**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| x          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                      |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                        |
| ** ** | **For the quarterly period  ended October 31, 2006**                                                                                                                                                                                                                                                              |
| ** ** | ** **                                                                                                                                                                                                                                                                                                        |
| **OR**     |
| ** ** | ** **                                                                                                                                                                                                                                                                                                        |
| ** ̈** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                     |
| ** ** | ** **                                                                                                                                                                                                                                                                                                        |
| ** ** | **For the transition period  from                         to                       ** |

 

### **Commission File Number 0-26686**

**First Investors Financial Services Group,Inc.**

(Exact Name of Registrant as Specified 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’s Telephone Number,Including Area Code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x No  ̈.

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

Large Accelerated Filer   ̈       Accelerated Filer   ̈       Non-Accelerated Filer  x

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

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date.
| Class                        | ** ** | **Shares Outstanding At  December 6, 2006** |
|------------------------------|------------|---------------------------------------------|
| Common Stock-$.001 Par Value |       | 4,477,694                                   |

 

 

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

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

### **OCTOBER 31, 2006**

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

| **Part I**     | **Financial Information** |                                                                   |   |
|----------------|---------------------------|------------------------------------------------------------------------|--------|
|           |                      |                                                                   |   |   |
|           | Item 1.                   | Financial Statements                                                   |   |   |
|           |                      |                                                                   |   |   |
|           |                      | Consolidated  Condensed Balance Sheets as of April 30, 2006 and        |   |   |
|           |                      | October 31,  2006                                                      |   |   |
|           |                      |                                                                   |   |   |
|           |                      | Consolidated  Condensed Statements of Earnings for the Three           |   |   |
|           |                      | and Six Months  Ended October 31, 2005 and 2006                        |   |   |
|           |                      |                                                                   |   |   |
|           |                      | Consolidated  Condensed Statement of Shareholders’ Equity for the |   |   |
|           |                      | Six Months  Ended October 31, 2006                                     |   |   |
|           |                      |                                                                   |   |   |
|           |                      | Consolidated  Condensed Statements of Cash Flows for the Six           |   |   |
|           |                      | Months Ended  October 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 4.                   | Submission of  Matters to a Vote of Security Holders                   |   |   |
|           |                      |                                                                   |   |   |
|           | Item 6.                   | Exhibits and  Reports On Form 8-K                                      |   |   |
|           |                      |                                                                   |   |   |
| **Signatures** |                      |                                                                   |
|                |                           |                                                                        |        |  |  |  |  |

V

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

##### **CONSOLIDATED CONDENSED BALANCE SHEETS — APRIL30, 2006 AND OCTOBER 31, 2006**

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

| ** **                                                                                                                                                                  | ** ** | **April 30,  2006** | ** ** | **October 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **(Audited)**            | ** ** | **(Unaudited)**            | ** ** |
| **ASSETS**                                                                                                                                                                  |       |                     |       |                       |       |
| Receivables Held for  Investment, net                                                                                                                                       |       | $                        | 377,399    |                       | $          | 437,920 |   |
| Cash and Short-Term  Investments                                                                                                                                            |       | 3,380                    |       | 3,176                      |       |
| Restricted Cash                                                                                                                                                             |       | 25,538                   |       | 35,683                     |       |
| Accrued Interest  Receivable                                                                                                                                                |       | 3,218                    |       | 3,684                      |       |
| Assets Held for Sale                                                                                                                                                        |       | 960                      |       | 1,239                      |       |
| Other Assets:                                                                                                                                                               |       |                     |       |                       |       |
| Funds held under  reinsurance agreement                                                                                                                                     |       | 3,431                    |       | 3,163                      |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $3,514 and $4,346                                                          |       | 5,362                    |       | 4,974                      |       |
| Total assets                                                                                                                                                                |       | $                        | 419,288    |                       | $          | 489,839 |   |
| ** **                                                                                                                                                                  |       |                     |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                              |       |                     |       |                       |       |
| Debt:                                                                                                                                                                       |       |                     |       |                       |       |
| Warehouse credit  facilities                                                                                                                                                |       | $                        | 47,080     |                       | $          | 184,586 |   |
| Term notes                                                                                                                                                                  |       | 316,584                  |       | 245,333                    |       |
| Working capital  facility                                                                                                                                                   |       | 16,454                   |       | 21,504                     |       |
| Related party  note                                                                                                                                                         |       | 2,500                    |       | 2,500                      |       |
| Other Liabilities:                                                                                                                                                          |       |                     |       |                       |       |
| Accounts payable  and accrued liabilities                                                                                                                                   |       | 6,397                    |       | 4,378                      |       |
| Income taxes                                                                                                                                                                |       | 1,386                    |       | 571                        |       |
| Deferred income  taxes payable                                                                                                                                              |       | 766                      |       | 543                        |       |
| Total  liabilities                                                                                                                                                          |       | 391,167                  |       | 459,415                    |       |
|                                                                                                                                                                        |       |                     |       |                       |       |
| Commitments and  Contingencies                                                                                                                                              |       |                     |       |                       |       |
| Shareholders’ Equity:                                                                                                                                                  |       |                     |       |                       |       |
| Common stock,  $0.001 par value, 10,000 shares authorized, 5,626 issued and 4,454 outstanding  at April 30, 2006 and 5,650 issued and 4,478 outstanding at October 31, 2006 |       | 6                        |       | 6                          |       |
| Additional  paid-in capital                                                                                                                                                 |       | 18,938                   |       | 19,210                     |       |
| Retained  earnings                                                                                                                                                          |       | 13,644                   |       | 15,675                     |       |
| Less: treasury  stock, at cost, 1,172 shares                                                                                                                                |       | (4,467                   | )          | (4,467                     | )          |
| Total  shareholders’ equity                                                                                                                                            |       | 28,121                   |       | 30,424                     |       |
| Total liabilities and shareholders’ equity                                                                                                                             |       | $                        | 419,288    |                       | $          | 489,839 |   |

 

The accompanying notesare an integral part of these consolidated condensed financial statements.

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

**CONSOLIDATED CONDENSEDSTATEMENTS OF EARNINGS**

**For the Three and Six MonthsEnded October 31, 2005 and 2006(In thousands, except per share amount)(Unaudited)**
| ** **                                             | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **Ended October 31,**         | ** ** | **Ended October 31,**       | ** ** |
| ** **                                             | ** ** | **2005**                                | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                   |       |                                    |       |                                  |       |   |   |   |   |
| Interest Income                                        |       | $                                       | 9,915      |                                  | $          | 13,374 |   | $ | 18,412 |   | $ | 25,705 |   |
| Interest Expense                                       |       | 3,476                                   |       | 5,813                                 |       | 6,436 |   | 11,020 |   |
| Net interest income                                    |       | 6,439                                   |       | 7,561                                 |       | 11,976 |   | 14,685 |   |
| Provision for Credit Losses                            |       | 2,065                                   |       | 2,677                                 |       | 3,716 |   | 5,195 |   |
| Net Interest Income After Provision for Credit Losses  |       | 4,374                                   |       | 4,884                                 |       | 8,260 |   | 9,490 |   |
| Other Income:                                          |       |                                    |       |                                  |       |   |   |   |   |
| Servicing revenue                                      |       | 495                                     |       | 312                                   |       | 1,073 |   | 676 |   |
| Other finance charges and fees                         |       | 598                                     |       | 825                                   |       | 1,106 |   | 1,560 |   |
| Insurance products                                     |       | 263                                     |       | 268                                   |       | 554 |   | 481 |   |
| Income from investment                                 |       | 111                                     |       | 188                                   |       | 237 |   | 255 |   |
| Other interest income                                  |       | 284                                     |       | 454                                   |       | 533 |   | 860 |   |
| Other income                                           |       | 242                                     |       | —                                |       | 387 |   | — |   |
| Unrealized gain on interest  rate derivative positions |       | 23                                      |       | —                                |       | 20 |   | — |   |
| Total other income                                     |       | 2,016                                   |       | 2,047                                 |       | 3,910 |   | 3,832 |   |
| Operating Expenses:                                    |       |                                    |       |                                  |       |   |   |   |   |
| Salaries and benefits                                  |       | 2,661                                   |       | 2,841                                 |       | 5,203 |   | 5,565 |   |
| Operating expense                                      |       | 1,124                                   |       | 1,654                                 |       | 1,727 |   | 2,633 |   |
| General and administrative                             |       | 1,097                                   |       | 954                                   |       | 2,014 |   | 1,998 |   |
| Other interest expense                                 |       | 304                                     |       | 452                                   |       | 565 |   | 874 |   |
| Total operating expenses                               |       | 5,186                                   |       | 5,901                                 |       | 9,509 |   | 11,070 |   |
| Income Before Provision for Income Taxes               |       | 1,204                                   |       | 1,030                                 |       | 2,661 |   | 2,252 |   |
| Provision (Benefit) for Income Taxes:                  |       |                                    |       |                                  |       |   |   |   |   |
| Current                                                |       | 224                                     |       | (88                                   | )          | 331 |   | 444 |   |
| Deferred                                               |       | 215                                     |       | (177                                  | )          | 640 |   | (223 | ) |
| Total provision for income  taxes                      |       | 439                                     |       | (265                                  | )          | 971 |   | 221 |   |
| Net Earnings                                           |       | $                                       | 765        |                                  | $          | 1,295 |   | $ | 1,690 |   | $ | 2,031 |   |
|                                                   |       |                                    |       |                                  |       |   |   |   |   |
| Basic Net Earnings per Common Share                    |       | $                                       | 0.17       |                                  | $          | 0.29 |   | $ | 0.38 |   | $ | 0.45 |   |
| Diluted  Net Earnings per Common Share                 |       | $                                       | 0.17       |                                  | $          | 0.27 |   | $ | 0.37 |   | $ | 0.42 |   |

 

The accompanying notes are an integral part of these consolidatedcondensed financial statements.

