**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**x****                             ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly periodended July 31, 2006**

**OR**

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition periodfrom                       to                       **

### **CommissionFile Number 0-26686**

**First Investors FinancialServices Group, Inc.**

(Exact Name of Registrant asSpecified in its Charter)

| **Texas**                                     | **76-0465087**                       |
|-----------------------------------------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation | (I.R.S. Employer Identification No.) |
| or Organization)                              |                                 |
| ** **                                    | ** **                           |
| **675 Bering Drive, Suite 710**               | ** **                           |
| **Houston, Texas**                            | **77057**                            |
| (Address of Principal Executive Offices)      | (Zip Code)                           |

 

**(713) 977-2600**

(Registrant’sTelephone Number, Including Area Code)

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 x No o.

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  o       Accelerated Filer o       Non-Accelerated Filer  x

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).Yes o No x.

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

|                              | ** ** | **Shares Outstanding At** |
|------------------------------|------------|---------------------------|
| **Class**                    | ** ** | **September 6, 2006**     |
| Common Stock-$.001 Par Value |       | 4,474,194                 |

 

 

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.****AND SUBSIDIARIES**

##### **FORM 10-Q**

### **JULY 31, 2006**

##### **TABLE OF CONTENTS**

| **Part I**     | **Financial Information** | ** **                                                                                               | ** ** |
|----------------|---------------------------|----------------------------------------------------------------------------------------------------------|------------|
|           |                      |                                                                                                     |       |   |
|           | Item 1.                   | Financial Statements                                                                                     |       |   |
|           |                      |                                                                                                     |       |   |
|           |                      | Consolidated  Condensed Balance Sheets as of April 30, 2006 and July 31, 2006                            |       |   |
|           |                      |                                                                                                     |       |   |
|           |                      | Consolidated  Condensed Statements of Earnings for the Three Months Ended July 31, 2005 and  2006        |       |   |
|           |                      |                                                                                                     |       |   |
|           |                      | Consolidated  Condensed Statement of Shareholders’ Equity for the Three Months Ended July  31, 2006 |       |   |
|           |                      |                                                                                                     |       |   |
|           |                      | Consolidated  Condensed Statements of Cash Flows for the Three Months Ended July 31, 2005  and 2006      |       |   |
|           |                      |                                                                                                     |       |   |
|           |                      | Notes to  Unaudited Consolidated Condensed 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 6.                   | Exhibits and  Reports On Form 8-K                                                                        |       |   |
|           |                      |                                                                                                     |       |   |
| **Signatures** | ** **                | ** **                                                                                               |

 

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**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

##### **CONSOLIDATEDCONDENSED BALANCE SHEETS — APRIL 30, 2006 AND JULY 31, 2006**

##### **(In thousands, except par value)**

| ** **                                                                                                                                                         | ** ** | **April 30,  2006** | ** ** | **July 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **(Audited)**            | ** ** | **(Unaudited)**         | ** ** |
| **ASSETS**                                                                                                                                                         |       |                     |       |                    |       |
| Receivables Held for  Investment, net                                                                                                                              |       | $                        | 377,399    |                    | $          | 412,694 |   |
| Cash and Short-Term  Investments                                                                                                                                   |       | 3,380                    |       | 2,835                   |       |
| Restricted Cash                                                                                                                                                    |       | 25,538                   |       | 32,264                  |       |
| Accrued Interest  Receivable                                                                                                                                       |       | 3,218                    |       | 3,347                   |       |
| Assets Held for Sale                                                                                                                                               |       | 960                      |       | 924                     |       |
| Other Assets:                                                                                                                                                      |       |                     |       |                    |       |
| Funds held under  reinsurance agreement                                                                                                                            |       | 3,431                    |       | 3,881                   |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $3,514 and $3,958                                                 |       | 5,362                    |       | 5,029                   |       |
| Total assets                                                                                                                                                       |       | $                        | 419,288    |                    | $          | 460,974 |   |
| ** **                                                                                                                                                         | ** ** | ** **               | ** ** | ** **              | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                     |       |                     |       |                    |       |
| Debt:                                                                                                                                                              |       |                     |       |                    |       |
| Warehouse credit  facilities                                                                                                                                       |       | $                        | 47,080     |                    | $          | 123,167 |   |
| Term notes                                                                                                                                                         |       | 316,584                  |       | 280,586                 |       |
| Working capital  facility                                                                                                                                          |       | 16,454                   |       | 19,374                  |       |
| Related party  note                                                                                                                                                |       | 2,500                    |       | 2,500                   |       |
| Other Liabilities:                                                                                                                                                 |       |                     |       |                    |       |
| Accounts payable  and accrued liabilities                                                                                                                          |       | 6,397                    |       | 4,016                   |       |
| Income taxes                                                                                                                                                       |       | 1,386                    |       | 1,606                   |       |
| Deferred income  taxes payable                                                                                                                                     |       | 766                      |       | 719                     |       |
| Total  liabilities                                                                                                                                                 |       | 391,167                  |       | 431,968                 |       |
|                                                                                                                                                               |       |                     |       |                    |       |
| Commitments and  Contingencies                                                                                                                                     |       |                     |       |                    |       |
| Shareholders’ Equity:                                                                                                                                         |       |                     |       |                    |       |
| Common stock,  $0.001 par value, 10,000 shares authorized, 5,627 issued; 4,454 outstanding at  April 30, 2006 and 5,647 issued; 4,474 outstanding at July 31, 2006 |       | 6                        |       | 6                       |       |
| Additional  paid-in capital                                                                                                                                        |       | 18,938                   |       | 19,087                  |       |
| Retained  earnings                                                                                                                                                 |       | 13,644                   |       | 14,380                  |       |
| Less: treasury  stock, at cost, 1,172 shares                                                                                                                       |       | (4,467                   | )          | (4,467                  | )          |
| Total  shareholders’ equity                                                                                                                                   |       | 28,121                   |       | 29,006                  |       |
| Total liabilities and shareholders’ equity                                                                                                                    |       | 419,288                  |       | $                       | 460,974    |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED STATEMENTS OF EARNINGS**

**For the Three Months Ended July31, 2005 and 2006**

**(In thousands, except per share amount)**

**(Unaudited)**
| ** **                                             | ** ** | **For the Three Months** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **Ended July 31,**            | ** ** |
| ** **                                             | ** ** | **2005**                                | ** ** | **2006** | ** ** |
|                                                   |       |                                    |       |   |   |
| Interest Income                                        |       | $                                       | 8,498      |   | $ | 12,330 |   |
| Interest Expense                                       |       | 2,960                                   |       | 5,206 |   |
| Net interest income                                    |       | 5,538                                   |       | 7,124 |   |
| Provision for Credit Losses                            |       | 1,651                                   |       | 2,518 |   |
| Net Interest Income After Provision for Credit Losses  |       | 3,887                                   |       | 4,606 |   |
| Other Income:                                          |       |                                    |       |   |   |
| Servicing revenue                                      |       | 578                                     |       | 364 |   |
| Other finance charges and fees                         |       | 508                                     |       | 735 |   |
| Insurance products                                     |       | 291                                     |       | 213 |   |
| Income from investment                                 |       | 126                                     |       | 67 |   |
| Other interest income                                  |       | 250                                     |       | 405 |   |
| Other income                                           |       | 144                                     |       | — |   |
| Unrealized loss on interest  rate derivative positions |       | (3                                      | )          | — |   |
| Total other income                                     |       | 1,894                                   |       | 1,784 |   |
| Operating Expenses:                                    |       |                                    |       |   |   |
| Salaries and benefits                                  |       | 2,542                                   |       | 2,724 |   |
| Operating expense                                      |       | 603                                     |       | 979 |   |
| General and administrative                             |       | 917                                     |       | 1,044 |   |
| Other interest expense                                 |       | 262                                     |       | 421 |   |
| Total operating expenses                               |       | 4,324                                   |       | 5,168 |   |
| Income Before Provision for Income Taxes               |       | 1,457                                   |       | 1,222 |   |
| Provision for Income Taxes:                            |       |                                    |       |   |   |
| Current                                                |       | 107                                     |       | 532 |   |
| Deferred                                               |       | 425                                     |       | (46 | ) |
| Total provision for income  taxes                      |       | 532                                     |       | 486 |   |
| Net Income                                             |       | $                                       | 925        |   | $ | 736 |   |
|                                                   |       |                                    |       |   |   |
| Basic Net Income per Common Share                      |       | $                                       | 0.21       |   | $ | 0.17 |   |
| Diluted  Net Income per Common Share                   |       | $                                       | 0.21       |   | $ | 0.15 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY**

**For the Three Months Ended July31, 2006(In thousands, except share amounts)(Unaudited, except where stated)**
| ** **                                                        | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **   | ** ** | **Treasury**       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|--------------------|------------|------------|------------|
| ** **                                                        | ** ** | **Common Stock** | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | **Stock, at** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Earnings**       | ** ** | **cost**   | ** ** | **Total** | ** ** |
| Balance at May 1, 2005                                            |       | 5,583,669             |       | $              | 6          |         | $          | 18,755             |       | $          | 11,199     |   | $ | (4,467 | ) | $ | 25,493 |   |
| Net income                                                        |       |                  |       | —         |       | —       |       | 2,445              |       | —     |       | 2,445 |   |
| Exercise of stock options                                         |       | 42,500                |       | —         |       | 183          |       | —             |       | —     |       | 183 |   |
| Balance at April 30, 2006 (Audited)                               |       | 5,626,169             |       | 6              |       | 18,938       |       | 13,644             |       | (4,467     | )          | 28,121 |   |
| Net income                                                        |       |                  |       | —         |       | —       |       | 736                |       | —     |       | 736 |   |
| Stock compensation expense                                        |       |                  |       | —         |       | 39           |       | —             |       | —     |       | 39 |   |
| Exercise of stock options                                         |       |                  |       | —         |       | 20           |       | —             |       | —     |       | 20 |   |
| Issuance of common stock related to the exercise of stock options |       | 20,001                |       | —         |       | 90           |       | —             |       | —     |       | 90 |   |
|                                                              |       |                  |       |           |       |         |       |               |       |       |       |   |   |
| Balance  at July 31, 2006                                         |       | 5,647,000             |       | $              | 6          |         | $          | 19,087             |       | $          | 14,380     |   | $ | (4,467 | ) | $ | 29,006 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

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**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS**

**For the Three Months Ended July 31, 2005 and 2006**

##### **(Inthousands)**

**(Unaudited)**
| ** **                                                                               | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                     |       |     |       |     |       |
| Cash Flows From Operating Activities:                                                    |       |     |       |     |       |
| Net income                                                                               |       | $        | 925        |     | $          | 736 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities — |       |     |       |     |       |
| Depreciation and amortization  expense                                                   |       | 1,113    |       | 1,642    |       |
| Provision for credit losses                                                              |       | 1,651    |       | 2,518    |       |
| Excess tax benefits from  share-based payment arrangements                               |       | —   |       | (20      | )          |
| Share-based payment  arrangements                                                        |       | —   |       | 39       |       |
| (Increase) decrease in:                                                                  |       |     |       |     |       |
| Accrued interest receivable                                                              |       | (585     | )          | (129     | )          |
| Restricted cash                                                                          |       | (2,274   | )          | (6,726   | )          |
| Deferred financing costs and  other assets                                               |       | (131     | )          | 108      |       |
| Funds held under reinsurance  agreement                                                  |       | (726     | )          | (450     | )          |
| Current income tax receivable                                                            |       | 5        |       | —   |       |
| Interest rate derivative  positions                                                      |       | (56      | )          | —   |       |
| Increase (decrease) in:                                                                  |       |     |       |     |       |
| Accounts payable and accrued  liabilities                                                |       | (47      | )          | (2,381   | )          |
| Deferred income taxes payable                                                            |       | 425      |       | (47      | )          |
| Income taxes                                                                             |       | 83       |       | 241      |       |
| Net cash provided by (used in)  operating activities                                     |       | 383      |       | (4,469   | )          |
| Cash Flows From Investing Activities:                                                    |       |     |       |     |       |
| Origination of Receivables  Held for Investment                                          |       | (81,480  | )          | (80,319  | )          |
| Payments received from  Investment                                                       |       | —   |       | 72       |       |
| Principal payments from  Receivables Held for Investment                                 |       | 27,862   |       | 39,563   |       |
| Payments received on Assets  Held for Sale                                               |       | 1,521    |       | 1,802    |       |
| Purchase of furniture and  equipment                                                     |       | (173     | )          | (312     | )          |
| Net cash used in investing  activities                                                   |       | (52,270  | )          | (39,194  | )          |
| Cash Flows From Financing Activities:                                                    |       |     |       |     |       |
| Proceeds from advances on—                                                          |       |     |       |     |       |
| Warehouse credit facilities                                                              |       | 121,218  |       | 170,397  |       |
| Term notes                                                                               |       | 175,493  |       | —   |       |
| Working capital facility                                                                 |       | 1,276    |       | 2,919    |       |
| Principal payments made on—                                                         |       |     |       |     |       |
| Warehouse credit facilities                                                              |       | (219,816 | )          | (94,310  | )          |
| Term notes                                                                               |       | (28,338  | )          | (35,998  | )          |
| Proceeds from the issuance of  common stock                                              |       | —   |       | 90       |       |
| Excess tax benefits from  share-based payment arrangements                               |       | —   |       | 20       |       |
| Net cash provided by financing  activities                                               |       | 49,833   |       | 43,118   |       |
| Decrease in Cash and Short-Term Investments                                              |       | (2,054   | )          | (545     | )          |
| Cash and Short-Term Investments at Beginning of Period                                   |       | 2,414    |       | 3,380    |       |
| Cash and Short-Term Investments at End of Period                                         |       | $        | 360        |     | $          | 2,835 |   |
| Supplemental Disclosures of Cash Flow Information:                                       |       |     |       |     |       |
| Cash paid during the period  for—                                                   |       |     |       |     |       |
| Interest                                                                                 |       | $        | 2,758      |     | $          | 4,561 |   |
| Income taxes                                                                             |       | 18       |       | 292      |       |

 

The accompanying notesare an integral part of these consolidated financial statements

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

##### **(Dollarsin thousands, except per share data)**

##### **July31, 2006**

**1.****              TheCompany**

*Organization.*  First Investors Financial Services Group,Inc. (First Investors) was established to serve as a holding company for FirstInvestors Financial Services, Inc. (FIFS) and FIFS’s wholly-owned subsidiaries,First Investors Insurance Company (FIIC), First Investors Auto ReceivablesCorporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors ServicingCorporation (FISC), formerly known as Auto Lenders Acceptance Corporation(ALAC), FIFS Acquisition Funding Corp. LLC, Farragut Financial Corporation, andFirst Investors Auto Funding Corporation. First Investors, together with itswholly- and majority-owned subsidiaries, is hereinafter referred to as theCompany.

