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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-K

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

Commission file number 033-19694

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

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

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

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

Securities registered pursuant to Section 12(g) of the Act:
None

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes o No ý

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

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

Large
accelerated filer o                Accelerated
filer ý                Non-accelerated filer o

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

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

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

DOCUMENTS
INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)



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FIRSTCITY FINANCIAL CORPORATION

TABLE OF CONTENTS



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

FORWARD LOOKING INFORMATION

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

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PART I

Item 1.Business.

General

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

Securities Exchange Act Reports and Additional Information

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

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:



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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 $7.8 billion in Face Value of Portfolio Assets.

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

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

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

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

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

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

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

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

Portfolio Asset Acquisition and Resolution Business

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

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

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



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

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

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

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

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

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

Portfolio Assets Acquired

Year ended December 31,2006

2005

2004(Dollars in thousands)Face Value

$
855,633

$
330,390

$
842,920Total purchase price

$
296,990

$
146,581

$
174,139Total invested (1)

$
298,515

$
134,085

$
139,850FirstCity invested (2)

$
144,048

$
71,405

$
59,762Total number of Portfolio Assets


392,208


28,839


323,111


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Portfolio Purchases by Region

Year ended December 31,2006

2005

2004(Dollars in thousands)Purchase priceDomestic

$
136,596

$
93,410

$
91,300Europe


102,158


37,172


9,837Latin America


58,236


15,999


73,002Total

$
296,990

$
146,581

$
174,139FirstCity investedDomestic

$
103,467

$
58,558

$
47,681Europe


32,893


10,638


2,213Latin America


7,688


2,209


9,868Total

$
144,048

$
71,405

$
59,762


Sources of Portfolio Assets

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

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



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

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

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



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

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



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

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

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

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

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

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



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

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

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

The
Right of First Refusal Agreement terminated on February 28, 2006.



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

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



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

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

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

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

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

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

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

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

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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:



Consumer LendingDiscontinued Operations

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

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

Government Regulation

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

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Competition

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).

Employees

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

Foreign Operations

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

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

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

Item 1A.Risk Factors.

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

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

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

We may not predict the availability of Portfolio Assets.

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

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

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

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

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

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

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

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

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

We may be materially adversely affected by fluctuation in interest rates.

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

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

Our liquidity or ability to raise capital may be limited.

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

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

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

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

We may not have access to the estimated net operating loss carryforwards.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We may be adversely affected by the result of certain legal proceedings.

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

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

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

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

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

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

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

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

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

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

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

We may be adversely affected by period to period variances.

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

We may be adversely affected by tax, monetary and fiscal policy changes.

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

We may be adversely affected by changes in future cash receipts.

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

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

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

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

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

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

Item 3.Legal Proceedings.



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

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

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

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



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

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

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

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PART II

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

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

2006
Market Price

2005
Market PriceQuarter EndedHigh

Low

High

LowMarch 31

$
12.25

$
10.25

$
13.35

$
9.92June 30


12.05


10.35


13.25


11.00September 30


11.20


8.53


12.75


10.74December 31


11.10


9.76


12.40


10.50


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

There
were no stock repurchases by the Company in the fourth quarter of 2006.

Item 6.Selected Financial Data.

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

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Selected Financial Data

|                                                             |         | Years ended December 31, |        
|------------------------------------------------------------ | ------- | ------------------------ | -------
|
|
|Consolidated Statement of Operations Data:                   |         |                          |        
|Revenues                                                     |         | $                        | 28,387 
|Expenses                                                     |         |                          | 32,636 
|Equity in earnings of investments                            |         |                          | 11,756 
|Gain on sale of interest in equity investments               |         |                          | 2,459  
|Earnings from continuing operations                          |         |                          | 9,877  
|Earnings (loss) from discontinued operations                 |         |                          | (75    
|Net earnings (loss)                                          |         |                          | 9,802  
|Redeemable preferred dividends                               |         |                          |       
|Net earnings (loss) to common stockholders                   |         |                          | 9,802  
|Earnings (loss) from continuing operations per common share |         |                          |        
|                                                             | Basic   |                          |        
|                                                             | Diluted |                          |        
|Net earnings (loss) per common share                        |         |                          |        
|                                                             | Basic   |                          |        
|                                                             | Diluted |                          |        
|Consolidated Balance Sheet Data:                             |         |                          |        
|Total assets                                                 |         |                          | 297,663
|Total notes payable                                          |         |                          | 187,811
|Preferred stock                                              |         |                          |       
|Total common equity                                          |         |                          | 103,893

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

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

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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

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

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

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

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

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

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

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

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

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

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

Results of Independent Investigation

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

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

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

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

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

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Results of Operations



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



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

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

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

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

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

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

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

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

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

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

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

Minority
interest expense was minimal from year to year.

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



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



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

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

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

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

In
April 2005, the Company exercised an early purchase option on the 1998-1 securitization. Loans receivable were recorded at $6.1 million in accordance
with EITF 02-9,Accounting for Changes that Result in a Transferor Regaining Control of Financial Assets Sold.The transaction did
not have an impact on the results of operations, but did result in the elimination of $.8 million of residual interest previously classified as discontinued mortgage assets.

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



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

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



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

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

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

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

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

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

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

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

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

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

Minority
interest expense was minimal from year to year.

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

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





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

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

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

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

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In April 2005, the Company exercised an early purchase option on the 1998-1 securitization. Loans receivable were recorded at $6.1 million in accordance
with EITF 02-9,Accounting for Changes that Result in a Transferor Regaining Control of Financial Assets Sold.The transaction did
not have an impact on the results of operations, but did result in the elimination of $.8 million of residual interest previously classified as discontinued mortgage assets.

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

Portfolio Asset Acquisition and Resolution

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

Purchase
Price

FirstCity
Investment(In thousands)1st Quarter

$
42,351

$
23,3412nd Quarter


25,201


18,9363rd Quarter


91,521


31,5044th Quarter


137,917


70,267Total 2006


296,990


144,048Total 2005


146,581


71,405Total 2004


174,139


59,762Total 2003


129,192


22,944Total 2002


171,769


16,717


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

Liquidity and Capital Resources

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

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

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



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

At
December 31, 2006, the Company had $48.3 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe. In
general, the type of risk hedged relates to the foreign currency exposure of net investments in Europe caused by movements in Euro exchange rates. The Company entered into the hedging relationship
such that changes in the net investments being hedged are expected to be offset by corresponding changes in the values of the Euro-denominated debt. Effectiveness of the hedging
relationship is measured and designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the

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

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

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

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

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

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

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

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

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

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. Actual results could differ significantly
from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are
most important to the portrayal of the Company's consolidated financial position and results and require management's most difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.



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

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



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

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

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



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

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

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



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

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



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

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

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

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



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

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



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

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

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

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



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

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

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



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

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



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





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

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



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

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



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

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

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

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Contractual Obligations and Commercial Commitments

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

|                                                                                                   |  | Payments Due by Period
|-------------------------------------------------------------------------------------------------- |  | ----------------------
|
|Notes payable secured by Portfolio Assets, loans receivable and equity in Acquisition Partnerships |  | $                     
|Unsecured notes                                                                                    |  |                       
|Operating leases                                                                                   |  |                       
|Unfunded Portfolio purchase obligation                                                             |  |                       
|                                                                                                   |  |                       
|                                                                                                   |  | $                     
|                                                                                                   |  |                       

|                       |  | Amount of Commitment Expiration Period
|---------------------- |  | --------------------------------------
|
|Commercial Commitments |  | $                                     

Effect of New Accounting Standards

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

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

In
September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N, Financial StatementsConsidering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be evaluated
when determining the materiality of misstatements in the current year financial statements. SAB 108 requires materiality to be determined by considering the effect of prior year misstatements on both
the current year balance sheet and income statement, with consideration of their carryover and reversing effects. SAB 108 also addresses how to correct material misstatements. The provisions of SAB
108 are effective for the year ending December 31, 2006. The cumulative effect of the initial application of SAB 108 must be reported in the carrying amounts of

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

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

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

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

In
November 2005, the FASB issued FASB Staff Position SFAS 115-1,The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments("FSP 115-1"). FSP 115-1 addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement of an impaired loss. FSP 115-1 also includes accounting

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

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

Interest Rate 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's
ability to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following
describes each component of interest bearing assets held by the Company and how each could be affected by changes in interest rates.

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

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

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

Foreign Currency Risk

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

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

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

One
U.S. dollar
equals

Estimated decline in
valuation of investments
resulting from
incremental depreciation
of foreign currency of
(dollars in thousands)5%

10%Europe

EUR

0.76

$
2,915

$
5,573Mexico

MXN

10.88

$
1,454

$
2,803Argentina

ARS

3.07

$
112

$
217Dominican Republic

DOP

34.44

$
37

$
70Chile

CLP

532.55

$
2

$
3Canada

CAD

1.17

$
111

$
216


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Item 8.Financial Statements and Supplementary Data.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

|                                                                        |                                                                                                                                                                                             | December 31,
2006                          |         | December 31,
2005 |        
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------------- | -------
|ASSETS                                                                  |                                                                                                                                                                                             |                                            |         |                   |        
|Cash and cash equivalents                                               |                                                                                                                                                                                             | $                                          | 18,472  |                   | $      
|Portfolio Assets, net                                                   |                                                                                                                                                                                             |                                            | 108,696 |                   |        
|Loans receivable from Acquisition Partnerships held for investment      |                                                                                                                                                                                             |                                            | 4,755   |                   |        
|Loans receivableother                                                  |                                                                                                                                                                                             |                                            | 23,991  |                   |        
|Equity investments                                                      |                                                                                                                                                                                             |                                            | 112,357 |                   |        
|Deferred tax asset, net                                                 |                                                                                                                                                                                             |                                            | 20,101  |                   |        
|Service fees receivable ($917 and $1,095 from affiliates, respectively) |                                                                                                                                                                                             |                                            | 928     |                   |        
|Other assets, net                                                       |                                                                                                                                                                                             |                                            | 8,260   |                   |        
|Discontinued mortgage assets                                            |                                                                                                                                                                                             |                                            | 103     |                   |        
|                                                                        |                                                                                                                                                                                             |                                            |         |                   |        
|                                                                        |                                                                                                                                                                                             | Total Assets                               |         | $                 | 297,663
|                                                                        |                                                                                                                                                                                             |                                            |         |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                    |                                                                                                                                                                                             |                                            |         |                   |        
|Liabilities:                                                            |                                                                                                                                                                                             |                                            |         |                   |        
|                                                                        | Notes payable other                                                                                                                                                                         |                                            | $       | 187,811           |        
|                                                                        | Notes payable to affiliates                                                                                                                                                                 |                                            |         |                  |        
|                                                                        | Minority interest                                                                                                                                                                           |                                            |         | 1,570             |        
|                                                                        | Liabilities from discontinued consumer operations                                                                                                                                           |                                            |         | 114               |        
|                                                                        | Other liabilities                                                                                                                                                                           |                                            |         | 4,275             |        
|                                                                        |                                                                                                                                                                                             |                                            |         |                   |        
|                                                                        |                                                                                                                                                                                             | Total Liabilities                          |         |                   | 193,770
|Commitments and contingencies (note 15)                                 |                                                                                                                                                                                             |                                            |         |                   |        
|Stockholders' equity:                                                   |                                                                                                                                                                                             |                                            |         |                   |        
|                                                                        | Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)                                                                          |                                            |         |                  |        
|                                                                        | Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 11,316,937 and 11,307,187, respectively; shares outstanding: 10,786,637 and 11,307,187, respectively) |                                            |         | 113               |        
|                                                                        | Treasury stock, at cost: 530,300 shares and zero shares, respectively                                                                                                                       |                                            |         | (5,571            | )      
|                                                                        | Paid in capital                                                                                                                                                                             |                                            |         | 100,562           |        
|                                                                        | Retained earnings (accumulated deficit)                                                                                                                                                     |                                            |         | 7,417             |        
|                                                                        | Accumulated other comprehensive income                                                                                                                                                      |                                            |         | 1,372             |        
|                                                                        |                                                                                                                                                                                             |                                            |         |                   |        
|                                                                        |                                                                                                                                                                                             | Total Stockholders' Equity                 |         |                   | 103,893
|                                                                        |                                                                                                                                                                                             |                                            |         |                   |        
|                                                                        |                                                                                                                                                                                             | Total Liabilities and Stockholders' Equity |         | $                 | 297,663
|                                                                        |                                                                                                                                                                                             |                                            |         |                   |        

