Use these links to rapidly review the documentFALCON FINANCIAL INVESTMENT TRUST AND PREDECESSOR Index to Form 10-Q



SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

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

For The Quarterly Period Ended September 30, 2004

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FALCON FINANCIAL INVESTMENT TRUST(Exact name of registrant as specified in its charter)

Commission file number 000-50509

|Maryland(State or other jurisdiction of
incorporation or organization) |  | 57-6208172(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------- |  | ----------------------------------------------

15 Commerce Road
Stamford, CT 06902(Address of principal executive offices) (Zip code)

203-967-0000(Registrant's telephone number, including area code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

|(Class)                        |  | (Outstanding as of November 15, 2004)
|------------------------------ |  | -------------------------------------
|COMMON SHARES, $0.01 PAR VALUE |  | 15,968,900 SHARES                    



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FALCON FINANCIAL INVESTMENT TRUST AND PREDECESSOR        Index to Form 10-Q



|PART I     |  | Consolidated Financial Information                                                   
|---------- |  | -------------------------------------------------------------------------------------
|Item 1.    |  | Financial Statements                                                                 
|           |  |                                                                                      
|           |  |                                                                                      
|           |  |                                                                                      
|           |  |                                                                                      
|           |  |                                                                                      
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and
Results of Operations
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4.    |  | Controls and Procedures                                                              
|PART II    |  | Other Information                                                                    
|Item 1.    |  | Legal Proceedings                                                                    
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities      
|Item 6.    |  | Exhibits                                                                             
|Signatures

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PART I. CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. Financial Statements

FALCON FINANCIAL INVESTMENT TRUST AND PREDECESSOR  Consolidated Statements of Financial Position

|                                     |                                                                                                                               | Company
September 30, 2004                 |   | Company
December 31, 2003 |            
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------------------- | -----------
|
|ASSETS                               |                                                                                                                               |                                            |   |                           |            
|ASSETS:                              |                                                                                                                               |                                            |   |                           |            
|                                     | Cash and cash equivalents                                                                                                     |                                            | $ | 26,379,103                |            
|                                     | Loans receivable, net of allowance for loan losses of $1,631,338 and $1,086,692, respectively                                 |                                            |   | 185,733,115               |            
|                                     | Retained interests in loan securitizations                                                                                    |                                            |   | 8,020,966                 |            
|                                     | Due from broker                                                                                                               |                                            |   | 3,900,000                 |            
|                                     | Accrued interest receivable                                                                                                   |                                            |   | 1,330,183                 |            
|                                     | Restricted cash                                                                                                               |                                            |   | 1,974,729                 |            
|                                     | Property and equipment, net                                                                                                   |                                            |   | 439,747                   |            
|                                     | Prepaid expenses and other assets                                                                                             |                                            |   | 1,706,497                 |            
|                                     |                                                                                                                               |                                            |   |                           |            
|                                     |                                                                                                                               | Total assets                               |   | $                         | 229,484,340
|                                     |                                                                                                                               |                                            |   |                           |            
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                               |                                            |   |                           |            
|LIABILITIES:                         |                                                                                                                               |                                            |   |                           |            
|                                     | Borrowings                                                                                                                    |                                            | $ | 103,297,774               |            
|                                     | Accrued interest payable                                                                                                      |                                            |   | 406,209                   |            
|                                     | Customer deposits                                                                                                             |                                            |   | 700,300                   |            
|                                     | Hold back of loan proceeds                                                                                                    |                                            |   | 1,974,729                 |            
|                                     | Interest rate swap contracts                                                                                                  |                                            |   | 3,933,671                 |            
|                                     | Accounts payable and accrued liabilities                                                                                      |                                            |   | 1,276,667                 |            
|                                     | Dividends payable                                                                                                             |                                            |   | 798,445                   |            
|                                     |                                                                                                                               |                                            |   |                           |            
|                                     |                                                                                                                               | Total liabilities                          |   |                           | 112,387,795
|                                     |                                                                                                                               |                                            |   |                           |            
|COMMITMENTS AND CONTINGENCIES        |                                                                                                                               |                                            |   |                           |            
|STOCKHOLDERS' EQUITY:                |                                                                                                                               |                                            |   |                           |            
|                                     | Preferred shares, $0.01 par value; 50,000,000 authorized; none issued and outstanding                                         |                                            |   |                          |            
|                                     | Common shares, $0.01 par value; 100,000,000 authorized; 15,968,900 and 14,105,800 shares issued and outstanding, respectively |                                            |   | 159,689                   |            
|                                     | Additional paid-in capital                                                                                                    |                                            |   | 123,521,350               |            
|                                     | Unearned compensation                                                                                                         |                                            |   | (2,052,017                | )          
|                                     | Accumulated deficit                                                                                                           |                                            |   | (2,675,559                | )          
|                                     | Accumulated other comprehensive (loss) income                                                                                 |                                            |   | (1,856,918                | )          
|                                     |                                                                                                                               |                                            |   |                           |            
|                                     |                                                                                                                               | Total stockholders' equity                 |   |                           | 117,096,545
|                                     |                                                                                                                               |                                            |   |                           |            
|                                     |                                                                                                                               | Total liabilities and stockholders' equity |   | $                         | 229,484,340
|                                     |                                                                                                                               |                                            |   |                           |            

See
accompanying notes to unaudited consolidated financial statements.

1

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FALCON FINANCIAL INVESTMENT TRUST AND PREDECESSOR  Consolidated Statements of Operations  (unaudited)

|          |                                                                                 | Company
Three Months
Ended
September 30,
2004 |                   | Predecessor
Three Months
Ended
September 30,
2003 |           | Company
Nine Months
Ended
September 30,
2004 |           | Predecessor
Nine Months
Ended
September 30,
2003
|--------- | ------------------------------------------------------------------------------- | --------------------------------------------- | ----------------- | ------------------------------------------------- | --------- | -------------------------------------------- | --------- | ------------------------------------------------
|REVENUES: |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          | Interest income on loans                                                        |                                               | $                 | 4,049,995                                         |           | $                                            | 1,972,835 |                                                 
|          | Interest income on securities purchased under resale agreements  related party |                                               |                   |                                                  |           |                                              | 59,919    |                                                 
|          | Interest income from retained interests                                         |                                               |                   | 297,579                                           |           |                                              | 378,373   |                                                 
|          | Gain on sale of loans                                                           |                                               |                   |                                                  |           |                                              |          |                                                 
|          | Gain on sale of retained interests                                              |                                               |                   |                                                  |           |                                              |          |                                                 
|          | Gain on securities sold, but not yet purchased  related party                  |                                               |                   |                                                  |           |                                              | 3,478,806 |                                                 
|          | Changes in fair value of interest rate swap contracts                           |                                               |                   | (53,691                                           | )         |                                              | (432,469  | )                                               
|          | Income from loan servicing                                                      |                                               |                   | 110,229                                           |           |                                              | 107,200   |                                                 
|          | Interest and other income                                                       |                                               |                   | 118,769                                           |           |                                              | 66,376    |                                                 
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 | Total revenues                                |                   |                                                   | 4,522,881 |                                              |           | 5,631,040                                       
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|EXPENSES: |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          | Interest expense on borrowings                                                  |                                               |                   | 1,158,918                                         |           |                                              | 234,303   |                                                 
|          | Interest expense on borrowings  related party                                  |                                               |                   |                                                  |           |                                              | 891,181   |                                                 
|          | Interest expense on securities sold, but not yet repurchased  related party    |                                               |                   |                                                  |           |                                              | 526,772   |                                                 
|          | Provision for loan losses                                                       |                                               |                   | 45,220                                            |           |                                              |          |                                                 
|          | Facility fee expense                                                            |                                               |                   | 496,500                                           |           |                                              | 93,750    |                                                 
|          | Other than temporary decline in value of retained interests                     |                                               |                   | 11,816                                            |           |                                              | 422,477   |                                                 
|          | Salaries and benefits                                                           |                                               |                   | 1,436,001                                         |           |                                              | 1,314,389 |                                                 
|          | Professional fees                                                               |                                               |                   | 241,061                                           |           |                                              | 281,850   |                                                 
|          | General and administrative                                                      |                                               |                   | 557,991                                           |           |                                              | 255,938   |                                                 
|          | Advertising and promotion                                                       |                                               |                   | 242,109                                           |           |                                              | 196,693   |                                                 
|          | Depreciation and amortization                                                   |                                               |                   | 41,654                                            |           |                                              | 31,036    |                                                 
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 | Total expenses                                |                   |                                                   | 4,231,270 |                                              |           | 4,248,389                                       
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 | Net income                                    |                   | $                                                 | 291,611   |                                              | $         | 1,382,651                                       
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 | Earnings per common share:                    |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 |                                               | Basic and diluted |                                                   | $         | 0.02                                         |           |                                                 
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 | Weighted average shares outstanding:          |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 |                                               | Basic             |                                                   |           | 15,662,500                                   |           |                                                 
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 
|          |                                                                                 |                                               | Diluted           |                                                   |           | 15,709,675                                   |           |                                                 
|          |                                                                                 |                                               |                   |                                                   |           |                                              |           |                                                 

See
accompanying notes to unaudited consolidated financial statements.

2

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FALCON FINANCIAL INVESTMENT TRUST AND PREDECESSOR  Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss)  For the Nine Months Ended September 30, 2004  (unaudited)

|                            |                                                          | Common Stock                                         |         |           |         |      |        |             |          | Accumulated
Other
Comprehensive
Income (Loss) |            |          |   |            |           
|--------------------------- | -------------------------------------------------------- | ---------------------------------------------------- | ------- | --------- | ------- | ---- | ------ | ----------- | -------- | --------------------------------------------- | ---------- | -------- | - | ---------- | ----------
|
|
|BALANCE, December 31, 2003  |                                                          | 14,105,800                                           |         | $         | 141,058 |      | $      | 108,020,597 |          | $                                             | (2,840,827 | )        | $ | (1,090,858 | )         
|                            | Net income                                               |                                                      |         |           |         |      |        |             |          |                                               |            |          |   |            | 12,589    
|                            | Over-allotment transaction on February 2, 2004:          |                                                      |         |           |         |      |        |             |          |                                               |            |          |   |            |           
|                            |                                                          | Issuance of shares in connection with over-allotment |         | 1,875,000 |         |      | 18,750 |             |          | 16,856,250                                    |            |          |   |            |           
|                            |                                                          | Underwriters' fee and offering expenses              |         |           |         |      |        |             |          | (1,246,316                                    | )          |          |   |            |           
|                            | Issuance of restricted shares to employees and trustees  |                                                      | 14,000  |           |         | 140  |        |             | 123,660  |                                               |            | (123,800 | ) |            |           
|                            | Terminated restricted shares to employees and trustees   |                                                      | (25,900 | )         |         | (259 | )      |             | (232,841 | )                                             |            | 233,100  |   |            |           
|                            | Amortization of unearned compensation                    |                                                      |         |           |         |      |        |             |          |                                               |            | 679,510  |   |            |           
|                            | Unrealized loss on hedging transactions                  |                                                      |         |           |         |      |        |             |          |                                               |            |          |   |            |           
|                            | Unrealized gain on retained interests in securitizations |                                                      |         |           |         |      |        |             |          |                                               |            |          |   |            |           
|                            | Dividends paid or declared                               |                                                      |         |           |         |      |        |             |          |                                               |            |          |   |            | (1,597,290
|                            |                                                          |                                                      |         |           |         |      |        |             |          |                                               |            |          |   |            |           
|BALANCE, September 30, 2004 |                                                          | 15,968,900                                           |         | $         | 159,689 |      | $      | 123,521,350 |          | $                                             | (2,052,017 | )        | $ | (2,675,559 | )         
|                            |                                                          |                                                      |         |           |         |      |        |             |          |                                               |            |          |   |            |           

See accompanying notes to unaudited consolidated financial statements.

3

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FALCON FINANCIAL INVESTMENT TRUST AND PREDECESSOR  Consolidated Statements of Cash Flows  (unaudited)