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

**CONSOLIDATED CONDENSEDSTATEMENT OF SHAREHOLDERS’ EQUITY**

**For the Six Months EndedOctober 31, 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                                                        |       | —                |       | —      |       | —         |       | 2,031               |       | —       |       | 2,031      |       |
| Stock compensation expense                                        |       | —                |       | —      |       | 142            |       | —              |       | —       |       | 142        |       |
| Excess tax benefits from share based arrangements                 |       | —                |       | —      |       | 23             |       | —              |       | —       |       | 23         |       |
| Issuance of common stock related to the exercise of stock options |       | 23,501                |       | —      |       | 107            |       | —              |       | —       |       | 107        |       |
| Balance  at October 31, 2006                                      |       | 5,649,670             |       | $           | 6          |           | $          | 19,210              |       | $            | 15,675     |       | $          | (4,467 | ) | $ | 30,424 |   |

 

Theaccompanying notes are an integral part of this consolidated condensedfinancial statement.

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSFor the Six Months Ended October 31, 2005 and 2006(In thousands)(Unaudited)**
| ** **                                                                               | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                     |       |     |       |     |       |
| Cash Flows From Operating Activities:                                                    |       |     |       |     |       |
| Net income                                                                               |       | $        | 1,690      |     | $          | 2,031 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities — |       |     |       |     |       |
| Depreciation and amortization  expense                                                   |       | 2,331    |       | 3,345    |       |
| Provision for credit losses                                                              |       | 3,716    |       | 5,195    |       |
| Reversal of uncertain tax  provision                                                     |       | —   |       | (669     | )          |
| Excess tax benefits from  share-based payment arrangements                               |       | —   |       | (23      | )          |
| Share-based payment  arrangements                                                        |       | —   |       | 142      |       |
| (Increase) decrease in:                                                                  |       |     |       |     |       |
| Accrued interest receivable                                                              |       | (554     | )          | (466     | )          |
| Restricted cash                                                                          |       | (8,337   | )          | (10,145  | )          |
| Deferred financing costs and  other assets                                               |       | (567     | )          | (85      | )          |
| Funds held under reinsurance  agreement                                                  |       | (632     | )          | 268      |       |
| Current income tax receivable                                                            |       | 5        |       | —   |       |
| Interest rate derivative  positions                                                      |       | (332     | )          | —   |       |
| Increase (decrease) in:                                                                  |       |     |       |     |       |
| Accounts payable and accrued  liabilities                                                |       | 527      |       | (2,019   | )          |
| Deferred income taxes payable                                                            |       | 295      |       | (223     | )          |
| Income taxes                                                                             |       | 640      |       | (123     | )          |
| Net cash (used in) operating  activities                                                 |       | (1,218   | )          | (2,772   | )          |
| Cash Flows From Investing Activities:                                                    |       |     |       |     |       |
| Origination of Receivables  Held for Investment                                          |       | (148,341 | )          | (152,208 | )          |
| Payments received from  Investment                                                       |       | 94       |       | 188      |       |
| Contributions to Investment                                                              |       | —   |       | (251     | )          |
| Principal payments from  Receivables Held for Investment                                 |       | 58,014   |       | 79,553   |       |
| Payments received on Assets  Held for Sale                                               |       | 2,889    |       | 4,221    |       |
| Purchase of furniture and  equipment                                                     |       | (446     | )          | (371     | )          |
| Net cash used in investing  activities                                                   |       | (87,790  | )          | (68,868  | )          |
| Cash Flows From Financing Activities:                                                    |       |     |       |     |       |
| Proceeds from advances on                                                                |       |     |       |     |       |
| Warehouse credit facilities                                                              |       | 258,105  |       | 315,729  |       |
| Term notes                                                                               |       | 175,493  |       | —   |       |
| Working capital facility                                                                 |       | 3,616    |       | 5,049    |       |
| Principal payments made on                                                               |       |     |       |     |       |
| Warehouse credit facilities                                                              |       | (290,687 | )          | (178,221 | )          |
| Term notes                                                                               |       | (55,798  | )          | (71,251  | )          |
| Proceeds from the issuance of  common stock                                              |       | 145      |       | 107      |       |
| Excess tax benefits from  share-based payment arrangements                               |       | —   |       | 23       |       |
| Net cash provided by financing  activities                                               |       | 90,874   |       | 71,436   |       |
| Increase/(Decrease) in Cash and Short-Term Investments                                   |       | 1,866    |       | (204     | )          |
| Cash and Short-Term Investments at Beginning of Period                                   |       | 2,414    |       | 3,380    |       |
| Cash and Short-Term Investments at End of Period                                         |       | $        | 4,280      |     | $          | 3,176 |   |
| Supplemental Disclosures of Cash Flow Information:                                       |       |     |       |     |       |
| Cash paid during the period  for—                                                   |       |     |       |     |       |
| Interest                                                                                 |       | $        | 5,774      |     | $          | 9,832 |   |
| Income taxes                                                                             |       | 32       |       | 1,236    |       |

 

Theaccompanying notes are an integral part of these consolidated condensedfinancial statements

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

**NOTES TOUNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**(Dollars in thousands, except pershare data)**

**October31, 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), FIFS Acquisition Funding Corp. LLC, Farragut FinancialCorporation, and First Investors Auto Funding Corporation. First Investors,together with its wholly- and majority-owned subsidiaries, is hereinafterreferred to as the Company.

FIFS began operations in May 1989 and isprincipally involved in the business of originating and holding for investmentretail installment contracts and promissory notes secured by new and usedautomobiles originated by factory authorized franchised dealers or directlythrough consumers. As of October 31, 2006, approximately 34% and 15% ofreceivables held for investment had been originated in Texas and Georgia,respectively.  The Company currentlyoperates in 28 states.

FIIC was organized under the captiveinsurance company laws of the state of Vermont for the purpose of reinsuringcertain credit enhancement insurance policies that have been written byunrelated third party insurance companies.

On October 2, 1998, the Company completedthe acquisition of FISC and the operations of FISC are included in theconsolidated results of the Company since the date of acquisition.Headquartered in Atlanta, Georgia, FISC performed servicing and collectionactivities on a portfolio of receivables originated for investment as well ason a portfolio of receivables originated and sold pursuant to two assetsecuritizations. 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, the Company enteredinto a partnership agreement whereby a subsidiary of the Company was thegeneral partner owning 70% of the partnership interests and First UnionInvestors, Inc. served as the limited partner and owned 30% of the partnershipinterests.  On September 19, 2003, FirstInvestors Financial Services, Inc. purchased the limited partnership interestspreviously held by First Union Investors, Inc. The Partnership consists primarily of a portfolio of loans previouslyowned or securitized by FISC and certain other financial assets includingcharged-off accounts owned by FISC.

On December 24, 2002, the Companypurchased 40% of the common stock and an investment in the junior mezzaninedebt 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, FISC entered into aservicing agreement with an unrelated third party to service an approximately$300,000 portfolio of installment loan receivables purchased from a subsidiaryof Union Acceptance Corporation.

Intotal, at October 31, 2006, FISC performs servicing and collection functions ona managed receivables portfolio of approximately $501,915.

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**2.****              Interim Financial 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 October 31, 2006, the Company does not have any variable interestentities under FIN 46 as amended by Interpretation 46R.

The results for the interimperiods are not necessarily indicative of the results of operations that may beexpected for the fiscal year. In the opinion of management, the informationfurnished reflects all adjustments which are of a normal recurring nature andare necessary for a fair presentation of the Company’s financial position as ofOctober 31, 2006, and the results of its operations for the three and sixmonths ended October 31, 2006 and 2005, and its cash flows for the six monthsended October 31, 2006 and 2005.

The consolidatedfinancial statements for the interim periods have been prepared pursuant to therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations, although the Company believes that the disclosures areadequate to make the information not misleading. These financial statementsshould be read in conjunction with the audited consolidated financialstatements included in the Company’s 2006 Annual Report on Form 10-K filed July27, 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*.  OtherIncome consists of income received from servicing activities, other financecharges and fees, income from investments, reinvestment revenue, income earnedfrom the sale of GAP insurance and extended service contracts, and unrealizedloss on interest 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.  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 whenincurred.

*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.