See
accompanying notes to consolidated financial statements.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

|                                                                              |                                                                             | Year ended December 31, |       
|----------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------- | ------
|
|Revenues:                                                                     |                                                                             |                         |       
|                                                                              | Servicing fees ($12,635, $11,463 and $13,480 from affiliates, respectively) |                         | $     
|                                                                              | Income from Portfolio Assets                                                |                         |       
|                                                                              | Interest income from affiliates                                             |                         |       
|                                                                              | Interest income from loans receivableother                                 |                         |       
|                                                                              | Other income                                                                |                         |       
|                                                                              |                                                                             |                         |       
|                                                                              |                                                                             | Total revenues          |       
|                                                                              |                                                                             |                         |       
|Expenses:                                                                     |                                                                             |                         |       
|                                                                              | Interest and fees on notes payableother                                    |                         |       
|                                                                              | Interest and fees on notes payable to affiliates                            |                         |       
|                                                                              | Interest on shares subject to mandatory redemption                          |                         |       
|                                                                              | Salaries and benefits                                                       |                         |       
|                                                                              | Provision for loan and impairment losses                                    |                         |       
|                                                                              | Occupancy, data processing, communication and other                         |                         |       
|                                                                              |                                                                             |                         |       
|                                                                              |                                                                             | Total expenses          |       
|                                                                              |                                                                             |                         |       
|Equity in earnings of investments                                             |                                                                             |                         | 11,756
|Gain on sale of interest in equity investments                                |                                                                             |                         | 2,459 
|                                                                              |                                                                             |                         |       
|Earnings from continuing operations before income taxes and minority interest |                                                                             |                         | 9,966 
|                                                                              | Income tax expense                                                          |                         |       
|                                                                              | Minority interest                                                           |                         |       
|                                                                              |                                                                             |                         |       
|Earnings from continuing operations                                           |                                                                             |                         | 9,877 
|Discontinued operations:                                                      |                                                                             |                         |       
|                                                                              | Earnings (loss) from discontinued operations                                |                         |       
|                                                                              | Income tax benefit (expense)                                                |                         |       
|                                                                              |                                                                             |                         |       
|                                                                              | Net earnings (loss) from discontinued operations                            |                         |       
|                                                                              |                                                                             |                         |       
|Net earnings                                                                  |                                                                             | $                       | 9,802 
|                                                                              |                                                                             |                         |       
|Basic earnings per common share are as follows:                               |                                                                             |                         |       
|                                                                              | Earnings from continuing operations                                         |                         | $     
|                                                                              | Discontinued operations                                                     |                         | $     
|                                                                              | Net earnings to common stockholders                                         |                         | $     
|                                                                              | Weighted average common shares outstanding                                  |                         |       
|Diluted earnings per common share are as follows:                             |                                                                             |                         |       
|                                                                              | Earnings from continuing operations                                         |                         | $     
|                                                                              | Discontinued operations                                                     |                         | $     
|                                                                              | Net earnings to common stockholders                                         |                         | $     
|                                                                              | Weighted average common shares outstanding                                  |                         |       

See
accompanying notes to consolidated financial statements.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

(Dollars in thousands)

|                                                                                        |                         | Common Stock |   | Treasury Stock |     |   |         | Retained
Earnings
(Accumulated
Deficit) |   | Accumulated
Other
Comprehensive
Income |   |   |        
|--------------------------------------------------------------------------------------- | ----------------------- | ------------ | - | -------------- | --- | - | ------- | --------------------------------------- | - | -------------------------------------- | - | - | -------
|
|
|Balances, December 31, 2003                                                             |                         | 11,193,687   |   | $              | 112 |   |        |                                         | $ |                                       |   | $ | 99,168 
|Exercise of common stock options                                                        |                         | 67,000       |   |                | 1   |   |        |                                         |   |                                       |   |   | 196    
|Comprehensive income:                                                                   |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|                                                                                        | Net earnings for 2004   |              |  |                |     |  |         |                                        |   |                                        |  |   |        
|                                                                                        | Translation adjustments |              |  |                |     |  |         |                                        |   |                                        |  |   |        
|                                                                                        |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|Total comprehensive income                                                              |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|                                                                                        |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|Balances, December 31, 2004                                                             |                         | 11,260,687   |   |                | 113 |   |        |                                         |   |                                       |   |   | 99,364 
|Exercise of common stock options                                                        |                         | 46,500       |   |                |    |   |        |                                         |   |                                       |   |   | 196    
|Additional paid-in capital arising from sale of shares by investee                      |                         |             |   |                |    |   |        |                                         |   |                                       |   |   | 283    
|Comprehensive income:                                                                   |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|                                                                                        | Net earnings for 2005   |              |  |                |     |  |         |                                        |   |                                        |  |   |        
|                                                                                        | Translation adjustments |              |  |                |     |  |         |                                        |   |                                        |  |   |        
|                                                                                        |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|Total comprehensive income                                                              |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|                                                                                        |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|Balances, December 31, 2005                                                             |                         | 11,307,187   |   |                | 113 |   |        |                                         |   |                                       |   |   | 99,843 
|Cumulative effect of adjustments resulting from the adoption of SAB No. 108 (Note 1(q)) |                         |             |   |                |    |   |        |                                         |   |                                       |   |   |       
|Exercise of common stock options                                                        |                         | 9,750        |   |                |    |   |        |                                         |   |                                       |   |   | 68     
|Repurchase of common stock                                                              |                         |             |   |                |    |   | 530,300 |                                         |   | (5,571                                 | ) |   |       
|Additional paid-in capital arising from stock option compensation expense               |                         |             |   |                |    |   |        |                                         |   |                                       |   |   | 651    
|Comprehensive income:                                                                   |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|                                                                                        | Net earnings for 2006   |              |  |                |     |  |         |                                        |   |                                        |  |   |        
|                                                                                        | Translation adjustments |              |  |                |     |  |         |                                        |   |                                        |  |   |        
|                                                                                        |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|Total comprehensive income                                                              |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|                                                                                        |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        
|Balances, December 31, 2006                                                             |                         | 11,316,937   |   | $              | 113 |   | 530,300 |                                         | $ | (5,571                                 | ) | $ | 100,562
|                                                                                        |                         |              |   |                |     |   |         |                                         |   |                                        |   |   |        

See accompanying notes to consolidated financial statements.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

|                                                                 |                                                                                 | Year ended December 31,                                                 |                                                       
|---------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------
|
|Cash flows from operating activities:                            |                                                                                 |                                                                         |                                                       
|                                                                 | Net earnings                                                                    |                                                                         | $                                                     
|                                                                 | Adjustments to reconcile net earnings to net cash used in operating activities: |                                                                         |                                                       
|                                                                 |                                                                                 | Net (earnings) loss from discontinued operations                        |                                                       
|                                                                 |                                                                                 | Purchase of Portfolio Assets, net                                       |                                                       
|                                                                 |                                                                                 | Proceeds applied to principal on Portfolio Assets                       |                                                       
|                                                                 |                                                                                 | Income from Portfolio Assets                                            |                                                       
|                                                                 |                                                                                 | Capitalized interest and costs on Portfolio Assets and loans receivable |                                                       
|                                                                 |                                                                                 | Provision for loan and impairment losses                                |                                                       
|                                                                 |                                                                                 | Equity in earnings of investments                                       |                                                       
|                                                                 |                                                                                 | Gain on sale of interest in equity investments                          |                                                       
|                                                                 |                                                                                 | Depreciation and amortization                                           |                                                       
|                                                                 |                                                                                 | Stock-based compensation expense related to stock options               |                                                       
|                                                                 |                                                                                 | Decrease (increase) in service fees receivable                          |                                                       
|                                                                 |                                                                                 | Increase in other assets                                                |                                                       
|                                                                 |                                                                                 | Payments of dividends on preferred stock                                |                                                       
|                                                                 |                                                                                 | Change in debt imputed value                                            |                                                       
|                                                                 |                                                                                 | Increase (decrease) in other liabilities                                |                                                       
|                                                                 |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 |                                                                         | Net cash used in operating activities                 
|                                                                 |                                                                                 |                                                                         |                                                       
|Cash flows from investing activities:                            |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 | Property and equipment, net                                             |                                                       
|                                                                 |                                                                                 | Proceeds from sale of interest in equity investments                    |                                                       
|                                                                 |                                                                                 | Loan receivable advances                                                |                                                       
|                                                                 |                                                                                 | Loan receivable payments                                                |                                                       
|                                                                 |                                                                                 | Contributions to Acquisition Partnerships and Servicing Entities        |                                                       
|                                                                 |                                                                                 | Distributions from Acquisition Partnerships and Servicing Entities      |                                                       
|                                                                 |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 |                                                                         | Net cash provided by (used in) investing activities   
|                                                                 |                                                                                 |                                                                         |                                                       
|Cash flows from financing activities:                            |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 | Borrowings under notes payableother                                    |                                                       
|                                                                 |                                                                                 | Payments of notes payable to affiliates                                 |                                                       
|                                                                 |                                                                                 | Payments of notes payableother                                         |                                                       
|                                                                 |                                                                                 | Repurchase of common stock                                              |                                                       
|                                                                 |                                                                                 | Payments for tender of redeemable preferred stock                       |                                                       
|                                                                 |                                                                                 | Proceeds from issuance of common stock                                  |                                                       
|                                                                 |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 |                                                                         | Net cash provided by (used in) financing activities   
|                                                                 |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 |                                                                         | Net cash provided by (used in) continuing operations  
|Cash flows from discontinued operations (Revisedsee note 1(r)): |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 |                                                                         | Net cash provided by (used in) operating activities   
|                                                                 |                                                                                 |                                                                         | Net cash provided by investing activities             
|                                                                 |                                                                                 |                                                                         |                                                       
|                                                                 |                                                                                 |                                                                         | Net cash provided by (used in) discontinued operations
|                                                                 |                                                                                 |                                                                         |                                                       
|Net increase in cash and cash equivalents                        |                                                                                 |                                                                         | 5,571                                                 
|Cash and cash equivalents, beginning of period                   |                                                                                 |                                                                         | 12,901                                                
|                                                                 |                                                                                 |                                                                         |                                                       
|Cash and cash equivalents, end of period                         |                                                                                 | $                                                                       | 18,472                                                
|                                                                 |                                                                                 |                                                                         |                                                       
|Supplemental disclosure of cash flow information:                |                                                                                 |                                                                         |                                                       
|                                                                 | Cash paid during the period for:                                                |                                                                         |                                                       
|                                                                 |                                                                                 | Interest                                                                |                                                       
|                                                                 |                                                                                 | Income taxes, net of refunds received                                   |                                                       

See accompanying notes to consolidated financial statements.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        December 31, 2006, 2005 and 2004        (Dollars in thousands, except per
share data)

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

(b)   Description of Business

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

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

(c)   Principles of Consolidation

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

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

Affiliate

Percentage
OwnershipCRY Limited

20.00%CTY Limited

20.00%UHR Limited

20.00%WOX Limited

20.00%FG Portfolio Limited

22.50%SAI Societe Auxiliaire Immobiliere

22.50%WOD Limited

22.50%WOL Limited

22.50%BIDMEX 6, LLC

22.56%NEVVS Limited

25.00%HMCS-GEN Limited

30.00%HMCS-SIG Limited

30.00%HMCS-ECK Limited

32.00%EHCTY Limited

33.00%MinnTex Investment Partners LP

33.00%Santiago Asset Acquisition Company One, SA

33.00%Brazos River Partnership One, LP

33.33%P.R.L. Development, SAS

43.50%First B Realty, LP

49.00%WAMCO XX, Ltd

49.00%WAMCO XXIV, Ltd

49.00%WAMCO 30, Ltd

49.32%FirstVal 1, Ltd

49.50%WAMCO 31, Ltd

49.50%WAMCO 32, Ltd

49.50%WAMCO 33, Ltd

49.50%WAMCO 34, Ltd

49.50%WAMCO 35, Ltd.

49.50%FCS Creamer, Ltd

49.75%FCS Wildhorse, Ltd

49.75%FCS Wood, Ltd

49.75%Calibat Fund, LLC

50.00%FCS Creamer GP Corp

50.00%FCS Wildhorse GP Corp

50.00%FCS Wood GP Corp

50.00%FirstCity Recovery, SA

50.00%FirstCity South America, LLC

50.00%FirstVal 1 GP Corp

50.00%


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Inversiones Crediticias SA

50.00%MinnTex GP Corp

50.00%WAMCO XX of Texas, Inc

50.00%WAMCO XXIV of Texas, Inc

50.00%WAMCO XXVII of Texas, Inc

50.00%WAMCO 30 of Texas, Inc

50.00%WAMCO 31 of Texas, Inc

50.00%WAMCO 32 of Texas, Inc

50.00%WAMCO 33 of Texas, Inc

50.00%WAMCO 34 of Texas, Inc

50.00%WAMCO 35 of Texas, Inc

50.00%


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

Affiliate

Percentage
OwnershipTB 1 Private Financial Trust

2.09%WAMCO XXVII, Ltd

4.07%Renova Financial Trust

10.00%TR I Private Financial Trust

10.00%WHBE Limited

10.00%El Consorcio Recovery FirstCity BNV, SA

11.09%MCS et Associes, SA

11.89%Bidmex Holding, LLC

15.00%HMCS Investment GmbH

16.30%ResMex, LLC

19.45%


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

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

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(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.