|                                                                                            |                                                                           | Company
Three Months
Ended
September 30,
2004        |            | Predecessor
Three Months
Ended
September 30,
2003 |            | Company
Nine Months
Ended
September 30,
2004 |             | Predecessor
Nine Ended
Months
September 30,
2003 |           
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ---------------------------------------------------- | ---------- | ------------------------------------------------- | ---------- | -------------------------------------------- | ----------- | ------------------------------------------------ | ----------
|Cash flows from operating activities:                                                       |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|Net income                                                                                  |                                                                           | $                                                    | 291,611    |                                                   | $          | 1,382,651                                    |             | $                                                | 12,589    
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Gain on sale of loans                                                     |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Gain on sale of retained interests                                        |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Other than temporary decline in value of retained interest                |                                                      |            | 11,816                                            |            |                                              | 422,477     |                                                  |           
|                                                                                            | Changes in fair value of interest rate swap contracts                     |                                                      |            | 53,691                                            |            |                                              |            |                                                  |           
|                                                                                            | Depreciation and amortization  property and equipment                    |                                                      |            | 41,654                                            |            |                                              | 31,036      |                                                  |           
|                                                                                            | Depreciation and amortization  deferred origination fees, net of expense |                                                      |            | (39,745                                           | )          |                                              | 10,662      |                                                  |           
|                                                                                            | Provision for loan losses                                                 |                                                      |            | 45,220                                            |            |                                              |            |                                                  |           
|                                                                                            | Amortization of unearned compensation                                     |                                                      |            | 202,060                                           |            |                                              |            |                                                  |           
|                                                                                            | Loss on disposition of property and equipment                             |                                                      |            |                                                  |            |                                              | 170         |                                                  |           
|                                                                                            | (Accretion) amortization of (discount) premium on retained interests      |                                                      |            | (45,107                                           | )          |                                              | (11,254     | )                                                |           
|Changes in operating assets and liabilities:                                                |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Increase in securities sold, but not yet purchased  related party        |                                                      |            |                                                  |            |                                              | (64,012,614 | )                                                |           
|                                                                                            | Decrease (increase) in interest rate swap contracts                       |                                                      |            | 709,629                                           |            |                                              | 433,170     |                                                  |           
|                                                                                            | Increase in securities purchased under resale agreements  related party  |                                                      |            |                                                  |            |                                              | 64,443,940  |                                                  |           
|                                                                                            | (Increase) decrease in due from broker                                    |                                                      |            | (3,900,000                                        | )          |                                              | (41,112     | )                                                |           
|                                                                                            | (Increase) decrease in accrued interest receivable                        |                                                      |            | (186,121                                          | )          |                                              | (114,490    | )                                                |           
|                                                                                            | Decrease (increase) in prepaid expenses and other assets                  |                                                      |            | 535,309                                           |            |                                              | (660,889    | )                                                |           
|                                                                                            | Decrease in due to broker  related party                                 |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Increase (decrease) in accrued interest payable                           |                                                      |            | 90,863                                            |            |                                              | 6,195       |                                                  |           
|                                                                                            | Decrease in accrued interest payable  related party                      |                                                      |            |                                                  |            |                                              | (591,411    | )                                                |           
|                                                                                            | Increase (decrease) in customer deposits                                  |                                                      |            | 169,549                                           |            |                                              | (11,687     | )                                                |           
|                                                                                            | Increase (decrease) in accounts payable and accrued liabilities           |                                                      |            | 16,539                                            |            |                                              | 1,309,466   |                                                  |           
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            |                                                                           | Net cash (used in) provided by operating activities  |            |                                                   | (2,003,032 | )                                            |             | 2,596,310                                        |           
|Cash flows from investing activities:                                                       |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Disbursements for loan originations, net of fees received                 |                                                      |            | (5,319,832                                        | )          |                                              | (21,131,515 | )                                                |           
|                                                                                            | Repayments of loans                                                       |                                                      |            | 1,366,415                                         |            |                                              | 599,487     |                                                  |           
|                                                                                            | Net proceeds from sale of retained interests                              |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Net proceeds from sale of loans                                           |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Capital expenditures, net                                                 |                                                      |            | (22,037                                           | )          |                                              | (3,899      | )                                                |           
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            |                                                                           | Net cash (used in) provided by investing activities  |            |                                                   | (3,975,454 | )                                            |             | (20,535,927                                      | )         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|Cash flows from financing activities:                                                       |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Proceeds from over-allotment                                              |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Payment of over-allotment expenses                                        |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Borrowings from warehouse line of credit                                  |                                                      |            | 4,256,000                                         |            |                                              | 19,554,413  |                                                  |           
|                                                                                            | Repayments of warehouse line of credit                                    |                                                      |            | (1,366,415                                        | )          |                                              | (603,899    | )                                                |           
|                                                                                            | Borrowings from subordinated loans                                        |                                                      |            |                                                  |            |                                              | 1,950,000   |                                                  |           
|                                                                                            | Repayments of subordinated loans                                          |                                                      |            |                                                  |            |                                              | (2,769,766  | )                                                |           
|                                                                                            | Borrowings from interest capitalization notes                             |                                                      |            |                                                  |            |                                              | 60,346      |                                                  |           
|                                                                                            | Repayments of interest capitalization notes                               |                                                      |            |                                                  |            |                                              |            |                                                  |           
|                                                                                            | Cash dividends paid                                                       |                                                      |            | (798,845                                          | )          |                                              |            |                                                  |           
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            |                                                                           | Net cash provided by (used in) financing activities  |            |                                                   | 2,090,740  |                                              |             | 18,191,094                                       |           
|                                                                                            |                                                                           | Net (decrease) increase in cash and cash equivalents |            |                                                   | (3,887,746 | )                                            |             | 251,477                                          |           
|Cash and cash equivalents, beginning of period                                              |                                                                           |                                                      | 30,266,849 |                                                   |            | 240,721                                      |             |                                                  | 25,645,578
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|Cash and cash equivalents, end of period                                                    |                                                                           | $                                                    | 26,379,103 |                                                   | $          | 492,198                                      |             | $                                                | 26,379,103
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|Supplemental disclosure of cash flow information:                                           |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Interest paid                                                             |                                                      | $          | 1,069,486                                         |            | $                                            | 1,016,733   |                                                  | $         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Interest received                                                         |                                                      | $          | 3,838,861                                         |            | $                                            | 1,804,544   |                                                  | $         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|Supplemental disclosure of non-cash flow information:                                       |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Interest payable on interest rate swaps                                   |                                                      | $          | 1,766                                             |            | $                                            |            |                                                  | $         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Changes in fair value of interest rate swap agreements                    |                                                      | $          | (5,555,019                                        | )          | $                                            |            |                                                  | $         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Changes in fair value of retained interests in securitization             |                                                      | $          | (5,765                                            | )          | $                                            | (621,927    | )                                                | $         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Allocated basis of retained interest in 2003-1 securitization             |                                                      | $          |                                                  |            | $                                            |            |                                                  | $         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           
|                                                                                            | Dividends paid or declared                                                |                                                      | $          | 798,445                                           |            | $                                            |            |                                                  | $         
|                                                                                            |                                                                           |                                                      |            |                                                   |            |                                              |             |                                                  |           

See accompanying notes to unaudited consolidated financial statements.

4

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FALCON FINANCIAL INVESTMENT TRUST AND PREDECESSOR        Notes to Consolidated Financial Statements  (unaudited)

(1)   Organization

Falcon Financial Investment Trust (the "Trust") is a fully integrated, self-advised finance company focused solely on the business of originating and
servicing loans to automotive dealers in the United States. The Trust was formed as a Maryland Real Estate Investment Trust ("REIT") on August 27, 2003. The Trust was formed to address the
specialized capital needs of the automotive retailing industry. The Trust commenced operations on December 22, 2003 when it completed its initial public offering ("IPO") and concurrently
consummated certain other formation transactions, including a merger with Falcon Financial, LLC (the "Predecessor").

The
IPO consisted of the sale of 12,500,000 common shares to the public at a price of $9 per share, generating gross proceeds of $112.5 million. The aggregate proceeds to the
Trust, net of underwriters' discount and offering costs, was approximately $102.4 million. Concurrent with the IPO, the Trust issued 1,287,500 common shares to the owners of its Predecessor as
part of the formation transaction in acquiring the assets and assuming the liabilities of the Predecessor. Also concurrently with the IPO, the Trust issued 318,300 restricted shares as part of its
Equity Incentive Plan to its independent trustees, trustee nominees, members of senior management and other employees. The total number of common shares outstanding immediately following the IPO was
14,105,800. In February 2004, the underwriters exercised the over-allotment and the Trust sold an additional 1,875,000 common shares to the public at a price of $9 per share. The
aggregate proceeds to the Trust, net of underwriters' discount and offering costs, was approximately $15.6 million, bringing the total aggregate net proceeds of the IPO to approximately
$118.0 million. The total number of common shares outstanding immediately following the over-allotment was 15,985,800, which includes an additional 5,000 restricted shares issued in
connection with the Equity Incentive Plan.

The
Predecessor was owned by Falcon Auto Venture, LLC (40%), SunAmerica, Inc. (30%), and MLQ Investors, LP (an affiliate of Goldman, Sachs & Co.) (30%). Members of the
senior management of the Trust owned an 86% interest in Falcon Auto Venture, LLC. Subsequent to the IPO, owners of the Predecessor collectively owned 10.3% of the Trust, with no individual owning
greater than 5%.

Concurrently
with the completion of the IPO, the Trust authorized 50.0 million preferred shares of beneficial interest. No preferred shares have been issued.

The
Trust utilized its net proceeds of $102.4 million to repay $77.8 million in borrowings. After repayment of certain borrowings, the Trust had $24.6 million in
available cash immediately following the IPO.

(2)   Summary of Significant Accounting Policies



The unaudited interim consolidated financial statements presented herein include all of the accounts of the Trust and its wholly owned subsidiary, Falcon
Financial II, LLC (collectively, the "Company") which commenced operations on December 22, 2003. For periods prior to that time, this report includes the financial statements of the
Predecessor. All intercompany transactions and account balances have been eliminated in consolidation.

The
accompanying unaudited financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America, commonly
referred to as U.S. GAAP, for interim financial information and in conformity with the rules and

5

---



regulations
of the Securities and Exchange Commission, commonly referred to as the SEC for reporting on the Quarterly Report on Form 10-Q. Accordingly, they do not include all of
the information and footnotes for complete U.S. GAAP financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto as of and for
the period ended December 31, 2003, contained in the Company's Transition Report on Form 10-K for the transition period from October 1, 2003 to December 31,
2003 filed with the SEC on March 30, 2004. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the Company's consolidated financial position at September 30, 2004 and December 31, 2003, the results of its operations and
its cash flows for the three and nine months ended September 30, 2004 and 2003, and changes in shareholders' equity and comprehensive income (loss) for the nine months ended
September 30, 2004.

The
results of operations for any interim period are not necessarily indicative of the results that may be expected for the full year. 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 materially from those estimates and assumptions. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the period
they are determined necessary.



For purposes of the statements of cash flows, the Company and its Predecessor consider all highly liquid investments with original maturities of three months or
less at the date of acquisition to be cash equivalents. These assets are carried at cost, which approximates fair value. Restricted cash is not considered as cash or cash equivalents for the purpose
of the statements of cash flows.



The Company originates loans that are underwritten with the intention of securitizing the receivables in a financing transaction, which will be accounted for as
secured borrowings under the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilitiesa replacement of FASB Statement 125"("SFAS No. 140"), and carry the loans on the statements of financial position to
maturity. The loans receivable are stated at their principal amount outstanding, less net deferred loan fees, unearned discounts and allowance for loan losses. Nonrefundable origination fees less
certain related direct costs associated with the origination of the loans are deferred and amortized into interest income over the term of the loan using a method that approximates the interest
method.

All
loans originated by the Predecessor were underwritten with the intention of securitizing and selling the portfolio and are carried at the lower of cost or market value on the
statements of financial position. The amount, if any, by which the cost exceeds the fair value, is recorded as a valuation allowance. Changes in the valuation allowance are recorded in the statements
of operations. As of September 30, 2003, no valuation allowance was deemed necessary.



The allowance for loan losses is based on a periodic analysis of the loan portfolio and in management's judgment, reflects an amount that is adequate to absorb
losses inherent in the existing portfolio. In evaluating the portfolio, management considers a variety of factors such as the size of the portfolio, prior loss experience, current and potential risks
of the loan portfolio, present financial

6

---



condition
of the borrower, current economic conditions and other portfolio risk characteristics. Provisions for loan losses are charged to operations. Loans, including impaired loans, are charged
against the allowance for loan losses when actual losses have been established.

The
Company accounts for its allowance for losses on loans in accordance with SFAS No. 5, "Accounting for Contingencies"("SFAS
No. 5") and SFAS No. 114, "Accounting by Creditors for Impairment of a Loan"("SFAS
No. 114").Both Statements require the Company to evaluate the collectibility of both contractual interest and principal loan payments. SFAS
No. 5 requires the accrual of a loss when it is probable that a loan has been impaired and the amount of the loss can be reasonably estimated. SFAS No. 114 requires that impaired loans
be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate, or as an alternative,
at the loan's observable market price or fair value of the collateral. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. A loss from impairment represents the amount by which a creditor's recorded investment in a loan exceeds the present value of the
expected future cash flows from the loan discounted at the loan's effective interest rate (including the fair value of the collateral that may be part of the loan). Losses for which such provisions
for impairment are made, unless applied as a write-down of the recorded investment in the loan, represent a portion of the creditor's allowance for loan losses.



The Predecessor accounted for its loan securitizations in accordance with SFAS No. 140. When the Predecessor sold loans in a securitization, it may have
retained one or more subordinated certificates from the certificates issued. Securitizations may be structured in various ways but generally conform to a common model. Typically, an issuer sells a
portfolio of loans to a special purpose entity established for the sole purpose of purchasing and reselling the loans to a securitization trust. The securitization trust then may issue bonds or
certificates collateralized by the loans transferred to the securitization trust. The proceeds received from these bonds or certificates are used to purchase the loans from the issuing entity. The
gain on the sale of loans is the difference between the proceeds from the sale of loans (net of related selling costs) and the allocated carrying amount of the receivables sold, including deferred
origination fees and costs. The Predecessor determined the carrying amount by allocating the total carrying amount of the loans sold between the portion sold and the interests retained based on each
portion's relative fair values at the time of the securitization. Assumptions used in calculating the estimated fair value of such retained interests are subject to volatility that could materially
affect operating results.

Retained
interests in securitizations are accounted for as available-for-sale securities and are carried at estimated fair value, with unrealized gains or losses
included in stockholders' equity within the caption accumulated other comprehensive income (loss). The Company is not aware of an active market for the purchase and sale of these retained interests at
this time and accordingly, the Company estimates the fair value of the retained interest by calculating the present value of the estimated expected future cash flows received by the Company after
being released by the securitization trust, using a discount rate commensurate with the risk involved taking into consideration the results of sales of certificates owned by the Company to third
parties. The cash flows being discounted are adjusted for estimated net losses due to defaults or prepayments. The Company has experienced four defaulted loans since inception (of which one has been
fully resolved and three are pending resolution) and no prepayments in its retained interests in securitizations as of September 30, 2004 and December 31, 2003. All other loans are
current.

Each
loan securitization has a specific credit enhancement in the form of cash flow requirements that must be met before the Company receives any cash on its retained interest. The
retained interests which the Company holds are subordinate in the right of payment to all other classes of certificates,

7

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which
must receive their applicable distributions before any cash is available for distribution to the holders of the retained interests.

Changes
in the fair value of the retained interests resulting from changes in the timing of cash flows to be received by the Company or changes in market interest rates are adjusted
through accumulated other comprehensive income (loss) within stockholders' equity. Reductions in the estimated aggregate cash flows to be received by the Company, caused by defaults or prepayments
that result in a reduction to the fair value of the retained interests, are considered an other than temporary impairment and are recognized through a charge to expense in that period.



The Company maintains various escrow accounts on behalf of its borrowers to fund work that needs to be performed on the borrower's secured property as a condition
to the loan agreement. At September 30, 2004 and December 31, 2003, the Company held $1,974,729 and $2,657,660, respectively, of cash collateral for the completion of those projects.



Interest is accrued monthly on outstanding principal balances unless management considers the collection of interest to be uncertain (generally, when loans are
contractually past due three months or more).

Origination
fees received and direct costs incurred related to the origination of the loans is deferred as an adjustment to the carrying value of the loan portfolio. Origination fees and
direct costs incurred are amortized into income over the life of the related loan. At the time of sale of the related loans, any remaining deferred fees and costs are recognized as income and included
with the gain or loss on the sale of loans.



Under servicing agreements for all of the Company's securitizations, servicing fees for loans in good standing are accrued monthly based upon the then outstanding
principal balances of loans serviced. The Company acts as primary servicer and special servicer with respect to loans securitized. A subsidiary of the Bank of New York acts as master servicer. The
Company earns a servicing fee of 0.085% per annum (0.095% on the Company's most recently completed securitization in 2003) of the outstanding loan balance with respect to each loan serviced in its
capacity as primary servicer. As a special servicer, the Company earns a servicing fee of 0.25% per annum of the outstanding balance of each loan in default. Servicing fees on defaulted loans are
earned and paid monthly once a loan enters into default status. As of September 30, 2004, there are three loans in default. Fees received for loan servicing approximate the actual cost of
servicing.