TheCompany initiates efforts to make customer contact as early as when thecustomer is one day past due and become more aggressive as the loan becomesfurther past due.  Management reviewspast due loans and considers various factors including payment history, jobstatus and any events that may have occurred that prevent the customer frommaking a payment.  Through theevaluation, if it is determined that the loan is uncollectible, the collateralis typically repossessed.  Generally thisoccurs at 60 to 90 days after the loan becomes past due.   Upon repossession, the uncollectible portionof the loan and 100% of accrued interest is written off.  The fair value of the collateral is recordedas an Assets Held for Sale.  Fair valueis determined by estimating the proceeds from the sale of the collateral, whichprimarily are comprised of auction proceeds on the sale of the automobile 

8

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less selling related expenses. After collection of all proceeds, the Company records an adjustment,positive or negative, based on the difference between the fair value estimateand the proceeds received.  In the eventthe collateral cannot be located or if the customer refuses to pay and is notsubject to bankruptcy court protection, the Company will write off the entirebalance of the loan once it reaches 180 days past due.  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 the customeris dismissed from bankruptcy, the Company resumes collection efforts.

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanon a date which is six months prior to the reporting date, to the aging loanstatus as of the reporting date.  Thesefactors are then applied to the aging status of each loan at the reporting datein order to calculate the number of loans that are expected to migrate toimpaired status.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  Effective thequarter ended April 30, 2005, the Company elected to increase its allowance forloan losses against loans that were greater than 120 days past due and loans inwhich the collateral had been assigned for repossession but had not yet beenrepossessed as of the reporting date. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy 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.

*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 2006 amounts to conform with the fiscal 2007 presentation.

**3.****              Receivables Held 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 October 31, 2006:

|                                           | ** ** | **April 30,** | ** ** | **October 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2006**           | ** ** | **2006**             | ** ** |
| Receivables                               |       | $                  | 368,878    |                 | $          | 428,416 |   |
| Unamortized premium and deferred fees (1) |       | 10,853             |       | 12,232               |       |
| Allowance for credit losses               |       | (2,332             | )          | (2,728               | )          |
| Net receivables                           |       | $                  | 377,399    |                 | $          | 437,920 |   |

 

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

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Activityin the allowance for credit losses for the periods ended October 31, 2005 and2006 was as follows:

|                                | ** ** | **For the Six Months  Ended October 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                                           | ** ** | **2006** | ** ** |
| Balance, beginning of period   |       | $                                                                  | 2,249      |   | $ | 2,332 |   |
| Provision for credit losses    |       | 3,716                                                              |       | 5,195 |   |
| Charge-offs, net of recoveries |       | (3,706                                                             | )          | (4,799 | ) |
| Balance,  end of period        |       | $                                                                  | 2,259      |   | $ | 2,728 |   |

**4.****              Debt**

The Company finances its loan origination throughtwo warehouse credit facilities. The Company’s credit facilities provide forone-year terms and have been renewed annually. Management of the Companybelieves that the credit facilities will continue to be renewed or extended orthat it would be able to secure alternate financing on satisfactory terms;however, there can be no assurance that it will be able to do so.  In November, 2003, the Company issued$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 borrowings includingthe effect of program fees and dealer fees was 4.3% and 5.2% for the periodsended October 31, 2005 and 2006, respectively.

*Warehouse Facilities as of October 31, 2006*
|              | ** ** | ** **   | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                                                                                              | ** ** | ** **               | ** ** | **Borrowing**        | ** ** |
|--------------|------------|--------------|------------|-----------------|------------|------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------|------------|
| ** **   | ** ** | ** **   | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                                                                                              | ** ** | ** **               | ** ** | **Rate At**     | ** ** |
| ** **   | ** ** | ** **   | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                                                                                              | ** ** | ** **               | ** ** | **October 31,** | ** ** |
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                                | ** ** | **Insurance**            | ** ** | **2006**             | ** ** |
| FIARC        |       | $            | 300,000    |            | $          | 148,062                |       | Commercial  paper rate plus .3%                                                                         |       | .30%  of Unused Facility |       | None                 |       | 5.8 | % |
| FIRC         |       | $            | 50,000     |            | $          | 36,524                 |       | 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            |       | 5.3 | % |

*Warehouse Facilities –Credit Enhancement as of October 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 of funding, the Company has agreedto maintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders are named asadditional insureds under these policies. The coverage is obtained on eachreceivable at the time it is purchased by the Company and the applicablepremiums are prepaid for the life of the receivable. The insurance enhancingthis facility is default insurance under a standard auto loan protection policy(known as “ALPI” insurance) which covers the difference between the outstandingbalance of a receivable and the liquidation proceeds in the event theunderlying collateral is repossessed. Solely at its expense, the Companycarries this 

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coverage and neither the vehicle purchasers nor the dealers are chargedfor the coverages and they are usually unaware of their existence. The Company’sALPI insurance policy is written by National Union Fire Insurance Company ofPittsburgh (“National Union”), which is a wholly-owned subsidiary of AmericanInternational Group.

Thepremiums that the Company paid during the three months and six months endedOctober 31, 2006 for its three credit enhancement insurance coverages, of whichthe largest component is basic ALPI insurance, represented approximately 1.1%and 1.7%, respectively, of the principal amount of the receivables originatedduring the periods. Aggregate premiums paid for ALPI coverage alone were $1,366and $536 during the three months ended, and $2,572 and $1,852 for six monthsended, October 31, 2005 and 2006, respectively, and accounted for 2.1% and 0.9%during the three months ended, and 1.8% and 1.2% for the six months ended,October 31, 2005 and 2006, respectively, of the principal amount of thereceivables originated during such respective periods.

In April 1994, the Company organized First InvestorsInsurance Company (the “Insurance Subsidiary”) under the captive insurancecompany laws of the State of Vermont. The Insurance Subsidiary is an indirectwholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100% of the risk under theCompany’s ALPI insurance policy. At the time each receivable is insured byNational Union, the risk is automatically reinsured to its full extent andapproximately 96% of the premium paid by the Company to National Union withrespect to such receivable is ceded to the Insurance Subsidiary. When a losscovered by the ALPI policy occurs, National Union pays it after the claim isprocessed, and National Union is then reimbursed in full by the InsuranceSubsidiary.  In addition to the monthlypremiums and liquidity reserves of the Insurance Subsidiary, a trust account ismaintained by National Union to secure the Insurance Subsidiary’s obligationsfor losses it has reinsured.

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofOctober 31, 2006, the Insurance Subsidiary had capital and surplus of $3,607and unencumbered cash reserves of $2,413 in addition to the $3,252 trustaccount.

The ALPI coverage as well as the InsuranceSubsidiary’s liability under the Reinsurance Agreement, remains in effect foreach receivable that is pledged as collateral under the warehouse creditfacility. Once receivables are transferred from FIRC to FIARC and financedunder the commercial paper facility, ALPI coverage and the Insurance Subsidiary’sliability under the Reinsurance Agreement is cancelled with respect to thetransferred receivables. Any unearned premium associated with the transferredreceivables is returned to the Company. The Company believes the losses itsInsurance Subsidiary will be required to indemnify will be less than thepremiums ceded to it. However, there can be no assurance that losses will notexceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

FIARC – Credit Enhancement for the FIARC warehouse facility is provided tothe commercial paper investors by a 6% overcollaterization level and a cashreserve account equal to 1% of the receivables held by FIARC.  The Company is not a guarantor of, orotherwise 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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OnDecember 4, 2003, the FIRC facility was renewed, under similar terms andconditions, 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 increased to $65,000, andreverted back to $50,000 on September 13, 2004. As of April 30, 2006 and October 31, 2006, there was $47,080 and$36,524, 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 well as eliminating the requirement to purchase interest ratecaps.  As a result, the 0.35% surety bondpremium 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%.  On October 11, 2006, the Company amended thefacility to increase the commitment from $150,000 to $300,000 in order to fundthe growth in origination volume.  As ofApril 30, 2006 and October 31, 2006, there was $0 and $148,062, respectively,outstanding.

Management presently intends to seek furtherextensions 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 information on the Term Notes asof October 31, 2006.

| Term Notes | ** ** | **Issuance Date** | ** ** | **Issuance   Amount** | ** ** | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest   Rate** | ** ** |
|-----------------|------------|------------------------|------------|----------------------------|------------|------------------------|--------------------|-----------------|------------|--------------------------|------------|
| 2003-A          |       | November  11, 2003     |       | $                          | 139,661    |                   | April  20, 2011    |            | $          | 26,561                   |       | 2.58 | % |
| 2005-A Class 2  |       | May  5, 2005           |       | $                          | 106,493    |                   | July  16, 2012     |            | $          | 79,359                   |       | 4.23 | % |
| 2006-A Class 2  |       | January  26, 2006      |       | $                          | 47,000     |                   | March  16, 2009    |            | $          | 29,353                   |       | 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 theTerm 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   |

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Term Notes - On November 20, 2003, the Company, through its indirect,wholly-owned subsidiary, First Investors Auto Owner Trust 2003-A (“2003 AutoTrust”), completed the issuance of $139,661 of 2.58% Class A asset-backed notes(“2003-A Term Notes”). The initial pool of automobile receivables transferredto the 2003 Auto Trust totaled $114,727, which was previously owned by FIRC andFIARC, secure the 2003-A Term Notes.  Inaddition to the issuance of the Class A Notes, the 2003 Auto Trust also issueda $5,066 Class B Note that was retained by the Company and pledged to securethe Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$139,657, 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 2003-A Term Noteissuance, and (v) fund an initial cash reserve account of 0.5%, or $574, of theinitial receivables pledged.  The Class ATerm Notes bear interest at 2.58% and requires monthly principal reductionssufficient to reduce the balance of the Class A Term Notes to 96.1% of theoutstanding balance of the underlying receivables pool. The final maturity ofthe 2003-A Term Notes is April 20, 2011. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 3.9% 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 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2006, and October 31, 2006,the outstanding principal balances on the 2003-A term notes were $37,715 and$26,561, respectively.