(e)   Portfolio Assets

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

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

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



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



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

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



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

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



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

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

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FirstCity
establishes valuation allowances for all acquired loans subject to SOP 03-3 to reflect only those losses incurred after acquisitionthat is, the
present value of cash flows expected at acquisition that are not expected to be collected.



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

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



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

(f)    Loans Receivable

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

(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.

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(h)   Intangibles

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

(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, in all material respects, the Portfolio Assets owned for its own account, the Portfolio Assets
owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, the
Company generally earns a servicing fee, which is a percentage of gross cash collections generated rather than a management fee based on the Face Value of the asset being serviced. The rate of
servicing fee charged is generally a function of the average Face Value of the assets within each pool being serviced (the larger the average Face Value of the assets in a Portfolio, the lower
the fee percentage within the prescribed range), the type of assets and the level of servicing required on each assets. For the Mexican Acquisition Partnerships, the Company earns a servicing fee
based on costs of servicing plus a profit margin. The Acquisition Partnerships in Europe and South America are serviced by various entities in which the Company maintains an equity interest. In all
cases, service fees are recognized as they are earned in accordance with the servicing agreements.

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

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

(k)   Accumulated Other Comprehensive Income

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

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

(l)    Translation Adjustments

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

|Balance, December 31, 2003 |                                                                                                                             | $ | 3,612 |       
|-------------------------- | --------------------------------------------------------------------------------------------------------------------------- | - | ----- | ------
|                           | Aggregate adjustment for the year resulting from translation adjustments and gains and losses on certain hedge transactions |   |       | (377  
|                           |                                                                                                                             |   |      
|Balance, December 31, 2004 |                                                                                                                             |   | 3,235 |       
|                           | Aggregate adjustment for the year resulting from translation adjustments and gains and losses on certain hedge transactions |   |       | (2,222
|                           |                                                                                                                             |   |      
|Balance, December 31, 2005 |                                                                                                                             |   | 1,013 |       
|                           | Aggregate adjustment for the year resulting from translation adjustments and gains and losses on certain hedge transactions |   |       | 359   
|                           |                                                                                                                             |   |      
|Balance, December 31, 2006 |                                                                                                                             | $ | 1,372 |       
|                           |                                                                                                                             |   |      

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

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

(m)  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 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.

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(n)   Net Earnings Per Common Share

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

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

|                                                                                 |                        | Year ended December 31,
|-------------------------------------------------------------------------------- | ---------------------- | -----------------------
|
|Earnings from continuing operations                                              |                        | $                      
|                                                                                 |                        |                        
|Weighted average outstanding shares of common stock (in thousands)               |                        |                        
|Dilutive effect of:                                                              |                        |                        
|                                                                                 | Warrants               |                        
|                                                                                 | Employee stock options |                        
|                                                                                 |                        |                        
|Weighted average outstanding shares of common stock and common stock equivalents |                        |                        
|                                                                                 |                        |                        
|Earnings from continuing operations per share:                                   |                        |                        
|                                                                                 | Basic                  |                        
|                                                                                 |                        |                        
|                                                                                 | Diluted                |                        
|                                                                                 |                        |                        

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

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

(p)   Stock-Based Compensation

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

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(q)   Effects of New Accounting Standards

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

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

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

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

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

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

On
January 1, 2006, FirstCity adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based
Payment("SFAS 123(R)"), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either
equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The
statement eliminates the ability to account for share-based compensation transactions, as the Company formerly did, using the intrinsic
value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25,Accounting for Stock Issued to Employees("APB 25"), and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in the consolidated statement of operations.
FirstCity adopted SFAS 123(R) using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The consolidated financial statements
as of and for the year ended December 31, 2006, reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for
prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). See Note 10 for further details.

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

(r)   Reclassifications

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

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

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

Year ended December 31,2005

2004Statement of Cash Flows:Cash flows from operating activities (as reported)

$
(13,892
)
$
(49,137
)Impact of reclassification on loans receivable advances


1,790


9,474Impact of reclassification on loans receivable payments


(3,507
)

(6,076
)Cash flows from operating activities (as corrected)

$
(15,609
)
$
(45,739
)Cash flows from investing activities (as reported)

$
(16,443
)
$
14,140Impact of reclassification on advances of loans receivable


(1,790
)

(9,474
)Impact of reclassification on payments of loans receivable


3,507


6,076Cash flows from investing activities (as corrected)

$
(14,726
)
$
10,742


2.     Restructure, Liquidity and Capital Resources



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

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

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

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

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

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

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

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

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

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

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



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

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

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

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



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

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

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

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

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

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

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

3.     Discontinued Operations

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

Year ended December 31,2006

2005

2004Mortgage

$
(75
)
$
(356
)
$
(3,840
)Consumer





509


62,463Net earnings (loss) from discontinued operations

$
(75
)
$
153

$
58,623




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

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

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

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



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

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

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

Year ended December 31,2006

2005

2004Equity in earnings

$


$


$
17,662Gain on sale of Drive








67,158Interest and fees on notes payable to affiliate








(2,040
)Other expenses





(121
)

(10
)Income taxes





630


(1,759
)Minority interest








(18,548
)Earnings from discontinued consumer operations

$


$
509

$
62,463


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

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

|                                                     |         | Year Ended December 31, 2004
|---------------------------------------------------- | ------- | ----------------------------
|
|
|Earnings from continuing operations                  |         | $                           
|                                                     |         |                             
|Earnings from continuing operations per common share |         |                             
|                                                     | Basic   |                             
|                                                     | Diluted |                             
|Weighted average common shares outstanding           |         |                             
|                                                     | Basic   |                             
|                                                     | Diluted |                             

---

4.     Portfolio Assets

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

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Portfolio
Assets are summarized as follows:

December 31,
2006

December 31,
2005Loan PortfoliosLoans Acquired Prior to 2005Non-performing Portfolio Assets

$
6,163

$
10,528Performing Portfolio Assets


5,166


12,029Loans Acquired After 2004Loans acquired with credit deterioration


84,550


12,703Loans acquired with no credit deterioration


6,473


3,976Outstanding balance


102,352


39,236Allowance for loan losses


(333
)

(163
)Carrying amount of loans, net of allowance


102,019


39,073Real Estate Portfolios


4,574


8,018Other


2,103


2,255Portfolio Assets, net

$
108,696

$
49,346


Income
from Portfolio Assets is summarized as follows:

Year ended December 31,2006

2005

2004Loan PortfoliosLoans Acquired Prior to 2005Non-performing Portfolio Assets

$
2,962

$
4,407

$
1,525Performing Portfolio Assets


1,483


2,122


947Loans Acquired After 2004Loans acquired with credit deterioration


4,578


1,091


Loans acquired with no credit deterioration


396


354


Real Estate Portfolios


1,325


197


Other


243


91


Income from Portfolio Assets

$
10,987

$
8,262

$
2,472


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

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The
changes in the allowance for loan losses are as follows:

Year ended December 31,2006

2005

2004Beginning Balance

$
(163
)
$


$
Provisions


(363
)

(462
)

Recoveries


120


299


Charge Offs


73





Ending Balance

$
(333
)
$
(163
)
$



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

Year ended December 31,2006

2005Beginning Balance

$
3,765

$
Additions


33,210


6,101Accretion


(4,025
)

(711
)Reclassification from (to) nonaccretable difference


(109
)

(1,039
)Disposals


(553
)

(586
)Translation adjustments


51


Ending Balance

$
32,339

$
3,765


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

Year ended December 31,2006

2005Face value at acquisition

$
300,481

$
25,656Cash flows expected to be collected at acquisition


119,122


26,088Basis in acquired loans at acquisition


85,912


19,987


5.     Loans Receivable

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

December 31,2006

2005Latin America

$
1,182

$
16,098Europe


3,573


1,674Domestic





1,834$
4,755

$
19,606


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

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

Loans
receivableOther are summarized as follows:

December 31,2006

2005Canada

$
2,254

$
Domestic


21,737


$
23,991

$



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

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.

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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 31,2006

2005Assets

$
457,173

$
444,825Liabilities

$
100,973

$
340,881Net equity


356,200


103,944$
457,173

$
444,825Equity investments in Acquisition Partnerships

$
105,852

$
77,893Equity investments in servicing entities


6,505


5,892$
112,357

$
83,785


Year ended December 31,2006

2005

2004Income from Portfolio Assets

$
86,732

$
82,320

$
107,258Other income


2,171


899


3,257Revenues


88,903


83,219


110,515Interest expense


13,624


15,063


18,495Average cost (annualized)


6.49%


4.86%


5.38%Service fees


18,225


19,390


17,260Provision for loan and impairment losses


857


8,888


12,027Other operating costs


21,596


24,168


18,737Foreign currency (gains) losses


10,502


(16,861
)

(957
)Income taxes


1,194


1,105


1,970Expenses


65,998


51,753


67,532Net earnings

$
22,905

$
31,466

$
42,983Equity in earnings of Acquisition Partnerships

$
10,927

$
11,370

$
13,970Equity in earnings of servicing entities


829


643


943$
11,756

$
12,013

$
14,913


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

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

December 31,2006

2005Assets:Domestic:WAMCO Partnerships

$
116,634

$
166,213MinnTex Investment Partners LP


71


307Other


4,206


10,410Latin America


167,407


185,702Europe


168,855


82,193$
457,173

$
444,825Equity (deficit):Domestic:WAMCO Partnerships

$
69,579

$
111,329MinnTex Investment Partners LP


62


283Other


2,614


5,485Latin America


126,402


(79,527
)Europe


157,543


66,374$
356,200

$
103,944Equity investment in Acquisition Partnerships:Domestic:WAMCO Partnerships

$
34,203

$
51,772MinnTex Investment Partners LP


20


93Other


1,671


2,825Latin America


18,640


2,771Europe


51,318


20,432$
105,852

$
77,893


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

Year ended December 31,2006

2005

2004Revenues:Domestic:WAMCO Partnerships

$
26,136

$
30,770

$
32,494MinnTex Investment Partners LP


1,492


4,766


8,796Other


351


948


75Latin America


37,652


23,359


22,658Europe


23,272


23,376


46,492$
88,903

$
83,219

$
110,515Net earnings (loss):Domestic:WAMCO Partnerships

$
13,332

$
14,850

$
17,419MinnTex Investment Partners LP


1,345


4,286


7,850Other


(852
)

215


(730
)Latin America


(6,868
)

(3,687
)

(5,333
)Europe


15,948


15,802


23,777$
22,905

$
31,466

$
42,983Equity in earnings (loss) of AcquisitionPartnerships:Domestic:WAMCO Partnerships

$
6,431

$
6,403

$
7,519MinnTex Investment Partners LP


444


1,414


2,591Other


(373
)

224


(205
)Latin America


(189
)

(227
)

(992
)Europe


4,614


3,556


5,057$
10,927

$
11,370

$
13,970


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

At
December 31, 2006, the Company had $48.3 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe. In
general, the type of risk hedged relates to the foreign currency exposure of net investments in Europe caused by movements in Euro exchange rates. The Company designated the hedging relationship such
that changes in the net investments being hedged are expected to be offset by corresponding changes in the values of the Euro-denominated debt.