The Predecessor entered into certain transactions (short sales and purchases, securities resale and repurchase agreements, and interest rate swaps) to mitigate
the effects that changes in interest rates and credit spreads have on the fair value of its fixed-rate loan portfolio held for sale. In connection with the Predecessor's short sales, its
obligation to deliver the securities to Goldman, Sachs & Co. is recorded in the statements of financial position under the caption securities sold, but not yet purchasedrelated
party. This liability is carried at market value with any unrealized gain or loss recorded in the statements of operations. The related interest expense recorded in the statements of operations over
the period held for the three and nine months ended September 30, 2003 was $526,772 and $1,071,075, respectively.

8

---





Purchases of securities under agreements to resell and sales of securities under agreements to repurchase are accounted for as secured lending and financing
transactions, respectively. In connection with the Predecessor's purchase contracts, its obligation to resell the securities to Goldman, Sachs & Co. is recorded in the statements of financial
position. These assets are carried at the amounts at which the identical securities will be subsequently resold as specified in the agreements, generally at market value.
The related interest income recorded in the statements of operations for the three and nine months ended September 30, 2003 was $59,919 and $136,756, respectively.



The Company enters into forward interest rate swap contracts as a means of mitigating the impact that changes in interest rates and credit spreads have with
respect to the forecasted issuance of long-term debt. The contracts are evaluated at inception and on an on-going basis in order to determine whether the contracts qualify for
hedge accounting under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended and interpreted. The hedge
instrument must be highly effective in achieving offsetting changes in the hedged item attributable to the risk being hedged in order to qualify for hedge accounting treatment. Forward starting
interest rate swaps accounted for as cash flow hedges are carried in the statements of financial position at fair value with changes in their fair value recorded in accumulated other comprehensive
income (loss). Any ineffectiveness which arises during the hedging relationship is recognized in statements of operations during the period in which it arises. The aggregate net interest expense and
market value change for the three and nine months ended September 30, 2004 was $(53,691) and $102,680, respectively.

The
Predecessor entered into interest rate swap arrangements to mitigate the impact that changes in interest rates and credit spreads have on the value of its fixed-rate loan
portfolio held for sale. The term of the derivative contracts is determined by duration of the loans held for sale pool. Swap contracts are carried at fair value with any unrealized gain or loss
recorded in the statements of operations. The related interest income and interest expense is recorded in the statements of operations over the periods held. The aggregate net interest expense and
market value change for the three and nine months ended September 30, 2003 was $(432,469) and $246,347, respectively.



Property and equipment, net are reported at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over five years for
furniture and fixtures and three years for computers and equipment. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining term of the respective leases.

The
components of property and equipment, net at September 30, 2004 and December 31, 2003 are as follows:

September 30,
2004

December 31, 2003(unaudited)Furniture and fixtures

$
336,332

$
322,140Computers and equipment


582,957


396,335Leasehold improvements


93,806


79,363Gross property and equipment, at cost


1,013,095


797,838Less: accumulated depreciation and amortization


(573,348
)

(461,978
)Property and equipment, net

$
439,747

$
335,860


9

---



Depreciation
and amortization expense for the three and nine months ended September 30, 2004 and 2003 was $41,654 and $111,370 and $31,036 and $99,591, respectively.



Immediately prior to the IPO, the Company adopted an Equity Incentive Plan and issued restricted common shares to its executives, employees and
non-employee trustees. Unearned compensation expense was recorded by the Company as reduction to stockholders' equity and charged to compensation expense on a straight-line
basis over the vesting period of three years. The compensation expense for the three and nine months ended September 30, 2004 was $202,060 and $679,510, respectively.

In
September 1999, the Predecessor adopted the Falcon Financial, LLC Option Plan. The options of the Predecessor were recorded based on the fair value method as prescribed in SFAS
No. 123, "Accounting for Stock-Based Compensation."The option plan was terminated prior to the formation transaction on December 22,
2003.



Comprehensive income (loss) represents net income (loss) and certain amounts reported directly in stockholders' equity, such as net unrealized gain or loss on
retained interests in securitizations and the change in the fair value of cash flow hedges. Accumulated other comprehensive (loss) income reported in the statements of financial position as of
September 30, 2004 and December 31, 2003, represents the accumulated unrealized (loss) gain on retained interests in securitizations and interest rate swaps accounted for as cash flow
hedges. The components of comprehensive income (loss) for the three and nine months ended September 30, 2004 are as follows (unaudited):

Three Months
Ended
September 30, 2004

Nine Months
Ended
September 30, 2004Net income

$
291,611

$
12,589Unrealized loss on hedging transactions


(5,555,020
)

(4,219,598
)Unrealized (loss) gain on retained interests in securitizations


(5,765
)

690,963Comprehensive loss

$
(5,269,174
)
$
(3,516,046
)




The Company has elected to be treated as a real estate investment trust (hereafter "REIT") for federal income tax purposes. To maintain its status as a REIT, the
Company must comply with the REIT provisions of the Internal Revenue Code of 1986, as amended (hereafter "IRC"). If the Company distributes 90% of its taxable income to its shareholders and satisfies
the various REIT asset, income, stock ownership and other tests required under the IRC, the Company generally will not be subject to federal income tax. If the Company fails to qualify as a REIT in
any taxable year, it will be subject to federal income tax including any applicable alternative minimum tax on its taxable income at regular corporate rates. Under certain circumstances, if the
Company qualifies as a REIT, it may be subject to federal income tax and excise tax on its undistributed taxable income and may also be subject to state and local income taxes. The Company's
subsidiary, Falcon Financial II, LLC is a taxable REIT subsidiary for federal income tax purposes and is fully taxable at normal corporate tax rates.

10

---





The Company calculates basic earning (loss) per share by dividing net income (loss) for the period by the weighted-average shares of its common stock outstanding
for that period. Diluted earning (loss) per share takes into account the effect of dilutive instruments, such as unvested restricted shares, based on the average share price for the period in
determining the number of incremental shares that are added to the weighted-average number of shares outstanding using the treasury stock method.

The
reconciliation of shares used in the basic and diluted earnings (loss) per common share computations for the three and nine months ended September 30, 2004 is as follows
(unaudited):

Three Months
Ended
September 30, 2004

Nine Months
Ended
September 30, 2004Net income

$
291,611

$
12,589Weighted average shares outstanding


15,976,355


15,762,343Effect of dilutive securities:Unvested restricted shares


(313,855
)

(318,821
)Basic weighted average shares outstanding


15,662,500


15,443,522Effect of dilutive securities:Dilutive impact of restricted shares


47,175


72,646Diluted weighted average shares outstanding


15,709,675


15,516,168Earnings per common share:Basic and diluted

$
0.02

$





Certain items from prior periods have been reclassified to conform to current period presentation. Such reclassifications had no effect on previously reported net
income or earnings per share.



In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities", an interpretation of ARB 51 (FIN 46). The interpretation provides guidance on consolidating variable interest entities ("VIE") and applies immediately to variable
interests created after January 31, 2003. The guidelines of the interpretation as revised by FIN 46 (revised December 31, 2003), "Consolidation of Variable
Interest Entities"(FIN 46R) became applicable to the Company in the first quarter of 2004 for variable interest entities created before February 1, 2003. The
interpretation requires VIEs, formerly referred to as special purpose entities, to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities
without support from other parties, or the equity investors lack certain specified characteristics. Adoption of this new accounting standard did not have a material effect on the Company's financial
condition or results of operations.

11

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(3)   Loans Receivable, net

Loans receivable, net as of September 30, 2004 and December 31, 2003 are summarized as follows:

September 30,
2004

December 31,
2003(unaudited)Loans

$
188,383,017

$
127,846,080Less: Net deferred loan origination fees and initial direct costs


(1,018,564
)

(682,766
)Allowance for loan losses


(1,631,338
)

(1,086,692
)Loans, net

$
185,733,115

$
126,076,622


Loans
receivable at September 30, 2004 are comprised of fixed-rate and variable-rate loans with interest rates ranging between 7.18% and 9.52% and 4.65%
and 6.30%, respectively. Maturity dates range from June 1, 2009 to April 1, 2023 with 56.6% of the principal balance maturing during 2018. Nine loans totaling approximately
$73.6 million have balloon payments of
approximately $3.4 million on June 1, 2009, approximately $4.0 million on February 1, 2011, approximately $6.2 million on July 1, 2011, approximately
$3.1 million on September 11, 2011, approximately $1.5 million on December 1, 2013, approximately $2.0 million on March 1, 2014, approximately
$17.1 million on April 1, 2014 and approximately $12.0 million on July 1, 2014. There are 24 borrowers located in 18 states. Approximately 47.1% of the outstanding
principal balance of the loans is to eight borrowers located in three states (Florida  25.8%, Tennessee  11.2%, and
Ohio  10.1%). There are no other concentrations greater than 10% in any other state or to any individual borrower.

Loans
receivable at December 31, 2003 are comprised of fixed-rate loans with interest rates ranging between 8.14% and 9.52%. Maturity dates range from
February 1, 2011 to April 1, 2023 with 78.9% of the principal balance maturing during 2018. Two loans totaling approximately $9.6 million have balloon payments of approximately
$4.0 million on February 1, 2011 and approximately $1.5 million on December 1, 2013. There are 17 borrowers located in 15 states. Approximately 33.1% of the principal
balance of the loans is to three borrowers located in two states (Florida  22.1% and Virginia  11.0%). There are no other concentrations greater
than 10% in any other state or to any individual borrower.

The
Company originates franchise mortgage loans secured by automotive dealerships, including real estate and improvements (real collateral), parts inventory, and blue-sky
value (business asset collateral). Blue-sky or franchise value is an intangible asset that is a function of, among other things, the business reputation, brand strength, financial strength
and market share of the dealership. The Company also originates mortgage loans secured by real collateral. The Company's liens on business asset collateral may be subordinated in whole or in part to
liens held by other lenders.

There
were no loans with unpaid principal or interest balances contractually past due or on non-accrual status December 31, 2003.

Subsequent
to September 30, 2004, one loan with an unpaid principal balance of approximately $13.7 million became delinquent in regards to the November 2004 payment.
Management is currently working with the borrower to remedy the delinquency. The Company estimates that the resolution of this situation will not have a material impact on its financial position or
results of operations.

12

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(4)   Allowance for Loan Losses

The Company establishes an allowance for loan losses to reserve for losses inherent in the Company's loan portfolio. The following summarizes the activity in the
allowance for loan losses for the period from December 31, 2003 through September 30, 2004 (unaudited):

Balance at December 31, 2003

$
1,086,692Provision for loan losses


544,646Balance at September 30, 2004

$
1,631,338


(5)   Derivative Instruments and Hedging Activities

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities"("SFAS No. 133"). In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging ActivitiesDeferral of the Effective Date of SFAS No. 133." In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133." In April 2003, the FASB
issued SFAS No. 149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."These Statements, collectively referred to as
SFAS No. 133, establish accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the
balance sheet as either an asset or liability measured at its fair value. Changes in the fair value of the derivative are to be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows gains and losses on derivatives to offset related results on the hedged items in the statements of operations and requires that a
company document, designate, and assess the effectiveness of transactions that receive hedge accounting under SFAS No. 133.

The
Company enters into forward starting interest rate swap transactions to mitigate the effect that changes in interest rates and credit spreads have on the forecasted issuance of
long-term debt. In swap transactions, the Company will generally enter into an interest rate swap contract, receiving a floating rate of interest and paying a fixed rate of interest. The
term of the swap contracts is determined by the duration of the forecasted long-term debt to be issued. These swaps are accounted for as cash flow hedges and changes in their fair value
are recorded in accumulated other comprehensive income (loss).

The
Predecessor entered into certain transactions (short sales and purchases, securities resale and repurchase agreements, and interest rate swaps) to mitigate the effect that changes in
interest rates and credit spreads have on the fair value of its fixed-rate loan portfolio held for sale. Periods of rising interest rates and widening credit spreads decrease the fair
value of the loan portfolio held for sale. Generally, the Predecessor entered into these transactions when the rate was locked on a pending loan just prior to the closing of the loan. The new loan was
added to the pool of loans being held for sale and the pool was then reviewed to determine what, if any, additional hedging transaction was to be executed. Generally, the Predecessor shorted U.S.
Treasuries and invested the proceeds in repurchase agreements with Goldman, Sachs & Co. with U.S. Treasury notes as the underlying securities. In swap transactions, the Predecessor generally
entered into an interest rate swap contract, receiving a floating rate of interest and paying a fixed rate of interest. The term of the swap contracts was determined by duration of the loans held for
sale pool. The Predecessor had a contractual obligation to settle the repurchase and swap agreements with Goldman, Sachs & Co. at the current fair value on the repurchase date. These contracts
have been recorded as free standing derivatives with changes in fair value recorded in results of operations.

As
of September 30, 2004, the Company had nine forward starting interest rate swap contracts accounted for as cash flow hedges on which the Company paid fixed and received
floating. The

13

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contracts
had a total notional amount of $122,854,368 and a fair value of $(3,933,671). There was accrued interest on these contracts of $1,766 at September 30, 2004. The contracts had maturity
dates ranging from April 1, 2014 to February 28, 2018. Fixed interest rates ranged from 4.417% to 5.315% and a floating rate of 1.84%.

As
of December 31, 2003, the Company had four forward starting interest rate swap contracts accounted for as cash flow hedges on which the Company paid fixed and received
floating. The contracts had a total notional amount of $94,271,976 and a fair value of $389,783. There was no accrued interest on these contracts at December 31, 2003. The contracts had
maturity dates ranging from April 1, 2014 to December 1, 2016. Fixed interest rates ranged from 4.045% to 4.815% and a floating rate of 1.12%.

As
of September 30, 2004 and December 31, 2003, included in accumulated other comprehensive income (loss) for the forward starting interest rate swap contracts was
$(3,829,815) and $389,783, respectively.

(6)   Loan Securitizations

Through a special purpose bankruptcy remote subsidiary, the Predecessor entered into securitization transactions that qualified as sales for financial reporting
purposes, resulting in off-balance sheet accounting treatment. The Predecessor retained rated and non-rated certificates issued in connection with the securitization
transaction.

In
February 2003, the Predecessor completed Falcon Auto Dealership Loan Trust Certificates 2003-1, securitizing loans with a principal balance of $141,060,558,
receiving net proceeds (after the payment of expenses) of $145,464,590 and retaining rated and non-rated certificates with an allocated book value of $4,962,378 and a fair value of
$5,431,623. The securitization transaction resulted in a pretax gain of $10,696,524. The proceeds from the securitization were used to pay down borrowings outstanding under the warehouse line of
credit and the senior subordinated loans.

In
February 2003, the Predecessor sold 100% of its rated retained interest in the 2003-1 Trust to a third party. The Predecessor received proceeds of $2,983,560 and
realized a gain of $265,352.