On May 5, 2005, the Company, through its indirect,wholly-owned subsidiary, First Investors Auto Owner Trust 2005-A (“2005 AutoTrust”), completed the issuance of $69,000 of 3.57% Class A-1 asset-backednotes and $106,493 of 4.23% Class A-2 asset-backed notes (collectively “2005-ATerm Notes”), for a total of $175,493 of asset backed notes. The initial poolof automobile receivables transferred to the 2005 Auto Trust totaled $150,921,which was previously owned by FIRC and FIARC, and secures the 2005-A TermNotes.  In addition to the issuance ofthe Class A-1 and Class A-2 Notes, the 2005 Auto Trust also issued a $5,428Class B Note that was retained by the Company and pledged to secure the WorkingCapital 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 for future loan originations,(ii) repay all outstanding borrowings under the FIARC commercial paperfacility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2005-A Term Note issuance,and (v) fund an initial cash reserve account of 1%, or $1,509, of the initialreceivables pledged.  The Class A-1 andClass A-2 Term Notes bear interest at 3.57% and 4.23%, respectively, and requiremonthly principal reductions sufficient to reduce the balance of the Class ATerm Notes to 95.75% of the outstanding balance of the underlying receivablespool. The Class A-1 notes were paid off during the fiscal year ended April 30,2006.  The final maturity of the ClassA-2 Term Notes is July 16, 2012.  TheClass B Note does not bear interest but requires principal reductionssufficient to reduce the balance of the Class B Note to 4.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA Insurance Corporationprovides 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 October 31, 2006,the outstanding principal balances on the 2005-A Term notes were $106,162 and$79,359, respectively.

OnJanuary 26, 2006, the Company, through its indirect, wholly-owned subsidiary,First Investors Auto Owner Trust 2006-A (“2006 Auto Trust”), completed theissuance of $32,000 of 4.57% Class A-1 asset-backed notes, $47,000 of 4.87%Class A-2 asset-backed notes, $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 TermNotes”), for a total of $189,060 of asset backed notes. The initial pool ofautomobile receivables transferred to the 2006 Auto Trust totaled $151,939, waspreviously owned by FIRC 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 

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the 2006-A Term Note issuance, and (v) fund an initial cash reserveaccount of 1% or $1,519 of the initial receivables pledged.  The 2006-A Term Notes require monthlyprincipal reductions sufficient to reduce the balance of the notes to 96.75% ofthe outstanding balance of the underlying receivables pool. The Class A-1 noteswere paid off during the quarter ended July 31, 2006.  The final maturity of the Class A-2, ClassA-3, and Class A-4 Term Notes is March 16, 2009, February 15, 2011, and April15, 2013, respectively.  The Class B Notedoes not bear interest but requires principal reductions sufficient to reducethe balance of the Class B Note to 3.25% 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 the greater of 2% of the initial pool balance or 6% of the thencurrent principal balance of the receivables pool.  As of April 30, 2006 and October 31, 2006,the outstanding principal balances on the 2006-A Class A term notes were$172,708 and $139,413, 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%.  OnNovember 7, 2006, the Company amended the facility to increase the commitmentamount from $23,500 to $28,500.  As of April30, 2006 and October 31, 2006, there was $16,454 and $21,504, respectively,outstanding under this facility.

The Company presentlyintends to seek a renewal of the working capital facility from its lender priorto maturity.  Should the facility not berenewed, the outstanding balance of the receivables would be amortized in accordancewith the borrowing base.  Managementconsiders its relationship with its lenders to be satisfactory and has noreason to believe that this credit facility will not be renewed.  If the facility is not renewed, however, orif material changes are made to its terms and conditions, it could have amaterial 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 the Companymay, from time to time, borrow up to $2,500. On December 6, 2004, the original $2,500 shareholder loan was replacedwith a $2,500 loan containing identical terms and conditions between theCompany and a limited partnership that is affiliated with a current shareholderand member of the Board of Directors The proceeds of the borrowings have beenutilized to fund certain private and open market purchases of the Company’scommon stock pursuant to a Stock Repurchase Plan authorized by the Board ofDirectors and for 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 October 31, 2006.  For the three and six months ended October31, 2005 and October 31, 2006, the Company recorded interest expense underthese facilities of $63 and $126, respectively.

*Loan Covenants*.  The documentation governing these creditfacilities and Term Notes contains numerous covenants relating to the Company’sbusiness, the maintenance of credit enhancement insurance covering thereceivables (if applicable), the observance of certain financial covenants, theavoidance of certain levels of delinquency experience and other matters. Thebreach of these covenants, if not cured within the time limits specified, couldprecipitate events of default that might result in the acceleration of the FIRCcredit facility, the Term Notes and the working capital facility or thetermination of the commercial paper facilities. The Company

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was not in default with respect to any financial and non-financialcovenants governing these financing arrangements at October 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.

On July 18, 2005, as arequirement of the FIARC commercial paper facility, the Company entered into aninterest rate cap transaction, with a strike rate of 6%.  The aggregate initial notional amount of thecap was $18,804 which amortizes over six years. The Company paid $59 in premium to purchase this cap.  The interest rate cap was not designated as ahedge, and accordingly, changes in the fair value of the interest rate capswere recorded as an unrealized loss and are reflected in net income.  During the three and six months ended October31, 2005, the Company recorded an unrealized gain of $23 and $20, respectively,that is included as a separate line under other income.  This requirement was eliminated as part ofthe facility’s renewal.

**5.****              Earnings Per Share**

Earnings per shareamounts are based on the weighted average number of shares of common stock andpotential dilutive common shares outstanding during the period. The weightedaverage number of shares used to compute basic and diluted earnings per sharefor the three and six months ended October 31, 2005 and 2006 are as follows:
| ** **                                                         | ** ** | **For the Three Months Ended   October 31,** | ** ** | **For the Six Months Ended  October 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                                               |       | **2005**                                                                   | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2006** |   |
| Weighted average shares:                                           |       |                                                                       |       |                                                               |       |   |   |   |   |
| Weighted average shares  outstanding for basic earnings per share  |       | 4,438,504                                                                  |       | 4,474,194                                                          |       | 4,425,099 |   | 4,465,715 |   |
| Effect of dilutive stock options  and warrants                     |       | 183,113                                                                    |       | 332,831                                                            |       | 132,504 |   | 331,592 |   |
| Weighted average shares outstanding for diluted earnings per share |       | 4,621,617                                                                  |       | 4,807,025                                                          |       | 4,557,603 |   | 4,797,307 |   |

For the three and six months ended October 31, 2005and 2006, the Company had 43,500 and 257,500 stock options and stock warrants,respectively, which were not included in the computation of diluted income pershare because to do so would have been antidilutive for the period presented.

**6.****              Investment in First Auto Receivables Corporation**

On December 24, 2002, the Company invested $475 for a 40% ownershipinterest in First Auto Receivables Corporation (“FARC”) and $713 for juniormezzanine investments of FARC.  FARCpurchased a $197,500 automobile loan portfolio from UAFC-2 Corporation, a subsidiaryof Union 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%.

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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.  The Company recognizedservicing revenue of $139 and $83 for the three months ended, and $301 and $178for the six months ended, October 31, 2005 and 2006, respectively, interestincome of $27 and $3 for the three months ended, and $54 and $9 for the sixmonths ended, October 31, 2005 and 2006, respectively, and equity in earningsin FARC of $111 and $319 for the three months ended, and $237 and $386 for thesix months ended, October 31, 2005 and 2006, respectively.  As of April 30, 2006 the equity investment inFARC of $873 and junior mezzanine debt of $80 and as of October 31, 2006, theequity investment in FARC of $1,083 and junior mezzanine debt of $4 are includedin Deferred Financing Costs and Other Assets on the balance sheet.

**7.****              NewAccounting Pronouncements**

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 overturned on audit, based on the technical merits of theposition. The provisions of FIN 48 are effective for the Company onMay 1, 2007, with the cumulative effect of the change in accountingprinciple, if any, recorded as an adjustment to opening retainedearnings.  The Company is currently evaluating the impact of adoptingFIN 48 on its financial position, cash flows, 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, *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 May 1, 2007 although early adoptionis permitted as of the beginning of an entity’s fiscal year. The provisions ofSFAS 155 are not expected to have a financial statement impact at adoption;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 March 2006, the FASB issued SFAS No. 156, “*Accountingfor Servicing of Financial Assets – an amendment of FASB Statement No. 140*”(“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract in specific situations.Additionally, the servicing asset or servicing liability shall be initiallymeasured at fair value, if practicable. SFAS 156 permits an entity to chooseeither the amortization method or fair value measurement method for subsequentmeasurement of the servicing asset or servicing liability. SFAS 156 iseffective for the fiscal year ending April 30, 2008. The Company iscurrently evaluating the impact of adopting SFAS 156 on its financialposition, cash flows, and results of operations; however it is not expected tohave a material impact on our consolidated financial position, results ofoperations or cash flows.