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

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

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

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

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

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7.     Notes Payable

Notes payable consisted of the following:

|                          |                                                                                                                                                                 | December 31,                                                                                     
|------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------
|
|Notes payableother:      |                                                                                                                                                                 |                                                                                                  
|                          | Senior Credit Facility, secured and with recourse to the Company:                                                                                               |                                                                                                  
|                          |                                                                                                                                                                 | US Dollar denominated -LIBOR (5.35% at December 31, 2006) plus 2.0% to 2.5%, due November 2010   
|                          |                                                                                                                                                                 | Eurocurrency denominated -LIBOR (3.67% at December 31, 2006) plus 2.0% to 2.5%, due November 2010
|                          |                                                                                                                                                                 | Prime (8.25% at December 31, 2006) plus .5%, due November 2010                                   
|                          | Acquisition facility secured by assets of FH Partners, L.P. and guaranteed by the Company, LIBOR (5.35% at December 31, 2006) plus 2.00%, due November 2008     |                                                                                                  
|                          | Term loan secured by assets of FC Washington, L.P. and guaranteed by the Company, fixed rate at 5.625%, due 2008                                                |                                                                                                  
|                          | Revolving line of credit secured by Bank of Scotland letter of credit, renewable every 30 days, rate based on monthly Chilean index rate plus .0625% per month  |                                                                                                  
|                          | Line of credit secured by Bank of Scotland letter of credit, rate based on 28 day Mexican index rate plus 1.5%, due November 2008                               |                                                                                                  
|                          | Revolving loan facility secured by assets of American Business Lending, Inc., LIBOR plus 2.625%, or the greater of Wells Fargo prime or 7.5%, due December 2009 |                                                                                                  
|                          | Other: Secured borrowing                                                                                                                                        |                                                                                                  
|                          |                                                                                                                                                                 |                                                                                                  
|                          |                                                                                                                                                                 |                                                                                                  
|                          |                                                                                                                                                                 |                                                                                                  
|Notes payableaffiliates: |                                                                                                                                                                 |                                                                                                  
|                          | Unsecured notes payable for purchase of minority interest in FirstCity Holdings, due 2011                                                                       |                                                                                                  
|                          |                                                                                                                                                                 |                                                                                                  
|                          |                                                                                                                                                                 |                                                                                                  
|                          |                                                                                                                                                                 |                                                                                                  
|Total notes payable       |                                                                                                                                                                 | $                                                                                                
|                          |                                                                                                                                                                 |                                                                                                  

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

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

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8.     Segment Reporting

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

Year ended December 31,2006

2005

2004Portfolio Asset Acquisition and Resolution:Revenues:Servicing fees

$
12,906

$
11,754

$
13,747Income from Portfolio Assets


10,987


8,262


2,471Interest income from affiliates


1,498


1,838


2,263Interest income from loans receivableother


576





Other income


1,555


1,737


2,056Total


27,522


23,591


20,537Expenses:Interest and fees on notes payable


8,311


4,002


3,798Salaries and benefits


11,428


12,065


12,403Provision for loan and impairment losses


271


212


30Occupancy, data processing, communication and other


6,516


5,326


4,745Minority interest


(97
)

53


63Total


26,429


21,658


21,039Equity in earnings of investments


11,756


12,013


14,913Gain on sale of interest in equity investments


2,459





Operating contribution before direct taxes

$
15,308

$
13,946

$
14,411Operating contribution, net of direct taxes

$
15,104

$
13,780

$
14,437Corporate Overhead:Corporate interest expense








3,378Salaries and benefits, occupancy, professional and other income and expenses, net


5,227


5,702


6,048Earnings from continuing operations

$
9,877

$
8,078

$
5,011


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

Year ended December 31,2006

2005

2004Domestic

$
22,063

$
20,707

$
18,899Latin America


11,191


10,508


10,189Europe


5,913


4,389


6,362Other


111





Total

$
39,278

$
35,604

$
35,450


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

December 31,
2006

December 31,
2005Cash

$
18,472

$
12,901Portfolio acquisition and resolution assets:Domestic


158,147


105,938Latin America


28,883


19,764Europe


61,062


27,699Other


2,272


Deferred tax asset, net


20,101


20,101Other non-earning assets, net


8,623


8,309Discontinued mortgage assets


103


157Total assets

$
297,663

$
194,869


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

Year ended December 31,2006

2005

2004Average investment in Portfolio Assets and loans receivable:Domestic

$
66,381

$
42,567

$
19,028Latin America


12,479


18,068


16,568Europe


2,475


652


1,112Other


703





Total

$
82,038

$
61,287

$
36,708Income from Portfolio Assets and loans receivable:Domestic

$
11,392

$
8,506

$
2,653Latin America


1,377


1,559


2,017Europe


181


35


64Other


111





Total

$
13,061

$
10,100

$
4,734


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9.     Preferred Stock and Stockholders' Equity

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

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

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

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

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

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

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

10.   Stock Based Compensation

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

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

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

Year ended December 31,2006

2005

2004Amount of compensation cost recognized in income

$
651

$


$
Tax benefit recognized in income

$


$


$
Amount capitalized as part of an asset

$


$


$



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

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

Year ended December 31,2006

2005

2004Weighted average grant date fair value

$
6.71

$
9.95

$
6.56Volatility


82%


84%


90%Risk-free interest rate


4.88%


4.50%


4.85%Expected life in years


5


10


10Dividend yield


Zero


Zero


Zero


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Stock
option activity during the years indicated is as follows:

|                                 |  | Shares  |   | Weighted Average
Exercise Price |       | Weighted Average
Remaining
Contractual Term
(Years) |      | Aggregate Intrinsic Value
|-------------------------------- |  | ------- | - | ------------------------------- | ----- | --------------------------------------------------- | ---- | -------------------------
|Outstanding at January 1, 2004   |  | 614,500 |   | $                               | 7.59  |                                                     |      |                          
|Granted                          |  | 264,500 |   |                                 | 7.46  |                                                     |      |                          
|Exercised                        |  | (67,000 | ) |                                 | 2.94  |                                                     |      |                          
|Expired                          |  |        |   |                                 |      |                                                     |      |                          
|Forfeited                        |  | (50,000 | ) |                                 | 18.10 |                                                     |      |                          
|                                 |  |         |   |                                 |       |                                                     |      |                          
|Outstanding at December 31, 2004 |  | 762,000 |   | $                               | 7.26  |                                                     |      |                          
|Granted                          |  | 122,650 |   |                                 | 11.62 |                                                     |      |                          
|Exercised                        |  | (46,500 | ) |                                 | 4.22  |                                                     |      |                          
|Expired                          |  | (67,300 | ) |                                 | 20.00 |                                                     |      |                          
|Forfeited                        |  | (15,000 | ) |                                 | 7.25  |                                                     |      |                          
|                                 |  |         |   |                                 |       |                                                     |      |                          
|Outstanding at December 31, 2005 |  | 755,850 |   | $                               | 7.02  |                                                     |      |                          
|Granted                          |  | 35,000  |   |                                 | 9.84  |                                                     |      |                          
|Exercised                        |  | (9,750  | ) |                                 | 6.93  |                                                     |      |                          
|Expired                          |  |        |   |                                 |      |                                                     |      |                          
|Forfeited                        |  | (2,000  | ) |                                 | 27.25 |                                                     |      |                          
|                                 |  |         |   |                                 |       |                                                     |      |                          
|Outstanding at December 31, 2006 |  | 779,100 |   | $                               | 7.10  |                                                     | 6.01 |                          
|                                 |  |         |   |                                 |       |                                                     |      |                          
|Exercisable at December 31, 2004 |  | 490,000 |   | $                               | 7.40  |                                                     |      |                          
|                                 |  |         |   |                                 |       |                                                     |      |                          
|Exercisable at December 31, 2005 |  | 502,325 |   | $                               | 6.20  |                                                     |      |                          
|                                 |  |         |   |                                 |       |                                                     |      |                          
|Exercisable at December 31, 2006 |  | 582,363 |   | $                               | 6.51  |                                                     | 5.30 |                          
|                                 |  |         |   |                                 |       |                                                     |      |                          

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

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

Shares

Weighted-Average
Grant-Date
Fair ValueNonvested at January 1, 2006

253,525

$
6.58Granted

35,000

$
6.71Vested

(91,788
)
$
6.45Forfeited




Nonvested at December 31, 2006

196,737

$
6.67


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

The
pro forma information for 2005 and 2004 was as follows:

Year ended December 31,2005

2004Net earnings to common stockholders, as reported

$
8,231

$
63,634Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(666
)

(346
)Pro forma net earnings to common stockholders

$
7,565

$
63,288Net earnings per common share:Basicas reported

$
0.73

$
5.67Basicpro forma

$
0.67

$
5.64Dilutedas reported

$
0.69

$
5.37Dilutedpro forma

$
0.63

$
5.35


11.   Income Taxes

Income tax expense from continuing operations consists of:

Year ended December 31,2006

2005

2004Federal and state current expense

$
(186
)
$
(250
)
$
(75
)Federal deferred expense








Total

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


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

Year ended December 31,2006

2005

2004Computed expected tax expense

$
(3,488
)
$
(2,933
)
$
(1,802
)Reduction in income taxes resulting from:Change in valuation allowance


3,488


2,933


1,802Alternative minimum tax and state income tax


(186
)

(250
)

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


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

December 31,2006

2005Deferred tax assets (liabilities):Investments in Acquisition Partnerships, principally due to differences in basis for tax and financial reporting purposes

$
(347
)
$
(1,536
)State tax differences


(12
)

Intangibles, principally due to differences in amortization


281


389Tax basis in fixed assets less than book


(76
)

(183
)Foreign non-repatriated earnings


(2,398
)

Other


(9,032
)

(12,193
)Federal net operating loss carryforwards


130,528


198,038Net gross deferred tax assets


118,944


184,515Valuation allowance


(98,843
)

(164,414
)Net deferred tax assets

$
20,101

$
20,101


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

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

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

12.   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 $138 in 2006, $134 in 2005 and $143 in 2004.

13.   Leases

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

14.   Other Related Party Transactions

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

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

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

15.   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
August 2000, Consumer Corp. and Funding LP contributed all of the assets utilized in the operations of the automobile finance operation to Drive pursuant to the terms of
a Contribution and Assumption Agreement by and between Consumer Corp. and Drive, and a Contribution and Assumption Agreement by and between Funding LP and Drive (collectively, the "Contribution
Agreements"). Drive assumed substantially all of the liabilities of the automobile finance operation as set forth in the Contribution Agreements. In addition, pursuant to the terms of a Securities
Purchase Agreement dated as of August 18, 2000 (the "2000 Securities Purchase Agreement"), by and among FirstCity, Consumer Corp., FirstCity Funding LP ("Funding LP"), and
FirstCity Funding GP Corp. ("Funding GP"), IFA-GP and IFA-LP; FirstCity, Consumer Corp., Funding LP and Funding GP made various warranties
concerning (i) their respective organizations, (ii) the automobile finance operation conducted by Consumer Corp. and Funding LP, and (iii) the assets transferred by
Consumer Corp. and Funding LP to Drive. The Company, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and IFA-LP from
damages resulting from a breach of any representation or warranty contained in the 2000 Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in
connection with the transaction. The indemnity obligation under the 2000 Securities Purchase Agreement survives for a period of seven (7) years from August 25, 2000 (the "2000
Closing Date") with respect to tax-related representations and warranties and for thirty months from the 2000 Closing Date with respect to all other representations and warranties. Neither
the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the 2000 Securities Purchase Agreement until the
aggregate amount payable exceeds $250 thousand, and then only for the amount in excess of $250 thousand in the aggregate; however certain representations and warranties are not subject
to this $250 thousand threshold. Pursuant to the terms of the Contribution Agreements, Consumer Corp. and Funding LP have agreed to indemnify Drive from any damages resulting in a
material adverse effect on Drive resulting from breaches of representations or warranties, failure to perform, pay or discharge liabilities

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

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

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

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

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

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

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

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

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

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

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

16.   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.

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(a)   Cash and Cash Equivalents

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

(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 $137.4 million and $69 million, respectively, at December 31, 2006 and 2005. The estimated fair value of the Portfolio Assets and
loans receivable was approximately $149.6 million and $73.2 million, respectively, at December 31, 2006 and 2005.

(c)   Residual Interests in Securitizations

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

(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,
2006 and 2005 approximate the market terms for similar credit instruments. Accordingly, the carrying amount of notes payable is believed to approximate fair value.

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17.   Selected Quarterly Financial Data (Unaudited)

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

|                                                      |  | 2006 |       | 2005 |  
|----------------------------------------------------- |  | ---- | ----- | ---- | -
|
|
|
|Revenues                                              |  | $    | 5,715 |      | $
|Expenses                                              |  |      | 7,119 |      |  
|Equity in earnings of investments (1)                 |  |      | 3,634 |      |  
|Gain on sale of interest in equity investments        |  |      |      |      |  
|Earnings from continuing operations                   |  |      | 2,097 |      |  
|Earnings (loss) from discontinued operations          |  |      | (75   | )    |  
|Net earnings to common stockholders                   |  |      | 2,022 |      |  
|Earnings from continuing operations per common share |  |      |       |      |  
|Basic                                                 |  | $    | 0.19  |      | $
|Diluted                                               |  | $    | 0.18  |      | $

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
FirstCity Financial Corporation:

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

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

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

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

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

KPMG LLP

Dallas,
Texas
July 20, 2007

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
FirstCity Financial Corporation:

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

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

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

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

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

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

KPMG LLP

Dallas,
Texas
July 20, 2007

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WAMCO PARTNERSHIPS

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Partners
WAMCO Partnerships:

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

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

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

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

KPMG LLP

Dallas,
Texas
July 20, 2007

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WAMCO PARTNERSHIPS        COMBINED BALANCE SHEETS        December 31, 2006 and 2005

|                                                                                             |                   | 2006 |         | 2005  
|-------------------------------------------------------------------------------------------- | ----------------- | ---- | ------- | ------
|
|ASSETS                                                                                       |                   |      |         |       
|Cash                                                                                         |                   | $    | 8,009   |       
|Portfolio Assets, net                                                                        |                   |      | 108,215 |       
|Investment in partnership                                                                    |                   |      |        |       
|Deferred profit sharing                                                                      |                   |      |        |       
|Other assets, net                                                                            |                   |      | 410     |       
|                                                                                             |                   |      |         |       
|                                                                                             |                   | $    | 116,634 |       
|                                                                                             |                   |      |         |       
|LIABILITIES AND PARTNERS' CAPITAL                                                            |                   |      |         |       
|Notes payable (including $0 and $7,866 to affiliates in 2006 and 2005, respectively)         |                   | $    | 44,139  |       
|Deferred compensation                                                                        |                   |      |        |       
|Other liabilities (including $1,799 and $1,592 to affiliates in 2006 and 2005, respectively) |                   |      | 2,916   |       
|                                                                                             |                   |      |         |       
|                                                                                             | Total liabilities |      |         | 47,055
|Commitments and contingencies (notes 6 and 9)                                                |                   |      |         |       
|Partners' capital                                                                            |                   |      | 69,579  |       
|                                                                                             |                   |      |         |       
|                                                                                             |                   | $    | 116,634 |       
|                                                                                             |                   |      |         |       

See
accompanying notes to combined financial statements.