In
August 2003, a delinquency was experienced in the 2003-1 Trust for a loan with an unpaid principal balance of approximately $9.5 million. The loan defaulted
in September 2003 and the Predecessor estimated that there would be an other than temporary reduction in the aggregate cash flows that the Predecessor expects to receive from the
2003-1 Trust for its unrated retained interest. Accordingly, the Predecessor charged $422,477 to expense, which was the amount considered to be other than temporary decline in the
Predecessor's fair value of the unrated retained interest. This estimated reduction in aggregate cash flows was based on management's assessment of the amount it would ultimately collect on the
defaulted loan.

In
October 2003, Moody's downgraded the Class A-1 and A-2 certificates in the 2003 securitization from Aaa to Aa1, the Class B certificates
from Aa2 to Aa3, the Class C certificates from A2 to A3, the Class D certificates from Baa2 to Baa3, the Class E certificates from Ba2 to Ba3, and the Class F certificates
from B3 to Caa2. In November 2003, Moody's further downgraded the Class A-1 and A-2 certificates in this securitization from Aa1 to Aa2, the Class B
certificates from Aa3 to A1, the Class C certificates from A3 to Baa1, the Class D certificates from Baa3 to Ba1, the Class E certificates from Ba3 to B3 and the Class F
certificates from Caa2 to Caa3. In November 2003, Fitch Ratings downgraded the Class E certificates in this securitization from BB to B+ and the Class F certificates from B to CC.
Additionally, Fitch Ratings placed the Class B, C, D, E and F certificates on rating watch for potential downgrade. Fitch Ratings affirmed the Class A certificates at AAA.

In
January 2004, a delinquency was experienced in the 2001-1 Trust for a loan with an unpaid principal balance of approximately $2.5 million. The loan defaulted
in January 2004 and the Company

14

---



estimated
that there would be an other than temporary reduction in the aggregate cash flows that the Company expects to receive from the 2001-1 Trust for its unrated retained interest.
While this delinquency resulted in an estimated $0.2 million reduction in the value of the retained interest on the 2001-1 Trust as of December 31, 2003 and an additional
estimated reduction of $0.1 million as of September 30, 2004, they were offset by unrealized gains in accumulated other comprehensive income (loss) for the 2001-1 transaction
and accordingly, did not result in a charge to the statements of operations. These estimated reductions in aggregate cash flows were based on management's assessment of the amount it would ultimately
collect on the defaulted loan. The real estate collateral for this loan was foreclosed upon.

In
August 2004, a loan with an unpaid principal balance of approximately $5.4 million in the 2001-1 Trust defaulted. The loan defaulted in August 2004 and the
Company estimated that there would be an other than temporary reduction in the aggregate cash flows that the Company expects to receive from the 2001-1 Trust for its unrated retained
interest. While this delinquency resulted in an estimated $0.3 million reduction in the value of the retained interest in the 2001-1 Trust, it was mostly offset by unrealized gains
in accumulated other comprehensive income (loss) for the 2001-1 transaction. Accordingly, the Company recorded $11,816 to expense, which was the amount considered to be other than
temporary decline in the Predecessor's fair value of the unrated retained interest which could not be offset by unrealized gains in accumulated other comprehensive income (loss). This estimated
reduction in aggregate cash flows was based on management's assessment of the amount it would ultimately collect on the defaulted loan.

On
November 15, 2004, Moody's downgraded the Class A-1 and A-2 certificates in the 2001 securitization from Aaa to Aa1, the Class IO certificates from Aaa to Aa1,
the Class B certificates from Aa2 to A1, the Class C certificates from A2 to Baa1, the Class D certificates from Baa2 to Ba2, the Class E certificates from Ba2 to B2, and
the Class F certificates from B2 to Caa1.

For
the 1999-1 Trust, 2000-1 Trust, 2001-1 Trust and the 2003-1 Trust, the master servicer fee rate was 0.065% (0.055% on the
2003-1 Trust), the primary servicer fee rate was 0.085% (0.095% on the 2003-1 Trust) and the trustee fee rate was 0.010%.

The
activity related to the Company's retained interests as of September 30, 2004 and December 31, 2003 is as follows:

September 30, 2004

December 31, 2003(unaudited)Balance at beginning of period, January 1, 2004 and October 1, 2003, respectively

$
7,239,136

$
7,347,881Interest income recorded


900,663


375,517Other than temporary decline in fair value of retained interest


(11,816
)

Cash received


(797,980
)

(360,589
)Fair value adjustments, net of other than temporary decline in value


690,963


(123,673
)Balance at end of period

$
8,020,966

$
7,239,136


The
Company's key assumptions used to value the retained interests at September 30, 2004 are the loss/prepayment rate over the life of the transaction (which ranges from 1.76% to
4.89%), and the discount rates applied to the future cash flows (which ranges from 14.5% to 18.0%). These assumptions are consistent with the assumption used at December 31, 2003 to value the
retained interests. The result of changing the key economic and sensitivity assumptions of the current fair value of retained interest to an immediate 10% and 20% adverse change in those assumptions
would not be materially

15

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different
than those previously discussed in the Company's Transition Report on Form 10-K for the transition period ended December 31, 2003.

As
of September 30, 2004 and December 31, 2003, net unrealized gains for the Company's retained interests in securitizations included in accumulated other comprehensive
income (loss) was $1,972,897 and $1,281,934, respectively.

(7)   Borrowings



On April 28, 2004, the Company entered into a $150.0 million Revolving Warehouse Financing Agreement with iStar Financial Inc. ("iStar")
solely for the purpose of originating loans, which replaced the previously existing facility, $150.0 million Revolving Warehouse Financing Agreement dated January 7, 1998 with ABN AMRO
Bank, N.V., as lender, and SunAmerica Life Insurance Company or SALIC (an affiliate of SunAmerica, Inc.), as guarantor. The new facility may be increased to $200.0 million at the
Company's option with the consent of iStar. Interest is calculated using LIBOR plus 290 basis points. Under the facility, iStar financed all of the Company's existing outstanding loans that were
financed under the previously existing warehouse facility, which was terminated concurrent with this transaction. In connection with entering into the new facility, the Company paid a fee of
$1,875,000 to iStar and a termination fee of $199,500 to the lenders under the previously existing facility in the quarter ended in April 2004. The interest rate as of September 30, 2004
was 4.64%. The outstanding balance as of September 30, 2004 was $103,297,774.

The
warehouse credit line is secured by, among other things, the Company's loans. All payments made by borrowers in respect of such loans are applied on a monthly basis to pay the
outstanding fee and interest obligations under the new warehouse credit line and to reduce the principal amount outstanding under the new warehouse credit line by an amount equal to the portion of the
payments on the loans that constitute payments of principal.

The
maturity date of the new warehouse credit line is April 10, 2005. The availability of funds under this credit line is subject to, among other things, compliance with specified
financial covenants relating to leverage ratio, net worth, limitations on capital expenditures and limitations on total indebtedness, as described below. The Company is required under the warehouse
facility to maintain a ratio of consolidated total debt to consolidated net worth not in excess of 4:1 and a consolidated net worth of not less than $80.0 million. The Company generally may not
maintain indebtedness outside the new warehouse credit line other than indebtedness to fund obligations under the Company's hedging arrangements, purchase money indebtedness for the acquisition of
assets not in excess of $1.0 million, indebtedness in connection with securitization transactions and certain capital leases. In order to make a borrowing under the facility, either Vernon B.
Schwartz, the Company's Chairman and Chief Executive Officer, or David A. Karp, the Company's President and Chief Financial Officer, must be
employed as a senior executive officer of the Company with the same decision making authority as on April 28, 2004.

The
lender under the new warehouse credit line will generally fund up to 80%, the advance rate, of the principal amount of eligible loans that the Company originates with the lender's
approval. The maximum funding available for any individual loan is not permitted to exceed $20.0 million. In addition, the lender will not fund an amount in excess of 66.6% of the aggregate
market value of the eligible loans.

The
Company is required to make prepayments under the new warehouse credit line under certain circumstances. Among other things, the Company may be required to make prepayments upon a
decrease in the aggregate market value of the eligible loan portfolio. Specifically, in the event that the lender determines that the product of the market value of the eligible loans in the loan
portfolio and the aggregate maximum advance rate of 66.6% is less than the aggregate outstanding principal amount under the warehouse credit line, then, subject to an exception for certain market
value fluctuations of

16

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less
than 5%, the Company will be required to prepay amounts borrowed under the new warehouse credit line sufficient to eliminate such deficiency. The new warehouse credit line also specifies various
events that would allow the lender to terminate the warehouse credit line in its entirety, including, among other things, the Company's failure to qualify as a real estate investment trust under the
Internal Revenue Code or a change of control.

The
Predecessor entered into a $150.0 million Revolving Warehouse Financing Agreement dated January 7, 1998 (the "Warehouse Loan Agreement") with ABN AMRO Bank, N.V., as
lender, and SunAmerica Life Insurance Company or SALIC (an affiliate of SunAmerica, Inc.), as guarantor (collectively, the "Lenders"), solely for the purpose of originating loans. SALIC, along
with Goldman Sachs Mortgage Company (an affiliate of Goldman, Sachs & Co.), as a result of a participation agreement between two entities, were the guarantors of the Warehouse Loan Agreement.
As guarantors, each of the entities were paid fees of $0 and $259,980 for the three and nine months ended September 30, 2003, respectively. The fees are shown in the statements of operations
within the caption interest expenserelated party. The maturity date was October 1, 2004. This credit facility was collateralized by the loans held for sale. The Company was
required to make prepayments under the warehouse facility under certain circumstances. Among other things, in the event that a customer defaulted on a scheduled loan payment that is not cured within
30 days, such loan would be treated as a defaulted receivable and the Company would be required to prepay the outstanding principal amount of the borrowings incurred under the warehouse
facility in respect of such defaulted receivable. Interest was calculated using a 30-day commercial paper rate plus 300 basis points until December 22, 2003, when it was reduced to
a 30-day commercial paper rate plus 200 basis points (which includes amounts paid to the guarantors as described above). The interest rate as of December 31, 2003 was 3.09%. The
outstanding balance as of December 31, 2003 was $53,475,879. On April 28, 2004, the outstanding balance under the Warehouse Loan Agreement was paid in full and the Warehouse Loan
Agreement was terminated.

The
Warehouse Loan Agreement required that the Company maintain certain financial covenants related to aggregate indebtedness, net income, net worth, leverage ratio, capital expenditures
and lease commitments. In addition, the Warehouse Loan Agreement also specified various events ("Termination Events") that would allow the Lenders to terminate the warehouse facility in its entirety
should one of these events occur, including, among other things, (i) a material adverse change in the Company's business, financial condition or prospects or (ii) a downgrade or other
impairment of the rating of any notes issued in the Company's securitization transactions. In October 2003 and November 2003, the notes issued in the Company's Falcon Trust
Series 2003-1 securitization were downgraded by the ratings agencies. The Company received a waiver from the Lenders for this Termination Event.

Senior Subordinated Debt

The Predecessor entered into a $19.3 million Amended and Restated Senior Subordinated Loan Agreement dated January 7, 1998 with Goldman Sachs
Mortgage Company and SALIC. The agreement provided for a $5.0 million working capital loan, a $2.0 million hedge loan and $12.3 million for loan originations. The interest rate on
the senior subordinated loan was 12%, with 9% payable in cash and 3% accrued and capitalized. This loan was paid in full on December 23, 2003 and the loan terminated. Interest expense for the
three and nine months ended September 30, 2003 was $874,219 and $2,248,595, respectively.

The
Predecessor entered into a $0.5 million Junior Subordinated Loan Agreement dated April 19, 1999 with Falcon Auto Venture, LLC. The agreement provided for a
$0.5 million working capital loan. The interest rate on the junior subordinated loan was 12%, with 9% payable in cash and 3% accrued and capitalized. This loan was paid in full on
December 23, 2003 and the loan terminated. Interest expense for the three and nine months ended September 30, 2003 was $16,962 and $49,955, respectively.

17

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(8)   Equity Incentive and Option Plans

In November 2003, the Company adopted the 2003 Equity Incentive Plan to provide incentives to employees, non-employee trustees and other
service providers to stimulate their efforts toward the Company's continued success, long-term growth and profitability and to attract, reward and retain key personnel. The plan approved
725,658 restricted common shares reserved for issuance, of which 318,300 were issued immediately prior to the closing of the IPO, with the remaining 407,358 shares available for future issuance. The
318,300 shares issued were valued at the IPO price of $9 per share and recorded in stockholders' equity under the caption of unearned compensation. During the three and nine months ended
September 30, 2004, 4,000 additional shares valued at $7.50 per share and 14,000 additional shares of which 10,000 shares were valued at $9.38 per
share were issued, respectively, and 11,100 shares and 25,900 shares were retired, respectively, bringing the total number of outstanding restricted shares to 306,400. The shares vest over three years
and will be amortized into the statements of operations as compensation expense ratably over the vesting period.

In
September 1999, the Predecessor adopted the Falcon Financial, LLC Option Plan. The Predecessor granted certain employees options, which generally expired ten years from the
grant date, to purchase membership interests in the Predecessor at prices not less than the market value of the membership interests on the grant date. Option exercise prices were determined by
reference to comparable public company market values and earnings multiples. Options vested at a rate of 20% per year beginning one year after the date of hire. The Predecessor did not incur an
expense associated with the option plan for the three and nine months ended September 30, 2003. The plan was terminated prior to the formation transaction on December 22, 2003 and
through that date no options had been exercised.

(9)   Commitments and Contingencies



The Company's financial instruments with off-balance sheet risk were limited to fixed-rate mortgage loan origination commitments with
total contractual amounts of $42.5 million and $2.2 million as of September 30, 2004 and December 31, 2003, respectively. These instruments involve elements of credit risk
and interest rate risk in addition to the amounts recognized in the statements of financial position. The contractual amounts represent the Company's maximum potential exposure to credit loss but do
not necessarily represent future cash requirements since certain commitments may expire without being funded. Loan commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee by the customer. Commitments are subject to the Company's credit approval process, including a case-by-case evaluation of the customer's
creditworthiness and related collateral requirements. The Company collected cash deposits in connection with these commitments of $399,960 and $19,534 as of September 30, 2004 and
December 31, 2003, respectively.



As of September 30, 2004, the Company was obligated under noncancelable operating lease agreements for office space and computer equipment. The future
minimum lease payments under these lease agreements at September 30, 2004 were (unaudited):

2004 (October 1 to December 31)

$
51,6432005


206,1902006


208,2482007


218,0492008


227,853Thereafter


807,276$
1,719,259


18

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The
Company had previously entered into employment agreements with three members of senior management. Effective July 1, 2004, the Company entered into an employment agreement
with an additional member of senior management. The agreements range in terms from eighteen to thirty-six months, subject to additional one year renewals. The future minimum salary expense
relating to these agreements is $268,750, $1,075,000 and $750,000 for the period October 1, 2004 to December 31, 2004 and for the years ended December 31, 2005 and 2006,
respectively.