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In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “*Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*” (“SAB 108”). SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prioryear misstatements should be considered in quantifying a current yearmisstatement. Under this bulletin, registrants should quantify errors usingboth a balance sheet and an income statement approach and evaluate whethereither approach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is material. SAB 108 iseffective for the fiscal year ending April 30, 2007.  The Company is currently evaluating theimpact of adopting SAB 108 on its financial position, cash flows, and resultsof operations.

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

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a $1.00 par value. As of October 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 intended to be incentive stock options, the exerciseprice may not be less than 100% of the fair market value per share of commonstock on the date of grant. With respect to non-qualified stock options, theexercise price may be fixed as low as 50% of the fair market value per share atthe time of grant. 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 and October 31, 2006, a total of 360,500options had been issued, and 294,500 and 278,500, respectively, options remainedoutstanding. This plan expired on June 27, 2005.

On September 8, 2005,the shareholders approved the Company’s 2005 Employee Stock Option Plan (the2005 Plan).  The 2005 Plan isadministered by the Compensation Committee of the Board of Directors and providesthat options may be granted to officers and other key employees for thepurchase of up to 200,000 shares of common stock, which was subsequentlyamended on September 6, 2006, increasing the number of available shares to400,000, subject to adjustment in the event of certain changes incapitalization. Options may be granted either as incentive stock options (whichare intended to qualify for certain favorable tax treatment) or asnon-qualified stock options.  TheCompensation Committee selects the persons to receive options and determinesthe exercise price, the duration, any conditions on exercise and other terms ofthe options. The exercise price may not be less than 100% of the fair marketvalue per share of common stock on the date of grant, and 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 and October 31, 2006, atotal of 102,500 and 197,500, respectively, options had been issued andremained outstanding, leaving a remaining 97,500 and 202,500, respectively,available for issuance.

The exercise price ofthe option is payable in cash upon exercise. At the discretion of theCompensation Committee, options may be issued in tandem with stock appreciationrights entitling the option holder to receive an amount in cash or in shares ofcommon stock, or a combination thereof, equal in value to any increase sincethe date of grant in the fair market value of the common stock covered by theoption.

*Non-Employee Director StockOption 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

17

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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 July 2006.  Subsequent automatic grants of an option topurchase 28,000 shares shall be made to each non-employee director on July 15th each year, beginningJuly 15, 2007. The plan also gives the Board of Directors discretionaryauthority to provide for additional option grants if the Company’s annualfinancial performance exceeds parameters established by the Board.  No discretionary grants have beenawarded.  As of April 30, 2006 andOctober 31, 2006, a total of 490,000 and 630,000, respectively, options hadbeen issued under the plan, leaving a remaining 10,000 and 270,000,respectively, available for issuance.  Inaddition to the options granted above, there were an additional 20,000 optionsgranted to a director in 1995, before the adoption of the Non-Employee DirectorStock Option Plan.  All options issuedunder this plan were issued with an exercise price equal to the fair marketvalue of the underlying common stock on the date 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”), as amended by SFAS No. 148,*  Accountingfor Stock 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 StockOption Plan (the “Plans”). The pro forma effects on net income and income pershare for the awards issued under the Plans were instead disclosed in afootnote to the financial statements. Under SFAS No. 123(R), allshare-based compensation is measured at the grant date, based on the fair valueof the award, and is recognized as an expense in earnings over the requisiteservice period.

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 utilizes the Black-Scholes-Merton model for calculating thefair value pro forma disclosures under SFAS No. 123, which is anacceptable valuation approach under SFAS No. 123(R).

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 October 31, 2006:

|                                                 | ** ** | **For the six months ended October 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                                               | ** ** | **2006** | ** ** |
| Dividend yield                                  |       | —                                                                 |       | — |   |
| Expected volatility                             |       | 19.34                                                                  | %          | 26.44 | % |
| Risk-free interest rate                         |       | 3.93                                                                   | %          | 5.02 | % |
| Estimated life (in years)                       |       | 4                                                                      |       | 6 |   |
| Weighted  average fair-value of options granted |       | $                                                                      | 1.13       |   | $ | 3.06 |   |
|                                                 |            |                                                                        |            |  |  |  |  |

 

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Thefollowing table summarizes the option activity under the Plans as ofOctober 31, 2006, and the options exercisable at the end of the reportedperiod:
|                                               | ** ** | **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                         |       | (15         | )          | $                                      | 8.97       |                                                |       |                            |       |   |
| Exercised                                     |       | (23         | )          | $                                      | 4.56       |                                                |       |                            |       |   |
| Outstanding  options, end of period           |       | 1,066       |       | $                                      | 5.40       |                                                | 7.4        |                            | $          | 1,967 |   |
|                                          |       |        |       |                                   |       |                                                |       |                            |       |
| Exercisable at  end of period                 |       | 572         |       | $                                      | 4.61       |                                                | 6.1        |                            | $          | 1,407 |   |
| Vested and  expected to vest at end of period |       | 1,023       |       | $                                      | 5.37       |                                                | 7.3        |                            | $          | 1,913 |   |

 

The total intrinsic value of options exercisedduring the six months ended October 31, 2006 and 2005 was $79 and $0.  The total grant date fair value of stockoptions that became fully vested for the six months ended October 31, 2006 wasapproximately $752.

Cash received from option exercises under all sharebased payment arrangements for the six months ended October 31, 2006 and 2005was $107 and $0, respectively.  Theestimated tax benefit expected to be realized for the six months ended October31, 2006 and 2005 is $23 and $0, respectively.

A summary of the status of the Company’s nonvestedshares as of October 31, 2006, and changes during the six months ended October31, 2006, is presented below:

| Nonvested Shares          | ** ** | **Shares** | ** ** | **Weighted  Average Grant  Date Fair  Value** | ** ** |
|--------------------------------|------------|------------|------------|---------------------------------------------------------|------------|
| Nonvested at  April 30, 2006   |       | 428        |       | $                                                       | 1.78       |   |
| Granted                        |       | 237        |       | 3.06                                                    |       |
| Vested                         |       | (167       | )          | 1.22                                                    |       |
| Forfeited                      |       | (4         | )          | 5.59                                                    |       |
| Nonvested at October  31, 2006 |       | 494        |       | $                                                       | 1.96       |   |

 

As of October 31, 2006, there was $859 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Plans. The cost is expected to be recognized over a weighted average period of3.2 years.  The total fair value ofshares vested during the six months ended October 31, 2006 and 2005 was $1,151and $991, respectively.

SFAS No. 123(R) also requires the Company toestimate forfeitures in calculating the expense relating to stock-basedcompensation as opposed to accounting for forfeitures as they occur, as allowedby SFAS No. 123. The Company adjusted for this effect with respect tounvested options as of May 1, 2006 in the stock-based compensation expenserecognized, which was recorded within general and administrative expense on theCompany’s consolidated statement of earnings. This adjustment was not recordedas a cumulative effect adjustment because no compensation cost was recognizedprior to the adoption SFAS No. 123(R). In addition, SFAS No. 123(R)requires the Company to reflect the tax savings resulting from tax deductionsin excess of expense reflected in its financial statements as a financing cashflow rather than as an operating cash flow as in prior periods.

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Total compensation costs related to stock-basedcompensation that have been charged against income during the three monthsended October 31, 2006 were $79, net of income tax benefits of $24.  Total compensation costs related tostock-based compensation that have been charged against income during the sixmonths ended October 31, 2006 were $110, net of income tax benefits of$32.  Included in this total is $79 and$110 for the three and six months ended October 31, 2006, respectively,resulting from the adoption of SFAS No. 123(R), which would havepreviously been presented in a pro forma footnote disclosure, as discussedabove.

The following tableillustrates the effect on net earnings and earnings per share as if the Companyhad applied the fair-value recognition provisions of SFAS No. 123(R) toall of its share-based compensation awards for periods prior to the adoption ofSFAS No. 123(R), and the actual effect on net earnings and earnings pershare for the period subsequent to the adoption of SFAS No. 123(R):
| ** **                                                                                                                                           | ** ** | **For the Three Months  Ended October 31,** | ** ** | **For the Six Months  Ended October 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2005**                                                             | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net Earnings, as reported                                                                                                                            |       | $                                                                    | 765        |                                                               | $          | 1,295 |   | $ | 1,690 |   | $ | 2,031 |   |
| Add: Total stock  option plan compensation expense included in the determination of reported  net earnings, net of taxes                             |       | —                                                               |       | 79                                                                 |       | — |   | 110 |   |
|                                                                                                                                                 |       |                                                                 |       |                                                               |       |   |   |   |   |
| Deduct: Total stock option plan compensation expense determined under  fair value based method for awards granted, modified or settled, net of taxes |       | (57                                                                  | )          | (79                                                                | )          | (103 | ) | (110 | ) |
| Pro Forma Net Earnings                                                                                                                               |       | $                                                                    | 708        |                                                               | $          | 1,295 |   | $ | 1,587 |   | $ | 2,031 |   |
|                                                                                                                                                 |       |                                                                 |       |                                                               |       |   |   |   |   |
| Basic Net Earnings per Common Share, as reported                                                                                                     |       | $                                                                    | 0.17       |                                                               | $          | 0.29 |   | $ | 0.38 |   | $ | 0.45 |   |
| Diluted Net Earnings per Common Share, as reported                                                                                                   |       | $                                                                    | 0.17       |                                                               | $          | 0.27 |   | $ | 0.37 |   | $ | 0.42 |   |
| Basic Net Earnings per Common Share, pro forma                                                                                                       |       | $                                                                    | 0.16       |                                                               | $          | 0.29 |   | $ | 0.35 |   | $ | 0.45 |   |
| Diluted  Net Earnings per Common Share, pro forma                                                                                                    |       | $                                                                    | 0.15       |                                                               | $          | 0.27 |   | $ | 0.34 |   | $ | 0.42 |   |

