, performing or real estate. Each
Portfolio is accounted for as a pool and not on an individual
asset basis, except for real estate Portfolios. To date, a
substantial majority of the Portfolio Assets acquired by
FirstCity have been designated as non-performing. Once a
Portfolio has been designated as either non-performing or
performing, such designation is not changed regardless of the
performance of the assets comprising the Portfolio. The Company
recognizes revenue from Portfolio Assets and Acquisition
Partnerships based on proceeds realized from the resolution of
Portfolio Assets, which proceeds have historically varied
significantly and likely will continue to vary significantly
from period to period.



| |                                
| | -------------------------------
| | Non-Performing Portfolio Assets

Non-performing Portfolio Assets consist primarily
of distressed loans and loan related assets, such as foreclosed
upon collateral. Portfolio Assets are designated as
non-performing unless a majority of all of the loans in the
Portfolio is being repaid in accordance with the contractual
terms of the underlying loan agreements. Such Portfolios are
acquired on the basis of an evaluation by the Company 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 are 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. The evaluation of impairment is determined based on the
review of the estimated future cash receipts, which represents
the net realizable value of the non-performing pool. Once it is
determined that there is impairment, a valuation allowance is
established for any impairment identified through provisions
charged to operations in the period the impairment is
identified. The Company recorded an allowance for impairment of
$31,000 in 2003, $97,000 in 2002 and $1.6 million in 2001.

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 Portfolio. Cost allocation is based on a proration of
actual proceeds divided by total estimated proceeds of the pool.
No interest income is recognized separately on non-performing
Portfolio Assets. All proceeds, of whatever type, are included
in proceeds from resolution of Portfolio Assets in determining
the gain on resolution of such assets. Accounting for Portfolios
is on a pool basis as opposed to an individual asset-by-asset
basis.

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 borrowers financial condition and
other conditions described in the risk factors discussed later
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

Performing Portfolio Assets consist primarily of
Portfolios of consumer and commercial loans acquired at a
discount from the aggregate amount of the borrowers
obligation. Portfolios are classified as performing if a
majority of all of the loans in the Portfolio is being repaid in
accordance with the contractual terms of the underlying loan
agreements.

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

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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 performing Portfolio is
measured based on the present value of the expected future cash
flows in the aggregate discounted at the loans risk
adjusted rate, 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. The Company recorded an allowance for impairment of
$57,000 in 2003, $4,000 in 2002 and $552,000 in 2001.

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 later 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.



| |                       
| | ----------------------
| | Real Estate Portfolios

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, which represents the net realizable value
of the real estate Portfolio. A valuation allowance is
established for any impairment identified through provisions
charged to operations in the period the impairment is
identified. The Company recorded an allowance for impairment of
$10,000 in 2003, $194,000 in 2002, $1.1 million in 2001.



| |                   
| | ------------------
| | Deferred Tax Asset

As a part of the process of preparing its
consolidated financial statements, the Company is required to
estimate its income taxes in each of the jurisdictions in which
it operates. This process involves estimating the Companys
actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred
tax asset 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.

33



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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, such as the acquisition of
Harbor in the third quarter of 1997, 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 2003, 2002 and 2001. Similar events
could occur in the future, and would impact the recognition of
the Companys estimate of the required valuation allowance
associated with its NOLs. If there are changes in the estimated
level of the required reserve, operating results will be
affected accordingly.

The Company has recorded a net deferred tax asset
of $20 million in the consolidated balance sheet as of
December 31, 2003, which is composed of a gross deferred
tax asset of $199 million net of a valuation allowance of
$179 million. Realization is dependent on generating
sufficient taxable income in a look forward period over the next
four years. Although realization is not assured, management
believes it is more likely than not that all of the net deferred
tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the look
forward period are reduced. In the event that actual results
differ from these estimates or the Company adjusts these
estimates in future periods, the Company may need to establish
an additional valuation allowance which could materially impact
its consolidated financial position and results of operations.



| |                           
| | --------------------------
| | Equity Investment in Drive

The Company has an equity investment in Drive
from which it records 31% of the results of Drive using the
equity method of accounting. The following discussion addresses
the critical accounting policies associated with Drive.

Retail Installment Contracts,
Net Retail installment
contracts, net consist of sub-prime automobile finance
receivables, which are acquired from third-party dealers at a
nonrefundable discount from the contractual principal amount. At
December 31, 2001, all retail installment contracts at
Drive were held for sale and stated at the lower of cost or fair
value in the aggregate.

On July 1, 2002, Drive made a decision to
change the structure of its securitization transactions to treat
the transactions as secured financings for accounting purposes.
Therefore, retail installment contracts at Drive are classified
as held for portfolio and carried at amortized cost, net of
credit loss reserves at December 31, 2002 and 2003, and
include retail installment contracts pledged under secured
financings. Drive does not hedge its retail installment
contracts at this time. Management of Drive does not believe
that Drive is exposed to material interest rate risk during the
period contracts are not securitized.

Interest is accrued when earned in accordance
with the contractual terms of the retail installment contract.
The accrual of interest is discontinued once a retail
installment contract becomes past due 60 days or more.
Discounts on retail installment contracts are recognized as
adjustments to the yield of the related contract.

Gain on Sale of Retail Installment Contracts
prior to July 2002 Drive
accounts for sales of retail installment contracts from
securitizations in accordance with Statement of Financial
Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities  A Replacement of FASB Statement
No. 125(SFAS 140). In applying
SFAS 140 to Drives securitized retail installment
contract sales, Drive recognizes revenue (gain on sales of
retail installment contracts) and allocates the total cost of
the loans sold to financial components based on their relative
fair values. During the year ended December 31, 2001, Drive
sold $402 million of auto retail installment contracts in
securitization transactions and recognized pre-tax gains of
$39 million. Drive retained servicing responsibilities and
interests in the receivables in the form of residual
certificates. As of December 31, 2003, Drive was servicing

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$122 million of auto receivables that have
been sold to certain special purpose financing trusts (the
Trusts). In connection with the sales of retail
installment contracts from securitizations, Drive receives
certain residual certificates associated with the
securitizations as described below. Drive and certain of its
subsidiaries have entered into an agreement whereby Drive
receives all the economic benefits associated with the residual
certificates and conversely assumes all the risks.


Under the above agreement, Drive has retained
unrated interests in retail installment contracts sold, which
are subordinate to senior investors and certificated interest
only strips for the benefit of Drive, which represents the
present value of the right to the excess cash flows generated by
the securitized contracts, which represents the difference
between (a) interest at the stated rate paid by borrowers
and (b) the sum of (i) pass-through interest paid to
third-party investors, (ii) trustee fees,
(iii) third-party credit enhancement fees (if applicable),
(iv) stipulated servicing fees, and (v) estimated contract
portfolio credit losses. Drives right to receive the cash
flows begins after certain over-collateralization requirements
have been met, which are specific to each securitization and
used as a means of credit enhancement.

Valuation of Residual Interests at
Drive Fair value of the
residual interests at Drive is determined by calculating the
present value of the anticipated cash flows at the time each
securitization transaction closes, utilizing valuation
assumptions appropriate for each particular transaction. The
significant valuation assumptions are related to the anticipated
average lives of the retail installment contracts sold,
including the effect of anticipated prepayment speeds and
anticipated credit losses.

The residual interests are accounted for under
Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Because such assets can be contractually prepaid
or otherwise settled in such a way that the holder would not
receive all of the recorded investment, the assets are
classified as available-for-sale investments and are carried at
estimated fair value with any accompanying increases or
decreases in estimated fair value being recorded as unrealized
gains or losses in other comprehensive income (loss). The
determination of fair value is based on the present value of the
anticipated excess cash flows utilizing various discount rates,
prepayment speeds and cumulative loss rates. Drive assesses the
carrying value of its securitization related securities for
impairment in accordance with the provisions of EITF 99-20 as
discussed below under  Effect of New Accounting
Standards. There can be no assurance that the estimates
used to determine the fair value of the residual certificates
will remain appropriate for the life of each asset and it is
reasonably possible that circumstances could change in future
periods, which could result in a material change in the
estimates used to prepare the accompanying financial statements.
If actual retail installment contract prepayments or credit
losses exceed the Drives current estimates, other than
temporary impairment may be required to be recognized. The
implementation of EITF 99-20 required Drive to record a
cumulative effect of accounting change for other-than-temporary
impairments on retained beneficial interests in certain
securitized assets, which had previously been recorded as
unrealized losses. As a result, in the second quarter of 2001,
the Company recognized a charge for the cumulative effect of a
change in accounting principle of $.3 million relating to
the Companys share of Drives cumulative effect.



| |                                                   
| | --------------------------------------------------
| | Equity Investments in Acquisition
    Partnerships

FirstCity accounts for its investments in
Acquisition Partnerships using the equity method of accounting.
This accounting method generally results in the pass-through of
its pro rata share of earnings from the Acquisition
Partnerships activities as if it had a direct investment
in the underlying Portfolio Assets held by the Acquisition
Partnership. The revenues and earnings of the Acquisition
Partnerships are determined on a basis consistent with the
accounting methodology applied to non-performing, performing and
real estate Portfolios described in the preceding paragraphs.
FirstCity has ownership interests in the various partnerships
that range from 3% to 50%. The Company also holds investments in
servicing entities that are accounted for on 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

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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

The Company recorded provisions of
$.5 million in 2003, $9.7 million in 2002 and
$5.2 million in 2001 for additional losses from
discontinued operations. The additional provisions primarily
relate to a decrease in the estimated future gross cash receipts
on residual interests in securitizations. These securities are
in run-off, and the Company is contractually
obligated to service these assets. The assumptions used in the
valuation model consider both industry as well as the
Companys historical experience. The decrease in the
estimated future gross cash receipts is a result of the actual
losses exceeding the losses projected by the valuation model. As
the securities run 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. Effective during the
third quarter of 1999, management of the Company adopted formal
plans to discontinue the operations of Harbor Financial
Group, Inc. (formerly known as FirstCity Financial Mortgage
Corp.) and its subsidiaries (collectively referred to as
Mortgage Corp.), and FC Capital Corp.
(Capital Corp.). These entities comprise the
operations that were previously reported as the Companys
residential and commercial mortgage banking business and are now
reflected as discontinued operations in the accompanying
consolidated statements of operations. Additionally, the net
assets related to the resolution of activity from the
discontinued operations have been reflected in the accompanying
consolidated balance sheets.

The only assets remaining from discontinued
operations are the investment securities resulting from the
retention of residual interests in securitization transactions.
These residual interests are classified as discontinued
operations even though the liquidation or run-off of the
securitized assets extends longer than one year because the
Company is contractually obligated to service the securitized
assets as master servicer. The Company has considered the
estimated future gross cash receipts for such investment
securities in the computation of the loss from discontinued
operations. The cash flows are collected over a period of time
and are valued using prepayment assumptions of 35% for fixed
rate loans and 23% for variable rate loans. Overall loss rates
are estimated from 4% to 13% of collateral. The Company uses
modeling techniques to estimate future results from discontinued
operations that consider the contractual terms of the
securitization structures and using the assumptions stated
above. The actual cash flows received from the residual
interests in the future could differ materially positively or
negatively due to factors such as economic conditions, changes
in collateral values, fluctuating interest rates, differences
between actual prepayments and actual losses, which differ from
the assumptions used in the estimating process.



| |                                      
| | -------------------------------------
| | Estimates of Future Cash
    Receipts

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:



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | (i) to calculate the allocation of cost of
    sales of non-performing Portfolios;                                         
|
| | (ii) to determine the effective yield of
    performing Portfolios;                                                        
|
| | (iii) to determine the reasonableness of
    settlement offers received in the liquidation of the Portfolio
    Assets; and
|
| | (iv) to determine whether or not there is
    impairment in a pool of Portfolio Assets                                     



| |                                                         
| | --------------------------------------------------------
| | Calculation of the estimates of future cash
    receipts

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

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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.




| |                                          
| | -----------------------------------------
| | Risks associated with these
    estimates

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 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 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 due to
higher levels of interest expense and other carrying costs of
the Portfolios negating any potentially positive effects.



| |                     
| | --------------------
| | Consolidation Policy

The accompanying consolidated financial
statements include the accounts of all of the majority owned
subsidiaries of the Company. All significant intercompany
transactions and balances have been eliminated in consolidation.
Investments in 20% to 50% owned affiliates are accounted for on
the equity method since the Company has the ability to exercise
significant influence over operating and financial policies of
those affiliates. For domestic Acquisition Partnerships, the
Company owns a limited partner interest and generally shares in
a general partner interest. Regarding the foreign investments,
the Company participates as a limited partner. In all cases the
Companys direct and indirect equity interest never exceeds
50%.

Investments in less than 20% owned affiliates are
also accounted for on the equity method. These investments are
partnerships formed to share in the risks and rewards in
developing new markets as well as to pool resources. Also, the
Company has the ability to exercise significant influence over
operating and financial policies, despite its comparatively
smaller equity percentage, due to its leading role in the
formation of these partnerships as well as its involvement in
the day-to-day management activities.

Equity earnings in the foreign Acquisition
Partnerships are recorded on a one-month lag due to the timing
of FirstCitys receipt of those financial statements.
FirstCity records equity earnings in MCS on a one-quarter lag.



| |                          
| | -------------------------
| | Relationship with Cargill

Cargill is a wholly owned subsidiary of Cargill,
Incorporated, which is generally regarded as one of the
worlds largest privately held corporations and has offices
worldwide. Cargill and its affiliates provide significant debt
and equity financing to the Acquisition Partnerships. In
addition, FirstCity believes its relationship with Cargill
significantly enhances FirstCitys credibility as a
purchaser of Portfolio Assets and facilitates its ability to
expand into related businesses and foreign markets.

Under the Right of First Refusal Agreement, if
the Company receives an invitation to bid on or otherwise
obtains an opportunity to acquire interests in loans,
receivables, real estate or other assets located in the United
States, Canada, Latin America, or the Caribbean in which the
aggregate amount to be bid exceeds $4 million, or $500
thousand for consumer assets, the Company is required to follow
a prescribed notice procedure pursuant to which CFSC has the
option to participate in the proposed purchase by requiring that
such purchase or acquisition be effected through an Acquisition
Partnership formed by the Company and

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Cargill (or an affiliate). The Right of First
Refusal Agreement does not prohibit the Company from holding
discussions with entities other than CFSC regarding potential
joint purchases of interests in loans, receivables, real estate
or other assets, provided that any such purchase is subject to
CFSCs right to participate in the Companys share of
the investment. The Right of First Refusal Agreement further
provides that, subject to certain conditions, CFSC will bear 50%
of the due diligence expenses incurred by the Company in
connection with proposed asset purchases. The Right of First
Refusal Agreement is a restatement and extension of a similar
agreement entered into among the Company, certain members of the
Companys management and Cargill in 1992. The Right of
First Refusal Agreement has a termination date of
February 1, 2006 and will renew automatically for an
additional year on an annual basis thereafter unless either
party gives notice to the other of its desire to discontinue the
arrangement six months prior to the termination date.


Future increases in the Companys
investments in Portfolio Assets acquired from institutions and
government agencies may be obtained through investment entities
formed with Cargill, whereby Cargill shares a general partner
interest, thereby capitalizing on the expertise of Cargill whose
skills complement those of the Company.

Contractual Obligations and Commercial
Commitments

The following tables present contractual cash
obligations and commercial commitments of the Company as of
December 31, 2003. See Notes 7, 9, 12 and 14 of the
Notes to Consolidated Financial Statements (dollars in
thousands).

|                                                                                                       |  |                        |        |           |  |             |        |            |  |   |        |  |  |   |        | 
|------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------ | --------- |  | ----------- | ------ | ---------- |  | - | ------ |  |  | - | ------ | 
|                                                                                                       |  |                       
|                                                                                                       |  | Payments Due by Period
|                                                                                                       |  |                       
|                                                                                                       |  |                        |        | Less than |  | One to      |        | Four to   
|Contractual Cash Obligations                                                                           |  | Total                  |        | One Year  |  | Three Years |        | Five Years
|                                                                                                       |  |                        |        |           |  |             |        |           
|Notes payable secured by Portfolio Assets, loans
    receivable and equity in Acquisition Partnerships |  | $                      | 29,436 |           |  | $           | 2,254  |            |  | $ | 27,182 |  |  | $ |       | 
|Note payable secured by equity interest in Drive                                                       |  |                        | 16,000 |           |  |             |       |            |  |   |       |  |  |   | 16,000 | 
|Unsecured notes                                                                                        |  |                        | 1,454  |           |  |             | 178    |            |  |   |       |  |  |   | 1,276  | 
|Company credit facility                                                                                |  |                        | 44,170 |           |  |             | 11,150 |            |  |   | 21,020 |  |  |   | 12,000 | 
|Operating leases                                                                                       |  |                        | 1,219  |           |  |             | 600    |            |  |   | 617    |  |  |   | 2      | 
|New Preferred Stock(1)                                                                                 |  |                        | 3,846  |           |  |             |       |            |  |   | 3,846  |  |  |   |       | 
|                                                                                                       |  |                        |        |           |  |             |        |            |  |   |        |  |  |   |        | 
|                                                                                                       |  | $                      | 96,125 |           |  | $           | 14,182 |            |  | $ | 52,665 |  |  | $ | 29,278 | 
|                                                                                                       |  |                        |        |           |  |             |        |            |  |   |        |  |  |   |        | 

|                       |  |                                        |   |           |  |             |   |  |  |   |   | 
|---------------------- |  | -------------------------------------- | - | --------- |  | ----------- | - |  |  | - | - | 
|                       |  |                                       
|                       |  | Amount of Commitment Expiration Period
|                       |  |                                       
|                       |  | Unfunded                               |   | Less than |  | One to     
|                       |  | Commitments                            |   | One Year  |  | Three Years
|                       |  |                                        |   |           |  |            
|Commercial Commitments |  | $                                      |  |           |  | $           |  |  |  | $ |  | 



---



|    |                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | New Preferred Stock as shown above includes
    $2.6 million payable at December 31, 2003 plus
    $1.2 million of unaccrued dividends through September 2005.

Effect of New Accounting Standards

In April 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities(SFAS 149).
SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003.
The Company currently has no derivatives or hedging
relationships, and therefore, the adoption of SFAS 149 had
no effect on the Companys consolidated financial
statements.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). SFAS establishes
standards for how an issuer

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measures certain financial instruments with
characteristics of both liabilities and equity and classifies
them in its statement of financial position. It requires that an
issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances) when that
financial instrument embodies an obligation of the issuer. This
Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective on
July 1, 2003. As it relates to FirstCity, on July 1,
2003, the carrying value of the New Preferred Stock was
$3.7 million and approximated fair value. Beginning with
the third quarter of 2003, the New Preferred Stock is to be
presented as a liability in the consolidated financial
statements and any related accretion of discount and dividends
are charged to the consolidated results of operations.


In November 2003, the FASB issued Staff Position,
No. 150-3, Effective Date, Disclosures, and Transition
for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests under FASB Statement No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity (Staff
Position 150-3). Staff Position 150-3 defers the
application of various provisions of SFAS 150 for specified
mandatorily redeemable noncontrolling interests in consolidated
limited-life entities. FirstCity has minority interests in
various limited-life partnerships with a carrying value of
$.8 million at December 31, 2003. The estimated amount
that would be paid to the minority interest holder if the
instruments were to be settled at December 31, 2003 is
$.6 million.

In December 2003, the Accounting Standards
Executive Committee issued Statement of Position No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer(SOP 03-3). SOP 03-3 addresses
accounting for differences between contractual cash flows and
cash flows expected to be collected from an investors
initial investment in loans or debt securities acquired in a
transfer if those differences are attributable, at least in
part, to credit quality. SOP 03-3 limits the yield that may be
accreted on a loan portfolio to the excess of undiscounted
expected cash flows over the initial investment in the loan
portfolio. FirstCity will be required to account for all loans
acquired after 2004 in accordance with SOP 03-3. For loans
acquired prior to January 1, 2005, FirstCity will adopt the
provisions of SOP 03-3 on a prospective basis.

In December 2003, the FASB issued a revision to
Interpretation No. 46, Consolidation of Variable
Interest Entities(FIN 46R), which was
originally issued in January 2003. FIN 46R provides
guidance on the consolidation of certain entities when control
exists through other than voting (or similar) interests and was
effective immediately with respect to entities created after
January 31, 2003. For certain special purpose entities
created prior to February 1, 2003, FIN 46R became
effective for financial statements issued after
December 15, 2003. FIN 46R is effective for all other
entities created prior to February 1, 2003 beginning with
financial statements for reporting periods ending after
March 15, 2004.

FIN 46R requires consolidation by the
majority holder of expected residual gains and losses of the
activities of a variable interest entity (VIE).
FirstCity holds significant variable interests in certain
domestic Acquisition Partnerships and all of the French and
Mexico partnerships, which would be characterized as VIEs.
However, FirstCity is not deemed to be the primary beneficiary
of any of these entities. At December 31, 2003,
FirstCitys maximum exposure to loss as a result of its
involvement with the VIEs is $40.5 million.

RISK FACTORS

Availability of Portfolio Assets

The Portfolio Asset acquisition and resolution
business is affected by long-term cycles in the general economy.
The Company cannot predict its future annual acquisition volume
of Portfolio Assets. Moreover, future Portfolio Asset purchases
will depend on the availability of Portfolios offered for sale,
the availability of capital and the Companys ability to
submit successful bids to purchase Portfolio Assets. The
acquisition of Portfolio Assets is highly competitive in the
United States. This may require the Company to acquire Portfolio
Assets at higher prices thereby lowering profit margins on the
resolution of such Portfolios. To offset these changes in the
domestic arena, the Company continues to develop its presence in
other markets. Under certain circumstances, the Company may
choose not to bid for Portfolio Assets that it believes cannot
be acquired at

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attractive prices. As a result of all the above
factors, Portfolio Asset purchases, and the revenue derived from
the resolution of Portfolio Assets, may vary significantly from
quarter to quarter.




| |                                                       
| | ------------------------------------------------------
| | Assumptions Underlying Portfolio Asset
    Performance

The purchase price and carrying value of
Portfolio Assets acquired by FirstCity are determined largely by
estimating expected future cash flows from such assets.
FirstCity develops and revises such estimates based on its
historical experience and current market conditions, and based
on the discount rates that the Company believes are appropriate
for the assets comprising the Portfolios. In addition, many
obligors on Portfolio Assets have impaired credit, with risks
associated with such obligors similar to the risks described in
respect of borrowers under Credit Impaired Borrowers at
Drive. If the amount and timing of actual cash flows is
materially different from estimates, the Companys
consolidated financial position, results of operations and
business prospects could be materially adversely affected.

Risk Associated with Foreign
Operations

FirstCity has acquired, and manages and resolves,
Portfolio Assets located in France and Mexico and is actively
pursuing opportunities to purchase additional pools of
distressed assets in these locations as well as other areas of
Western Europe, Southeast Asia and Central and South America.
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, the Company would 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 other
obligations of the Company, which may be payable even if the
Company has no earnings on a consolidated basis. Any or all of
the foregoing could have a material adverse effect on the
Companys consolidated position, results of operations and
business prospects.

Impact of Changing Interest Rates

Because most of the Companys borrowings are
at variable rates of interest, the Company will be impacted by
fluctuations in interest rates. However, certain effects of
changes in interest rates, such as increased prepayments of
outstanding loans, cannot be mitigated. Fluctuations in interest
rates could have a material adverse effect on the Companys
consolidated financial position, results of operations and
business prospects.

A substantial and sustained decline in interest
rates may adversely impact the amount of distressed assets
available for purchase by FirstCity. The value of the
Companys 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.

Conversely, a substantial and sustained increase
in interest rates could adversely affect the ability of the
Company to originate loans and could reduce the gains recognized
by the Company upon their sale. Fluctuating interest rates also
may affect the net interest income earned by the Company
resulting from the difference between the yield to the Company
on loans held pending sale and the interest paid by the Company
for funds borrowed under the Companys warehouse credit
facilities or otherwise. See Item 7A. 
Quantitative and Qualitative Disclosures About Market Risk.

Continuing Need for Financing

General.The
successful execution of the Companys business strategy
depends on its continued access to financing. In addition to the
need for such financing, the Company must have access to
liquidity to invest as equity or subordinated debt to meet its
capital needs. Liquidity is generated by the cash flow to the
Company from subsidiaries, access to the public debt and equity
markets and borrowings incurred by the Company. The
Companys access to the capital markets is affected by such
factors as changes in interest rates, general

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economic conditions, and the perception in the
capital markets of the Companys business, results of
operations, leverage, financial position and business prospects.
In addition, the Companys 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
the Company as a result of the Merger. There can be no assurance
that the Companys funding relationships with commercial
banks, investment banks and financial services companies
(including Cargill and the Senior Lenders) that have previously
provided financing for the Company and its subsidiaries will
continue past their respective current maturity dates. Some
credit facilities to which the Company and its subsidiaries are
parties have short-term maturities. If these credit facilities
are not extended and the Company or its subsidiaries cannot find
alternative funding sources on satisfactory terms, or at all,
the Companys consolidated financial position, results of
operations and business prospects would be materially adversely
affected. See Liquidity and Capital Resources.


Each of the Company and its major operating
subsidiaries has its own source of debt financing. In certain
circumstances, a default by the Company or any of its major
operating subsidiaries in respect of indebtedness owed to a
third party constitutes a default under the Companys
credit facility. Although the Company intends to segregate the
debt obligations of each such subsidiary, there can be no
assurance that its existing financing sources will continue to
agree to such arrangements or that alternative financing sources
that would accept such arrangements would be available. In the
event the Companys major operating subsidiaries are
compelled to accept cross-guarantees, or cross-default or
cross-acceleration provisions in connection with their
respective credit facilities, financial difficulties experienced
by one of the Companys subsidiaries could adversely impact
the Companys other subsidiaries.

Dependence on Warehouse Financing at
Drive.As is customary in the consumer
lending businesses, Drive depends upon warehouse credit
facilities with financial institutions or institutional lenders
to finance the origination and purchase of loans on a short-term
basis pending sale or securitization. Implementation of
Drives business strategy requires the continued
availability of warehouse credit facilities, and may require
increases in the permitted borrowing levels under such
facilities. There can be no assurance that such financing will
be available on terms satisfactory to Drive. The inability of
Drive or its subsidiaries to arrange additional warehouse credit
facilities, to extend or replace existing facilities when they
expire or to increase the capacity of such facilities may have a
material adverse effect on the Companys consolidated
position, results of operations and business prospects.



| |                                          
| | -----------------------------------------
| | Risk of Declining Value of
    Collateral

The value of the collateral securing automobile
and other consumer loans and 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. Any material decline in the value of such collateral
could adversely affect the consolidated financial position,
results of operations and business prospects of the Company.



| |                                 
| | --------------------------------
| | Risks of Securitization by Drive

Significance of
Securitization.The Company continues
to believe that Drives ability to securitize sub-prime
automobile loans is necessary to efficiently finance the volume
of assets expected to be generated. Accordingly, adverse changes
in the secondary market for such loans could impair Drives
ability to originate and securitize on a favorable or timely
basis. Any such impairment could have a material adverse effect
upon Drives consolidated position, results of operations
and business prospects. Proceeds from the securitization of
acquired loans are required to be used to repay borrowings under
warehouse credit facilities, which makes such facilities
available to finance the purchase of additional loan assets.
There can be no assurance that, as Drives volume of loans
purchased increases, Drive will be able to securitize its loan
production efficiently. An inability of Drive to efficiently
securitize its loan production could have a material adverse
effect on the Companys consolidated position, results of
operations and business prospects.

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Securitization transactions may be affected by a
number of factors, some of which are beyond Drives
control, including, among other things, the adverse financial
condition of, or developments related to, some of Drives
competitors, conditions in the securities markets in general,
and conditions in the asset-backed securitization market.
Drives securitizations typically utilize credit
enhancements in the form of financial guaranty insurance
policies in order to achieve enhanced credit ratings. Failure to
obtain insurance company credit enhancement could adversely
affect the timing of or ability of Drive to effect
securitizations. In addition, the failure to satisfy rating
agency requirements with respect to loan pools would adversely
impact Drives ability to effect securitizations.

Contingent Risks.During 2002, Drive began structuring securitization transactions
as secured financings and retaining the assets on the balance
sheet and thus retains the credit risk on substantially all
loans securitized in this manner. Drive is subject to various
business risks associated with the lending business, including
the risk of borrower default, the risk of foreclosure and the
risk that a rapid increase in interest rates would result in a
decline in the future net interest margins on future
securitizations. Drive expects that the terms of its
securitizations will require it to establish deposit accounts or
build over-collateralization levels through retention of
distributions otherwise payable to Drive who holds the
subordinated interests in the securitization. Drive also expects
to be required to commit to repurchase or replace loans that do
not conform to the representations and warranties made by Drive
at the time of securitization.

Retained Risks of Securitized
Loans.Drive makes various
representations with respect to the loans that it securitizes.
With respect to acquired loans, Drives representations
rely in part on similar representations made by the originators
of such loans when Drive purchased them. In the event of a
breach of its representations, Drive may be required to
repurchase or replace the related loan using its own funds.
While Drive may have a claim against the originator in the event
of a breach of any of these representations made by the
originators, the Companys ability to recover on any such
claim will be dependent on the financial condition of the
originator. There can be no assurance that Drive will not
experience a material loss associated with any of these
contingencies.

Performance
Assumptions.Securitizations completed
by Drive for the foreseeable future will be structured as debt
financings and will result in a growth of the net interest
margin and grow Drives balance sheet. Prior to July 2002
Drive structured the securitizations as sales and retains
subordinated interests in those securitizations. Management of
Drive makes a number of assumptions in determining the estimated
fair value for the subordinated interests. These assumptions
include, but are not limited to, prepayment speeds, default
rates and subsequent losses on the underlying loans, and the
discount rates used to present value the future cash flows. All
of the assumptions are subjective. Varying the assumptions can
have a material effect on the present value determination in one
securitization as compared to any other. Subsequent events will
cause the actual occurrences of prepayments, losses and interest
rates to be different from the assumptions used for such factors
at the time of the recognition of the sale of the loans. The
effect of the subsequently occurring events could cause a
re-evaluation of the carrying values of the previously estimated
values of the subordinated interests and excess spreads and such
adjustment could be material. Defaults and losses on defaults
increased in 2002 and 2001 due to recession related factors. Of
major importance was the reduction in used car values caused by
the events of September 11, 2001, when, facing significant
slowdowns in travel, the car rental agencies reduced their
fleets dramatically. This, compounded by the zero percent
financing offered on new cars, flooded the used car market
creating downward pressure on used car values.

Because the subordinated interests to be retained
by Drive represent claims to future cash flow that are
subordinated to holders of senior interests, Drive retains a
significant portion of the risk of whether the full value of the
underlying loans may be realized. In addition, holders of the
senior interests may have the right to receive certain
additional payments on account of principal in order to reduce
the balance of the senior interests in proportion to the credit
enhancement requirements of any particular transaction. Such
payments for the benefit of the senior interest holders will
delay the payment, if any, of excess cash flow to Drive as the
holder of the subordinated interests.

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| |                                     
| | ------------------------------------
| | Risk of Minority Investment in Drive

Although the Company continues to have some
influence on Drive and its operations, due to the sale of 49% of
its interest, the Company now maintains a minority interest in
Drive. There can be no guarantee that Drives future
operations will be consistent with the Companys goals



| |                                   
| | ----------------------------------
| | Credit Impaired Borrowers at Drive

Drives sub-prime borrowers generally are
unable to obtain credit from traditional financial institutions
due to factors such as an impaired or poor credit history, low
income or other adverse credit events. Drive is 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. While the Company believes that the
underwriting criteria and collection methods Drive employs
enable it to identify and control the higher risks inherent in
loans made to such borrowers, and that the interest rates
charged compensate Drive for the risks inherent in such loans,
no assurance can be given that such criteria or methods, or such
interest rates, will afford adequate protection against, or
compensation for, higher than anticipated delinquencies,
foreclosures or losses. The actual rate of delinquencies,
foreclosures or losses could be significantly accelerated by an
economic downturn or recession. Consequently, the Companys
consolidated financial position, results of operations
(primarily Consumer Corp.s 31% equity earnings in Drive)
and business prospects could be materially adversely affected.
Retail installment contracts at Drive are held for portfolio and
carried at amortized cost, net of credit loss reserves. Drive is
exposed to interest rate risk during the period contracts are
held, and there can be no assurance that future material
valuation impairments will not be required.



| |                                                     
| | ----------------------------------------------------
| | Availability of Net Operating Loss
    Carryforwards

The Company believes that, as a result of the
Merger, approximately $596 million of NOLs were available
to the Company to offset future taxable income as of
December 31, 1995. Since December 31, 1995, the
Company has generated an additional $132 million in tax
operating losses and utilized $23 million of NOLs.
Accordingly, as of December 31, 2003, the Company believes
that it has approximately $705 million of NOLs available to
offset future taxable income. Out of the total $705 million
of NOLs, the Company estimates it will be able to utilize
$57.4 million, which equates to a $20.1 million
deferred tax asset on the Companys books and records.
However, because the Companys position in respect of its
$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 the Company, 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 the Companys
NOLs, with the result that the Companys $20.1 million
deferred tax asset would be reduced or eliminated.

Some of the NOLs may be carried forward to offset
future federal taxable income of the Company through the year
2022; however, the availability of some of the NOLs begins to
expire beginning in 2005. The ability of the Company to utilize
such NOLs will be severely limited if there is a more than 50%
ownership change of the 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 the Company were unable to utilize its NOLs to
offset future taxable income, it would lose significant
competitive advantages that it now enjoys. Such advantages
include, but are not limited to, the Companys ability to
offset non-cash income recognized by the Company in connection
with certain securitizations, to generate capital to support its
expansion plans on a tax-advantaged basis, to offset its and its
consolidated subsidiaries pretax income, and to have
access to the cash flow that would otherwise be represented by
payments of federal tax liabilities.

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| |                                                            
| | -----------------------------------------------------------
| | Assumptions Regarding Recognition of Deferred
    Tax Asset

As noted above, the Company has NOLs available
for federal income tax purposes to offset future federal taxable
income, if any, through the year 2022. 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 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. The ability of the Company 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.



| |                          
| | -------------------------
| | Environmental Liabilities

The Company, through its subsidiaries and
affiliates, acquires real property in its Portfolio Asset
acquisition and resolution business. There is a risk that
properties acquired by the Company could contain hazardous
substances or waste, contaminants or pollutants. The Company may
be required to remove such substances from the affected
properties at its expense, and the cost of such removal may
substantially exceed the value of the affected properties or the
loans secured by such properties. Furthermore, the Company may
not have adequate remedies against the prior owners or other
responsible parties to recover its costs, either as a matter of
law or regulation, or as a result of such prior owners
financial inability to pay such costs. The Company may find it
difficult or impossible to sell the affected properties either
prior to or following any such removal.



| |            
| | -----------
| | Competition

All of the businesses in which the Company
operates are highly competitive. Some of the Companys
principal competitors are substantially larger and better
capitalized than the Company. Because of their resources, these
companies may be better able than the Company to obtain new
customers for loan production, 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 the Companys ability to compete. Many of the
Companys competitors have superior access to capital
sources and can arrange or obtain lower cost of capital,
resulting in a competitive disadvantage to the Company with
respect to such competitors.

In addition, certain of the Companys
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 the Company. In the event a significant number of
competitors establish pricing levels below those established by
the Company, the Companys ability to compete would be
adversely affected.



| |                            
| | ---------------------------
| | General Economic Conditions

Periods of economic slowdown or recession, or
declining demand for commercial real estate, automobile loans or
other commercial or consumer loans may adversely affect the
Companys business. Economic downturns may reduce the
number of loan originations by the Companys consumer
business and negatively impact its securitization activity and
generally reduce the value of the Companys assets. In
addition, periods of economic slowdown or recession, whether
general, regional or industry-related, may increase the risk of
default on loans and could have a material adverse effect on the
Companys consolidated financial position, results of
operations and business prospects. Such periods also may be
accompanied by declining values of automobiles and other
property securing outstanding loans, thereby weakening
collateral coverage and increasing the possibility of losses in
the event of default. Due to significant increases in
automobiles for sale during the recent recessionary economic
period have depressed the prices at which such collateral may be
sold

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or delayed the timing of such sales. There can be
no assurance that there will be adequate markets for the sale of
repossessed automobiles. Any additional deterioration of such
markets could reduce recoveries from the sale of collateral.


Such economic conditions could also 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 the Company 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 the Companys consolidated
financial position, results of operations and business prospects.



| |                      
| | ---------------------
| | Government Regulation

Some aspects of the Companys 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. The Company believes it is currently in compliance in
all material respects with applicable regulations, but there can
be no assurance that the Company will be able to maintain such
compliance. Failure to comply with, or changes in, these laws or
regulations, or the expansion of the Companys business
into jurisdictions that have adopted more stringent regulatory
requirements than those in which the Company currently conducts
business, could have an adverse effect on the Company by, among
other things, limiting the income the Company may generate on
existing and additional loans, limiting the states in which the
Company may operate or restricting the Companys ability to
realize on the collateral securing its loans. See
Item 1  Business  Government
Regulation.



| |           
| | ----------
| | Litigation

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

Industry participants in the consumer lending
businesses from time to time are named as defendants in
litigation involving alleged violations of federal and state
consumer protection or other similar laws and regulations. A
judgment against FirstCity or Drive in connection with any such
litigation could have a material adverse effect on the
Companys consolidated financial position, results of
operations and business prospects.



| |                                                  
| | -------------------------------------------------
| | Relationship With and Dependence Upon
    Cargill

The Companys 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, provides equity and
debt financings for many of the Acquisition Partnerships.
Cargill owns approximately 1.98% of the Companys
outstanding Common Stock, and a Cargill designee, Jeffery Leu,
serves as a director of the Company. The Company believes its
relationship with Cargill significantly enhances the
Companys credibility as a purchaser of Portfolio Assets
and facilitates its ability to expand into other businesses and
foreign markets. Although management believes that the
Companys relationship with Cargill is excellent, there can
be no assurance that such relationship will continue in the
future. Absent such relationship, the Company and the
Acquisition Partnerships would be required to find alternative
sources for the financing that Cargill has historically
provided. There can be no assurance that such alternative
financing would be available. Any termination of such
relationship could have a material adverse effect on the
Companys consolidated financial position, results of
operations and business prospects.

45



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| |                            
| | ---------------------------
| | Dependence on Key Personnel

The Company is dependent on the efforts of its
senior executive officers, particularly James R. Hawkins
(Chairman of the Board) and James T. Sartain (President and
Chief Executive Officer). The Company is also dependent on
several of the key members of management of each of its
operating subsidiaries, many of whom were instrumental in
developing and implementing the business strategy for such
subsidiaries. The inability or unwillingness of one or more of
these individuals to continue in his present role could have a
material adverse effect on the Companys consolidated
condition, results of operations and business prospects. 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. The Company does not
maintain key person life insurance for any of its senior
executive officers.

The borrowing facilities for the Company and
FirstCity each 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.



| |                                  
| | ---------------------------------
| | Influence of Certain Stockholders

The directors and executive officers of the
Company collectively beneficially own 26.88% of the Common
Stock. Although there are no agreements or arrangements with
respect to voting such Common Stock among such persons except as
described below, such persons, if acting together, may
effectively be able to control any vote of stockholders of the
Company and thereby exert considerable influence over the
affairs of the Company. James R. Hawkins, the Chairman of the
Board, is the beneficial owner of 11.41% of the Common Stock.
James T. Sartain, President and Chief Executive Officer of the
Company, is the beneficial owner of 5.27% of the Common Stock.
ATARA I, Ltd. (ATARA), an entity associated
with Rick R. Hagelstein, former Executive Vice President of the
Company and former Chief Executive Officer of Mortgage Corp.,
beneficially owns 3.06% of the outstanding Common Stock. In
addition, Cargill owns approximately 1.98% of the Common Stock.
Mr. Hawkins, Mr. Sartain, Cargill and ATARA are
parties to a shareholder voting agreement (the Stockholder
Voting Agreement). Under the Stockholder Voting Agreement,
Mr. Hawkins, Mr. Sartain and ATARA are required to
vote their shares in favor of Cargills designee for
director of the Company, and Cargill is required to vote its
shares in favor of one or more of the designees of
Messrs. Hawkins and Sartain and ATARA. There can be no
assurance that the interests of management or the other entities
and individuals named above will be aligned with the
Companys other stockholders.



| |                                
| | -------------------------------
| | Shares Eligible for Future Sale

The utilization of the Companys
$596 million in NOLs resulting from the Merger may be
limited or prohibited under the Tax Code in the event of certain
ownership changes. The Companys Amended and Restated
Certificate of Incorporation (the Certificate of
Incorporation) contains provisions restricting the
transfer of its securities that are designed to avoid the
possibility of such changes. Such restrictions may prevent
certain holders of Common Stock of the Company 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 the Companys 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.



| |                           
| | --------------------------
| | Period to Period Variances

The revenue of FirstCity 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, the Companys
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 the Company, may
result in significant fluctuations in the reported operations of
the Company and in the trading prices of the Companys
securities, particularly the Common Stock.