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WAMCO PARTNERSHIPS        COMBINED STATEMENTS OF OPERATIONS        Years Ended December 31, 2006, 2005 and 2004

|                                               |  | 2006 |         | 2005 |   | 2004    |  
|---------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|
|Income from Portfolio Assets                   |  | $    | 24,577  |      | $ | 30,664  |  
|Other income, net                              |  |      | 1,559   |      |   | 106     |  
|                                               |  |      |         |      |   |         |  
|Revenues                                       |  |      | 26,136  |      |   | 30,770  |  
|                                               |  |      |         |      |   |         |  
|Interest and fees on notesaffiliate           |  |      | (467    | )    |   | (1,765  | )
|Interest and fees on notes payableother       |  |      | (3,409  | )    |   | (2,371  | )
|Provision for loan and impairment losses       |  |      | (1,803  | )    |   | (1,024  | )
|Servicing feesaffiliate                       |  |      | (3,659  | )    |   | (3,391  | )
|General, administrative and operating expenses |  |      | (3,466  | )    |   | (7,369  | )
|                                               |  |      |         |      |   |         |  
|Expenses                                       |  |      | (12,804 | )    |   | (15,920 | )
|                                               |  |      |         |      |   |         |  
|Net earnings                                   |  | $    | 13,332  |      | $ | 14,850  |  
|                                               |  |      |         |      |   |         |  

See
accompanying notes to combined financial statements.

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WAMCO PARTNERSHIPS        COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL        Years Ended December 31, 2006, 2005 and 2004

|                             |                                                                                         | Class A Equity |    | Class B
Equity |   |       |        |   |     |      |  
|---------------------------- | --------------------------------------------------------------------------------------- | -------------- | -- | -------------- | - | ----- | ------ | - | --- | ---- | -
|
|
|Balance at December 31, 2003 |                                                                                         | $              | 45 |                | $ | 2,193 |        | $ | 791 |      | $
|                             | Contributions                                                                           |                |    |               |   |       |       |   |     |     |  
|                             | Distributions                                                                           |                |    | (76            | ) |       | (3,716 | ) |     | (59  | )
|                             | Comprehensive income:                                                                   |                |    |                |   |       |        |   |     |      |  
|                             | Net earnings                                                                            |                |    | 31             |   |       | 1,523  |   |     | 57   |  
|                             |                                                                                         |                |    |                |   |       |        |   |     |      |  
|                             | Total comprehensive income                                                              |                |    | 31             |   |       | 1,523  |   |     | 57   |  
|                             |                                                                                         |                |    |                |   |       |        |   |     |      |  
|Balance at December 31, 2004 |                                                                                         |                |   |                |   |      |        |   | 789 |      |  
|                             | Contributions                                                                           |                |    |               |   |       |       |   |     |     |  
|                             | Distributions                                                                           |                |    | (1             | ) |       | (43    | ) |     | (789 | )
|                             | Comprehensive income:                                                                   |                |    |                |   |       |        |   |     |      |  
|                             | Net earnings                                                                            |                |    | 1              |   |       | 43     |   |     |     |  
|                             |                                                                                         |                |    |                |   |       |        |   |     |      |  
|                             | Total comprehensive income                                                              |                |    | 1              |   |       | 43     |   |     |     |  
|                             |                                                                                         |                |    |                |   |       |        |   |     |      |  
|Balance at December 31, 2005 |                                                                                         |                |   |                |   |      |        |   |    |      |  
|                             | Cumulative effect of adjustments resulting from the adoption of SAB No. 108 (Note 2(f)) |                |    |               |   |       |       |   |     |     |  
|                             | Contributions                                                                           |                |    |               |   |       |       |   |     |     |  
|                             | Distributions                                                                           |                |    |               |   |       |       |   |     |     |  
|                             | Change in combined entities                                                             |                |    |               |   |       |       |   |     |     |  
|                             | Comprehensive income:                                                                   |                |    |                |   |       |        |   |     |      |  
|                             | Net earnings                                                                            |                |    |               |   |       |       |   |     |     |  
|                             |                                                                                         |                |    |                |   |       |        |   |     |      |  
|                             | Total comprehensive income                                                              |                |    |               |   |       |       |   |     |     |  
|                             |                                                                                         |                |    |                |   |       |        |   |     |      |  
|Balance at December 31, 2006 |                                                                                         | $              |   |                | $ |      |        | $ |    |      | $
|                             |                                                                                         |                |    |                |   |       |        |   |     |      |  

See
accompanying notes to combined financial statements.

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WAMCO PARTNERSHIPS        COMBINED STATEMENTS OF CASH FLOWS        Years Ended December 31, 2006, 2005 and 2004

|                                      |                                                                                     | 2006                                                              |                                           | 2005   |          | 2004    |       
|------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | ------ | -------- | ------- | ------
|
|Cash flows from operating activities: |                                                                                     |                                                                   |                                           |        |          |         |       
|                                      | Net earnings                                                                        |                                                                   | $                                         | 13,332 |          | $       | 14,850
|                                      | Adjustments to reconcile net earnings to net cash provided by operating activities: |                                                                   |                                           |        |          |         |       
|                                      |                                                                                     | Amortization of loan origination and commitment fees              |                                           |        | 321      |         |       
|                                      |                                                                                     | Amortization of deferred profit sharing                           |                                           |        | 596      |         |       
|                                      |                                                                                     | Provision for loan and impairment losses                          |                                           |        | 1,803    |         |       
|                                      |                                                                                     | Income from Portfolio Assets                                      |                                           |        | (24,577  | )       |       
|                                      |                                                                                     | Purchase of Portfolio Assets                                      |                                           |        | (56,560  | )       |       
|                                      |                                                                                     | Advances net of receipts on Portfolio Asset lines of credit       |                                           |        | (9,442   | )       |       
|                                      |                                                                                     | Capitalized costs and interest on Portfolio Assets                |                                           |        | (757     | )       |       
|                                      |                                                                                     | Proceeds applied to principal on Portfolio Assets                 |                                           |        | 112,783  |         |       
|                                      |                                                                                     | Excess of distribution over cost from partnership carried at cost |                                           |        | (1,274   | )       |       
|                                      |                                                                                     | (Increase) decrease in deferred profit sharing                    |                                           |        | 220      |         |       
|                                      |                                                                                     | (Increase) decrease in other assets                               |                                           |        | (444     | )       |       
|                                      |                                                                                     | Increase (decrease) in deferred compensation                      |                                           |        | (220     | )       |       
|                                      |                                                                                     | Deferred compensation and profit sharing paid                     |                                           |        | (396     | )       |       
|                                      |                                                                                     | Increase (decrease) in other liabilities                          |                                           |        | 386      |         |       
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       
|                                      |                                                                                     |                                                                   | Net cash provided by operating activities |        |          | 35,771  |       
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       
|Cash flows from investing activities: |                                                                                     |                                                                   |                                           |        |          |         |       
|                                      |                                                                                     | Contribution to partnership                                       |                                           |        |         |         |       
|                                      |                                                                                     | Distributions from partnership                                    |                                           |        | 2,570    |         |       
|                                      |                                                                                     | Change in combined entities                                       |                                           |        | (1,126   | )       |       
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       
|                                      |                                                                                     |                                                                   | Net cash provided by investing activities |        |          | 1,444   |       
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       
|Cash flows from financing activities: |                                                                                     |                                                                   |                                           |        |          |         |       
|                                      |                                                                                     | Borrowing of debtaffiliate                                       |                                           |        | 27       |         |       
|                                      |                                                                                     | Borrowing of debt                                                 |                                           |        | 46,500   |         |       
|                                      |                                                                                     | Repayment of debtaffiliate                                       |                                           |        | (7,893   | )       |       
|                                      |                                                                                     | Repayment of debt                                                 |                                           |        | (32,003  | )       |       
|                                      |                                                                                     | Capital contributions                                             |                                           |        | 55,312   |         |       
|                                      |                                                                                     | Capital distributions                                             |                                           |        | (103,996 | )       |       
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       
|                                      |                                                                                     |                                                                   | Net cash used in financing activities     |        |          | (42,053 | )     
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       
|Net decrease in cash                  |                                                                                     |                                                                   | (4,838                                    | )      |          | (888    | )     
|Cash at beginning of year             |                                                                                     |                                                                   | 12,847                                    |        |          | 13,735  |       
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       
|Cash at end of year                   |                                                                                     | $                                                                 | 8,009                                     |        | $        | 12,847  |       
|                                      |                                                                                     |                                                                   |                                           |        |          |         |       

Supplemental
disclosure of cash flow information:



See
accompanying notes to combined financial statements.

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WAMCO PARTNERSHIPS        NOTES TO COMBINED FINANCIAL STATEMENTS        December 31, 2006, 2005 and 2004        (Dollars in thousands)

1.     Organization and Partnership Agreements

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

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

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

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

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

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2.     Summary of Significant Accounting Policies



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

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

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



Non-performing Portfolio Assets consist primarily of distressed loans and loan related assets, such as foreclosed upon collateral. Prior to
January 1, 2005, Portfolio Assets were designated as non-performing unless a majority of all of the loans in the Portfolio was being repaid in accordance with the contractual terms
of the underlying loan agreements at date of acquisition. Such Portfolios were acquired on the basis of an evaluation by the Partnerships of the timing and amount of cash flow expected to be derived
from borrower payments or other resolution of the underlying collateral securing the loan.

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

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



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

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

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

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



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

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



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

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

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

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



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

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



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

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

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



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



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



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



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

3.     Combining Financial Statements

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

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Combining Balance Sheets
December 31, 2006

|                                                                |                   | WAMCO 31 |        | WAMCO 33 |   | Other
Partnerships |       | Combined
|--------------------------------------------------------------- | ----------------- | -------- | ------ | -------- | - | ------------------ | ----- | --------
|ASSETS                                                          |                   |          |        |          |   |                    |       |         
|Cash                                                            |                   | $        | 1,236  |          | $ | 1,503              |       | $       
|Portfolio Assets, net                                           |                   |          | 10,624 |          |   | 12,582             |       |         
|Investment in partnership                                       |                   |          |       |          |   |                   |       |         
|Deferred profit sharing                                         |                   |          |       |          |   |                   |       |         
|Other assets, net                                               |                   |          | 4      |          |   | 61                 |       |         
|                                                                |                   |          |        |          |   |                    |       |         
|                                                                |                   | $        | 11,864 |          | $ | 14,146             |       | $       
|                                                                |                   |          |        |          |   |                    |       |         
|LIABILITIES AND PARTNERS' CAPITAL                               |                   |          |        |          |   |                    |       |         
|Notes payable                                                   |                   | $        | 4,559  |          | $ | 3,818              |       | $       
|Deferred compensation                                           |                   |          |       |          |   |                   |       |         
|Other liabilities                                               |                   |          | 1,165  |          |   | 709                |       |         
|                                                                |                   |          |        |          |   |                    |       |         
|                                                                | Total liabilities |          |        | 5,724    |   |                    | 4,527 |         
|Partners' capital                                               |                   |          | 6,140  |          |   | 9,619              |       |         
|                                                                |                   |          |        |          |   |                    |       |         
|                                                                |                   | $        | 11,864 |          | $ | 14,146             |       | $       
|                                                                |                   |          |        |          |   |                    |       |         
|Other liabilities owed to affiliates included in above balances |                   | $        | 459    |          | $ | 618                |       | $       