 

**9.****             ****Income Taxes**

The Company has recorded income tax expense as a percentageof income before taxes for the three and six months ended:
| ** **                                | ** ** | **For the Three Months  Ended October 31,** | ** ** | **For the Six Months  Ended October 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                                        | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| Income tax -  statutory rate              |       | 34.0                                                            | %          | 35.0                                                               | %          | 34.0 | % | 35.0 | % |
| State income  tax, net of federal benefit |       | 2.0                                                             | %          | 3.7                                                                | %          | 2.0 | % | 3.9 | % |
| Reversal of  uncertain tax position       |       | —                                                          |       | (65.0                                                              | )%         | — |   | (29.7 | )% |
| Non-deductible  expenses                  |       | 0.5                                                             | %          | 0.6                                                                | %          | 0.5 | % | 0.6 | % |
| Effective income  tax rate                |       | 36.5                                                            | %          | (25.7                                                              | )%         | 36.5 | % | 9.8 | % |

 

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**ITEM2.  *MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

##### **(Dollars in thousands, except per share data)**

**Critical Accounting Policies**

FinancialReporting Release No. 60, which was issued by the Securities and ExchangeCommission (“SEC”), requires all registrants to discuss critical accountingpolicies or methods used in the preparation of financial statements.  Note 2 to the consolidated condensedfinancial statements includes a summary of the significant accounting policiesand methods used in the preparation of the Company’s consolidated financialstatements.

Thepreparation of financial statements includes the use of estimates andassumptions that affect the reported amounts of assets and liabilities and thereported amounts of net revenues and expenses during the reporting periods. Thefollowing is a review of the more significant assumptions and estimates, aswell as the accounting policies and methods used in the preparation of theconsolidated 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 issuspended until the payments become current. When a loan is charged off or thecollateral is 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.

*AdvertisingCosts. *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 initiates efforts to make customercontact as early as when the customer is one day past due and become moreaggressive 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 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 relatedexpenses.  After collection of allproceeds, the Company records an adjustment, positive or negative, based on thedifference between the 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 a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging

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status of each loan on a date which is six months prior to thereporting date, to the aging loan status as of the reporting date.  These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans 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 expenses stock-based compensationexpense in accordance with SFAS No. 123(R), *Share-Based Payment - arevision to SFAS No. 123, Accounting for Stock-Based Compensation*(“SFASNo. 123(R)”).  Prior to SFAS 123Radoption, we accounted for share-based payments under APB 25 and accordingly,accounted for our stock*-*basedcompensation using the intrinsic value method.

**ManagedReceivables**

TheCompany’s managed receivables are:
|                                                                                      | ** ** | **As of or for the Periods** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **Ended October 31,**                       | ** ** |
| ** **                                                                           | ** ** | **2005**                                              | ** ** | **2006** | ** ** |
| Receivables Held for Investment:                                                     |       |                                                  |       |   |   |
| Number                                                                               |       | 20,826                                                |       | 25,879 |   |
| Principal balance                                                                    |       | $                                                     | 324,225    |   | $ | 428,416 |   |
| Average principal balance of  receivables outstanding during the  six-month period   |       | $                                                     | 288,749    |   | $ | 402,098 |   |
| Average principal balance of  receivables outstanding during the  three-month period |       | $                                                     | 310,276    |   | $ | 417,196 |   |
| Other Servicing:                                                                     |       |                                                  |       |   |   |
| Number                                                                               |       | 11,753                                                |       | 8,127 |   |
| Principal balance                                                                    |       | $                                                     | 143,095    |   | $ | 73,499 |   |
| Total Managed Receivables Portfolio:                                                 |       |                                                  |       |   |   |
| Number                                                                               |       | 32,579                                                |       | 34,006 |   |
| Principal balance                                                                    |       | $                                                     | 467,320    |   | $ | 501,915 |   |
| Average principal balance of  receivables outstanding during the  six-month period   |       | $                                                     | 456,789    |   | $ | 490,954 |   |
| Average principal balance of receivables outstanding during the three-month period   |       | $                                                     | 465,260    |   | $ | 497,972 |   |

 

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The following table sets forth information with regard to the Company’snet interest spread, which represents the difference between the effectiveyield on Receivables Held for Investment and the Company’s average cost of debtutilized to fund these receivables, and its net interest margin (averages basedon month-end balances):
|                                                         | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2006** | ** ** |
| Receivables Held for Investment:                        |       |                                               |       |                                             |       |   |   |   |   |
| Effective yield on Receivables  Held for Investment (1) |       | 12.8                                               | %          | 12.8                                             | %          | 12.8 | % | 12.8 | % |
| Average cost of debt (2)                                |       | 4.5                                                | %          | 5.6                                              | %          | 4.5 | % | 5.5 | % |
| Net interest spread (3)                                 |       | 8.3                                                | %          | 7.2                                              | %          | 8.3 | % | 7.3 | % |
| Net interest margin (4)                                 |       | 8.3                                                | %          | 7.3                                              | %          | 8.3 | % | 7.3 | % |

 

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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 is the differencebetween interest earned from the receivables portfolio and interest expenseincurred on the credit facilities used to finance the receivables. Net interestincome was $7,561 and $14,685 for the three and six months ended October 31,2006, respectively, an increase of 17.4% and 22.6% when compared to amountsreported for the three and six months ended October 31, 2005, respectively.

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 rate componentsassociated with the receivables and debt can be segregated to analyze theperiodic changes in net interest income. The following table analyzes thechanges attributable to the principal amount and rate components of netinterest income:
| ** **                        | ** ** | **Three Months Ended  October 31, 2005 to 2006** | ** ** | **Six Months Ended  October 31, 2005 to 2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Increase (Decrease) Due to Change in**              | ** ** | **Increase (Decrease) Due to Change in**            | ** ** |
| ** **                        | ** ** | **Average  Principal  Amount**                                                 | ** ** | **Average  Rate**                                                            | ** ** | **Total Net** | ** ** | **Average  Principal  Amount** | ** ** | **Average  Rate** | ** ** | **Total Net** | ** ** |
|                              |       |                                                                           |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Receivables Held  for Investment: |       |                                                                           |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Interest income                   |       | $                                                                              | 3,412      |                                                                         | $          | 47 |   | $ | 3,459 |   | $ | 7,221 |   | $ | 72 |   | $ | 7,293 |   |
| Interest expense                  |       | 1,183                                                                          |       | 1,154                                                                        |       | 2,337 |   | 2,490 |   | 2,094 |   | 4,584 |   |
| Net interest income               |       | $                                                                              | 2,229      |                                                                         | $          | (1,107 | ) | $ | 1,122 |   | $ | 4,731 |   | $ | (2,022 | ) | $ | 2,709 |   |

 

**Results of Operations**

*Three andSix Months Ended October 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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*Executive Summary. *Net earnings for the threeand six months ended October 31, 2006 were $1,295 and $2,031, respectively,compared to $765 and $1,690 for the three and six months ended October 31,2005, respectively.  Basic earnings percommon share were $0.29 and $0.45, respectively, for the three and six monthsended October 31, 2006, compared to $0.17 and $0.38, respectively, for thethree and six months ended October 31, 2005. Diluted earnings per common share were $0.27 and $0.42, respectively,for the three and six months ended October 31,2006, compared to $0.17 and$0.37, respectively, for the three and six months ended October 31, 2005.  The increase in net income for the three andsix months ended October 31, 2006 compared to October 31, 2005 is due toseveral factors, including (i) a $1,122 increase in net interest income for thethree months ended October 31, 2006, and a $2,709 increase in net interestincome for the six months ended October 31, 2006 due to a 34% and 39% increasein the average balance of Receivables Held for Investment for the three and sixmonths ended October 31, 2006, respectively, (ii) an increase in other interestincome due to higher average cash balances, (iii) a decrease in general andadministrative expenses primarily due to the defense of a class action lawsuitduring the six months ended April 30, 2006, and (iv) a decrease in income taxexpense of $704 and $750 for the three and six months ended October 31, 2006,respectively, primarily due to the recognition of a $669 income tax benefitthat was previously recorded as an uncertain tax provision.  This is partially offset by several factors,including (i) an increase in interest expense of $2,337 and $4,584 for thethree and six months ended October 31, 2006, respectively, due to a 34% and 39%increase in the average debt outstanding and a 110 and 104 basis point increasefor the three and six months ended October 31, 2006, respectively, (ii) a $612and $1,479 increase in provision for credit losses, for the three and six monthsended October 31, 2006, respectively, primarily associated with the growth in the portfolio of ReceivablesHeld for Investment and an associated increase in the allowance for creditlosses, (iii) a $242 and $387 reduction in other income, for the three and sixmonths ended October 31, 2006, respectively, primarily due to lower servicingrevenue resulting from the continued decline in serviced receivablesoutstanding and lower dealer marketing fees due to the elimination of certaindealer programs, (iv) a $180 and $362 increase in salaries and benefitsexpense, for the three and six months ended October 31, 2006, respectively, tosupport an increase in origination volume, staffing for the Company’s inboundcall center which was moved from a third party provider during 2005, and theimplementation of FASB 123(R) during the period, (v) a $530 and $906 increase in operating costs, for the three and sixmonths ended October 31, 2006, respectively, associated with an increase inorigination volume and a decrease in the dollar amount of expenses which theCompany was able to capitalize as deferred acquisition costs and, (vi) a$148 and $309 increase in other interest expense, for the three and six monthsended October 31, 2006, respectively, due to an increase in the averageoutstanding balance of the Company’s working capital facility.  Theincrease in net interest income was partially offset by a reduction in the netinterest spread created by flat effective yields on the portfolio ofReceivables Held for Investment and an increasing cost of funds.  The decline in net interest spread reducednet interest income by $1,107 and $2,022 for the three and six months endedOctober 31, 2006 as compared to the three and six months ended October 31,2005, respectively.