46



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| |                                            
| | -------------------------------------------
| | Tax, Monetary and Fiscal Policy
    Changes

The Company originates and acquires financial
assets, the value and income potential of which are subject to
influence by 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 the control of the
Company, and the Company cannot predict the timing or effect of
changes in such policies. Changes in such policies could have a
material adverse effect on the Companys consolidated
financial position, results of operations and business prospects.



| |                                                      
| | -----------------------------------------------------
| | Dependence on Automobile Dealership
    Relationships

The ability of the Drive to expand into new
geographic markets and to maintain or increase its volume of
automobile loans is dependent upon maintaining and expanding the
network of franchised automobile dealerships from which it
purchases contracts. Increased competition, including
competition from captive finance affiliates of automobile
manufacturers, could have a material adverse effect on the
Drives ability to maintain or expand its dealership
network.



| |                             
| | ----------------------------
| | Anti-Takeover Considerations

The Companys Certificate of Incorporation
and by-laws contain a number of provisions relating to corporate
governance and the rights of stockholders. Certain of these
provisions may be deemed to have a potential
anti-takeover effect to the extent they are utilized
to delay, defer or prevent a change of control of the Company by
deterring unsolicited tender offers or other unilateral takeover
proposals and compelling negotiations with the Companys
Board of Directors rather than non-negotiated takeover attempts
even if such events may be in the best interests of the
Companys stockholders. The Certificate of Incorporation
also contains certain provisions restricting the transfer of its
securities that are designed to prevent ownership changes that
might limit or eliminate the ability of the Company to use its
NOLs resulting from the Merger.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

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 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 loan assets. Furthermore, these pools of assets are
held for sale, not for investment; therefore, the disposition
strategy is to liquidate these assets as quickly as possible.

Loans receivable consist of investment loans made
to Acquisition Partnerships located in Mexico 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.

The Companys equity investment in Drive is
materially impacted by net interest margins and the ability to
securitize the loans Drive originates. During 2002, Drive
elected not to use gain on sale treatment when assets were
securitized. Instead, Drive pursued a strategy to grow the
balance sheet and record interest income from loans and interest
expense on the related debt as incurred to build an earnings
stream over time. Demand

47



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from potential investors in Drives
securitizations is affected by the perception of credit quality
and prepayment risk associated with the loans Drive originates
and securitizes. The timing and size and interest rates of the
bonds issued as a part of the securitizations could also have a
material effect on the net income of Drive. Interest rates
offered to customers also affect prices paid for loans. These
rates are determined by review of competitors rate
offerings to the public and current prices being paid to Drive
for the products. Drive does not hedge these price risks.


Drives residual interests in
securitizations represent the present value of the excess cash
flows Drive expects to receive over the life of the underlying
sub-prime automobile loans. The sub-prime automobile residual
interests are affected less by prepayment speeds due to the
shorter term of the underlying assets and the fact that the
loans are fixed rate, generally at the highest rate allowable by
law.

Additionally the Company has various sources of
financing which have been previously described in
Item 7  Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

In summary, the Company would be negatively
impacted by rising interest rates and declining prices of its
sub-prime loans. Rising interest rates would negatively impact
the value of residual interests in securitizations currently
held and costs of borrowings under the warehouse lines and new
secured financings. Declining prices of the Companys
sub-prime loans would adversely affect the levels of gains
achieved in the event Drive elects to sell those loans. The
Company has not entered into any instruments to minimize this
market risk of adverse changes in interest rates or declining
prices.

The following table is a summary of the interest
earning assets and interest bearing liabilities, as of
December 31, 2003, segregated by asset type as described in
the previous paragraphs, with expected maturity or sales dates
as indicated (dollars in thousands):

|                                                                                                          |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |        | 
|--------------------------------------------------------------------------------------------------------- | ------------------------ | -------- | ---- | ------ |  | ------ | ------ | ------ |  | ------ | ------ | ------- |  | ----- | ----- | ----- |  | - | ------ | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                                                          |                          | Weighted |      |        |  |        |        |        |  |        |        | Greater |  |      
|                                                                                                          |                          | Average  |      | 0-3    |  | 3-6    |        | 6-9    |  | 9-12   |        | than 12 |  |      
|                                                                                                          |                          | Rate     |      | Months |  | Months |        | Months |  | Months |        | Months  |  | Total
|                                                                                                          |                          |          |      |        |  |        |        |        |  |        |        |         |  |      
|Interest bearing assets                                                                                   |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |       
|Portfolio assets(1)                                                                                       |                          |          | N/A  |        |  | $      | 833    |        |  | $      | 812    |         |  | $     | 369   |       |  | $ | 556    |       |  | $ | 1,955  |        |  | $ | 4,525  |       
|Loans receivable(2)                                                                                       |                          |          | 9.08 | %      |  |        | 2,879  |        |  |        | 1,431  |         |  |       | 1,105 |       |  |   | 992    |       |  |   | 10,906 |        |  |   | 17,313 |       
|Equity investments(3)                                                                                     |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |       
|                                                                                                          | Acquisition Partnerships |          |      | N/A    |  |        |        | 11,301 |  |        |        | 7,998   |  |       |       | 4,677 |  |   |        | 7,505 |  |   |        | 25,998 |  |   |        | 57,479 | 
|                                                                                                          | Drive                    |          |      | N/A    |  |        |        |       |  |        |        |        |  |       |       |      |  |   |        |      |  |   |        | 15,667 |  |   |        | 15,667 | 
|                                                                                                          |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |       
|                                                                                                          |                          |          |      |        |  | $      | 15,013 |        |  | $      | 10,241 |         |  | $     | 6,151 |       |  | $ | 9,053  |       |  | $ | 54,526 |        |  | $ | 94,984 |       
|                                                                                                          |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |       
|Interest bearing liabilities                                                                              |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |       
|Notes payable secured by Portfolio Assets, loans
    receivable and equity in Acquisition Partnerships(4) |                          |          | 8.23 | %      |  | $      |       |        |  | $      |       |         |  | $     |      |       |  | $ | 2,254  |       |  | $ | 27,182 |        |  | $ | 29,436 |       
|Unsecured notes                                                                                           |                          |          | 4.75 | %      |  |        | 178    |        |  |        |       |         |  |       |      |       |  |   |       |       |  |   | 1,276  |        |  |   | 1,454  |       
|Consumer Lending                                                                                          |                          |          | 2.13 | %      |  |        |       |        |  |        |       |         |  |       |      |       |  |   |       |       |  |   | 16,000 |        |  |   | 16,000 |       
|Company credit facility                                                                                   |                          |          | 6.61 | %      |  |        |       |        |  |        |       |         |  |       |      |       |  |   | 11,150 |       |  |   | 33,020 |        |  |   | 44,170 |       
|                                                                                                          |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |       
|                                                                                                          |                          |          |      |        |  | $      | 178    |        |  | $      |       |         |  | $     |      |       |  | $ | 13,404 |       |  | $ | 77,478 |        |  | $ | 91,060 |       
|                                                                                                          |                          |          |      |        |  |        |        |        |  |        |        |         |  |       |       |       |  |   |        |       |  |   |        |        |  |   |        |       



---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Portfolio assets are shown based on estimated
    proceeds from disposition, which could occur much faster or
    slower than anticipated or as directed.
|   
|(2) | Loans receivable are shown in the table based
    upon the expected date of sale or repayment.                                                           
|   
|(3) | Equity investments are shown based on anticipated
    equity disbursements, which could occur much faster or slower
    than anticipated.                

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|    |                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Notes payable mature in the periods indicated.
    This does not necessarily indicate when the outstanding balances
    would be paid. Notes payable secured by Portfolio Assets fund up
    to 100% of the corresponding asset class. If the asset balance
    declines whether through a sale or a payment from the borrower,
    the corresponding liability must be paid.

The Company currently has investments in Mexico
and France. In France, the Companys investments are in the
form of equity and represent a significant portion of the
Companys total equity investments. As of December 31,
2003, one U.S. dollar equaled .80 Euros. A sharp change of
the Euro relative to the U.S. dollar could materially
adversely affect the financial position and results of
operations of the Company. The Company has not entered into any
instruments to minimize this market risk of adverse changes in
currency rates. A 5% and 10% incremental depreciation of the
Euro would result in an estimated decline in the valuation of
the Companys equity investments in France of approximately
$.9 million and $1.6 million, respectively. These
amounts are estimates of the financial impact of a depreciation
of the Euro relative to the U.S. dollar. 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.

In Mexico, approximately 95% of the
Companys investments in Mexico are made through
U.S. dollar denominated loans to the Partnerships located
in Mexico. The remaining investment is in the form of equity in
these same Partnerships. The loans receivable are required to be
repaid in U.S. dollars. Although the U.S. dollar
balance of these loans will not change due to a change in the
Mexican peso, the future estimated cash flows of the underlying
assets in Mexico could become less valuable as a result of a
change in the exchange rate for the Mexican peso, and thus could
affect the overall total returns to the Company on these
investments. As of December 31, 2003, one U.S. dollar
equaled 11.2 Mexican pesos. A 5% and 10% incremental
depreciation of the peso would result in an estimated decline in
the valuation of the Companys total investments in Mexico
of approximately $.7 million and $1.3 million,
respectively. These amounts are estimates of the financial
impact of a depreciation of the Mexican peso relative to the
U.S. dollar. 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.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |        |         | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                           
|                                                                       |                                                                                                                                                                                                                                                                     | December 31,                                                              
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                           
|                                                                       |                                                                                                                                                                                                                                                                     | 2003                                                                       |         | 2002  
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |       
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                           
|                                                                       |                                                                                                                                                                                                                                                                     | (Dollars in thousands,                                                    
|                                                                       |                                                                                                                                                                                                                                                                     | except per share data)                                                    
|ASSETS                                                                
|Cash and cash equivalents                                              |                                                                                                                                                                                                                                                                     | $                                                                          | 2,745   |        |         | $ | 4,118   |       
|Portfolio Assets, net                                                  |                                                                                                                                                                                                                                                                     |                                                                            | 4,525   |        |         |   | 9,820   |       
|Loans receivable from acquisition partnerships
    held for investment |                                                                                                                                                                                                                                                                     |                                                                            | 17,313  |        |         |   | 17,700  |       
|Equity investments                                                     |                                                                                                                                                                                                                                                                     |                                                                            | 73,146  |        |         |   | 58,342  |       
|Deferred tax asset, net                                                |                                                                                                                                                                                                                                                                     |                                                                            | 20,101  |        |         |   | 20,101  |       
|Service fees receivable from affiliates                                |                                                                                                                                                                                                                                                                     |                                                                            | 1,390   |        |         |   | 2,235   |       
|Other assets, net                                                      |                                                                                                                                                                                                                                                                     |                                                                            | 6,769   |        |         |   | 6,376   |       
|Net assets of discontinued operations                                  |                                                                                                                                                                                                                                                                     |                                                                            | 6,150   |        |         |   | 7,764   |       
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|                                                                       |                                                                                                                                                                                                                                                                     | Total Assets                                                               |         | $      | 132,139 |   |         | $      | 126,456 | 
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|                                                                      
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND
    STOCKHOLDERS EQUITY  
|Liabilities:                                                           |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|                                                                       | Notes payable to affiliates                                                                                                                                                                                                                                         |                                                                            | $       | 88,628 |         |   | $       | 95,560 |        
|                                                                       | Notes payable other                                                                                                                                                                                                                                                 |                                                                            |         | 2,432  |         |   |         | 1,113  |        
|                                                                       | Preferred stock subject to mandatory redemption,
    including accumulated dividends in arrears of $1,193 in 2003
    (par value $.01; redemption value of $21 per share;
    2,000,000 shares authorized; shares issued and outstanding:
    126,291 in 2003)      |                                                                            |         | 3,846  |         |   |         |       |        
|                                                                       | Minority interest                                                                                                                                                                                                                                                   |                                                                            |         | 3,972  |         |   |         | 4,052  |        
|                                                                       | Other liabilities                                                                                                                                                                                                                                                   |                                                                            |         | 4,292  |         |   |         | 3,274  |        
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|                                                                       |                                                                                                                                                                                                                                                                     | Total Liabilities                                                          |         |        | 103,170 |   |         |        | 103,999 | 
|Commitments and contingencies (Notes 2, 3,
    7, 9, 10, 12 and 14)    |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|Redeemable preferred stock:                                            |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|                                                                       | Preferred stock subject to mandatory redemption,
    including accumulated dividends in arrears of $960 in 2002 (par
    value $.01; redemption value of $21 per share;
    2,000,000 shares authorized; shares issued and outstanding:
    130,691 shares in 2002) |                                                                            |         |       |         |   |         | 3,705  |        
|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; issued and outstanding:
    11,193,687 and 11,195,076 shares, respectively)                                                                                                              |                                                                            |         | 112    |         |   |         | 112    |        
|Paid in capital                                                        |                                                                                                                                                                                                                                                                     |                                                                            | 99,168  |        |         |   | 98,934  |       
|Accumulated deficit                                                    |                                                                                                                                                                                                                                                                     |                                                                            | (73,923 | )      |         |   | (82,977 | )     
|Accumulated other comprehensive income                                 |                                                                                                                                                                                                                                                                     |                                                                            | 3,612   |        |         |   | 2,683   |       
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|                                                                       |                                                                                                                                                                                                                                                                     | Total Stockholders Equity                                                 |         |        | 28,969  |   |         |        | 18,752  | 
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       
|                                                                       |                                                                                                                                                                                                                                                                     | Total Liabilities, Redeemable Preferred Stock and
    Stockholders Equity |         | $      | 132,139 |   |         | $      | 126,456 | 
|                                                                       |                                                                                                                                                                                                                                                                     |                                                                            |         |        |         |   |         |       

See accompanying notes to consolidated financial
statements.

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |        |        | 
|---------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                                     |                                                                         |                                      
|                                                                                                     |                                                                         | Year Ended December 31,              
|                                                                                                     |                                                                         |                                      
|                                                                                                     |                                                                         | 2003                                  |        | 2002   |        | 2001
|                                                                                                     |                                                                         |                                       |        |        |        |     
|                                                                                                     |                                                                         |                                      
|                                                                                                     |                                                                         | (In thousands, except per share data)
|Revenues:                                                                                            |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|                                                                                                     | Servicing fees from affiliates                                          |                                       | $      | 15,051 |        |      | $      | 12,665 |        |   | $      | 9,580  |       
|                                                                                                     | Gain on resolution of Portfolio Assets                                  |                                       |        | 1,380  |        |      |        | 1,138  |        |   |        | 1,049  |       
|                                                                                                     | Equity in earnings of investments                                       |                                       |        | 21,411 |        |      |        | 8,680  |        |   |        | 16,694 |       
|                                                                                                     | Interest income from affiliates                                         |                                       |        | 2,794  |        |      |        | 4,060  |        |   |        | 3,993  |       
|                                                                                                     | Interest income, other                                                  |                                       |        | 533    |        |      |        | 1,068  |        |   |        | 1,892  |       
|                                                                                                     | Gain on sale of interest in equity investments                          |                                       |        |       |        |      |        | 1,779  |        |   |        | 3,316  |       
|                                                                                                     | Gain on sale of interest in subsidiary                                  |                                       |        |       |        |      |        | 4,000  |        |   |        |       |       
|                                                                                                     | Other income                                                            |                                       |        | 1,560  |        |      |        | 2,598  |        |   |        | 1,887  |       
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|                                                                                                     |                                                                         | Total revenues                        |        |        | 42,729 |      |        |        | 35,988 |   |        |        | 38,411 | 
|Expenses:                                                                                            |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|                                                                                                     | Interest and fees on notes payable to affiliates                        |                                       |        | 7,567  |        |      |        | 6,456  |        |   |        | 7,838  |       
|                                                                                                     | Interest and fees on notes payable, other                               |                                       |        | 155    |        |      |        | 366    |        |   |        | 939    |       
|                                                                                                     | Interest on shares subject to mandatory redemption                      |                                       |        | 133    |        |      |        |       |        |   |        |       |       
|                                                                                                     | Salaries and benefits                                                   |                                       |        | 15,875 |        |      |        | 12,609 |        |   |        | 10,606 |       
|                                                                                                     | Provision for loan and impairment losses                                |                                       |        | 98     |        |      |        | 295    |        |   |        | 3,277  |       
|                                                                                                     | Occupancy, data processing, communication and
    other                 |                                       |        | 7,518  |        |      |        | 8,962  |        |   |        | 11,200 |       
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|                                                                                                     |                                                                         | Total expenses                        |        |        | 31,346 |      |        |        | 28,688 |   |        |        | 33,860 | 
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|Earnings from continuing operations before income
    taxes, minority interest and accounting change |                                                                         |                                       | 11,383 |        |        |      | 7,300  |        |        |   | 4,551  |       
|Provision for income taxes                                                                           |                                                                         |                                       | (240   | )      |        |      | (153   | )      |        |   | (15    | )     
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|Earnings from continuing operations before
    minority interest and accounting change               |                                                                         |                                       | 11,143 |        |        |      | 7,147  |        |        |   | 4,536  |       
|Minority interest                                                                                    |                                                                         |                                       | (1,436 | )      |        |      | (1,204 | )      |        |   | (2,061 | )     
|Cumulative effect of accounting change                                                               |                                                                         |                                       |       |        |        |      |       |        |        |   | (304   | )     
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|Earnings from continuing operations                                                                  |                                                                         |                                       | 9,707  |        |        |      | 5,943  |        |        |   | 2,171  |       
|Loss from discontinued operations                                                                    |                                                                         |                                       | (520   | )      |        |      | (9,714 | )      |        |   | (5,200 | )     
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|Net earnings (loss)                                                                                  |                                                                         |                                       | 9,187  |        |        |      | (3,771 | )      |        |   | (3,029 | )     
|Accumulated preferred dividends in arrears                                                           |                                                                         |                                       | (133   | )      |        |      | (2,478 | )      |        |   | (2,568 | )     
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|Net earnings (loss) to common stockholders                                                           |                                                                         | $                                     | 9,054  |        |        | $    | (6,249 | )      |        | $ | (5,597 | )     
|                                                                                                     |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|Basic earnings (loss) per common share are as
    follows:                                           |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|                                                                                                     | Earnings (loss) from continuing operations before
    accounting change |                                       | $      | .86    |        |      | $      | 0.40   |        |   | $      | (0.01  | )     
|                                                                                                     | Discontinued operations                                                 |                                       |        | (0.05  | )      |      |        | (1.14  | )      |   |        | (0.62  | )     
|                                                                                                     | Cumulative effect of accounting change                                  |                                       |        |       |        |      |        |       |        |   |        | (0.04  | )     
|                                                                                                     | Net earnings (loss)                                                     |                                       | $      | .81    |        |      | $      | (0.74  | )      |   | $      | (0.67  | )     
|                                                                                                     | Weighted average common shares outstanding                              |                                       |        | 11,200 |        |      |        | 8,500  |        |   |        | 8,374  |       
|Diluted earnings (loss) per common share are as
    follows:                                         |                                                                         |                                       |        |        |        |      |        |        |        |   |        |       
|                                                                                                     | Earnings (loss) from continuing operations before
    accounting change |                                       | $      | .85    |        |      | $      | 0.40   |        |   | $      | (0.01  | )     
|                                                                                                     | Discontinued operations                                                 |                                       |        | (0.05  | )      |      |        | (1.14  | )      |   |        | (0.62  | )     
|                                                                                                     | Cumulative effect of accounting change                                  |                                       |        |       |        |      |        |       |        |   |        | (0.04  | )     
|                                                                                                     | Net earnings (loss)                                                     |                                       | $      | .80    |        |      | $      | (0.74  | )      |   | $      | (0.67  | )     
|                                                                                                     | Weighted average common shares outstanding                              |                                       |        | 11,349 |        |      |        | 8,500  |        |   |        | 8,374  |       

See accompanying notes to consolidated financial
statements.

51



---



##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

AND COMPREHENSIVE INCOME (LOSS)


|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |        |  
|----------------------------------------------------------------------- | ------------------------------------- | ---------------------- | ---------- | ------ |  | ------- | --- | ----------- |  | ------------- | ------ | ------------- |  | - | ------- | ------ | - | - | ----- | ------ | - | - | ------ | ------ | -
|                                                                        |                                       |                        |            |        |  |         |     |             |  | Accumulated   |        |              
|                                                                        |                                       |                        |            |        |  |         |     |             |  | Other         |        |              
|                                                                        |                                       | Number of              |            |        |  |         |     |             |  | Comprehensive |        | Total        
|                                                                        |                                       | Common                 |            | Common |  | Paid in |     | Accumulated |  | Income        |        | Stockholders
|                                                                        |                                       | Shares                 |            | Stock  |  | Capital |     | Deficit     |  | (Loss)        |        | Equity       
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |              
|                                                                        |                                       |                       
|                                                                        |                                       | (Dollars in thousands)
|Balances, December 31, 2000                                             |                                       |                        | 8,368,344  |        |  |         | 84  |             |  |               | 79,634 |               |  |   | (71,131 | )      |   |   | (109  | )      |   |   | 8,478  |       
|Issuance of common stock Under employee stock
    purchase plan         |                                       |                        | 8,156      |        |  |         |    |             |  |               | 11     |               |  |   |        |        |   |   |      |        |   |   | 11     |       
|Comprehensive loss:                                                     |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|                                                                        | Net loss for 2001                     |                        |            |       |  |         |     |            |  |               |        |              |  |   |         | (3,029 | ) |   |       |       |   |   |        | (3,029 | )
|                                                                        | Foreign currency items                |                        |            |       |  |         |     |            |  |               |        |              |  |   |         |       |   |   |       | (218   | ) |   |        | (218   | )
|                                                                        | Unrealized net gain on securitization |                        |            |       |  |         |     |            |  |               |        |              |  |   |         |       |   |   |       | 1,203  |   |   |        | 1,203  |  
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Total comprehensive loss                                                |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   | (2,044 | )     
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Preferred dividends                                                     |                                       |                        |           |        |  |         |    |             |  |               |       |               |  |   | (2,568  | )      |   |   |      |        |   |   | (2,568 | )     
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Balances, December 31, 2001                                             |                                       |                        | 8,376,500  |        |  |         | 84  |             |  |               | 79,645 |               |  |   | (76,728 | )      |   |   | 876   |        |   |   | 3,877  |       
|Issuance of common stock in Exchange for
    redeemable preferred stock |                                       |                        | 2,417,388  |        |  |         | 24  |             |  |               | 18,891 |               |  |   |        |        |   |   |      |        |   |   | 18,915 |       
|Issuance of common stock to acquire minority
    interest in subsidiary |                                       |                        | 400,000    |        |  |         | 4   |             |  |               | 396    |               |  |   |        |        |   |   |      |        |   |   | 400    |       
|Issuance of common stock                                                |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Under employee stock purchase plan                                      |                                       |                        | 1,188      |        |  |         |    |             |  |               | 2      |               |  |   |        |        |   |   |      |        |   |   | 2      |       
|Comprehensive loss:                                                     |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|                                                                        | Net loss for 2002                     |                        |            |       |  |         |     |            |  |               |        |              |  |   |         | (3,771 | ) |   |       |       |   |   |        | (3,771 | )
|                                                                        | Foreign currency items                |                        |            |       |  |         |     |            |  |               |        |              |  |   |         |       |   |   |       | 1,782  |   |   |        | 1,782  |  
|                                                                        | Unrealized net gain on securitization |                        |            |       |  |         |     |            |  |               |        |              |  |   |         |       |   |   |       | 25     |   |   |        | 25     |  
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Total comprehensive loss                                                |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   | (1,964 | )     
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Preferred dividends                                                     |                                       |                        |           |        |  |         |    |             |  |               |       |               |  |   | (2,478  | )      |   |   |      |        |   |   | (2,478 | )     
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Balances, December 31, 2002                                             |                                       |                        | 11,195,076 |        |  |         | 112 |             |  |               | 98,934 |               |  |   | (82,977 | )      |   |   | 2,683 |        |   |   | 18,752 |       
|Issuance of common stock in Exchange for
    redeemable preferred stock |                                       |                        | 8,200      |        |  |         |    |             |  |               | 75     |               |  |   |        |        |   |   |      |        |   |   | 75     |       
|Issuance of common stock under employee stock
    purchase plan         |                                       |                        | 1,395      |        |  |         |    |             |  |               | 3      |               |  |   |        |        |   |   |      |        |   |   | 3      |       
|Exercise of common stock options                                        |                                       |                        | 6,250      |        |  |         |    |             |  |               | 12     |               |  |   |        |        |   |   |      |        |   |   | 12     |       
|Refund of unconverted common stock                                      |                                       |                        | (17,234    | )      |  |         |    |             |  |               | 144    |               |  |   |        |        |   |   |      |        |   |   | 144    |       
|Comprehensive income:                                                   |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|                                                                        | Net earnings for 2003                 |                        |            |       |  |         |     |            |  |               |        |              |  |   |         | 9,187  |   |   |       |       |   |   |        | 9,187  |  
|                                                                        | Foreign currency items                |                        |            |       |  |         |     |            |  |               |        |              |  |   |         |       |   |   |       | 2,157  |   |   |        | 2,157  |  
|                                                                        | Unrealized net loss on Securitization |                        |            |       |  |         |     |            |  |               |        |              |  |   |         |       |   |   |       | (1,228 | ) |   |        | (1,228 | )
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Total comprehensive income                                              |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   | 10,116 |       
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Preferred dividends                                                     |                                       |                        |           |        |  |         |    |             |  |               |       |               |  |   | (133    | )      |   |   |      |        |   |   | (133   | )     
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       
|Balances, December 31, 2003                                             |                                       |                        | 11,193,687 |        |  | $       | 112 |             |  | $             | 99,168 |               |  | $ | (73,923 | )      |   | $ | 3,612 |        |   | $ | 28,969 |       
|                                                                        |                                       |                        |            |        |  |         |     |             |  |               |        |               |  |   |         |        |   |   |       |        |   |   |        |       

See accompanying notes to consolidated financial
statements.

52



---



##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |         |         |        |  
|------------------------------------------------- | ------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------- | ------ | -
|                                                  |                                                                                            |                                                                            
|                                                  |                                                                                            | Year Ended December 31,                                                    
|                                                  |                                                                                            |                                                                            
|                                                  |                                                                                            | 2003                                                                        |                                           | 2002    |         | 2001  
|                                                  |                                                                                            |                                                                             |                                           |         |         |       
|                                                  |                                                                                            |                                                                            
|                                                  |                                                                                            | (Dollars in thousands)                                                     
|Cash flows from operating activities:             |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  | Net earnings (loss)                                                                        |                                                                             | $                                         | 9,187   |         |        | $      | (3,771  | )      |        | $      | (3,029  | )      
|                                                  | Adjustments to reconcile net earnings (loss) to
    net cash used in operating activities: |                                                                             |                                           |         |         |        |        |         |        |        |        |         |        
|                                                  |                                                                                            | Loss from discontinued operations                                           |                                           |         | 520     |        |        |         | 9,714  |        |        |         | 5,200   |       
|                                                  |                                                                                            | Proceeds from resolution of Portfolio Assets                                |                                           |         | 7,527   |        |        |         | 4,210  |        |        |         | 8,801   |       
|                                                  |                                                                                            | Gain on resolution of Portfolio Assets                                      |                                           |         | (1,380  | )      |        |         | (1,138 | )      |        |         | (1,049  | )     
|                                                  |                                                                                            | Purchase of Portfolio Assets and loans
    receivable, Net                  |                                           |         | (6,646  | )      |        |         | (4,412 | )      |        |         | (10,606 | )     
|                                                  |                                                                                            | Provision for loan and impairment losses                                    |                                           |         | 98      |        |        |         | 295    |        |        |         | 3,277   |       
|                                                  |                                                                                            | Equity in earnings of investments                                           |                                           |         | (21,411 | )      |        |         | (8,680 | )      |        |         | (16,694 | )     
|                                                  |                                                                                            | Proceeds from performing Portfolio Assets and
    loans receivable, net     |                                           |         | 4,660   |        |        |         | 5,675  |        |        |         | 10,328  |       
|                                                  |                                                                                            | Capitalized interest and costs on Portfolio
    Assets and loans receivable |                                           |         | (216    | )      |        |         | (15    | )      |        |         | (509    | )     
|                                                  |                                                                                            | Depreciation and amortization                                               |                                           |         | 896     |        |        |         | 721    |        |        |         | 899     |       
|                                                  |                                                                                            | (Increase) decrease in service fees receivable
    from affiliate           |                                           |         | 845     |        |        |         | (689   | )      |        |         | (282    | )     
|                                                  |                                                                                            | (Increase) decrease in other assets                                         |                                           |         | (2,576  | )      |        |         | (2,528 | )      |        |         | 1,713   |       
|                                                  |                                                                                            | Gain on sale of interest in equity investments or
    Subsidiary            |                                           |         |        |        |        |         | (5,779 | )      |        |         | (3,316  | )     
|                                                  |                                                                                            | Gain on early debt extinguishment                                           |                                           |         |        |        |        |         | (899   | )      |        |         |        |       
|                                                  |                                                                                            | Increase in other liabilities                                               |                                           |         | 1,961   |        |        |         | 1,790  |        |        |         | 3,228   |       
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  |                                                                                            |                                                                             | Net cash used in operating activities     |         |         | (6,535 | )      |         |        | (5,506 | )      |         |         | (2,039 | )
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|Cash flows from investing activities:             |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  | Proceeds from sale of interest in equity
    investments or Subsidiary                     |                                                                             |                                           |        |         |        |        | 3,373   |        |        |        | 7,567   |        
|                                                  | Purchase of minority interest by consolidated
    subsidiary                               |                                                                             |                                           | (1,399  | )       |        |        |        |        |        |        |        |        
|                                                  | Property and equipment, net                                                                |                                                                             |                                           | (776    | )       |        |        | (412    | )      |        |        | (983    | )      
|                                                  | Contributions to Acquisition Partnerships and
    Servicing entities                       |                                                                             |                                           | (18,879 | )       |        |        | (14,011 | )      |        |        | (14,088 | )      
|                                                  | Distributions from Acquisition Partnerships and
    Servicing entities                     |                                                                             |                                           | 30,845  |         |        |        | 23,440  |        |        |        | 11,259  |        
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  |                                                                                            |                                                                             | Net cash provided by investing activities |         |         | 9,791  |        |         |        | 12,390 |        |         |         | 3,755  |  
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|Cash flows from financing activities:             |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  | Borrowings under notes payable to affiliates                                               |                                                                             |                                           | 26,042  |         |        |        | 45,189  |        |        |        | 30,700  |        
|                                                  | Borrowings under notes payable  other                                                     |                                                                             |                                           | 4,706   |         |        |        | 437     |        |        |        | 170     |        
|                                                  | Payments of notes payable to affiliates                                                    |                                                                             |                                           | (33,193 | )       |        |        | (35,519 | )      |        |        | (27,415 | )      
|                                                  | Payments of notes payable  other                                                          |                                                                             |                                           | (3,387  | )       |        |        | (5,678  | )      |        |        | (6,229  | )      
|                                                  | Proceeds from issuance of common stock                                                     |                                                                             |                                           | 15      |         |        |        | 2       |        |        |        | 11      |        
|                                                  | Refund on unconverted common stock                                                         |                                                                             |                                           | 144     |         |        |        |        |        |        |        |        |        
|                                                  | Payments for tender of redeemable preferred stock                                          |                                                                             |                                           | (50     | )       |        |        | (10,456 | )      |        |        |        |        
|                                                  | Payments for closing costs of recapitalization                                             |                                                                             |                                           |        |         |        |        | (1,503  | )      |        |        |        |        
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  |                                                                                            |                                                                             | Net cash used in financing activities     |         |         | (5,723 | )      |         |        | (7,528 | )      |         |         | (2,763 | )
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  | Net cash used in continuing operations                                                     |                                                                             | $                                         | (2,467  | )       |        | $      | (644    | )      |        | $      | (1,047  | )      
|                                                  | Net cash provided by (used by) discontinued
    operations                                 |                                                                             |                                           | 1,094   |         |        |        | (821    | )      |        |        | (1,413  | )      
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|Net decrease in cash and cash equivalents         |                                                                                            | $                                                                           | (1,373                                    | )       |         | $      | (1,465 | )       |        | $      | (2,460 | )      
|Cash and cash equivalents, beginning of year      |                                                                                            |                                                                             | 4,118                                     |         |         |        | 5,583  |         |        |        | 8,043  |        
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|Cash and cash equivalents, end of year            |                                                                                            | $                                                                           | 2,745                                     |         |         | $      | 4,118  |         |        | $      | 5,583  |        
|                                                  |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|Supplemental disclosure of cash flow information: |                                                                                            |                                                                             |                                           |         |         |        |        |         |        |        |        |        
|                                                  | Cash paid during the year for:                                                             |                                                                             |                                           |         |         |        |        |         |        |        |        |         |        
|                                                  |                                                                                            | Interest                                                                    |                                           | $       | 6,401   |        |        | $       | 5,580  |        |        | $       | 7,700   |       
|                                                  |                                                                                            | Income taxes                                                                |                                           | $       | 350     |        |        | $       | 46     |        |        | $       | 13      |       
|                                                  | Non-cash financing activities:                                                             |                                                                             |                                           |         |         |        |        |         |        |        |        |         |        
|                                                  |                                                                                            | Dividends accumulated and not paid on preferred
    stock                   |                                           | $       | 133     |        |        | $       | 2,478  |        |        | $       | 2,568   |       

See accompanying notes to consolidated financial
statements.

53



---



##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002 and
2001


(Dollars in thousands)




|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



| |                              
| | -----------------------------
| | (a) Basis of
    Presentation

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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Significant estimates include the estimation of future
collections on purchased portfolio assets used in the
calculation of net gain on resolution of portfolio assets,
interest rate environments, valuation of the deferred tax asset,
and prepayment speeds and collectibility of loans held in
inventory, securitization trusts and for investment. Actual
results could differ materially from those estimates.



| |                                
| | -------------------------------
| | (b) Description of
    Business

The Company is a financial services company with
offices throughout the United States and Mexico, with a presence
in France. At December 31, 2003, the Company was engaged in
two principal reportable segments: (i) portfolio asset
acquisition and resolution and (ii) consumer lending
through the Companys minority investment in Drive
Financial Services LP (Drive). Refer to Note 8 for
operational information related to each of these principal
segments. Effective in the third quarter of 1999, the Company
adopted formal plans to discontinue its mortgage banking
operations (refer to Note 3), which had previously also been
reported as a segment. Activities related to the mortgage
banking operations have been reclassified in the accompanying
consolidated financial statements to discontinued operations.

In December 2002, FirstCity completed a
recapitalization in which holders of redeemable preferred stock,
par value $.01 per share (New Preferred Stock)
exchanged 1,092,210 shares of New Preferred Stock for
2,417,388 shares of common stock and $10.5 million. As
a result, common equity was increased by $18.9 million.
During the first quarter of 2003, 4,400 shares of New
Preferred Stock were redeemed for 8,200 shares of common
stock and $50,000 in cash. FirstCity also recorded a
$4 million gain in December 2002 from the release of its
guaranty of Drives indebtedness to 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
are Senior Vice Presidents of FirstCity by issuing 400,000
shares of common stock of the Company 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.

In the third quarter of 2000, FirstCity Consumer
Lending Corporation (Consumer Corp.), a wholly-owned
subsidiary of FirstCity, completed a 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. (formerly known as IFA Incorporated)
(BoS(USA)), a wholly-owned subsidiary of Bank of
Scotland (together with BoS(USA), the Senior
Lenders), for a purchase price of $15 million cash
pursuant to the terms of a Securities Purchase Agreement dated
as of August 18, 2000 (the Securities Purchase
Agreement), by and among the Company, Consumer Corp.,
FirstCity Funding, LP (Funding LP), and FirstCity
Funding GP Corp. (Funding GP), IFA-GP and IFA-LP
(see Note 2 for further discussion). As a result of this
sale, the Company no longer consolidates the financial
statements of its

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

automobile finance operation since August 1,
2000, but instead records its investment under the equity method
of accounting. Also, in relation to the sale, the Senior Lenders
forgave a loan fee in the amount of $2.5 million, which
resulted in accrued loan fees of $.8 million owed to the
senior lender being recorded as other income in the consolidated
financial statements.

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 all such assets until
they are collected or sold and normally does not manage assets
for non-affiliated third parties.



| |                                    
| | -----------------------------------
| | (c) Principles of
    Consolidation

The accompanying consolidated financial
statements include the accounts of all majority owned
subsidiaries of the Company. All significant intercompany
transactions and balances have been eliminated in consolidation.
Investments in 20 to 50 percent owned affiliates are
accounted for on the equity method since the Company has the
ability to exercise significant influence over operating and
financial policies of those affiliates. For domestic Acquisition
Partnerships, the Company owns a limited partner interest and
generally shares in a general partner interest. Regarding the
foreign investments, the Company participates as a limited
partner only. In all cases, the Companys direct and
indirect equity interest never exceeds 50%. The following is a
listing of the 20 to 50 percent owned affiliates accounted
for on the equity method and held at December 31, 2003:

|                                           |  |            |       | 
|------------------------------------------ |  | ---------- | ----- | 
|                                           |  | Percentage
|Affiliate                                  |  | Ownership 
|                                           |  |           
|BIDMEX 4, LLC                              |  |            | 20.00 | 
|BIDMEX 5, LLC                              |  |            | 20.00 | 
|UHR Limited                                |  |            | 20.00 | 
|BIDMEX 8, LLC                              |  |            | 20.00 | 
|Namex, LLC                                 |  |            | 22.22 | 
|WOD Limited                                |  |            | 22.50 | 
|WOL Limited                                |  |            | 22.50 | 
|FCS Fischer, Ltd.                          |  |            | 24.70 | 
|NEVVS Limited                              |  |            | 25.00 | 
|BIDMEX 7, LLC                              |  |            | 25.00 | 
|Drive GP LLC                               |  |            | 31.00 | 
|Compagnie Transatlantique de Portefeuilles |  |            | 33.33 | 
|MinnTex Investment Partners LP             |  |            | 33.00 | 

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                            |  |            |       | 
|--------------------------- |  | ---------- | ----- | 
|                            |  | Percentage
|Affiliate                   |  | Ownership 
|                            |  |           
|FCS Fischer GP, Corp.       |  |            | 33.33 | 
|P.R.L. Development, SAS     |  |            | 33.50 | 
|Drive Financial Services LP |  |            | 38.71 | 
|First B Realty, L.P.        |  |            | 49.00 | 
|WAMCO III, Ltd.             |  |            | 49.00 | 
|WAMCO IX, Ltd.              |  |            | 49.00 | 
|WAMCO XXIV, Ltd.            |  |            | 49.00 | 
|WAMCO XXV, Ltd.             |  |            | 49.00 | 
|WAMCO XXVIII, Ltd.          |  |            | 49.50 | 
|WAMCO XXX, Ltd.             |  |            | 49.50 | 
|WAMCO 31, Ltd.              |  |            | 49.50 | 
|WAMCO 32, Ltd.              |  |            | 49.50 | 
|WAMCO 33, Ltd.              |  |            | 49.50 | 
|FCS Creamer Ltd.            |  |            | 49.75 | 
|FCS Wildhorse, Ltd.         |  |            | 49.75 | 
|FCS Wood, Ltd.              |  |            | 49.75 | 
|WAMCO XXVI, Ltd.            |  |            | 49.75 | 
|Calibat Fund, LLC           |  |            | 50.00 | 
|FCS Creamer GP, Corp.       |  |            | 50.00 | 
|FCS Wildhorse GP Corp.      |  |            | 50.00 | 
|FCS Wood GP Corp.           |  |            | 50.00 | 
|MinnTex GP Corp.            |  |            | 50.00 | 
|WAMCO III of Texas, Inc.    |  |            | 50.00 | 
|WAMCO IX of Texas, Inc.     |  |            | 50.00 | 
|WAMCO XXIV of Texas, Inc.   |  |            | 50.00 | 
|WAMCO XXV of Texas, Inc.    |  |            | 50.00 | 
|WAMCO XXVI of Texas, Inc.   |  |            | 50.00 | 
|WAMCO XXVII of Texas, Inc.  |  |            | 50.00 | 
|WAMCO XXVIII of Texas, Inc. |  |            | 50.00 | 
|WAMCO XXX of Texas, Inc.    |  |            | 50.00 | 
|WAMCO 31 of Texas, Inc.     |  |            | 50.00 | 
|WAMCO 32 of Texas, Inc.     |  |            | 50.00 | 
|WAMCO 33 of Texas, Inc.     |  |            | 50.00 | 

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

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

listing of the less than 20 percent owned
partnerships accounted for on the equity method and held at
December 31, 2003:

|                    |  |            |       | 
|------------------- |  | ---------- | ----- | 
|                    |  | Percentage
|Affiliate           |  | Ownership 
|                    |  |           
|BIDMEX, LLC         |  |            | 3.21  | 
|WAMCO XXVII, Ltd.   |  |            | 4.07  | 
|BIDMEX II, LLC      |  |            | 4.12  | 
|BIDMEX 6, LLC       |  |            | 10.00 | 
|WHBE Limited        |  |            | 10.00 | 
|BIDMEX 3, LLC       |  |            | 10.02 | 
|ResMex, LLC         |  |            | 11.12 | 
|FC Properties, Ltd. |  |            | 14.50 | 

The Company has a ten percent ownership in a
French servicing corporation, MCS et Associes, S.A.
(MCS), which is accounted for on the equity method.
FirstCity has the ability to exercise significant influence over
operating and financial policies of this entity, despite its
comparatively smaller equity percentage, due primarily to its
active participation in the policy making process as well as its
involvement in the day-to-day management activities.

Equity earnings in the foreign Acquisition
Partnerships are recorded on a one-month lag due to the timing
of FirstCitys receipt of those financial statements.
FirstCity records equity earnings in MCS on a one-quarter lag.