(10) Related Party Transactions

The Company is involved in significant financing, risk management and other transactions, and had significant related party balances with Goldman, Sachs &
Co. (an affiliate of MLQ Investors, LP), SunAmerica, Inc. and Falcon Auto Venture, LLC, both directly and indirectly through affiliates and subsidiaries of these entities. The Company entered
into these transactions in the ordinary course of business and believed that the terms of these transactions were on market terms that could be obtained from unrelated third parties. As of
December 22, 2003, after the IPO transaction, the aforementioned related parties were no longer considered related parties as their ownership of the Company has been significantly reduced to
less than 5%.

Included
in the statements of operations are revenues and expenses resulting from various financing, capital markets transactions and loan sales transactions. The following table sets
forth the related party revenues and expenses included in the respective captions in the statements of operations for the three and nine months ended September 30, 2003, respectively. The
amounts reflect the related party transactions with Goldman, Sachs & Co., except where otherwise indicated and are as follows (unaudited):

|                                                                                                                                                                                                                               |  | Three Months
Ended
September 30, 2003 |           | Nine Months
Ended
September 30, 2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------- | --------- | ------------------------------------ | -
|Interest income on securities purchased under resale agreements 
related party                                                                                                                                                |  | $                                     | 59,919    |                                      | $
|Gain on sale of loans (fee expense)                                                                                                                                                                                            |  |                                       |          |                                      |  
|Changes in fair value of interest rate swap contracts                                                                                                                                                                          |  |                                       | (432,469  | )                                    |  
|Gain on securities sold, but not yet purchased  related party                                                                                                                                                                 |  |                                       | 3,478,806 |                                      |  
|Interest expense on borrowings  related party ($437,110 and $16,962 and $1,124,298 and $49,955 related to SunAmerica, Inc. and Falcon Auto Venture, LLC for the three and nine months ended September 30, 2003,
respectively) |  |                                       | 891,181   |                                      |  
|Interest expense on securities sold, but not yet repurchased  related party                                                                                                                                                   |  |                                       | 526,772   |                                      |  
|Facility fee expense ($46,875 and $140,625 for the three and nine months ended September 30, 2003, respectively, related to SunAmerica, Inc.)                                                                                  |  |                                       | 93,750    |                                      |  

(11) Dividends

On November 10, 2004, the Company declared a cash dividend of $798,445, or $0.05 per common share applicable to the three-month period ended
September 30, 2004, and payable to shareholders of record on December 1, 2004. The dividend is payable on December 15, 2004.

19

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ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Conditions and Results of Operations ("MD&A") is provided as a supplement to the accompanying unaudited
consolidated financial statements and footnotes in Item 1Financial Statements to help provide an understanding of our financial condition, changes in our financial condition and results
of operations. The MD&A is organized as follows:



Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q which are not historical fact may be forward-looking statements within the meaning
of Section 21(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21(e) of the Exchange Act, as amended. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate,"
"believe," "continue," "estimate," "predict," "expect," "intend," "may," "plans," "potential," "should," "could," "will," and "would," or the negative of these terms or other comparable terminology.

The
forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our beliefs, assumptions and expectations of our future performance, taking into
account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or facts, not all of which are known to us or are within
our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully
consider the factors referenced in this report, including those set forth under the sections captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" and
"Overview." Among the factors about which we have made assumptions are the following:



20

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Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q filed with
the SEC. We provide access to this interim report and all other reports and amendments, if any, filed by us with the Securities and Exchange Commission ("SEC"), which can be accessed, free of
charge, through our website at
http://investor.falconfinancial.com/edgar.cfm on the same day that they are electronically filed with the SEC. The information found on our website is not part of this or any other report we file with
or furnish to the SEC. Our executive offices are located at 15 Commerce Road, Stamford, CT 06902.

Overview

We are a fully integrated, self-advised REIT focused on the business of originating and servicing loans to automotive dealers in the United States. We
have also provided loans to select motorcycle dealers on a limited basis. We have elected to be taxed as a REIT for federal income tax purposes and are the successor to Falcon Financial, LLC (the
"Predecessor"), which was organized in Delaware in May 1997.

For
the nine months ended September 30, 2004, we originated seven loans totaling approximately $64.7 million in aggregate initial principal amount. For the three months
ended September 30, 2004, we originated one loan totaling approximately $5.3 million in aggregate initial principal amount. Although rising interest rates, a fall-off in dealership
acquisition transactions and the current operating environment for automotive dealers has slowed our pipeline, we believe that the continuing consolidation among automotive dealers will present loan
origination opportunities for our business. As of September 30, 2004, our portfolio consisted of 24 loans with an aggregate outstanding principal balance of approximately $188.4 million,
and we had $42.5 million in outstanding loan commitments. Our portfolio of 24 loans as of September 30, 2004 had an average principal amount of approximately $7.8 million, a
weighted-average remaining term of 143 months and a weighted-average interest rate of 8.44%. To date, our loans have been long-term, fixed- and variable-rate, cash
flow-based as well as mortgaged-based and generally under approximately $19.0 million in loan size. We closed our first loan in February 1998 and we have originated a total of 118
loans representing approximately $726.3 million in aggregate initial principal amount through September 30, 2004. We have successfully securitized four pools of our loans in 1999, 2000,
2001 and 2003 totaling 92 loans representing approximately $517.0 million in aggregate principal amount at the date of securitization and we continue to provide primary servicing for all of our
securitized loans.

21

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We
derive our revenues primarily from loan payments of interest and principal made by automotive dealers under loans we originate and from acting as primary servicer for our securitized
loans. Historically, we also have derived revenues from gain on the sale of loans that we held and pooled for securitization because those transactions were structured as off-balance sheet
transactions, as described below under the heading "Off-Balance Sheet Arrangements". We currently intend to structure our securitizations as on-balance sheet secured
financings, and therefore do not expect to record any gain on sale in connection with future securitizations. We expect that we will incur losses initially until our volume of loan originations
increases sufficiently to offset the increased general and administrative expenses.

We
enter into forward starting interest rate swap transactions to mitigate the effect that changes in interest rates and credit spreads have on the forecasted issuance of
long-term debt. In swap transactions, we will generally enter into an interest rate swap contract, receiving a floating rate of interest and paying a fixed rate of interest. The term of
the swap contracts is determined by the duration of the forecasted long-term debt to be issued. The forward starting swaps are accounted for as cash flow hedges, therefore changes in the
fair value of the swaps are recorded in comprehensive income.

Interest
rates have increased during 2004, with many economists currently anticipating further increases during the remainder of 2004. Changes in interest rates can affect our ability to
originate loans, the value of our retained interests in securitization pools and our ability to securitize loans. We have only recently begun to offer variable-rate loan products, which
are an important part of our growth strategy. We are uncertain at this time of the impact, if any, that any future interest rate increases may have on the mix of new variable-rate loans
and traditional fixed-rate loans that we will originate during the remainder of 2004.

A
period of continued rising interest rates in the future also could result in a decline in the value of our retained interests in securitization pools. We have not historically and
currently do not intend to enter into hedging transactions to mitigate our exposure to interest rate risk relating to the value of our retained interests. We periodically seek to securitize our pool
of loans as an important source of funding for our business. An increase in interest rates could affect our ability to securitize our existing loans on favorable terms or at all.

Our
business depends on our access to external sources of financing at a cost we can absorb while still generating an attractive risk-adjusted return on the loans we fund
using the proceeds of our financings. We fund our operations primarily through the net proceeds from our initial public offering and subsequent over-allotment and our $150.0 million
warehouse line of credit.

We
have experienced only four defaulted loans since our inception. The first defaulted loan was in our 2001 securitization and resulted in a loss of principal of approximately
$2.8 million. The three other defaults related to one loan in our 2003 securitization and two loans in our 2001 securitization. Although these three loan defaults have not yet been resolved, we
have estimated losses upon the resolution of these three loans of approximately $3.5 million, $1.5 million and $1.4 million, respectively. The aggregate impact of the estimated
losses on the 2003 and 2001 securitization would be approximately $3.5 million and $2.9 million, respectively. These estimated losses were taken into consideration when establishing the
value of retained interests held by us in connection with the securitized pools in which these loans are held and resulted in a charge of approximately $0.01 million, $0.4 million and
$0.2 million in fiscal 2004, 2003 and 2002, respectively. We cannot provide any assurance that the actual losses will equal the estimates indicated.

When
we have sold our loans into a securitization, we made certain assumptions about loan losses in calculating the estimated fair value of our retained interests in the securitizations.
We will account for our future securitizations as on-balance sheet secured financings. Accordingly, we have established a reserve for loan losses for estimated losses inherent in our loan
portfolio.

22

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We
plan to focus on internal growth of our business by expanding our loan product offerings to include our new variable-rate cash flow-based and
fixed-rate and variable-rate real estate mortgage loan products, which we recently introduced in the marketplace. We expect to incur additional costs to introduce these new
products as we hire additional employees and increase our marketing, advertising and underwriting efforts. We also expect to face increased competition from established providers in connection with
our offering of real estate mortgage loan products, which could affect the profitability of these products.

On
November 10, 2004, the Company declared a cash dividend of $798,445, or $0.05 per common share applicable to the three-month period ended September 30, 2004, and payable
to shareholders of record on December 1, 2004. The dividend is payable on December 15, 2004.

We
intend to continue to pay regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common shares. Any future distributions we make will
be at the discretion of our board of trustees and will depend upon, among other things, our actual results of operations. Our actual results of operations and our ability to pay distributions will be
affected by a number of factors, including the revenue we receive from our loans, our ability to complete additional loan securitizations, our operating expenses, the ability of our customers to meet
their loan payment obligations and unanticipated expenditures.

The
discussion of financial condition and results of operations relates in part to our Predecessor, Falcon Financial, LLC, a Delaware limited liability company formed in 1997.
Immediately prior to the closing of our initial public offering, Falcon Financial, LLC merged with and into Falcon Financial Investment Trust, a newly formed Maryland real estate investment trust. In
connection with our election to be taxed as a REIT following the completion of our initial public offering, we have a fiscal year ending on December 31, as opposed to a fiscal year ending on
September 30, which was used by our Predecessor. The results for the three and nine months ended September 30, 2003 included herein are the results of our Predecessor.

Off-Balance Sheet Arrangements

Historically, we have funded our business in substantial part with the proceeds from four securitization transactions in 1999, 2000, 2001 and 2003 totaling
approximately $517.0 million in aggregate principal amount at the date of securitization. After originating a sufficient number of loans to develop a pool available for securitization, our
approach has been to subsequently sell the loans we originate in a securitization transaction. These securitization transactions have been critically important to us as a primary source of funds to
originate loans.

We
have structured each of our four securitizations as off-balance sheet transactions, and therefore we have recorded gain on sale with respect to the loans included in each
securitization. We currently intend to structure our future securitizations as on-balance sheet secured financings. As a result of this anticipated change in structuring future
securitizations, comparisons of our future results of operations to our historical operating results may not be meaningful. In particular, we do not expect to record any gain on sale in connection
with future securitizations and instead will continue to recognize interest income associated with each loan we originate and interest expense associated with each secured borrowings even after we
place the loan into securitization. In conjunction with the secured financing transaction, we will record secured borrowings as well as the associated securitization expenses, which will be amortized
over the term of the financing. Since the future transactions will not be sale transactions, the associated loan receivables will remain on our consolidated financial statements instead of being
removed as was the case historically with a sale securitization transaction. The effect on the future consolidated financial statements will be that the loan receivable portfolio along with our
borrowings will continue to increase with each new loan we issue. The increase in loan assets and related liabilities will also create a corresponding increase in interest income on loans along with
an

23

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increase
in interest expense from the related financings. Since we will no longer be selling the loan assets, there will be no gain on sale of loans recorded in the statements of operations, nor will
there be a related retained interest as a result of future securitizations recorded in the balance sheets. The total portfolio of loans, their applicable financing arrangements, their interest income
and related interest expense and a provision and allowance for potential loan losses will be reflected on our consolidated financial statements. The on-balance sheet approach will also
show the earnings over the entire term of the loan on a more consistent basis as compared to showing earnings for a short period and then reflecting a gain on sale transaction, as was the case
historically. The impact of securitizing loans using on-balance sheet treatment is that the economic benefit of our loans will be realized over their life, rather than recognizing their
present value early in their economic life in the form of gain on sale.

Our
ability to complete additional securitizations in the future may be affected by several factors, including the following:



For
each previous and future securitization transaction, the loan trust certificates represent beneficial interests in one or more trust funds established by our special purpose
bankruptcy remote subsidiary. The trust fund assets consist primarily of bonds issued by a trust established by the special purpose subsidiary. The bonds are generally secured by loans, interests in
real estate used in the operation of automotive dealerships as well as secured by a lien on the business assets, including automobile parts and equipment and intangible property but not the
dealership's automobile inventory.

We
also are subject to off-balance sheet risk in the normal course of our business from commitments we make to extend credit to automotive dealers. As of September 30,
2004 and December 31, 2003, we had commitments to extend credit to our customers of $42.5 million and approximately $2.2 million, respectively, and amounts available under our
warehouse credit line of approximately $46.7 million and $96.5 million, respectively, to fund such commitments.

Critical Accounting Policies and Management Estimates

Our unaudited consolidated financial statements and related disclosures, which are prepared to conform with accounting principles generally accepted in the United
Statements of America (U.S. GAAP), require us to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying unaudited consolidated financial
statements. In the preparation of these financial statements, management uses its best estimates and judgments as they relate to certain amounts which are included in the financial statements, giving
adequate consideration to materiality. We believe that our estimates and assumptions are reasonable and that there is not a great likelihood that materially different amounts would be reported
relating to the accounting policies as described in Note 2 of the accompanying unaudited consolidated financial statements. However, the application of these accounting policies involves the
exercise of judgment and use of estimates and assumptions as to future uncertainties and, as a result, actual results could differ materially from those estimates and assumptions.

24

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We
considered the most critical accounting policies and use of estimates in our unaudited consolidated financial statements to be those surrounding:



These
accounting policies, the bases for these estimates and their potential impact to our unaudited consolidated financial statements and related disclosures, should any of these
estimates change, are further described as follows:



We originate loans that are underwritten with the intention of securitizing the receivables in a financing transaction, which will be accounted for as secured
borrowings under the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilitiesa replacement of FASB Statement 125" ("SFAS No. 140"), and carry the loans on the statements of financial position to maturity.
The loans receivable are stated at their principal amount outstanding, less net deferred loan fees, unearned discounts and allowance for loan losses. Nonrefundable origination fees less certain
related direct costs associated with the origination of the loans are deferred and amortized into interest income over the term of the loan using a method that approximates the interest method.