FIFS began operations inMay 1989 and is principally involved in the business of originating and holdingfor investment retail installment contracts and promissory notes secured by newand used automobiles originated by factory authorized franchised dealers ordirectly through consumers. As of July 31, 2006, approximately 33% and 15% ofreceivables held for investment had been originated in Texas and Georgia,respectively.  The Company currentlyoperates in 28 states.

FIIC was organized underthe captive insurance company laws of the state of Vermont for the purpose ofreinsuring certain credit enhancement insurance policies that have been writtenby unrelated third party insurance companies.

On October 2, 1998, theCompany completed the acquisition of FISC and the operations of FISC areincluded in the consolidated results of the Company since the date ofacquisition. Headquartered in Atlanta, Georgia, FISC performed servicing andcollection activities on a portfolio of receivables originated for investmentas well as on a portfolio of receivables originated and sold pursuant to twoasset securitizations. As a result of the acquisition, the Company increased thetotal dollar value on its balance sheet of receivables, acquired an interest incertain trust certificates related to the asset securitizations and acquiredcertain servicing rights along with furniture, fixtures, equipment andtechnology to perform the servicing and collection functions for the portfolioof receivables under management.

On August 8, 2000, theCompany entered into a partnership agreement whereby a subsidiary of theCompany was the general partner owning 70% of the partnership interests andFirst Union Investors, Inc. served as the limited partner and owned 30% of thepartnership interests.  On September 19,2003, First Investors Financial Services, Inc. purchased the limitedpartnership interests previously held by First Union Investors, Inc.  The Partnership consists primarily of aportfolio of loans previously owned or securitized by FISC and certain otherfinancial assets including charged-off accounts owned by FISC.

On December 24, 2002,the Company purchased 40% of the common stock and an investment in the juniormezzanine debt of First Auto Receivables Corporation (“FARC”).  FARC purchased an approximately $197,500portfolio of installment loan receivables from a subsidiary of Union AcceptanceCorporation.  FISC performs ongoingservicing and collection activities on the portfolio.

On March 19, 2003, FISCentered into a servicing agreement with an unrelated third party to service anapproximately $300,000 portfolio of installment loan receivables purchased froma subsidiary of Union Acceptance Corporation.

In total, at July 31,2006, FISC performs servicing and collection functions on a managed receivablesportfolio of approximately $492,000.

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**2.****              InterimFinancial Information**

*Basis of Presentation*.  The consolidated financial statements includethe accounts of First Investors and its wholly-owned and majority-ownedsubsidiaries. All intercompany accounts and transactions have been eliminated.Investments in which the Company exercises significant influence, but which itdoes not control (generally a 20% to 50% ownership interest), are accounted forunder the equity method of accounting, except for variable interest entitiesfor which the Company is considered the primary beneficiary under FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51*, asamended in December 2003 by Interpretation 46R. As of July 31, 2006, the Company does not have any variable interestentities under FIN 46 as amended by Interpretation 46R.

The results forthe interim periods are not necessarily indicative of the results of operationsthat may be expected for the fiscal year. In the opinion of management, theinformation furnished reflects all adjustments which are of a normal recurringnature and are necessary for a fair presentation of the Company’s financial positionas of July 31, 2006, and the results of its operations for the three monthsended July 31, 2006 and 2005, and its cash flows for the three months endedJuly 31, 2006 and 2005.

The consolidated financial statements for the interimperiods have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the disclosures are adequate to make the informationnot misleading. These financial statements should be read in conjunction withthe audited consolidated financial statements included in the Company’s 2006Annual Report on Form 10-K filed July 27, 2006.

*Receivables Held for Investment*.  Receivables Held for Investment represents theaggregate outstanding balance of installment sales contracts and promissorynotes originated by the Company through its automobile dealer relationships ordirectly with consumers.  The Companyaccrues interest income monthly using the effective interest method.  When a receivable becomes 90 days past due,the income accrual is suspended until the payments become current. When a loanis charged off or the collateral is repossessed, the remaining income accrualis written off.

*Other Income*. Other Income consists of income received from servicing activities,other finance charges and fees, income from investments, reinvestment revenue,income earned from the sale of GAP insurance and extended service contracts,and unrealized loss on interest rate derivative positions.  Servicing revenue is accrued as services arerendered. Late fees and other loan-related fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.  Income from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized loss on interest rate derivatives is recognized when incurred.

*Allowance for Credit Losses*.  TheCompany calculates the allowance for credit losses in accordance with SFAS No.5*, Accounting for Contingencies.*  SFAS No. 114, *Accountingby Creditors for Impairment of a Loan* does not apply to loanscurrently held by the Company because they comprise a large group of smallerbalance homogenous loans that are evaluated collectively for impairment.

The Company initiatesefforts to make customer contact as early as when the customer is one day pastdue and become more aggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determinedthat the loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 60 to 90 days afterthe loan becomes past due.  Uponrepossession, the uncollectible portion of the loan and 100% of accrued interestis written off.  The fair value of thecollateral is recorded as an Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling relatedexpenses.  After collection of allproceeds, the Company records an adjustment, positive or

8

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negative, based on the difference between the fairvalue estimate and the proceeds received. In the event the collateral cannot be located or if the customer refusesto pay and is not subject to bankruptcy court protection, the Company willwrite off the entire balance of the loan once it reaches 180 days pastdue.  If the customer is subject to bankruptcycourt protection, the loan generally remains in bankruptcy status as long aspayments are being received from the trustee. If a payment is missed, the Company seeks to repossess the collateralwith approval of the court.  If thecustomer is dismissed from bankruptcy, the Company resumes collection efforts.

The Company applies asystematic methodology in order to determine the amount of the allowance forcredit losses.  The specific methodologyis a six-month migration analysis whereby the Company compares the aging statusof each loan on a date which is six months prior to the reporting date, to theaging loan status as of the reporting date. These factors are then applied to the aging status of each loan at thereporting date in order to calculate the number of loans that are expected tomigrate to impaired status.  Theestimated number of impairments is then multiplied by the estimated loss perloan, which is based on historical information. Effective the quarter ended April 30, 2005, the Company elected toincrease its allowance for loan losses against loans that were greater than 120days past due and loans in which the collateral had been assigned forrepossession but had not yet been repossessed as of the reporting date.  The Company believes that this increase iswarranted in light of the change in federal bankruptcy laws enacted during theperiod and the recognition that the migration trends of severely delinquentloans and loans subject to bankruptcy are expected to become moreprotracted.  Based on this, the Companyhas assigned a specific allowance against these loans equal to the outstandingbalance of loans in these categories less the estimated recovery amount basedon current data regarding liquidation of the collateral and collection of anyadditional payments.  The Companyutilized its most recent recovery rates in order to assess fair value of theseloans.  For loans that are not classifiedinto these categories, the historical migration pattern is utilized in order toestablish the estimated impairment.  Theallowance for credit losses is based on estimates and qualitativeevaluations.  Ultimate losses may varyfrom current estimates. These estimates are reviewed periodically and asadjustments, either positive or negative, become necessary, they are reportedin earnings in the period they become known.

*Stock-Based Compensation*.  TheCompany expenses stock-based compensation expense in accordance with SFAS No.123(R), *Share-Based Payment - a revision to SFAS No. 123,Accounting for Stock-Based Compensation*(“SFAS No. 123(R)”) (seenote 8).

*Reclassifications*. Certain reclassifications have been made to thefiscal 2005 amounts to conform with the fiscal 2006 presentation.

**3.****              ReceivablesHeld for Investment**

The receivables generally have terms between 48 and 72months and are collateralized by the underlying vehicles.  Net receivable balances consisted of thefollowing at April 30, 2006 and July 31, 2006:

|                                           | ** ** | **April 30,** | ** ** | **July 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2006**           | ** ** | **2006**          | ** ** |
| Receivables                               |       | $                  | 368,878    |              | $          | 403,569 |   |
| Unamortized premium and deferred fees (1) |       | 10,853             |       | 11,820            |       |
| Allowance for credit losses               |       | (2,332             | )          | (2,695            | )          |
| Net receivables                           |       | $                  | 377,399    |              | $          | 412,694 |   |

 

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(1)  Includes premium and discounts paid to dealerplus deferred acquisition cost.

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Activity in the allowance for credit losses for theperiods ended July 31, 2005 and 2006 was as follows:

|                                | ** ** | **For the Three Months  Ended July 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                                          | ** ** | **2006** | ** ** |
| Balance, beginning of period   |       | $                                                                 | 2,249      |   | $ | 2,332 |   |
| Provision for credit losses    |       | 1,651                                                             |       | 2,518 |   |
| Charge-offs, net of recoveries |       | (1,707                                                            | )          | (2,155 | ) |
| Balance,  end of period        |       | $                                                                 | 2,193      |   | $ | 2,695 |   |

 

**4.****              Debt**

The Company finances itsloan origination through two warehouse credit facilities. The Company’s creditfacilities provide for one-year terms and have been renewed annually. Managementof the Company believes that the credit facilities will continue to be renewedor extended or that it would be able to secure alternate financing onsatisfactory terms; however, there can be no assurance that it will be able todo so.  In November, 2003, the Companyissued $139,661 asset-backed notes (“Term Notes”) secured by a discrete pool ofreceivables.  In May, 2005, the Companyissued $175,493 in Term Notes secured by a discrete pool of receivables.  In January, 2006, the Company issued $189,060in Term Notes secured by a discrete pool of receivables.  Substantially all receivables retained by theCompany are pledged as collateral for the credit facilities and the Term Notes.The weighted average interest rate for the Company’s secured borrowingsincluding the effect of program fees and dealer fees was 4.0% and 5.1% for theperiods ended July 31, 2005 and 2006, respectively.

*Warehouse Facilities as of July 31, 2006*

| Facility | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**            | ** ** | **Borrowing  Rate At  July 31,  2006** | ** ** |
|----------|------------|--------------|------------|-----------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------------|------------|
| FIARC    | ** ** | $            | 150,000    |            | $          | 84,423                 |       | Commercial paper  rate plus .3%                                                                       |       | .30%  of Unused Facility |       | None                                             |       | 5.38 | % |
| FIRC     | ** ** | $            | 50,000     |            | $          | 38,744                 |       | Option of a) Base Rate,  which is the higher of prime rate or fed funds plus .5% or b) LIBOR plus .5% |       | .25% of Unused Facility  |       | See below                                        |       | 5.89 | % |

 

*Warehouse Facilities – Credit Enhancement as of July 31, 2006*

| Facility | ** ** | **Cash Reserve**          | ** ** | **Advance  Rate** | ** ** | **Insurance**             | ** ** |
|----------|------------|--------------------------------|------------|-------------------|------------|---------------------------|------------|
| FIARC    |       | 1% of  outstanding receivables |       | 94                | %          | None                      |       |
| FIRC     |       | 1% of borrowings               |       | 100               | %          | Default  Insurance (ALPI) |       |

 

FIRC - In order to obtain a lower cost offunding, the Company has agreed to maintain credit enhancement insurancecovering the receivables pledged as collateral under the FIRC credit facility.The facility lenders are named as additional insureds under these policies. Thecoverages are obtained on each receivable at the time it is purchased by theCompany and the applicable premiums are prepaid for the life of the receivable.Each receivable is covered by three separate credit insurance policies,consisting of basic default insurance under a standard auto

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loan protection policy (known as “ALPI” insurance)together with certain supplemental coverages relating to physical damage andother risks. Solely at its expense, the Company carries these coverages andneither the vehicle purchasers nor the dealers are charged for the coveragesand they are usually unaware of their existence. The Company’s ALPI insurancepolicy is written by National Union Fire Insurance Company of Pittsburgh (“NationalUnion”), which is a wholly-owned subsidiary of American International Group.

The premiums that theCompany paid during the three months ended July 31, 2006 for its three creditenhancement insurance coverages, of which the largest component is basic ALPIinsurance, represented approximately 2.5% of the principal amount of thereceivables originated during the three months ended July 31, 2006. Aggregatepremiums paid for ALPI coverage alone during the three months ended July 31,2005 and 2006 were $1,206 and $1,520 respectively, and accounted for 1.5% and1.9% of the aggregate principal balance of the receivables originated duringsuch respective periods.

In April 1994, the Companyorganized First Investors Insurance Company (the “Insurance Subsidiary”) underthe captive insurance company laws of the State of Vermont. The InsuranceSubsidiary is an indirect wholly-owned subsidiary of the Company and is a partyto a reinsurance agreement whereby the Insurance Subsidiary reinsures 100% ofthe risk under the Company’s ALPI insurance policy. At the time each receivableis insured by National Union, the risk is automatically reinsured to its fullextent and approximately 96% of the premium paid by the Company to NationalUnion with respect to such receivable is ceded to the Insurance Subsidiary.When a loss covered by the ALPI policy occurs, National Union pays it after theclaim is processed, and National Union is then reimbursed in full by theInsurance Subsidiary.  In addition to themonthly premiums and liquidity reserves of the Insurance Subsidiary, a trustaccount is maintained by National Union to secure the Insurance Subsidiary’sobligations for losses it has reinsured.