During 2002, the Company sold all of its equity
interest in the following entities:

|                                   |  |            |       | 
|---------------------------------- |  | ---------- | ----- | 
|                                   |  | Percentage
|Affiliate                          |  | Ownership 
|                                   |  |           
|Credit Finance Corporation Limited |  |            | 10.00 | 
|Miromesnil Limited                 |  |            | 33.30 | 
|Societe Immobilere Lincoln, S.A.   |  |            | 10.00 | 
|CATX Limited                       |  |            | 25.00 | 
|Transalp Limited                   |  |            | 25.00 | 
|Finin Limited                      |  |            | 33.30 | 
|Mirom Limited                      |  |            | 10.00 | 

The Company also 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).



| |                     
| | --------------------
| | (d) Cash Equivalents

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.

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                     
| | --------------------
| | (e) Portfolio Assets

Portfolio Assets are held for sale and reflected
in the accompanying consolidated financial statements as
non-performing Portfolio Assets, performing Portfolio Assets or
real estate Portfolios. Such designation is made at the
acquisition of the pool and does not change even though the
actual mix of the loans may change. The following is a
description of each classification and the related accounting
policy accorded to each Portfolio type:



| |                                
| | -------------------------------
| | Non-Performing Portfolio Assets

Non-performing Portfolio Assets consist primarily
of distressed loans and loan related assets, such as foreclosed
upon collateral. Portfolio Assets are designated as
non-performing unless a majority of all of the loans in the
Portfolio is being repaid in accordance with the contractual
terms of the underlying loan agreements at date of acquisition.
Such Portfolios are acquired on the basis of an evaluation by
the Company 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 are 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. The evaluation of impairment is determined based on the
review of the estimated future cash receipts, which represents
the net realizable value of the non-performing pool. Once it is
determined that there is impairment, a valuation allowance is
established for any impairment identified through provisions
charged to operations in the period the impairment is
identified. The Company recorded an allowance for impairment of
$31, $97 and $1,627 in 2003, 2002 and 2001, respectively.

Net gain on resolution of non-performing
Portfolio Assets is recognized as income to the extent that
proceeds collected exceed a pro rata portion of allocated cost
from the pool. Cost allocation is based on a proration of actual
proceeds divided by total estimated proceeds of the pool. No
interest income is recognized separately on non-performing
Portfolio Assets. All proceeds, of whatever type, are included
in proceeds from resolution of Portfolio Assets in determining
the gain on resolution of such assets. Accounting for Portfolios
is on a pool basis as opposed to an individual asset-by-asset
basis.



| |                            
| | ---------------------------
| | Performing Portfolio Assets

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

Performing Portfolio Assets are carried at the
unpaid principal balance of the underlying loans, net of
acquisition discounts. Interest is accrued when earned in
accordance with the contractual terms of the loans. The accrual
of interest is discontinued once a loan 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

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FIRSTCITY FINANCIAL CORPORATION AND
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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the fair value of the collateral, less estimated
selling costs, if any loans are collateral dependent and
foreclosure is probable. The Company recorded an allowance for
impairment of $57, $4 and $552 in 2003, 2002 and 2001,
respectively.



| |                       
| | ----------------------
| | Real Estate Portfolios

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. A valuation allowance is
established for any impairment identified through provisions
charged to operations in the period the impairment is
identified. The Company recorded an allowance for impairment of
$10, $194 and $1,098 in 2003, 2002 and 2001, respectively.



| |                     
| | --------------------
| | (f) Loans Receivable

Loans receivable consist primarily of loans made
to Acquisition Partnerships located in Mexico at fixed rates
ranging between 19% and 20%, the repayment of which is generally
dependent upon future cash flows and distributions made from
those Acquisition Partnerships. Interest is accrued when earned
in accordance with the contractual terms of the loans. The
evaluation for impairment is determined based on the review of
the estimated future cash receipts of the underlying
nonperforming Portfolio Assets of each related Acquisition
Partnership. The Company recorded no allowance for impairment in
2003, 2002 and 2001. During 2003, the Company amended loan
agreements with three Mexican partnerships to provide for no
interest to be payable with respect to periods after the
effective date of the amendments.



| |                               
| | ------------------------------
| | (g) Property and
    Equipment

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



| |                
| | ---------------
| | (h) Intangibles

Intangible assets represent the excess of
purchase price over fair value of assets acquired in connection
with purchase transactions (goodwill) as well as the purchase
price of future service fee revenues and 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(SFAS 142).



| |                                            
| | -------------------------------------------
| | (i) Revenue Recognition on Service
    Fees

The Company has no capitalized servicing rights
because servicing is not contractually separated from the
underlying assets by sale or securitization of the assets with
servicing retained or separate purchase or assumption of the
servicing. The Company services all of the Portfolio Assets
owned for its own account, all of 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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 France are serviced by
MCS et Associes, S.A., in which the Company maintains a 10%
equity interest. In all cases, service fees are recognized as
they are earned in accordance with the servicing agreements.



| |                                               
| | ----------------------------------------------
| | (j) Revenue Recognition on Contingent
    Fees

The Company currently has certain servicing
contracts with its Mexican investment entities whereby the
Company is entitled to additional compensation for servicing
once a specified return to the investors has been achieved. The
Company will not recognize any revenue related to these
contracts until the investors have received the required level
of returns specified in the contracts and the Mexican investment
entity has received 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
$334 in 2003, $604 in 2002 and $409 in 2001.

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



| |                                                      
| | -----------------------------------------------------
| | (k) Accumulated Other Comprehensive
    Income (Loss)

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 on securitization transactions.



| |                                      
| | -------------------------------------
| | (l) Foreign Currency
    Translations

The Company has determined that the local
currency is the functional currency for its operations outside
the United States (primarily France and Mexico). 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 2003, 2002 and 2001 follows
(dollars in thousands):

|                           |                                                                                |   |       |       |  
|-------------------------- | ------------------------------------------------------------------------------ | - | ----- | ----- | -
|Balance, December 31, 2000 |                                                                                | $ | (109  | )    
|                           | Aggregate adjustment for the period resulting
    from translation adjustments |   |       | (218  | )
|                           |                                                                                |   |       |      
|Balance, December 31, 2001 |                                                                                |   | (327  | )    
|                           | Aggregate adjustment for the period resulting
    from translation adjustments |   |       | 1,782 |  
|                           |                                                                                |   |       |      
|Balance, December 31, 2002 |                                                                                |   | 1,455 |      
|                           | Aggregate adjustment for the period resulting
    from translation adjustments |   |       | 2,157 |  
|                           |                                                                                |   |       |      
|Balance, December 31, 2003 |                                                                                | $ | 3,612 |      
|                           |                                                                                |   |       |      

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 exchange rate changes. Aggregate foreign
currency transaction gains

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(losses) included in the consolidated statements
of operations for 2003, 2002 and 2001 were $1,136, $143 and
$(331), respectively.



| |                                                        
| | -------------------------------------------------------
| | (m) Unrealized Gains on Securitization
    Transactions

The Company has equity investments in certain
entities which have retained unrated interests in securitization
transactions, which represent the present value of the right to
the excess cash flow generated by the securitized contracts. The
residual certificates are accounted for under Statement of
Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities.Because
such assets can be contractually prepaid or otherwise settled in
such a way that the holder would not receive all of the recorded
investment, the assets are classified as available-for-sale
investments and are carried at estimated fair value with any
accompanying increases or decreases in estimated fair value
being recorded as unrealized gains or losses in other
comprehensive income (loss) in the accompanying statements of
stockholders equity and comprehensive loss. The
determination of fair value is based on the present value of the
anticipated excess cash flows utilizing the valuation
assumptions discussed above. The carrying value of each retained
certificate is assessed for impairment in accordance with the
provisions of EITF 99-20, Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets. There can be no assurance that
the estimates used to determine the fair value of the residual
certificates will remain appropriate for the life of each asset
and it is reasonably possible that circumstances could change in
future periods which could result in a material change in the
estimates used to prepare the accompanying consolidated
financial statements. If actual prepayments or credit losses
exceed the current estimates, other than temporary impairment
may be required to be recognized.

An analysis of the changes in the unrealized net
gains on securitization transactions during 2003, 2002 and 2001
follows (dollars in thousands). There were no unrealized gains
or losses on securitization transactions in 2000.

|                           |                                                                                                 |   |       |        |  
|-------------------------- | ----------------------------------------------------------------------------------------------- | - | ----- | ------ | -
|Balance, December 31, 2000 |                                                                                                 | $ |      |       
|                           | Aggregate adjustment for the period resulting
    from unrealized net gains on securitizations  |   |       | 1,203  |  
|                           |                                                                                                 |   |       |       
|Balance, December 31, 2001 |                                                                                                 | $ | 1,203 |       
|                           | Aggregate adjustment for the period resulting
    from unrealized net gains on securitizations  |   |       | 25     |  
|                           |                                                                                                 |   |       |       
|Balance, December 31, 2002 |                                                                                                 |   | 1,228 |       
|                           | Aggregate adjustment for the period resulting
    from unrealized net losses on securitizations |   |       | (1,228 | )
|                           |                                                                                                 |   |       |       
|Balance, December 31, 2003 |                                                                                                 | $ |      |       
|                           |                                                                                                 |   |       |       



| |                 
| | ----------------
| | (n) Income Taxes

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

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



| |                                             
| | --------------------------------------------
| | (o) Net Earnings (Loss) Per Common
    Share

Basic net earnings (loss) per common share
calculations are based upon the weighted average number of
common shares outstanding. Earnings (losses) included in the
earnings (loss) per common share calculation are reduced by
minority interest and increased for preferred stock dividends.
Potentially dilutive common share equivalents include warrants
and stock options in the diluted loss per common share
calculations.

The effects of any common stock equivalents are
antidilutive for 2002 and 2001 due to the net loss for the
periods; therefore, diluted loss per common share is reported
the same as basic loss per common share for those years.



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

The Company assesses the impairment of long-lived
assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell (see note 1(r)).



| |                                 
| | --------------------------------
| | (q) Stock-Based
    Compensation

At December 31, 2003, the Company has three
stock-based employee compensation plans, which are described
more fully in Note 9. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees,and related Interpretations. No stock-based employee
compensation cost is reflected in the consolidated statements of
operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying
common stock on the date of grant. As required by SFAS 148 as
discussed under Effects of New Accounting Standards,
the following table illustrates the effect on net loss and loss
per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation,to stock-based employee
compensation.

|                                                          |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |      |  
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----- | ---- | - | ---- | ------ | ---- | - | - | ------ | ---- | -
|                                                          |                                                                                                                                                   |                        
|                                                          |                                                                                                                                                   | Year Ended December 31,
|                                                          |                                                                                                                                                   |                        
|                                                          |                                                                                                                                                   | 2003                    |       | 2002 |   | 2001
|                                                          |                                                                                                                                                   |                         |       |      |   |     
|Net income (loss) to common stockholders, as
    reported |                                                                                                                                                   | $                       | 9,054 |      |   | $    | (6,249 | )    |   | $ | (5,597 | )   
|                                                          | Less: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                         |       | (204 | ) |      |        | (208 | ) |   |        | (168 | )
|                                                          |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |     
|Pro forma net earnings (loss) to common
    stockholders  |                                                                                                                                                   | $                       | 8,850 |      |   | $    | (6,457 | )    |   | $ | (5,765 | )   
|                                                          |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |     
|Net earnings (loss) per common share:                     |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |     
|Basic  as reported                                       |                                                                                                                                                   | $                       | 0.81  |      |   | $    | (0.74  | )    |   | $ | (0.67  | )   
|                                                          |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |     
|Basic  pro forma                                         |                                                                                                                                                   | $                       | 0.79  |      |   | $    | (0.76  | )    |   | $ | (0.69  | )   
|                                                          |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |     
|Diluted  as reported                                     |                                                                                                                                                   | $                       | 0.80  |      |   | $    | (0.74  | )    |   | $ | (0.67  | )   
|                                                          |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |     
|Diluted  pro forma                                       |                                                                                                                                                   | $                       | 0.78  |      |   | $    | (0.76  | )    |   | $ | (0.69  | )   
|                                                          |                                                                                                                                                   |                         |       |      |   |      |        |      |   |   |        |     

62



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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair value of stock options was estimated on
the date of grant using the Black-Scholes option pricing model.
The following table sets forth the weighted average assumptions
used to calculate the fair value of the stock options for 2003
and 2001. There were no stock options granted in 2002.

|                        |  |                         |      |      |  |      |   |  |  |  |      |  
|----------------------- |  | ----------------------- | ---- | ---- |  | ---- | - |  |  |  | ---- | -
|                        |  |                        
|                        |  | Year Ended December 31,
|                        |  |                        
|                        |  | 2003                    |      | 2002 |  | 2001
|                        |  |                         |      |      |  |     
|Volatility              |  |                         | 94   | %    |  |      |  |  |  |  | 98   | %
|Risk-free interest rate |  |                         | 3.96 | %    |  |      |  |  |  |  | 6.00 | %
|Expected life in years  |  |                         | 10   |      |  |      |  |  |  |  | 10   |  
|Dividend yield          |  |                         | Zero |      |  |      |  |  |  |  | Zero |  



| |                                            
| | -------------------------------------------
| | (r) Effects of New Accounting
    Standards

In March 2001, the Company adopted the provisions
of EITF 99-20, Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized
Financial Assets (EITF 99-20), which requires
that other-than-temporary impairments in beneficial interests be
written down to fair value with the resulting charge being
included in operations. The implementation of EITF 99-20
required Drive to record a cumulative effect of accounting
change for other-than-temporary impairments on retained
beneficial interests in certain securitized assets, which had
previously been recorded as unrealized losses. As a result, in
the second quarter of 2001, the Company recognized a charge for
the cumulative effect of a change in accounting principle of
$.3 million relating to the Companys share of
Drives cumulative effect because the Company believed it
to be material to the consolidated results of operations.

On April 1, 2002, the Company elected early
adoption of Statement of Financial Accounting Standards
(SFAS) SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections(SFAS 145).
SFAS 145 updates, clarifies and simplifies existing accounting
pronouncements. As it relates to FirstCity, SFAS 145 eliminates
the extraordinary gain classification on early debt
extinguishments. Instead, the gains associated with the early
extinguishment of debt have been recorded in other income in the
consolidated statements of operations. The result of this
adoption did not modify or adjust net loss for any period and
does not impact the Companys compliance with various debt
covenants. The effect of SFAS 145 resulted in the extinguishment
of debt of $.7 million in 2002 being included in other income in
the consolidated statements of operations.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities(SFAS 149).
SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities.SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The
Company currently has no derivatives or hedging relationships,
and therefore, the adoption of SFAS 149 had no effect on
the Companys consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and
Equity(SFAS 150). SFAS 150 establishes
standards for how an issuer measures certain financial
instruments with characteristics of both liabilities and equity
and classifies them in its statement of financial position. It
requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some
circumstances) when that financial instrument embodies an
obligation of the issuer. This Statement is effective for
financial instruments entered into or modified after
May 31, 2003, and otherwise is effective on July 1,
2003. As it relates to FirstCity, on July 1, 2003, the
carrying value of the New Preferred Stock was $3.7 million
and approximated fair value. Beginning with the third quarter of
2003, the New Preferred Stock is be presented as a liability in
the consolidated financial

63



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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

statements and any related accretion of discount
and dividends are charged to the consolidated results of
operations.

In November 2003, the FASB issued Staff Position,
No. 150-3, Effective Date, Disclosures, and Transition
for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests under FASB Statement No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity(Staff
Position 150-3). Staff Position 150-3 defers the
application of various provisions of SFAS 150 for specified
mandatorily redeemable noncontrolling interests in consolidated
limited-life entities. FirstCity has minority interests in
various limited-life partnerships with a carrying value of
$.8 million at December 31, 2003. The estimated amount
that would be paid to the minority interest holder if the
instruments were to be settled at December 31, 2003 is
$.6 million.

In December 2003, the Accounting Standards
Executive Committee issued Statement of Position No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer(SOP 03-3). SOP 03-3
addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at
least in part, to credit quality. SOP 03-3 limits the yield
that may be accreted on a loan portfolio to the excess of
undiscounted expected cash flows over the initial investment in
the loan portfolio. FirstCity will be required to account for
all loans acquired after 2004 in accordance with SOP 03-3.
For loans acquired prior to January 1, 2005, FirstCity will
adopt the provisions of SOP 03-3 on a prospective basis.

In December 2003, the FASB issued a revision to
Interpretation No. 46, Consolidation of Variable
Interest Entities(FIN 46R), which was
originally issued in January 2003. FIN 46R provides
guidance on the consolidation of certain entities when control
exists through other than voting (or similar) interests and was
effective immediately with respect to entities created after
January 31, 2003. For certain special purpose entities
created prior to February 1, 2003, FIN 46R became
effective for financial statements issued after
December 15, 2003. FIN 46R is effective for all other
entities created prior to February 1, 2003 beginning with
financial statements for reporting periods ending after
March 15, 2004.

FIN 46R requires consolidation by the majority
holder of expected residual gains and losses of the activities
of a variable interest entity (VIE). FirstCity holds
significant variable interests in certain domestic Acquisition
Partnerships and all of the French and Mexico partnerships,
which would be characterized as VIEs. However, FirstCity
is not deemed to be the primary beneficiary of any of these
entities. At December 31, 2003, FirstCitys maximum
exposure to loss as a result of its involvement with the
VIEs is $40.5 million.

(s) Reclassifications

Certain amounts in the financial statements for
prior years have been reclassified to conform with current
financial statement presentation.



|   |                                                 
|-- | ------------------------------------------------
|2. | Restructure, Liquidity and Capital
    Resources

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 interest on preferred
stock, and other investments by FirstCity. The potential sources
of liquidity are funds generated from operations, equity
distributions from the Acquisition Partnerships, interest and
principal payments on subordinated intercompany debt and
dividends from the Companys subsidiaries, short-term
borrowings from revolving lines of credit, proceeds from equity
market transactions, securitization and other structured finance
transactions and other special purpose short-term borrowings.

64



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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In December 2002, FirstCity completed a
recapitalization in which holders of redeemable preferred stock,
par value $.01 per share, (New Preferred Stock)
exchanged 1,092,210 shares of New Preferred Stock for 2,417,388
shares of common stock and $10.5 million in cash. As a
result, common equity was increased by $18.9 million.
During the first quarter of 2003, 4,400 shares of New Preferred
Stock were redeemed for 8,200 shares of common stock and $50,000
in cash. FirstCity also recorded a $4 million gain in
December 2002 from the release of its guaranty of Drives
indebtedness to BoS(USA), Inc. (BoS(USA)).
BoS(USA)s warrant to purchase 1,975,000 shares of
non-voting common stock was cancelled. FirstCity also acquired
the minority interest in FirstCity Holdings Corporation held by
Terry R. DeWitt, G. Stephen Fillip and James C. Holmes,
each of whom are Senior Vice Presidents of FirstCity, by issuing
400,000 shares of common stock of the Company 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 a part of the recapitalization, 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 (together
with BoS(USA), the Senior Lenders). The
$16 million loan is secured by a 20% interest in Drive
(64.51% of FirstCitys remaining 31% interest in Drive) and
other assets of Consumer Lending Corporation (Consumer
Corp.) In connection with the $16 million loan,
FirstCity is 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. Management of the
Company believes the value of FirstCitys 20% ownership
interest of Drive does not exceed $16 million as of
December 31, 2003.

In connection with the recapitalization, the
Senior Lenders refinanced the remainder of the Companys
debt facilities ($40 million outstanding at December 31,
2003). The Senior Lenders also provided new financing to
FirstCity, with a total commitment of up to $59 million,
consisting of (a) a $5 million revolving credit loan
and (b) an acquisition term loan in an amount up to
$54 million ($20 million available at
December 31, 2003). The aggregate amount of outstanding
loans under the total commitment by the Senior Lenders for the
refinancing and the new financing at any time may not exceed
$77 million.

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 to retain its ability
to acquire approximately 4.86% of the Companys voting
Common Stock.

In the third quarter of 1999, dividends on the
Companys redeemable preferred stock (New Preferred
Stock) were suspended. At December 31, 2003,
accumulated dividends in arrears on New Preferred Stock totaled
$1.1 million, or $9.45 per share. Since the Company
failed to pay quarterly dividends for six consecutive quarters,
the holders of New Preferred Stock are entitled to exercise
their right to elect two directors to the Companys Board
until cumulative dividends have been paid in full. To exercise
this right, the holders of the New Preferred Stock must follow
certain prescribed actions set forth in the Certificate of
Designations of the Companys New Preferred Stock. To date,
the holders of the New Preferred Stock have not exercised this
right. Dividends on outstanding shares of New Preferred Stock of
FirstCity will be restricted until the Tranche II term loan is
paid in full. Given the continued high debt levels of the
Company, and managements priority of assuring adequate
levels of liquidity, the Company does not anticipate that
dividends on New Preferred Stock will be paid in the foreseeable
future.

The Company has a $35 million loan facility
with CFSC Capital Corp. XXX, a subsidiary of Cargill. This
facility is being used exclusively to provide equity in new
Portfolio acquisitions in partnerships with Cargill and its
affiliates and matures in March 2005. At December 31, 2003,
approximately $27 million was outstanding under this
facility.

65



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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In September 2003, FirstCity entered into a
Portfolio acquisition facility line of credit with Greenwich
Capital Financial Products, Inc., which provides borrowings up
to $30 million. The facility obligation was zero at
December 31, 2003 and matures September 2004.

Management believes that the BoS(USA) loan
facilities along with the liquidity from the Cargill Facility,
the related fees generated from the servicing of assets and
equity distributions from existing Acquisition Partnerships and
wholly owned portfolios will allow the Company to meet its
obligations as they come due during the next twelve months.

3.     Discontinued
Operations

The Company recorded provisions of
$.5 million in 2003, $9.7 million in 2002 and
$5.2 million in 2001 for additional losses from
discontinued operations. Effective during the third quarter of
1999, management of the Company adopted formal plans to
discontinue the operations of Harbor Financial Group, Inc.
(formerly known as FirstCity Financial Mortgage Corp.) and its
subsidiaries (collectively referred to as Mortgage
Corp.), and FC Capital Corp. (Capital
Corp.). These entities comprise the operations that were
previously reported as the Companys residential and
commercial mortgage banking business. Additionally, the net
assets related to the resolution of activity from the
discontinued operations have been reflected in the accompanying
consolidated balance sheets.

The net assets from discontinued operations
consist of the following:

|                                                                                  |                                       |              |       |       |  |   |        |       | 
|--------------------------------------------------------------------------------- | ------------------------------------- | ------------ | ----- | ----- |  | - | ------ | ----- | 
|                                                                                  |                                       |             
|                                                                                  |                                       | December 31,
|                                                                                  |                                       |             
|                                                                                  |                                       | 2003         |       | 2002 
|                                                                                  |                                       |              |       |      
|Estimated future gross cash receipts on residual
    interests in securitizations |                                       | $            | 6,399 |       |  | $ | 8,764  |      
|Accrual for loss on operations and disposal of
    discontinued operations        |                                       |              | (249  | )     |  |   | (1,000 | )    
|                                                                                  |                                       |              |       |       |  |   |        |      
|                                                                                  | Net assets of discontinued operations |              | $     | 6,150 |  |   | $      | 7,764 | 
|                                                                                  |                                       |              |       |       |  |   |        |      

The only assets remaining from discontinued
operations are the investment securities resulting from the
retention of residual interests in securitization transactions.
Although the liquidation or run-off of these investment
securities will last longer than one year, the Company is
contractually obligated to service the securitized assets. The
Company has considered the estimated future gross cash receipts
for such investment securities in the computation of the loss
from discontinued operations. The cash flows are collected over
a period of time and are valued using prepayment assumptions of
35% for fixed rate loans and 23% for variable rate loans.
Overall loss rates are estimated from 4% to 13% of collateral.
If the prepayment speeds were to increase by 10% and 20%, the
estimated future gross cash receipts would decrease by
$.6 million and $1.1 million, respectively.
Additionally, if the loss rates were to increase by 10% and 20%,
the estimated future gross cash receipts would decrease by
$.5 million and $1.1 million, respectively.

66



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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Portfolio
Assets

Portfolio Assets are summarized as follows:

|                                                                                      |                        |              |         |        |  |   |         |        | 
|------------------------------------------------------------------------------------- | ---------------------- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                                                                      |                        |             
|                                                                                      |                        | December 31,
|                                                                                      |                        |             
|                                                                                      |                        | 2003         |         | 2002  
|                                                                                      |                        |              |         |       
|Non-performing Portfolio Assets                                                       |                        | $            | 27,071  |        |  | $ | 39,241  |       
|Performing Portfolio Assets                                                           |                        |              | 2,682   |        |  |   | 7,761   |       
|Real estate Portfolios                                                                |                        |              | 283     |        |  |   | 1,242   |       
|                                                                                      |                        |              |         |        |  |   |         |       
|                                                                                      | Total Portfolio Assets |              |         | 30,036 |  |   |         | 48,244 | 
|Adjusted purchase discount required to reflect
    Portfolio Assets at carrying value |                        |              | (25,511 | )      |  |   | (38,424 | )     
|                                                                                      |                        |              |         |        |  |   |         |       
|                                                                                      | Portfolio Assets, net  |              | $       | 4,525  |  |   | $       | 9,820  | 
|                                                                                      |                        |              |         |        |  |   |         |       

The Company recorded an allowance for impairment
on Portfolio Assets of approximately $.1 million,
$.3 million and $3.3 million in 2003, 2002 and 2001,
respectively. The Company recorded permanent valuation
impairments of $.2 million in 2002 on two real estate
Portfolios due to deterioration of property values and market
conditions, as well as additional expected disposal costs.
Minimal provisions were recorded in 2003 and 2002 for performing
or non-performing Portfolios as the economic conditions during
the year did not negatively impact the Companys
expectation of future cash flows. In 2001, provisions of
$1.6 million in four non-performing Portfolios and
$.6 million in two performing Portfolios were recorded as
estimated future collections were reduced primarily due to the
Company accepting discounted payoffs in lieu of extended
payouts. Also, the Company recorded permanent valuation
impairments of $1.1 million in 2001 on one real estate
Portfolio due to deterioration of property values and market
conditions. Portfolio Assets are pledged to secure non-recourse
notes payable.



|   |                                                                       
|-- | ----------------------------------------------------------------------
|5. | Loans Receivable from Acquisition Partnerships
    Held for Investment

Loans receivable from Acquisition Partnerships
held for investment consist primarily of loans from certain
partnerships located in Mexico and are summarized as follows:

|         |  |              |        |      |  |   |        | 
|-------- |  | ------------ | ------ | ---- |  | - | ------ | 
|         |  |             
|         |  | December 31,
|         |  |             
|         |  | 2003         |        | 2002
|         |  |              |        |     
|Mexico   |  | $            | 13,351 |      |  | $ | 16,399 | 
|France   |  |              | 2,604  |      |  |   |       | 
|Domestic |  |              | 1,358  |      |  |   | 1,301  | 
|         |  |              |        |      |  |   |        | 
|         |  | $            | 17,313 |      |  | $ | 17,700 | 
|         |  |              |        |      |  |   |        | 

There were no provisions recorded on these loans
during 2003, 2002 and 2001. The loans receivable from the
Mexican partnerships are secured by the assets/loans acquired by
the Mexican partnerships with purchase money loans provided by
the investors to the Mexican partnerships to purchase the asset
pools held in those entities. These loans are evaluated for
impairment by analyzing the expected future cash flows from the
underlying assets within each pool to determine that the cash
flows were sufficient to repay these notes. The Company applies
the asset valuation methodology consistently in all venues and
uses the same proprietary asset management system to evaluate
impairment on all asset pools. The results of this evaluation
indicated that cash flows from the pools will be sufficient to
repay the loans and no allowances for impairment were necessary.

Equity method losses which were recorded to
reduce the loans and interest receivable from the Mexican
partnerships was $2.8, $3.0 million and $1.0 million during
2003, 2002 and 2001, respectively, in compliance

67



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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.
During the third quarter of 2003, the Company amended loan
agreements with three Mexican partnerships to provide for no
interest to be payable with respect to periods after the
effective date of the amendment. This change had no impact on
the consolidated net earnings as the effect is offset through
equity earnings in the partnerships.

At December 31, 2003, the Company has a
$2.6 million loan receivable from one French Acquisition
Partnership. This loan is secured by the assets/loans held by
the Partnership and is evaluated for impairment in the same
manner as the loans to the Mexican Partnerships described above.
The results of this evaluation indicated that the cash flows
from the underlying assets will be sufficient to repay the loan
and no allowance for impairment is necessary.

6.     Equity
Investments

The Company has investments in Acquisition
Partnerships and their general partners that are accounted for
under the equity method. The Company also has investments in
servicing entities that are accounted for on the equity method.
The condensed combined financial position and results of
operations of the Acquisition Partnerships (excluding servicing
entities), which include the domestic and foreign Acquisition
Partnerships and their general partners, are summarized as
follows:

Condensed Combined Balance Sheets

|                                              |  |              |         |      |  |   |         | 
|--------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                              |  |             
|                                              |  | December 31,
|                                              |  |             
|                                              |  | 2003         |         | 2002
|                                              |  |              |         |     
|Assets                                        |  | $            | 525,493 |      |  | $ | 585,435 | 
|                                              |  |              |         |      |  |   |         | 
|Liabilities                                   |  | $            | 441,677 |      |  | $ | 480,713 | 
|Net equity                                    |  |              | 83,816  |      |  |   | 104,722 | 
|                                              |  |              |         |      |  |   |         | 
|                                              |  | $            | 525,493 |      |  | $ | 585,435 | 
|                                              |  |              |         |      |  |   |         | 
|Equity investment in Acquisition Partnerships |  | $            | 53,098  |      |  | $ | 46,029  | 
|Equity investment in servicing entities       |  |              | 4,381   |      |  |   | 3,247   | 
|                                              |  |              |         |      |  |   |         | 
|                                              |  | $            | 57,479  |      |  | $ | 49,276  | 
|                                              |  |              |         |      |  |   |         | 

Condensed Combined Summary of
Operations

|                                               |  |                         |         |      |  |      |         |   |  |   |         | 
|---------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | 
|                                               |  |                        
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2003                    |         | 2002 |  | 2001
|                                               |  |                         |         |      |  |     
|Proceeds from resolution of Portfolio Assets   |  | $                       | 255,419 |      |  | $    | 271,929 |   |  | $ | 249,219 | 
|Gain on resolution of Portfolio Assets         |  |                         | 98,126  |      |  |      | 89,824  |   |  |   | 103,599 | 
|Interest income on performing Portfolio Assets |  |                         | 9,631   |      |  |      | 14,380  |   |  |   | 24,473  | 
|Net earnings (loss)                            |  | $                       | 15,148  |      |  | $    | (13,224 | ) |  | $ | 14,172  | 
|                                               |  |                         |         |      |  |      |         |   |  |   |         | 
|Equity in earnings of Acquisition Partnerships |  | $                       | 13,588  |      |  | $    | 8,418   |   |  | $ | 9,742   | 
|Equity in earnings of servicing entities       |  |                         | 586     |      |  |      | 794     |   |  |   | 1,029   | 
|                                               |  |                         |         |      |  |      |         |   |  |   |         | 
|                                               |  | $                       | 14,174  |      |  | $    | 9,212   |   |  | $ | 10,771  | 
|                                               |  |                         |         |      |  |      |         |   |  |   |         | 

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.

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                               |           |                    |         |         |         |   |         |         |         | 
|---------------------------------------------- | --------- | ------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                               |           |                   
|                                               |           | December 31,      
|                                               |           |                   
|                                               |           | 2003               |         | 2002   
|                                               |           |                    |         |        
|Assets:                                        |           |                    |         |         |         |   |         |        
|                                               | Domestic: |                    |         |         |         |   |         |         |        
|                                               |           | WAMCO Partnerships |         | $       | 205,134 |   |         | $       | 189,392 | 
|                                               |           | Other              |         |         | 11,694  |   |         |         | 19,491  | 
|                                               | Mexico    |                    |         | 186,431 |         |   |         | 246,087 |        
|                                               | France    |                    |         | 122,234 |         |   |         | 130,465 |        
|                                               |           |                    |         |         |         |   |         |        
|                                               |           | $                  | 525,493 |         |         | $ | 585,435 |        
|                                               |           |                    |         |         |         |   |         |        
|Equity (deficit):                              |           |                    |         |         |         |   |         |        
|                                               | Domestic: |                    |         |         |         |   |         |         |        
|                                               |           | WAMCO Partnerships |         | $       | 84,589  |   |         | $       | 80,059  | 
|                                               |           | Other              |         |         | 7,636   |   |         |         | 7,212   | 
|                                               | Mexico    |                    |         | (86,412 | )       |   |         | (51,567 | )      
|                                               | France    |                    |         | 78,003  |         |   |         | 69,018  |        
|                                               |           |                    |         |         |         |   |         |        
|                                               |           | $                  | 83,816  |         |         | $ | 104,722 |        
|                                               |           |                    |         |         |         |   |         |        
|Equity investment in Acquisition Partnerships: |           |                    |         |         |         |   |         |        
|                                               | Domestic: |                    |         |         |         |   |         |         |        
|                                               |           | WAMCO Partnerships |         | $       | 33,413  |   |         | $       | 29,951  | 
|                                               |           | Other              |         |         | 3,551   |   |         |         | 3,494   | 
|                                               | Mexico    |                    |         | 1,021   |         |   |         | 1,108   |        
|                                               | France    |                    |         | 15,113  |         |   |         | 11,476  |        
|                                               |           |                    |         |         |         |   |         |        
|                                               |           | $                  | 53,098  |         |         | $ | 46,029  |        
|                                               |           |                    |         |         |         |   |         |        

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                                                           |           |                        
|                                                           |           | 2003                    |         | 2002    |        | 2001
|                                                           |           |                         |         |         |        |     
|Revenues:                                                  |           |                         |         |         |        |      |         |         |        |   |         |        
|                                                           | Domestic: |                         |         |         |        |      |         |         |        |   |         |         |       
|                                                           |           | WAMCO Partnerships      |         | $       | 35,730 |      |         | $       | 44,158 |   |         | $       | 45,603 | 
|                                                           |           | Other                   |         |         | 18,281 |      |         |         | 8,265  |   |         |         | 1,512  | 
|                                                           | Mexico    |                         |         | 23,383  |        |      |         | 37,230  |        |   |         | 63,687  |       
|                                                           | France    |                         |         | 32,112  |        |      |         | 16,899  |        |   |         | 20,199  |       
|                                                           |           |                         |         |         |        |      |         |         |        |   |         |        
|                                                           |           | $                       | 109,506 |         |        | $    | 106,552 |         |        | $ | 131,001 |        
|                                                           |           |                         |         |         |        |      |         |         |        |   |         |        
|Net earnings (loss):                                       |           |                         |         |         |        |      |         |         |        |   |         |        
|                                                           | Domestic: |                         |         |         |        |      |         |         |        |   |         |         |       
|                                                           |           | WAMCO Partnerships      |         | $       | 20,528 |      |         | $       | 27,541 |   |         | $       | 21,128 | 
|                                                           |           | Other                   |         |         | 14,695 |      |         |         | 5,208  |   |         |         | 1,190  | 
|                                                           | Mexico    |                         |         | (41,189 | )      |      |         | (56,480 | )      |   |         | (21,816 | )     
|                                                           | France    |                         |         | 21,114  |        |      |         | 10,507  |        |   |         | 13,670  |       
|                                                           |           |                         |         |         |        |      |         |         |        |   |         |        
|                                                           |           | $                       | 15,148  |         |        | $    | (13,224 | )       |        | $ | 14,172  |        
|                                                           |           |                         |         |         |        |      |         |         |        |   |         |        
|Equity in earnings (loss) of Acquisition
    Partnerships: |           |                         |         |         |        |      |         |         |        |   |         |        
|                                                           | Domestic: |                         |         |         |        |      |         |         |        |   |         |         |       
|                                                           |           | WAMCO Partnerships      |         | $       | 8,282  |      |         | $       | 8,099  |   |         | $       | 7,363  | 
|                                                           |           | Other                   |         |         | 5,244  |      |         |         | 1,885  |   |         |         | 798    | 
|                                                           | Mexico    |                         |         | (4,028  | )      |      |         | (3,493  | )      |   |         | (1,153  | )     
|                                                           | France    |                         |         | 4,090   |        |      |         | 1,927   |        |   |         | 2,734   |       
|                                                           |           |                         |         |         |        |      |         |         |        |   |         |        
|                                                           |           | $                       | 13,588  |         |        | $    | 8,418   |         |        | $ | 9,742   |        
|                                                           |           |                         |         |         |        |      |         |         |        |   |         |        

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

FirstCity also has an investment in Drive that is
accounted for under the equity method. The condensed
consolidated financial position and results of operations of
Drive are summarized below:

Condensed Consolidated Balance
Sheets

|                                      |                   |                         |         |              |        |   |         |         |       | 
|------------------------------------- | ----------------- | ----------------------- | ------- | ------------ | ------ | - | ------- | ------- | ----- | 
|                                      |                   | December 31,            |         | December 31,
|                                      |                   | 2003                    |         | 2002        
|                                      |                   |                         |         |             
|Cash                                  |                   | $                       | 19,013  |              |        | $ | 14,337  |        
|Restricted cash                       |                   |                         | 47,623  |              |        |   | 12,124  |        
|Retail installment contracts, net     |                   |                         | 623,389 |              |        |   | 367,520 |        
|Residual interests in securitizations |                   |                         | 29,094  |              |        |   | 63,202  |        
|Other assets                          |                   |                         | 19,711  |              |        |   | 14,494  |        
|                                      |                   |                         |         |              |        |   |         |        
|                                      | Total assets      |                         | $       | 738,830      |        |   | $       | 471,677 |      
|                                      |                   |                         |         |              |        |   |         |        
|Notes payable                         |                   | $                       | 683,758 |              |        | $ | 434,422 |        
|Other liabilities                     |                   |                         | 14,631  |              |        |   | 14,123  |        
|                                      |                   |                         |         |              |        |   |         |        
|                                      | Total liabilities |                         |         | 698,389      |        |   |         | 448,545 |      
|Net equity                            |                   |                         | 40,441  |              |        |   | 23,132  |        
|                                      |                   |                         |         |              |        |   |         |        
|                                      |                   | $                       | 738,830 |              |        | $ | 471,677 |        
|                                      |                   |                         |         |              |        |   |         |        
|Equity investment in Drive            |                   | $                       | 15,667  |              |        | $ | 9,066   |        
|                                      | Minority interest |                         |         | (3,131       | )      |   |         | (1,812  | )    
|                                      |                   |                         |         |              |        |   |         |        
|                                      |                   | Net investment in Drive |         | $            | 12,536 |   |         | $       | 7,254 | 
|                                      |                   |                         |         |              |        |   |         |        

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Condensed Consolidated Summary Of
Operations

|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |        |        | 
|---------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                   |                                                          |                                                                             
|                                                                                   |                                                          | Year Ended                                                                  
|                                                                                   |                                                          |                                                                             
|                                                                                   |                                                          | 2003                                                                         |         | 2002   |         | 2001
|                                                                                   |                                                          |                                                                              |         |        |         |     
|Finance and other interest income                                                  |                                                          | $                                                                            | 193,756 |        |         | $    | 101,238 |        |        | $ | 45,224 |       
|Interest expense                                                                   |                                                          |                                                                              | 31,773  |        |         |      | 16,366  |        |        |   | 11,744 |       
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   |                                                          | Net interest margin                                                          |         |        | 161,983 |      |         |        | 84,872 |   |        |        | 33,480 | 
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|Provision for credit losses on retail installment
    contracts                    |                                                          |                                                                              | 67,335  |        |         |      | 28,663  |        |        |   | 7,245  |       
|Impairment of residual interests in
    securitizations, including servicing asset |                                                          |                                                                              | 8,449   |        |         |      | 3,415   |        |        |   | 5,443  |       
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   |                                                          | Net interest margin after provision for credit
    losses and impairments    |         |        | 86,199  |      |         |        | 52,794 |   |        |        | 20,792 | 
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|Other revenues:                                                                    |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   | Gain on sale of retail installment contracts             |                                                                              |         |       |         |      |         |       |        |   |        | 39,033 |       
|                                                                                   | Servicing income                                         |                                                                              |         | 5,189  |         |      |         | 11,115 |        |   |        | 11,495 |       
|                                                                                   | Other income                                             |                                                                              |         | 2,339  |         |      |         | 1,205  |        |   |        | 881    |       
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   |                                                          | Total other revenues                                                         |         |        | 7,528   |      |         |        | 12,320 |   |        |        | 51,409 | 
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|Costs and expenses:                                                                |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   | Salaries and benefits                                    |                                                                              |         | 46,162 |         |      |         | 41,648 |        |   |        | 33,185 |       
|                                                                                   | Repossession expense                                     |                                                                              |         | 11,296 |         |      |         | 7,980  |        |   |        | 4,934  |       
|                                                                                   | Occupancy, data processing, communication, and
    other |                                                                              |         | 17,319 |         |      |         | 17,126 |        |   |        | 18,799 |       
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   |                                                          | Total costs and expenses                                                     |         |        | 74,777  |      |         |        | 66,754 |   |        |        | 56,918 | 
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   |                                                          | Income (loss) before cumulative effect of change
    in accounting principle |         |        | 18,950  |      |         |        | (1,640 | ) |        |        | 15,283 | 
|                                                                                   | Cumulative effect of change in accounting
    principle  |                                                                              |         |       |         |      |         |       |        |   |        | (783   | )     
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   |                                                          | Net income (loss)                                                            |         | $      | 18,950  |      |         | $      | (1,640 | ) |        | $      | 14,500 | 
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|Equity in earnings (loss) of Drive                                                 |                                                          | $                                                                            | 7,237   |        |         | $    | (532    | )      |        | $ | 5,923  |       
|Cumulative effect of accounting change                                             |                                                          |                                                                              |        |        |         |      |        |        |        |   | (304   | )     
|Minority interest                                                                  |                                                          |                                                                              | (1,446  | )      |         |      | 107     |        |        |   | (1,124 | )     
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       
|                                                                                   | Net equity in earnings (loss) of Drive                   |                                                                              | $       | 5,791  |         |      | $       | (425   | )      |   | $      | 4,495  |       
|                                                                                   |                                                          |                                                                              |         |        |         |      |         |        |        |   |        |       

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |              
|-- | -------------
|7. | Notes Payable

Notes payable consisted of the following:

|                                                                                                                              |                                                                                      |                                                                                                         |                                   |      |        |        |        |   |        |        | 
|----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | --------------------------------- | ---- | ------ | ------ | ------ | - | ------ | ------ | 
|                                                                                                                              |                                                                                      |                                                                                                        
|                                                                                                                              |                                                                                      | December 31,                                                                                           
|                                                                                                                              |                                                                                      |                                                                                                        
|                                                                                                                              |                                                                                      | 2003                                                                                                    |                                   | 2002
|                                                                                                                              |                                                                                      |                                                                                                         |                                   |     
|Notes payable to affiliates:                                                                                                  |                                                                                      |                                                                                                         |                                   |      |        |        |        |  
|                                                                                                                              | Senior Credit Facility with affiliate, secured
    and with recourse to the Company: |                                                                                                         |                                   |      |        |        |        |   |       
|                                                                                                                              |                                                                                      | Prime (4.0% at December 31, 2003) plus 2.5%;
    fixed rate at 8.77%, due at various dates through 2007 |                                   |      | 40,054 |        |        |   | 49,290 |       
|                                                                                                                              |                                                                                      | LIBOR (1.1% at December 31, 2003) plus
    2.75%, due at various dates through 2006                     |                                   |      | 4,116  |        |        |   |       |       
|Acquisition Facility with affiliate, secured by
    certain equity interests of the Company, fixed rate at 8.5%, due
    2005 |                                                                                      |                                                                                                         | 27,182                            |      |        |        | 24,599 |  
|Term loan to affiliate, secured by equity
    interest in Drive, LIBOR (1.1% at December 31, 2003) plus
    1.0%, due 2007    |                                                                                      |                                                                                                         | 16,000                            |      |        |        | 16,000 |  
|Term loans, secured by Portfolio Assets, LIBOR
    (1.4% at December 31, 2002) plus 5%, due at various dates
    through 2003 |                                                                                      |                                                                                                         |                                  |      |        |        | 4,314  |  
|Unsecured notes payable to senior management, due
    2011                                                                    |                                                                                      |                                                                                                         | 1,276                             |      |        |        | 1,283  |  
|Unsecured notes payable to affiliate, fixed rate
    at 7.0%, paid off                                                        |                                                                                      |                                                                                                         |                                  |      |        |        | 74     |  
|                                                                                                                              |                                                                                      |                                                                                                         |                                   |      |        |        |        |  
|                                                                                                                              |                                                                                      |                                                                                                         | Total notes payable to affiliates |      | $      | 88,628 |        |   | $      | 95,560 | 
|                                                                                                                              |                                                                                      |                                                                                                         |                                   |      |        |        |        |  
|Notes payable  other:                                                                                                        |                                                                                      |                                                                                                         |                                   |      |        |        |        |  
|                                                                                                                              | Collateralized loans, secured by Portfolio Assets:                                   |                                                                                                         |                                   |      |        |        |        |   |       
|                                                                                                                              |                                                                                      | Bank prime (4.50% at December 31, 2003) plus
    .50%, due 2004                                         |                                   | $    | 2,254  |        |        | $ | 962    |       
|                                                                                                                              |                                                                                      | Fixed rate (10.00% at December 31, 2002),
    paid off May 2003                                         |                                   |      |       |        |        |   | 962    |       
|Unsecured notes payable, fixed rates between
    5.36% and 6.26%, due 2004                                                    |                                                                                      |                                                                                                         | 178                               |      |        |        | 151    |  
|                                                                                                                              |                                                                                      |                                                                                                         |                                   |      |        |        |        |  
|                                                                                                                              |                                                                                      |                                                                                                         | Total notes payable  other       |      | $      | 2,432  |        |   | $      | 1,113  | 
|                                                                                                                              |                                                                                      |                                                                                                         |                                   |      |        |        |        |  
|                                                                                                                              |                                                                                      |                                                                                                         | Total notes payable               |      | $      | 91,060 |        |   | $      | 96,673 | 
|                                                                                                                              |                                                                                      |                                                                                                         |                                   |      |        |        |        |  

Refer to Note 2 for a description of terms
related to the Companys Senior Credit Facility at
December 31, 2003 and other matters concerning the
Companys liquidity.