*Interest Income*. Interest income for the three and six monthsended October 31, 2006 increased to $13,374 and $25,705 compared to $9,915 and$18,412 for the three and six months ended October 31, 2005.

The level of interest income, a primary driver of financialresults, is impacted by the average outstanding balance of the portfolio ofReceivables Held for Investment, the weighted average interest rate onreceivables originated by the Company, the mix of direct and indirect lendingactivities and the level of early prepayments and charge-offs.  Interest income on Receivables Held forInvestment increased 35% and****40% for thethree and six months ended October 31, 2006 compared to the three and sixmonths ended October 31, 2005.  Theincrease in interest income for the three and six months ended October 31, 2006is primarily due to a 34% and 39% increase in the average portfolio outstandingfor the three and six months ended October 31, 2006 compared to the three andsix months ended October 31, 2005.

*Interest Expense.*Interest expense for the three and six monthsended October 31, 2006 increased to $5,813 and $11,020 compared to $3,476 and$6,436 for the three and six months ended October 31, 2005. Interest expenseincreased 67% and 71% for the three and six months ended October 31, 2006.  The increase in interest expense is primarilydue to (i) a $106,118 or 34% and $112,273, or 39%, increase in the average debtoutstanding for the three and six months ended October 31, 2006, compared tothe three and six months ended October 31, 2005 as a result of a 34% and 39%increase in the average portfolio of Receivables Held for Investment, (ii) anincrease in overall market interest rates as a result of short-term market rateincreases 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 

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interest rates than shorter term floating rate debt.  The combined effects of the increase inoverall market interest rates and the decision to lock in a fixed interest rateon $189,060 of debt resulted in a 110 and 104 basis point increase in theaverage interest rate for the three and six months ended October 31, 2006, ascompared to the three and six months ended October 31, 2005.

*Provisionfor Credit Losses*. The provision forcredit losses for the three and six months ended October 31, 2006 increased to$2,677 and $5,195 as compared to $2,065 and $3,716 for the three and six monthsended October 31, 2005. The increase in provision for credit losses isprimarily due to a 34% and 39% increase in the average portfolio outstandingfor the three and six months ended October 31, 2006, compared to the three andsix months ended October 31, 2005. Provision for credit losses as a percentage of average Receivables Heldfor Investment on an annual basis decreased to 2.6% as compared to 2.7% for thethree months ended October 31, 2005. Provision for credit losses as a percentage of average Receivables Heldfor Investment on an annual basis remained constant at 2.6% for the six monthsended October 31, 2006 and October 31, 2005.

Net charge-offs forthe three and six months ended October 31, 2006 increased to $2,651 and $4,799compared to $1,998 and $3,706 for the three and six months ended October 31,2005.  The increase in net charge-offsfor the three and six months ended October 31, 2006 is primarily due to a 34%and 39% increase in the average portfolio outstanding for the three and sixmonths ended October 31, 2006, compared to the three and six months endedOctober 31, 2005.  This is partiallyoffset by an increase in recoveries from defaulted loans.  As a result, the allowance for loan loss as apercentage of the portfolio of Receivables Held for Investment decreased from0.7% as of October 31, 2005 to 0.6% as of October 31, 2006.  This compares to 0.6% as of April 30, 2006.

The level of provision for credit losses is a key driver of overallfinancial performance and should be positively impacted by improvement ingeneral 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.

*ServicingRevenue*. On December 24, 2002, the Company entered into an agreement to provideloan servicing and collection activities on behalf of FARC.  FARC, which is 40% owned by the Company, purchaseda portfolio of approximately $200,000 of installment loan receivables.  On March 19, 2003, the Company entered intoan agreement to provide loan servicing and collection activities on $276,000 ofinstallment loan receivables for unrelated third parties.  Servicing revenue decreased to $312 and $676****for the three and six months ended October 31, 2006compared to $495 and $1,073 for three and six months ended October 31,2005.  The decrease in servicing revenuefor the three and six months ended October 31, 2006 is due to the liquidationof serviced receivables during the periods. Revenue derived from servicing activities will increase or decrease indirect proportion to the average outstanding balance of serviced receivables.

*OtherFinance Charges and Fees*.  Other finance charges and fees increased to$825 and $1,560 for the three and six months ended October 31, 2006, comparedto $598 and $1,106 for the three and six months ended October 31, 2005.  The increase isprimarily attributable to (i) increased assessment and collection of fees dueto a 34% and 39% increase in the average portfolio of Receivables Held forInvestment and (ii) an increase in fees charged to customers for processingelectronic payments.  Income derived from late fees and collectionactivities are recognized when received, and therefore can be potentiallyvolatile from period to period based on overall cash collection, seasonality,delinquency rates and other factors.  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.

*InsuranceProducts.* Insurance products decreased to $481 from $554 for the six months endedOctober 31, 2006.  The decrease isprimarily attributable to the Company’s decision to stop selling extendedwarranties.  This is partially offset byincreased penetration rates on insurance products.  Insurance products revenue is primarilydriven by growth rates in the Company’s direct lending business, which willaffect the ability of the Company to generate fee income from marketinginsurance products.

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*Income fromInvestments.*  Income from investments increased to $188from $111 for the three months ended October 31, 2006.  The increase is primarily attributable to theincrease in earnings in FARC, which is accounted for under the equity method ofaccounting for investments.

*OtherInterest Income.*  Other interest income increased to $454 and$860 for the three and six months ended October 31, 2006, compared to $284 and$533 for the three and six months ended October 31, 2005.  The increase is attributable to (i) anincrease in the average cash on hand balance due to increased collections as aresult of a 34% and 39% increase in the average portfolio of Receivables Heldfor Investment and (ii) an increase in overall market interest rates as aresult of the current economic environment and market rate increases adopted bythe Federal Reserve System.

*OtherIncome.* Other income decreased to $0 for the three and six months ended October31, 2006, compared to $242 and $387 for the three and six months ended October31, 2005.  The decrease is attributableto the cancellation of a marketing program with several dealerships.

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to$2,841 and $5,565 for the three and six months ended October 31, 2006, comparedto $2,661 and $5,203 for the three and six months ended October 31, 2005.  The increase is primarily due to (i) theCompany implementing a call center that was previously outsourced, (ii)additional staffing levels necessary to support the increase in loanorigination volume, and (iii) an additional $103 and $142 of expense for thethree and six months ended October 31, 2006, due to the implementation of SFAS123(R)

*Operating Expenses.* OperatingExpenses increased to $1,654 and $2,633 for the three and six months endedOctober 31, 2006, compared to $1,124 and $1,727 for the three and six monthsended October 31, 2005.   Expensescharacterized as operating expenses are generally variable in nature and aretypically dependent on a number of factors including origination volume, theoutstanding balance of the managed portfolio, credit quality and operatingefficiency levels.  The increase wasprimarily due to (i) an increase in postage and printing expense associatedwith the growth in the Company’s direct originations, (ii) an increase in otherloan origination costs including credit bureau and verification fees associatedwith the increase in total origination volume, (iii) increased repossession andcollection related costs, and (iv) a decrease in the dollar amount of expenseswhich the Company was able to capitalize as deferred acquisition costs.  These were partially offset by (i) lowertemporary help and third party fees associated with completion of the Company’sinbound call center location which had previously been outsourced and (ii) lower marketing commissions.

*General and Administrative.* General and administrative expenses decreased to$954 for the three months ended October 31, 2006, compared to $1,097 for thethree months ended October 31, 2005.  Thedecrease is primarily attributable to decreased legal expenses associated withthe defense of a class action lawsuit during the fiscal year ended April 30,2006. General and administrative costs tend to be more fixed in nature and notas dependent on the overall level of managed receivables.

*Other Interest Expense*. Other interest expense increased to $452 and $874 forthe three and six months ended October 31, 2006, compared to $304 and $565 forthe three and six months ended October 31, 2005. The increase was due to (i) a58% and 60% increase in the average outstanding borrowings on the Company’sworking capital line for the three and six months ended October 31, 2006compared to the three and six months ended October 31, 2005, and (ii) an increase in overall market interest rates as aresult short-term rate increases adopted by the Federal Reserve System.