The result of the foregoingreinsurance structure is that National Union, as the “fronting” insurer underthe captive arrangement, is unconditionally obligated to the Company’s creditfacility lenders for all losses covered by the ALPI policy, and the Company,through its Insurance Subsidiary, is obligated to indemnify National Union forall such losses. As of July 31, 2006, the Insurance Subsidiary had capital andsurplus of $3,493 and unencumbered cash reserves of $2,062 in addition to the$3,459 trust account.

The ALPI coverage as well asthe Insurance Subsidiary’s liability under the Reinsurance Agreement, remainsin effect for each receivable that is pledged as collateral under the warehousecredit facility. Once receivables are transferred from FIRC to FIARC andfinanced under the commercial paper facility, ALPI coverage and the InsuranceSubsidiary’s liability under the Reinsurance Agreement is cancelled withrespect to the transferred receivables. Any unearned premium associated withthe transferred receivables is returned to the Company. The Company believesthe losses its Insurance Subsidiary will be required to indemnify will be lessthan the premiums ceded to it. However, there can be no assurance that losseswill not exceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

FIARC – Credit Enhancement for the FIARC warehousefacility is provided to the commercial paper investors by a 6%overcollaterization level and a cash reserve account equal to 1% of thereceivables held by FIARC.  The Companyis not a guarantor of, or otherwise a party to, such commercial paper.

*Warehouse Facilities – Agents and Expirations*
| Facility | ** ** | **Agent** | ** ** | **Expiration**     | ** ** | **Event if not Renewed**                                                                                                                                                                |
|----------|------------|-----------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC    |       | Wachovia  |       | February 14,  2007 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC     |       | Wachovia  |       | February 14,  2007 |       | The loan would convert to a term loan which would  mature six months thereafter and amortize monthly in accordance with the  borrowing base with the remaining balance due at maturity. |

 

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On December 4, 2003, the FIRC facility was renewed, under similar termsand conditions, at the $50,000 commitment level until December 2, 2004, and wassubsequently extended until February 14, 2007. On June 15, 2004, the FIRC facility was extended to $65,000, andreverted back to $50,000 on September 13, 2004. As of April 30, 2006 and July 31, 2006, there was $47,080 and $38,744,respectively, outstanding.

On January 29,2004, following a short-term extension of the original maturity date, the FIARCfacility was renewed, under similar terms and conditions, to December 2, 2004,and was subsequently extended until February 14, 2007.  In connection with the renewal, the Companyobtained approval from the lender to eliminate the requirement that a suretybond be maintained to provide additional enhancement to the commercial paperinvestors.  As a result, the 0.35% suretybond premium and the 0.25% unused surety bond premium were eliminated.  In exchange, the Company agreed to increasethe program fee paid to the lender from 0.30% to 0.55% and to increase theunused fee paid to the lender from 0.25% to 0.30%.  As of April 30, 2006 and July 31, 2006, therewas $0 and $84,423, respectively, outstanding.

Management presently intendsto seek further extensions to these warehouse facilities prior to the currentexpiration dates.  Management furtherconsiders its relationship with its lenders to be satisfactory and has noreason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

The following table contains pertinent informationon the Term Notes as of July 31, 2006.

| Term Notes | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** ** | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|-----------------|------------|------------------------|------------|----------------------|------------|------------------------|--------------------|-----------------|------------|--------------------|------------|
| 2003-A          |       | November  11, 2003     |       | $                    | 139,661    |                   | April  20, 2011    |            | $          | 31,770             |       | 2.58 | % |
| 2005-A Class 2  |       | May  5, 2005           |       | $                    | 106,493    |                   | July  16, 2012     |            | $          | 92,337             |       | 4.23 | % |
| 2006-A Class 2  |       | January  26, 2006      |       | $                    | 47,000     |                   | March  16, 2009    |            | $          | 46,419             |       | 4.87 | % |
| 2006-A Class 3  |       | January  26, 2006      |       | $                    | 74,000     |                   | February  15, 2011 |            | $          | 74,000             |       | 4.93 | % |
| 2006-A Class 4  |       | January 26, 2006       |       | $                    | 36,060     |                   | April 15, 2013     |            | $          | 36,060             |       | 5.00 | % |

 

Credit enhancement on the Term Notes are as follows:

| Facility | ** ** | **Cash Reserve**                                                                                | ** ** | **Advance  Rate**                           | ** ** | **Insurance** | ** ** |
|----------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|------------|
| 2003-A   |       | 0.5% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 96.5%  initial advance decreasing to 96.1%  |       | Surety  Bond  |       |
| 2005-A   |       | 1.0% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 97.0%  initial advance decreasing to 95.75% |       | Surety  Bond  |       |
| 2006-A   |       | 1.0% of Initial Pool  Balance increasing to 2% of Initial Pool Balance including Pre-Funding Amount  |       | 98.5% initial advance decreasing  to 96.75% |       | Surety Bond   |       |

 

Term Notes - On November 20, 2003, the Company, throughits indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2003-A (“2003Auto Trust”) completed the issuance of $139,661 of 2.58% Class A asset-backednotes (“2003-A Term Notes”). The initial pool of automobile receivablestransferred to the 2003 Auto Trust totaled $114,727, which was previously ownedby FIRC and FIARC, secure the 2003-A Term Notes.

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In addition to the issuance of the Class A Notes,the 2003 Auto Trust also issued a $5,066 in Class B Note that was retained bythe Company and pledged to secure the Working Capital Facility as furtherdescribed below.  Proceeds from theissuance, which totaled $139,657 were used to (i) fund a $30,000 pre-funding accountto be used for future loan originations; (ii) repay all outstanding borrowingsunder the FIARC commercial paper facility, (iii) reduce the outstandingborrowings under the FIRC credit facility, (iv) pay transaction fees related tothe 2003-A term note issuance, and (v) fund an initial cash reserve account of0.5% or $574 of the initial receivables pledged.  The Class A Term Notes bear interest at 2.58%and requires monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 96.1% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2003-A Term Notes is April 20,2011.  The Class B Note does not bearinterest but requires principal reductions sufficient to reduce the balance ofthe Class B Note to 3.9% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6% of the then current principal balance of the receivables pool.  As of April 30, 2006, and July 31, 2006, theoutstanding principal balances on the 2003-A term notes were $37,715 and$31,770, respectively.

On May 5, 2005, the Company,through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust2005-A (“2005 Auto Trust”) completed the issuance of $69,000 of 3.57% Class A-1asset-backed notes and $106,493 of 4.23% Class A-2 asset-backed notes(collectively “2005-A Term Notes”), for a total of $175,493 of asset backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,921, which was previously owned by FIRC and FIARC, andsecures the 2005-A Term Notes.  Inaddition to the issuance of the Class A-1 and Class A-2 Notes, the 2005 AutoTrust also issued a $5,428 Class B Note that was retained by the Company andpledged to secure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$175,488 were used to (i) fund a $30,000 pre-funding account to be used forfuture loan originations; (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under theFIRC credit facility, (iv) pay transaction fees related to the 2005-A Term Noteissuance, and (v) fund an initial cash reserve account of 1% or $1,509 of theinitial receivables pledged.  The ClassA-1 and Class A-2 Term Notes bear interest at 3.57% and 4.23%, respectively,and require monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 95.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 notes were paid off during the fiscal yearended April 30, 2006.  The final maturityof the Class A-2 Term Notes is July 16, 2012. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Notes to 4.25% ofthe outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.  As of April 30, 2006 and July 31, 2006, theoutstanding principal balances on the 2005-A Term notes were $106,162 and$92,337, respectively.

On January 26, 2006, theCompany, through its indirect, wholly-owned subsidiary First Investors AutoOwner Trust 2006-A (“2006 Auto Trust”) completed the issuance of $32,000 of4.57% Class A-1 asset-backed notes, $47,000 of 4.87% Class A-2 asset-backednotes, $74,000 of 4.93% Class A-3 asset-backed notes, and $36,060 of 5.00%Class A-4 asset-backed notes (collectively “2006-A Term Notes”), for a total of$189,060 of asset backed notes. The initial pool of automobile receivablestransferred to the 2006 Auto Trust totaled $151,939, was previously owned byFIRC and FIARC, and secures the 2006-A Term Notes.  In addition to the issuance of the Class A-1,Class A-2, Class A-3, and Class A-4 notes, the 2006 Auto Trust also issued a$2,879 Class B Note that was retained by the Company and pledged to secure theWorking Capital Facility as further described below.  Proceeds from the issuance, which totaled$188,446 were used to (i) fund a $40,000 pre-funding account to be used forfuture loan originations; (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under theFIRC credit facility, (iv) pay transaction fees related to the 2006-A Term Noteissuance, and (v) fund an initial cash reserve account of 1% or $1,519 of theinitial receivables pledged.  The 2006-ATerm Notes require monthly principal reductions sufficient to reduce thebalance of the notes to 96.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 notes were paid off during the quarter endedJuly 31, 2006.  The final maturity of theClass A-2, Class A-3, and Class A-4 Term Notes is March 16, 2009, February 15,2011, and April 15, 2013, respectively. The Class B Note does

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not bear interest but requires principal reductionssufficient to reduce the balance of the Class B Note to 3.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset quality covenantsare not met, the reserve account target level will increase to the greater of2% of the initial pool balance or 6% of the then current principal balance ofthe receivables pool.  As of April 30,2006 and July 31, 2006, the outstanding principal balances on the 2006-A ClassA term notes were $172,708 and $156,479, respectively.

*Working Capital Facility*.  Thefacility is provided to a special-purpose, wholly-owned subsidiary of theCompany, First Investors Residual Funding LP. This facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities and theexisting and future term note facilities. The outstanding borrowings under the facility bear interest at one-monthLIBOR plus 2.25%.  In addition, acommitment fee of 1.5% is paid on the total amount of this facility.  On October 26, 2004, the Working CapitalFacility was extended until October 10, 2005, increasing the commitment amountfrom $9,000 to $13,500.  The interestrate remained at LIBOR plus 2.25% and the commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%.  On August 15, 2005, the Working CapitalFacility was extended until February 15, 2006, increasing the commitment amountto $23,500, and was subsequently extended on February 15, 2006 until February14, 2007.  The interest rate remained atLIBOR plus 2.25% and the commitment fee paid on the total available amount ofthe facility was maintained at 1.5%.  Asof April 30, 2006 and July 31, 2006, there was $16,454 and $19,374,respectively, outstanding under this facility.

The Companypresently intends to seek a renewal of the working capital facility from itslender prior to maturity.  Should thefacility not be renewed, the outstanding balance of the receivables would beamortized in accordance with the borrowing base.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed.  If thefacility is not renewed, however, or if material changes are made to its termsand conditions, it could have a material adverse effect on the Company.

*Related Party Loans. *On December 3, 2001 the Company entered into an agreement with one ofits shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2,500.  On December 6, 2004, the original $2,500shareholder loan was replaced with a $2,500 loan containing identical terms andconditions between the Company and a limited partnership that is affiliatedwith a current shareholder and member of the Board of Directors  The proceeds of the borrowings have been utilizedto fund certain private and open market purchases of the Company’s common stockpursuant to a Stock Repurchase Plan authorized by the Board of Directors andfor general corporate purposes. Borrowings under the facility bear interest at a fixed rate of 10% perannum.  The facility is unsecured andexpressly subordinated to the Company’s senior credit facilities. The facilitymatures on December 3, 2008 but may be repaid at any time unless the Company isin default on one of its other credit facilities.  There was $2,500 outstanding under thisfacility as of April 30, 2006 and July 31, 2006, respectively.  For the three months ended July 31, 2005 andJuly 31, 2006, the Company recorded interest expense under these facilities of$63.

*Loan Covenants*.  The documentationgoverning these credit facilities and Term Notes contains numerous covenantsrelating to the Company’s business, the maintenance of credit enhancementinsurance covering the receivables (if applicable), the observance of certainfinancial covenants, the avoidance of certain levels of delinquency experienceand other matters. The breach of these covenants, if not cured within the timelimits specified, could precipitate events of default that might result in theacceleration of the FIRC credit facility, the Term Notes and the workingcapital facility or the termination of the commercial paper facilities. TheCompany was not in default with respect to any financial and non-financialcovenants governing these financing arrangements at July 31, 2006.

*Interest Rate Management*.  TheCompany’s warehouse credit facilities and working capital facilities bearinterest at floating interest rates which are reset on a short-term basis whilethe secured Term Notes bear interest at a fixed rate of interest. The Company’sreceivables bear interest at fixed rates that do not generally vary with achange in market interest rates. Since a primary contributor to the Company’sprofitability is its ability to manage

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its net interest spread, the Company seeks to maximizethe net interest spread while minimizing exposure to changes in interest rates.In connection with managing the net interest spread, the Company mayperiodically enter into interest rate swaps or caps to minimize the effects ofmarket interest rate fluctuations on the net interest spread. To the extentthat the Company has outstanding floating rate borrowings or has elected toconvert a portion of its borrowings from fixed rates to floating rates, theCompany will be exposed to fluctuations in short-term interest rates.

OnJuly 18, 2005, as a requirement of the FIARC commercial paper facility, theCompany entered into an interest rate cap transaction, with a strike rate of6%.  The aggregate initial notionalamount of the cap was $18,804which amortizes over six years.  The Company paid $59 in premium to purchasethis cap.  The interest rate cap was notdesignated as a hedge, and accordingly, changes in the fair value of the interestrate caps were recorded as an unrealized loss and is reflected in net income.  During the three months ended July 31, 2005,the Company recorded an unrealized loss of $3 that is included as a separatecaption of other income.