The Company has unsecured notes payable to Terry
R. DeWitt, G. Stephen Fillip and James C. Holmes, each of
whom are Senior Vice Presidents of FirstCity, in connection with
the acquisition of the minority interest in FirstCity Holdings
(see note 1(b)). The notes are to be periodically redeemed
by the Company for an aggregate of up to $3.2 million out
of certain cash collections from servicing income from
Portfolios in Mexico. FirstCity valued the loans at the
inception date using an imputed interest rate of 4.56% based on
the Companys cost of funds. At December 31, 2003,
these notes had a combined balance of $1,276 and mature in
December 2011.

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, 2003, the Company was in compliance with the
aforementioned covenants. The aggregate maturities of notes
payable for the five years ending December 31, 2008 are as
follows: $13,582 in 2004, $39,182 in 2005, $9,020 in 2006,
$28,000 in 2007, and zero in 2008.

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                  
|-- | -----------------
|8. | Segment Reporting

The Company is engaged in two reportable segments
(i) Portfolio Asset acquisition and resolution and
(ii) consumer lending through the Companys minority
investment in Drive. These segments have been segregated based
on products and services offered by each. As a result of the
sale of a 49% equity interest in the Companys automobile
finance operation, the net operations of Drive have been
recorded (since August 1, 2000) as equity in earnings of
investments. The following is a summary of results of operations
for each of the two segments and reconciliation to earnings from
continuing operations.

|                                                |                                             |                                             |       |        |        |        |   |        |        |        |   |       |        |        | 
|----------------------------------------------- | ------------------------------------------- | ------------------------------------------- | ----- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ----- | ------ | ------ | 
|                                                |                                             |                                            
|                                                |                                             | Year Ended December 31,                    
|                                                |                                             |                                            
|                                                |                                             | 2003                                        |       | 2002   |        | 2001  
|                                                |                                             |                                             |       |        |        |       
|Portfolio Asset Acquisition and
    Resolution: |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|                                                | Revenues:                                   |                                             |       |        |        |        |   |        |        |        |   |       |       
|                                                |                                             | Servicing fees                              |       | $      | 15,051 |        |   | $      | 12,665 |        |   | $     | 9,580  |       
|                                                |                                             | Gain on resolution of Portfolio Assets      |       |        | 1,380  |        |   |        | 1,138  |        |   |       | 1,049  |       
|                                                |                                             | Gain on the sale of interest in investments |       |        |       |        |   |        | 1,779  |        |   |       | 3,316  |       
|                                                |                                             | Equity in earnings of investments           |       |        | 14,174 |        |   |        | 9,212  |        |   |       | 10,771 |       
|                                                |                                             | Interest income                             |       |        | 3,324  |        |   |        | 5,122  |        |   |       | 5,847  |       
|                                                |                                             | Other                                       |       |        | 1,197  |        |   |        | 2,185  |        |   |       | 1,836  |       
|                                                |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|                                                |                                             |                                             | Total |        |        | 35,126 |   |        |        | 32,101 |   |       |        | 32,399 | 
|                                                | Expenses:                                   |                                             |       |        |        |        |   |        |        |        |   |       |       
|                                                |                                             | Interest and fees on notes payable          |       |        | 2,907  |        |   |        | 2,946  |        |   |       | 4,128  |       
|                                                |                                             | Salaries and benefits                       |       |        | 12,537 |        |   |        | 9,611  |        |   |       | 7,679  |       
|                                                |                                             | Provision for loan and impairment losses    |       |        | 98     |        |   |        | 295    |        |   |       | 3,277  |       
|                                                |                                             | Occupancy, data processing and other        |       |        | 4,953  |        |   |        | 6,504  |        |   |       | 8,566  |       
|                                                |                                             | Minority Interest                           |       |        | (10    | )      |   |        | 1,311  |        |   |       | 937    |       
|                                                |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|                                                |                                             |                                             | Total |        |        | 20,485 |   |        |        | 20,667 |   |       |        | 24,587 | 
|                                                |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|                                                | Operating contribution before direct taxes  |                                             | $     | 14,641 |        |        | $ | 11,434 |        |        | $ | 7,812 |       
|                                                |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|                                                | Operating contribution, net of direct taxes |                                             | $     | 14,497 |        |        | $ | 11,214 |        |        | $ | 7,713 |       
|                                                |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|Consumer Lending:                               |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|                                                | Revenues:                                   |                                             |       |        |        |        |   |        |        |        |   |       |       
|                                                |                                             | Equity in earnings (loss) of Drive          |       | $      | 7,237  |        |   | $      | (532   | )      |   | $     | 5,923  |       
|                                                |                                             | Interest income                             |       |        |       |        |   |        |       |        |   |       | 5      |       
|                                                |                                             | Gain on sale of interest in Drive           |       |        |       |        |   |        | 4,000  |        |   |       |       |       
|                                                |                                             | Other                                       |       |        |       |        |   |        | 1      |        |   |       | 9      |       
|                                                |                                             |                                             |       |        |        |        |   |        |        |        |   |      
|                                                |                                             |                                             | Total |        |        | 7,237  |   |        |        | 3,469  |   |       |        | 5,937  | 

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |        |       |        | 
|------------------- | --------------------------------------------------------------------- | -------------------------------------- | ------------------------------------------- | ------ | ----- | ------ | - | ------ | ---- | ------ | - | ------ | ----- | ------ | 
|                    |                                                                       |                                       
|                    |                                                                       | Year Ended December 31,               
|                    |                                                                       |                                       
|                    |                                                                       | 2003                                   |                                             | 2002   |       | 2001  
|                    |                                                                       |                                        |                                             |        |       |       
|                    | Expenses:                                                             |                                        |                                             |        |       |        |   |        |      |        |   |        |      
|                    |                                                                       | Interest and fees on notes payable     |                                             | $      | 360   |        |   | $      | 18   |        |   | $      |      |       
|                    |                                                                       | Occupancy, data processing and other   |                                             |        | 27    |        |   |        | 13   |        |   |        | 45    |       
|                    |                                                                       | Minority interest                      |                                             |        | 1,446 |        |   |        | (106 | )      |   |        | 1,124 |       
|                    |                                                                       | Cumulative effect of accounting change |                                             |        |      |        |   |        |     |        |   |        | 304   |       
|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       
|                    |                                                                       |                                        | Total                                       |        |       | 1,833  |   |        |      | (75    | ) |        |       | 1,473  | 
|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       
|                    | Operating contribution before direct taxes                            |                                        | $                                           | 5,404  |       |        | $ | 3,544  |      |        | $ | 4,464  |      
|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       
|                    | Operating contribution, net of direct taxes                           |                                        | $                                           | 5,349  |       |        | $ | 3,544  |      |        | $ | 4,448  |      
|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       
|                    |                                                                       |                                        | Total operating income, net of direct taxes |        | $     | 19,846 |   |        | $    | 14,758 |   |        | $     | 12,161 | 
|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       
|Corporate Overhead: |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       
|                    | Other revenue                                                         |                                        | $                                           | 366    |       |        | $ | 418    |      |        | $ | 75     |      
|                    | Corporate interest expense                                            |                                        |                                             | (4,588 | )     |        |   | (3,858 | )    |        |   | (4,649 | )    
|                    | Salaries and benefits, occupancy, professional
    and other Expenses |                                        |                                             | (5,917 | )     |        |   | (5,375 | )    |        |   | (5,416 | )    
|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       
|                    | Earnings from continuing operations                                   |                                        | $                                           | 9,707  |       |        | $ | 5,943  |      |        | $ | 2,171  |      
|                    |                                                                       |                                        |                                             |        |       |        |   |        |      |        |   |       

Revenues from the Consumer Lending segment are
all attributable to domestic operations. Revenues from the
Portfolio Asset acquisition and resolution segment attributable
to domestic and foreign operations are summarized as follows:

|              |       |                         |        |        |  |      |        |        |  |   |        |        | 
|------------- | ----- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|              |       |                        
|              |       | Year Ended December 31,
|              |       |                        
|              |       | 2003                    |        | 2002   |  | 2001
|              |       |                         |        |        |  |     
|Domestic      |       | $                       | 21,084 |        |  | $    | 19,444 |        |  | $ | 18,978 |       
|Mexico        |       |                         | 9,049  |        |  |      | 7,985  |        |  |   | 9,460  |       
|France        |       |                         | 4,993  |        |  |      | 4,646  |        |  |   | 3,941  |       
|Other foreign |       |                         |       |        |  |      | 26     |        |  |   | 20     |       
|              |       |                         |        |        |  |      |        |        |  |   |        |       
|              | Total |                         | $      | 35,126 |  |      | $      | 32,101 |  |   | $      | 32,399 | 
|              |       |                         |        |        |  |      |        |        |  |   |        |       

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

|                                            |              |              |        |         |  |   |        |         | 
|------------------------------------------- | ------------ | ------------ | ------ | ------- |  | - | ------ | ------- | 
|                                            |              |             
|                                            |              | December 31,
|                                            |              |             
|                                            |              | 2003         |        | 2002   
|                                            |              |              |        |        
|Cash                                        |              | $            | 2,745  |         |  | $ | 4,118  |        
|Portfolio acquisition and resolution assets |              |              | 80,428 |         |  |   | 77,744 |        
|Consumer assets                             |              |              | 15,685 |         |  |   | 9,127  |        
|Deferred tax benefit, net                   |              |              | 20,101 |         |  |   | 20,101 |        
|Other assets, net                           |              |              | 7,030  |         |  |   | 7,602  |        
|Net assets of discontinued operations       |              |              | 6,150  |         |  |   | 7,764  |        
|                                            |              |              |        |         |  |   |        |        
|                                            | Total assets |              | $      | 132,139 |  |   | $      | 126,456 | 
|                                            |              |              |        |         |  |   |        |        

9.                Preferred
Stock, Stockholders Equity and Earnings (Loss) Per
Share

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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

time in the future. The registration statement
became effective July 28, 1998. As of December 31,
2003, there have been no securities issued under this
registration statement.

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

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

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

The redeemable preferred stock has a redemption
value of $21.00 per share and cumulative quarterly cash
dividends at the annual rate of $2.10 per share through the
redemption date of September 30, 2005. The Company may
redeem the New Preferred Stock for $21 per share plus accrued
dividends. The New Preferred Stock carries no voting rights
except in the event of non-payment of dividends, in which case,
the holders of New Preferred Stock have the right to elect two
directors to the Companys Board. In the third quarter of
1999, dividends on the Companys New Preferred Stock were
suspended. In connection with the recapitalization discussed in
Note 2, 1,092,210 shares of New Preferred Stock were
exchanged for 2,417,388 shares of common stock and
$10.5 million. At December 31, 2003, accumulated
dividends in arrears on remaining New Preferred Stock totaled
$1.1 million, or $8.75 per share. Since the Company failed
to pay quarterly dividends for six consecutive quarters, the
holders of New Preferred Stock are entitled to elect two
directors to the Companys Board until cumulative dividends
have been paid in full; the right to elect the additional
directors has not been exercised by the holders of the New
Preferred Stock.

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.

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 730,000 shares (net of shares cancelled and
forfeited) of Common Stock.

Stock option activity during the years indicated
is as follows:

|                                 |  |        |         |          |  |        |       |          |  |        |         |          |  |   |       |  |  |  |         |  |  |   |       | 
|-------------------------------- |  | ------ | ------- | -------- |  | ------ | ----- | -------- |  | ------ | ------- | -------- |  | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|                                 |  |        |         |          |  |       
|                                 |  | 2003   |         | 2002     |  | 2001  
|                                 |  |        |         |          |  |       
|                                 |  |        |         | Weighted |  |        |       | Weighted |  |        |         | Weighted
|                                 |  |        |         | Average  |  |        |       | Average  |  |        |         | Average 
|                                 |  |        |         | Exercise |  |        |       | Exercise |  |        |         | Exercise
|                                 |  | Shares |         | Price    |  | Shares |       | Price    |  | Shares |         | Price   
|                                 |  |        |         |          |  |        |       |          |  |        |         |         
|Outstanding at beginning of Year |  |        | 599,250 |          |  | $      | 7.96  |          |  |        | 623,250 |          |  | $ | 8.07  |  |  |  | 347,750 |  |  | $ | 12.03 | 
|Granted                          |  |        | 30,000  |          |  |        | 1.80  |          |  |        |        |          |  |   |       |  |  |  | 275,500 |  |  |   | 3.06  | 
|Exercised                        |  |        | (6,250  | )        |  |        | 2.00  |          |  |        |        |          |  |   |      |  |  |  |        |  |  |   |      | 
|Cancelled                        |  |        |        |          |  |        |      |          |  |        |        |          |  |   |      |  |  |  |        |  |  |   |      | 
|Forfeited                        |  |        | (8,500  | )        |  |        | 17.58 |          |  |        | (24,000 | )        |  |   | 10.76 |  |  |  |        |  |  |   |      | 
|                                 |  |        |         |          |  |        |       |          |  |        |         |          |  |   |       |  |  |  |         |  |  |   |       | 
|Outstanding at end of year       |  |        | 614,500 |          |  | $      | 7.59  |          |  |        | 599,250 |          |  | $ | 7.96  |  |  |  | 623,250 |  |  | $ | 8.07  | 
|                                 |  |        |         |          |  |        |       |          |  |        |         |          |  |   |       |  |  |  |         |  |  |   |       | 

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes stock options
granted by grant date.

|                  |  |         |         |                |  |          |         |  |  |   |       | 
|----------------- |  | ------- | ------- | -------------- |  | -------- | ------- |  |  | - | ----- | 
|                  |  |         |         | Shares         |  |         
|                  |  |         |         | Outstanding at |  |         
|                  |  | Shares  |         | December 31,   |  | Exercise
|Date of Grant     |  | Granted |         | 2003           |  | Price   
|                  |  |         |         |                |  |         
|October 27, 1995  |  |         | 229,600 |                |  |          | 89,000  |  |  | $ | 20.00 | 
|February 27, 1997 |  |         | 95,200  |                |  |          | 53,250  |  |  |   | 27.25 | 
|May 21, 1998      |  |         | 15,000  |                |  |          | 7,500   |  |  |   | 29.69 | 
|December 1, 2000  |  |         | 183,000 |                |  |          | 166,750 |  |  |   | 2.00  | 
|December 20, 2001 |  |         | 275,500 |                |  |          | 268,000 |  |  |   | 3.06  | 
|April 29, 2003    |  |         | 30,000  |                |  |          | 30,000  |  |  |   | 1.80  | 
|                  |  |         |         |                |  |          |         |  |  |   |       | 
|                  |  |         | 828,300 |                |  |          | 614,500 |  |  |   |       | 
|                  |  |         |         |                |  |          |         |  |  |   |       | 

At December 31, 2003, the weighted-average
remaining contractual life of outstanding options was
6.40 years. In addition, 542,813, 439,750 and 346,375
options were exercisable with a weighted-average exercise price
of $8.33, $9.73 and $12.34 at December 31, 2003, 2002 and
2001, respectively.

Through September 30, 2003, the Company had
an employee stock purchase plan, under which up to 100,000
shares of Common Stock were available for purchase by plan
participants at 85% of the fair value at the end of each
quarterly plan period. Through September 30, 2003,
participants purchased 138,578 shares of stock through this
plan, including 38,578 shares over-issued as a result of an
interpretation by the administrator of the share adjustment
provision in the plan. The over-issued shares were issued based
upon the terms and provisions of the plan. The plan terminated
pursuant to its terms as all shares included in the plan have
been issued.



|    |             
|--- | ------------
|10. | Income Taxes

Income tax expense from continuing operations
consists of:

|                                  |       |                         |      |      |   |      |      |      |   |   |     |     |  
|--------------------------------- | ----- | ----------------------- | ---- | ---- | - | ---- | ---- | ---- | - | - | --- | --- | -
|                                  |       |                        
|                                  |       | Year Ended December 31,
|                                  |       |                        
|                                  |       | 2003                    |      | 2002 |   | 2001
|                                  |       |                         |      |      |   |     
|Federal and state current expense |       | $                       | (240 | )    |   | $    | (153 | )    |   | $ | (15 | )  
|Federal deferred expense          |       |                         |     |      |   |      |     |      |   |   |     |    
|                                  |       |                         |      |      |   |      |      |      |   |   |     |    
|                                  | Total |                         | $    | (240 | ) |      | $    | (153 | ) |   | $   | (15 | )
|                                  |       |                         |      |      |   |      |      |      |   |   |     |    

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

|                                                         |                                              |      |        |       |   |      |        |       |   |   |        |       |  
|-------------------------------------------------------- | -------------------------------------------- | ---- | ------ | ----- | - | ---- | ------ | ----- | - | - | ------ | ----- | -
|                                                         |                                              | 2003 |        | 2002  |   | 2001
|                                                         |                                              |      |        |       |   |     
|Computed expected tax benefit (expense)                  |                                              | $    | (3,984 | )     |   | $    | (2,555 | )     |   | $ | (1,593 | )    
|(Increase) reduction in income taxes resulting
    from: |                                              |      |        |       |   |      |        |       |   |   |        |      
|                                                         | Change in valuation allowance                |      |        | 3,984 |   |      |        | 2,555 |   |   |        | 1,593 |  
|                                                         | Alternative minimum tax and state income tax |      |        | (240  | ) |      |        | (153  | ) |   |        | (15   | )
|                                                         |                                              |      |        |       |   |      |        |       |   |   |        |      
|                                                         |                                              | $    | (240   | )     |   | $    | (153   | )     |   | $ | (15    | )    
|                                                         |                                              |      |        |       |   |      |        |       |   |   |        |      

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FIRSTCITY FINANCIAL CORPORATION AND
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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets at
December 31, 2003 and 2002 are as follows:

|                     |                                                                                                                                   |                                 |   |          |         |  |   |          |         | 
|-------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | - | -------- | ------- |  | - | -------- | ------- | 
|                     |                                                                                                                                   | 2003                            |   | 2002    
|                     |                                                                                                                                   |                                 |   |         
|Deferred tax assets: |                                                                                                                                   |                                 |   |          |         |  |   |         
|                     | Investments in Acquisition Partnerships,
    principally due to differences in basis for tax and financial
    reporting purposes |                                 | $ | 14,145   |         |  | $ | 2,931    |        
|                     | Intangibles, principally due to differences in
    amortization                                                                   |                                 |   | 103      |         |  |   | 158      |        
|                     | Tax basis in fixed assets less than book                                                                                          |                                 |   | (174     | )       |  |   | (161     | )      
|                     | Other                                                                                                                             |                                 |   | (8,592   | )       |  |   | (2,210   | )      
|                     | Federal net operating loss carryforwards                                                                                          |                                 |   | 193,537  |         |  |   | 202,285  |        
|                     |                                                                                                                                   |                                 |   |          |         |  |   |         
|                     |                                                                                                                                   | Total gross deferred tax assets |   |          | 199,019 |  |   |          | 203,003 | 
|                     | Valuation allowance                                                                                                               |                                 |   | (178,918 | )       |  |   | (182,902 | )      
|                     |                                                                                                                                   |                                 |   |          |         |  |   |         
|                     |                                                                                                                                   | Net deferred tax assets         |   | $        | 20,101  |  |   | $        | 20,101  | 
|                     |                                                                                                                                   |                                 |   |          |         |  |   |         

The Company has net operating loss carryforwards
for federal income tax purposes of approximately
$553 million from continuing operations and $152 million
from discontinued operations at December 31, 2003,
available to offset future federal taxable income, if any,
through the year 2022. A valuation allowance is provided to
reduce the deferred tax assets to a level, which, more likely
than not, will be realized. During 2003, 2002 and 2001, the
Company adjusted the previously established valuation allowance
to recognize a deferred tax benefit of $4.0 million,
$2.6 million and $1.6 million, respectively.
Realization 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.



|    |                      
|--- | ---------------------
|11. | Employee Benefit Plan

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 $162 in 2003, $184 in 2002
and $152 in 2001.



|    |       
|--- | ------
|12. | Leases

The Company leases its current headquarters from
a related party under a noncancellable operating lease. The
lease calls for monthly payments of $10 through its expiration
in December 2006 and includes an option to renew for an
additional five-year period. Rental expense for 2003, 2002 and
2001 under this lease was $120, $120 and $90, respectively. The
Company also leases office space and equipment from unrelated
parties under operating leases expiring in various years through
2007. Rental expense under these leases for 2003, 2002 and 2001
was $689, $665 and $602, respectively. As of December 31,
2003, the future minimum lease payments under all noncancellable
operating leases are: $600 in 2004, $446 in 2005, $171 in 2006
and $2 in 2007.

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FIRSTCITY FINANCIAL CORPORATION AND
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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Other Related
Party Transactions

The Company has contracted with the Acquisition
Partnerships and related parties as a third party loan servicer.
Servicing fees totaling $15.1 million, $12.7 million
and $9.6 million, for 2003, 2002 and 2001, respectively,
and due diligence fees (included in other income) were derived
from such affiliates.

Park Central Recreation, Inc., a Texas
corporation of which James R. Hawkins is a 50% shareholder, is
indebted to an Acquisition Partnership under a note dated
March 1, 1996, which has an outstanding principal balance
of $2.0 million as of December 31, 2003. The note is
secured by a first lien on real estate in Port Arthur, Texas,
which is operated as a bowling alley. The note bears a fixed
interest rate of 10%, matures on March 1, 2006 and requires
annual payments of $289,500.

During 2003, the Company acquired the minority
interest in MCSFC, Ltd for $1.4 million. The book value of
the minority interest at the time of purchase was
$1.3 million. Also in 2003, the Company participated in the
purchase of an Acquisition Partnership from an affiliate of
Cargill for $9.4 million. FirstCitys total investment
in this partnership was $4.5 million comprising a
$4.1 million loan receivable and $.4 million equity
contribution.

During 2001, the Company sold equity investments
in two domestic Acquisition Partnerships to affiliates of
Cargill for $7.6 million resulting in a gain of
$3.3 million.

14.     Commitments
and Contingencies

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

In connection with the transactions contemplated
by the Securities Purchase Agreement, effective August 1,
2000, Consumer Corp. and FirstCity Funding LP
(Funding LP) contributed all of the assets
utilized in the operations of the automobile finance operation
to Drive pursuant to the terms of a Contribution and Assumption
Agreement by and between Consumer Corp. and Drive, and a
Contribution and Assumption Agreement by and between
Funding LP and Drive (collectively, the Contribution
Agreements). Drive assumed substantially all of the
liabilities of the automobile finance operation as set forth in
the Contribution Agreements.

In addition, in the Securities Purchase
Agreement, the Company, Consumer Corp., Funding LP and
Funding GP made various representations and warranties
concerning (i) their respective organizations,
(ii) the automobile finance operation conducted by Consumer
Corp. and Funding LP, and (iii) the assets transferred
by Consumer Corp. and Funding LP to Drive. The Company,
Consumer Corp., Funding LP and Funding GP also agreed
to indemnify BoS(USA), IFA-GP and IFA-LP from damages resulting
from a breach of any representation or warranty contained in the
Securities Purchase Agreement or otherwise made by the Company,
Consumer Corp. or Funding LP in connection with the
transaction. The indemnity obligation under the Securities
Purchase Agreement survives for a period of seven (7) years
from August 25, 2000 (the Closing Date) with
respect to tax-related representations and warranties and for
thirty months from the Closing Date with respect to all other
representations and warranties. Neither the Company, Consumer
Corp., Funding LP, or Funding GP is required to make
any payments as a result of the indemnity provided under the
Securities Purchase Agreement until the aggregate amount payable
exceeds $.25 million, and then only for the amount in
excess of $.25 million in the aggregate; however certain
representations and warranties are not subject to this
$.25 million threshold. Pursuant to the terms of the
Contribution Agreements, Consumer Corp. and Funding LP have
agreed to indemnify Drive from any damages resulting in

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

a material adverse effect on Drive resulting from
breaches of representations or warranties, failure to perform,
pay or discharge liabilities other than the assumed liabilities,
or claims, lawsuits or proceedings resulting from the
transactions contemplated by the Contribution Agreements.
Pursuant to the terms of the Contribution Agreements, Drive has
agreed to indemnify Consumer Corp. and Funding LP for any breach
of any representation or warranty by Drive, the failure of Drive
to discharge any assumed liability, or any claims arising out of
any failure by Drive to properly service receivables after
August 1, 2000. Liability for indemnification pursuant to
the terms of the Contribution Agreements will not arise until
the total of all losses with respect to such matters exceeds
$.25 million and then only for the amount by which such
losses exceed $.25 million; however this limitation will
not apply to any breach of which the party had knowledge at the
time of the Closing Date or any intentional breach by a party of
any covenant or obligation under the Contribution Agreements.

The Company has agreed to indemnify BoS(USA) for
up to 31% of losses, which might arise as a result of agreements
BoS(USA) executed as a sponsor in connection with the
securitizations completed by Drive. The Company also agreed to
provide support in connection with securitizations by Consumer
Corp. and Drive prior to the acquisition by BoS(USA) of the
interest in Drive in August 2000. Management of the Company
currently does not believe it is likely that FirstCity will be
required to make payments on these indemnification agreements.

FirstCity is obligated to pay BoS(USA) an
arrangement fee related to the $16 million loan equal to
20% of all proceeds and other amounts paid to FirstCity from any
sale or other disposition (regardless of when such sale or other
disposition occurs) of, and of all dividends and other
distributions paid to FirstCity by Drive or its general partner
(regardless of when such dividend or other distribution occurs)
on, its 20% interest in Drive, in each case in excess of
$16 million in the aggregate. As of December 31, 2003
the Company has not accrued any amount related to this
contingent liability. The Companys maximum loss exposure
related to this contingency is the amount of the arrangement fee
that would be calculated in the event the fair value of Drive
exceeds $16 million in the future.

15.     Financial
Instruments

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

(a) Cash
and Cash Equivalents

The carrying amount of cash and cash equivalents
approximated fair value at December 31, 2003 and 2002.

(b) Portfolio
Assets and Loans Receivable

The Portfolio Assets and loans receivable are
carried at the lower of cost or estimated fair value. The
estimated fair value is calculated by discounting projected cash
flows on an asset-by-asset basis using estimated market discount
rates that reflect the credit and interest rate risks inherent
in the assets. The carrying value of the Portfolio Assets and
loans receivable was $21.8 million and $27.5 million,
respectively, at December 31, 2003 and 2002. The estimated
fair value of the Portfolio Assets and loans receivable was
approximately $22.7 million and $29.7 million,
respectively, at December 31, 2003 and 2002.

(c) Residual
Interests in Securitizations

Residual interests in securitizations included in
discontinued operations are carried at estimated future gross
cash receipts. The estimated fair value is calculated using
various assumptions regarding prepayment

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FIRSTCITY FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

speeds and credit losses. The carrying value of
the residual interests was $6.4 million and
$8.8 million at December 31, 2003 and 2002,
respectively. The estimated fair value of the residual interests
was $3.8 million and $5.5 million at December 31,
2003 and 2002, respectively.

(d) Notes
Payable

Management believes that the repayment terms for
similar rate financial instruments with similar credit risks and
the stated interest rates at December 31, 2003 and 2002
approximate the market terms for similar credit instruments.
Accordingly, the carrying amount of notes payable is believed to
approximate fair value.

(e) Preferred
Stock Subject to Mandatory Redemption/Redeemable Preferred
Stock

The Preferred Stock is carried at redemption
value plus accrued but unpaid dividends. Carrying values were
$3.8 million and $3.7 million at December 31,
2003 and 2002, respectively. Fair market values based on quoted
market rates were $3.1 million and $1.8 million at
December 31, 2003 and 2002, respectively.

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INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders

FirstCity Financial Corporation:


We have audited the accompanying consolidated
balance sheets of FirstCity Financial Corporation and
subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
December 31, 2003. 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
auditing standards generally accepted in the United States of
America. 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, 2003 and
2002, and the results of their operations and their cash flows
for each of the years in the three-year period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1 to the consolidated
financial statements, in 2003, the Company changed the
presentation of preferred stock in accordance with the Statement
of Financial Accounting Standards No. 150, Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity; in 2002, the Company early adopted
Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections;and in 2001, the Company changed its method of
accounting for residual interests in securitized financial
assets in accordance with the Financial Accounting Standards
Boards EITF 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets.



| |         
| | --------
| | KPMG LLP

Dallas, Texas

February 13, 2004


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FIRSTCITY FINANCIAL CORPORATION

SELECTED QUARTERLY FINANCIAL DATA

|                                                                                           |  |                                               |       |         |  |         |        |         |  |         |        |         |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | --------------------------------------------- | ----- | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ----- | ------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                           |  |                                               |       |        
|                                                                                           |  | 2003                                          |       | 2002   
|                                                                                           |  |                                               |       |        
|                                                                                           |  | First                                         |       | Second  |  | Third   |        | Fourth  |  | First   |        | Second  |  | Third   |       | Fourth 
|                                                                                           |  | Quarter                                       |       | Quarter |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Quarter |       | Quarter
|                                                                                           |  |                                               |       |         |  |         |        |         |  |         |        |         |  |         |       |        
|                                                                                           |  |                                              
|                                                                                           |  | (Dollars in thousands, except per share data)
|                                                                                           |  | (Unaudited)                                  
|Revenues                                                                                   |  | $                                             | 7,758 |         |  | $       | 12,613 |         |  | $       | 10,017 |         |  | $       | 12341 |         |  | $ | 5,486  |   |  | $ | 12,637 |   |  | $ | 6,541  |   |  | $ | 11,324 |  
|Expenses                                                                                   |  |                                               | 7,477 |         |  |         | 7,634  |         |  |         | 7,976  |         |  |         | 8,259 |         |  |   | 6,292  |   |  |   | 7,532  |   |  |   | 7,488  |   |  |   | 7,376  |  
|Earnings (loss) from continuing operations before
    accounting change(1)                 |  |                                               | (19   | )       |  |         | 4,237  |         |  |         | 1,840  |         |  |         | 3,649 |         |  |   | (834   | ) |  |   | 4,202  |   |  |   | (1,137 | ) |  |   | 3,712  |  
|Loss from discontinued operations                                                          |  |                                               |      |         |  |         | (420   | )       |  |         |       |         |  |         | (100  | )       |  |   | (500   | ) |  |   | (1,500 | ) |  |   | (5,700 | ) |  |   | (2.014 | )
|Net earnings (loss)                                                                        |  |                                               | (19   | )       |  |         | 3,817  |         |  |         | 1,840  |         |  |         | 3,549 |         |  |   | (1,334 | ) |  |   | 2,702  |   |  |   | (6,837 | ) |  |   | 1,698  |  
|Preferred dividends                                                                        |  |                                               | 66    |         |  |         | 67     |         |  |         |       |         |  |         |      |         |  |   | 642    |   |  |   | 642    |   |  |   | 642    |   |  |   | 552    |  
|Net earnings (loss) to common stockholders                                                 |  | $                                             | (85   | )       |  | $       | 3,750  |         |  | $       | 1,840  |         |  | $       | 3,549 |         |  | $ | (1,976 | ) |  | $ | 2,060  |   |  | $ | (7,479 | ) |  | $ | 1,146  |  
|Earnings (loss) from continuing operations
    before accounting change per common share  |  |                                               |       |         |  |         |        |         |  |         |        |         |  |         |       |         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|Basic                                                                                      |  | $                                             | (0.01 | )       |  | $       | 0.33   |         |  | $       | 0.16   |         |  | $       | 0.32  |         |  | $ | (0.18  | ) |  | $ | 0.43   |   |  | $ | (0.21  | ) |  | $ | 0.36   |  
|Diluted                                                                                    |  | $                                             | (0.01 | )       |  | $       | 0.33   |         |  | $       | 0.16   |         |  | $       | 0.31  |         |  | $ | (0.18  | ) |  | $ | 0.43   |   |  | $ | (0.21  | ) |  | $ | 0.36   |  



---



|    |                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Significant losses from continuing operations in
    the third quarter 2002 primarily related to a decrease in equity
    earnings in investments during the quarter and lower earnings
    from Drive as a result of Drive structuring its securitizations
    as secured financings versus gain on sale treatment.

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WAMCO PARTNERSHIPS

COMBINED FINANCIAL STATEMENTS

December 31, 2003, 2002 and
2001


(With Independent Auditors Report
Thereon)


84



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INDEPENDENT AUDITORS REPORT

The Partners

WAMCO Partnerships:


We have audited the accompanying combined balance
sheets of the WAMCO Partnerships as of December 31, 2003
and 2002, 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, 2003.
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.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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 combined financial statements
referred to above present fairly, in all material respects, the
financial position of the WAMCO Partnerships as of
December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States of America.



| |         
| | --------
| | KPMG LLP

Dallas, Texas


February 13, 2004


85



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WAMCO PARTNERSHIPS

COMBINED BALANCE SHEETS

December 31, 2003 and 2002


|                                                                                                 |                   |                        |         |         |  |   |         |         | 
|------------------------------------------------------------------------------------------------ | ----------------- | ---------------------- | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                 |                   | 2003                   |         | 2002   
|                                                                                                 |                   |                        |         |        
|                                                                                                 |                   |                       
|                                                                                                 |                   | (Dollars in thousands)
|ASSETS                                                                                          
|Cash                                                                                             |                   | $                      | 15,044  |         |  | $ | 13,035  |        
|Portfolio Assets, net                                                                            |                   |                        | 168,681 |         |  |   | 147,686 |        
|Investments in partnerships                                                                      |                   |                        | 2,350   |         |  |   | 2,302   |        
|Investments in trust certificates                                                                |                   |                        |        |         |  |   | 7,883   |        
|Deferred profit sharing                                                                          |                   |                        | 18,273  |         |  |   | 17,671  |        
|Other assets, net                                                                                |                   |                        | 786     |         |  |   | 815     |        
|                                                                                                 |                   |                        |         |         |  |   |         |        
|                                                                                                 |                   | $                      | 205,134 |         |  | $ | 189,392 |        
|                                                                                                 |                   |                        |         |         |  |   |         |        
|                                                                                                
|LIABILITIES AND PARTNERS
    CAPITAL                                                           
|Notes payable (including $71,224 and $46,137
    affiliates in 2003 and 2002, respectively)      |                   | $                      | 95,946  |         |  | $ | 79,891  |        
|Deferred compensation                                                                            |                   |                        | 21,466  |         |  |   | 21,706  |        
|Other liabilities (including $1,603 and $1,862 to
    affiliates in 2003 and 2002, respectively) |                   |                        | 3,133   |         |  |   | 3,392   |        
|                                                                                                 |                   |                        |         |         |  |   |         |        
|                                                                                                 | Total liabilities |                        |         | 120,545 |  |   |         | 104,989 | 
|Commitments and contingencies (notes 7 and 11)                                                   |                   |                        |         |         |  |   |         |        
|Preferred equity                                                                                 |                   |                        |        |         |  |   | 4,344   |        
|Partners capital                                                                                |                   |                        | 84,589  |         |  |   | 80,059  |        
|                                                                                                 |                   |                        |         |         |  |   |         |        
|                                                                                                 |                   | $                      | 205,134 |         |  | $ | 189,392 |        
|                                                                                                 |                   |                        |         |         |  |   |         |        

See accompanying notes to combined financial
statements.

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WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF OPERATIONS

Years Ended December 31, 2003, 2002, and
2001


|                                               |  |                        |        |      |  |      |         |   |  |   |         |  
|---------------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                               |  | 2003                   |        | 2002 |  | 2001
|                                               |  |                        |        |      |  |     
|                                               |  |                       
|                                               |  | (Dollars in thousands)
|Proceeds from resolution of Portfolio Assets   |  | $                      | 89,819 |      |  | $    | 133,198 |   |  | $ | 69,188  |  
|Cost of Portfolio Assets resolved              |  |                        | 61,921 |      |  |      | 102,170 |   |  |   | 44,916  |  
|                                               |  |                        |        |      |  |      |         |   |  |   |         |  
|Gain on resolution of Portfolio Assets         |  |                        | 27,898 |      |  |      | 31,028  |   |  |   | 24,272  |  
|Interest income on performing Portfolio Assets |  |                        | 6,731  |      |  |      | 11,280  |   |  |   | 19,543  |  
|Interest and fees on notes  affiliate         |  |                        | (3,082 | )    |  |      | (5,187  | ) |  |   | (12,104 | )
|Interest and fees on notes payable 
    other |  |                        | (1,733 | )    |  |      | (1,957  | ) |  |   | (1,234  | )
|Provision for loan and impairment losses       |  |                        | (1,025 | )    |  |      | (904    | ) |  |   | (1,254  | )
|Servicing fees  affiliate                     |  |                        | (3,606 | )    |  |      | (3,779  | ) |  |   | (3,131  | )
|General, administrative and operating expenses |  |                        | (5,756 | )    |  |      | (4,790  | ) |  |   | (6,752  | )
|Other income, net                              |  |                        | 1,101  |      |  |      | 1,850   |   |  |   | 1,788   |  
|                                               |  |                        |        |      |  |      |         |   |  |   |         |  
|Net earnings                                   |  | $                      | 20,528 |      |  | $    | 27,541  |   |  | $ | 21,128  |  
|                                               |  |                        |        |      |  |      |         |   |  |   |         |  

See accompanying notes to combined financial
statements.