All
loans originated by our Predecessor were underwritten with the intention of selling by way of a securitization transaction and were accounted for as loans held for sale on the
statements of financial position. The amount, if any, by which the cost basis of the loans exceeds their estimated fair value is recorded through a valuation allowance. Changes in the valuation
allowance are recorded in the statements of operations. As of September 30, 2004 and December 31, 2003, no valuation allowance was deemed necessary.



The allowance for loan losses is based on a periodic analysis of the loan portfolio and in management's judgment, reflects an amount that is adequate to absorb
losses inherent in the existing loan portfolio. In evaluating the portfolio, management considers a variety of factors such as the size of the portfolio, prior loss experience, current and potential
risks of the loan portfolio, present financial condition of the borrower, current economic conditions and other portfolio risk characteristics. Provisions for loan losses are charged to operations.
Loans, including impaired loans, are charged off against the allowance for loan losses when actual losses have been established.

We
account for our allowance for losses on loans in accordance with SFAS No. 5,"Accounting for Contingencies"("SFAS
No. 5") and SFAS No. 114,"Accounting by Creditors for Impairment of a Loan"(SFAS No. 114"). Both Statements require that we
evaluate the collectibility of both contractual interest and principal loan payments. SFAS No. 5 requires the accrual of a loss when it is probable that a loan has been impaired and the amount
of the loss can be reasonably estimated. SFAS No. 114 requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective
interest rate, or as an alternative, at the loan's observable market price or fair value of the collateral. A loan is impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loss from impairment represents the amount by which a creditor's recorded investment in a
loan exceeds the present value of the expected future cash flows from the

25

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loan
discounted at the loan's effective interest rate (including the fair value of the collateral that may be part of the loan). Losses for which such provisions for impairment are made, unless
applied as a write-down of the recorded investment in the loan, represent a portion of the creditor's allowance for loan losses.



Historically, we have sold through securitization transactions substantially all of the loans we originate. We account for our loan securitizations in accordance
with SFAS No. 140. When we sold loans in a securitization, we retained one or more subordinated certificates from the certificates issued. Securitizations may be structured in various ways but
generally conform to a common model. Typically, an issuer sells a portfolio of loans to a special purpose entity established for the sole purpose of purchasing and reselling the loans to a
securitization trust. The securitization trust then may issue bonds or certificates collateralized by the loans transferred to the securitization trust. The proceeds received from these bonds or
certificates are used to purchase the loans from the issuing entity. The gain on the sale of loans is the difference between the proceeds from the sale of loans, net of related selling costs, and the
allocated carrying amount of the receivables sold, including deferred origination fees and costs. We determine the carrying amount by allocating the total carrying amount of the loans sold between the
portion sold and the interests retained based on each portion's relative fair values at the time of the securitization. Assumptions used in calculating the estimated fair value of such retained
interests are subject to volatility that could materially affect operating results.

Retained
interests in securitizations are accounted for as available-for-sale securities and are carried at estimated fair value, with unrealized gains or losses
included in stockholders' equity within the caption, accumulated other comprehensive income (loss). We are not aware of an active market for the purchase and sale of these retained interests at this
time and accordingly, we estimate the fair value of the retained interest by calculating the present value of the estimated expected future cash flows received by us after being released by the
securitization trust, using a discount rate commensurate with the risk involved. The cash flows being discounted are adjusted for estimated net losses due to defaults or prepayments of the
underlying loans. As of September 30, 2004, we had three loans in default, one of which related to a loan in our 2003 securitization and the other two loans in to our 2001 securitization. The
loan default relating to the 2003 securitization has not yet been resolved and we have estimated the loss upon resolution of the defaulted loan of approximately $3.5 million. The estimated loss
resulted in a reduction in the estimated value of our retained interest in the 2003 securitization of approximately $0.7 million as of September 30, 2003. The second loan default, which
related to our 2001 securitization has not yet been resolved and we have estimated the loss upon resolution of the defaulted loan of approximately $1.5 million. The estimated loss resulted in a
reduction in the estimated value of our retained interest in the 2001 securitization of approximately $0.2 million as of December 31, 2003 and an additional $0.1 million as of
September 30, 2004. During the nine months ended September 30, 2004, the real estate collateral for the loan in default in the 2001 securitization (with an outstanding balance of
approximately $2.5 million) was foreclosed upon. The third default relates to a loan in our 2001 securitization. In August 2004, a delinquency was experienced in the 2001 Trust for a
loan with an unpaid principal balance of approximately $5.4 million. The loan defaulted in August 2004. The estimated loss resulted in a reduction in the estimated value of our retained
interest in the 2001 securitization of approximately $1.4 million as of September 30, 2004. We cannot provide any assurance that the actual losses will equal the estimates indicated. All
other loans included in our securitization pools are current as of September 30, 2004.

Each
loan securitization has a specific credit enhancement in the form of cash flow requirements that must be met before we receive any cash on our retained interest.

Changes
in the fair value of the retained interests resulting from changes in the timing of cash flows to be received by us or changes in market interest rates are adjusted through
accumulated other

26

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comprehensive
income (loss) within stockholders' equity. Reductions in the estimated aggregate cash flows to be received by us, caused by defaults or prepayments or the timing of expected future cash
flows that result in a reduction to the fair value below the historical cost basis of the retained interests, are considered an other than temporary impairment and are recognized through a charge to
expense in that period.



In
June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities"("SFAS No. 133"). In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
ActivitiesDeferral of the Effective Date of SFAS No. 133." In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain
Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133." In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities."These Statements, collectively referred to as SFAS No. 133,
establish accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet as
either an asset or liability measured at its fair value. Changes in the fair value of the derivative are to be recognized currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows gains and losses on derivatives to offset related results on the hedged items in the statements of operations and requires that a company document,
designate, and assess the effectiveness of transactions that receive hedge accounting under SFAS No. 133.

We
enter into forward starting interest rate swap transactions to mitigate the effect that changes in interest rates and credit spreads have on the forecasted issuance of
long-term debt. In swap transactions, we will generally enter into an interest rate swap contract, receiving a floating rate of interest and paying a fixed rate of interest. The term of
the swap contracts is determined by duration of the forecasted long-term debt issuance. These swap transactions are accounted for as cash flow hedges, therefore, changes in their estimated
fair value are recorded in accumulated other comprehensive income (loss).

Our
Predecessor entered into certain transactions (short sales and purchases, securities resale and repurchase agreements, and interest rate swaps) to mitigate the effect that changes in
interest rates and credit spreads have on the fair value of its fixed-rate loan portfolio held for sale. Periods of rising interest rates and widening credit spreads decrease the fair
value of the loan portfolio held for sale. Generally, we entered into these transactions when the rate was locked on a pending loan just prior to the closing of the loan. The new loan was added to the
pool of loans being held for sale and the pool was then reviewed to determine what, if any, additional hedging transaction was to be executed. Generally, our Predecessor shorted U.S. Treasuries and
invested the proceeds in repurchase agreements with Goldman, Sachs & Co. with U.S. Treasury notes as the underlying securities. In swap transactions, our Predecessor entered into an interest
rate swap contract, receiving a floating rate of interest and paying a fixed rate of interest. The term of the swap contracts is determined by duration of the loans held for sale pool. Our Predecessor
had a contractual obligation to settle the repurchase and swap agreements with Goldman, Sachs & Co. at the current fair value on the repurchase date. These contracts have been recorded as free
standing derivatives with changes in fair value recorded in results of operations.

We
carry each of the derivative instruments on our statements of financial condition at fair value or amounts that approximate fair value. The determination of fair value is fundamental
to our statements of financial condition and results of operations. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and we use them when available. We typically obtain them through
electronic

27

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quotations
or published prices. If quoted market prices in active markets are not available, our estimate of fair value is based on, if available, quoted prices or recent transactions in less active
markets and/or prices of similar instruments. We typically obtain this type of information through broker quotes or third-party pricing sources.

Results of Operations for the Three Months Ended September 30, 2004 and 2003

The results of operations that follow should be read in conjunction with our critical accounting policies and estimates summarized above as well as our
accompanying unaudited consolidated financial statements and notes thereto contained in Item 1Financial Statements of this report.

Revenues

Total revenues for the three months ended September 30, 2004 decreased by approximately $1.1 million, or 19.7%, to approximately $4.5 million
for the three months ended September 30, 2004 from approximately $5.6 million for the three months ended September 30, 2003. The decrease was primarily due to decreases in
interest income from retained interests, gain on securities sold, but not yet purchasedrelated party and changes in fair value of interest rate swap contracts. The overall decrease was
partially offset by an increase in interest income on loans and interest and other income.

Interest
income on loans for the three months ended September 30, 2004 increased by approximately $2.0 million, or 105.3%, to approximately $4.0 million for the
three months ended September 30, 2004 from approximately $2.0 million for the three months ended September 30, 2003. The increase was primarily due to an increase in the weighted
average portfolio of loans to approximately $186.4 million for three months ended September 30, 2004 as compared to approximately $102.7 million for the three months ended
September 30, 2003, which was offset by a decrease in the weighted average interest rate on loans to approximately 8.6% for the three months ended September 30, 2004 as compared to
approximately 8.9% for the three months ended September 30, 2003.

Interest
income from retained interests for the three months ended September 30, 2004 decreased by approximately $0.1 million, or 21.4%, to approximately
$0.3 million for the three months ended September 30, 2004 from approximately $0.4 million for the three months ended September 30, 2003. The decrease was primarily due to
the effect of three defaulted loans in our securitized pools.

Gain
on securities sold, but not yet purchasedrelated party for the three months ended September 30, 2004 and 2003 was $0 and approximately $3.5 million,
respectively. We no longer enter into certain derivative instruments, such as short sales and purchases, and securities resale and repurchase agreements.

Changes
in fair value of interest rate swap contracts for the three months ended September 30, 2004 decreased by approximately $0.4 million, or 87.6% to a loss of
approximately $0.05 million for the three months ended September 30, 2004 from a loss of approximately $0.4 million for the three months ended September 30, 2003. The
decrease was primarily due to market fluctuations and the composition of our hedging instruments.

Interest
and other income for the three months ended September 30, 2004 increased by approximately $0.05 million, or 78.9% to approximately $0.11 million for the
three months ended September 30, 2004 from approximately $0.06 million for the three months ended September 30, 2003. The increase was primarily attributable to higher interest
income due to a higher average cash balance during the three months ended September 30, 2004 as compared to the same comparable period in the prior year. At September 30, 2004, the
effective interest rate on our interest-bearing securities was approximately 1.65%.

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Expenses

Total expenses for the three months ended September 30, 2004 decreased by approximately $0.02 million, to approximately $4.23 million for the
three months ended September 30, 2004 from approximately $4.25 million for the three months ended September 30, 2003. The overall decrease was primarily due to decreases in
interest expense on securities sold, but not yet repurchasedrelated party, other than temporary decline in value of retained interest, and professional fees. The decrease was partially
offset by increases in interest expense on borrowings and interest expense on borrowingsrelated party combined, provision for loan losses, facility fee expense, salaries and benefits,
general and administrative expenses and advertising and promotion.

Interest
expense on borrowings and interest expense on borrowingsrelated party combined for the three months ended September 30, 2004 increased slightly by
approximately $0.03 million, or 3.0% to approximately $1.16 million for the three months ended September 30, 2004 from approximately $1.13 million for the three months
ended September 30, 2003. The increase was primarily due to an increase in the weighted average debt balance as a result of increased borrowings attributable to the growth of our loan
portfolio. The weighted average debt balance during the three months ended September 30, 2004 was approximately $103.9 million as compared to approximately $85.7 million during
the three months ended September 30, 2003. The overall increase was offset by a decrease in the weighted average interest rate for our borrowings during the three months ended
September 30, 2004 of approximately 4.46% as compared to approximately 4.94% during the three months ended September 30, 2003.

Interest
expense on securities sold, but not yet repurchasedrelated party for the three months ended September 30, 2004 decreased by approximately
$0.5 million, or 100% to $0 for the three months ended September 30, 2004 from approximately $0.5 million for the three months ended September 30, 2003. We no longer enter
into certain derivative instruments, such as short sales and purchases, and securities resale and repurchase agreements.

Provision
for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, trends in
the level of delinquent and problem loans, the volume and type of lending conducted by us, the status of past due principal and interest payments including any adverse situations that may affect the
borrower's ability to repay and general economic conditions, particularly as such conditions relate to our market share. As a result of such analysis, management recorded approximately
$0.05 million provision for losses on loans for the three months ended September 30, 2004 which was predicated upon approximately $5.3 million of a new loan origination during the
current three-month period. Prior to December 22, 2003, we did not record a provision for losses on loans.

Facility
fee expense for the three months ended September 30, 2004 increased by approximately $0.4 million, or 429.6% to approximately $0.5 million for the three
months ended September 30, 2004 from approximately $0.1 million for the three months ended September 30, 2003. The increase was due to increased facility fees associated with the
extension of our warehouse line of credit.

Salaries
and benefits for the three months ended September 30, 2004 increased by approximately $0.1 million, or 9.3%, to approximately $1.4 million for the three
months ended September 30, 2004 from approximately $1.3 million for the three months ended September 30, 2003. The increase was primarily due to increases in salaries and bonuses
paid or accrued as well as the amortization of unearned compensation expense relating to the restricted share grants.

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Professional fees for the three months ended September 30, 2004 decreased by approximately $0.04 million, or 14.5% to approximately $0.24 million for the three
months ended September 30, 2004 from approximately $0.28 million for the three months ended September 30, 2003. The decrease was primarily due to increased accounting and auditing
fees in 2003 in anticipation of our initial public offering. The overall decrease was offset by increases in legal and public company costs including resources required to comply with regulations
mandated by the Sarbanes-Oxley Act of 2002.

General
and administrative expenses consist primarily of personnel-related expenses and facilities expenses. General and administrative expenses for the three months ended
September 30, 2004 increased by approximately $0.3 million, or 118.0% to approximately $0.6 million for the three months ended September 30, 2004 from approximately
$0.3 million for the three months ended September 30, 2003. The increase was primarily due to an increase in insurance expense and public company related expenses.

Advertising
and promotion for the three months ended September 30, 2004 increased by approximately $0.04 million, or 23.1%, to approximately $0.24 million for the
three months ended September 30, 2004 from approximately $0.2 million for the three months ended September 30, 2003. The increase was primarily due to an increase in advertising
relating to the introduction of new loan products and web developments, and retainer fees incurred in connection with engaging a new advertising firm.