Combining Balance Sheets
December 31, 2005

|                                                                |                   | WAMCO 31 |        | WAMCO 33 |   | Other
Partnerships |        | Combined
|--------------------------------------------------------------- | ----------------- | -------- | ------ | -------- | - | ------------------ | ------ | --------
|ASSETS                                                          |                   |          |        |          |   |                    |        |         
|Cash                                                            |                   | $        | 1,311  |          | $ | 2,354              |        | $       
|Portfolio Assets, net                                           |                   |          | 19,408 |          |   | 30,807             |        |         
|Investment in partnership                                       |                   |          |       |          |   |                   |        |         
|Deferred profit sharing                                         |                   |          |       |          |   |                   |        |         
|Other assets, net                                               |                   |          | 17     |          |   | 207                |        |         
|                                                                |                   |          |        |          |   |                    |        |         
|                                                                |                   | $        | 20,736 |          | $ | 33,368             |        | $       
|                                                                |                   |          |        |          |   |                    |        |         
|LIABILITIES AND PARTNERS' CAPITAL                               |                   |          |        |          |   |                    |        |         
|Notes payable                                                   |                   | $        | 11,530 |          | $ | 18,111             |        | $       
|Deferred compensation                                           |                   |          |       |          |   |                   |        |         
|Other liabilities                                               |                   |          | 817    |          |   | 682                |        |         
|                                                                |                   |          |        |          |   |                    |        |         
|                                                                | Total liabilities |          |        | 12,347   |   |                    | 18,793 |         
|Partners' capital                                               |                   |          | 8,389  |          |   | 14,575             |        |         
|                                                                |                   |          |        |          |   |                    |        |         
|                                                                |                   | $        | 20,736 |          | $ | 33,368             |        | $       
|                                                                |                   |          |        |          |   |                    |        |         
|Notes payable owed to affiliates included in above balances     |                   | $        |       |          | $ |                   |        | $       
|Other liabilities owed to affiliates included in above balances |                   |          | 394    |          |   | 528                |        |         

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Combining Statements of Operations
Year Ended December 31, 2006

|                                               |              | WAMCO 31 |        | WAMCO 33 |   | Other
Partnerships |       | Combined |       
|---------------------------------------------- | ------------ | -------- | ------ | -------- | - | ------------------ | ----- | -------- | ------
|Income from Portfolio Assets                   |              | $        | 2,186  |          | $ | 4,868              |       | $        | 17,523
|Other income, net                              |              |          | 44     |          |   | 65                 |       |          | 1,450 
|                                               |              |          |        |          |   |                    |       |          |       
|Revenues                                       |              |          | 2,230  |          |   | 4,933              |       |          | 18,973
|                                               |              |          |        |          |   |                    |       |          |       
|Interest and fees expenseaffiliate            |              |          |       |          |   |                   |       |          | (467  
|Interest and fees expenseother                |              |          | (718   | )        |   | (942               | )     |          | (1,749
|Provision for loan and impairment losses       |              |          |       |          |   | (75                | )     |          | (1,728
|Service feesaffiliate                         |              |          | (330   | )        |   | (737               | )     |          | (2,592
|General, administrative and operating expenses |              |          | (188   | )        |   | (454               | )     |          | (2,824
|                                               |              |          |        |          |   |                    |       |          |       
|Expenses                                       |              |          | (1,236 | )        |   | (2,208             | )     |          | (9,360
|                                               |              |          |        |          |   |                    |       |          |       
|                                               | Net earnings |          | $      | 994      |   | $                  | 2,725 |          | $     
|                                               |              |          |        |          |   |                    |       |          |       

Combining Statements of Operations
Year Ended December 31, 2005

|                                               |              | WAMCO 31 |        | WAMCO 33 |   | Other
Partnerships |       | Combined |        
|---------------------------------------------- | ------------ | -------- | ------ | -------- | - | ------------------ | ----- | -------- | -------
|Income from Portfolio Assets                   |              | $        | 4,291  |          | $ | 6,824              |       | $        | 19,549 
|Other income, net                              |              |          | 28     |          |   |                   |       |          | 78     
|                                               |              |          |        |          |   |                    |       |          |        
|Revenues                                       |              |          | 4,319  |          |   | 6,824              |       |          | 19,627 
|                                               |              |          |        |          |   |                    |       |          |        
|Interest and fees expenseaffiliate            |              |          |       |          |   | (893               | )     |          | (872   
|Interest and fees expenseother                |              |          | (1,175 | )        |   | (940               | )     |          | (256   
|Provision for loan and impairment losses       |              |          |       |          |   | (655               | )     |          | (369   
|Service feesaffiliate                         |              |          | (564   | )        |   | (807               | )     |          | (2,020 
|General, administrative and operating expenses |              |          | (301   | )        |   | (554               | )     |          | (6,514 
|                                               |              |          |        |          |   |                    |       |          |        
|Expenses                                       |              |          | (2,040 | )        |   | (3,849             | )     |          | (10,031
|                                               |              |          |        |          |   |                    |       |          |        
|                                               | Net earnings |          | $      | 2,279    |   | $                  | 2,975 |          | $      
|                                               |              |          |        |          |   |                    |       |          |        

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Combining Statements of Operations
Year Ended December 31, 2004

|                                               |              | WAMCO 31 |        | WAMCO 33 |   | Other
Partnerships |       | Combined |       
|---------------------------------------------- | ------------ | -------- | ------ | -------- | - | ------------------ | ----- | -------- | ------
|Income from Portfolio Assets                   |              | $        | 5,823  |          | $ | 4,981              |       | $        | 21,058
|Other income, net                              |              |          | 13     |          |   |                   |       |          | 619   
|                                               |              |          |        |          |   |                    |       |          |       
|Revenues                                       |              |          | 5,836  |          |   | 4,981              |       |          | 21,677
|                                               |              |          |        |          |   |                    |       |          |       
|Interest and fees expenseaffiliate            |              |          | (133   | )        |   | (1,076             | )     |          | (1,143
|Interest and fees expenseother                |              |          | (1,462 | )        |   |                   |       |          | (846  
|Provision for loan and impairment losses       |              |          | (100   | )        |   |                   |       |          | (1,452
|Service feesaffiliate                         |              |          | (820   | )        |   | (725               | )     |          | (2,390
|General, administrative and operating expenses |              |          | (413   | )        |   | (441               | )     |          | (4,074
|                                               |              |          |        |          |   |                    |       |          |       
|Expenses                                       |              |          | (2,928 | )        |   | (2,242             | )     |          | (9,905
|                                               |              |          |        |          |   |                    |       |          |       
|                                               | Net earnings |          | $      | 2,908    |   | $                  | 2,739 |          | $     
|                                               |              |          |        |          |   |                    |       |          |       

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

|                             |                                                                                         | WAMCO 31 |        | WAMCO 33 |   | Other
Partnerships |        | Combined |       
|---------------------------- | --------------------------------------------------------------------------------------- | -------- | ------ | -------- | - | ------------------ | ------ | -------- | ------
|Balance at December 31, 2003 |                                                                                         | $        | 19,558 |          | $ | 3,167              |        | $        | 61,864
|                             | Contributions                                                                           |          |        |         |   |                    | 10,653 |          |       
|                             | Distributions                                                                           |          |        | (9,580   | ) |                    | (4,658 | )        |       
|                             | Net earnings                                                                            |          |        | 2,908    |   |                    | 2,739  |          |       
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|                             | Total comprehensive income                                                              |          |        | 2,908    |   |                    | 2,739  |          |       
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|Balance at December 31, 2004 |                                                                                         |          | 12,886 |          |   | 11,901             |        |          | 56,446
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|                             | Contributions                                                                           |          |        |         |   |                    | 2,144  |          |       
|                             | Distributions                                                                           |          |        | (6,775   | ) |                    | (2,445 | )        |       
|                             | Net earnings                                                                            |          |        | 2,278    |   |                    | 2,975  |          |       
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|                             | Total comprehensive income                                                              |          |        | 2,278    |   |                    | 2,975  |          |       
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|Balance at December 31, 2005 |                                                                                         |          | 8,389  |          |   | 14,575             |        |          | 88,365
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|                             | Cumulative effect of adjustments resulting from the adoption of SAB No. 108 (Note 2(f)) |          |        |         |   |                    | (212   | )        |       
|                             | Contributions                                                                           |          |        |         |   |                    |       |          |       
|                             | Distributions                                                                           |          |        | (3,243   | ) |                    | (7,469 | )        |       
|                             | Change in combined entities                                                             |          |        |         |   |                    |       |          |       
|                             | Net earnings                                                                            |          |        | 994      |   |                    | 2,725  |          |       
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|                             | Total comprehensive income                                                              |          |        | 994      |   |                    | 2,725  |          |       
|                             |                                                                                         |          |        |          |   |                    |        |          |       
|Balance at December 31, 2006 |                                                                                         | $        | 6,140  |          | $ | 9,619              |        | $        | 53,820
|                             |                                                                                         |          |        |          |   |                    |        |          |       

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Combining Statements of Cash Flows
Year Ended December 31, 2006

|                                                 |                                                                                     | WAMCO 31                                                          |                                           | WAMCO 33 |        | Other
Partnerships |       | Combined |        
|------------------------------------------------ | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | -------- | ------ | ------------------ | ----- | -------- | -------
|Cash flows from operating activities:            |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|                                                 | Net earnings                                                                        |                                                                   | $                                         | 994      |        | $                  | 2,725 |          | $      
|                                                 | Adjustments to reconcile net earnings to net cash provided by operating activities: |                                                                   |                                           |          |        |                    |       |          |        
|                                                 |                                                                                     | Amortization of loan origination and commitment fees              |                                           |          | 53     |                    |       | 146      |        
|                                                 |                                                                                     | Amortization of deferred profit sharing                           |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Provision for loan and impairment losses                          |                                           |          |       |                    |       | 75       |        
|                                                 |                                                                                     | Income from Portfolio Assets                                      |                                           |          | (2,186 | )                  |       | (4,868   | )      
|                                                 |                                                                                     | Purchase of Portfolio Assets                                      |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Advances net of receipts on Portfolio Asset lines of credit       |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Capitalized costs and interest on Portfolio Assets                |                                           |          |       |                    |       | (566     | )      
|                                                 |                                                                                     | Proceeds applied to principal on Portfolio Assets                 |                                           |          | 10,970 |                    |       | 23,372   |        
|                                                 |                                                                                     | Excess of distribution over cost from partnership carried at cost |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Decrease in deferred profit sharing                               |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Increase in other assets                                          |                                           |          | (40    | )                  |       |         |        
|                                                 |                                                                                     | Decrease in deferred compensation                                 |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Deferred compensation and profit sharing paid                     |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Increase in other liabilities                                     |                                           |          | 348    |                    |       | 27       |        
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|                                                 |                                                                                     |                                                                   | Net cash provided by operating activities |          |        | 10,139             |       |          | 20,911 
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|Cash flows from investing activities:            |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|                                                 |                                                                                     | Distributions from partnership                                    |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Change in combined entities                                       |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|                                                 |                                                                                     |                                                                   | Net cash provided by investing activities |          |        |                   |       |          |       
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|Cash flows from financing activities:            |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|                                                 |                                                                                     | Borrowing of debtaffiliate                                       |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Borrowing of debt                                                 |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Repayment of debtaffiliate                                       |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Repayment of debt                                                 |                                           |          | (6,971 | )                  |       | (14,293  | )      
|                                                 |                                                                                     | Capital contributions                                             |                                           |          |       |                    |       |         |        
|                                                 |                                                                                     | Capital distributions                                             |                                           |          | (3,243 | )                  |       | (7,469   | )      
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|                                                 |                                                                                     |                                                                   | Net cash used in financing activities     |          |        | (10,214            | )     |          | (21,762
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|Net decrease in cash                             |                                                                                     |                                                                   | (75                                       | )        |        | (851               | )     |          | (3,912 
|Cash at beginning of year                        |                                                                                     |                                                                   | 1,311                                     |          |        | 2,354              |       |          | 9,182  
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|Cash at end of year                              |                                                                                     | $                                                                 | 1,236                                     |          | $      | 1,503              |       | $        | 5,270  
|                                                 |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|Supplemental disclosure of cash flow information |                                                                                     |                                                                   |                                           |          |        |                    |       |          |        
|                                                 | Approximate cash paid for interest                                                  |                                                                   | $                                         | 693      |        | $                  | 851   |          | $      