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WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CHANGES IN
PARTNERS CAPITAL

Years Ended December 31, 2003, 2002, and
2001


|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |         |  
|---------------------------- | ------------------------------------- | ---------------------- | --- | -------- | - | -------- | ----- | -------- | - | -------- | ----- | ----- | - | - | ----- | ---- | - | - | ------ | ------- | - | - | ------ | ------- | -
|                             |                                       |                        |     | Class B  |   |          |       |          |   |         
|                             |                                       | Class A Equity         |     | Equity   |   |          |       |          |   |         
|                             |                                       |                        |     |          |   |          |       |          |   |         
|                             |                                       | General                |     | Limited  |   | Limited  |       | General  |   | Limited  |       |      
|                             |                                       | Partners               |     | Partners |   | Partners |       | Partners |   | Partners |       | Total
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |      
|                             |                                       |                       
|                             |                                       | (Dollars in thousands)
|Balance at December 31, 2000 |                                       | $                      | 117 |          |   | $        | 5,715 |          |   | $        | 1,147 |       |   | $ | 870   |      |   | $ | 53,755 |         |   | $ | 61,604 |        
|                             | Contributions                         |                        |     |         |   |          |       |         |   |          |       |      |   |   |       | 265  |   |   |        | 26,265  |   |   |        | 26,530  |  
|                             | Distributions                         |                        |     | (26      | ) |          |       | (1,271   | ) |          |       | (145  | ) |   |       | (311 | ) |   |        | (18,194 | ) |   |        | (19,947 | )
|Comprehensive income         |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        
|Net earnings                 |                                       |                        | 26  |          |   |          | 1,291 |          |   |          | 106   |       |   |   | 253   |      |   |   | 19,452 |         |   |   | 21,128 |        
|                             | Unrealized net gain on securitization |                        |     | 14       |   |          |       | 667      |   |          |       |      |   |   |       | 5    |   |   |        | 248     |   |   |        | 934     |  
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        
|                             | Total comprehensive income            |                        |     | 40       |   |          |       | 1,958    |   |          |       | 106   |   |   |       | 258  |   |   |        | 19,700  |   |   |        | 22,062  |  
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        
|Balance at December 31, 2001 |                                       |                        | 131 |          |   |          | 6,402 |          |   |          | 1,108 |       |   |   | 1,082 |      |   |   | 81,526 |         |   |   | 90,249 |        
|                             | Contributions                         |                        |     |         |   |          |       |         |   |          |       |      |   |   |       | 159  |   |   |        | 15,812  |   |   |        | 15,971  |  
|                             | Distributions                         |                        |     | (43      | ) |          |       | (2,119   | ) |          |       | (126  | ) |   |       | (605 | ) |   |        | (51,305 | ) |   |        | (54,198 | )
|                             | Comprehensive income:                 |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |         |  
|                             | Net earnings                          |                        |     | 28       |   |          |       | 1,376    |   |          |       | 76    |   |   |       | 300  |   |   |        | 25,761  |   |   |        | 27,541  |  
|                             | Unrealized net gain on securitization |                        |     | 7        |   |          |       | 351      |   |          |       | 5     |   |   |       | 3    |   |   |        | 130     |   |   |        | 496     |  
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        
|                             | Total comprehensive income            |                        |     | 35       |   |          |       | 1,727    |   |          |       | 81    |   |   |       | 303  |   |   |        | 25,891  |   |   |        | 28,037  |  
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        
|Balance at December 31, 2002 |                                       |                        | 123 |          |   |          | 6,010 |          |   |          | 1,063 |       |   |   | 939   |      |   |   | 71,924 |         |   |   | 80,059 |        
|                             | Contributions                         |                        |     |         |   |          |       |         |   |          |       |      |   |   |       | 332  |   |   |        | 29,850  |   |   |        | 30,182  |  
|                             | Distributions                         |                        |     | (98      | ) |          |       | (4,788   | ) |          |       | (322  | ) |   |       | (546 | ) |   |        | (38,987 | ) |   |        | (44,741 | )
|                             | Comprehensive income:                 |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |         |  
|                             | Net earnings                          |                        |     | 41       |   |          |       | 1,989    |   |          |       | 55    |   |   |       | 280  |   |   |        | 18,163  |   |   |        | 20,528  |  
|                             | Unrealized net gain on securitization |                        |     | (21      | ) |          |       | (1,018   | ) |          |       | (5    | ) |   |       | (17  | ) |   |        | (378    | ) |   |        | (1,439  | )
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        
|                             | Total comprehensive income            |                        |     | 20       |   |          |       | 971      |   |          |       | 50    |   |   |       | 263  |   |   |        | 17,785  |   |   |        | 19,089  |  
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        
|Balance at December 31, 2003 |                                       | $                      | 45  |          |   | $        | 2,193 |          |   | $        | 791   |       |   | $ | 988   |      |   | $ | 80,572 |         |   | $ | 84,589 |        
|                             |                                       |                        |     |          |   |          |       |          |   |          |       |       |   |   |       |      |   |   |        |         |   |   |        |        

See accompanying notes to combined financial
statements.

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WAMCO PARTNERSHIPS

COMBINED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2003, 2002, and
2001


|                                      |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |          |          |  
|------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------ | ------- | ------- | ---- | ------ | -------- | ------- | - | ------ | -------- | -------- | -
|                                      |                                                                                                   | 2003                                                     |        | 2002    |         | 2001
|                                      |                                                                                                   |                                                          |        |         |         |     
|                                      |                                                                                                   |                                                         
|                                      |                                                                                                   | (Dollars in thousands)                                  
|Cash flows from operating activities: |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|                                      | Net earnings                                                                                      |                                                          | $      | 20,528  |         |      | $      | 27,541   |         |   | $      | 21,128   |         
|                                      | Adjustments to reconcile net earnings to net cash
    provided by (used in) operating activities: |                                                          |        |         |         |      |        |          |         |   |        |          |         
|                                      |                                                                                                   | Amortization of loan origination and commitment
    fees |        |         | 425     |      |        |          | 522     |   |        |          | 768      |  
|                                      |                                                                                                   | Amortization of deferred profit sharing                  |        |         | 2,411   |      |        |          | 720     |   |        |          | 1,228    |  
|                                      |                                                                                                   | Accretion of unrealized gain on trust certificates       |        |         | (197    | )    |        |          | (287    | ) |        |          |         |  
|                                      |                                                                                                   | Provision for loan losses                                |        |         | 1,025   |      |        |          | 904     |   |        |          | 1,254    |  
|                                      |                                                                                                   | Gain on resolution of Portfolio Assets                   |        |         | (27,898 | )    |        |          | (31,028 | ) |        |          | (24,272  | )
|                                      |                                                                                                   | Purchase of Portfolio Assets                             |        |         | (95,819 | )    |        |          | (48,713 | ) |        |          | (118,147 | )
|                                      |                                                                                                   | Net receipts on Portfolio Asset lines of credit          |        |         | 184     |      |        |          |        |   |        |          |         |  
|                                      |                                                                                                   | Capitalized costs on Portfolio Assets                    |        |         | (1,465  | )    |        |          | (4,059  | ) |        |          | (536     | )
|                                      |                                                                                                   | Capitalized interest on Portfolio Assets                 |        |         | (976    | )    |        |          | (897    | ) |        |          | (1,228   | )
|                                      |                                                                                                   | Proceeds from resolution of Portfolio Assets             |        |         | 89,819  |      |        |          | 133,198 |   |        |          | 69,188   |  
|                                      |                                                                                                   | Proceeds from sale of Portfolio Assets                   |        |         |        |      |        |          |        |   |        |          | 1,594    |  
|                                      |                                                                                                   | Principal payments on Performing Portfolio Assets        |        |         | 20,037  |      |        |          | 21,640  |   |        |          | 34,071   |  
|                                      |                                                                                                   | Increase in deferred profit sharing                      |        |         | (3,013  | )    |        |          | (2,885  | ) |        |          | (560     | )
|                                      |                                                                                                   | (Increase) decrease in other assets                      |        |         | (334    | )    |        |          | 170     |   |        |          | (43      | )
|                                      |                                                                                                   | Increase in deferred compensation                        |        |         | 3,013   |      |        |          | 2,885   |   |        |          | 560      |  
|                                      |                                                                                                   | Deferred compensation and profit sharing paid            |        |         | (3,253  | )    |        |          | (1,730  | ) |        |          | (2,365   | )
|                                      |                                                                                                   | (Increase) decrease in other liabilities                 |        |         | (259    | )    |        |          | (458    | ) |        |          | 258      |  
|                                      |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|                                      |                                                                                                   | Net cash provided by (used in) operating
    activities  |        |         | 4,228   |      |        |          | 97,523  |   |        |          | (17,102  | )
|Cash flows from investing activities: |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|                                      | Contribution to subsidiaries                                                                      |                                                          |        | (48     | )       |      |        |         |         |   |        | (48      | )       
|                                      | Change in trust certificates                                                                      |                                                          |        | 676     |         |      |        | 1,123    |         |   |        | (381     | )       
|                                      |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|                                      |                                                                                                   | Net cash provided by (used) in investing
    activities  |        |         | 628     |      |        |          | 1,123   |   |        |          | (429     | )
|Cash flows from financing activities: |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|                                      | Borrowing of debt  affiliate                                                                     |                                                          |        | 63,462  |         |      |        | 53,143   |         |   |        | 93,569   |         
|                                      | Borrowing of debt                                                                                 |                                                          |        | 26,000  |         |      |        | 28,500   |         |   |        | 45,901   |         
|                                      | Repayment of debt  affiliate                                                                     |                                                          |        | (42,534 | )       |      |        | (108,184 | )       |   |        | (113,327 | )       
|                                      | Repayment of debt                                                                                 |                                                          |        | (35,032 | )       |      |        | (33,979  | )       |   |        | (8,930   | )       
|                                      | Capitalized interest on preferred equity                                                          |                                                          |        |        |         |      |        | 150      |         |   |        | 1,049    |         
|                                      | Repayment of preferred equity                                                                     |                                                          |        | (184    | )       |      |        | (411     | )       |   |        |         |         
|                                      | Capital contributions                                                                             |                                                          |        | 30,182  |         |      |        | 15,971   |         |   |        | 26,530   |         
|                                      | Capital distributions                                                                             |                                                          |        | (44,741 | )       |      |        | (54,198  | )       |   |        | (19,947  | )       
|                                      |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|                                      |                                                                                                   | Net cash provided by (used in) financing
    activities  |        |         | (2,847  | )    |        |          | (99,008 | ) |        |          | 24,845   |  
|                                      |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|Net increase (decrease) in cash       |                                                                                                   |                                                          | 2,009  |         |         |      | (362   | )        |         |   | 7,314  |         
|Cash at beginning of year             |                                                                                                   |                                                          | 13,035 |         |         |      | 13,397 |          |         |   | 6,083  |         
|                                      |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         
|Cash at end of year                   |                                                                                                   | $                                                        | 15,044 |         |         | $    | 13,035 |          |         | $ | 13,397 |         
|                                      |                                                                                                   |                                                          |        |         |         |      |        |          |         |   |        |         

Supplemental disclosure of cash flow information:

Cash paid for interest was approximately $4,323,
$6,782, and $12,533 for 2003, 2002, and 2001, respectively.

During 2003, preferred equity of $4,160 was
converted to a note payable.

See accompanying notes to combined financial
statements.

89



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WAMCO PARTNERSHIPS

NOTES TO COMBINED FINANCIAL
STATEMENTS

December 31, 2003, 2002, and
2001


(Dollars in thousands)




|   |                                            
|-- | -------------------------------------------
|1. | Organization and Partnership
    Agreements

The combined financial statements represents
domestic Texas limited partnerships and limited liability
companies (Acquisition Partnerships or
Partnerships) and include the accounts of
WAMCO III, Ltd. (WAMCO III);
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 XXX, Ltd.
(WAMCO XXX); WAMCO 31, Ltd.
(WAMCO 31); WAMCO 32, Ltd.
(WAMCO 32); WAMCO 33, Ltd.
(WAMCO 33); SOWAMCO XXIX, Ltd.
(SOWAMCO XXIX); Calibat Fund, LLC; First B
Realty, Ltd.; First Paradee, Ltd.; FirstStreet Investments LLC
(FirstStreet); FC Properties, Ltd. (FC
Properties); and Community Development Investment, LLC.
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. FC
Properties, WAMCO XXVII and WAMCO XXX are considered
to be significant subsidiaries of FirstCity. The WAMCO XXX
partnership recorded its first activity in June 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.

The partnership agreement for WAMCO III
provides for Class A and Class B Equity partners. The
Class A Equity partners are WAMCO III of Texas, Inc.,
FirstCity Commercial Corporation and CFSC Capital Corp. II,
and the Class B Equity partner is CFSC Capital Corp. II.
The Class B Equity limited partner is 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 are allocated to the Class A Equity
partners in proportion to their respective ownership
percentages. Net income or loss is 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 are allocated using the same methodology as net
income or loss. The Class B Equity limited partner is not
required to make capital contributions.

During June 2001, First Paradee, Ltd. was merged
with and into WAMCO XXV with WAMCO XXV being the
surviving entity. Also during June 2001, WAMCO IX sold, at
cost, its remaining Portfolio Assets that had projected
estimated remaining collections to WAMCO XXV.

During September 2003, WAMCO XXIX, Ltd. was
merged with and into WAMCO XXVII, Ltd. with
WAMCO XXVII, Ltd. being the surviving entity. Also during
September 2003, Community Development Investment, LLC. was
merged with and into WAMCO XXIV, Ltd. with WAMCO XXIV,
Ltd. being the surviving entity.

90



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                     
| | --------------------
| | (a) Portfolio Assets

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.

Portfolio Assets are held for sale and reflected
in the accompanying combined financial statements as
non-performing Portfolio Assets, performing Portfolio Assets or
real estate Portfolios. The following is a description of each
classification and the related accounting policy accorded to
each Portfolio type:



| |                                
| | -------------------------------
| | Non-Performing Portfolio Assets

Non-performing Portfolio Assets consist primarily
of distressed loans and loan related assets, such as foreclosed
upon collateral. Portfolio Assets are designated as
non-performing unless a majority of all of the loans in the
Portfolio is being repaid in accordance with the contractual
terms of the underlying loan agreements at date of acquisition.
Such Portfolios are 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 are purchased
at substantial discounts from their outstanding legal principal
amount, the total of the aggregate of expected future sales
prices and the total payments to be received from obligors.
Subsequent to acquisition, the adjusted cost of non-performing
Portfolio Assets is evaluated for impairment on a quarterly
basis. A valuation allowance is established for any impairment
identified through provisions charged to earnings in the period
the impairment is identified. Impairments on non-performing
Portfolio Assets were $503, $97, and $497 for 2003, 2002 and
2001, respectively.

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 Portfolio. Cost allocation is based on a proration of
actual proceeds divided by total estimated proceeds of the pool.
No interest income is recognized separately on non-performing
Portfolio Assets. All proceeds, of whatever type, are included
in proceeds from resolution of Portfolio Assets in determining
the gain on resolution of such assets. Accounting for Portfolios
is on a pool basis as opposed to an individual asset-by-asset
basis.



| |                            
| | ---------------------------
| | Performing Portfolio Assets

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

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

91



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

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

Impairment on each Portfolio is measured based on
the present value of the expected future cash flows in the
aggregate discounted at the loans risk adjusted rates,
which approximates the effective interest rates, or the fair
value of the collateral, less estimated selling costs, if any
loans are collateral dependent and foreclosure is probable.
Impairments on performing Portfolio Assets were $519, $790, and
$757 for 2003 2002 and 2001 respectively.



| |                       
| | ----------------------
| | Real Estate Portfolios

Real estate Portfolios consist of real estate
assets 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, which represents the net realizable value
of the real estate Portfolio. A valuation allowance is
established for any impairment identified through provisions
charged to earnings in the period the impairment is identified.
Impairments on real estate Portfolios were $3 and $17 in 2003
and 2002, respectively. There were no impairments on real estate
Portfolios in 2001.

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.



| |                                         
| | ----------------------------------------
| | (b) Investment in Trust
    Certificates

Through August 2003, the Partnerships held an
investment in trust certificates, representing a residual
interest in a REMIC created by the sale of certain Partnership
assets. This residual interest was subordinate to the senior
tranches of the certificate and represented the present value of
the right to the excess cash flows generated by the securitized
assets. The residual certificates were accounted for under
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and
Equity Securities.Because such assets could be
contractually prepaid or otherwise settled in such a way that
the holder would not receive all of the recorded investment, the
assets were classified as available-for-sale investments and
carried at estimated fair value with any accompanying increases
or decreases in estimated fair value being recorded as
unrealized gains or losses in other comprehensive income in the
accompanying combined statements of changes in partners
capital. The determination of fair value was based on the
present value of the anticipated excess cash flows utilizing the
certain valuation assumptions. The significant valuation
assumptions include expected credit losses and timing of cash
collected.

The Partnerships assessed the carrying value of
this investment for impairment in accordance with the provisions
of EITF 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets,which requires that
other-than-temporary impairments in beneficial interests be
written down to fair value with the resulting change being
included in operations.

92



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

During September 2003 the Partnerships purchased
the underlying assets from the trust. At the time of this
purchase, these assets were included in the Performing Portfolio
Assets at their remaining historical cost of $5,902 and the
remaining balance for the adjustment to market value of $905 was
reversed against its corresponding balance of unrealized net
gain on securitizations in the Partnerships equity.



| |                 
| | ----------------
| | (c) Income Taxes

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.



| |                     
| | --------------------
| | (d) Use of Estimates

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



| |                      
| | ---------------------
| | (e) Reclassifications

Certain amounts in the financial statements for
prior years have been reclassified to conform with current
financial statement presentation.

93



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

3. Combining Financial
Statements

FC Properties, WAMCO XXVIII and WAMCO XXX are
considered to be significant subsidiaries of FirstCity. The
WAMCO XXX partnership recorded its first activity in June 2002.
The following tables summarize the combining balance sheets of
the WAMCO Partnerships as of December 31, 2003 and 2002,
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, 2003.

Combining Balance Sheets

December 31, 2003


|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |         |        |  |   |         |         | 
|------------------------------------------------------------------- | ----------------- | ---------------------- | ------ | ------ |  | ----- | ------ | ------------ |  | -------- | ------ | ------ |  | - | ------- | ------ |  | - | ------- | ------- | 
|                                                                    |                   | FC                     |        | WAMCO  |  | WAMCO |        | Other        |  |         
|                                                                    |                   | Properties             |        | XXVIII |  | XXX   |        | Partnerships |  | Combined
|                                                                    |                   |                        |        |        |  |       |        |              |  |         
|                                                                    |                   |                       
|                                                                    |                   | (Dollars in thousands)
|ASSETS                                                             
|Cash                                                                |                   | $                      | 1,526  |        |  | $     | 539    |              |  | $        | 3,897  |        |  | $ | 9,082   |        |  | $ | 15,044  |        
|Portfolio Assets, net                                               |                   |                        | 13,340 |        |  |       | 17,780 |              |  |          | 19,086 |        |  |   | 118,475 |        |  |   | 168,681 |        
|Investments in partnerships                                         |                   |                        |       |        |  |       |       |              |  |          |       |        |  |   | 2,350   |        |  |   | 2,350   |        
|Deferred profit sharing                                             |                   |                        | 18,273 |        |  |       |       |              |  |          |       |        |  |   |        |        |  |   | 18,273  |        
|Other assets, net                                                   |                   |                        | 5      |        |  |       | 101    |              |  |          | 187    |        |  |   | 493     |        |  |   | 786     |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |         |        |  |   |         |        
|                                                                    |                   | $                      | 33,144 |        |  | $     | 18,420 |              |  | $        | 23,170 |        |  | $ | 130,400 |        |  | $ | 205,134 |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |         |        |  |   |         |        
|                                                                   
|LIABILITIES AND PARTNERS
    CAPITAL                              
|Notes payable                                                       |                   | $                      |       |        |  | $     | 6,829  |              |  | $        | 13,393 |        |  | $ | 75,724  |        |  | $ | 95,946  |        
|Deferred compensation                                               |                   |                        | 21,466 |        |  |       |       |              |  |          |       |        |  |   |        |        |  |   | 21,466  |        
|Other liabilities                                                   |                   |                        | 533    |        |  |       | 987    |              |  |          | 209    |        |  |   | 1,384   |        |  |   | 3,133   |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |         |        |  |   |         |        
|                                                                    | Total liabilities |                        |        | 22,019 |  |       |        | 7,816        |  |          |        | 13,602 |  |   |         | 77,108 |  |   |         | 120,545 | 
|Partners capital                                                   |                   |                        | 11,125 |        |  |       | 10,604 |              |  |          | 9,568  |        |  |   | 53,292  |        |  |   | 84,589  |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |         |        |  |   |         |        
|                                                                    |                   | $                      | 33,144 |        |  | $     | 18,420 |              |  | $        | 23,170 |        |  | $ | 130,400 |        |  | $ | 205,134 |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |         |        |  |   |         |        
|Notes payable owed to affiliates included in
    above balances     |                   | $                      |       |        |  | $     |       |              |  | $        |       |        |  | $ | 71,224  |        |  | $ | 71,224  |        
|Other liabilities owed to affiliates included in
    above balances |                   |                        | 1      |        |  |       | 572    |              |  |          | 163    |        |  |   | 867     |        |  |   | 1,603   |        

94



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

Combining Balance Sheets

December 31, 2002


|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |        |        |  |   |         |         | 
|------------------------------------------------------------------- | ----------------- | ---------------------- | ------ | ------ |  | ----- | ------ | ------------ |  | -------- | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                                                    |                   | FC                     |        | WAMCO  |  | WAMCO |        | Other        |  |         
|                                                                    |                   | Properties             |        | XXVIII |  | XXX   |        | Partnerships |  | Combined
|                                                                    |                   |                        |        |        |  |       |        |              |  |         
|                                                                    |                   |                       
|                                                                    |                   | (Dollars in thousands)
|ASSETS                                                             
|Cash                                                                |                   | $                      | 1,484  |        |  | $     | 2,440  |              |  | $        | 3,621  |        |  | $ | 5,490  |        |  | $ | 13,035  |        
|Portfolio Assets, net                                               |                   |                        | 15,182 |        |  |       | 32,341 |              |  |          | 44,002 |        |  |   | 56,161 |        |  |   | 147,686 |        
|Investments in partnerships                                         |                   |                        |       |        |  |       |       |              |  |          |       |        |  |   | 2,302  |        |  |   | 2,302   |        
|Investments in trust certificates                                   |                   |                        |       |        |  |       |       |              |  |          |       |        |  |   | 7,883  |        |  |   | 7,883   |        
|Deferred profit sharing                                             |                   |                        | 17,671 |        |  |       |       |              |  |          |       |        |  |   |       |        |  |   | 17,671  |        
|Other assets, net                                                   |                   |                        | 5      |        |  |       | 346    |              |  |          |       |        |  |   | 464    |        |  |   | 815     |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |        |        |  |   |         |        
|                                                                    |                   | $                      | 34,342 |        |  | $     | 35,127 |              |  | $        | 47,623 |        |  | $ | 72,300 |        |  | $ | 189,392 |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |        |        |  |   |         |        
|                                                                   
|LIABILITIES AND PARTNERS
    CAPITAL                              
|Notes payable                                                       |                   | $                      |       |        |  | $     | 18,882 |              |  | $        | 34,948 |        |  | $ | 26,061 |        |  | $ | 79,891  |        
|Deferred compensation                                               |                   |                        | 21,706 |        |  |       |       |              |  |          |       |        |  |   |       |        |  |   | 21,706  |        
|Other liabilities                                                   |                   |                        | 540    |        |  |       | 1,301  |              |  |          | 524    |        |  |   | 1,027  |        |  |   | 3,392   |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |        |        |  |   |         |        
|                                                                    | Total liabilities |                        |        | 22,246 |  |       |        | 20,183       |  |          |        | 35,472 |  |   |        | 27,088 |  |   |         | 104,989 | 
|Preferred equity                                                    |                   |                        |       |        |  |       |       |              |  |          |       |        |  |   | 4,344  |        |  |   | 4,344   |        
|Partners capital                                                   |                   |                        | 12,096 |        |  |       | 14,944 |              |  |          | 12,151 |        |  |   | 40,868 |        |  |   | 80,059  |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |        |        |  |   |         |        
|                                                                    |                   | $                      | 34,342 |        |  | $     | 35,127 |              |  | $        | 47,623 |        |  | $ | 72,300 |        |  | $ | 189,392 |        
|                                                                    |                   |                        |        |        |  |       |        |              |  |          |        |        |  |   |        |        |  |   |         |        
|Notes payable owed to affiliates included in
    above balances     |                   | $                      |       |        |  | $     |       |              |  | $        | 34,948 |        |  | $ | 11,189 |        |  | $ | 46,137  |        
|Other liabilities owed to affiliates included in
    above balances |                   |                        | 20     |        |  |       | 1,196  |              |  |          | 225    |        |  |   | 421    |        |  |   | 1,862   |        

95



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

Combining Statements of Operations

Year Ended December 31, 2003


|                                               |              |                        |        |        |  |       |        |              |  |          |        |       |  |   |        |       |  |   |        |        | 
|---------------------------------------------- | ------------ | ---------------------- | ------ | ------ |  | ----- | ------ | ------------ |  | -------- | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ------ | 
|                                               |              | FC                     |        | WAMCO  |  | WAMCO |        | Other        |  |         
|                                               |              | Properties             |        | XXVIII |  | XXX   |        | Partnerships |  | Combined
|                                               |              |                        |        |        |  |       |        |              |  |         
|                                               |              |                       
|                                               |              | (Dollars in thousands)
|Proceeds from resolution of Portfolio Assets   |              | $                      | 10,368 |        |  | $     | 16,638 |              |  | $        | 33,277 |       |  | $ | 29,536 |       |  | $ | 89,819 |       
|Cost of Portfolio Assets resolved              |              |                        | 2,502  |        |  |       | 12,080 |              |  |          | 25,006 |       |  |   | 22,333 |       |  |   | 61,921 |       
|                                               |              |                        |        |        |  |       |        |              |  |          |        |       |  |   |        |       |  |   |        |       
|Gain on resolution of Portfolio Assets         |              |                        | 7,866  |        |  |       | 4,558  |              |  |          | 8,271  |       |  |   | 7,203  |       |  |   | 27,898 |       
|Interest income on performing Portfolio Assets |              |                        |       |        |  |       | 1,159  |              |  |          |       |       |  |   | 5,572  |       |  |   | 6,731  |       
|Interest and fees expense  affiliate          |              |                        |       |        |  |       | (665   | )            |  |          | (596   | )     |  |   | (1,821 | )     |  |   | (3,082 | )     
|Interest and fees expense  other              |              |                        |       |        |  |       | (677   | )            |  |          | (567   | )     |  |   | (489   | )     |  |   | (1,733 | )     
|Provision for loan and impairment losses       |              |                        | (3     | )      |  |       | (301   | )            |  |          |       |       |  |   | (721   | )     |  |   | (1,025 | )     
|Service fees  affiliate                       |              |                        | (311   | )      |  |       | (614   | )            |  |          | (1,122 | )     |  |   | (1,559 | )     |  |   | (3,606 | )     
|General, administrative and operating expenses |              |                        | (3,644 | )      |  |       | (517   | )            |  |          | (656   | )     |  |   | (939   | )     |  |   | (5,756 | )     
|Other income, net                              |              |                        | 1      |        |  |       | 8      |              |  |          | 12     |       |  |   | 1,080  |       |  |   | 1,101  |       
|                                               |              |                        |        |        |  |       |        |              |  |          |        |       |  |   |        |       |  |   |        |       
|                                               | Net earnings |                        | $      | 3,909  |  |       | $      | 2,951        |  |          | $      | 5,342 |  |   | $      | 8,326 |  |   | $      | 20,528 | 
|                                               |              |                        |        |        |  |       |        |              |  |          |        |       |  |   |        |       |  |   |        |       

Combining Statements of Operations

Year Ended December 31, 2002


|                                               |              |                        |        |        |  |       |        |              |  |          |       |       |  |   |        |        |  |   |         |        | 
|---------------------------------------------- | ------------ | ---------------------- | ------ | ------ |  | ----- | ------ | ------------ |  | -------- | ----- | ----- |  | - | ------ | ------ |  | - | ------- | ------ | 
|                                               |              | FC                     |        | WAMCO  |  | WAMCO |        | Other        |  |         
|                                               |              | Properties             |        | XXVIII |  | XXX   |        | Partnerships |  | Combined
|                                               |              |                        |        |        |  |       |        |              |  |         
|                                               |              |                       
|                                               |              | (Dollars in thousands)
|Proceeds from resolution of Portfolio Assets   |              | $                      | 6,803  |        |  | $     | 47,892 |              |  | $        | 6,852 |       |  | $ | 71,651 |        |  | $ | 133,198 |       
|Cost of Portfolio Assets resolved              |              |                        | 2,000  |        |  |       | 34,418 |              |  |          | 4,770 |       |  |   | 60,982 |        |  |   | 102,170 |       
|                                               |              |                        |        |        |  |       |        |              |  |          |       |       |  |   |        |        |  |   |         |       
|Gain on resolution of Portfolio Assets         |              |                        | 4,803  |        |  |       | 13,474 |              |  |          | 2,082 |       |  |   | 10,669 |        |  |   | 31,028  |       
|Interest income on performing Portfolio Assets |              |                        |       |        |  |       | 2,767  |              |  |          |      |       |  |   | 8,513  |        |  |   | 11,280  |       
|Interest and fees expense  affiliate          |              |                        |       |        |  |       | (1,826 | )            |  |          | (596  | )     |  |   | (2,765 | )      |  |   | (5,187  | )     
|Interest and fees expense  other              |              |                        | (9     | )      |  |       | (585   | )            |  |          |      |       |  |   | (1,363 | )      |  |   | (1,957  | )     
|Provision for loan and impairment losses       |              |                        | (17    | )      |  |       |       |              |  |          |      |       |  |   | (887   | )      |  |   | (904    | )     
|Service fees  affiliate                       |              |                        | (204   | )      |  |       | (1,574 | )            |  |          | (250  | )     |  |   | (1,751 | )      |  |   | (3,779  | )     
|General, administrative and operating expenses |              |                        | (1,923 | )      |  |       | (1,488 | )            |  |          | (138  | )     |  |   | (1,241 | )      |  |   | (4,790  | )     
|Other income, net                              |              |                        | 18     |        |  |       | 34     |              |  |          | 21    |       |  |   | 1,777  |        |  |   | 1,850   |       
|                                               |              |                        |        |        |  |       |        |              |  |          |       |       |  |   |        |        |  |   |         |       
|                                               | Net earnings |                        | $      | 2,668  |  |       | $      | 10,802       |  |          | $     | 1,119 |  |   | $      | 12,952 |  |   | $       | 27,541 | 
|                                               |              |                        |        |        |  |       |        |              |  |          |       |       |  |   |        |        |  |   |         |       

96



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

Combining Statements of Operations

Year Ended December 31, 2001


|                                               |              |                        |        |        |  |       |        |              |  |          |   |   |  |   |        |        |  |   |         |        | 
|---------------------------------------------- | ------------ | ---------------------- | ------ | ------ |  | ----- | ------ | ------------ |  | -------- | - | - |  | - | ------ | ------ |  | - | ------- | ------ | 
|                                               |              | FC                     |        | WAMCO  |  | WAMCO |        | Other        |  |         
|                                               |              | Properties             |        | XXVIII |  | XXX   |        | Partnerships |  | Combined
|                                               |              |                        |        |        |  |       |        |              |  |         
|                                               |              |                       
|                                               |              | (Dollars in thousands)
|Proceeds from resolution of Portfolio Assets   |              | $                      | 9,509  |        |  | $     | 32,142 |              |  | $        |  |   |  | $ | 27,537 |        |  | $ | 69,188  |       
|Cost of Portfolio Assets resolved              |              |                        | 2,115  |        |  |       | 23,513 |              |  |          |  |   |  |   | 19,288 |        |  |   | 44,916  |       
|                                               |              |                        |        |        |  |       |        |              |  |          |   |   |  |   |        |        |  |   |         |       
|Gain on resolution of Portfolio Assets         |              |                        | 7,394  |        |  |       | 8,629  |              |  |          |  |   |  |   | 8,249  |        |  |   | 24,272  |       
|Interest income on performing Portfolio Assets |              |                        |       |        |  |       | 3,047  |              |  |          |  |   |  |   | 16,496 |        |  |   | 19,543  |       
|Interest and fees expense  affiliate          |              |                        | (160   | )      |  |       | (3,507 | )            |  |          |  |   |  |   | (8,437 | )      |  |   | (12,104 | )     
|Interest and fees expense  other              |              |                        |       |        |  |       |       |              |  |          |  |   |  |   | (1,234 | )      |  |   | (1,234  | )     
|Provision for loan and impairment losses       |              |                        |       |        |  |       |       |              |  |          |  |   |  |   | (1,254 | )      |  |   | (1,254  | )     
|Service fees  affiliate                       |              |                        | (285   | )      |  |       | (1,067 | )            |  |          |  |   |  |   | (1,779 | )      |  |   | (3,131  | )     
|General, administrative and operating expenses |              |                        | (2,710 | )      |  |       | (1,330 | )            |  |          |  |   |  |   | (2,712 | )      |  |   | (6,752  | )     
|Other income, net                              |              |                        | 32     |        |  |       | 64     |              |  |          |  |   |  |   | 1,692  |        |  |   | 1,788   |       
|                                               |              |                        |        |        |  |       |        |              |  |          |   |   |  |   |        |        |  |   |         |       
|                                               | Net earnings |                        | $      | 4,271  |  |       | $      | 5,836        |  |          | $ |  |  |   | $      | 11,021 |  |   | $       | 21,128 | 
|                                               |              |                        |        |        |  |       |        |              |  |          |   |   |  |   |        |        |  |   |         |       

Combining Statements of Changes in
Partners Capital

Years Ended December 31, 2003, 2002, and
2001


|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |         |  
|---------------------------- | ------------------------------------- | ---------------------- | ------ | ------ | - | ----- | ------ | ------------ | - | -------- | ------ | ------ | - | - | ------ | ------- | - | - | ------ | ------- | -
|                             |                                       | FC                     |        | WAMCO  |   | WAMCO |        | Other        |   |         
|                             |                                       | Properties             |        | XXVIII |   | XXX   |        | Partnerships |   | Combined
|                             |                                       |                        |        |        |   |       |        |              |   |         
|                             |                                       |                       
|                             |                                       | (Dollars in thousands)
|Balance at December 31, 2000 |                                       | $                      | 8,846  |        |   | $     | 4,216  |              |   | $        |       |        |   | $ | 48,542 |         |   | $ | 61,604 |        
|                             | Contributions                         |                        |        |       |   |       |        | 18,890       |   |          |        |       |   |   |        | 7,640   |   |   |        | 26,530  |  
|                             | Distributions                         |                        |        | (1,093 | ) |       |        | (4,132       | ) |          |        |       |   |   |        | (14,722 | ) |   |        | (19,947 | )
|                             | Net earnings                          |                        |        | 4,271  |   |       |        | 5,836        |   |          |        |       |   |   |        | 11,021  |   |   |        | 21,128  |  
|                             | Unrealized net gain on securitization |                        |        |       |   |       |        |             |   |          |        |       |   |   |        | 934     |   |   |        | 934     |  
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|                             | Total comprehensive income            |                        |        | 4,271  |   |       |        | 5,836        |   |          |        |       |   |   |        | 11,955  |   |   |        | 22,062  |  
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|Balance at December 31, 2001 |                                       |                        | 12,024 |        |   |       | 24,810 |              |   |          |       |        |   |   | 53,415 |         |   |   | 90,249 |        
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|                             | Contributions                         |                        |        |       |   |       |        |             |   |          |        | 15,942 |   |   |        | 29      |   |   |        | 15,971  |  
|                             | Distributions                         |                        |        | (2,596 | ) |       |        | (20,668      | ) |          |        | (4,910 | ) |   |        | (26,024 | ) |   |        | (54,198 | )
|                             | Net earnings                          |                        |        | 2,668  |   |       |        | 10,802       |   |          |        | 1,119  |   |   |        | 12,952  |   |   |        | 27,541  |  
|                             | Unrealized net gain on securitization |                        |        |       |   |       |        |             |   |          |        |       |   |   |        | 496     |   |   |        | 496     |  
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|                             | Total comprehensive income            |                        |        | 2,668  |   |       |        | 10,802       |   |          |        | 1,119  |   |   |        | 13,448  |   |   |        | 28,037  |  
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|Balance at December 31, 2002 |                                       |                        | 12,096 |        |   |       | 14,944 |              |   |          | 12,151 |        |   |   | 40,868 |         |   |   | 80,059 |        
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|                             | Contributions                         |                        |        |       |   |       |        |             |   |          |        |       |   |   |        | 30,182  |   |   |        | 30,182  |  
|                             | Distributions                         |                        |        | (4,880 | ) |       |        | (7,291       | ) |          |        | (7,925 | ) |   |        | (24,645 | ) |   |        | (44,741 | )
|                             | Net earnings                          |                        |        | 3,909  |   |       |        | 2,951        |   |          |        | 5,342  |   |   |        | 8,326   |   |   |        | 20,528  |  
|                             | Unrealized net gain on securitization |                        |        |       |   |       |        |             |   |          |        |       |   |   |        | (1,439  | ) |   |        | (1,439  | )
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|                             | Total comprehensive income            |                        |        | 3,909  |   |       |        | 2,951        |   |          |        | 5,342  |   |   |        | 6,887   |   |   |        | 19,089  |  
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        
|Balance at December 31, 2003 |                                       | $                      | 11,125 |        |   | $     | 10,604 |              |   | $        | 9,568  |        |   | $ | 53,292 |         |   | $ | 84,589 |        
|                             |                                       |                        |        |        |   |       |        |              |   |          |        |        |   |   |        |         |   |   |        |        