Net Income

The net income for the three months ended September 30, 2004 was approximately $0.3 million as compared to approximately $1.4 million for the
three months ended September 30, 2003.

Results of Operations for the Nine Months Ended September 30, 2004 and 2003

Revenues

Total revenues for the nine months ended September 30, 2004 decreased by approximately $7.9 million, or 38.8% to approximately $12.5 million
for the nine months ended September 30, 2004 from approximately $20.4 million for the nine months ended September 30, 2003. The decrease was primarily due to decreases in interest
income on securities purchased under resale agreementsrelated party, interest income from retained interests, a gain on sale of loans, a gain on sale of retained interest, changes in fair
value of interest rate swap contracts, gain on securities sold, but not yet purchasedrelated party. The overall decrease was partially offset by an increase in interest income on loans
and interest and other income.

Interest
income on loans for the nine months ended September 30, 2004 increased by approximately $5.4 million, or 103.7%, to approximately $10.5 million for the nine
months ended September 30, 2004 from approximately $5.1 million for the nine months ended September 30, 2003. The increase was primarily due to a significant increase in the
weighted average portfolio of loans to approximately $159.8 million for nine months ended September 30, 2004 as compared to approximately $80.3 million for the nine months ended
September 30, 2003.

Interest
income on securities purchased under resale agreementsrelated party decreased by $0.1 million, or 100%, to $0 for the nine months ended September 30,
2004 from approximately $0.1 million for the nine months ended September 30, 2003. We no longer enter into certain derivative instruments, such as short sales and purchases, and
securities resale and repurchase agreements.

Interest
income from retained interests for the nine months ended September 30, 2004 decreased by approximately $0.2 million, or 21.0%, to approximately $0.9 million
for the nine months ended September 30, 2004 from approximately $1.1 million for the nine months ended September 30, 2003. The decrease was primarily due to the effect of three
defaulted loans in our securitized pools.

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Gain
on sale of loans for the nine months ended September 30, 2003 was approximately $10.7 million which resulted from the securitization transaction 2003-1. We
did not record any gain on sale of loans in the nine months ended September 30, 2004. We intend to account for all future securitizations as on-balance sheet secured financings, and
as such will no longer be subject to gain on sale accounting.

Gain
on sale of retained interests for the nine months ended September 30, 2003 was approximately $0.3 million which resulted from a sale of one of the retained interests
in the 2003-1
securitization transaction. There were no sales of retained interests during the nine months ended September 30, 2004.

Changes
in fair value of interest rate swap contracts for the nine months ended September 30, 2004 decreased by approximately $0.1 million, or 58.3% to a gain of
approximately $0.1 million for the nine months ended September 30, 2004 from a gain of approximately $0.2 million for the nine months ended September 30, 2003. The decrease
was primarily due to market fluctuations and the composition of our hedging instruments.

Gain
on securities sold, but not yet purchasedrelated party for the nine months ended September 30, 2004 and 2003 was $0 and approximately $2.1 million,
respectively. We no longer enter into certain derivative instruments, such as short sales and purchases, and securities resale and repurchase agreements.

Interest
and other income for the nine months ended September 30, 2004 increased by approximately $0.3 million, or 115.4% to $0.6 million for the nine months ended
September 30, 2004 from $0.3 million as compared to the same period in 2003. The increase was primarily attributable to a loan assumption fee earned during the nine months ended
September 30, 2004. Also contributing to the overall increase was higher interest income due to a higher average cash balance during the nine months ended September 30, 2004 as compared
to the same comparable period in the prior year. At September 30, 2004, the effective interest rate on our interest-bearing securities was approximately 1.65%.

Expenses

Total expenses for the nine months ended September 30, 2004 increased by approximately $2.9 million, or 30.3% to approximately $12.5 million
for the nine months ended September 30, 2004 from approximately $9.6 million for the nine months ended September 30, 2003. The increase was primarily due to increases in provision
for loan losses, facility fee expense, salaries and benefits, professional fees, general and administrative expenses and advertising and promotion. The overall increase was partially offset by
decreases in interest expense on borrowings and interest expense on borrowingsrelated party combined, interest expense on securities sold, not yet repurchasedrelated party
and other than temporary decline in value of retained interest.

Total
interest expense on borrowings and interest expense on borrowingsrelated party combined for the nine months ended September 30, 2004 decreased by approximately
$0.6 million, or 19.1%, to approximately $2.3 million for the nine months ended September 30, 2004 from approximately $2.9 million for the nine months ended
September 30, 2003. The decrease was primarily due to a decrease in the weighted average interest rate and weighted average debt balance for the nine months ended September 30, 2004 as
compared to the same prior year period primarily attributable to the pay down of the Predecessor warehouse line of credit at higher rates of interest with certain related parties, which was terminated
on April 28, 2004 concurrently with the iStar new warehouse credit line transaction. The weighted average interest rate for our borrowings during the nine months ended September 30, 2004
was approximately 3.95% as compared to approximately 4.51% during the nine months ended September 30, 2003. The weighted average debt balance during the nine months ended September 30,
2004 was approximately $80.3 million as compared to approximately $84.9 million during

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the
nine months ended September 30, 2003 which resulted from the pay down of the Predecessor warehouse line of credit with certain related parties, which was terminated on April 28, 2004
concurrently with the iStar new warehouse credit line transaction.

Interest
expense on securities sold, but not yet repurchasedrelated party for the nine months ended September 30, 2004 decreased by approximately $1.0 million
to $0 for the nine months ended September 30, 2004 from approximately $1.0 million for the nine months ended September 30, 2003. We no longer enter into certain derivative
instruments, such as short sales and purchases, and securities resale and repurchase agreements.

Provision
for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, trends in
the level of delinquent and problem loans, the volume and type of lending conducted by us, the status of past due principal and interest payments including any adverse situations that may affect the
borrower's ability to repay and general economic conditions, particularly as such conditions relate to our market share. As a result of such analysis, management recorded approximately
$0.5 million provision for losses on loans for the nine months ended September 30, 2004 which was predicated upon approximately $64.1 million of new loans during the current
nine-month period. Prior to December 22, 2003, we did not record a provision for losses on loans.

Facility
fee expense for the nine months ended September 30, 2004 increased by approximately $1.7 million, or 620.7% to approximately $2.0 million for the nine
months ended September 30, 2004 from approximately $0.3 million for the nine months ended September 30, 2003. The increase was due to increased facility fees associated with the
extension of our prior warehouse line of credit coupled with a termination fee paid to the lenders under the previously existed warehouse credit line.

Salaries
and benefits for the nine months ended September 30, 2004 increased by approximately $1.3 million, or 43.7% to approximately $4.3 million for the nine
months ended September 30, 2004 from
approximately $3.0 million for the nine months ended September 30, 2003. The increase was primarily due to increases in salaries and commissions, which are based substantially on loan
originations. The costs associated with commissions are volume driven and increase in relation to increased loan originations. Also contributing to the overall increase was bonuses paid or accrued as
well as the amortization of unearned compensation expense relating to the restricted share grants.

Professional
fees for the nine months ended September 30, 2004 increased by approximately $0.3 million, or 78.2% to approximately $0.7 million for the nine months
ended September 30, 2004 from approximately $0.4 million for the nine months ended September 30, 2003. The increase was primarily due to increases in legal and public company
costs including resources required to comply with regulations mandated by the Sarbanes-Oxley Act of 2002.

General
and administrative expenses consist primarily of personnel-related expenses and facilities expenses. General and administrative expenses for the nine months ended
September 30, 2004 increased by approximately $0.8 million, or 105.1% to approximately $1.5 million for the nine months ended September 30, 2004 from approximately
$0.7 million for the nine months ended September 30, 2003. The increase was primarily due to an increase in insurance expense and public company related expenses.

Advertising
and promotion for the nine months ended September 30, 2004 increased by approximately $0.2 million, or 36.6% to approximately $0.8 million for the nine
months ended September 30, 2004 from approximately $0.6 million for the nine months ended September 30, 2003. The increase was primarily due to an increase in advertising relating
to the introduction of new loan products and web developments, and retainer fees incurred in connection with engaging a new advertising firm.

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Other
than temporary decline in value of retained interest decreased by approximately $0.4 million, or 97.2% to approximately $0.01 million for the nine month period ended
September 30, 2004 from approximately $0.4 million for the nine month period ended September 30, 2003. The decrease was due to the effect of a loan default in the 2003
securitization.

Net Income

The net income for the nine months ended September 30, 2004 was $12,589 as compared to approximately $10.8 million for the nine months ended
September 30, 2003.

Liquidity and Capital Resources

As of September 30, 2004 and December 31, 2003, we had approximately $26.4 million and approximately $25.6 million, respectively, in
cash and cash equivalents. We invest cash on hand in short-term liquid investments. Similar to other financial institutions, we must ensure that sufficient funds are available to meet loan
commitments, expenses and other obligations that arise in the ordinary course of business. Control of our cash flow requires the anticipation of deposit flows and loan payments. Our primary sources of
funds are deposits, borrowings and principal and interest payment on loans. We use funds from deposit inflows, proceeds from our borrowings and principal and interest payments on loans primarily to
fund new loan originations using borrowings under our new warehouse line of credit and proceeds from our initial public offering and over-allotment. Details of our cash inflows and
outflows as well as future commitments for the three and nine months ended September 30, 2004 and 2003 are detailed as follows:



We have financed our operations and have met our capital requirements since incorporation primarily through private and public issuances of equity securities,
bank borrowings and cash generated from operations. Our principal sources of liquidity consisted of approximately $26.4 million of cash and cash equivalents as of September 30, 2004.
Cash equivalents are instruments with maturities of less than 90 days. Our cash equivalents consist of U.S. Treasury Bills, corporate debt, taxable municipal securities, money market
instruments and commercial paper.

We
believe that our existing cash and cash equivalents coupled with borrowings under our new warehouse line of credit and the remainder of proceeds from our initial public offering and
over-allotment will be sufficient to fund operations, capital expenditures and provide adequate working capital for the next twelve months. However, there can be no assurance that events in the future
will not require us to seek additional capital and, if so required, that capital will be available on terms favorable or acceptable to us, if at all.



During the three months ended September 30, 2004, the net decrease in cash and cash equivalents was approximately $3.9 million compared to
approximately $0.3 million increase in cash and cash equivalents during the three months ended September 30, 2003. As reported on our consolidated

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statements
of cash flows, our (decrease) increase in cash and cash equivalents during the three months ended September 30, 2004 and 2003 is summarized as follows (unaudited):

|                                                       |  | Three Months
Ended
September 30, 2004 |            | Three Months
Ended
September 30, 2003 |  
|------------------------------------------------------ |  | ------------------------------------- | ---------- | ------------------------------------- | -
|Net cash (used in) provided by operating activities    |  | $                                     | (2,003,032 | )                                     | $
|Net cash used in investing activities                  |  |                                       | (3,975,454 | )                                     |  
|Net cash provided by financing activities              |  |                                       | 2,090,740  |                                       |  
|                                                       |  |                                       |            |                                       |  
|Total (decrease) increase in cash and cash equivalents |  | $                                     | (3,887,746 | )                                     | $
|                                                       |  |                                       |            |                                       |  

Details
of our cash inflows and outflows are as follows during the three months ended September 30, 2004:

Operating Activities:During the three months ended September 30, 2004 and 2003, net cash used was approximately
$2.0 million as compared to net cash provided of approximately $2.6 million in cash and cash equivalents in operating activities, respectively. This was comprised primarily of our net
income of approximately $0.3 million and a decrease of working capital of approximately $2.6 million coupled with non-cash charges totaling approximately $0.3 million.
The components of our net income are detailed in our Results of Operations section included above in this Item. Components of our significant non-cash adjustments are as follows for the
three months ended September 30, 2004:



Investing Activities:Cash flow used in investing activities was approximately $4.0 million for the three months ended
September 30, 2004 as compared with approximately $20.6 million for the three months ended September 30, 2003. Specific investing activity during the three months ended
September 30, 2004 and 2003 was as follows:



Financing Activities:During the three months ended September 30, 2004, cash flows from financing activities provided
approximately $2.1 million, which consisted of borrowings from our warehouse line of credit, net of related repayments.

During
the nine months ended September 30, 2004, the net increase in cash and cash equivalents was approximately $0.7 million compared to a net decrease of approximately
$0.1 million during the nine months ended September 30, 2003. As reported on our consolidated statements of cash flows, our

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increase
(decrease) in cash and cash equivalents during the nine months ended September 30, 2004 and 2003 is summarized as follows (unaudited):

|                                                       |  | Nine Months
Ended
September 30, 2004 |             | Nine Months
Ended
September 30, 2003 |  
|------------------------------------------------------ |  | ------------------------------------ | ----------- | ------------------------------------ | -
|Net cash used in operating activities                  |  | $                                    | (3,608,855  | )                                    | $
|Net cash (used in) provided by investing activities    |  |                                      | (60,309,354 | )                                    |  
|Net cash provided by (used in) financing activities    |  |                                      | 64,651,734  |                                      |  
|                                                       |  |                                      |             |                                      |  
|Total increase (decrease) in cash and cash equivalents |  | $                                    | 733,525     |                                      | $
|                                                       |  |                                      |             |                                      |  

Details
of our cash inflows and outflows are as follows during the nine months ended September 30, 2004:

Operating Activities:During the nine months ended September 30, 2004 and 2003, we used approximately
$3.6 million and $1.2 million in cash and cash equivalents in operating activities, respectively. This was comprised primarily of our net income of $12,589 and a decrease of working
capital of approximately $4.7 million coupled with non-cash charges totaling approximately $1.1 million. The
components of our net income are detailed in our Results of Operations section included above in this Item. Components of our significant non-cash adjustments are as follows:



Investing Activities:Cash flow used in investing activities was approximately $60.3 million for the nine months ended
September 30, 2004 as compared to approximately $47.4 million generated from investing activities for the nine months ended September 30, 2003. Specific investing activity during
the nine months ended September 30, 2004 and 2003 was as follows:



Financing Activities:During the nine months ended September 30, 2004, cash flows from financing activities provided
approximately $64.7 million, which consisted of borrowings from our warehouse line of credit, net of related repayments coupled with net proceeds from the over-allotment.