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Combining Statements of Cash Flows
Year Ended December 31, 2005

|                                                    |                                                                                               | WAMCO 31                                                    |                                                     | WAMCO 33 |         | Other
Partnerships |       | Combined |       
|--------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------------------------------------- | -------- | ------- | ------------------ | ----- | -------- | ------
|Cash flows from operating activities:               |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|                                                    | Net earnings                                                                                  |                                                             | $                                                   | 2,279    |         | $                  | 2,975 |          | $     
|                                                    | Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |                                                             |                                                     |          |         |                    |       |          |       
|                                                    |                                                                                               | Amortization of loan origination and commitment fees        |                                                     |          | 201     |                    |       | 85       |       
|                                                    |                                                                                               | Amortization of deferred profit sharing                     |                                                     |          |        |                    |       |         |       
|                                                    |                                                                                               | Provision for loan and impairment losses                    |                                                     |          |        |                    |       | 655      |       
|                                                    |                                                                                               | Income from Portfolio Assets                                |                                                     |          | (4,291  | )                  |       | (6,824   | )     
|                                                    |                                                                                               | Purchase of Portfolio Assets                                |                                                     |          |        |                    |       | (8,699   | )     
|                                                    |                                                                                               | Advances net of receipts on Portfolio Asset lines of credit |                                                     |          |        |                    |       |         |       
|                                                    |                                                                                               | Capitalized costs and interest on Portfolio Assets          |                                                     |          | (6      | )                  |       | (652     | )     
|                                                    |                                                                                               | Proceeds applied to principal on Portfolio Assets           |                                                     |          | 20,138  |                    |       | 25,851   |       
|                                                    |                                                                                               | Increase in deferred profit sharing                         |                                                     |          |        |                    |       |         |       
|                                                    |                                                                                               | (Increase) decrease in other assets                         |                                                     |          | 53      |                    |       | (219     | )     
|                                                    |                                                                                               | Increase in deferred compensation                           |                                                     |          |        |                    |       |         |       
|                                                    |                                                                                               | Deferred compensation and profit sharing paid               |                                                     |          |        |                    |       |         |       
|                                                    |                                                                                               | Increase (decrease) in other liabilities                    |                                                     |          | 64      |                    |       | 256      |       
|                                                    |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|                                                    |                                                                                               |                                                             | Net cash provided by (used in) operating activities |          |         | 18,438             |       |          | 13,428
|                                                    |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|Cash flows from financing activities:               |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|                                                    |                                                                                               | Borrowing of debtaffiliate                                 |                                                     |          |        |                    |       | 6,465    |       
|                                                    |                                                                                               | Borrowing of debt                                           |                                                     |          |        |                    |       | 29,100   |       
|                                                    |                                                                                               | Repayment of debtaffiliate                                 |                                                     |          |        |                    |       | (37,436  | )     
|                                                    |                                                                                               | Repayment of debt                                           |                                                     |          | (13,350 | )                  |       | (10,989  | )     
|                                                    |                                                                                               | Capital contributions                                       |                                                     |          |        |                    |       | 2,143    |       
|                                                    |                                                                                               | Capital distributions                                       |                                                     |          | (6,776  | )                  |       | (2,444   | )     
|                                                    |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|Net cash provided by (used in) financing activities |                                                                                               |                                                             | (20,126                                             | )        |         | (13,161            | )     |          | 15,691
|                                                    |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|Net increase (decrease) in cash                     |                                                                                               |                                                             | (1,688                                              | )        |         | 267                |       |          | 533   
|Cash at beginning of year                           |                                                                                               |                                                             | 2,999                                               |          |         | 2,087              |       |          | 8,649 
|                                                    |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|Cash at end of year                                 |                                                                                               | $                                                           | 1,311                                               |          | $       | 2,354              |       | $        | 9,182 
|                                                    |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|Supplemental disclosure of cash flow information    |                                                                                               |                                                             |                                                     |          |         |                    |       |          |       
|                                                    | Approximate cash paid for interest                                                            |                                                             | $                                                   | 988      |         | $                  | 1,713 |          | $     

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Combining Statements of Cash Flows
Year Ended December 31, 2004

|                                                    |                                                                                               | WAMCO 31                                                          |                                                     | WAMCO 33 |         | Other
Partnerships |       | Combined |        
|--------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | -------- | ------- | ------------------ | ----- | -------- | -------
|Cash flows from operating activities:               |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|                                                    | Net earnings                                                                                  |                                                                   | $                                                   | 2,908    |         | $                  | 2,739 |          | $      
|                                                    | Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |                                                                   |                                                     |          |         |                    |       |          |        
|                                                    |                                                                                               | Amortization of loan origination and commitment fees              |                                                     |          | 185     |                    |       |         |        
|                                                    |                                                                                               | Amortization of deferred profit sharing                           |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               | Provision for loan and impairment losses                          |                                                     |          | 100     |                    |       |         |        
|                                                    |                                                                                               | Income from Portfolio Assets                                      |                                                     |          | (5,823  | )                  |       | (4,981   | )      
|                                                    |                                                                                               | Purchase of Portfolio Assets                                      |                                                     |          |        |                    |       | (44,187  | )      
|                                                    |                                                                                               | Transfer of Portfolio Assets at cost                              |                                                     |          | 3,145   |                    |       |         |        
|                                                    |                                                                                               | Advances net of receipts on Portfolio Asset lines of credit       |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               | Capitalized costs and interest on Portfolio Assets                |                                                     |          | (329    | )                  |       | (60      | )      
|                                                    |                                                                                               | Proceeds applied to principal on Portfolio Assets                 |                                                     |          | 28,215  |                    |       | 23,447   |        
|                                                    |                                                                                               | Excess of distribution over cost from partnership carried at cost |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               | Decrease in deferred profit sharing                               |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               | Increase in other assets                                          |                                                     |          | (301    | )                  |       | (73      | )      
|                                                    |                                                                                               | Decrease in deferred compensation                                 |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               | Deferred compensation and profit sharing paid                     |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               | Increase (decrease) in other liabilities                          |                                                     |          | 86      |                    |       | 357      |        
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|                                                    |                                                                                               |                                                                   | Net cash provided by (used in) operating activities |          |         | 28,186             |       |          | (22,758
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|Cash flows from investing activities:               |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|                                                    |                                                                                               | Contribution to partnership                                       |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               | Distributions from partnership                                    |                                                     |          |        |                    |       |         |        
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|Net cash provided by investing activities           |                                                                                               |                                                                   |                                                    |          |         |                   |       |          | 1,647  
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|Cash flows from financing activities:               |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|                                                    |                                                                                               | Borrowing of debtaffiliate                                       |                                                     |          |        |                    |       | 33,420   |        
|                                                    |                                                                                               | Borrowing of debt                                                 |                                                     |          | 43,900  |                    |       |         |        
|                                                    |                                                                                               | Repayment of debtaffiliate                                       |                                                     |          | (47,800 | )                  |       | (14,672  | )      
|                                                    |                                                                                               | Repayment of debt                                                 |                                                     |          | (19,020 | )                  |       |         |        
|                                                    |                                                                                               | Capital contributions                                             |                                                     |          |        |                    |       | 10,652   |        
|                                                    |                                                                                               | Capital distributions                                             |                                                     |          | (9,580  | )                  |       | (4,657   | )      
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|Net cash provided by (used in) financing activities |                                                                                               |                                                                   | (32,500                                             | )        |         | 24,743             |       |          | (38,614
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|Net increase (decrease) in cash                     |                                                                                               |                                                                   | (4,314                                              | )        |         | 1,985              |       |          | 1,020  
|Cash at beginning of year                           |                                                                                               |                                                                   | 7,313                                               |          |         | 102                |       |          | 7,629  
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|Cash at end of year                                 |                                                                                               | $                                                                 | 2,999                                               |          | $       | 2,087              |       | $        | 8,649  
|                                                    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|Supplemental disclosure of cash flow information    |                                                                                               |                                                                   |                                                     |          |         |                    |       |          |        
|                                                    | Approximate cash paid for interest                                                            |                                                                   | $                                                   | 1,403    |         | $                  | 1,018 |          | $      

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4.     Portfolio Assets

Portfolio Assets are summarized as follows:

|                                         |                                            | December 31, 2006                           |                      
|---------------------------------------- | ------------------------------------------ | ------------------------------------------- | ---------------------
|
|Loan Portfolios                          |                                            |                                             |                      
|                                         | Loans Acquired Prior to 2005               |                                             |                      
|                                         |                                            | Non-performing Portfolio Assets             |                      
|                                         |                                            | Performing Portfolio Assets                 |                      
|                                         | Loans Acquired After 2004                  |                                             |                      
|                                         |                                            | Loans acquired with credit deterioration    |                      
|                                         |                                            | Loans acquired with no credit deterioration |                      
|                                         |                                            |                                             |                      
|                                         | Outstanding balance                        |                                             |                      
|                                         |                                            | Allowance for loan losses                   |                      
|                                         |                                            |                                             |                      
|                                         | Carrying amount of loans, net of allowance |                                             |                      
|                                         |                                            |                                             |                      
|Real Estate Portfolios, net of allowance |                                            |                                             |                     
|                                         |                                            |                                             |                      
|                                         |                                            |                                             | Portfolio Assets, net
|                                         |                                            |                                             |                      

|                                         |                                            | December 31, 2005                        |                      
|---------------------------------------- | ------------------------------------------ | ---------------------------------------- | ---------------------
|
|Loan Portfolios                          |                                            |                                          |                      
|                                         | Loans Acquired Prior to 2005               |                                          |                      
|                                         |                                            | Non-performing Portfolio Assets          |                      
|                                         |                                            | Performing Portfolio Assets              |                      
|                                         | Loans Acquired After 2004                  |                                          |                      
|                                         |                                            | Loans acquired with credit deterioration |                      
|                                         |                                            |                                          |                      
|                                         | Outstanding balance                        |                                          |                      
|                                         |                                            | Allowance for loan losses                |                      
|                                         |                                            |                                          |                      
|                                         | Carrying amount of loans, net of allowance |                                          |                      
|                                         |                                            |                                          |                      
|Real Estate Portfolios, net of allowance |                                            |                                          |                     
|                                         |                                            |                                          |                      
|                                         |                                            |                                          | Portfolio Assets, net
|                                         |                                            |                                          |                      

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

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5.     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. As a result of the disposition of FC Properties in 2006, this obligation is no longer presented as of December 31, 2006, as discussed in Note 1 of the Combined Financial
Statements. At December 31, 2005, the estimated liability for this profit participation was $14,539, and was reported as deferred compensation in the accompanying combined balance sheets.
Additionally, amortization of $596, $4,088 and $1,610 was recognized during 2006, 2005 and 2004, respectively, and has been included in general, administrative and operating expenses in the
accompanying combined statements of operations.

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

6.     Notes Payable

Notes payable at December 31, 2006 and 2005 consist of the following:

2006

2005London Interbank Offering Rate (LIBOR) (5.32188% at December 31, 2006) based:WAMCO 31 (LIBOR plus 2.5%)

$
4,559

$
11,530WAMCO 33 (LIBOR plus 2.35%)


3,818


18,111Other Partnerships (LIBOR plus 4% to 5%)affiliate





2,061Other Partnerships (LIBOR plus 1.75% to 2.0%)


35,762


Other Partnerships (LIBOR plus 5%, with floor 6.3%)affiliate





1,806Total LIBOR based


44,139


33,508Fixed rate:Other Partnerships (10.17%)affiliate





4,000$
44,139

$
37,508


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

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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
31

WAMCO
33

Other
Partnerships

CombinedYear Ending December 31:2007

$
4,559

$
3,818

$


$
8,3772008











2009








28,146


28,1462010








7,616


7,616$
4,559

$
3,818

$
35,762

$
44,139


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

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

7.     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. Service fees to affiliates of approximately
$3,659, $3,391, and $3,935 are reported on the accompanying combined statements of operations in 2006, 2005 and 2004, respectively.

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

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

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

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

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8.     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.



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



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



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

9.     Commitments and Contingencies

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.

10.   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. This agreement matured on December 15, 2005. Under the swap agreement, WAMCO XXVIII paid fixed/floating rate interest and received
floating rate interest at specified periodic intervals based on an agreed upon notional amount.

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

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

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

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

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MINNTEX INVESTMENT PARTNERS LP
(A Texas Limited Partnership)

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2006 and 2005, and the related
statements of operations, changes in partners' capital, and cash flows for each of the years in the three-year period ended
December 31, 2006. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on
our audits.

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

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

KPMG LLP

Dallas,
Texas
July 20, 2007

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MINNTEX INVESTMENT PARTNERS LP  (A Texas Limited Partnership)        BALANCE SHEETS        December 31, 2006 and 2005

|                                         |  | 2006 |    | 2005
|---------------------------------------- |  | ---- | -- | ----
|
|ASSETS                                   |  |      |    |     
|Cash                                     |  | $    | 71 |     
|Portfolio Asset, net (note 3)            |  |      |   |     
|                                         |  |      |    |     
|                                         |  | $    | 71 |     
|                                         |  |      |    |     
|LIABILITIES AND PARTNERS' CAPITAL        |  |      |    |     
|Accounts payable and accrued liabilities |  | $    | 4  |     
|Service fees payableaffiliate (note 4)  |  |      | 5  |     
|                                         |  |      |    |     
|Liabilities                              |  |      | 9  |     
|Partners' capital                        |  |      | 62 |     
|                                         |  |      |    |     
|                                         |  | $    | 71 |     
|                                         |  |      |    |     

See
accompanying notes to financial statements.