97



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

Combining Statements of Cash Flows

Year Ended December 31, 2003


|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |         |         |        |  
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | ------ | ------------ | ------ | -------- | ----- | ------- | ------ | ------- | ----- | ------- | ------- | ------- | ------ | ------- | ------- | ------ | -
|                                                                                        |                                                                                                   | FC                                                       |                                                         | WAMCO  |        | WAMCO  |        | Other        |        |         
|                                                                                        |                                                                                                   | Properties                                               |                                                         | XXVIII |        | XXX    |        | Partnerships |        | Combined
|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |         
|                                                                                        |                                                                                                   |                                                         
|                                                                                        |                                                                                                   | (Dollars in thousands)                                  
|Cash flows from operating activities:                                                   |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|                                                                                        | Net earnings                                                                                      |                                                          | $                                                       | 3,909  |        |        | $      | 2,951        |        |          | $     | 5,342   |        |         | $     | 8,326   |         |         | $      | 20,528  |        
|                                                                                        | Adjustments to reconcile net earnings to net cash
    provided by (used in) operating activities: |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |         |        
|                                                                                        |                                                                                                   | Amortization of loan origination and commitment
    fees |                                                         |        |       |        |        |              | 175    |          |       |         | 105    |         |       |         | 145     |         |        |         | 425     |       
|                                                                                        |                                                                                                   | Amortization of deferred profit sharing                  |                                                         |        | 2,411  |        |        |              |       |          |       |         |       |         |       |         |        |         |        |         | 2,411   |       
|                                                                                        |                                                                                                   | Accretion of unrealized gain on trust certificates       |                                                         |        |       |        |        |              |       |          |       |         |       |         |       |         | (197    | )       |        |         | (197    | )     
|                                                                                        |                                                                                                   | Provision for loan losses                                |                                                         |        | 3      |        |        |              | 301    |          |       |         |       |         |       |         | 721     |         |        |         | 1,025   |       
|                                                                                        |                                                                                                   | Gain on resolution of Portfolio Assets                   |                                                         |        | (7,866 | )      |        |              | (4,558 | )        |       |         | (8,271 | )       |       |         | (7,203  | )       |        |         | (27,898 | )     
|                                                                                        |                                                                                                   | Purchase of Portfolio Assets                             |                                                         |        |       |        |        |              |       |          |       |         |       |         |       |         | (95,819 | )       |        |         | (95,819 | )     
|                                                                                        |                                                                                                   | Net receipts on Portfolio Asset lines of credit          |                                                         |        |       |        |        |              |       |          |       |         |       |         |       |         | 184     |         |        |         | 184     |       
|                                                                                        |                                                                                                   | Capitalized costs on Portfolio Assets                    |                                                         |        | (663   | )      |        |              | (328   | )        |       |         | (90    | )       |       |         | (384    | )       |        |         | (1,465  | )     
|                                                                                        |                                                                                                   | Capitalized interest on Portfolio Assets                 |                                                         |        |       |        |        |              | (107   | )        |       |         |       |         |       |         | (869    | )       |        |         | (976    | )     
|                                                                                        |                                                                                                   | Proceeds from resolution of Portfolio Assets             |                                                         |        | 10,368 |        |        |              | 16,638 |          |       |         | 33,277 |         |       |         | 29,536  |         |        |         | 89,819  |       
|                                                                                        |                                                                                                   | Principal payments on Performing Portfolio Assets        |                                                         |        |       |        |        |              | 2,615  |          |       |         |       |         |       |         | 17,422  |         |        |         | 20,037  |       
|                                                                                        |                                                                                                   | Increase in deferred profit sharing                      |                                                         |        | (3,013 | )      |        |              |       |          |       |         |       |         |       |         |        |         |        |         | (3,013  | )     
|                                                                                        |                                                                                                   | (Increase) decrease in other assets                      |                                                         |        |       |        |        |              | 70     |          |       |         | (292   | )       |       |         | (112    | )       |        |         | (334    | )     
|                                                                                        |                                                                                                   | Increase in deferred compensation                        |                                                         |        | 3,013  |        |        |              |       |          |       |         |       |         |       |         |        |         |        |         | 3,013   |       
|                                                                                        |                                                                                                   | Deferred compensation and profit sharing paid            |                                                         |        | (3,253 | )      |        |              |       |          |       |         |       |         |       |         |        |         |        |         | (3,253  | )     
|                                                                                        |                                                                                                   | Increase (decrease) in other liabilities                 |                                                         |        | 13     |        |        |              | (314   | )        |       |         | (315   | )       |       |         | 357     |         |        |         | (259    | )     
|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|                                                                                        |                                                                                                   |                                                          | Net cash provided by (used in) operating
    Activities |        |        | 4,922  |        |              |        | 17,443   |       |         |        | 29,756  |       |         |         | (47,893 | )      |         |         | 4,228  |  
|Cash flows from investing activities:                                                   |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|                                                                                        | Contribution to subsidiaries                                                                      |                                                          |                                                         |       |        |        |        |             |        |          |       |        |        |         |       | (48     | )       |         |        | (48     | )      
|                                                                                        | Change in trust certificates                                                                      |                                                          |                                                         |       |        |        |        |             |        |          |       |        |        |         |       | 676     |         |         |        | 676     |        
|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|                                                                                        |                                                                                                   |                                                          | Net cash provided by investing activities               |        |        |       |        |              |        |         |       |         |        |        |       |         |         | 628     |        |         |         | 628    |  
|Cash flows from financing activities:                                                   |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|                                                                                        | Borrowing of debt  affiliate                                                                     |                                                          |                                                         |       |        |        |        |             |        |          |       | 118     |        |         |       | 63,344  |         |         |        | 63,462  |        
|                                                                                        | Borrowing of debt                                                                                 |                                                          |                                                         |       |        |        |        |             |        |          |       | 26,000  |        |         |       |        |         |         |        | 26,000  |        
|                                                                                        | Repayment of debt  affiliate                                                                     |                                                          |                                                         |       |        |        |        |             |        |          |       | (35,066 | )      |         |       | (7,468  | )       |         |        | (42,534 | )      
|                                                                                        | Repayment of debt                                                                                 |                                                          |                                                         |       |        |        |        | (12,053      | )      |          |       | (12,607 | )      |         |       | (10,372 | )       |         |        | (35,032 | )      
|                                                                                        | Repayment of preferred equity                                                                     |                                                          |                                                         |       |        |        |        |             |        |          |       |        |        |         |       | (184    | )       |         |        | (184    | )      
|                                                                                        | Capital contributions                                                                             |                                                          |                                                         |       |        |        |        |             |        |          |       |        |        |         |       | 30,182  |         |         |        | 30,182  |        
|                                                                                        | Capital distributions                                                                             |                                                          |                                                         | (4,880 | )      |        |        | (7,291       | )      |          |       | (7,925  | )      |         |       | (24,645 | )       |         |        | (44,741 | )      
|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|                                                                                        |                                                                                                   |                                                          | Net cash provided by (used in) financing
    Activities |        |        | (4,880 | )      |              |        | (19,344  | )     |         |        | (29,480 | )     |         |         | 50,857  |        |         |         | (2,847 | )
|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|Net increase (decrease) in cash                                                         |                                                                                                   |                                                          | 42                                                      |        |        |        | (1,901 | )            |        |          | 276   |         |        |         | 3,592 |         |         |         | (2,009 | )      
|Cash at beginning of year                                                               |                                                                                                   |                                                          | 1,484                                                   |        |        |        | 2,440  |              |        |          | 3,621 |         |        |         | 5,490 |         |         |         | 13,035 |        
|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|Cash at end of year                                                                     |                                                                                                   | $                                                        | 1,526                                                   |        |        | $      | 539    |              |        | $        | 3,897 |         |        | $       | 9,082 |         |         | $       | 15,044 |        
|                                                                                        |                                                                                                   |                                                          |                                                         |        |        |        |        |              |        |          |       |         |        |         |       |         |         |         |        |        
|Supplemental disclosure of cash flow information
    Approximate cash paid for interest |                                                                                                   | $                                                        |                                                        |        |        | $      | 1,211  |              |        | $        | 982   |         |        | $       | 2,130 |         |         | $       | 4,323  |        
|                                                                                        | Preferred equity converted to note payable                                                        |                                                          | $                                                       |       |        |        | $      |             |        |          | $     |        |        |         | $     | 4,160   |         |         | $      | 4,160   |        

98



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

Combining Statements of Cash Flows

Year Ended December 31, 2002


|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |          |         |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | ------ | ------------ | ------- | -------- | ----- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | -------- | ------- | ------- | -
|                                                 |                                                                                                   | FC                                                       |                                                         | WAMCO  |        | WAMCO  |        | Other        |         |         
|                                                 |                                                                                                   | Properties                                               |                                                         | XXVIII |        | XXX    |        | Partnerships |         | Combined
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |         
|                                                 |                                                                                                   |                                                         
|                                                 |                                                                                                   | (Dollars in thousands)                                  
|Cash flows from operating activities:            |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|                                                 | Net earnings                                                                                      |                                                          | $                                                       | 2,668  |        |        | $      | 10,802       |         |          | $     | 1,119   |         |         | $      | 12,952  |         |         | $      | 27,541   |        
|                                                 | Adjustments to reconcile net earnings to net cash
    provided by (used in) operating activities: |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |          |        
|                                                 |                                                                                                   | Amortization of loan origination and commitment
    fees |                                                         |        |       |        |        |              | 87      |          |       |         |        |         |        |         | 435     |         |        |          | 522     |        
|                                                 |                                                                                                   | Amortization of deferred profit sharing                  |                                                         |        | 720    |        |        |              |        |          |       |         |        |         |        |         |        |         |        |          | 720     |        
|                                                 |                                                                                                   | Accretion of unrealized gain on trust certificates       |                                                         |        |       |        |        |              |        |          |       |         |        |         |        |         | (287    | )       |        |          | (287    | )      
|                                                 |                                                                                                   | Provision for loan losses                                |                                                         |        | 17     |        |        |              |        |          |       |         |        |         |        |         | 887     |         |        |          | 904     |        
|                                                 |                                                                                                   | Gain on resolution of Portfolio Assets                   |                                                         |        | (4,803 | )      |        |              | (13,474 | )        |       |         | (2,082  | )       |        |         | (10,669 | )       |        |          | (31,028 | )      
|                                                 |                                                                                                   | Purchase of Portfolio Assets                             |                                                         |        |       |        |        |              |        |          |       |         | (48,713 | )       |        |         |        |         |        |          | (48,713 | )      
|                                                 |                                                                                                   | Capitalized costs on Portfolio Assets                    |                                                         |        | (1,633 | )      |        |              | (2,177  | )        |       |         | (59     | )       |        |         | (190    | )       |        |          | (4,059  | )      
|                                                 |                                                                                                   | Capitalized interest on Portfolio Assets                 |                                                         |        |       |        |        |              | (102    | )        |       |         |        |         |        |         | (795    | )       |        |          | (897    | )      
|                                                 |                                                                                                   | Proceeds from resolution of Portfolio Assets             |                                                         |        | 6,803  |        |        |              | 47,892  |          |       |         | 6,852   |         |        |         | 71,651  |         |        |          | 133,198 |        
|                                                 |                                                                                                   | Principal payments on Performing Portfolio Assets        |                                                         |        |       |        |        |              | 5,803   |          |       |         |        |         |        |         | 15,837  |         |        |          | 21,640  |        
|                                                 |                                                                                                   | Increase in deferred profit sharing                      |                                                         |        | (2,885 | )      |        |              |        |          |       |         |        |         |        |         |        |         |        |          | (2,885  | )      
|                                                 |                                                                                                   | (Increase) decrease in other assets                      |                                                         |        |       |        |        |              | (295    | )        |       |         |        |         |        |         | 465     |         |        |          | 170     |        
|                                                 |                                                                                                   | Increase in deferred compensation                        |                                                         |        | 2,885  |        |        |              |        |          |       |         |        |         |        |         |        |         |        |          | 2,885   |        
|                                                 |                                                                                                   | Deferred compensation and profit sharing paid            |                                                         |        | (1,730 | )      |        |              |        |          |       |         |        |         |        |         |        |         |        |          | (1,730  | )      
|                                                 |                                                                                                   | Increase (decrease) in other liabilities                 |                                                         |        | 96     |        |        |              | 144     |          |       |         | 524     |         |        |         | (1,222  | )       |        |          | (458    | )      
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|                                                 |                                                                                                   |                                                          | Net cash provided by (used in) operating
    Activities |        |        | 2,138  |        |              |         | 48,680   |       |         |         | (42,359 | )      |         |         | 89,064  |        |          |         | 97,523  |  
|Cash flows from investing activities:            |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|                                                 | Change in trust certificates                                                                      |                                                          |                                                         |       |        |        |        |             |         |          |       |        |         |         |        | 1,123   |         |         |        | 1,123    |        
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|                                                 |                                                                                                   |                                                          | Net cash provided by investing activities               |        |        |        |        |              |         |         |       |         |         |        |        |         |         |        |        |          |         | 1,123   |  
|Cash flows from financing activities:            |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|                                                 | Borrowing of debt  affiliate                                                                     |                                                          |                                                         |       |        |        |        |             |         |          |       | 53,143  |         |         |        |        |         |         |        | 53,143   |        
|                                                 | Borrowing of debt                                                                                 |                                                          |                                                         |       |        |        |        | 28,500       |         |          |       |        |         |         |        |        |         |         |        | 28,500   |        
|                                                 | Repayment of debt  affiliate                                                                     |                                                          |                                                         |       |        |        |        | (47,964      | )       |          |       | (18,195 | )       |         |        | (42,025 | )       |         |        | (108,184 | )      
|                                                 | Repayment of debt                                                                                 |                                                          |                                                         |       |        |        |        | (9,618       | )       |          |       |        |         |         |        | (24,361 | )       |         |        | (33,979  | )      
|                                                 | Capitalized interest on preferred equity                                                          |                                                          |                                                         |       |        |        |        |             |         |          |       |        |         |         |        | 150     |         |         |        | 150      |        
|                                                 | Repayment of preferred equity                                                                     |                                                          |                                                         |       |        |        |        |             |         |          |       |        |         |         |        | (411    | )       |         |        | (411     | )      
|                                                 | Capital contributions                                                                             |                                                          |                                                         |       |        |        |        |             |         |          |       | 15,942  |         |         |        | 29      |         |         |        | 15,971   |        
|                                                 | Capital distributions                                                                             |                                                          |                                                         | (2,596 | )      |        |        | (20,668      | )       |          |       | (4,910  | )       |         |        | (26,024 | )       |         |        | (54,198  | )      
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|                                                 |                                                                                                   |                                                          | Net cash provided by (used in) financing
    activities |        |        | (2,596 | )      |              |         | (49,750  | )     |         |         | 45,980  |        |         |         | (92,642 | )      |          |         | (99,008 | )
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|Net increase (decrease) in cash                  |                                                                                                   |                                                          | (458                                                    | )      |        |        | (1,070 | )            |         |          | 3,621 |         |         |         | (2,455 | )       |         |         | (362   | )       
|Cash at beginning of year                        |                                                                                                   |                                                          | 1,942                                                   |        |        |        | 3,510  |              |         |          |      |         |         |         | 7,945  |         |         |         | 13,397 |         
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|Cash at end of year                              |                                                                                                   | $                                                        | 1,484                                                   |        |        | $      | 2,440  |              |         | $        | 3,621 |         |         | $       | 5,490  |         |         | $       | 13,035 |         
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|Supplemental disclosure of cash flow information |                                                                                                   |                                                          |                                                         |        |        |        |        |              |         |          |       |         |         |         |        |         |         |         |        |         
|                                                 | Approximate cash paid for interest                                                                |                                                          | $                                                       | 9      |        |        | $      | 2,412        |         |          | $     | 524     |         |         | $      | 3,837   |         |         | $      | 6,782    |        

99



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

Combining Statements of Cash Flows

Year Ended December 31, 2001


|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |          |          |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | ----- | ------------ | ------- | -------- | - | - | - | - | ----- | ------- | ------- | ------- | ------ | -------- | -------- | ------- | -
|                                                 |                                                                                                   | FC                                                       |                                                         | WAMCO  |        | WAMCO  |       | Other        |         |         
|                                                 |                                                                                                   | Properties                                               |                                                         | XXVIII |        | XXX    |       | Partnerships |         | Combined
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |         
|                                                 |                                                                                                   |                                                         
|                                                 |                                                                                                   | (Dollars in thousands)                                  
|Cash flows from operating activities:            |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|                                                 | Net earnings                                                                                      |                                                          | $                                                       | 4,271  |        |        | $     | 5,836        |         |          | $ |  |   |   | $     | 11,021  |         |         | $      | 21,128   |         
|                                                 | Adjustments to reconcile net earnings to net cash
    provided by (used in) operating activities: |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |          |         
|                                                 |                                                                                                   | Amortization of loan origination and commitment
    fees |                                                         |        |        |        |       |              |        |          |   |   |  |   |       |         | 768     |         |        |          | 768      |        
|                                                 |                                                                                                   | Amortization of deferred profit sharing                  |                                                         |        | 1,228  |        |       |              |        |          |   |   |  |   |       |         |        |         |        |          | 1,228    |        
|                                                 |                                                                                                   | Provision for loan losses                                |                                                         |        |       |        |       |              |        |          |   |   |  |   |       |         | 1,254   |         |        |          | 1,254    |        
|                                                 |                                                                                                   | Gain on resolution of Portfolio Assets                   |                                                         |        | (7,394 | )      |       |              | (8,629  | )        |   |   |  |   |       |         | (8,249  | )       |        |          | (24,272  | )      
|                                                 |                                                                                                   | Purchase of Portfolio Assets                             |                                                         |        |       |        |       |              | (82,951 | )        |   |   |  |   |       |         | (35,196 | )       |        |          | (118,147 | )      
|                                                 |                                                                                                   | Capitalized costs on Portfolio Assets                    |                                                         |        | (375   | )      |       |              | (149    | )        |   |   |  |   |       |         | (12     | )       |        |          | (536     | )      
|                                                 |                                                                                                   | Capitalized interest on Portfolio Assets                 |                                                         |        |       |        |       |              | (7      | )        |   |   |  |   |       |         | (1,221  | )       |        |          | (1,228   | )      
|                                                 |                                                                                                   | Proceeds from resolution of Portfolio Assets             |                                                         |        | 9,509  |        |       |              | 32,142  |          |   |   |  |   |       |         | 27,537  |         |        |          | 69,188   |        
|                                                 |                                                                                                   | Proceeds from sell back of Portfolio Assets              |                                                         |        |       |        |       |              |        |          |   |   |  |   |       |         | 1,594   |         |        |          | 1,594    |        
|                                                 |                                                                                                   | Principal payments on Performing Portfolio Assets        |                                                         |        |       |        |       |              | 4,936   |          |   |   |  |   |       |         | 29,135  |         |        |          | 34,071   |        
|                                                 |                                                                                                   | Increase in deferred profit sharing                      |                                                         |        | (560   | )      |       |              |        |          |   |   |  |   |       |         |        |         |        |          | (560     | )      
|                                                 |                                                                                                   | (Increase) decrease in other assets                      |                                                         |        | 157    |        |       |              | (252    | )        |   |   |  |   |       |         | 52      |         |        |          | (43      | )      
|                                                 |                                                                                                   | Increase in deferred compensation                        |                                                         |        | 560    |        |       |              |        |          |   |   |  |   |       |         |        |         |        |          | 560      |        
|                                                 |                                                                                                   | Deferred compensation and profit sharing paid            |                                                         |        | (2,365 | )      |       |              |        |          |   |   |  |   |       |         |        |         |        |          | (2,365   | )      
|                                                 |                                                                                                   | Increase (decrease) in other liabilities                 |                                                         |        | (142   | )      |       |              | 957     |          |   |   |  |   |       |         | (557    | )       |        |          | 258      |        
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|                                                 |                                                                                                   |                                                          | Net cash provided by (used in) operating
    activities |        |        | 4,889  |       |              |         | (48,117  | ) |   |   |  |       |         |         | 26,126  |        |          |          | (17,102 | )
|Cash flows from investing activities:            |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|                                                 | Contribution to subsidiaries                                                                      |                                                          |                                                         |       |        |        |       |             |         |          |   |  |   |   |       | (48     | )       |         |        | (48      | )       
|                                                 | Change in trust certificates                                                                      |                                                          |                                                         |       |        |        |       |             |         |          |   |  |   |   |       | (381    | )       |         |        | (381     | )       
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|                                                 |                                                                                                   |                                                          | Net cash used in investing activities                   |        |        |       |       |              |         |         |   |   |   |  |       |         |         | (429    | )      |          |          | (429    | )
|Cash flows from financing activities:            |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|                                                 | Borrowing of debt  affiliate                                                                     |                                                          |                                                         | 41     |        |        |       | 64,187       |         |          |   |  |   |   |       | 29,341  |         |         |        | 93,569   |         
|                                                 | Borrowing of debt                                                                                 |                                                          |                                                         |       |        |        |       |             |         |          |   |  |   |   |       | 45,901  |         |         |        | 45,901   |         
|                                                 | Repayment of debt  affiliate                                                                     |                                                          |                                                         | (3,165 | )      |        |       | (28,191      | )       |          |   |  |   |   |       | (81,971 | )       |         |        | (113,327 | )       
|                                                 | Repayment of debt                                                                                 |                                                          |                                                         |       |        |        |       |             |         |          |   |  |   |   |       | (8,930  | )       |         |        | (8,930   | )       
|                                                 | Capitalized interest on preferred equity                                                          |                                                          |                                                         |       |        |        |       |             |         |          |   |  |   |   |       | 1,049   |         |         |        | 1,049    |         
|                                                 | Capital contributions                                                                             |                                                          |                                                         |       |        |        |       | 18,890       |         |          |   |  |   |   |       | 7,640   |         |         |        | 26,530   |         
|                                                 | Capital distributions                                                                             |                                                          |                                                         | (1,093 | )      |        |       | (4,132       | )       |          |   |  |   |   |       | (14,722 | )       |         |        | (19,947  | )       
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|                                                 |                                                                                                   |                                                          | Net cash provided by (used in) financing
    activities |        |        | (4,217 | )     |              |         | 50,754   |   |   |   |  |       |         |         | (21,692 | )      |          |          | 24,845  |  
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|Net increase in cash                             |                                                                                                   |                                                          | 672                                                     |        |        |        | 2,637 |              |         |          |  |   |   |   | 4,005 |         |         |         | 7,314  |         
|Cash at beginning of year                        |                                                                                                   |                                                          | 1,270                                                   |        |        |        | 873   |              |         |          |  |   |   |   | 3,940 |         |         |         | 6,083  |         
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|Cash at end of year                              |                                                                                                   | $                                                        | 1,942                                                   |        |        | $      | 3,510 |              |         | $        |  |   |   | $ | 7,945 |         |         | $       | 13,397 |         
|                                                 |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|Supplemental disclosure of cash flow information |                                                                                                   |                                                          |                                                         |        |        |        |       |              |         |          |   |   |   |   |       |         |         |         |        |         
|                                                 | Approximate cash paid for interest                                                                |                                                          | $                                                       | 107    |        |        | $     | 3,365        |         |          | $ |  |   |   | $     | 9,061   |         |         | $      | 12,533   |         

100



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##### Table of Contents



WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

4.     Portfolio
Assets

Portfolio Assets are summarized as follows:

|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |         | 
|------------------------------------------------------------------- | ---------------------- | ----------------- | ------ | ------ |  | ----- | ------- | ------------ |  | -------- | ------- | ------ |  | - | ------- | ------- |  | - | -------- | ------- | 
|                                                                    |                        |                  
|                                                                    |                        | December 31, 2003
|                                                                    |                        |                  
|                                                                    |                        | FC                |        | WAMCO  |  | WAMCO |         | Other        |  |         
|                                                                    |                        | Properties        |        | XXVIII |  | XXX   |         | Partnerships |  | Combined
|                                                                    |                        |                   |        |        |  |       |         |              |  |         
|Non-performing Portfolio Assets                                     |                        | $                 |       |        |  | $     | 37,230  |              |  | $        | 50,542  |        |  | $ | 134,034 |         |  | $ | 221,806  |        
|Performing Portfolio Assets                                         |                        |                   |       |        |  |       | 10,209  |              |  |          |        |        |  |   | 71,573  |         |  |   | 81,782   |        
|Real estate Portfolios                                              |                        |                   | 13,340 |        |  |       |        |              |  |          |        |        |  |   | 4,214   |         |  |   | 17,554   |        
|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |        
|                                                                    | Total Portfolio Assets |                   |        | 13,340 |  |       |         | 47,439       |  |          |         | 50,542 |  |   |         | 209,821 |  |   |          | 321,142 | 
|Discount required to reflect Portfolio Assets at
    carrying value |                        |                   |       |        |  |       | (29,659 | )            |  |          | (31,456 | )      |  |   | (91,346 | )       |  |   | (152,461 | )      
|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |        
|                                                                    | Portfolio Assets, net  |                   | $      | 13,340 |  |       | $       | 17,780       |  |          | $       | 19,086 |  |   | $       | 118,475 |  |   | $        | 168,681 | 
|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |        

|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |         | 
|------------------------------------------------------------------- | ---------------------- | ----------------- | ------ | ------ |  | ----- | ------- | ------------ |  | -------- | ------- | ------ |  | - | ------- | ------- |  | - | -------- | ------- | 
|                                                                    |                        |                  
|                                                                    |                        | December 31, 2002
|                                                                    |                        |                  
|                                                                    |                        | FC                |        | WAMCO  |  | WAMCO |         | Other        |  |         
|                                                                    |                        | Properties        |        | XXVIII |  | XXX   |         | Partnerships |  | Combined
|                                                                    |                        |                   |        |        |  |       |         |              |  |         
|Non-performing Portfolio Assets                                     |                        | $                 |       |        |  | $     | 60,386  |              |  | $        | 95,937  |        |  | $ | 45,531  |         |  | $ | 201,854  |        
|Performing Portfolio Assets                                         |                        |                   |       |        |  |       | 20,404  |              |  |          |        |        |  |   | 59,461  |         |  |   | 79,865   |        
|Real estate Portfolios                                              |                        |                   | 15,182 |        |  |       |        |              |  |          |        |        |  |   | 1,129   |         |  |   | 16,311   |        
|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |        
|                                                                    | Total Portfolio Assets |                   |        | 15,182 |  |       |         | 80,790       |  |          |         | 95,937 |  |   |         | 106,121 |  |   |          | 298,030 | 
|Discount required to reflect Portfolio Assets at
    carrying value |                        |                   |       |        |  |       | (48,449 | )            |  |          | (51,935 | )      |  |   | (49,960 | )       |  |   | (150,344 | )      
|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |        
|                                                                    | Portfolio Assets, net  |                   | $      | 15,182 |  |       | $       | 32,341       |  |          | $       | 44,002 |  |   | $       | 56,161  |  |   | $        | 147,686 | 
|                                                                    |                        |                   |        |        |  |       |         |              |  |          |         |        |  |   |         |         |  |   |          |        

Portfolio Assets are pledged to secure
non-recourse notes payable.



|   |                                                                
|-- | ---------------------------------------------------------------
|5. | Interest Related to Residual Interest in Trust
    Certificates

Residual certificates held by the Partnerships to
which the Partnerships receive all the economic benefits and
risks consist of retained interests in the amount of $0 and
$7,883 at December 31, 2003 and 2002, respectively. The
Partnerships recognized interest income on these certificates
utilizing a yield of 21.52% for the first eight months of 2003
and 20.90% and 19.63% for the years ended December 31, 2002
and 2001, respectively. During September 2003 the Partnerships
purchased the underlying assets from the trust. At the time of
this purchase, these assets were included in the Performing
Portfolio Assets at their remaining historical cost of $5,902
and the remaining balance for the adjustment to market value of
$905 was reversed against its corresponding balance of
unrealized net gain on securitizations in the Partnerships
equity.

6.     Deferred
Profit Sharing and Deferred Compensation

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. At December 31, 2003 and 2002,
the estimated liability for this profit participation was
$21,466 and $21,706, respectively, and was included in deferred
compensation in the accompanying combined balance sheets.
Additionally, amortization of $2,411, $720 and $1,228 was
recognized during 2003, 2002 and 2001,

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WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

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 $3,253, $1,730 and $2,365 in deferred
profit sharing and commissions in 2003, 2002, and 2001,
respectively.

7.     Notes
Payable

Notes payable at December 31, 2003 and 2002
consist of the following:

|                                                                               |                                                                     |             |        |        |        |   |        |        |        | 
|------------------------------------------------------------------------------ | ------------------------------------------------------------------- | ----------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                               |                                                                     | 2003        |        | 2002  
|                                                                               |                                                                     |             |        |       
|London Interbank Offering Rate (LIBOR) (1.12% at
    December 31, 2003) based: |                                                                     |             |        |        |        |   |        |       
|                                                                               | WAMCO XXVIII (LIBOR plus 2.5%)                                      |             | $      | 6,829  |        |   | $      | 18,882 |       
|                                                                               | WAMCO XXX (LIBOR plus 2.5%)                                         |             |        | 13,393 |        |   |        |       |       
|                                                                               | WAMCO XXX (LIBOR plus 4%)  affiliate                               |             |        |       |        |   |        | 30,887 |       
|                                                                               | Other Partnerships (LIBOR plus 2.5% to
    5%)  affiliate          |             |        | 64,097 |        |   |        | 3,290  |       
|                                                                               | Other Partnerships (LIBOR plus 1.75% to 5%)                         |             |        | 4,500  |        |   |        | 14,872 |       
|                                                                               | Other Partnerships (LIBOR plus 5%, with floor
    6.3%)  affiliate |             |        | 3,127  |        |   |        |       |       
|                                                                               | WAMCO XXX (LIBOR plus 5%, with floor
    9.0%)  affiliate          |             |        |       |        |   |        | 4,061  |       
|                                                                               |                                                                     |             |        |        |        |   |        |       
|                                                                               |                                                                     | Total LIBOR |        |        | 91,946 |   |        |        | 71,992 | 
|Fixed rate:                                                                    |                                                                     |             |        |        |        |   |        |       
|                                                                               | Other Partnerships (9.8% to 10.17%) 
    affiliate                 |             |        | 4,000  |        |   |        | 7,899  |       
|                                                                               |                                                                     |             |        |        |        |   |        |       
|                                                                               |                                                                     | $           | 95,946 |        |        | $ | 79,891 |       
|                                                                               |                                                                     |             |        |        |        |   |        |       

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:

|                         |  |        |       |       |  |              |        |          |  |   |        |  |  |   |        | 
|------------------------ |  | ------ | ----- | ----- |  | ------------ | ------ | -------- |  | - | ------ |  |  | - | ------ | 
|                         |  | WAMCO  |       | WAMCO |  | Other        |        |         
|                         |  | XXVIII |       | XXX   |  | Partnerships |        | Combined
|                         |  |        |       |       |  |              |        |         
|Year Ending December 31: |  |        |       |       |  |              |        |          |  |   |        |  |  |   |        | 
|2004                     |  | $      | 6,829 |       |  | $            |       |          |  | $ | 4,500  |  |  | $ | 11,329 | 
|2005                     |  |        |      |       |  |              | 13,393 |          |  |   | 63,785 |  |  |   | 77,178 | 
|2006                     |  |        |      |       |  |              |       |          |  |   | 3,439  |  |  |   | 3,439  | 
|2007                     |  |        |      |       |  |              |       |          |  |   | 4,000  |  |  |   | 4,000  | 
|2008                     |  |        |      |       |  |              |       |          |  |   |       |  |  |   |       | 
|Thereafter               |  |        |      |       |  |              |       |          |  |   |       |  |  |   |       | 
|                         |  |        |       |       |  |              |        |          |  |   |        |  |  |   |        | 
|                         |  | $      | 6,829 |       |  | $            | 13,393 |          |  | $ | 75,724 |  |  | $ | 95,946 | 
|                         |  |        |       |       |  |              |        |          |  |   |        |  |  |   |        | 

It is anticipated that the notes payable maturing
in 2004 will be renewed or refinanced into financing
arrangements with terms similar to current facilities.

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, 2003, the Partnerships
were in compliance with the aforementioned covenants.

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WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

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, 2003 and 2002, approximately $415 and $447,
respectively, of origination and commitment fees are included in
other assets, net.

8.     Transactions
with Affiliates

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. Included in general, administrative
and operating expenses in the accompanying combined statements
of operations is approximately $3,606, $3,779, and $3,131 in
servicing fees incurred by the Partnerships in 2003, 2002 and
2001, respectively.

During September 2003, WAMCO XXIX, Ltd. was
merged with and into WAMCO XXVII, Ltd. with
WAMCO XXVII, Ltd being the surviving entity. Also during
September 2003, Community Development Investment, LLC was merged
with and into WAMCO XXIV, Ltd. with WAMCO XXIV, Ltd being
the surviving entity.

In March 2001, FirstCity sold 35% of its equity
interest in FC Properties, Ltd. to CFSC Capital Corp. II.

During 2001, WAMCO IX sold its portfolio assets
that had projected estimated remaining collections to
WAMCO XXV. The assets were sold for their historical cost
book value of $1,206. The sale resulted in no gain or goodwill
being recorded. This transaction was eliminated in the combining
statement of operations for 2001.

9. Fair Value of Financial
Instruments

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

(a) Cash
and Other Liabilities

The carrying amount of cash and other liabilities
approximates fair value at December 31, 2003 and 2002 due
to the short-term nature of such accounts.

(b) Portfolio
Assets

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 $168,681 and $147,686 at
December 31, 2003 and 2002, respectively. The estimated
fair value of the Portfolio Assets was approximately $200,848
and $200,881 at December 31, 2003 and 2002, respectively.

(c) Investments
in Trust Certificates

Investments in trust certificates are carried at
estimated fair value. The determination of fair value is based
on the present value of the anticipated excess cash flows
utilizing the certain valuation assumptions. The carrying value
of Investments in Trust Certificates was $0 and $7,883 at
December 31, 2003 and 2002, respectively. During September
2003 the Partnerships purchased the underlying assets from the
trust.

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WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

(d) Notes
Payable

Management believes that for similar financial
instruments with comparable credit risks, the stated interest
rates at December 31, 2003 and 2002 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.

10. Preferred Equity

In 1999, CFSC Capital Corp. XXX contributed
$3,556 as preferred equity in Community Development Investment,
LLC. This preferred equity was converted to a note payable on
August 30, 2003. The balance converted was $4,160. The note
agreement has terms similar to the preferred equity and a
maturity date of August 30, 2006. The note agreement
requires interest to be paid at a rate equal to the London
Interbank Offering Rate (1.12% at December 31, 2003) plus
5%. Interest in the amount of $5 and $11 has been accrued at
December 31, 2003 and 2002, respectively. Interest expense
on the preferred equity totaled $180 (plus additional $84 after
being converted to note payable), $311 and $458 during the years
ended December 31, 2003, 2002, and 2001, respectively. This
interest expense is included in interest and fees on notes
payable  affiliates in the accompanying combined
statements of operations.

On July 1, 2003, the Partnerships adopted
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). SFAS establishes
standards for how an issuer measures certain financial
instruments with characteristics of both liabilities and equity
and classifies them in its balance sheets. It requires that an
issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances) when that
financial instrument embodies an obligation of the issuer. At
December 31, 2003, SFAS No. 150 had no impact on the
combined financial statements since the preferred equity was
converted to a note payable.

11. Commitments and
Contingencies

WAMCO 31 owns a pool of loans that includes two
lines of credit with a combined outstanding balance of
$2.3 million at December 31, 2003. The maximum
commitment associated with these lines was $4.4 million at
December 31, 2003. After reserves and borrowing base
requirements, the total availability was $.7 million at
December 31, 2003.

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.

12. Interest Rate Swap

In 2001, WAMCO XXVIII entered into an interest
rate swap contract in order to manage a portion of the interest
rate risk associated with WAMCO XXVIIIs long-term
debt. Under this swap agreement, WAMCO XXVIII pays
fixed/floating rate interest and receives floating rate interest
at specified periodic intervals based on an agreed upon notional
amount.

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

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WAMCO PARTNERSHIPS


NOTES TO COMBINED FINANCIAL
STATEMENTS  (Continued)

Income or expense associated with these periodic
payments is recorded on an accrual basis. WAMCO XXVIII
recorded $665, $783, and $404 of net swap expense for the years
ended December 31, 2003, 2002 and 2001, respectively,
associated with these periodic payments. Net swap expense is
included in interest and fees expense  affiliate in
the accompanying combined statements of operations.

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

WAMCO XXVIII has not met the criteria necessary
to categorize its swap agreement as a hedging activity under the
provisions of FASB No. 133, Accounting for Derivative
Instruments and Hedging Activities; therefore, changes in
fair value of the interest rate swap are reported in general,
administrative and operating expenses and were $(506), $216, and
$840 during 2003, 2002, and 2001, respectively.

The following table summarizes WAMCO
XXVIIIs interest rate swap contract, included in other
liabilities:

|         |        |               |  |            |          |               |  |              |       |              |  |                                     |  |   |     |  |  |   |       | 
|-------- | ------ | ------------- |  | ---------- | -------- | ------------- |  | ------------ | ----- | ------------ |  | ----------------------------------- |  | - | --- |  |  | - | ----- | 
|         |        |               |  |            |          |               |  | Swap         |       | Swap        
|         |        |               |  |            |          |               |  | liability at |       | liability at
|Notional |        | Contact       |  |            |          |               |  | December 31, |       | December 31,
|amount   |        | maturity date |  | Fixed rate |          | Floating rate |  | 2003         |       | 2002        
|         |        |               |  |            |          |               |  |              |       |             
|$        | 4,510  |               |  |            | 12/15/03 |               |  |              | 6.139 | %            |  | One Month LIBOR (1.12% at 12/31/03) |  | $ |    |  |  | $ | 199   | 
|         | 4,510  |               |  |            | 12/15/04 |               |  |              | 6.167 | %            |  | One Month LIBOR (1.12% at 12/31/03) |  |   | 199 |  |  |   | 368   | 
|         | 4,510  |               |  |            | 12/15/05 |               |  |              | 6.195 | %            |  | One Month LIBOR (1.12% at 12/31/03) |  |   | 351 |  |  |   | 489   | 
|         |        |               |  |            |          |               |  |              |       |              |  |                                     |  |   |     |  |  |   |       | 
|$        | 13,530 |               |  |            |          |               |  |              |       |              |  |                                     |  | $ | 550 |  |  | $ | 1,056 | 
|         |        |               |  |            |          |               |  |              |       |              |  |                                     |  |   |     |  |  |   |       | 

105



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DRIVE FINANCIAL SERVICES LP

AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003, 2002 and
2001


(With Independent Auditors Report
Thereon)


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INDEPENDENT AUDITORS REPORT

The Board of Directors

Drive Financial Services LP:


We have audited the accompanying consolidated
balance sheets of Drive Financial Services LP (a Texas
Limited Partnership) and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, partners equity, and cash flows
for the years ended December 31, 2003 and 2002 and the
period March 1, 2001 through December 31, 2001. 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
auditing standards generally accepted in the United States of
America. 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 Drive Financial
Services LP and subsidiaries as of December 31, 2003
and 2002, and the results of their operations and their cash
flows for the years ended December 31, 2003 and 2002 and
the period March 1, 2001 through December 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in note 2(k) to the
consolidated financial statements, the Company changed its
method of accounting for residual interests in securitizations
in 2001 as a result of the adoption of EITF 99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets.



| |         
| | --------
| | KPMG LLP

Dallas, Texas

February 25, 2004


107



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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002


|                                                                                                  |                                        |                |         |         |  |   |         |         | 
|------------------------------------------------------------------------------------------------- | -------------------------------------- | -------------- | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                  |                                        | 2003           |         | 2002   
|                                                                                                  |                                        |                |         |        
|                                                                                                  |                                        |               
|                                                                                                  |                                        | (In thousands)
|ASSETS                                                                                           
|Cash and cash equivalents                                                                         |                                        | $              | 19,013  |         |  | $ | 14,337  |        
|Restricted cash                                                                                   |                                        |                | 47,623  |         |  |   | 12,124  |        
|Retail installment contracts, net                                                                 |                                        |                | 623,389 |         |  |   | 367,520 |        
|Residual interests in securitizations                                                             |                                        |                | 29,094  |         |  |   | 63,202  |        
|Accrued interest receivable                                                                       |                                        |                | 9,317   |         |  |   | 4,915   |        
|Furniture and equipment, net of accumulated
    depreciation of $7,558 in 2003 and $5,077 in 2002 |                                        |                | 5,061   |         |  |   | 4,905   |        
|Other assets                                                                                      |                                        |                | 5,333   |         |  |   | 4,674   |        
|                                                                                                  |                                        |                |         |         |  |   |         |        
|                                                                                                  | Total assets                           |                | $       | 738,830 |  |   | $       | 471,677 | 
|                                                                                                  |                                        |                |         |         |  |   |         |        
|LIABILITIES AND PARTNERS
    EQUITY                                                             
|Notes payable, including $180,910 in 2003 and
    $176,936 in 2002 to affiliate                   |                                        | $              | 180,910 |         |  | $ | 235,036 |        
|Notes payable related to securitized retail
    installment contracts                             |                                        |                | 448,848 |         |  |   | 151,386 |        
|Subordinated capital note to affiliate                                                            |                                        |                | 54,000  |         |  |   | 48,000  |        
|Capital lease obligations                                                                         |                                        |                | 305     |         |  |   | 268     |        
|Accrued interest                                                                                  |                                        |                | 1,085   |         |  |   | 1,387   |        
|Accounts payable and accrued expenses                                                             |                                        |                | 13,241  |         |  |   | 12,468  |        
|                                                                                                  |                                        |                |         |         |  |   |         |        
|                                                                                                  | Total liabilities                      |                |         | 698,389 |  |   |         | 448,545 | 
|                                                                                                  |                                        |                |         |         |  |   |         |        
|Partners equity                                                                                  |                                        |                | 40,441  |         |  |   | 23,132  |        
|                                                                                                  |                                        |                |         |         |  |   |         |        
|Commitments and contingencies (notes 10 and
    11)                                               |                                        |                |        |         |  |   |        |        
|                                                                                                  |                                        |                |         |         |  |   |         |        
|                                                                                                  | Total liabilities and partners equity |                | $       | 738,830 |  |   | $       | 471,677 | 
|                                                                                                  |                                        |                |         |         |  |   |         |        

See accompanying notes to consolidated financial
statements.

108



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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended December 31, 2003 and 2002
and


the Period March 1, 2001 through
December 31, 2001


|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |        |        | 
|----------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------------------------------- | ------- | ------------ | ------- | ------------ | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                                      |                                                          | December 31,                                                                 |         | December 31, |         | December 31,
|                                                                                                      |                                                          | 2003                                                                         |         | 2002         |         | 2001        
|                                                                                                      |                                                          |                                                                              |         |              |         |             
|                                                                                                      |                                                          |                                                                             
|                                                                                                      |                                                          | (In thousands)                                                              
|Finance and other interest income                                                                     |                                                          | $                                                                            | 193,756 |              |         | $            | 101,238 |        |        | $ | 37,506 |       
|Interest expense, including $19,107, $13,046 and
    $7,679, respectively, to an affiliate            |                                                          |                                                                              | 31,773  |              |         |              | 16,366  |        |        |   | 9,329  |       
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      |                                                          | Net interest margin                                                          |         |              | 161,983 |              |         |        | 84,872 |   |        |        | 28,177 | 
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|Provision for credit losses on retail installment
    contracts                                       |                                                          |                                                                              | 67,335  |              |         |              | 28,663  |        |        |   | 5,377  |       
|Impairment of residual interests in
    securitizations, including servicing asset                    |                                                          |                                                                              | 8,449   |              |         |              | 3,415   |        |        |   | 5,048  |       
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      |                                                          | Net interest margin after provision for credit
    losses and impairments    |         |              | 86,199  |              |         |        | 52,794 |   |        |        | 17,752 | 
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|Other revenues:                                                                                       |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      | Gain on sale of retail installment contracts             |                                                                              |         |             |         |              |         |       |        |   |        | 39,033 |       
|                                                                                                      | Servicing income                                         |                                                                              |         | 5,189        |         |              |         | 11,115 |        |   |        | 9,952  |       
|                                                                                                      | Other income                                             |                                                                              |         | 2,339        |         |              |         | 1,205  |        |   |        | 439    |       
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      |                                                          | Total other revenues                                                         |         |              | 7,528   |              |         |        | 12,320 |   |        |        | 49,424 | 
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|Costs and expenses:                                                                                   |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      | Salaries and benefits                                    |                                                                              |         | 46,162       |         |              |         | 41,648 |        |   |        | 28,706 |       
|                                                                                                      | Servicing expense                                        |                                                                              |         | 11,296       |         |              |         | 7,980  |        |   |        | 4,434  |       
|                                                                                                      | Occupancy, data processing, communication, and
    other |                                                                              |         | 17,319       |         |              |         | 17,126 |        |   |        | 13,990 |       
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      |                                                          | Total costs and expenses                                                     |         |              | 74,777  |              |         |        | 66,754 |   |        |        | 47,130 | 
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      |                                                          | Income (loss) before cumulative effect of change
    in accounting principle |         |              | 18,950  |              |         |        | (1,640 | ) |        |        | 20,046 | 
|Cumulative effect of change in accounting
    principle  permanent impairments of residual interests |                                                          |                                                                              |        |              |         |              |        |        |        |   | (783   | )     
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       
|                                                                                                      |                                                          | Net income (loss)                                                            |         | $            | 18,950  |              |         | $      | (1,640 | ) |        | $      | 19,263 | 
|                                                                                                      |                                                          |                                                                              |         |              |         |              |         |        |        |   |        |       

See accompanying notes to consolidated financial
statements.