**5.****              IncomePer Share**

Incomeper share amounts are based on the weighted average number of shares of commonstock and potential dilutive common shares outstanding during the period. Theweighted average number of shares used to compute basic and diluted earningsper share for the three months ended July 31, 2005 and 2006, are as follows:

|                                                                  | ** ** | **For the Three Months Ended  July 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                                          | ** ** | **2006** | ** ** |
| Weighted average shares:                                         |       |                                                              |       |   |   |
| Weighted average shares  outstanding for basic income per share  |       | 4,411,693                                                         |       | 4,457,237 |   |
| Effect of dilutive stock  options and warrants                   |       | 81,896                                                            |       | 322,578 |   |
| Weighted average shares outstanding for diluted income per share |       | 4,493,589                                                         |       | 4,779,815 |   |

 

For the threemonths ended July 31, 2005 and 2006, the Company had 437,000 and 257,500respectively, of stock options and stock warrants which were not included inthe computation of diluted income per share because to do so would have beenantidilutive for the period presented.

**6.****              Investmentin First Auto Receivables Corporation**

OnDecember 24, 2002, the Company invested $475 for a 40% ownership interest inFirst Auto Receivables Corporation (“FARC”) and $713 for junior mezzanineinvestments of FARC.  FARC purchased a$197,500 automobile loan portfolio from UAFC-2 Corporation, a subsidiary ofUnion Acceptance Corporation, with proceeds from $186,000 in senior bridgedebt, $8,900 of senior mezzanine debt, $1,800 of junior mezzanine debt and$1,200 of equity.  The bridge debtinterest rate is LIBOR plus 1%, the senior mezzanine interest rate is 22.5% andthe junior mezzanine interest rate is 25%.

The Company accounts for its ownership investment inFARC using the equity method in accordance with APB Opinion 18.  In addition to the equity and debtinvestments, the Company performs loan servicing and collection activities onthe portfolio.  For the three monthsended July 31, 2005 and 2006, the Company recognized $161 and $94 respectivelyof servicing revenue, $27 and $6 of interest income respectively, and $126 and$67 respectively of equity in the income from investment in FARC.  For the three months ended July 31, 2006, theequity investment in FARC of $873 and junior mezzanine debt of $80 are includedin Deferred Financing Costs and Other Assets on the balance sheet.

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**7.****              New AccountingPronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in IncomeTaxes—an Interpretation of FASB Statement No. 109* (“FIN 48”),which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in its financialstatements the impact of a tax position if that position is more likely thannot of being sustained on audit, based on the technical merits of the position.The provisions of FIN 48 are effective for the Company on May 1,2007, with the cumulative effect of the change in accounting principle, if any,recorded as an adjustment to opening retained earnings.  The Company iscurrently evaluating the impact of adopting FIN 48 on its financialposition, cash flows, and results of operations.

In February 2006, theFASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and140* (“SFAS 155”). This statement amends SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*(“SFAS 133”), and SFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities*and resolves issues addressed in SFAS 133 Implementation Issue No. D1, *Application of Statement 133 to Beneficial Interest in SecuritizedFinancial Assets*. This Statement: (a) permits fair valueremeasurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation; (b) clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS 133; (c) establishes a requirement to evaluatebeneficial interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation; (d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives; and, (e) eliminates restrictions on a qualifyingspecial-purpose entity’s ability to hold passive derivative financialinstruments that pertain to beneficial interests that are or contain aderivative financial instrument. The standard also requires presentation withinthe financial statements that identifies those hybrid financial instruments forwhich the fair value election has been applied and information on the incomestatement impact of the changes in fair value of those instruments. The Companyis required to apply SFAS 155 to all financial instruments acquired, issued orsubject to a remeasurement event beginning January 1, 2007 although earlyadoption is permitted as of the beginning of an entity’s fiscal year. Theprovisions of SFAS 155 are not expected to have a financial statement impact atadoption; however, the standard could affect the future income recognition forsecuritized financial assets because there may be more embedded derivativesidentified with changes in fair value recognized in net income.

In May 2005, SFAS No. 154, *Accounting Changes and Error Corrections*, was issued. Thisstatement applies to all voluntary changes in accounting principles andrequires retrospective application to prior periods’ financial statements ofchanges in accounting principles, unless this would be impracticable. Thisstatement also makes a distinction between “retrospective application” of anaccounting principle and the “restatement” of financial statements to reflectthe correction of an error. This statement is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. The Company does not expect the adoption of this interpretation to have amaterial impact on its financial position, cash flows and results ofoperations.

**8.****             ****Shareholders’ Equity**

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a $1.00 par value. As of July 31, 2006, no shares have been issued.

*Employee**Stock Option Plan*. In June 1995, the Board of Directorsadopted the Company’s 1995 Employee Stock Option Plan (the Plan). The Plan isadministered by the Compensation Committee of the Board of Directors andprovides that options may be granted to officers and other key employees forthe purchase of up to 300,000 shares of common stock, subject to adjustment inthe event of certain changes in capitalization. On September 10, 2002, thenumber of shares of common stock available for issuance was increased to500,000. Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options.  The CompensationCommittee selects the persons to receive options and determines the exerciseprice, the duration, any conditions on exercise and other terms of the options.In the case of options

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intended to be incentivestock options, the exercise price may not be less than 100% of the fair marketvalue per share of common stock on the date of grant. With respect tonon-qualified stock options, the exercise price may be fixed as low as 50% ofthe fair market value per share at the time of grant. In no event may theduration of an option exceed 10 years and no option may be granted after theexpiration of 10 years from the adoption of the Plan. As of April 30, 2006 andJuly 31, 2006, a total of 360,500 options had been issued, and 294,500 and 284,500,respectively, options remained outstanding. This plan expired on June 27, 2005.

OnSeptember 8, 2005, the shareholders approved the Company’s 2005 Employee StockOption Plan (the 2005 Plan).  The 2005Plan is administered by the Compensation Committee of the Board of Directorsand provides that options may be granted to officers and other key employeesfor the purchase of up to 200,000 shares of common stock, subject to adjustmentin the event of certain changes in capitalization. Options may be grantedeither as incentive stock options (which are intended to qualify for certainfavorable tax treatment) or as non-qualified stock options.  The Compensation Committee selects thepersons to receive options and determines the exercise price, the duration, anyconditions on exercise and other terms of the options. The exercise price maynot be less than 100% of the fair market value per share of common stock on thedate of grant, and in no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan.  As of April 30, 2006 andJuly 31, 2006, a total of 102,500 and 200,000, respectively, options had beenissued and remained outstanding.

Theexercise price of the option is payable in cash upon exercise. At thediscretion of the Compensation Committee, options may be issued in tandem withstock appreciation rights entitling the option holder to receive an amount incash or in shares of common stock, or a combination thereof, equal in value toany increase since the date of grant in the fair market value of the commonstock covered by the option.

*Non-EmployeeDirector Stock Option Plan* - In September 2002, the Non-EmployeeDirector Stock Option Plan was established to further align the interests ofthe Company’s directors with the interests of the shareholders, as well asattracting and retaining qualified directors. This plan was subsequently amended in July 2006 to increase the numberof options available for issuance to 900,000. The Board of Directors administers the plan and the options will not bequalified as incentive stock options. Option types will be automatic and discretionary.  Automatic grants of 28,000 shares for eachnon-employee director, or 140,000 shares total, were approved in July2006.  Subsequent automatic grants of anoption to purchase 28,000 shares shall be made to each non-employee director onJuly 15th each year, beginning July 15, 2007. The planalso gives the Board of Directors discretionary authority to provide foradditional option grants if the Company’s annual financial performance exceedsparameters established by the Board.  Nodiscretionary grants have been awarded. As of April 30, 2006 and July 31, 2006, a total of 490,000 and 630,000,respectively, options had been issued under the plan, leaving a remaining10,000 and 270,000, respectively, available for issuance.  In addition to the options granted above,there were an additional 20,000 options granted to a director in 1995, beforethe adoption of the Non-Employee Director Stock Option Plan.  All options issued under this plan wereissued with an exercise price equal to the fair market value of the underlyingcommon stock on the sate of the grant.

Effective May 1, 2006, the Company adopted the provisions of SFASNo. 123(R) for its share-based compensation plans. The Company previouslyaccounted for these plans under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*, (“APB 25”) andrelated interpretations and disclosure requirements established by Statement ofFinancial Accounting Standards No. 123,*Accounting for Stock-based Compensation*, (“SFAS No. 123”), asamended by SFAS No. 148,*Accounting forStock Based Compensation—Transition and Disclosure.*

Under APB 25, no compensation expense was recorded in earnings for theCompany’s stock-based options granted under the Company’s 1995 Employee StockOption Plan, 2005 Employee Stock Option Plan, and Non-Employee Director Stock OptionPlan (the “Plans”). The pro forma effects on net income and income per sharefor the awards issued under the Plans were instead disclosed in a footnote tothe financial statements. Under SFAS No. 123(R), all share-basedcompensation is measured at the grant date, based on the fair value of theaward, and is recognized as an expense in earnings over the requisite serviceperiod.

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The Company adopted SFAS No. 123(R) using the modified prospectivemethod. Under this transition method, for all share-based awards granted priorto May 1, 2006 that remain outstanding as of that date, compensation costis recognized for the unvested portion over the remaining requisite serviceperiod, using the grant-date fair value measured under the original provisionsof SFAS No. 123 for pro forma disclosure purposes. Furthermore,compensation costs will also be recognized for any awards issued, modified,repurchased, or canceled after May 1, 2006.

The Company utilized the Black-Scholes-Merton model for calculating thefair value pro forma disclosures under SFAS No. 123 and has subsequentlyswitched to a binomial model, which is an acceptable valuation approach underSFAS No. 123(R). The binomial option-pricing model was developed for usein estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, this model requires theinput of subjective assumptions, including the expected price volatility of theunderlying stock. Projected data related to the expected volatility andexpected life of stock options is based upon historical and other information,and notably, the Company’s common stock has limited trading history. Changes inthese subjective assumptions can materially affect the fair value of theestimate, and therefore, the existing valuation models do not provide a precisemeasure of the fair value of the Company’s employee stock options.

The following table summarizes the option-pricing model assumptionsused to compute the weighted average fair value of stock options granted duringthe periods below that remain outstanding as of July 31, 2006:

|                                                 | ** ** | **For the three months ended July 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                                              | ** ** | **2006** | ** ** |
| Dividend yield                                  |       | —                                                                |       | — |   |
| Expected volatility                             |       | 19.37                                                                 | %          | 26.44 | % |
| Risk-free interest rate                         |       | 3.92                                                                  | %          | 5.02 | % |
| Estimated life (in years)                       |       | 4                                                                     |       | 6 |   |
| Weighted  average fair-value of options granted |       | $                                                                     | 1.02       |   | $ | 3.06 |   |
|                                                 |            |                                                                       |            |  |  |  |  |

 

Thefollowing table summarizes the option activity under the Plans as ofJuly 31, 2006, and the options exercisable at the end of the reported period:

|                                               | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|-------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding options, beginning of period      |       | 867         |       | $                                      | 4.72       |                                                |       |                            |       |   |
| Granted                                       |       | 237         |       | $                                      | 8.05       |                                                |       |                            |       |   |
| Forfeited and Expired                         |       | 10          |       | $                                      | 11.00      |                                                |       |                            |       |   |
| Exercised                                     |       | 20          |       | $                                      | 4.51       |                                                |       |                            |       |   |
| Outstanding  options, end of period           |       | 1,074       |       | $                                      | 5.32       |                                                | 7.2        |                            | $          | 2,849 |   |
|                                          |       |        |       |                                   |       |                                                |       |                            |       |
| Exercisable at  end of period                 |       | 537         |       | $                                      | 4.63       |                                                | 5.7        |                            | $          | 1,835 |   |
| Vested and  expected to vest at end of period |       | 980         |       | $                                      | 5.65       |                                                | 7.8        |                            | $          | 2,890 |   |

 

The total intrinsic value ofoptions exercised during the three months ended July 31, 2006 and 2005 was $71and $0.  The total grant date fair valueof stock options that became fully vested for the three months ended July 31,2006 was approximately $580.

Cash received from optionexercises under all share based payment arrangements for the three months endedJuly 31, 2006 and 2005 was $90 and $0, respectively.  The estimated tax benefit expected to berealized for the three months ended July 31, 2006 and 2005 is $20 and $0,respectively.

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A summary of the status ofthe Company’s nonvested shares as of July 31, 2006, and changes during thethree months ended July 31, 2006, is presented below:

| Nonvested Shares        | ** ** | **Shares** | ** ** | **Weighted   Average Grant  Date Fair  Value** | ** ** |
|------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|
| Nonvested at  April 30, 2006 |       | 428        |       | $                                                             | 4.64       |   |
| Granted                      |       | 237        |       | 8.05                                                          |       |
| Vested                       |       | (107       | )          | 5.41                                                          |       |
| Exercised                    |       | (20        | )          | 4.51                                                          |       |
| Forfeited                    |       | —     |       | —                                                        |       |
| Nonvested at July 31,  2006  |       | 538        |       | $                                                             | 6.16       |   |

 

As of July 31, 2006, therewas $723 of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the Plans.  The cost is expected to be recognized over aweighted average period of 3.5 years. The total fair value of shares vested during the three months ended July31, 2006 and 2005 was $1,025 and $604, respectively.