As of September 30, 2004 and December 31, 2003, we had retained interests in loan securitizations of approximately $8.0 million and
$7.2 million, respectively. As of September 30, 2004 and

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December 31,
2003, our retained interests consisted of the following securities with estimated fair values as indicated:

|                                                                      |  | September 30, 2004 |           | December 31, 2003
|--------------------------------------------------------------------- |  | ------------------ | --------- | -----------------
|
|Falcon Franchise Loan Trust Certificates, Series 1999-1 Class F       |  | $                  | 2,098,708 |                  
|Falcon Franchise Loan Trust Certificates, Series 1999-1 Class G       |  |                    | 1,420,948 |                  
|Falcon Franchise Loan Trust Certificates, Series 2000-1 Class G       |  |                    | 1,230,541 |                  
|Falcon Auto Dealership Loan Trust Certificates, Series 2001-1 Class G |  |                    | 1,112,070 |                  
|Falcon Auto Dealership Loan Trust Certificates, Series 2003-1 Class G |  |                    | 2,158,699 |                  
|                                                                      |  |                    |           |                  
|                                                                      |  | $                  | 8,020,966 |                  
|                                                                      |  |                    |           |                  

We
estimate the fair value of the retained interest by calculating the present value of the estimated expected future cash flows received by us, using a discount rate commensurate with
the risk involved. We have experienced only four loan defaults since our inception. The first defaulted loan was in our 2001 securitization and resulted in a loss of principal of approximately
$2.8 million. The three other defaults related to one loan in our 2003 securitization and two loans in our 2001 securitization. Although these loan defaults have not yet been resolved, we have
estimated losses upon the resolution of these three loans of approximately $3.5 million, $1.5 million and $1.4 million, respectively. The aggregate impact of the estimated losses
on the 2003 and 2001 securitization pools would be approximately $3.5 million and $2.9 million, respectively. We took into account these estimated losses when establishing the value of
retained interests held by us in connection with the securitized pools in which these loans are held and resulted in a charge of approximately $0.01 million, $0.4 million and
approximately $0.2 million in fiscal 2004, 2003 and 2002, respectively. We cannot provide any assurance that our actual loss will equal the estimates indicated.

In
April 2004, a publicly traded dealership group acquired three automobile dealerships, which secured loans held in two of our securitization pools, 2001-1 and
2003-1. The subsidiaries of the dealership group assumed the obligations under the loans. In connection with these transactions, the loan collateral and financial covenants were released
and replaced with bank letters of credit from Bank of America in the full amount of the outstanding principal balance. This collateral replacement strengthened the quality of both securitization pools
as it improved the quality of the collateral available to support the loan balance of the borrowers.



Liquidity.Our short-term liquidity requirements consist primarily of funds necessary to originate new loans to
automotive dealers and to pay for other expenditures including interest and principal payments on our warehouse line, interest expense on our hedging activities, salaries and employee benefits,
general and administrative expenses, advertising and promotions and capital expenditures.

Our
primary sources of liquidity for the three and nine months ended September 30, 2004 were net proceeds from the exercise of the over-allotment option in connection
with our initial public offering and borrowings from our warehouse line of credit. Our primary sources of liquidity for the three and nine months ended September 30, 2003 were net proceeds from
the sale of loans, and borrowings from our warehouse line of credit. We have historically funded our short-term liquidity requirements from these sources.

We
expect cash from additional borrowings on existing and future warehouse lines of credit, proceeds from the completion of additional securitizations, the net proceeds of our IPO and

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over-allotment
and cash from operations to be adequate to support our operations for the next twelve months.

Loan Securitization Transactions.We sold at issuance of approximately $104.6 million, $111.6 million,
$122.2 million, and $123.4 million of loan trust certificates through securitization transactions in 1999, 2000, 2001 and 2003, respectively. To finance our business, we are
substantially dependent upon completing additional loan securitizations in the future. Factors that could affect our future ability to securitize loans that we originate include investor demand,
credit spreads relative to other investments and the general level of interest rates relative to other types of investments. We cannot provide any assurances that we will be able to complete
additional loan securitizations on favorable terms or at all.



On April 28, 2004, we entered into a $150.0 million Revolving Warehouse Financing Agreement with iStar Financial Inc. ("iStar"), solely for
the purpose of originating loans. The facility may be increased to $200.0 million at our option with the consent of iStar. Interest is calculated using LIBOR plus 290 basis points. Under the
facility, iStar financed all of our existing outstanding loans that were financed under the previously existing warehouse facility, which was terminated. In connection with entering into the new
facility, we paid a fee of $1,875,000 to iStar and a termination fee of $199,500 to the lenders under the previously existing facility. As of September 30, 2004, the outstanding balance was
approximately $103.3 million. The interest rate as of September 30, 2004 was 4.64%.

The
warehouse credit line is secured by, among other things, our loans. All payments made by borrowers in respect of such loans are applied on a monthly basis to pay the outstanding fee
and interest obligations under the new warehouse credit line and to reduce the principal amount outstanding under the new warehouse credit line by an amount equal to the portion of the payments on the
loans that constitute payments of principal.

The
maturity date of our new warehouse credit line is April 10, 2005. The availability of funds under this credit line is subject to, among other things, our compliance with
specified financial covenants relating to leverage ratio, net worth, limitations on capital expenditures and limitations on total indebtedness, as described below. We are required under the warehouse
facility to maintain a ratio of consolidated total debt to consolidated net worth not in excess of 4:1 and a consolidated net worth of not less than $80.0 million. We generally may not maintain
indebtedness outside the new warehouse credit line other than indebtedness to fund obligations under our hedging arrangements, purchase
money indebtedness for the acquisition of assets not in excess of $1.0 million, indebtedness in connection with our securitization transactions and certain capital leases. In order to make a
borrowing under the facility, either Vernon B. Schwartz, our Chairman and Chief Executive Officer, or David A. Karp, our President and Chief Financial Officer, must be employed as a senior executive
officer of our Company with the same decision making authority as on April 28, 2004.

The
lender under the new warehouse credit line will generally fund up to 80%, the advance rate, of the principal amount of eligible loans that we originate with the lender's approval.
The maximum funding available for any individual loan is not permitted to exceed $20.0 million. In addition, the lender will not fund an amount in excess of 66.6% of the aggregate market value
of our eligible loans.

We
are required to make prepayments under the new warehouse credit line under certain circumstances. Among other things, we may be required to make prepayments upon a decrease in the
aggregate market value of our eligible loan portfolio. Specifically, in the event that the lender determines that the product of the market value of the eligible loans in our loan portfolio and the
aggregate maximum advance rate of 66.6% is less than the aggregate outstanding principal amount under the warehouse credit line, then, subject to an exception for certain market value fluctuations of
less than 5%, we will be required to prepay amounts borrowed under the new warehouse credit line

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sufficient
to eliminate such deficiency. The new warehouse credit line also specifies various events that would allow the lender to terminate the warehouse credit line in its entirety, including,
among other things, our failure to qualify as a real estate investment trust under the Internal Revenue Code or a change of control.

Commitments and Significant Contractual Obligations

We have existing commitments to make future interest payments on our existing iStar warehouse line. As of September 30, 2004, we were obligated under
noncancelable operating lease agreements for office space and computer equipment. The future minimum lease payments under these lease agreements at September 30, 2004 were (unaudited):

2004 (October 1 to December 31)

$
51,6432005


206,1902006


208,2482007


218,0492008


227,853Thereafter


807,276$
1,719,259


We
had previously entered into employment agreements with three members of senior management. Effective July 1, 2004, we entered into an employment agreement with an additional
member of senior management. The agreements range in terms from eighteen to thirty-nine months, subject to additional one year renewals. The future minimum salary expense relating to these
agreements is $268,750, $1,075,000 and $750,000 for the period October 1, 2004 to December 31, 2004 and for the years ended December 31, 2005 and 2006, respectively.

Capital Expenditures

We are in the process of upgrading our loan administration and accounting software for 2004 at a cost of approximately $0.3 million. We do not anticipate
incurring any other significant capital expenditures in 2004.

Related Party Transactions

We were involved in significant financing, risk management and other transactions, and have significant related party balances with Goldman, Sachs & Co.,
an affiliate of MLQ Investors, L.P., SunAmerica Investments, Inc., SALIC, an affiliate of SunAmerica Investments, Inc., and Falcon Auto Venture, LLC all directly and indirectly through
affiliates and subsidiaries of the entities. We entered into these
transactions in the ordinary course of business and believe that the terms of these transactions are on market terms that could be obtained from unrelated third parties. As of December 22, 2003
after the IPO transaction, the aforementioned related parties were no longer considered related parties as their ownership of the Company has been significantly reduced to less than 5%.

Included
in the statements of operations are revenues and expenses resulting from various financing, capital markets transactions and loan sales transactions. The following table sets
forth the related party revenues and expenses included in the respective captions in the statements of operations for the three and nine months ended September 30, 2003. The amounts reflect the
related party

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transactions
with Goldman, Sachs & Co., except where otherwise indicated and are as follows (unaudited):

|                                                                                                                                                                                                                               |  | Three Months
Ended
September 30, 2003 |           | Nine Months
Ended
September 30, 2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------- | --------- | ------------------------------------ | -
|Interest income on securities purchased under resale agreements  related party                                                                                                                                                |  | $                                     | 59,919    |                                      | $
|Gain on sale of loans (fee expense)                                                                                                                                                                                            |  |                                       |          |                                      |  
|Changes in fair value of interest rate swap contracts                                                                                                                                                                          |  |                                       | (432,469  | )                                    |  
|Gain (loss) on securities sold, but not yet purchased  related party                                                                                                                                                          |  |                                       | 3,478,806 |                                      |  
|Interest expense on borrowings  related party ($437,110 and $16,962 and $1,124,298 and $49,955 related to SunAmerica, Inc. and Falcon Auto Venture, LLC for the three and nine months ended September 30, 2003,
respectively) |  |                                       | 891,181   |                                      |  
|Interest expense on securities sold, but not yet repurchased  related party                                                                                                                                                   |  |                                       | 526,772   |                                      |  
|Facility fee expense ($46,875 and $140,625 related to SunAmerica, Inc. for the three and nine months ended September 30, 2003, respectively)                                                                                   |  |                                       | 93,750    |                                      |  

Recent Accounting Pronouncement

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities,"an interpretation of ARB 51 (FIN 46). The interpretation provides guidance on consolidating variable interest entities ("VIE") and applies immediately to variable
interests created after January 31, 2003. The guidelines of the interpretation as revised by FIN 46 (revised December 31, 2003), "Consolidation of Variable
Interest Entities"(FIN 46R) became applicable to us in the first quarter of 2004 for variable interest entities created before February 1, 2003. The interpretation
requires VIEs, formerly referred to as special purpose entities, to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support
from other parties, or the equity investors lack certain specified characteristics. Adoption of this new accounting standard did not have a material effect on our financial condition or results of
operations.

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ITEM 3.    Quantitative and Qualitative Disclosure About Market Risk

Market risk refers to the risk of loss from adverse changes in the level of one or more market prices, rate indices, or other market factors. We are exposed to
market risk primarily from changes in interest rates and credit spreads. These two main risks are very sensitive to a variety of factors including political, economic, monetary and tax policies and
other factors outside of our control. As described below, we use some derivative financial instruments to manage or hedge interest rate risks related to our loans. We do not use derivatives for
trading or speculative purposes and only enter into contracts with major financial institutions based on their credit ratings and other factors.



The primary interest rate exposure to which we are subject to relates to our fixed-rate and variable-rate loan portfolio, our forecasted
issuance of long-term debt, interest rate swaps, our floating rate warehouse line of credit and our retained interests in securitization pools. Any change in the general level of interest
rates in the market can affect our net interest income in either a positive or negative manner. Net interest income is the difference between the income earned from interest bearing assets less the
expense incurred relating to interest bearing liabilities. Fluctuations in the interest rate environment can also affect our ability to acquire new loans, the value of our loan portfolio and our
ability to finance the loans.

We
enter into forward starting interest rate swap transactions to mitigate the effect that changes in interest rates and credit spreads have on the forecasted issuance of
long-term debt. In swap transactions, we will generally enter into an interest rate swap contract, receiving a floating rate of interest and paying a fixed rate of interest. The term of
the swap contracts is determined by the duration of the forecasted long-term debt to be issued. The forward starting swaps are accounted for as cash flow hedges, therefore changes in the
fair value of the swaps are recorded in accumulated other comprehensive income (loss).

We
have not historically and currently do not intend to enter into hedging transactions to mitigate our interest rate exposure relating to the value of our retained interests in
securitization pools. The fair value of our loan portfolio can decline during periods of rising interest rates and widening credit
spreads. Generally, we enter into these transactions when the rate is locked on a pending loan. In swap transactions, we will generally enter into an interest rate swap contract, receiving a floating
rate of interest and paying a fixed rate of interest. The term of the swap contracts is determined by the duration of the forecasted long-term debt to be issued. We have a contractual
obligation to settle the repurchase and swap agreements with Goldman, Sachs & Co. at the current fair value on the repurchase date.



As of September 30, 2004, our loan portfolio consisted of our fixed-rate and variable-rate loan portfolio at fixed rates ranging
between 7.18% and 9.52% and variable rates ranging between 4.15% and 6.30%, respectively. Consequently, we do not have significant cash flow exposure on our loan portfolio. However, the market value
of our loan portfolio is subject to significant fluctuation due to changes in market interest rates. Among other factors, changes in interest rates affect the fair value of our loan portfolio. Refer
to Critical Accounting Policies and Use of Estimates in Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.

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ITEM 4.    Controls and Procedures

As of the end of the period covered by this report, our principal executive officer and our principal financial officer carried out an evaluation of the
effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (or Exchange Act). Based
upon and as of that date of evaluation, these officers have concluded that our disclosure controls and procedures are in effect such that all material information relating to us required to be
disclosed in our periodic filings with the Securities and Exchange Commission (i) is recorded, processed, summarized and reported within the required time period, and (ii) is accumulated
and communicated to Company's management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There
have been no significant changes in our internal controls over financial reporting or in other factors, which could significantly affect controls over financial reporting
subsequent to the date our
management carried its evaluation, including any corrections with regard to significant deficiencies and material weaknesses.

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PART II  OTHER INFORMATION

ITEM 1.    Legal Proceedings

We are not party to any material litigation proceedings.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

On December 22, 2003, we closed the sale of 12.5 million common shares in our initial public offering pursuant to a registration statement that was
declared effective on December 16, 2003 (Registration No. 333-108603). On February 2, 2004, we sold 1.875 million common shares pursuant to the exercise of the
underwriters' over-allotment option. The remainder of the proceeds have been allocated to originate future loans as of September 30, 2004.

ITEM 6.    Exhibits

|Exhibit No. |  | Description                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1        |  | Chief Executive Officer Certification pursuant to Rule 13a-14(a) and Rule 15-d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).                                
|31.2        |  | Chief Financial Officer Certification pursuant to Rule 13a-14(a) and Rule 15-d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).                                
|32.1        |  | Chief Executive Officer and Chief Financial Officer Certification pursuant to Rule 13a-14(b) and Rule 15-d-14(b) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                  |  | FALCON FINANCIAL INVESTMENT TRUST (Registrant)
|----------------- |  | ----------------------------------------------
|November 15, 2004 |  | By:                                           
|November 15, 2004 |  | By:                                           

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