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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PARTNERS
EQUITY

Years Ended December 31, 2003 and 2002
and


the Period March 1, 2001 through
December 31, 2001


|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |        |        |  
|------------------------------------- | ---------------------------------------------------------------------------- | -------------------- | -- | -------- | - | ------------- | ------ | --------- | - | - | ----- | ------ | - | - | ------ | ------ | ------ | -
|                                      |                                                                              |                      |    |          |   | Accumulated   |        |          
|                                      |                                                                              |                      |    |          |   | Other         |        | Total    
|                                      |                                                                              | General              |    | Limited  |   | Comprehensive |        | Partners
|                                      |                                                                              | Partner              |    | Partners |   | Income        |        | Equity   
|                                      |                                                                              |                      |    |          |   |               |        |          
|                                      |                                                                              |                     
|                                      |                                                                              | (In thousands)      
|Partners equity at February 28, 2001 |                                                                              | $                    | 4  |          |   | $             | 3,864  |           |   | $ | 4,157 |        |   | $ | 8,025  |       
|Comprehensive income:                 |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|                                      | Net income                                                                   |                      |    | 19       |   |               |        | 19,244    |   |   |       |       |   |   |        | 19,263 |       
|                                      | Net change in unrealized gains on residual
    interests in securitizations  |                      |    |         |   |               |        |          |   |   |       | (1,798 | ) |   |        | (1,798 | )     
|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|                                      |                                                                              | Comprehensive income |    |          |   |               |        |           |   |   |       |        |   |   |        |        | 17,465 |  
|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|Partners equity at December 31, 2001 |                                                                              |                      | 23 |          |   |               | 23,108 |           |   |   | 2,359 |        |   |   | 25,490 |       
|Comprehensive loss:                   |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|                                      | Net loss                                                                     |                      |    | (1       | ) |               |        | (1,639    | ) |   |       |       |   |   |        | (1,640 | )     
|                                      | Net change in unrealized losses on residual
    interests in securitizations |                      |    |         |   |               |        |          |   |   |       | (718   | ) |   |        | (718   | )     
|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|                                      |                                                                              | Comprehensive loss   |    |          |   |               |        |           |   |   |       |        |   |   |        |        | (2,358 | )
|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|Partners equity at December 31, 2002 |                                                                              |                      | 22 |          |   |               | 21,469 |           |   |   | 1,641 |        |   |   | 23,132 |       
|Comprehensive income:                 |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|                                      | Net income                                                                   |                      |    | 19       |   |               |        | 18,931    |   |   |       |       |   |   |        | 18,950 |       
|                                      | Net change in unrealized losses on residual
    interests in securitizations |                      |    |         |   |               |        |          |   |   |       | (1,641 | ) |   |        | (1,641 | )     
|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|                                      |                                                                              | Comprehensive income |    |          |   |               |        |           |   |   |       |        |   |   |        |        | 17,309 |  
|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       
|Partners equity at December 31, 2003 |                                                                              | $                    | 41 |          |   | $             | 40,400 |           |   | $ |      |        |   | $ | 40,441 |       
|                                      |                                                                              |                      |    |          |   |               |        |           |   |   |       |        |   |   |        |       

See accompanying notes to consolidated financial
statements.

110



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years Ended December 31, 2003 and 2002
and the Period March 1, 2001 through December 31,
2001


|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |         |         |        |         |  
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ------- | ------------ | -------- | -------- | -------- | ------ | -------- | ------- | ------- | ------ | ------- | -
|                                                  |                                                                                                                     | December 31,                                                                                         |                                       | December 31,                                            |         | December 31,
|                                                  |                                                                                                                     | 2003                                                                                                 |                                       | 2002                                                    |         | 2001        
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |             
|Cash flows from operating activities:             |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  | Net income (loss)                                                                                                   |                                                                                                      | $                                     | 18,950                                                  |         |              | $        | (1,640   | )        |        | $        | 19,263  |        
|                                                  | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:              |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |         |        
|                                                  |                                                                                                                     | Retail installment contracts originated or
    purchased                                             |                                       |                                                         |        |              |          |          | (219,124 | )      |          |         | 56,884  |       
|                                                  |                                                                                                                     | Retail installment contracts liquidated                                                              |                                       |                                                         |        |              |          |          | 45,930   |        |          |         |        |       
|                                                  |                                                                                                                     | Provision for credit losses on retail installment
    contracts                                      |                                       |                                                         | 67,335  |              |          |          | 28,663   |        |          |         | 5,377   |       
|                                                  |                                                                                                                     | Depreciation and amortization                                                                        |                                       |                                                         | 2,481   |              |          |          | 2,281    |        |          |         | 1,951   |       
|                                                  |                                                                                                                     | Gain on sale of retail installment contracts                                                         |                                       |                                                         |        |              |          |          |         |        |          |         | (39,033 | )     
|                                                  |                                                                                                                     | Accretion of discount and capitalized origination
    costs                                          |                                       |                                                         | (63,652 | )            |          |          | (27,093  | )      |          |         |        |       
|                                                  |                                                                                                                     | Accretion of interest related to residual
    interests                                              |                                       |                                                         | (5,555  | )            |          |          | (11,965  | )      |          |         | (12,020 | )     
|                                                  |                                                                                                                     | Impairment of residual interests in
    securitizations, including servicing asset                   |                                       |                                                         | 8,449   |              |          |          | 3,415    |        |          |         | 5,048   |       
|                                                  |                                                                                                                     | Cumulative effect of change in accounting
    principle  permanent impairment of residual interests |                                       |                                                         |        |              |          |          |         |        |          |         | 783     |       
|                                                  |                                                                                                                     | Changes in assets and liabilities:                                                                   |                                       |                                                         |         |              |          |          |          |        |          |         |         |       
|                                                  |                                                                                                                     |                                                                                                      | Accrued interest receivable           |                                                         |         | (4,402       | )        |          |          | (3,826 | )        |         |         | 671    |        
|                                                  |                                                                                                                     |                                                                                                      | Other assets                          |                                                         |         | (564         | )        |          |          | (1,643 | )        |         |         | 141    |        
|                                                  |                                                                                                                     |                                                                                                      | Accrued interest payable              |                                                         |         | (302         | )        |          |          | 848    |          |         |         | (564   | )      
|                                                  |                                                                                                                     |                                                                                                      | Accounts payable and accrued expenses |                                                         |         | 773          |          |          |          | 514    |          |         |         | (3,135 | )      
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  |                                                                                                                     |                                                                                                      |                                       | Net cash provided by (used in) operating
    activities |         |              | 23,513   |          |          |        | (183,640 | )       |         |        | 35,366  |  
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|Cash flows from investing activities:             |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  | Retail installment contracts originated or
    purchased                                                            |                                                                                                      |                                       | (493,501                                                | )       |              |          | (206,516 | )        |        |          |        |        
|                                                  | Retail installment contracts liquidated                                                                             |                                                                                                      |                                       | 242,660                                                 |         |              |          | 91,228   |          |        |          |        |        
|                                                  | Repurchase of securitized pools                                                                                     |                                                                                                      |                                       | (243                                                    | )       |              |          | (4,797   | )        |        |          |        |        
|                                                  | Purchases of furniture and equipment                                                                                |                                                                                                      |                                       | (2,262                                                  | )       |              |          | (985     | )        |        |          | (3,956  | )      
|                                                  | Collections on residual interests in
    securitizations                                                            |                                                                                                      |                                       | 21,104                                                  |         |              |          | 16,673   |          |        |          | 29,455  |        
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  |                                                                                                                     |                                                                                                      |                                       | Net cash provided by (used in) investing
    activities |         |              | (232,242 | )        |          |        | (104,397 | )       |         |        | 25,499  |  
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|Cash flows from financing activities:             |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  | Net increase (decrease) in warehouse line of
    credit                                                             |                                                                                                      |                                       | (42,936                                                 | )       |              |          | 153,771  |          |        |          | (56,725 | )      
|                                                  | Net change in restricted cash                                                                                       |                                                                                                      |                                       | (35,499                                                 | )       |              |          | (12,124  | )        |        |          |        |        
|                                                  | Payments on term notes payable                                                                                      |                                                                                                      |                                       | (11,190                                                 | )       |              |          | (13,400  | )        |        |          | (15,975 | )      
|                                                  | Payments on capital leases                                                                                          |                                                                                                      |                                       | (433                                                    | )       |              |          | (562     | )        |        |          | (451    | )      
|                                                  | Proceeds from subordinated capital note                                                                             |                                                                                                      |                                       | 6,000                                                   |         |              |          | 16,000   |          |        |          | 12,000  |        
|                                                  | Proceeds from notes payable related to
    securitized retail installment contracts, net of debt issuance
    costs |                                                                                                      |                                       | 423,075                                                 |         |              |          | 174,141  |          |        |          |        |        
|                                                  | Payments on notes payable related to securitized
    retail installment contracts                                   |                                                                                                      |                                       | (125,612                                                | )       |              |          | (22,755  | )        |        |          |        |        
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  |                                                                                                                     |                                                                                                      |                                       | Net cash provided by (used in) financing
    activities |         |              | 213,405  |          |          |        | 295,071  |         |         |        | (61,151 | )
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  |                                                                                                                     |                                                                                                      |                                       | Net increase (decrease) in cash                         |         |              | 4,676    |          |          |        | 7,034    |         |         |        | (286    | )
|Cash at beginning of period                       |                                                                                                                     |                                                                                                      | 14,337                                |                                                         |         |              | 7,303    |          |          |        | 7,589    |        
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|Cash at end of period                             |                                                                                                                     | $                                                                                                    | 19,013                                |                                                         |         | $            | 14,337   |          |          | $      | 7,303    |        
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|Supplemental disclosure of cash flow information: |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        
|                                                  | Cash paid during the period for interest                                                                            |                                                                                                      | $                                     | 32,076                                                  |         |              | $        | 15,518   |          |        | $        | 9,894   |        
|                                                  |                                                                                                                     |                                                                                                      |                                       |                                                         |         |              |          |          |          |        |          |        

See accompanying notes to consolidated financial
statements.

111



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002 and
2001


(Dollars in thousands)




|   |                          
|-- | -------------------------
|1. | Organization and Business

Drive Financial Services LP (Drive FS), a
Texas Limited Partnership, was formed on August 1, 2000.
Pursuant to the terms of various Contribution and Assumption
Agreements, Drive FS assumed substantially all the assets and
the business of the former auto finance group of FirstCity
Funding and FirstCity Consumer Lending, including the
origination and servicing platforms, all rights and obligations
under asset-backed securities, and 100% of the stock of all
special purpose entities formed to be sellers in
securitization transactions. Drive FS contributed the assets and
liabilities and business of FirstCity Servicing to Drive
Servicing LLC and the asset-backed securities to Drive ABS LP
both wholly owned and consolidated entities.

Drive FS is a specialized consumer finance
company engaged in the purchase, securitization, and servicing
of retail installment contracts originated by automobile
dealers. Drive FS acquires retail installment contracts
principally from manufacturer-franchised dealers in connection
with their sale of used and new automobiles and light duty
trucks to sub-prime customers with limited credit
histories or past credit problems. At the present, Drive FS
does not extend credit directly to consumers, nor does it
purchase retail installment contracts from other financial
institutions.

The accompanying consolidated financial
statements include the accounts of Drive Financial
Services LP, Drive ABS LP, Drive ABS GP, FCAR
Receivables Corp. (FCAR), Drive Servicing LLC, Drive BOS GP,
Drive BOS LP and Drive VFC LP (collectively referred to as the
Company). Significant intercompany transactions have been
eliminated in the preparation of the consolidated financial
statements.

The Company owns 100% of the membership interests
of FCAR, Drive BOS LP, and Drive VFC LP, special purpose
entities formed to acquire retail installment contracts, which
are pledged as collateral on warehouse lines of credit.

Drive GP LLC (Drive GP) is the sole general
partner of Drive FS and owns 0.1% of the Drive FS.
FirstCity Consumer Lending owns 31% of the membership interests
of Drive GP. Management Group LP, a Texas limited
partnership that is owned by members of management of the
Company, owns 20% of the membership interests of Drive GP.
IFA Drive GP Holdings LLC, a Delaware limited liability company
and a wholly owned subsidiary of BOS(USA), owns the remaining
49% of the membership interests of Drive GP. BOS(USA) is a
wholly owned subsidiary of Bank of Scotland. On
September 10, 2001, Bank of Scotland merged with Halifax
Group plc, a personal and commercial lending institution, to
form HBOS plc. As a result of the merger, the Companys
fiscal year end changed from February 28 to
December 31.



|   |                                                             
|-- | ------------------------------------------------------------
|2. | Summary of Significant Accounting Policies and
    Practices



|    |                                      
|--- | -------------------------------------
|(a) | Retail Installment Contracts,
    Net

Retail installment contracts, net consist of
sub-prime automobile finance receivables, which are acquired
from third-party dealers at a nonrefundable discount from the
contractual principal amount.

On July 1, 2002, the Company made a decision
to change the structure of its securitization transactions to
treat the transactions as secured financings for accounting
purposes. Therefore, retail installment contracts are classified
as held to maturity and carried at amortized cost, net of credit
loss reserves, and include retail installment contracts pledged
under secured financings. The Company does not hedge its retail
installment contracts at this time. Management of the Company
does not believe that the Company is exposed to material
interest rate risk during the period contracts are not
securitized.

Interest is accrued when earned in accordance
with the contractual terms of the retail installment contract.
The accrual of interest is discontinued once a retail
installment contract becomes past due 60 days or

112



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

more. Discounts on retail installment contracts
are recognized as adjustments to the yield of the related
contract.



|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(b) | Sales of Retail Installment Contract from
    Securitization and Interest Related to Residual
    Certificates

The Company accounts for sales of retail
installment contracts into securitizations in accordance with
the Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities  a replacement of
FASB Statement No. 125(SFAS No. 140).

Prior to July 1, 2002, the Company
securitized and sold certain auto retail installment contracts
to investors with limited risk. The Company has retained the
servicing rights to these retail installment contracts. In
connection with the sales by FCAR, VFC LP, and Drive BOS of
retail installment contracts through securitizations, Drive ABS
retained certain residual certificates associated with the
securitization as described below. Drive FS and Drive ABS have
entered into an agreement whereby Drive FS receives all the
economic benefits associated with the residual certificates and
conversely assumes all the risks. Upon sale, retail installment
contracts were removed from the consolidated balance sheet, and
a gain on sale was recognized for the difference between the
allocated carrying value of the retail installment contracts and
the adjusted sales proceeds.

The risk to the Company is limited to the rights
on future cash flows on the residual certificates that the
Company has retained. Future cash flows are based on estimates
of prepayments, the impact of interest rate movements on yields
of receivables and securities issued, delinquency of receivables
sold, servicing fees, and other factors. Gain on sale, servicing
income and the interest income on residual certificates are
reported in the accompanying consolidated statements of
operations. Residual certificates are accounted for under
Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Because such assets can be contractually prepaid
or otherwise settled in such a way that the holder would not
receive all of the recorded investment, the assets are
classified as available-for-sale investments and are carried at
estimated fair value with any accompanying increases or
decreases in estimated fair value being recorded as unrealized
gains or losses in accumulated other comprehensive income in the
accompanying consolidated statements of partners equity.

The Company assesses the carrying value of its
securitization related securities for impairment in accordance
with the provisions of EITF 99-20 as discussed in
note 2(k). There can be no assurance that the
Companys estimates used to determine the fair value of the
residual certificates will remain appropriate for the life of
each asset and it is reasonably possible that circumstances
could change in future periods which could result in a material
change in the estimates used to prepare the accompanying
consolidated financial statements. If actual retail installment
contract prepayments or credit losses exceed the Companys
current estimates, an other than temporary impairment may be
required to be recognized.

Subsequent to July 1, 2002, the Company has
issued notes payable backed by auto retail installment
contracts. For accounting purposes, the transactions were
structured as secured financings, therefore, the retail
installment contracts, and the related debt remains on the
consolidated balance sheets.



|    |                            
|--- | ---------------------------
|(c) | Provision and Credit Losses

Provisions for credit losses are charged to
operations in amounts sufficient to maintain the credit loss
allowance at a level considered adequate to cover probable
credit losses on retail installment contracts. Probable losses
are estimated based on contractual delinquency status and
historical loss experience. In addition, loss allowances are
maintained to reflect the Companys judgment of estimates
of the value of the underlying collateral, bankruptcy trends,
economic conditions, such as unemployment rates, changes in used

113



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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

vehicle value index, and other information in
order to make the necessary judgments as to probable credit
losses on retail installment contracts.

Receivables are charged off against the allowance
for credit losses for the full amount of the carrying value at
the earlier of repossession and sale of the underlying
collateral, collateral in our possession for 90 days, or
the contract becoming 120 days contractually delinquent.
Charge-offs may occur sooner for receivables involving a
bankruptcy although the amount charged off will be limited to
the bankruptcy court judgment.



|    |                        
|--- | -----------------------
|(d) | Furniture and Equipment

Furniture and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated
useful lives of the respective assets, which range from three to
ten years. Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful lives of the
improvements. Expenditures for major renewals and betterments
are capitalized. Repairs and maintenance expenditures are
charged to operations as incurred.



|    |                          
|--- | -------------------------
|(e) | Cash and Cash Equivalents

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.



|    |                
|--- | ---------------
|(f) | Restricted Cash

Subsequent to July 1, 2002, the
Companys securitization transactions were structured as
secured financings. Cash is deposited to support the
securitization transactions and recorded in the Companys
consolidated balance sheets as restricted cash. Excess cash
flows generated by the securitization trusts (Trusts) are added
to the restricted cash account, creating additional
over-collateralization until the required percentage level of
assets has been reached. Once the targeted percentage level of
assets is reached, additional excess cash flows generated by the
Trusts are released to the Company as distributions from Trusts.

As of December 31, 2003, the Company was not
in compliance with the Sale and Servicing Agreements related to
Drive Auto Receivables Trust 2000-1, Drive Auto Receivables
Trust 2001-1, Drive Auto Receivables Trust 2001-2, Drive Auto
Receivables Trust 2002-1, Drive Auto Receivables Trust 2003-1,
and Drive Auto Receivables Trust 2003-2. Trigger and reserve
events related to delinquencies and extensions existed in all
Drive issues, the effects of which result in all the cash
available for the residual interest holder to be held in reserve
or restricted cash accounts for the benefit of the note holders.
At December 31, 2003, an additional $6,874 was held in
restricted cash as a result of these trigger and reserve events.



|    |             
|--- | ------------
|(g) | Income Taxes

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



|    |                                      
|--- | -------------------------------------
|(h) | Inventory of Repossessed
    Vehicles

Inventory of repossessed vehicles included in
other assets represent vehicles the Company has repossessed due
to the borrowers default on the payment terms of the
contracts. The Company records the vehicles at estimated fair
value, net of costs to sell.

114



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                 
|--- | ----------------
|(i) | Use of Estimates

Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets
and liabilities, revenue and expenses, and the disclosure of
contingent assets and liabilities to prepare these consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual
results could differ from those estimates.



|    |                                           
|--- | ------------------------------------------
|(j) | Accumulated Other Comprehensive
    Income

Statement of Financial Standards No. 130
(SFAS 130), Reporting Comprehensive Income,establishes standards for reporting and displaying
comprehensive income 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 to be displayed separately in the
equity section. The Companys other comprehensive income
consists of net unrealized gains on residual interests in
securitizations and had accumulated balances of zero, $1,641 and
$2,359 at December 31, 2003, 2002, and 2001, respectively.



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(k) | Recognition of Interest Income and
    Impairment of Residual Interests

The Company adopted the provisions of
EITF 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets(EITF 99-20) on
April 1, 2001. EITF 99-20 established the rules (effective
in the second quarter of 2001) for (1) recognizing interest
income on (a) all credit-sensitive asset-backed securities
and (b) certain prepayment-sensitive securities including
agency interest-only strips and (2) determining when these
securities must be written down to fair value due to other than
temporary impairment.

EITF 99-20 requires the use of the
prospective method for adjusting the level yield used to
recognize interest income when estimates of future cash flows on
the security either increase or decrease since the date of the
last evaluation. The Company adopted the use of prospective
method to recognize interest income as of the adoption date of
April 1, 2001.

Prior to the adoption of EITF 99-20, the
Company recognized interest income using the discount rate based
on the carrying value of the securities.

The cumulative effect of the change in accounting
principle at the time of adoption of EITF 99-20 was $783. During
the years ended December 31, 2003, 2002 and the period
ended December 31, 2001, the Company recorded additional
impairment of $8,449, $3,415 and $4,017, respectively.



|    |                  
|--- | -----------------
|(l) | Reclassifications

Certain amounts in the consolidated financial
statements for the prior years have been reclassified to conform
to the current consolidated financial statement presentation.

115



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|3. | Retail Installment Contracts, Net

Retail installment contracts are comprised of the
following:

|                                              |                                    |              |         |         |  |   |         |         | 
|--------------------------------------------- | ---------------------------------- | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                                              |                                    |             
|                                              |                                    | December 31,
|                                              |                                    |             
|                                              |                                    | 2003         |         | 2002   
|                                              |                                    |              |         |        
|Owned retail installment contracts (note 6)   |                                    | $            | 208,918 |         |  | $ | 253,208 |        
|Pledged retail installment contracts (note 7) |                                    |              | 500,295 |         |  |   | 165,741 |        
|                                              |                                    |              |         |         |  |   |         |        
|                                              |                                    |              | 709,213 |         |  |   | 418,949 |        
|Credit loss allowance                         |                                    |              | (29,853 | )       |  |   | (12,101 | )      
|Discount                                      |                                    |              | (60,081 | )       |  |   | (43,207 | )      
|Capitalized origination costs                 |                                    |              | 4,110   |         |  |   | 3,879   |        
|                                              |                                    |              |         |         |  |   |         |        
|                                              | Total retail installment contracts |              | $       | 623,389 |  |   | $       | 367,520 | 
|                                              |                                    |              |         |         |  |   |         |        

As of December 31, 2001, retail installment
contracts were held for sale and stated at the lower of cost or
fair value in the aggregate, and therefore there was no credit
loss allowance at December 31, 2001.

The activity in the credit loss allowance for the
years ended December 31, 2003 and 2002 were as follows:

|                                                                |  |      |         |      |  |   |         |  
|--------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                                |  | 2003 |         | 2002
|                                                                |  |      |         |     
|Balance at beginning of year                                    |  | $    | 12,101  |      |  | $ |        |  
|Provision for credit losses on retail installment
    contracts |  |      | 67,335  |      |  |   | 28,663  |  
|Charge-offs                                                     |  |      | (49,583 | )    |  |   | (16,562 | )
|                                                                |  |      |         |      |  |   |         |  
|Balance at end of year                                          |  | $    | 29,853  |      |  | $ | 12,101  |  
|                                                                |  |      |         |      |  |   |         |  

Contractual maturities of total retail
installment contracts at December 31, 2003 are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 5,031   | 
|2005       |  |   | 6,234   | 
|2006       |  |   | 52,094  | 
|2007       |  |   | 227,627 | 
|2008       |  |   | 400,243 | 
|2009       |  |   | 17,942  | 
|Thereafter |  |   | 42      | 
|           |  |   |         | 
|           |  | $ | 709,213 | 
|           |  |   |         | 

The retail installment contracts are
collateralized by vehicle titles, and the Company has the right
to repossess the vehicle in the event the borrower defaults on
the payment terms of the contract.

Pledged retail installment contracts are auto
receivables that have been securitized under a secured financing
agreement.

Borrowers on the Companys retail
installment contracts are located primarily in Texas, Georgia,
California, North Carolina, Florida, and Illinois.

The accrual of interest income of $966 and $596
has been suspended on delinquent retail installment contracts as
of December 31, 2003 and 2002, respectively.

116



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                                                 
|-- | ----------------------------------------------------------------
|4. | Interest Related to Residual Certificates in
    Securitizations

Prior to July 1, 2002, the Company
securitized retail installment contracts and recognized revenue
(gain on sales of retail installment contracts) and allocated
the total cost of the loans sold to financial components based
on their relative fair values. During the period ended
December 31, 2001, the Company sold $401,973 of auto retail
installment contracts in securitization transactions and
recognized gains of $39,033.

For retail installment contracts securitized
prior to July 1, 2002, the Company retained servicing
responsibilities and interests in the receivables in the form of
residual certificates. As of December 31, 2003 and 2002,
the Company was servicing $121,620 and $260,048, respectively,
of auto receivables that had been securitized to certain special
purpose financing trusts (the Trusts). Drive LP and
Drive ABS have entered into an agreement whereby Drive LP
receives all the economic benefits associated with the residual
certificates and, conversely, assumes all the risks. Residual
interests in securitizations are carried at estimated fair value
(note 6).

Beginning with transactions closed subsequent to
July 1, 2002, the Company changed the structure of its
securitization transactions to no longer meet the criteria for
sale of retail installment contracts. Accordingly, following a
securitization, the retail installment contracts and the related
securitization debt remain on the consolidated balance sheets.
The Company recognizes finance charges and fee income on the
retail installment contract and interest expense on the debt
issued in the securitization transaction, and records a
provision for loan losses to cover probable future losses on the
contracts. The Company securitized $485,999 and $200,001 of auto
retail installment contracts under secured financings in 2003
and 2002, respectively. Additionally, the Company issued notes
payable related to securitized retail installment contracts of
$425,249 and $175,000 in 2003 and 2002, respectively.

Residual certificates held by Drive ABS to which
the Company receives all the economic benefits and risks (see
note 2(b)) consist of the following at:

|                  |  |              |        |      |  |   |        | 
|----------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                  |  |             
|                  |  | December 31,
|                  |  |             
|                  |  | 2003         |        | 2002
|                  |  |              |        |     
|Retained interest |  | $            | 29,094 |      |  | $ | 63,202 | 
|                  |  |              |        |      |  |   |        | 

The residual certificates were valued at fair
value using the following key assumptions.

|                      |  |              |                 |      |  |  |                 | 
|--------------------- |  | ------------ | --------------- | ---- |  |  | --------------- | 
|                      |  |             
|                      |  | December 31,
|                      |  |             
|                      |  | 2003         |                 | 2002
|                      |  |              |                 |     
|Discount rate         |  |              | 13.5%           |      |  |  | 13.5%           | 
|Prepayment speeds     |  |              | 12.5%  18% CPR | *    |  |  | 11%  20% CPR   | 
|Cumulative loss rates |  |              | 17.13%  20.95% |      |  |  | 11.83%  18.74% | 




* Conditional
Prepayment Rate

SFAS 140 requires that the effect on the
fair value of the retained interests of two adverse changes in
each key assumption be independently calculated.

117



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

At December 31, 2003 and 2002, key economic
assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10% and 20% adverse changes in
those assumptions are as follows:

|                                                        |            |      |         |        |  |  |         |        | 
|------------------------------------------------------- | ---------- | ---- | ------- | ------ |  |  | ------- | ------ | 
|                                                        |            | 2003 |         | 2002  
|                                                        |            |      |         |       
|Balance sheet carrying value of retained
    interests: |            |      |         |        |  |  |         |       
|                                                        | Fair value |      | $       | 29,094 |  |  | $       | 63,202 | 
|Prepayment speed assumption                             |            |      |         |        |  |  |         |       
|Impact on fair value of 10% adverse change              |            |      | (692    | )      |  |  | (1,113  | )     
|Impact on fair value of 20% adverse change              |            |      | (1,734  | )      |  |  | (2,173  | )     
|Expected credit losses                                  |            |      |         |        |  |  |         |       
|Impact on fair value of 10% adverse change              |            |      | (9,673  | )      |  |  | (9,964  | )     
|Impact on fair value of 20% adverse change              |            |      | (18,837 | )      |  |  | (19,842 | )     
|Residual cash flows discount rate                       |            |      |         |        |  |  |         |       
|Impact on fair value of 10% adverse change              |            |      | (430    | )      |  |  | (905    | )     
|Impact on fair value of 20% adverse change              |            |      | (850    | )      |  |  | (1,789  | )     

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

Expected static pool credit losses are as follows:

|                     |             |                                               |  |         |   |         |  |        |   |        |  |       |   |  |  |       |   |  |  |       |  
|-------------------- | ----------- | --------------------------------------------- |  | ------- | - | ------- |  | ------ | - | ------ |  | ----- | - |  |  | ----- | - |  |  | ----- | -
|                     |             |                                              
|                     |             | Auto retail installment contracts securitized
|Actual and projected |             |                                              
|credit losses(%)     |             | 1999-2                                        |  | F2000-1 |   | D2000-1 |  | 2001-1 |   | 2001-2
|                     |             |                                               |  |         |   |         |  |        |   |       
|December 31, 2003:   |             |                                               |  |         |   |         |  |        |   |        |  |       |   |  |  |       |   |  |  |      
|                     | Actual date |                                               |  |        |   |         |  |       |   |        |  | 16.76 | % |  |  | 20.02 | % |  |  | 17.61 | %
|                     | Projected   |                                               |  |        |   |         |  |       |   |        |  | 17.13 | % |  |  | 20.60 | % |  |  | 20.95 | %
|December 31, 2002:   |             |                                               |  |         |   |         |  |        |   |        |  |       |   |  |  |       |   |  |  |      
|                     | Actual date |                                               |  | 11.21   | % |         |  | 16.31  | % |        |  | 13.33 | % |  |  | 14.58 | % |  |  | 9.53  | %
|                     | Projected   |                                               |  | 11.83   | % |         |  | 17.37  | % |        |  | 15.74 | % |  |  | 18.74 | % |  |  | 18.34 | %

118



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                           
|-- | ------------------------------------------
|5. | Accumulated Other Comprehensive
    Income

The accumulated balance of other comprehensive
income at December 31, 2003, 2002 and 2001 is as follows:

|                                                                                                                                                  |  |                    |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | -
|                                                                                                                                                  |  | Accumulated       
|                                                                                                                                                  |  | Other             
|                                                                                                                                                  |  | Comprehensive     
|                                                                                                                                                  |  | Income  Net      
|                                                                                                                                                  |  | Unrealized Gains  
|                                                                                                                                                  |  | (Losses) on       
|                                                                                                                                                  |  | Residual Interest 
|                                                                                                                                                  |  | in Securitizations
|                                                                                                                                                  |  |                   
|Ending balance at February 28, 2001                                                                                                               |  | $                  | 4,157  |  
|Unrealized gains related to 2001 securitizations                                                                                                  |  |                    | 6,163  |  
|Current period change                                                                                                                             |  |                    | (4,727 | )
|Reclassification adjustments for unrealized
    losses reclassified into income due to permanent impairment                                       |  |                    | (4,017 | )
|Reclassification adjustment for unrealized losses
    reclassified into income due to the cumulative effect of change
    in accounting principle |  |                    | 783    |  
|                                                                                                                                                  |  |                    |        |  
|Ending balance at December 31, 2001                                                                                                               |  |                    | 2,359  |  
|Current period change                                                                                                                             |  |                    | 2,697  |  
|Reclassification adjustments for unrealized
    losses reclassified into income due to permanent impairment                                       |  |                    | (3,415 | )
|                                                                                                                                                  |  |                    |        |  
|Ending balance at December 31, 2002                                                                                                               |  |                    | 1,641  |  
|Current period change                                                                                                                             |  |                    | 6,808  |  
|Reclassification adjustments for unrealized
    losses reclassified into income due to permanent impairment                                       |  |                    | (8,449 | )
|                                                                                                                                                  |  |                    |        |  
|Ending balance at December 31, 2003                                                                                                               |  | $                  |       |  
|                                                                                                                                                  |  |                    |        |  



|   |              
|-- | -------------
|6. | Notes Payable

The Company has a warehouse line of credit with
BoS(USA), which provides borrowings up to $250,000. The
Companys obligation under this arrangement at
December 31, 2003, is $178,000, which bears interest at
Prime minus .75% (3.25% at December 31, 2003). At
December 31, 2002 the Companys obligation under this
arrangement included $160,000, bearing interest at LIBOR plus 1%
(2.43% at 2002) and $2,836, which bore interest at Prime minus
1.5% (2.75% at December 31, 2002). The debt is secured by
$208,918 of the Companys retail installment contracts and
has been extended to February 28, 2005. The note payable
contains various covenants, which the Company was fully in
compliance with at December 31, 2003 and 2002.

Effective September 6, 2001, the Company
entered into a warehouse line of credit agreement with Variable
Funding Capital Corporation, a subsidiary of Wachovia
Corporation, which provided borrowings up to $100,000. The
warehouse line obligation was zero at December 31, 2003. At
December 31, 2002, the Companys obligation under the
arrangement was $58,100 and bore interest at a commercial paper
rate (2.00% plus associated fees).

The Company has a term loan with BoS(USA) with
$2,910 outstanding at December 31, 2003 and $14,100
outstanding at December 31, 2002. At December 31,
2003, the Companys obligation under this arrangement bears
interest at LIBOR plus 1% (2.15%). The Companys obligation
under this arrangement at December 31, 2002, included
$10,000, which bore interest at LIBOR plus 1% (2.47%) and
$4,100, which bore

119



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

interest at LIBOR plus 1% (2.42%). The loan
matures on March 31, 2004 and the outstanding balance will
be paid off at maturity. Residual interests in securitization
transactions secure the loan.



|   |                                                                      
|-- | ---------------------------------------------------------------------
|7. | Notes Payable Related to Securitized Retail
    Installment Contracts

Notes payable related to securitized retail
installment contracts structured as a secured financing with a
third party were $451,268 and $152,245 at December 31, 2003
and 2002, respectively. The principal and interest on these
notes are paid using the cash flows from the underlying retail
installment contracts which serve as collateral for the notes.
Accordingly, the timing of the principal payments on these notes
is dependent on the payments received on the underlying retail
installment contracts which back the notes. The average interest
rate and contractual maturity on these notes were as follows:

|                                     |                                                                                                               |              |         |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- | 
|                                     |                                                                                                               | December 31,
|                                     |                                                                                                               | 2003        
|                                     |                                                                                                               |             
|1.09%; final maturity 2004           |                                                                                                               | $            | 10,024  |        
|2.73%; final maturity 2005           |                                                                                                               |              | 9,441   |        
|2.05%; final maturity 2006           |                                                                                                               |              | 211,394 |        
|2.20%; final maturity 2007           |                                                                                                               |              | 85,000  |        
|3.42%; final maturity 2008           |                                                                                                               |              | 67,409  |        
|2.50%; final maturity 2009           |                                                                                                               |              | 68,000  |        
|                                     |                                                                                                               |              |         |        
|                                     |                                                                                                               |              | 451,268 |        
|Less unamortized debt issuance costs |                                                                                                               |              | (2,420  | )      
|                                     |                                                                                                               |              |         |        
|                                     | Notes payable related to securitized retail
    installment contracts, net of unamortized debt issuance costs |              | $       | 448,848 | 
|                                     |                                                                                                               |              |         |        

|                                     |                                                                                                               |              |         |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- | 
|                                     |                                                                                                               | December 31,
|                                     |                                                                                                               | 2002        
|                                     |                                                                                                               |             
|1.87%; final maturity 2003           |                                                                                                               | $            | 12,409  |        
|2.73%; final maturity 2005           |                                                                                                               |              | 58,343  |        
|3.68%; final maturity 2006           |                                                                                                               |              | 48,333  |        
|4.09%; final maturity 2008           |                                                                                                               |              | 33,160  |        
|                                     |                                                                                                               |              |         |        
|                                     |                                                                                                               |              | 152,245 |        
|Less unamortized debt issuance costs |                                                                                                               |              | (859    | )      
|                                     |                                                                                                               |              |         |        
|                                     | Notes payable related to securitized retail
    installment contracts, net of unamortized debt issuance costs |              | $       | 151,386 | 
|                                     |                                                                                                               |              |         |        



|   |                          
|-- | -------------------------
|8. | Subordinated Capital Note

The Company has a note payable to BOS(USA), for
$54,000 and $48,000 at December 31, 2003 and 2002, which
bears interest at a predefined rate of 16%. The note allows
borrowings up to $65,000 and matures February 15, 2006.
This note is subordinate to all other obligations of the
Company. At December 31, 2003, there was no required
amortization of the debt.

120



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##### Table of Contents



DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|9. | Securitization Activity

The table below summarizes the cash flows
received from securitization trusts during the following periods:

|                                                 |                                                |              |         |              |  |              |         |         |  |   |         |         | 
|------------------------------------------------ | ---------------------------------------------- | ------------ | ------- | ------------ |  | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                                                 |                                                | December 31, |         | December 31, |  | December 31,
|                                                 |                                                | 2003         |         | 2002         |  | 2001        
|                                                 |                                                |              |         |              |  |             
|Gross proceeds from new securitizations          |                                                | $            | 425,249 |              |  | $            | 175,000 |         |  | $ | 357,698 |        
|Servicing fees received                          |                                                |              | 5,556   |              |  |              | 11,739  |         |  |   | 9,344   |        
|Cash flows received on subordinated holdings     |                                                |              | 13,154  |              |  |              | 10,357  |         |  |   | 21,846  |        
|Cash received upon release from reserve accounts |                                                |              | 24,965  |              |  |              | 6,316   |         |  |   | 7,609   |        
|                                                 |                                                |              |         |              |  |              |         |         |  |   |         |        
|                                                 | Total cash received from securitization trusts |              | $       | 468,924      |  |              | $       | 203,412 |  |   | $       | 396,497 | 
|                                                 |                                                |              |         |              |  |              |         |         |  |   |         |        

Substantially all of the proceeds from new
securitizations were used to reduce borrowings on the warehouse
line of credit.

For the period ended December 31, 2001, the
Company recognized $39,033 of gains on sales of retail
installment contracts. There were no transactions treated as
sales in 2003 and 2002.

During 2003, the Company exercised early purchase
options on the 1999-2 and 2000-1A securitizations. The
receivables were recorded at a fair value of $8,638.

During 2002, the Company exercised early purchase
options on the 1998-2 and 1999-1 securitizations. The
receivables were recorded at a fair value of $9,744. Cash paid
for the exercise of early purchase options was $4,797.

During the period ended December 31, 2001,
the Company exercised early purchase options on the 1998-1 and
1998-2 securitizations. The receivables were recorded at a fair
value of $7,886. Cash paid for the exercise of early purchase
options was $3,900.

The table below summarizes delinquencies at
December 31, 2003 and 2002, and historical losses for the
years ended December 31, 2003 and 2002:

|                   |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |       |       | 
|------------------ | ----------------------------- | ------------------------------------------ | - | ----------- | ------- | -------------- |  | ----------- | --- | - | - | ------ | ------ |  |  | ----- | ----- | 
|                   |                               | Principal                                  |   | % of total  |         |                |  | % of total 
|                   |                               | amount of                                  |   | managed     |         |                |  | managed    
|                   |                               | retail                                     |   | retail      |         | Delinquent     |  | retail     
|                   |                               | installment                                |   | installment |         | principal over |  | installment
|                   |                               | contracts                                  |   | contracts   |         | sixty days     |  | contracts  
|                   |                               |                                            |   |             |         |                |  |            
|December 31, 2003: |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |      
|                   | Retail installment contracts: |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |       |      
|                   | Owned                         |                                            | $ | 208,918     |         |                |  | 25          | %   |   | $ | 3,213  |        |  |  | 0.39% |      
|                   | Pledged                       |                                            |   | 500,295     |         |                |  | 60          | %   |   |   | 14,720 |        |  |  | 1.77% |      
|                   | Securitized                   |                                            |   | 121,620     |         |                |  | 15          | %   |   |   | 4,661  |        |  |  | 0.56% |      
|                   |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |      
|                   |                               | Total managed retail installment contracts |   | $           | 830,833 |                |  |             | 100 | % |   | $      | 22,594 |  |  |       | 2.72% | 
|                   |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |      

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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                   |                               |                                            |   |                |         |  |   |        |        | 
|------------------ | ----------------------------- | ------------------------------------------ | - | -------------- | ------- |  | - | ------ | ------ | 
|                   |                               | Average                                    |   |               
|                   |                               | balance of                                 |   |               
|                   |                               | retail                                     |   | Credit        
|                   |                               | installment                                |   | losses  (net 
|                   |                               | contracts                                  |   | of recoveries)
|                   |                               |                                            |   |               
|December 31, 2003: |                               |                                            |   |                |         |  |   |       
|                   | Retail installment contracts: |                                            |   |                |         |  |   |        |       
|                   | Owned                         |                                            | $ | 192,481        |         |  | $ | 11,851 |       
|                   | Pledged                       |                                            |   | 398,205        |         |  |   | 37,732 |       
|                   | Securitized                   |                                            |   | 178,805        |         |  |   | 28,347 |       
|                   |                               |                                            |   |                |         |  |   |       
|                   |                               | Total managed retail installment contracts |   | $              | 769,491 |  |   | $      | 77,930 | 
|                   |                               |                                            |   |                |         |  |   |       

|                   |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |       |       | 
|------------------ | ----------------------------- | ------------------------------------------ | - | ----------- | ------- | -------------- |  | ----------- | --- | - | - | ------ | ------ |  |  | ----- | ----- | 
|                   |                               | Principal                                  |   | % of total  |         |                |  | % of total 
|                   |                               | amount of                                  |   | managed     |         |                |  | managed    
|                   |                               | retail                                     |   | retail      |         | Delinquent     |  | retail     
|                   |                               | installment                                |   | installment |         | principal over |  | installment
|                   |                               | contracts                                  |   | contracts   |         | sixty days     |  | contracts  
|                   |                               |                                            |   |             |         |                |  |            
|December 31, 2002: |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |      
|                   | Retail installment contracts: |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |       |      
|                   | Owned                         |                                            | $ | 253,208     |         |                |  | 37          | %   |   | $ | 4,599  |        |  |  | 0.68% |      
|                   | Pledged                       |                                            |   | 165,741     |         |                |  | 24          | %   |   |   | 5,719  |        |  |  | 0.84% |      
|                   | Securitized                   |                                            |   | 260,048     |         |                |  | 38          | %   |   |   | 10,955 |        |  |  | 1.61% |      
|                   |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |      
|                   |                               | Total managed retail installment contracts |   | $           | 678,997 |                |  |             | 100 | % |   | $      | 21,273 |  |  |       | 3.13% | 
|                   |                               |                                            |   |             |         |                |  |             |     |   |   |        |        |  |  |      

|                   |                               |                                            |   |                |         |  |   |        |        | 
|------------------ | ----------------------------- | ------------------------------------------ | - | -------------- | ------- |  | - | ------ | ------ | 
|                   |                               | Average                                    |   |               
|                   |                               | balance of                                 |   |               
|                   |                               | retail                                     |   | Credit        
|                   |                               | installment                                |   | losses  (net 
|                   |                               | contracts                                  |   | of recoveries)
|                   |                               |                                            |   |               
|December 31, 2002: |                               |                                            |   |                |         |  |   |       
|                   | Retail installment contracts: |                                            |   |                |         |  |   |        |       
|                   | Owned                         |                                            | $ | 172,101        |         |  | $ | 10,769 |       
|                   | Pledged                       |                                            |   | 184,497        |         |  |   | 9,214  |       
|                   | Securitized                   |                                            |   | 354,284        |         |  |   | 46,349 |       
|                   |                               |                                            |   |                |         |  |   |       
|                   |                               | Total managed retail installment contracts |   | $              | 710,882 |  |   | $      | 66,332 | 
|                   |                               |                                            |   |                |         |  |   |       

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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |       
|--- | ------
|10. | Leases

The Company has obligations under various lease
agreements for computer equipment and office furniture with
multiple equipment lease schedules. The leases are classified as
capital leases. The total future minimum rental payments are
included in the future minimum rental payments schedule below.