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MINNTEX INVESTMENT PARTNERS LP  (A Texas Limited Partnership)        STATEMENTS OF OPERATIONS        Years Ended December 31, 2006, 2005 and 2004

|                                                         |  | 2006 |       | 2005 |   | 2004  |  
|-------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|
|Income from Portfolio Asset                              |  | $    | 1,488 |      | $ | 4,756 |  
|Other income                                             |  |      | 4     |      |   | 10    |  
|                                                         |  |      |       |      |   |       |  
|Revenues                                                 |  |      | 1,492 |      |   | 4,766 |  
|                                                         |  |      |       |      |   |       |  
|General, administrative, and operating expenses (note 4) |  |      | (147  | )    |   | (480  | )
|                                                         |  |      |       |      |   |       |  
|Expenses                                                 |  |      | (147  | )    |   | (480  | )
|                                                         |  |      |       |      |   |       |  
|Net income                                               |  | $    | 1,345 |      | $ | 4,286 |  
|                                                         |  |      |       |      |   |       |  

See
accompanying notes to financial statements.

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MINNTEX INVESTMENT PARTNERS LP  (A Texas Limited Partnership)        STATEMENTS OF CHANGES IN PARTNERS' CAPITAL        Years Ended December 31, 2006, 2005 and 2004

|                             |  | General
Partner |     | Limited Partners |   |        |  
|---------------------------- |  | --------------- | --- | ---------------- | - | ------ | -
|
|
|Balance at December 31, 2003 |  | $               | 14  |                  | $ | 468    |  
|Distributions                |  |                 | (84 | )                |   | (2,807 | )
|Net income                   |  |                 | 77  |                  |   | 2,591  |  
|                             |  |                 |     |                  |   |        |  
|Balance at December 31, 2004 |  |                 | 7   |                  |   | 252    |  
|Distributions                |  |                 | (47 | )                |   | (1,573 | )
|Net income                   |  |                 | 44  |                  |   | 1,414  |  
|                             |  |                 |     |                  |   |        |  
|Balance at December 31, 2005 |  |                 | 4   |                  |   | 93     |  
|Distributions                |  |                 | (15 | )                |   | (517   | )
|Net income                   |  |                 | 13  |                  |   | 444    |  
|                             |  |                 |     |                  |   |        |  
|Balance at December 31, 2006 |  | $               | 2   |                  | $ | 20     |  
|                             |  |                 |     |                  |   |        |  

See
accompanying notes to financial statements.

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MINNTEX INVESTMENT PARTNERS LP  (A Texas Limited Partnership)        STATEMENTS OF CASH FLOWS        Years Ended December 31, 2006, 2005 and 2004

|                                                                                  |                                                      | 2006                                      |       | 2005   |        | 2004  |       
|--------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ----- | ------ | ------ | ----- | ------
|
|Cash flows from operating activities:                                             |                                                      |                                           |       |        |        |       |       
|Net income                                                                        |                                                      | $                                         | 1,345 |        | $      | 4,286 |       
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                      |                                           |       |        |        |       |       
|                                                                                  | Income from Portfolio Asset                          |                                           |       | (1,488 | )      |       | (4,756
|                                                                                  | Proceeds applied to principal on Portfolio Assets    |                                           |       | 1,500  |        |       | 4,846 
|                                                                                  | Decrease in service fees payableaffiliate           |                                           |       | (13    | )      |       | (51   
|                                                                                  | Decrease in accounts payable and accrued liabilities |                                           |       | (2     | )      |       | (2    
|                                                                                  |                                                      |                                           |       |        |        |       |       
|                                                                                  |                                                      | Net cash provided by operating activities |       |        | 1,342  |       |       
|                                                                                  |                                                      |                                           |       |        |        |       |       
|Cash flows from financing activities:                                             |                                                      |                                           |       |        |        |       |       
|                                                                                  | Capital distributions                                |                                           |       | (1,566 | )      |       | (4,766
|                                                                                  |                                                      |                                           |       |        |        |       |       
|                                                                                  |                                                      | Net cash used in financing activities     |       |        | (1,566 | )     |       
|                                                                                  |                                                      |                                           |       |        |        |       |       
|Net decrease in cash                                                              |                                                      |                                           | (224  | )      |        | (443  | )     
|Cash, beginning of period                                                         |                                                      |                                           | 295   |        |        | 738   |       
|                                                                                  |                                                      |                                           |       |        |        |       |       
|Cash, end of period                                                               |                                                      | $                                         | 71    |        | $      | 295   |       
|                                                                                  |                                                      |                                           |       |        |        |       |       
|Supplemental disclosure of cash flow information:                                 |                                                      |                                           |       |        |        |       |       
|                                                                                  | Cash paid for interest                               |                                           | $     |       |        | $     |      

See
accompanying notes to financial statements.

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MINNTEX INVESTMENT PARTNERS LP

NOTES TO FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

(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



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

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

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

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

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MINNTEX INVESTMENT PARTNERS LP

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands)



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



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

3.     Portfolio Assets

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

2006

2005Loans:Borrowers' obligations on outstanding balance of:Performing loans

$
514

$
1,241Nonperforming loans


23,224


31,97323,738


33,214Discount required to reflect the Portfolio Asset at unamortized cost


(23,738
)

(33,202
)Portfolio Assets, net

$


$
12


4.     Transactions With Affiliates

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

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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.

Management's Annual Report on Internal Control Over Financial Reporting

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

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

Item 9B.Other Information.

Not applicable.

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PART III

Item 10.Directors and Executive Officers of the Registrant.

Director Information

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

Name

Age

PositionRichard E. Bean

63

Chairman of the BoardC. Ivan Wilson

79

Vice Chairman of the BoardJames T. Sartain

58

President, Chief Executive Officer and DirectorDane Fulmer

57

DirectorRobert E. Garrison II

65

DirectorD. Michael Hunter

64

DirectorJeffery D. Leu

51

DirectorF. Clayton Miller

43

Director


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

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

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

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

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

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

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

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

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

Board of Directors and Committees

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

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

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

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

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

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

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



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

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

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

Executive Officers

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

Name

Age

PositionJames T. Sartain

58

President and Chief Executive OfficerJ. Bryan Baker

46

Senior Vice President and Chief Financial OfficerTerry R. DeWitt

49

Senior Vice PresidentJoe S. Greak

58

Senior Vice President, Tax DirectorJames C. Holmes

50

Senior Vice PresidentRichard J. Vander Woude

52

Senior Vice President, General Counsel and Secretary


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

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

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

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

Code of Business Conduct and Ethics

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

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Item 11.Executive Compensation.

COMPENSATION DISCUSSION AND ANALYSIS

Overview

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



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

Objectives of our compensation program

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

What our program is designed to reward

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

Elements of our compensation program and why we pay each element

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

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

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

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How we determine each element of compensation

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

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

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

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

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

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

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

Role of Executive Officers in Determining Executive Compensation

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

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

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

Tax Deductibility of Executive Compensation

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

COMPENSATION COMMITTEE REPORT

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

| |  | THE COMPENSATION COMMITTEE
C. Ivan Wilson, Chairman
Dane Fulmer
Robert E. Garrison II
D. Michael Hunter
| |  | -------------------------------------------------------------------------------------------------------

Summary Compensation Table

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

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

Summary Compensation Table

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

---

Executive

401(k)
Match($)

Supplement
Life($)

Auto($)

Total($)James T. Sartain

$
4,500

$
1,548

$
10,000

$
16,048J. Bryan Baker


4,500


540





5,040Terry R. DeWitt


4,500


540





5,040James C. Holmes


4,500


540





5,040Richard J. Vander Woude


4,500


828





5,328


Grants of Plan-Based Awards in 2006

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

Outstanding Equity Awards at 2006 Fiscal Year-End

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

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

|                        |  |                                                     |  | Number of Shares Underlying Unexercised Options (#) |  |                   |  |      
|----------------------- |  | --------------------------------------------------- |  | --------------------------------------------------- |  | ----------------- |  | -----
|
|
|James T. Sartain        |  | 12/1/2000
12/20/2001
5/13/2004
10/12/2005           |  | 50,000
50,000
18,750
2,750                          |  | 

18,750
8,250  |  | $$$$ 
|J. Bryan Baker          |  | 2/27/1997
12/1/2000
12/20/2001
5/13/2004
10/25/2005 |  | 3,000
30,000
20,000
7,500
2,000                     |  | 


7,500
6,000 |  | $$$$$
|Terry R. DeWitt         |  | 2/27/1997
12/20/2001
5/13/2004
10/25/2005           |  | 6,200
25,000
7,500
2,000                            |  | 

7,500
6,000   |  | $$$$ 
|James C. Holmes         |  | 2/27/1997
12/20/2001
5/13/2004
10/25/2005           |  | 6,000
22,000
7,500
2,000                            |  | 

7,500
6,000   |  | $$$$ 
|Richard J. Vander Woude |  | 12/1/2000
12/20/2001
5/13/2004
10/25/2005           |  | 25,000
25,000
7,500
2,000                           |  | 

7,500
6,000   |  | $$$$ 

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

Option Exercises and Stock Vested in Fiscal 2006

No options were exercised in Fiscal 2006 by the Named Executive Officers.

Potential Payments Upon Termination or Change-In-Control

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

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

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

Compensation of Non-Executive Directors at 2006 Fiscal Year End

Name

Fees Earned or Paid in Cash (1)
($)

Option
Awards (2)
($)

Total ($)Richard E. Bean

24,750

33,550

58,300C. Ivan Wilson

25,250

33,550

58,800Dane Fulmer

21,750

33,550

55,300Robert E. Garrison II

24,000

33,550

57,550D. Michael Hunter

21,500

33,550

55,050Jeffery D. Leu

17,000

33,550

50,550F. Clayton Miller

14,000

33,550

47,550


---

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

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

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Cumulative Total Stockholder Return

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



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

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

GRAPHIC

2001

2002

2003

2004

2005

2006FirstCity

100.00

114.17

508.33

840.00

960.83

923.33Nasdaq Market Index

100.00

69.13

103.36

112.49

114.88

126.22Nasdaq Industry Index

100.00

102.98

139.28

162.56

166.42

191.34


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

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

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

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|                             |  |       |  |            |  | Voting  |  | Investment
|---------------------------- |  | ----- |  | ---------- |  | ------- |  | ----------
|
|
|Heartland Advisors, Inc.     |  | 13G/A |  | 12/31/2006 |  |        |  | 1,121,050 
|First Manhattan Co.          |  | 13G/A |  | 12/31/2006 |  | 101,700 |  | 711,036   
|Dimensional Fund Advisors LP |  | 13G/A |  | 12/31/2006 |  | 628,160 |  |          
|F&C Asset Management plc.    |  | 13G   |  | 12/31/2006 |  | 549,670 |  |          

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

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

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

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

The
Right of First Refusal Agreement terminated on February 28, 2006.

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

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

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

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

Item 14.Principal Accountant Fees and Services.

Audit Fees

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

2006

2005Audit Fees (1)

$
1,673,000

$
1,160,300Total

$
1,673,000

$
1,160,300


---

Audit Committee Pre-Approval Policies and Procedures

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

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

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

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

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PART IV

Item 15.Exhibits and Financial Statement Schedules.



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



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



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

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

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

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*Filed
herewith.

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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:                            

July 24,
2007

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/RICHARD E. BEANRichard E. Bean       |  | Chairman of the Board and Director                                              |  | July 24, 2007
|/s/JAMES T. SARTAINJames T. Sartain     |  | President, Chief Executive Officer and
Director (Principal Executive Officer)   |  | July 24, 2007
|/s/J. BRYAN BAKERJ. Bryan Baker         |  | Senior Vice President and Chief
Financial Officer (Principal Financial Officer) |  | July 24, 2007
|/s/C. IVAN WILSONC. Ivan Wilson         |  | Vice Chairman of the Board and Director                                         |  | July 24, 2007
|/s/DANE FULMERDane Fulmer               |  | Director                                                                        |  | July 24, 2007
|/s/ROBERT E. GARRISONRobert E. Garrison |  | Director                                                                        |  | July 24, 2007
|/s/D. MICHAEL HUNTERD. Michael Hunter   |  | Director                                                                        |  | July 24, 2007
|/s/JEFFERY D. LEUJeffery D. Leu         |  | Director                                                                        |  | July 24, 2007
|/s/F. CLAY MILLERF. Clay Miller         |  | Director                                                                        |  | July 24, 2007

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