SFAS No. 123(R) alsorequires the Company to estimate forfeitures in calculating the expenserelating to stock-based compensation as opposed to accounting for forfeituresas they occur, as required by SFAS No. 123. The Company adjusted for thiseffect with respect to unvested options as of May 1, 2006 in thestock-based compensation expense recognized, which was recorded within generaland administrative expense on the Company’s consolidated statement ofoperations. This adjustment was not recorded as a cumulative effect adjustmentbecause no compensation cost was recognized prior to the adoption SFASNo. 123(R). In addition, SFAS No. 123(R) requires the Company toreflect the tax savings resulting from tax deductions in excess of expensereflected in its financial statements as a financing cash flow rather than asan operating cash flow as in prior periods.

Total compensation costsrelated to stock-based compensation that has been charged against income duringthe three months ended July 31, 2006 was $31, net of income tax benefitsof $8. Included in this total is $31 resulting from the adoption of SFASNo. 123(R), which would have previously been presented in a pro formafootnote disclosure, as discussed above.

The following tableillustrates the effect on net income and earnings per share as if the Companyhad applied the fair-value recognition provisions of SFAS No. 123 to allof its share-based compensation awards for periods prior to the adoption ofSFAS No. 123(R), and the actual effect on net income and earnings pershare for the period subsequent to the adoption of SFAS No. 123(R):

|                                                                                                                                                       | ** ** | **For the Three Months  Ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**                                                          | ** ** | **2006** | ** ** |
| Net Income as  reported                                                                                                                               |       | $                                                                 | 925        |   | $ | 736 |   |
| Add: Total stock  option plan compensation expense included in the determination of reported  net income, net of taxes                                |       | —                                                            |       | 31 |   |
| Deduct: Total  stock option plan compensation expense determined under fair value based  method for awards granted, modified or settled, net of taxes |       | (46                                                               | )          | (31 | ) |
| Pro Forma Net  Income                                                                                                                                 |       | $                                                                 | 879        |   | $ | 736 |   |
|                                                                                                                                                  |       |                                                              |       |   |   |
| Basic Net Income  per Common Share, as reported                                                                                                       |       | $                                                                 | 0.21       |   | $ | 0.17 |   |
| Diluted Net  Income per Common Share, as reported                                                                                                     |       | $                                                                 | 0.21       |   | $ | 0.15 |   |
| Basic Net Income  per Common Share, pro forma                                                                                                         |       | $                                                                 | 0.20       |   | $ | 0.17 |   |
| Diluted Net Income per  Common Share, pro forma                                                                                                       |       | $                                                                 | 0.20       |   | $ | 0.15 |   |

 

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**8.****             ****Subsequent Event**

Subsequent to quarterend, the Company recognized a $669 gain associated with a reduction in areserve for uncertain tax positions related to prior period tax returns whichwill positively impact net income for the second fiscal quarter ending October31, 2006 and increase book value per share by $0.15 per share

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** **

**ITEM 2.  *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS***

##### **(Dollarsin thousands, except per share data)**

**CriticalAccounting Policies**

Financial Reporting Release No. 60, which was issuedby the Securities and Exchange Commission (“SEC”), requires all registrants todiscuss critical accounting policies or methods used in the preparation offinancial statements.  Note 2 to theconsolidated condensed financial statements includes a summary of the significantaccounting policies and methods used in the preparation of the Company’sconsolidated financial statements.

The preparation of financial statements includes theuse of estimates and assumptions that affect the reported amounts of assets andliabilities and the reported amounts of net revenues and expenses during thereporting periods. The following is a review of the more significantassumptions and estimates, as well as the accounting policies and methods usedin the preparation of the consolidated financial statements.

*Receivables Held for Investment*.  Receivables Held for Investment represents theaggregate outstanding balance of installment sales contracts and promissorynotes originated by the Company through its automobile dealer relationships ordirectly with consumers, which includes the amortization of premiums ordiscounts associated with the loan originations.  The Company accrues interest income monthlyusing the effective interest method. When a receivable becomes 90 days past due, the income accrual is suspendeduntil the payments become current. When a loan is charged off or the collateralis repossessed, the remaining income accrual is written off.

*Other Income*. Other Income consists of income received from servicing activities, latefees and other loan-related fees, income from investments, reinvestmentrevenue, GAP insurance and extended service contracts, and unrealized loss oninterest rate derivative positions. Servicing revenue is accrued as services are rendered. Late fees andother loan-related fees are recognized when received.  Income from investments and reinvestmentrevenue are accrued based on the respective interest rate of suchinvestment.  Revenue from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized loss on interest rate derivatives is recognized whenincurred.

*Advertising Costs. *TheCompany expenses advertising costs as incurred.

*Allowance for Credit Losses*.  TheCompany calculates the allowance for credit losses in accordance with SFAS No.5*, Accounting for Contingencies.*  SFAS No. 114, *Accountingby Creditors for Impairment of a Loan* does not apply to loanscurrently held by the Company because they comprise a large group of smallerbalance homogenous loans that are evaluated collectively for impairment.

The Company initiatesefforts to make customer contact as early as when the customer is one day pastdue and become more aggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determined thatthe loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 60 to 90 days afterthe loan becomes past due.  Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair valueof the collateral is recorded as Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling related expenses.  After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the proceeds received.  In the event the collateral cannot be locatedor if the customer refuses to pay and is not subject to bankruptcy courtprotection, the Company will write off the entire balance of the loan once itreaches 180 days past due.  If thecustomer is subject to bankruptcy court protection, the loan generally remainsin bankruptcy status as long as payments are being received from thetrustee.  If a payment is missed, theCompany seeks to repossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

The Company applies asystematic methodology in order to determine the amount of the allowance forcredit losses.  The specific methodologyis a six-month migration analysis whereby the Company compares the aging

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status of each loan on a date which is six monthsprior to the reporting date, to the aging loan status as of the reportingdate.  These factors are then applied tothe aging status of each loan at the reporting date in order to calculate thenumber of loans that are expected to migrate to impaired status.  The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  During the quarter endedApril 30, 2005, the Company elected to increase its allowance for loan lossesagainst loans that were greater than 120 days past due and loans in which thecollateral had been assigned for repossession but had not yet been repossessedas of the reporting date.  The Companybelieves that this increase is warranted in light of the change in federalbankruptcy laws enacted during the period and the recognition that themigration trends of severely delinquent loans and loans subject to bankruptcyare expected to become more protracted. Based on this, the Company has assigned a specific allowance againstthese loans equal to the outstanding balance of loans in these categories lessthe estimated recovery amount based on current data regarding liquidation ofthe collateral and collection of any additional payments.  The Company utilized its most recent recoveryrates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  Despite theincrease in allowance associated with the higher delinquency loans and bankruptaccounts, the total allowance for loan losses decreased during the period as apercentage of Receivables Held for Investment due to improving overalldelinquency trends and lower repossession and loss rates.  The allowance for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, are reported in earnings in the period they become known.

*Stock-Based Compensation*.  The Company expensesstock-based compensation expense in accordance with SFAS No. 123(R), *Share-Based Payment - a revision to SFAS No. 123, Accounting forStock-Based Compensation*(“SFAS No. 123(R)”)

**Managed Receivables**

The Company’s managed receivables are:

|                                                                                     | ** ** | **As of or for the** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                          | ** ** | **Three Months Ended**         | ** ** |
| ** **                                                                          | ** ** | **July 31,**                        | ** ** |
| ** **                                                                          | ** ** | **2005**                                 | ** ** | **2006** | ** ** |
| Receivables Held for Investment:                                                    |       |                                     |       |   |   |
| Number                                                                              |       | 19,739                                   |       | 24,694 |   |
| Principal balance                                                                   |       | $                                        | 293,368    |   | $ | 403,569 |   |
| Average principal balance of  receivables outstanding during the three-month period |       | $                                        | 268,242    |   | $ | 387,367 |   |
| Other Servicing:                                                                    |       |                                     |       |   |   |
| Number                                                                              |       | 12,898                                   |       | 9,021 |   |
| Principal balance                                                                   |       | $                                        | 167,110    |   | $ | 88,339 |   |
| Average principal balance of  receivables outstanding during the three-month period |       | $                                        | 180,997    |   | $ | 96,807 |   |
| Total Managed Receivables Portfolio:                                                |       |                                     |       |   |   |
| Number                                                                              |       | 32,637                                   |       | 33,715 |   |
| Principal balance                                                                   |       | $                                        | 460,478    |   | $ | 491,908 |   |
| Average principal balance of receivables outstanding during the  three-month period |       | $                                        | 449,239    |   | $ | 484,174 |   |

 

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The following table sets forth information with regardto the Company’s net interest spread, which represents the difference betweenthe effective yield on Receivables Held for Investment and the Company’saverage cost of debt utilized to fund these receivables, and its net interestmargin (averages based on month-end balances):

|                                                         | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **July 31,**                | ** ** |
| ** **                                              | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| Receivables Held for Investment:                        |       |                             |       |   |   |
| Effective yield on Receivables  Held for Investment (1) |       | 12.7                             | %          | 12.7 | % |
| Average cost of debt (2)                                |       | 4.4                              | %          | 5.3 | % |
| Net interest spread (3)                                 |       | 8.3                              | %          | 7.4 | % |
| Net interest margin (4)                                 |       | 8.3                              | %          | 7.4 | % |

 

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(1)           Represents interest income as a percentage ofaverage Receivables Held for Investment outstanding.

(2)           Represents interest expense as a percentage ofaverage debt outstanding.

(3)           Represents yield on Receivables Held forInvestment less average cost of debt.

(4)           Represents net interest income as a percentage ofaverage Receivables Held for Investment outstanding.

Net interest income isthe difference between interest earned from the receivables portfolio andinterest expense incurred on the credit facilities used to acquire thereceivables. Net interest income was $7,124 for the three months ended July 31,2006, an increase of 28.6% when compared to amounts reported for the threemonths ended July 31, 2005.

Theamount of net interest income is the result of the relationship between theaverage principal amount of receivables held and average rate earned thereonand the average principal amount of debt incurred to finance such receivablesand the average rates paid thereon. Changes in the principal amount and ratecomponents associated with the receivables and debt can be segregated toanalyze the periodic changes in net interest income. The following tableanalyzes the changes attributable to the principal amount and rate componentsof net interest income:

 
| ** **                       | ** ** | **Three Months Ended  July 31, 2005 to 2006** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Increase (Decrease)  Due to  Change in**                   | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Average  Principal  Amount**                                              | ** ** | **Average  Rate** | ** ** | **Total  Net Increase  (Decrease)** | ** ** |
|                             |       |                                                                        |       |   |   |   |   |
| Receivables Held for Investment: |       |                                                                        |       |   |   |   |   |
| Interest income                  |       | $                                                                           | 3,772      |   | $ | 60 |   | $ | 3,832 |   |
| Interest expense                 |       | 1,308                                                                       |       | 938 |   | 2,246 |   |
| Net interest income              |       | $                                                                           | 2,464      |   | $ | (878 | ) | $ | 1,586 |   |

 

**Results of Operations**

*Three Months Ended July 31, 2006 and 2005*

*Key Factors.*Thecritical factors affecting the Company’s profitability during any period are (i) loan origination volume and thecorresponding growth in Receivables Held For Investment; (2) the level of netinterest spread, which is defined as the difference between the effective yieldon receivables held for investment and the cost of funds under the Company’scredit facilities and securitizations utilized to finance these receivables;(3) the level of provision for credit losses; (4) the amount of income derivedfrom other activities; and (5) the ability of the Company to control operatingexpenses relative to the total amount of the managed portfolio.

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*ExecutiveSummary. *Net incomefor the three months ended July 31, 2006 was $736 compared to $925 for year thethree months ended July 31, 2005.  Basicincome per common share was $0.17 and $0.21 and diluted income per common sharewas $0.15 and $0.21 for the three months ended July 31, 2006 and July 31, 2005,respectively.  The decrease in net incomefor the three months ended July 31, 2006 compared to July 31, 2005 is due toseveral factors including (i) an $866 increase in provision for credit lossesprimarily associated with the growth in the portfolio of receivables held forinvestment and an associated increase in the allowance for credit losses, (ii)a $110 reduction in other income primarily due to lower servicing revenueresulting from the continued decline in serviced receivables outstanding andlower dealer marketing fees due to the elimination of certain dealer programs,(iii) a $182 increase in salaries and benefits expense to support an increasein the average balance of receivables held for investment, staffing for theCompany’s inbound call center which was moved from a third party provider during2005, and the implementation of FASB 123(R) during the period and, (iv) a $376 increase in operating costs associatedwith an increase in the average balance of receivables held for investment anda decrease in the dollar amount of expenses which the Company was able tocapitalize as deferred acquisition costs. These are partially offset by (i) a $1,586 increase in netinterest income due to a 44% increase in the average balance of receivablesheld for investment, (ii) an increase in other interest income due to higheraverage cash balances, and (iii) reductions in third party fees related to thecall center move.  The increase in net interest income wasoffset by a reduction in the net interest spread created by flat effectiveyields on the portfolio of receivables held for investment and an increasingcost of funds.  The decline in netinterest spread reduced net interest income by $878 for the three months endedJuly 31, 2006 as compared to the three months ended July 31, 2005.

*Interest Income*. Interest income for the three months ended July31, 2006 increased to $12,331 compared to $8,498 for the three months endedJuly 31, 2005.

The level of interest income, aprimary driver of financial results, is impacted by the average outstandingbalance of the portfolio of Receivables Held for Investment, the weightedaverage interest rate on receivables originated by the Company, the mix ofdirect and indirect lending activities and the level of early prepayments andcharge-offs.  Interest income onReceivables Held for Investment increased****45.1% for thethree months ended July 31, 2006 compared to the three months ended July 31,2005.  The increase in interest incomefor the three months ended July 31, 2006 is primarily due to a 44.4% increasein the average portfolio outstanding for the period ended July 31, 2006compared the period ended July 31, 2005.