Future minimum rental payments under capital
leases together with the present value of minimum lease payments
at December 31, 2003 are as follows:

|                                   |      |                                         |    |     |     | 
|---------------------------------- | ---- | --------------------------------------- | -- | --- | --- | 
|Year ending December 31:           |      |                                         |    |    
|                                   | 2004 |                                         | $  | 171 |    
|                                   | 2005 |                                         |    | 124 |    
|                                   | 2006 |                                         |    | 69  |    
|                                   |      |                                         |    |    
|                                   |      | Total minimum lease payments            |    |     | 364 | 
|                                   |      |                                         |    |    
|Less amounts representing interest |      |                                         | 59 |    
|                                   |      |                                         |    |    
|                                   |      | Present value of minimum lease payments |    | $   | 305 | 
|                                   |      |                                         |    |    

The Company has entered into various operating
leases, primarily for office space and certain equipment. Lease
expense incurred during the periods ended December 31,
2003, 2002, and 2001 totaled $3,074, $2,959 and $840,
respectively. The remaining obligations under the lease
commitments are as follows at December 31, 2003:

|                         |      |  |   |       | 
|------------------------ | ---- |  | - | ----- | 
|Year ending December 31: |      |  |   |      
|                         | 2004 |  | $ | 2,816 | 
|                         | 2005 |  |   | 2,566 | 
|                         | 2006 |  |   | 552   | 
|                         | 2007 |  |   | 189   | 
|                         | 2008 |  |   | 184   | 



|    |                              
|--- | -----------------------------
|11. | Commitments and Contingencies

In connection with the sale of retail installment
contracts through securitizations, the Company has made standard
representations and warranties customary to the consumer finance
industry. Violations of these representations and warranties may
require the Company to repurchase loans previously sold. As of
December 31, 2003 and 2002, the Company had no repurchase
requests outstanding. In the opinion of management, the
potential exposure or other recourse obligations related to the
Companys retail installment contract sales agreements will
not have a material adverse effect on the consolidated financial
position or results of operations of the Company.

The Company has letters of credit issued by Bank
of Scotland (note 12) totaling $47,650 and $24,250 at
December 31, 2003 and 2002, respectively, of which none has
been drawn. The letters of credit are collateral for the Drive
2000-1, 2001-1, 2001-2, 2002-1, 2003-1 and 2003-2 Securitization
Reserves and an IBM Credit Corporation operating lease. The
letters of credit expire at various dates through July 16,
2004. Effective February 19, 2004, the Companys
letter of credit facility agreement with Bank of Scotland was
amended to extend the commitment termination date to
February 28, 2005.

Periodically, the Company is party to or
otherwise involved in legal proceedings arising in the normal
course of business. The Company does not believe that there are
any proceedings threatened or pending, if determined adversely,
would have a material adverse effect on the consolidated
financial position, results of operations, or liquidity of the
Company.

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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                           
|--- | --------------------------
|12. | Related-Party Transactions

The Company has the aforementioned subordinated
capital note payable to BOS(USA) totaling $54,000 and $48,000 at
December 31, 2003 and 2002, respectively (see note 8).
Interest costs incurred on such subordinated capital note
payable totaled $8,725, $6,169 and $2,564 for the periods ended
December 31, 2003, 2002, and 2001, respectively.

Additionally, the Company has letters of credit
issued by Bank of Scotland, as discussed in note 11. Fees
associated with these letters totaled $3,248, $997 and $65
during 2003, 2002 and 2001, respectively. Interest costs
incurred in connection with other debt with BOS(USA) totaled
$7,134, $5,880, and $5,115 for the periods ended
December 31, 2003, 2002, and 2001, respectively (see
note 6).



|    |                      
|--- | ---------------------
|13. | Financial Instruments

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



|    |                          
|--- | -------------------------
|(a) | Cash and Cash Equivalents

The carrying amount of cash and cash equivalents
approximated fair value at December 31, 2003 and 2002 due
to the short maturity of these instruments.



|    |                             
|--- | ----------------------------
|(b) | Retail Installment Contracts

Retail installment contracts are carried at
amortized cost at December 31, 2003 and 2002. Retail
installment contracts were carried at lower of cost or market
value in aggregate at December 31, 2001. The estimated fair
value is calculated by using estimated fair values from
securitizations of the contracts and discounting projected cash
flows using estimated market discount rates that reflect the
credit and interest rate risks inherent in the assets at
December 31, 2003 and 2002. The carrying value of the
retail installment contracts was $623,389 and $367,520 at
December 31, 2003 and 2002, respectively. The estimated
fair value of the retail installment contracts was $674,000 and
$398,000 at December 31, 2003 and 2002, respectively.



|    |                                                
|--- | -----------------------------------------------
|(c) | Notes Payable and Subordinated Capital
    Note

The fair value of the Companys notes
payable related to securitized retail installment contracts were
$454,980 and $155,393 at December 31, 2003 and 2002,
respectively. The fair value of such notes is estimated using
discounted cash flow analysis, based on the rate currently being
offered for similar transactions with similar credit risks.

The carrying amount of subordinated capital note
at December 31, 2003 and 2002, approximate the fair value.
Management believes that the repayment term for similar rate
financial instruments with similar credit risks and the stated
interest rates at December 31, 2003 and 2002, approximate
the market terms for similar credit instruments.

The fair value of the variable rate warehouse
lines of credits is equal to the carrying value as the effective
variable rates are considered to be the market rate.



|    |                       
|--- | ----------------------
|14. | Employee Benefit Plans

The Company sponsors a defined contribution plan
offered to substantially all salaried employees. Employees
participating in the plan may contribute up to 15% of their base
salary, subject to federal limitations on absolute amounts
contributed. The Company will match up to 6% of their base
salary, with

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DRIVE FINANCIAL SERVICES LP AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

matching contributions of 50% of employee
contributions. The total amount contributed by the Company for
the periods ended December 31, 2003, 2002, and 2001 was
$502, $364, and $210, respectively.



|    |                              
|--- | -----------------------------
|15. | New Accounting Pronouncements

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness to Others, an interpretation of FASB Statements
Nos. 5, 57, and 107 and a rescission of FASB Interpretation
No. 34(FIN 45). This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee,
a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified
after December 31, 2002. On January 1, 2003, the
Company adopted the recognition and measurement provisions of
FIN 45, with no material effect on the Companys
consolidated financial statements. FIN 45 also requires
additional disclosures in financial statements for periods
ending after December 15, 2002. The Company has disclosed
its potential guarantees related to this Interpretation in
note 11.

In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities(FIN 46R), which addresses how a business enterprise
should evaluate whether it has a controlling financial interest
in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003. The
Company will be required to apply FIN 46R to variable
interests in VIEs created after December 31, 2003. For
variable interests in VIEs created before January 1, 2004,
the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets,
liabilities and noncontrolling interests of the VIE initially
would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any
previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets,
liabilities, and noncontrolling interest of the VIE.

The Company enters into transactions or has
contractual relationships with various legal entities that are
commonly referred to as variable interest entities. Certain of
these entities, and where applicable, the assets sold to them by
the Company, are not included in the Companys consolidated
balance sheets. The Company may have certain relationships with
these entities, including servicer of the assets held by the
entity. In addition, the Company may retain certain interests in
these entities, which are recognized on the consolidated balance
sheet. The Company does not believe it would be required to
consolidate these entities as it does not hold any other
variable interests as of December 31, 2003.

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MINNTEX INVESTMENT PARTNERS LP

(A Texas Limited Partnership)


FINANCIAL STATEMENTS

December 31, 2003 and 2002


(With Independent Auditors Report
Thereon)


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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Partners

MinnTex Investment Partners LP:


We have audited the accompanying balance sheets
of MinnTex Investment Partners LP (a Texas limited partnership)
as of December 31, 2003 and 2002, and the related
statements of operations, changes in partners capital, and
cash flows for the year ended December 31, 2003 and for the
period March 11, 2002 (date of inception) through
December 31, 2002. These financial statements are the
responsibility of the Partnerships management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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 financial statements referred
to above present fairly, in all material respects, the financial
position of MinnTex Investment Partners LP as of
December 31, 2003 and 2002, and the results of its
operations and its cash flows for the year ended
December 31, 2003 and for the period March 11, 2002
(date of inception) through December 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.



| |         
| | --------
| | KPMG LLP

Dallas, Texas

February 13, 2004


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MINNTEX INVESTMENT PARTNERS LP

(A Texas Limited Partnership)


BALANCE SHEETS

December 31, 2003 and 2002


|                                              |             |                |       |      |  |   |       |     | 
|--------------------------------------------- | ----------- | -------------- | ----- | ---- |  | - | ----- | --- | 
|                                              |             | 2003           |       | 2002
|                                              |             |                |       |     
|                                              |             |               
|                                              |             | (In thousands)
|ASSETS                                       
|Cash                                          |             | $              | 1,053 |      |  | $ | 1,603 |    
|Portfolio Asset, net (note 3)                 |             |                | 477   |      |  |   | 2,130 |    
|                                              |             |                |       |      |  |   |       |    
|                                              |             | $              | 1,530 |      |  | $ | 3,733 |    
|                                              |             |                |       |      |  |   |       |    
|                                             
|LIABILITIES AND PARTNERS
    CAPITAL        
|Accounts payable and accrued liabilities      |             | $              | 14    |      |  | $ | 12    |    
|Service fees payable  affiliate
    (note 4) |             |                | 98    |      |  |   | 152   |    
|                                              |             |                |       |      |  |   |       |    
|                                              | Liabilities |                |       | 112  |  |   |       | 164 | 
|Partners capital                             |             |                | 1,418 |      |  |   | 3,569 |    
|                                              |             |                |       |      |  |   |       |    
|                                              |             | $              | 1,530 |      |  | $ | 3,733 |    
|                                              |             |                |       |      |  |   |       |    

See accompanying notes to financial statements.

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MINNTEX INVESTMENT PARTNERS LP

(A Texas Limited Partnership)


STATEMENTS OF OPERATIONS

The Year Ended December 31, 2003 and the
Period March 11, 2002


(date of inception) through December 31,
2002


|                                                             |                                       |                |        |        |  |   |        |       | 
|------------------------------------------------------------ | ------------------------------------- | -------------- | ------ | ------ |  | - | ------ | ----- | 
|                                                             |                                       | 2003           |        | 2002  
|                                                             |                                       |                |        |       
|                                                             |                                       |               
|                                                             |                                       | (In thousands)
|Proceeds from resolution of Portfolio Asset                  |                                       | $              | 14,294 |        |  | $ | 16,655 |      
|Cost of Portfolio Asset resolved                             |                                       |                | 1,653  |        |  |   | 9,292  |      
|                                                             |                                       |                |        |        |  |   |        |      
|                                                             | Gain on resolution of Portfolio Asset |                |        | 12,641 |  |   |        | 7,363 | 
|Interest expense  affiliate
    (note 4)                    |                                       |                |       |        |  |   | (201   | )    
|General, administrative, and operating expenses
    (note 4) |                                       |                | (1,462 | )      |  |   | (1,773 | )    
|Other income                                                 |                                       |                | 5      |        |  |   | 8      |      
|                                                             |                                       |                |        |        |  |   |        |      
|                                                             | Net income                            |                | $      | 11,184 |  |   | $      | 5,397 | 
|                                                             |                                       |                |        |        |  |   |        |      

See accompanying notes to financial statements.

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MINNTEX INVESTMENT PARTNERS LP

(A Texas Limited Partnership)


STATEMENTS OF CHANGES IN PARTNERS
CAPITAL

The Year Ended December 31, 2003 and the
Period March 11, 2002


(date of inception) through December 31,
2002


|                              |  |                |      |                  |  |          |        |         |  |       |        |   |  |   |        |   |  |   |         |  
|----------------------------- |  | -------------- | ---- | ---------------- |  | -------- | ------ | ------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                              |  |                |      |                  |  |         
|                              |  | General        |      | Limited Partners |  |         
|                              |  | Partner        |      |                  |  |         
|                              |  |                |      | FirstCity        |  | CFSC     |        |         |  |      
|                              |  | MinnTex        |      | Holdings of      |  | Capital  |        | Lenders |  |      
|                              |  | GP Corp.       |      | Minnesota        |  | Corp. II |        | Trust   |  | Total
|                              |  |                |      |                  |  |          |        |         |  |      
|                              |  |               
|                              |  | (In thousands)
|Inception Date March 11, 2002 |  | $              |     |                  |  | $        |       |         |  | $     |       |   |  | $ |       |   |  | $ |        |  
|Contributions                 |  |                | 39   |                  |  |          | 1,264  |         |  |       | 1,264  |   |  |   | 1,264  |   |  |   | 3,831   |  
|Distributions                 |  |                | (58  | )                |  |          | (1,867 | )       |  |       | (1,867 | ) |  |   | (1,867 | ) |  |   | (5,659  | )
|Net income                    |  |                | 54   |                  |  |          | 1,781  |         |  |       | 1,781  |   |  |   | 1,781  |   |  |   | 5,397   |  
|                              |  |                |      |                  |  |          |        |         |  |       |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2002  |  |                | 35   |                  |  |          | 1,178  |         |  |       | 1,178  |   |  |   | 1,178  |   |  |   | 3,569   |  
|Distributions                 |  |                | (132 | )                |  |          | (4,401 | )       |  |       | (4,401 | ) |  |   | (4,401 | ) |  |   | (13,335 | )
|Net income                    |  |                | 111  |                  |  |          | 3,691  |         |  |       | 3,691  |   |  |   | 3,691  |   |  |   | 11,184  |  
|                              |  |                |      |                  |  |          |        |         |  |       |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2003  |  | $              | 14   |                  |  | $        | 468    |         |  | $     | 468    |   |  | $ | 468    |   |  | $ | 1,418   |  
|                              |  |                |      |                  |  |          |        |         |  |       |        |   |  |   |        |   |  |   |         |  

See accompanying notes to financial statements.

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MINNTEX INVESTMENT PARTNERS LP

(A Texas Limited Partnership)


STATEMENTS OF CASH FLOWS

The Year Ended December 31, 2003 and the
Period March 11, 2002


(date of inception) through December 31,
2002


|                                                  |                                                                                       |                                                             |                                           |         |         |         |       |        |         |        |  
|------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------- | ----- | ------ | ------- | ------ | -
|                                                  |                                                                                       | 2003                                                        |                                           | 2002   
|                                                  |                                                                                       |                                                             |                                           |        
|                                                  |                                                                                       |                                                            
|                                                  |                                                                                       | (In thousands)                                             
|Cash flows from operating activities:             |                                                                                       |                                                             |                                           |         |         |         |       |       
|                                                  | Net income                                                                            |                                                             | $                                         | 11,184  |         |         | $     | 5,397  |        
|                                                  | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                             |                                           |         |         |         |       |        |        
|                                                  |                                                                                       | Purchase of Portfolio Asset                                 |                                           |         |        |         |       |        | (11,422 | )     
|                                                  |                                                                                       | Gain on resolution of Portfolio Asset                       |                                           |         | (12,641 | )       |       |        | (7,363  | )     
|                                                  |                                                                                       | Proceeds from resolution of Portfolio Asset                 |                                           |         | 14,294  |         |       |        | 16,655  |       
|                                                  |                                                                                       | Increase (decrease) in service fees
    payable  affiliate |                                           |         | (54     | )       |       |        | 152     |       
|                                                  |                                                                                       | Increase in accounts payable and accrued
    liabilities    |                                           |         | 2       |         |       |        | 12      |       
|                                                  |                                                                                       |                                                             |                                           |         |         |         |       |       
|                                                  |                                                                                       |                                                             | Net cash provided by operating activities |         |         | 12,785  |       |        |         | 3,431  |  
|                                                  |                                                                                       |                                                             |                                           |         |         |         |       |       
|Cash flows from financing activities:             |                                                                                       |                                                             |                                           |         |         |         |       |       
|                                                  | Borrowing on long-term debt  affiliate                                               |                                                             |                                           |        |         |         |       | 8,939  |        
|                                                  | Repayment of long-term debt  affiliate                                               |                                                             |                                           |        |         |         |       | (8,939 | )      
|                                                  | Capital contributions                                                                 |                                                             |                                           |        |         |         |       | 3,831  |        
|                                                  | Capital distributions                                                                 |                                                             |                                           | (13,335 | )       |         |       | (5,659 | )      
|                                                  |                                                                                       |                                                             |                                           |         |         |         |       |       
|                                                  |                                                                                       |                                                             | Net cash used in financing activities     |         |         | (13,335 | )     |        |         | (1,828 | )
|                                                  |                                                                                       |                                                             |                                           |         |         |         |       |       
|                                                  |                                                                                       |                                                             | Net increase (decrease) in cash           |         |         | (550    | )     |        |         | 1,603  |  
|Cash, beginning of period                         |                                                                                       |                                                             | 1,603                                     |         |         |         |      |       
|                                                  |                                                                                       |                                                             |                                           |         |         |         |       |       
|Cash, end of period                               |                                                                                       | $                                                           | 1,053                                     |         |         | $       | 1,603 |       
|                                                  |                                                                                       |                                                             |                                           |         |         |         |       |       
|Supplemental disclosure of cash flow information: |                                                                                       |                                                             |                                           |         |         |         |       |       
|                                                  | Cash paid for interest                                                                |                                                             | $                                         |        |         |         | $     | 201    |        

See accompanying notes to financial statements.

131



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##### Table of Contents



MINNTEX INVESTMENT PARTNERS LP

NOTES TO FINANCIAL STATEMENTS

December 31, 2003 and 2002

(Dollars in thousands)




|   |                                           
|-- | ------------------------------------------
|1. | Organization and Partnership
    Agreement

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

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

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



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



|    |                
|--- | ---------------
|(a) | Portfolio Asset

The Partnership acquires and resolves a portfolio
of performing and nonperforming loans to small businesses that
are unsecured (Portfolio Asset). Accounting for the
Portfolio Asset is on a pool basis as opposed to an individual
asset-by-asset basis. At December 31, 2003 and 2002, the
Portfolio Asset was designated as nonperforming as described
more fully below.

The Partnerships Portfolio Asset is
designated as nonperforming unless a majority of all of the
loans in the pool are being repaid in accordance with the
contractual terms of the underlying loan agreements. Such
designation is made at the acquisition of the pool and does not
change even though the actual mix of the loans may change. The
pool is acquired on the basis of an evaluation of the timing and
amount of cash flow expected to be derived from borrower
payments on the loans. The carrying value of the nonperforming
Portfolio Asset was $477 and $2,130 at December 31, 2003
and 2002, respectively.

A nonperforming Portfolio Asset is purchased at a
substantial discount from its outstanding legal principal
amount, the total of the aggregate of expected future sales
prices and the total payments to be received from obligors.
Subsequent to acquisition, the adjusted cost of the
nonperforming Portfolio Asset is evaluated for impairment on a
quarterly basis. A valuation allowance is established for any
impairment identified through provisions charged to earnings in
the period the impairment is identified. No valuation allowance
was required at December 31, 2003 or 2002.

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

132



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##### Table of Contents



MINNTEX INVESTMENT PARTNERS LP


NOTES TO FINANCIAL
STATEMENTS   (Continued)



|    |             
|--- | ------------
|(b) | Income Taxes

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



|    |                 
|--- | ----------------
|(c) | Use of Estimates

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



|   |                 
|-- | ----------------
|3. | Portfolio Assets

The Portfolio Assets (note 2) at
December 31, 2003 is summarized as follows:

|       |                                                                          |                     |                       |         |        |     |        |         |        |       | 
|------ | ------------------------------------------------------------------------ | ------------------- | --------------------- | ------- | ------ | --- | ------ | ------- | ------ | ----- | 
|       |                                                                          | 2003                |                       | 2002   
|       |                                                                          |                     |                       |        
|Loans: |                                                                          |                     |                       |         |        |     |        |        
|       | Borrowers obligations on outstanding
    balance of:                    |                     |                       |         |        |     |        |         |       
|       |                                                                          | Performing loans    |                       | $       | 11,052 |     |        | $       | 21,457 |      
|       |                                                                          | Nonperforming loans |                       |         | 35,518 |     |        |         | 37,940 |      
|       |                                                                          |                     |                       |         |        |     |        |        
|       |                                                                          |                     | 46,570                |         |        |     | 59,397 |        
|       | Discount required to reflect the Portfolio Asset
    at unamortized cost |                     |                       | (46,093 | )      |     |        | (57,267 | )     
|       |                                                                          |                     |                       |         |        |     |        |        
|       |                                                                          |                     | Portfolio Assets, net |         | $      | 477 |        |         | $      | 2,130 | 
|       |                                                                          |                     |                       |         |        |     |        |        



|   |                             
|-- | ----------------------------
|4. | Transactions With Affiliates

During March 2002, the Partnership borrowed
$8,939 from CFSC Capital Corp. XXX (an affiliate of a limited
partner) on a senior collateralized promissory note payable. In
August 2002, the Partnership paid off the senior collateralized
promissory note payable to CFSC Capital Corp. XXX. Interest
expense totaled $201 on such note during 2002.

Under the terms of a servicing agreement,
FirstCity receives a servicing fee based on proceeds from
resolution of Portfolio Asset, for processing transactions on
the Portfolio Asset and for conducting settlement and sale
negotiations. Included in general, administrative, and operating
expenses in the accompanying statement of operations is $1,429
and $1,666 in servicing fees incurred in 2003 and 2002,
respectively.

133



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##### Table of Contents








| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Item 9.     Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure

Not applicable.




Item 9A.     Controls
and Procedures

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.




PART III




Item 10. Directors and Executive
Officers of the Registrant

The information required by this item with
respect to the Companys directors and executive officers
is incorporated by reference from the Companys definitive
proxy statement pertaining to the 2004 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A (the
Proxy Statement).




Item 11. Executive
Compensation

This information is incorporated by reference to
the Companys Proxy Statement.




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

This information is incorporated by reference to
the Companys Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

This information is incorporated by reference to
the Companys Proxy Statement.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

This information is incorporated by reference to
the Companys Proxy Statement.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)1. Financial Statements

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

2. Financial Statement Schedules

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.

134



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3. Exhibits

|        |    |    |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | -- |  | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 |  |                       |  | Bylaws of the Company (incorporated herein by
    reference to Exhibit 3.2 of the Companys Current
    Report on Form 8-K dated July 3, 1995 filed with the
    Commission on July 18, 1995).                                                                                                                                                                                                                                                                                                 
|        | 4  | .1 |  |                       |  | Certificate of Designations of the New Preferred
    Stock ($0.01 par value) of the Company. (incorporated
    herein by reference to Exhibit 4.1 to the Companys
    Current Report on Form 10-K dated March 24, 1998 filed
    with the Commission on March 26, 1998).                                                                                                                                                                                                                      
|        | 9  | .1 |  |                       |  | Shareholder Voting Agreement, dated as of
    June 29, 1995, among ATARA I Ltd., James R. Hawkins,
    James T. Sartain and Cargill Financial Services Corporation.
    (incorporated herein by reference to Exhibit 9.1 of the
    Companys Form 10-K dated March 24, 1998 filed
    with the Commission on March 26, 1998).                                                                                                                                                                 
|        | 10 | .1 |  |                       |  | Note Agreement, dated as of June 6,
    1997, among Bosque Asset Corp., SVD Realty, L.P.,
    SOWAMCO XXII, LTD., Bosque Investment Realty Partners, L.P.
    and Bankers Trust Company of California, N.A. (incorporated
    herein by reference to Exhibit 10.14 of the Companys
    Form 10-K dated March 24, 1998 filed with the
    Commission March 26, 1998).                                                                                                                          
|        | 10 | .2 |  |                       |  | Loan Agreement, dated April 8, 1998 between
    Bank of Scotland and the Company (incorporated herein by
    reference to Exhibit 10.6 of the Companys
    Form 10-Q dated August 14, 1998, filed with the
    Commission on August 18, 1998).                                                                                                                                                                                                                                                
|        | 10 | .3 |  |                       |  | First Amendment to Loan Agreement, dated
    July 20, 1998, between Bank of Scotland and the Company
    (incorporated herein by reference to Exhibit 10.7 of the
    Companys Form 10-Q dated August 14, 1998, filed
    with the Commission on August 18, 1998).                                                                                                                                                                                                                            
|        | 10 | .4 |  |                       |  | Tenth Amendment to Loan Agreement, dated
    August 11, 1999 between Bank of Scotland and the Company
    (incorporated herein by reference to Exhibit 10.34 of the
    Companys Form 10-Q dated August 16, 1999, filed
    with the Commission on August 16, 1999).                                                                                                                                                                                                                          
|        | 10 | .5 |  |                       |  | Amended and Restated Loan Agreement, dated
    December 20, 1999, by and 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 22, 1999, filed with the
    Commission on December 28, 1999.                                                                                                                    
|        | 10 | .6 |  |                       |  | Securities Purchase Agreement, dated as of
    August 18, 2000, by and among the Company, Consumer Corp.,
    Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated herein
    by reference to Exhibit 10.40 of the Companys
    Form 8-K dated August 25, 2000, filed with the
    Commission on September 11, 2000).                                                                                                                                                                     
|        | 10 | .7 |  |                       |  | Contribution and Assumption Agreement by and
    between Consumer Corp. and Drive dated as of August 18,
    2000. (incorporated herein by reference to Exhibit 10.41 of
    the Companys Form 8-K dated August 25, 2000,
    filed with the Commission on September 11, 2000).                                                                                                                                                                                                               
|        | 10 | .8 |  |                       |  | 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).                                                                                                                                                                                                                   

135



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|        |    |     |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | -- | --- |  | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                       
|Number  |    |     |  | Description of Exhibit
|        |    |     |  |                       
|        | 10 | .9  |  |                       |  | Second Amendment to Amended and Restated Loan
    Agreement, dated December 20, 1999, by and among the
    Company, as borrower, and the Lenders, as lenders, and Bank of
    Scotland, as Agent. (incorporated herein by reference to
    Exhibit 10.43 of the Companys Form 8-K dated
    August 25, 2000, filed with the Commission on
    September 11, 2000).                                                                                                                                      
|        | 10 | .10 |  |                       |  | Receivables Financing Agreement, dated
    August 18, 2000, among Drive BOS LP, Drive Financial
    Services LP, each Lender, IPA Inc. and Wells Fargo Bank
    Minnesota, N.A. (incorporated herein by reference to
    Exhibit 10.44 of the Companys Form 10-K dated
    April 13, 2001, filed with the Commission on April 13,
    2001).                                                                                                                                                            
|        | 10 | .11 |  |                       |  | Amendment to Loan Agreement and extension of
    Promissory Note, dated January 12, 2001, by and between
    FirstCity Holdings Corporation and CSFC Capital Corp. XXX
    (incorporated herein by reference to Exhibit 10.45 of the
    Companys Form 10-K dated April 13, 2001, filed
    with the Commission on April 13, 2001).                                                                                                                                                                     
|        | 10 | .12 |  |                       |  | Second Amendment, dated as of February 16,
    2001, to the Receivables Financing Agreement, dated as of
    August 18, 2000, among Drive BOS LP, Drive Financial
    Services LP the Lenders party thereto, IPA Incorporated and
    Wells Fargo Bank Minnesota, NA (incorporated herein by reference
    to Exhibit 10.46 of the Companys Form 10-K dated
    April 13, 2001, filed with the Commission on April 13,
    2001).                                                                       
|        | 10 | .13 |  |                       |  | Subordinate Capital Loan Agreement, dated as of
    February 16, 2001, among Drive Financial Services LP, DRIVE
    BOS LP, the financial institutions from time to time party
    hereto and IFA Incorporated (incorporated herein by reference to
    Exhibit 10.47 of the Companys Form 10-K dated
    April 13, 2001, filed with the Commission on April 13,
    2001).                                                                                                                             
|        | 10 | .14 |  |                       |  | Amended and Restated Amendment #4 (Option
    and Option Warrant), dated as of December 31, 2001, between
    the Company and BoS(USA) Inc. (incorporated herein by reference
    to Exhibit 99.1 of the Companys Form 8-K dated
    January 18, 2002, filed with the Commission on
    January 18, 2002).                                                                                                                                                                                              
|        | 10 | .15 |  |                       |  | Letter Agreement, dated November 26, 2002,
    between FirstCity Consumer Lending Corporation and The Governor
    and Company of the Bank of Scotland, including Form of
    Promissory Note to be executed by FirstCity Consumer Lending
    Corporation, payable to The Governor and Company of the Bank of
    Scotland. (incorporated herein by reference to
    Exhibit 99(d)(5) of the Companys Form SC TO-I/ A
    dated November 27, 2002, filed with the Commission on
    November 27, 2002).
|        | 10 | .16 |  |                       |  | Amended and Restated Loan Agreement, dated
    December 12, 2002, by and 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 10.16 of the Companys
    Form 10-K dated April 15, 2003).                                                                                                                                                                                  
|        | 10 | .17 |  |                       |  | Term Loan and Revolving Credit Agreement, dated
    December 12, 2002, by and 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 10.17 of the Companys
    Form 10-K dated April 15, 2003).                                                                                                                                                                             
|        | 21 | .1* |  |                       |  | Subsidiaries of the Registrant (incorporated
    herein by reference to Exhibit 21.1 of the Companys
    Form 10-K/ A for dated October 21, 2002, filed with
    the Commission on October 21, 2002).                                                                                                                                                                                                                                                                                                   
|        | 23 | .1* |  |                       |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 23 | .2* |  |                       |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 23 | .3* |  |                       |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 23 | .4* |  |                       |  | 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.                                                                                                                                                                                                                                                                                                                                                              

136



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|        |    |     |  |                        |  |                                                                                                                                                                                                                                                                                       
|------- | -- | --- |  | ---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                       
|Number  |    |     |  | Description of Exhibit
|        |    |     |  |                       
|        | 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, 2003.
|        | 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, 2003.  



---



|  |                
|- | ---------------
|* | Filed herewith.

(b) Reports on Form 8-K

None filed.

137



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##### Table of Contents



SIGNATURES

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.



| |                                
| | -------------------------------
| | FIRSTCITY FINANCIAL CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ JAMES T. SARTAIN

| |                                          
| | -----------------------------------------
| |                                          
| | James T. Sartain                         
| | President and Chief Executive
    Officer

March 30, 2004

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.

|                                         |  |                                                                                         |  |                |  | 
|---------------------------------------- |  | --------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                         |  |                                                                                         |  |               
|Signature                                |  | Title                                                                                   |  | Date          
|                                         |  |                                                                                         |  |               
|                                        
|/s/ JAMES R. HAWKINSJames R. Hawkins     |  | Chairman of the Board and Director                                                      |  | March 30, 2004
|                                        
|/s/ JAMES T. SARTAINJames T. Sartain     |  | President, Chief Executive
    Officer and Director
    (Principal Executive Officer)   |  | March 30, 2004
|                                        
|/s/ J. BRYAN BAKERJ. Bryan Baker         |  | Senior Vice President and
    Chief Financial Officer
    (Principal financial officer) |  | March 30, 2004
|                                        
|/s/ C. IVAN WILSONC. Ivan Wilson         |  | Vice Chairman of the Board and Director                                                 |  | March 30, 2004
|                                        
|/s/ RICHARD E. BEANRichard E. Bean       |  | Director                                                                                |  | March 30, 2004
|                                        
|/s/ ROBERT E. GARRISONRobert E. Garrison |  | Director                                                                                |  | March 30, 2004
|                                        
|/s/ DANE FULMERDane Fulmer               |  | Director                                                                                |  | March 30, 2004
|                                        
|/s/ JEFFERY D. LEUJeffery D. Leu         |  | Director                                                                                |  | March 30, 2004

138



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EXHIBIT INDEX

|        |    |    |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | -- |  | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 |  |                       |  | Bylaws of the Company (incorporated herein by
    reference to Exhibit 3.2 of the Companys Current
    Report on Form 8-K dated July 3, 1995 filed with the
    Commission on July 18, 1995).                                                                                                                                                                                                                                                                                                 
|        | 4  | .1 |  |                       |  | Certificate of Designations of the New Preferred
    Stock ($0.01 par value) of the Company. (incorporated
    herein by reference to Exhibit 4.1 to the Companys
    Current Report on Form 10-K dated March 24, 1998 filed
    with the Commission on March 26, 1998).                                                                                                                                                                                                                      
|        | 9  | .1 |  |                       |  | Shareholder Voting Agreement, dated as of
    June 29, 1995, among ATARA I Ltd., James R. Hawkins, James
    T. Sartain and Cargill Financial Services Corporation.
    (incorporated herein by reference to Exhibit 9.1 of the
    Companys Form 10-K dated March 24, 1998 filed
    with the Commission on March 26, 1998).                                                                                                                                                                 
|        | 10 | .1 |  |                       |  | Note Agreement, dated as of June 6,
    1997, among Bosque Asset Corp., SVD Realty, L.P., SOWAMCO XXII,
    LTD., Bosque Investment Realty Partners, L.P. and Bankers Trust
    Company of California, N.A. (incorporated herein by reference to
    Exhibit 10.14 of the Companys Form 10-K dated
    March 24, 1998 filed with the Commission March 26,
    1998).                                                                                                                          
|        | 10 | .2 |  |                       |  | Loan Agreement, dated April 8, 1998 between
    Bank of Scotland and the Company (incorporated herein by
    reference to Exhibit 10.6 of the Companys
    Form 10-Q dated August 14, 1998, filed with the
    Commission on August 18, 1998).                                                                                                                                                                                                                                                
|        | 10 | .3 |  |                       |  | First Amendment to Loan Agreement, dated
    July 20, 1998, between Bank of Scotland and the Company
    (incorporated herein by reference to Exhibit 10.7 of the
    Companys Form 10-Q dated August 14, 1998, filed
    with the Commission on August 18, 1998).                                                                                                                                                                                                                            
|        | 10 | .4 |  |                       |  | Tenth Amendment to Loan Agreement, dated
    August 11, 1999 between Bank of Scotland and the Company
    (incorporated herein by reference to Exhibit 10.34 of the
    Companys Form 10-Q dated August 16, 1999, filed
    with the Commission on August 16, 1999).                                                                                                                                                                                                                          
|        | 10 | .5 |  |                       |  | Amended and Restated Loan Agreement, dated
    December 20, 1999, by and 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 22, 1999, filed with the
    Commission on December 28, 1999).                                                                                                                   
|        | 10 | .6 |  |                       |  | Securities Purchase Agreement, dated as of
    August 18, 2000, by and among the Company, Consumer Corp.,
    Funding LP, Funding GP, IFA-GP and IFA-LP. (incorporated
    herein by reference to Exhibit 10.40 of the Companys
    Form 8-K dated August 25, 2000, filed with the
    Commission on September 11, 2000).                                                                                                                                                                     
|        | 10 | .7 |  |                       |  | Contribution and Assumption Agreement by and
    between Consumer Corp. and Drive dated as of August 18,
    2000. (incorporated herein by reference to Exhibit 10.41 of
    the Companys Form 8-K dated August 25, 2000,
    filed with the Commission on September 11, 2000).                                                                                                                                                                                                               
|        | 10 | .8 |  |                       |  | 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 | .9 |  |                       |  | Second Amendment to Amended and Restated Loan
    Agreement, dated December 20, 1999, by and among the
    Company, as borrower, and the Lenders, as lenders, and Bank of
    Scotland, as Agent. (incorporated herein by reference to
    Exhibit 10.43 of the Companys Form 8-K dated
    August 25, 2000, filed with the Commission on
    September 11, 2000).                                                                                                                            

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##### Table of Contents



|        |    |     |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | --- |  | ---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                       
|Number  |    |     |  | Description of Exhibit
|        |    |     |  |                       
|        | 10 | .10 |  |                       |  | Receivables Financing Agreement, dated
    August 18, 2000, among Drive BOS LP, Drive Financial
    Services LP, each Lender, IPA Inc. and Wells Fargo Bank
    Minnesota, N.A. (incorporated herein by reference to
    Exhibit 10.44 of the Companys Form 10-K dated
    April 13, 2001, filed with the Commission on April 13,
    2001).                                                                                                                                                           
|        | 10 | .11 |  |                       |  | Amendment to Loan Agreement and extension of
    Promissory Note, dated January 12, 2001, by and between
    FirstCity Holdings Corporation and CSFC Capital Corp. XXX
    (incorporated herein by reference to Exhibit 10.45 of the
    Companys Form 10-K dated April 13, 2001, filed
    with the Commission on April 13, 2001).                                                                                                                                                                    
|        | 10 | .12 |  |                       |  | Second Amendment, dated as of February 16,
    2001, to the Receivables Financing Agreement, dated as of
    August 18, 2000, among Drive BOS LP, Drive Financial
    Services LP the Lenders party thereto, IPA Incorporated and
    Wells Fargo Bank Minnesota, NA (incorporated herein by reference
    to Exhibit 10.46 of the Companys Form 10-K dated
    April 13, 2001, filed with the Commission on April 13,
    2001).                                                                      
|        | 10 | .13 |  |                       |  | Subordinate Capital Loan Agreement, dated as of
    February 16, 2001, among Drive Financial Services LP, DRIVE
    BOS LP, the financial institutions from time to time party
    hereto and IFA Incorporated (incorporated herein by reference to
    Exhibit 10.47 of the Companys Form 10-K dated
    April 13, 2001, filed with the Commission on April 13,
    2001).                                                                                                                            
|        | 10 | .14 |  |                       |  | Amended and Restated Amendment #4 (Option
    and Option Warrant), dated as of December 31, 2001, between
    the Company and BoS(USA) Inc. (incorporated herein by reference
    to Exhibit 99.1 of the Companys Form 8-K dated
    January 18, 2002, filed with the Commission on
    January 18, 2002).                                                                                                                                                                                             
|        | 10 | .15 |  |                       |  | Letter Agreement, dated November 26, 2002,
    between FirstCity Consumer Lending Corporation and The Governor
    and Company of the Bank of Scotland, including Form of
    Promissory Note to be executed by FirstCity Consumer Lending
    Corporation, payable to The Governor and Company of the Bank of
    Scotland. (incorporated herein by reference to
    Exhibit 99(d)(5) of the Companys Form SC TO-I/A
    dated November 27, 2002, filed with the Commission on
    November 27, 2002).
|        | 10 | .16 |  |                       |  | Amended and Restated Loan Agreement, dated
    December 12, 2002, by and 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 10.16 of the Companys
    Form 10-K dated April 15, 2003).                                                                                                                                                                                 
|        | 10 | .17 |  |                       |  | Term Loan and Revolving Credit Agreement, dated
    December 12, 2002, by and 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 10.17 of the Companys
    Form 10-K dated April 15, 2003).                                                                                                                                                                            
|        | 21 | .1* |  |                       |  | Subsidiaries of the Registrant (incorporated
    herein by reference to Exhibit 21.1 of the Companys
    Form 10-K/A for dated October 21, 2002, filed with the
    Commission on October 21, 2002).                                                                                                                                                                                                                                                                                                   
|        | 23 | .1* |  |                       |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 23 | .2* |  |                       |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 23 | .3* |  |                       |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 23 | .4* |  |                       |  | 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, 2003.                                                                                                                                                                                                                  
|        | 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, 2003.                                                                                                                                                                                                                    

140