*Interest Expense.*Interest expense for the three months ended July31, 2006 increased to $5,206 compared to $2,960 for the three months ended July31, 2005. Interest expense increased 75.9% for the three months ended July 31,2006.  The increase in interest expenseis primarily due to (i) a $118,756 or 44.2% increase in the average debtoutstanding for the three months ended July 31, 2006, compared to the three monthsended July 31, 2005 as a result of a 44.4% increase in the average portfolio ofReceivables Held for Investment, (ii) an increase in overall market interestrates as a result of short-term market rate increases adopted by the FederalReserve System and (iii) the Company’s decision to lock in interest rates on$189,060 of debt in January 2006 through the issuance of term notes to minimizethe risk of future interest rate increases, as longer term fixed rate termnotes typically carry higher interest rates than shorter term floating ratedebt.  The combined effects of theincrease in overall market interest rates and the decision to lock in a fixedinterest rate on $189,060 of debt, resulted in a 97 basis point increase in theaverage interest rate for the three months ended July 31, 2006, as compared tothe three months ended July 31, 2005.

*Provisionfor Credit Losses*. The provision forcredit losses for the three months ended July 31, 2006 increased to $2,518 ascompared to $1,651 for the three months ended July 31, 2005. The increase inprovision for credit losses is primarily due to a 44.4% increase in the averageportfolio outstanding for the period ended July 31, 2006, compared to theperiod ended July 31, 2005.  Provisionfor credit losses as a percentage of average receivables held for investment onan annual basis increased to 2.6% as compared to 2.5% for the three monthsended July 31, 2005.

Netcharge-offs for the three months ended July 31, 2006 increased to $2,155compared to $1,707 for the three months ended July 31, 2005.  The increase in net charge-offs for the threemonths ended July 31, 2006 is primarily due to a 44.4% increase in the averageportfolio outstanding for the period ended July 31, 2006, compared to theperiod ended July 31, 2005.  This ispartially offset by (i) a decrease in loss frequency and

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severityfrom repossessions and (ii) an increase in recoveries from defaultedloans.  As a result, the allowance forloan loss as a percentage of the portfolio of receivables held for investmentdecreased from 0.8% as of July 31, 2005 to 0.7% as of July 31, 2006.  This compares to 0.6% as of April 30, 2006.

The level of provision for credit losses is a key driverof overall financial performance and should be positively impacted by improvementin general economic conditions, improvements in wholesale used car prices andlower delinquency rates and net losses projected for the portfolio ofReceivables Held for Investment.  Anyadditional economic deterioration or decline in wholesale used car prices willnegatively impact provision expense to the extent that these events cause anincrease in delinquency rates, bankruptcy rates or net charge-off rates in theportfolio of Receivables Held for Investment.

*Servicing Revenue*.  On December 24, 2002, the Company enteredinto an agreement to provide loan servicing and collection activities on behalfof FARC.  FARC, which is 40% owned by theCompany, purchased a portfolio of approximately $200,000 of installment loanreceivables.  On March 19, 2003, theCompany entered into an agreement to provide loan servicing and collectionactivities on $276,000 of installment loan receivables for unrelated thirdparties.  Servicing revenue decreased to$364****for the three months ended July 31,2006 compared to $578 for three months ended July 31, 2005.  The decrease in servicing revenue for thethree months ended July 31, 2006 is due to the liquidation of servicedreceivables during the quarter.  Revenuederived from servicing activities will increase or decrease in directproportion to the average outstanding balance of serviced receivables.

*OtherFinance Charges and Fees*.  Other finance charges and fees increased to$735 for the three months ended July 31, 2006, compared to $508 for the threemonths ended July 31, 2005.  Theincrease is primarily attributable to increased assessment and collection offees due to a 44.4% increase in the average portfolio of Receivables Held forInvestment.  Income derived from late fees and collection activities are recognizedwhen received, and therefore can be potentially volatile from period to periodbased on overall cash collection, seasonality, delinquency rates and otherfactors.  Late and loan related fees are driven by a number of factors includingoverall delinquency rates, the percentage of customers utilizing electronicpayment products and growth rates in the Company’s direct lending business.

*Insurance Products. *Insurance Productsrevenue decreased to $213 for the three months ended July 31, 2006, compared to$291 for the three months ended July 31, 2005. The decrease is attributable to (i) the Company’s decision to stopselling extended warranties and (ii) decreasedpenetration rates on insurance products.  Insurance products revenue is primarily driven by growth rates in theCompany’s direct lending business which will affect the ability of the Companyto generate fee income from marketing insurance products.

*OtherInterest Income.*  Other interest income increased to $405 forthe three months ended July 31, 2006, compared to $250 for the three monthsended July 31, 2005.  The increase isattributable to (i) an increase in the average cash on hand balance due toincreased collections as a result of a 44.4% increase in the average portfolioof Receivables Held for Investment and (ii) an increase in overall marketinterest rates as a result of the current economic environment and market rateincreases adopted by the Federal Reserve System.

*OtherIncome.* Other income decreased to $0 for the three months ended July 31, 2006,compared to $144 for the three months ended July 31, 2005.  The decrease is attributable to thecancellation of a marketing program with several dealerships.

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to$2,724 for the three months ended July 31, 2006, compared to $2,542 for thethree months ended July 31, 2005.  Theincrease is primarily due to the Company implementing a call center that waspreviously outsourced.

*Operating Expenses.* OperatingExpenses increased to $979 for the three months ended July 31, 2006, comparedto $603 for the three months ended July 31, 2005.  Expenses characterized as operating expensesare generally variable in nature and are typically dependent on a number of factorsincluding origination volume, the outstanding balance of the managed portfolio,credit quality and operating efficiency levels. The increase was primarily due to (i) an increase in postage andprinting expense associated with the growth in the Company’s directoriginations, (ii) an increase in other loan origination costs including creditbureau and verification fees associated with the increase in total originationvolume, and (iii) a decrease in the dollar amount of expenses

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which the Company was able to capitalize as deferredacquisition costs.  These were partiallyoffset by (i) lower temporary help and third party fees associated withcompletion of the Company’s inbound call center location which had previously been outsourced and (ii) lowermarketing commissions.

*General and Administrative.* General and administrative expenses increased to$1,044 for the three months ended July 31, 2006, compared to $917 for the threemonths ended July 31, 2005.  The increaseis attributable to (i) increased amortization expense associated with the accelerationof certain software amortization expense based on a reduction in the estimateduseful life and additional depreciation and amortization expense associatedwith certain capital expenditures incurred during the quarter, and (ii)additional legal expenses related to finalizing the settlement of a classaction lawsuit during the fiscal year ended April 30, 2006. General andadministrative costs tend to be more fixed in nature and not as dependent onthe overall level of managed receivables.

*Other Interest Expense*. Other interest expense increased to $421 for the threemonths ended July 31, 2006, compared to $261 for the three months ended July31, 2005. The increase was due to (i) a 60.8% increase in the averageoutstanding borrowings on the Company’s working capital line and (ii) an increase in overall market interest rates as aresult short-term rate increases adopted by the Federal Reserve System.

**Portfolio Characteristics**

*General*.  In selecting receivables for inclusion in itsportfolio, the Company seeks to identify potential borrowers whom it regards ascreditworthy despite credit histories that limit their access to traditionalsources of consumer credit. In addition to personal credit qualifications, theCompany attempts to assure that the characteristics of the automobile sold andthe terms of the sale are likely to result in a consistently performingreceivable. These considerations include amount financed, monthly paymentsrequired, duration of the loan, age of the automobile, mileage on the automobileand other factors.

*Customer Profile*.  The Company’s primary goal in creditevaluation is to make loans to customers having stable personal situations,predictable incomes and the ability and inclination to perform theirobligations in a timely manner. Many of the Company’s customers are persons whohave experienced credit difficulties in the past by reason of illness, divorce,job loss, reduction in pay or other adversities, but who appear to the Companyto have the capability and commitment to meet their obligations. Through itscredit evaluation process, the Company seeks to distinguish these persons fromthose applicants who are chronically poor credit risks.

**CreditEvaluation**

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which(i) the creditworthiness of the borrower and the terms of the proposedtransaction are evaluated and either approved, declined or modified by theCompany’s credit verification department, (ii) the loan documentation andcollateralization is reviewed by the Company’s funding department, and (iii)additional collateral verification procedures and customer interviews are conductedby the Company. During the course of this process, the Company’s creditverification and funding personnel coordinate closely with the finance andinsurance departments of the dealers or with individuals to whom the Companylends directly. The Company has developed financing programs under which itapproves loans that vary in pricing and loan terms depending on the relativecredit risk determined for each loan. Credit or default risk is evaluated bythe Company’s loan officers in conjunction with a proprietary, empirical creditscoring model developed from the Company’s 17 year database of non-primelending results.

Inaddition to this credit underwriting process, and prior to the origination of areceivable by the Company, the Company performs additional procedures tovalidate the details of the credit application, including income and/oremployment information, to verify that the collateral is insured, and toconfirm that the material terms of the sale conform to the purchaser’sunderstanding of the transaction.  TheCompany will originate a receivable only after receipt and review of asatisfactory audit report.

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# **Liquidityand Capital Resources**

*Sources and Uses of Cash Flows*.  The Company’s business requires significantcash flow to support its operating activities. The principal cash requirementsinclude (i) amounts necessary to acquire receivables from dealers and fundrequired reserve accounts, (ii) amounts necessary to fund premiums for creditenhancement insurance or other credit enhancement required by the Company’sfinancing programs, and (iii) amounts necessary to fund costs to retainreceivables, primarily interest expense. The Company also requires asignificant amount of cash flow for working capital to fund fixed operatingexpenses, primarily salaries and benefits.

The Company’s most significant cash flow requirementis for the origination of receivables. The Company originated $80,319 ofreceivables to be held for investment for the three months ended July 31, 2006compared to $81,480 for the three months ended July 31, 2005.

The Company funds loan originations through acombination of two warehouse credit facilities. The FIRC credit facilitygenerally permits the Company to borrow up to the outstanding principal balanceof qualified receivables, not to exceed $50,000.  Receivables that have accumulated in the FIRCcredit facility may be transferred to the FIARC commercial paper facility atthe option of the Company. The FIARC commercial paper facility provides anadditional financing source of up to $150,000. Additionally, the Company hastransferred receivables from the warehouse credit facilities and issued termnotes. Substantially all of the Company’s receivables are pledged tocollateralize these credit facilities and term notes.  The Company is obligated to meet certainfinancial covenants.  Noncompliance maysignificantly affect cash flow.

The Company’s most significant source of cash flow isthe principal and interest payments received from its receivables portfolios.The Company received such payments in the amount of $51,764 during the threemonths ended July 31, 2006, and $35,775 during the three months ended July 31,2005.  Such cash flow funds were used torepay amounts borrowed under the Company’s credit facilities and other holdingcosts, primarily interest expense, and servicing and custodial fees.  During the three months ended July 31, 2006,the Company required net cash of $28,555 as compared to $45,705 for the threemonths ended July 31, 2005, as the receivables originated exceeded portfoliocollections.  The Company relies onborrowed funds to provide cash flow in periods of growth.  As of July 31, 2006, the Company had $76,833of available capacity in the FIRC and FIARC credit facilities to fund futuregrowth.

In addition to the cash flow generated from theprincipal and interest collections on its receivables portfolio, the Companycollects servicing fees funded from each of the servicing portfolios.  Servicing fees range from 1.4% to 2.5% of theoutstanding principal balance of the loans in the portfolio.  Cash flow and servicing fees are receivedafter month end, but relate to the prior month activity.  Thus upon filing of the monthly servicingstatements, a portion of the restricted cash is converted to cash available tofund operations.  At July 31, 2006 and2005, the Company’s unencumbered cash was $2,835 and $360 respectively.  The increase in available cash is primarilydue to an increase in revenues due to a 44.4% increase in the average portfolioof Receivables Held for Investment. Management believes the unencumbered cash and cash inflows and amountsavailable under the working capital facility are adequate to fund cashrequirements for operations.

*Capitalization*. TheCompany expects to rely primarily on its credit facilities and the issuance ofsecured term notes to acquire and retain receivables. The Company believes itsexisting credit facilities have adequate capacity to fund the increase of thereceivables portfolio expected in the foreseeable future. While the Company hasno reason to believe that these facilities will not continue to be available,their termination could have a material adverse effect on the Company’soperations if substitute financing on comparable terms was not obtained.

*Financing Arrangements.  *The Company finances its loan origination through two warehouse creditfacilities. The Company’s credit facilities provide for one-year terms and havebeen renewed annually. Management of the Company believes that the creditfacilities will continue to be renewed or extended or that it would be able tosecure alternate financing on satisfactory terms; however, there can be noassurance that it will be able to do so. In November, 2003, the Company issued $139,661 asset-backed notes (“TermNotes”) secured by a discrete pool of receivables.  In May, 2005, the Company issued $175,493 inTerm Notes secured by a discrete pool of receivables.  In January, 2006, the Company issued $189,060in Term Notes secured by a discrete pool of

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receivables. Substantially all receivables retained by the Company are pledged ascollateral for the credit facilities and the Term Notes. The weighted averageinterest rate for the Company’s secured borrowings including the effect ofprogram fees and dealer fees was 4.0% and 5.1% for the periods ended July 31,2005 and 2006, respectively.

*Warehouse Facilities as of July 31, 2006*

| Facility | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**            | ** ** | **Borrowing  Rate At  July 31,  2006** | ** ** |
|----------|------------|--------------|------------|-----------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------------|------------|
| FIARC    | ** ** | $            | 150,000    |            | $          | 84,423                 |       | Commercial  paper rate plus .3%                                                                       |       | .30%  of Unused Facility |       | None                                             |       | 5.38 | % |
| FIRC     | ** ** | $            | 50,000     |            | $          | 38,744                 |       | Option of a) Base Rate,  which is the higher of prime rate or fed funds plus .5% or b) LIBOR plus .5% |       | .25% of Unused Facility  |       | See below                                        |       | 5.89 | % |

 

*Warehouse Facilities – Credit Enhancement as of July 31, 2006*

| Facility | ** ** | **Cash Reserve**          | ** ** | **Advance Rate** | ** ** | **Insurance**             | ** ** |
|----------|------------|--------------------------------|------------|-----------------------|------------|---------------------------|------------|
| FIARC    |       | 1%  of outstanding receivables |       | 94                    | %          | None                      |       |
| FIRC     |       | 1% of borrowings               |       | 100                   | %          | Default Insurance  (ALPI) |       |

 

FIRC - In order to obtain a lower cost offunding, the Company has agreed to maintain credit enhancement insurancecovering the receivables pledged as collateral under the FIRC credit facility.The facility lenders are named as additional insureds under these policies. Thecoverages are obtained on each receivable at the time it is purchased by theCompany and the applicable premiums are prepaid for the life of the receivable.Each receivable is covered by three separate credit insurance policies,consisting of basic default insurance under a standard auto loan protectionpolicy (known as “ALPI” insurance) together with certain supplemental coveragesrelating to physical damage and other risks. Solely at its expense, the Companycarries these coverages and neither the vehicle purchasers nor the dealers arecharged for the coverages and they are usually unaware of their existence. TheCompany’s ALPI insurance policy is written by National Union Fire InsuranceCompany of Pittsburgh (“National Union”), which is a wholly-owned subsidiary ofAmerican International Group.

The premiums that theCompany paid during the three months ended July 31, 2006 for its three creditenhancement insurance coverages, of which the largest component is basic ALPIinsurance, represented approximately 2.5% of the principal amount of thereceivables originated during the three months ended July 31, 2006. Aggregatepremiums paid for ALPI coverage alone during the three months ended July 31,2005 and 2006 were $1,206 and $1,520 respectively, and accounted for 1.5% and1.9% of the aggregate principal balance of the receivables originated duringsuch respective periods.

In April 1994, the Companyorganized First Investors Insurance Company (the “Insurance Subsidiary”) underthe captive insurance company laws of the State of Vermont. The InsuranceSubsidiary is an indirect wholly-owned subsidiary of the Company and is a partyto a reinsurance agreement whereby the Insurance Subsidiary reinsures 100% ofthe risk under the Company’s ALPI insurance policy. At the time each receivableis insured by National Union, the risk is automatically reinsured to its fullextent and approximately 96% of the premium paid by the Company to NationalUnion with respect to such receivable is ceded to the Insurance Subsidiary.When a loss covered by the ALPI policy occurs, National Union pays it after theclaim is processed, and National Union is then reimbursed in full by theInsurance Subsidiary.  In addition to themonthly premiums and liquidity reserves of the Insurance Subsidiary, a trustaccount is maintained by National Union to secure the Insurance Subsidiary’sobligations for losses it has reinsured.

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The result of the foregoingreinsurance structure is that National Union, as the “fronting” insurer underthe captive arrangement, is unconditionally obligated to the Company’s creditfacility lenders for all losses covered by the ALPI policy, and the Company,through its Insurance Subsidiary, is obligated to indemnify National Union forall such losses. As of July 31, 2006, the Insurance Subsidiary had capital andsurplus of $3,493 and unencumbered cash reserves of $2,062 in addition to the$3,459 trust account.

The ALPI coverage as well asthe Insurance Subsidiary’s liability under the Reinsurance Agreement, remainsin effect for each receivable that is pledged as collateral under the warehousecredit facility. Once receivables are transferred from FIRC to FIARC andfinanced under the commercial paper facility, ALPI coverage and the InsuranceSubsidiary’s liability under the Reinsurance Agreement is cancelled withrespect to the transferred receivables. Any unearned premium associated withthe transferred receivables is returned to the Company. The Company believesthe losses its Insurance Subsidiary will be required to indemnify will be lessthan the premiums ceded to it. However, there can be no assurance that losseswill not exceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

FIARC – Credit Enhancement for the FIARC warehousefacility is provided to the commercial paper investors by a 6%overcollaterization level and a cash reserve account equal to 1% of thereceivables held by FIARC.  The Companyis not a guarantor of, or otherwise a party to, such commercial paper.

*Warehouse Facilities – Agents and Expirations*
| Facility | ** ** | **Agent** | ** ** | **Expiration**    | ** ** | **Event if not Renewed**                                                                                                                                                                |
|----------|------------|-----------|------------|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC    |       | Wachovia  |       | February 14, 2007 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC     |       | Wachovia  |       | February 14, 2007 |       | The loan would convert to a term loan which would  mature six months thereafter and amortize monthly in accordance with the  borrowing base with the remaining balance due at maturity. |

 

On December 4, 2003, the FIRC facility was renewed, under similar termsand conditions, at the $50,000 commitment level until December 2, 2004, and wassubsequently extended until February 14, 2007. On June 15, 2004, the FIRC facility was extended to $65,000, andreverted back to $50,000 on September 13, 2004. As of April 30, 2006 and July 31, 2006, there was $47,080 and $38,744,respectively, outstanding.

On January 29,2004, following a short-term extension of the original maturity date, the FIARCfacility was renewed, under similar terms and conditions, to December 2, 2004,and was subsequently extended until February 14, 2007.  In connection with the renewal, the Companyobtained approval from the lender to eliminate the requirement that a suretybond be maintained to provide additional enhancement to the commercial paperinvestors.  As a result, the 0.35% suretybond premium and the 0.25% unused surety bond premium were eliminated.  In exchange, the Company agreed to increasethe program fee paid to the lender from 0.30% to 0.55% and to increase theunused fee paid to the lender from 0.25% to 0.30%.  As of April 30, 2006 and July 31, 2006, therewas $0 and $84,423, respectively, outstanding.

Management presently intendsto seek further extensions to these warehouse facilities prior to the current expirationdates.  Management further considers itsrelationship with its lenders to be satisfactory and has no reason to believethat the FIRC and FIARC facilities will not be renewed at each of theirrespective expiration dates.

The following table contains pertinent informationon the Term Notes as of July 31, 2006.

| Term Notes | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** ** | **Maturity Date** | ** **        | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|-----------------|------------|------------------------|------------|----------------------|------------|------------------------|-------------------|-----------------|------------|--------------------|------------|
| 2003-A          |       | November 11, 2003      |       | $                    | 139,661    |                   | April 20, 2011    |            | $          | 31,770             |       | 2.58 | % |
| 2005-A Class 2  |       | May 5, 2005            |       | $                    | 106,493    |                   | July 16, 2012     |            | $          | 92,337             |       | 4.23 | % |
| 2006-A Class 2  |       | January 26, 2006       |       | $                    | 47,000     |                   | March 16, 2009    |            | $          | 46,419             |       | 4.87 | % |
| 2006-A Class 3  |       | January 26, 2006       |       | $                    | 74,000     |                   | February 15, 2011 |            | $          | 74,000             |       | 4.93 | % |
| 2006-A Class 4  |       | January 26, 2006       |       | $                    | 36,060     |                   | April 15, 2013    |            | $          | 36,060             |       | 5.00 | % |

 

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Credit enhancement on the Term Notes are as follows:

| Facility | ** ** | **Cash Reserve**                                                                                | ** ** | **Advance  Rate**                          | ** ** | **Insurance** | ** ** |
|----------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------|------------|
| 2003-A   |       | 0.5% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 96.5% initial  advance decreasing to 96.1% |       | Surety Bond   |       |
| 2005-A   |       | 1.0% of Initial Pool Balance increasing to 2% of Initial Pool Balance  including Pre-Funding Amount  |       | 97.0% initial advance decreasing to 95.75% |       | Surety Bond   |       |
| 2006-A   |       | 1.0% of Initial Pool Balance increasing to 2% of Initial Pool Balance  including Pre-Funding Amount  |       | 98.5% initial advance decreasing to 96.75% |       | Surety Bond   |       |

 

Term Notes - On November 20, 2003, the Company, throughits indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2003-A (“2003Auto Trust”) completed the issuance of $139,661 of 2.58% Class A asset-backednotes (“2003-A Term Notes”). The initial pool of automobile receivablestransferred to the 2003 Auto Trust totaled $114,727, which was previously ownedby FIRC and FIARC, secure the 2003-A Term Notes.  In addition to the issuance of the Class ANotes, the 2003 Auto Trust also issued a $5,066 in Class B Note that wasretained by the Company and pledged to secure the Working Capital Facility asfurther described below.  Proceeds fromthe issuance, which totaled $139,657 were used to (i) fund a $30,000pre-funding account to be used for future loan originations; (ii) repay alloutstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2003-A term note issuance, and (v) fund an initial cashreserve account of 0.5% or $574 of the initial receivables pledged.  The Class A Term Notes bear interest at 2.58%and requires monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 96.1% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2003-A Term Notes is April 20,2011.  The Class B Note does not bearinterest but requires principal reductions sufficient to reduce the balance ofthe Class B Note to 3.9% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6% of the then current principal balance of the receivables pool.  As of April 30, 2006, and July 31, 2006, theoutstanding principal balances on the 2003-A term notes were $37,715 and$31,770, respectively.

On May 5, 2005, the Company,through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust2005-A (“2005 Auto Trust”) completed the issuance of $69,000 of 3.57% Class A-1asset-backed notes and $106,493 of 4.23% Class A-2 asset-backed notes(collectively “2005-A Term Notes”), for a total of $175,493 of asset backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,921, which was previously owned by FIRC and FIARC, andsecures the 2005-A Term Notes.  Inaddition to the issuance of the Class A-1 and Class A-2 Notes, the 2005 AutoTrust also issued a $5,428 Class B Note that was retained by the Company andpledged to secure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$175,488 were used to (i) fund a $30,000 pre-funding account to be used forfuture loan originations; (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under theFIRC credit facility, (iv) pay transaction fees related to the 2005-A Term Noteissuance, and (v) fund an initial cash reserve account of 1% or $1,509 of theinitial receivables pledged.  The ClassA-1 and Class A-2 Term Notes bear interest at 3.57% and 4.23%, respectively, andrequire monthly principal reductions sufficient to reduce the balance of theClass A Term Notes to 95.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 notes were paid off during the fiscal

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year ended April 30, 2006.  The final maturity of the Class A-2 Term Notesis July 16, 2012.  The Class B Note doesnot bear interest but requires principal reductions sufficient to reduce thebalance of the Class B Notes to 4.25% of the outstanding balance of theunderlying receivables pool.  A suretybond issued by MBIA Insurance Corporation provides credit enhancement for theClass A Notes.  In the event that certainasset quality covenants are not met, the reserve account target level willincrease to 2% of the then current principal balance of the receivablespool.  As of April 30, 2006 and July 31,2006, the outstanding principal balances on the 2005-A Term notes were $106,162and $92,337, respectively.

On January 26, 2006, theCompany, through its indirect, wholly-owned subsidiary First Investors AutoOwner Trust 2006-A (“2006 Auto Trust”) completed the issuance of $32,000 of4.57% Class A-1 asset-backed notes, $47,000 of 4.87% Class A-2 asset-backednotes, $74,000 of 4.93% Class A-3 asset-backed notes, and $36,060 of 5.00%Class A-4 asset-backed notes (collectively “2006-A Term Notes”), for a total of$189,060 of asset backed notes. The initial pool of automobile receivablestransferred to the 2006 Auto Trust totaled $151,939, was previously owned byFIRC and FIARC, and secures the 2006-A Term Notes.  In addition to the issuance of the Class A-1,Class A-2, Class A-3, and Class A-4 notes, the 2006 Auto Trust also issued a$2,879 Class B Note that was retained by the Company and pledged to secure theWorking Capital Facility as further described below.  Proceeds from the issuance, which totaled$188,446 were used to (i) fund a $40,000 pre-funding account to be used forfuture loan originations; (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under the FIRCcredit facility, (iv) pay transaction fees related to the 2006-A Term Noteissuance, and (v) fund an initial cash reserve account of 1% or $1,519 of theinitial receivables pledged.  The 2006-ATerm Notes require monthly principal reductions sufficient to reduce thebalance of the notes to 96.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 notes were paid off during the quarter endedJuly 31, 2006.  The final maturity of theClass A-2, Class A-3, and Class A-4 Term Notes is March 16, 2009, February 15,2011, and April 15, 2013, respectively. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 3.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to thegreater of 2% of the initial pool balance or 6% of the then current principalbalance of the receivables pool.  As ofApril 30, 2006 and July 31, 2006, the outstanding principal balances on the2006-A Class A term notes were $172,708 and $156,479, respectively.

*Working Capital Facility*.  Thefacility is provided to a special-purpose, wholly-owned subsidiary of theCompany, First Investors Residual Funding LP. This facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities and theexisting and future term note facilities. The outstanding borrowings under the facility bear interest at one-monthLIBOR plus 2.25%.  In addition, acommitment fee of 1.5% is paid on the total amount of this facility.  On October 26, 2004, the Working CapitalFacility was extended until October 10, 2005, increasing the commitment amountfrom $9,000 to $13,500.  The interestrate remained at LIBOR plus 2.25% and the commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%.  On August 15, 2005, the Working Capital Facilitywas extended until February 15, 2006, increasing the commitment amount to$23,500, and was subsequently extended on February 15, 2006 until February 14,2007.  The interest rate remained atLIBOR plus 2.25% and the commitment fee paid on the total available amount ofthe facility was maintained at 1.5%.  Asof April 30, 2006 and July 31, 2006, there was $16,454 and $19,374,respectively, outstanding under this facility.

The Companypresently intends to seek a renewal of the working capital facility from itslender prior to maturity.  Should thefacility not be renewed, the outstanding balance of the receivables would beamortized in accordance with the borrowing base.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed.  If thefacility is not renewed, however, or if material changes are made to its termsand conditions, it could have a material adverse effect on the Company.

*Related Party Loans. *On December 3, 2001 the Company entered into an agreement with one ofits shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2,500.  On December 6, 2004, the original $2,500shareholder loan was replaced with a $2,500 loan containing identical terms andconditions between the Company and a limited partnership that is affiliatedwith a current shareholder and member of the Board of Directors  The proceeds of the borrowings have beenutilized to

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fund certain private and open market purchases ofthe Company’s common stock pursuant to a Stock Repurchase Plan authorized bythe Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2,500 outstandingunder this facility as of April 30, 2006 and July 31, 2006, respectively.  For the three months ended July 31, 2005 andJuly 31, 2006, the Company recorded interest expense under these facilities of$63.

*Loan Covenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any financialand non-financial covenants governing these financing arrangements at July 31,2006.

*Interest Rate Management*.  TheCompany’s warehouse credit facilities and working capital facilities bearinterest at floating interest rates which are reset on a short-term basis whilethe secured Term Notes bear interest at a fixed rate of interest. The Company’sreceivables bear interest at fixed rates that do not generally vary with achange in market interest rates. Since a primary contributor to the Company’sprofitability is its ability to manage its net interest spread, the Companyseeks to maximize the net interest spread while minimizing exposure to changesin interest rates. In connection with managing the net interest spread, theCompany may periodically enter into interest rate swaps or caps to minimize theeffects of market interest rate fluctuations on the net interest spread. To theextent that the Company has outstanding floating rate borrowings or has electedto convert a portion of its borrowings from fixed rates to floating rates, theCompany will be exposed to fluctuations in short-term interest rates.

OnJuly 18, 2005, as a requirement of the FIARC commercial paper facility, theCompany entered into an interest rate cap transaction, with a strike rate of6%.  The aggregate initial notionalamount of the cap was $18,804which amortizes over six years.  The Company paid $59 in premium to purchasethis cap.  The interest rate cap was notdesignated as a hedge, and accordingly, changes in the fair value of theinterest rate caps were recorded as an unrealized loss and is reflected in netincome.  During the three months endedJuly 31, 2005, the Company recorded an unrealized loss of $3 that is includedas a separate caption of other income.

**Delinquencyand Credit Loss Experience**

The Company’s results ofoperations, financial condition and liquidity may be adversely affected bynonperforming receivables. The Company seeks to manage its risk of credit lossthrough (i) prudent credit evaluations, (ii) risk management activities, (iii)effective collection procedures, and (iv) by maximizing recoveries on defaultedloans. The allowance for credit losses of $2,695 as of July 31, 2006, and$2,332 as of April 30, 2006, as a percentage of Receivables Held for Investmentof $403,569 as of July 31, 2006, and $368,878 as of April 30, 2006, was 0.7%and 0.6%, respectively.

The Companyconsiders a loan to be delinquent when the borrower fails to make a scheduledpayment of principal and interest. Accrual of interest is suspended when thepayment from the borrower is over 90 days past due. Generally, repossessionprocedures are initiated 60 to 90 days after the payment default.

The Companyretains the credit risk associated with the receivables originated. The Companypurchases credit enhancement insurance from third party insurers which coversthe risk of loss upon default and certain other risks. The Company establisheda captive insurance subsidiary to reinsure certain risks under the creditenhancement insurance coverage for all receivables.  In addition, receivables financed under theAuto Trust and FIARC commercial paper facilities do not carry defaultinsurance.  Provisions for credit lossesof $2,518 and $1,651 have been recorded for the three months ended July 31,2006 and July 31, 2005, respectively.

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The Company calculates the allowance for credit lossesin accordance with SFAS No. 5*, Accounting forContingencies.*  SFAS No. 114, *Accounting for Creditors by Impairment of a Loan* does notapply to loans currently held by the Company because they are comprised of alarge group of smaller balance homogenous loans that are evaluated collectivelyfor impairment.

The Company applies asystematic methodology in order to determine the amount of the allowance forcredit losses.  The specific methodologyis a six-month migration analysis whereby the Company compares the aging statusof each loan on a date which is six months prior to the reporting date, to theaging loan status as of the reporting date. These factors are then applied to the aging status of each loan at thereporting date in order to calculate the number of loans that are expected tomigrate to impaired status.  Theestimated number of impairments is then multiplied by the estimated loss perloan, which is based on historical information. Effective the quarter ended April 30, 2005, the Company elected toincrease its allowance for loan losses against loans that were greater than 120days past due and loans in which the collateral had been assigned forrepossession but had not yet been repossessed as of the reporting date.  The Company believes that this increase iswarranted in light of the change in federal bankruptcy laws enacted during theperiod and the recognition that the migration trends of severely delinquentloans and loans subject to bankruptcy are expected to become more protracted.  Based on this, the Company has assigned aspecific allowance against these loans equal to the outstanding balance ofloans in these categories less the estimated recovery amount based on currentdata regarding liquidation of the collateral and collection of any additionalpayments.  The Company utilized its mostrecent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  The allowancefor credit losses is based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, they are reported in earnings in theperiod they become known.

The following table sets forth certain informationregarding the Company’s delinquency and charge-off experience over its last twofiscal years (dollars in thousands):

|                                                                                           | ** ** | **For the three months ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | **Number**                                                            | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **of Loans**                                                     | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                         |       |                                                                  |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                       |       |                                                                  |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 130                                                                   |       | $ | 1,003 |   | 75 |   | $ | 718 |   |
| 60 - 89 days                                                                              |       | 36                                                                    |       | 297 |   | 29 |   | 284 |   |
| 90 days or more                                                                           |       | 51                                                                    |       | 367 |   | 14 |   | 147 |   |
| Total  delinquencies                                                                      |       | 217                                                                   |       | $ | 1,667 |   | 118 |   | $ | 1,149 |   |
| Total  delinquencies as a percentage of outstanding receivables                           |       | 1.1                                                                   | %          | 0.6 | % | 0.5 | % | 0.3 | % |
| Net charge-offs as a  percentage of average receivables outstanding during the period (2) |       |                                                                  |       | 2.5 | % |   |   | 2.2 | % |

 

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(1)           Delinquent amounts outstanding do not includeloans in bankruptcy status since collection activity is limited and highlyregulated for bankrupt accounts.

(2)           Thepercentages have been annualized and are not necessarily indicative of theresults for a full year.

The lower annualizedcharge-off rate results from an improving economic environment coupled with anincrease in the Company’s direct to consumer lending program.

As of July 31,2006, there were 156 accounts totaling $2,001 that were in bankruptcy statusand were more than 30 days past due.  Asof July 31, 2005, there were 318 accounts totaling $3,297 that were inbankruptcy

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status and were more than 30 days past due.  As of July 31, 2006 and 2005, 86% and 88%,respectively, of the bankruptcy delinquencies filed for protection underChapter 13.

**New Accounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement No. 109* (“FIN 48”), whichclarifies the accounting for uncertainty in income tax positions.  ThisInterpretation requires that the Company recognize in its financial statementsthe impact of a tax position if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. Theprovisions of FIN 48 are effective for the Company on August 1, 2006,with the cumulative effect of the change in accounting principle, if any, recordedas an adjustment to opening retained earnings.  The Company is currentlyevaluating the impact of adopting FIN 48 on its financial position, cashflows, and results of operations.

 In February 2006, the FASB issued SFASNo. 155, *Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140* (“SFAS155”). This statement amends SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities* (“SFAS 133”), andSFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities*and resolves issues addressed in SFAS 133 Implementation Issue No. D1, “Applicationof Statement 133 to Beneficial Interest in Securitized Financial Assets”. ThisStatement: (a) permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation; (b) clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS 133; (c) establishes arequirement to evaluate beneficial interests in securitized financial assets toidentify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiringbifurcation; (d) clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives; and, (e) eliminatesrestrictions on a qualifying special-purpose entity’s ability to hold passivederivative financial instruments that pertain to beneficial interests that areor contain a derivative financial instrument. The standard also requirespresentation within the financial statements that identifies those hybridfinancial instruments for which the fair value election has been applied andinformation on the income statement impact of the changes in fair value ofthose instruments. The Company is required to apply SFAS 155 to all financialinstruments acquired, issued or subject to a remeasurement event beginningJanuary 1, 2007 although early adoption is permitted as of the beginningof an entity’s fiscal year. The provisions of SFAS 155 are not expected to havea financial statement impact at adoption; however, the standard could affectthe future income recognition for securitized financial assets because theremay be more embedded derivatives identified with changes in fair valuerecognized in net income.

In May 2005, SFAS No. 154, *Accounting Changes and Error Corrections*, was issued. Thisstatement applies to all voluntary changes in accounting principles andrequires retrospective application to prior periods’ financial statements ofchanges in accounting principles, unless this would be impracticable. Thisstatement also makes a distinction between “retrospective application” of anaccounting principle and the “restatement” of financial statements to reflectthe correction of an error. This statement is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. The Company does not expect the adoption of this interpretation to have amaterial impact on its financial position, cash flows and results ofoperations.

**ITEM 3.     *QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

Themarket risk discussion and the estimated amounts generated from the analysisthat follows are forward-looking statements of market risk assuming certainadverse market conditions occur. Actual results in the future may differmaterially due to changes in the Company’s product and debt mix, developmentsin the financial markets, and further utilization by the company ofrisk-mitigating strategies such as hedging.

TheCompany’s operating revenues are derived almost entirely from the collection ofinterest on the receivables it retains and its primary expense is the interestthat it pays on borrowings incurred to purchase and retain such receivables.The Company’s credit facilities bear interest at floating rates which are reseton a short-term basis, whereas its receivables bear interest at fixed rateswhich do not generally vary with changes in interest rates. The Company istherefore exposed primarily to market risks associated with movements ininterest rates on

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its credit facilities.The Company believes that it takes the necessary steps to appropriately reducethe potential impact of interest rate increases on the Company’s financialposition and operating performance.

TheCompany relies almost exclusively on revolving credit facilities to fund itsorigination of receivables. Periodically, the Company will transfer receivablesfrom a revolving to a term credit facility. Currently all of the Company’scredit facilities in bear interest at floating rates tied to either acommercial paper index or LIBOR.

As of July 31, 2006, theCompany had $142,541 of floating rate secured debt outstanding under the FIRCwarehouse and working capital facilities. For every 1% increase in LIBOR annual after-tax earnings would decreaseby approximately $941 assuming the Company maintains a level amount of floatingrate debt and assuming an immediate increase in rates.  As of July 31, 2005, the Company had $84,740of floating rate secured debt outstanding net of swap and cap agreements. Forevery 1% increase in commercial paper rates or LIBOR, annual after-tax earningswould decrease by approximately $559 assuming the Company maintains a levelamount of floating rate debt and assuming an immediate increase in rates.

**Forward Looking Information**

Statements and financialdiscussion and analysis included in this report that are not historical are consideredto be forward-looking in nature. Forward-looking statements involve a number ofrisks and uncertainties that may cause actual results to differ materially fromanticipated results. Specific factors that could cause such differences includeunexpected fluctuations in market interest rates, changes in economicconditions, changes in the competition for loans, or the inability to renew orobtain financing. Further information concerning risks and uncertainties isincluded in this report and the company’s other reports filed with theSecurities and Exchange Commission.

The Company believes the factors discussed in itsreports are important factors that could cause actual results to differmaterially from those expressed in any forward looking statement made herein orelsewhere by the Company or on its behalf. The factors listed are not necessarily all of the importantfactors.  Unpredictable or unknownfactors not discussed could also have material adverse effects on actualresults.  The Company does not intend toupdate its description of important factors each time a potential importantfactor arises.  The Company advises itsstockholders that they should:  (1) beaware that important factors not described herein could affect the accuracy ofour forward looking statements, and (2) use caution and common sense whenanalyzing our forward looking statements in this document or elsewhere.  All of such forward looking statements arequalified in their entirety by this cautionary statement.

**ITEM 4.    CONTROLS ANDPROCEDURES**

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of July 31, 2006 to provide reasonable assurancethat information required to be disclosed in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.

There has been no change in our internal controls overfinancial reporting that occurred during the three months ended July 31, 2006that has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

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######  

###### **PARTII**

##### **OTHER INFORMATION**

**ITEM 6.      *EXHIBITS ANDREPORTS ON FORM 8-K***

(a)   Exhibits

31.1    Certification of Chief Executive Officer pursuantto section 302 of the Sarbanes-Oxley Act of 2002.

31.2    Certification of Chief Financial Officer pursuantto section 302 of the Sarbanes-Oxley Act of 2002.

32.1    Certification of Chief Executive Officer pursuantto section 906 of the Sarbanes-Oxley Act of 2002.

32.2    Certification of Chief Financial Officer pursuantto section 906 of the Sarbanes-Oxley Act of 2002.

Filedwith this 10-Q

(b)   Reports on Form 8-K

Form8-K filed July 11, 2006, press release announcing fiscal year end April 30,2006 financial results.

Form 8-K filed July 14, 2006, announcing an amendment to the 2002Non-Employee Director Stock Option Plan.

### **SIGNATURES**

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
|                         | First Investors Financial Services Group, Inc.   |
|-------------------------|--------------------------------------------------|
|                    | (Registrant)                                     |
|                    |                                             |
| Date: September 6, 2006 | By: /s/TOMMY A. MOORE, JR.                       |
|                    | Tommy A. Moore, Jr.                              |
|                    | President and Chief Executive Officer            |
|                    |                                             |
| Date: September 6, 2006 | By: /s/BENNIE H. DUCK                            |
|                    | Bennie H. Duck                                   |
|                    | Secretary, Treasurer and Chief Financial Officer |

 

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