*Provision for Income Taxes.*  Provisionfor income taxes decreased to $(265) and $221 for the three and six monthsended October 31, 2006, compared to $439 and $971 for the three and six monthsended October 31, 2005.  The decrease isprimarily due to the recognition of $669 related to an uncertain tax provisionthat was previously classified as a liability. This is partially offset by an increase in the tax rate due to increasedstate income taxes.

**PortfolioCharacteristics**

*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

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consumer credit. In addition to personalcredit qualifications, the Company attempts to assure that the characteristicsof the automobile sold and the terms of the sale are likely to result in aconsistently performing receivable. These considerations include amountfinanced, monthly payments required, duration of the loan, age of theautomobile, mileage on the automobile and other factors.

*CustomerProfile*. The Company’s primary goal in credit evaluation is to make loans tocustomers having stable personal situations, predictable incomes and theability and inclination to perform their obligations in a timely manner. Manyof the Company’s customers are persons who have experienced credit difficultiesin the past by reason of illness, divorce, job loss, reduction in pay or otheradversities, but who appear to the Company to have the capability and commitmentto meet their obligations. Through its credit evaluation process, the Companyseeks to distinguish these persons from those applicants who are chronicallypoor credit risks.

**Credit Evaluation**

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto reduce unacceptable risks. This involves a three-step process in which (i)the creditworthiness of the borrower and the terms of the proposed transactionare evaluated and either approved, declined or modified by the Company’s creditverification department, (ii) the loan documentation and collateralization isreviewed by the Company’s funding department, and (iii) additional collateralverification procedures and customer interviews are conducted by the Company.During the course of this process, the Company’s credit verification andfunding personnel coordinate closely with the finance and insurance departmentsof the dealers or with individuals to whom the Company lends directly. The Companyhas developed financing programs under which it approves loans that vary inpricing and loan terms depending on the relative credit risk determined foreach loan. Credit or default risk is evaluated by the Company’s loan officersin conjunction with a proprietary, empirical credit scoring model developedfrom the Company’s 17 year database of non-prime lending results.

In addition tothis credit underwriting process, and prior to the origination of a receivableby the Company, the Company performs additional procedures to validate thedetails of the credit application, including income and/or employmentinformation, to verify that the collateral is insured, and to confirm that thematerial terms of the sale conform to the purchaser’s understanding of thetransaction.  The Company will originatea receivable only after receipt and review of a satisfactory audit report.

# **Liquidity and 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.

TheCompany’s most significant cash flow requirement is for the origination ofreceivables. The Company originated $71,889 and $152,208 of receivables to beheld for investment for the three and six months ended October 31, 2006 comparedto $66,861 and $148,341 for the three and six months ended October 31, 2005.

TheCompany funds loan originations through a combination of two warehouse creditfacilities. The FIRC credit facility generally permits the Company to borrow upto the outstanding principal balance of qualified receivables, not to exceed$50,000.  Receivables that haveaccumulated in the FIRC credit facility may be transferred to the FIARCcommercial paper facility at the option of the Company. The FIARC commercialpaper facility provides an additional financing source of up to $300,000.Additionally, the Company has transferred receivables from the warehouse creditfacilities and issued term notes. Substantially all of the Company’sreceivables are pledged to collateralize these credit facilities and termnotes.  The Company is obligated to meetcertain financial covenants. Noncompliance may significantly affect cash flow.

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TheCompany’s most significant source of cash flow is the principal and interestpayments received from its receivables portfolios. The Company received suchpayments in the amount of $53,027 and $104,792 during the three and six monthsended October 31, 2006, and $40,101 and $75,875 during the three and six monthsended October 31, 2005.  Such cash flowfunds were used to repay amounts borrowed under the Company’s credit facilitiesand other holding costs, primarily interest expense, and servicing and custodialfees.  During the three and six monthsended October 31, 2006, the Company required net cash of $18,862 and $47,416 ascompared to $26,760 and $72,466 for the three and six months ended October 31,2005, as the receivables originated exceeded portfolio collections.  The Company relies on borrowed funds toprovide cash flow in periods of growth. As of October 31, 2006, the Company had $165,414 of available capacityin the FIRC and FIARC credit facilities to fund future growth.

In addition to the cash flow generated from the principal and interestcollections on its receivables portfolio, the Company collects servicing feesfunded from each of the servicing portfolios. Servicing fees range from 1.4% to 2.5% of the outstanding principalbalance of the loans in the portfolio. Cash flow and servicing fees are received after month end, but relate tothe prior month activity.  Thus uponfiling of the monthly servicing statements, a portion of the restricted cash isconverted to cash available to fund operations.   At October 31, 2006 and 2005, the Company’sunencumbered cash was $3,176 and $4,280, respectively.  The decrease in available cash is primarilydue to an increase in operating expenses due to the Company’s continuedgrowth.  This is partially offset by anincrease in revenues due to a 34% and 39% increase in the average portfolio ofReceivables Held for Investment for the three and six months ended October 31,2006.  Management believes theunencumbered cash and cash inflows and amounts available under the workingcapital facility are adequate to fund cash requirements 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 loanorigination through two warehouse credit facilities. The Company’s creditfacilities provide for one-year terms and have been renewed annually.Management of the Company believes that the credit facilities will continue tobe renewed or extended or that it would be able to secure alternate financingon satisfactory terms; however, there can be no assurance that it will be ableto do 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 4.3% and 5.2% for theperiods ended October 31, 2005 and 2006, respectively.

*Warehouse Facilities as of October 31, 2006*
| Facility | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**            | ** ** | **Borrowing  Rate At  October 31,   2006** | ** ** |
|----------|------------|--------------|------------|-----------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|
| FIARC    | ** ** | $            | 300,000    |            | $          | 148,062                |       | Commercial  paper rate plus .3%                                                                       |       | .30%  of Unused Facility |       | None                                                      |       | 5.8 | % |
| FIRC     | ** ** | $            | 50,000     |            | $          | 36,524                 |       | 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                                                 |       | 5.3 | % |

 

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*Warehouse Facilities – Credit Enhancement as of October 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 of funding, the Company has agreedto maintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders are named asadditional insureds under these policies. The coverage is obtained on eachreceivable at the time it is purchased by the Company and the applicablepremiums are prepaid for the life of the receivable. The insurance enhancingthis facility is default insurance under a standard auto loan protection policy(known as “ALPI” insurance) which covers the difference between the outstandingbalance of a receivable and the liquidation proceeds in the event theunderlying collateral is repossessed. Solely at its expense, the Companycarries this coverage 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.

Thepremiums that the Company paid during the three months and six months endedOctober 31, 2006 for its three credit enhancement insurance coverages, of whichthe largest component is basic ALPI insurance, represented approximately 1.1%and 1.7%, respectively, of the principal amount of the receivables originatedduring the periods. Aggregate premiums paid for ALPI coverage alone were $1,366and $536 during the three months ended, and $2,572 and $1,852 for six monthsended, October 31, 2005 and 2006, respectively, and accounted for 2.1% and 0.9%during the three months ended, and 1.8% and 1.2% for the six months ended,October 31, 2005 and 2006, respectively, of the principal amount of thereceivables originated during such respective periods.

In April 1994, the Company organized First InvestorsInsurance Company (the “Insurance Subsidiary”) under the captive insurancecompany laws of the State of Vermont. The Insurance Subsidiary is an indirectwholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100% of the risk under theCompany’s ALPI insurance policy. At the time each receivable is insured byNational Union, the risk is automatically reinsured to its full extent andapproximately 96% of the premium paid by the Company to National Union withrespect to such receivable is ceded to the Insurance Subsidiary. When a losscovered by the ALPI policy occurs, National Union pays it after the claim isprocessed, and National Union is then reimbursed in full by the InsuranceSubsidiary.  In addition to the monthlypremiums and liquidity reserves of the Insurance Subsidiary, a trust account ismaintained by National Union to secure the Insurance Subsidiary’s obligationsfor losses it has reinsured.

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofOctober 31, 2006, the Insurance Subsidiary had capital and surplus of $3,607and unencumbered cash reserves of $2,413 in addition to the $3,252 trustaccount.

The ALPI coverage as well as the InsuranceSubsidiary’s liability under the Reinsurance Agreement, remains in effect foreach receivable that is pledged as collateral under the warehouse creditfacility. Once receivables are transferred from FIRC to FIARC and financedunder the commercial paper facility, ALPI coverage and the Insurance Subsidiary’sliability under the Reinsurance Agreement is cancelled with respect to thetransferred receivables. Any unearned premium associated with the transferredreceivables is returned to the Company. The Company believes the losses itsInsurance Subsidiary will be required to indemnify will be less than thepremiums ceded to it. However, there can be no assurance that losses will notexceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

FIARC – Credit Enhancement for the FIARC warehouse facility is provided tothe commercial paper investors by a 6% overcollaterization level and a cashreserve account equal to 1% of the receivables held by FIARC.  The Company is not a guarantor of, orotherwise a party to, such commercial paper.

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*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. |

 

OnDecember 4, 2003, the FIRC facility was renewed, under similar terms andconditions, 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 increased to $65,000, andreverted back to $50,000 on September 13, 2004. As of April 30, 2006 and October 31, 2006, there was $47,080 and$36,524, 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 well as eliminating the requirement to purchase interest ratecaps.  As a result, the 0.35% surety bondpremium 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%.  On October 11, 2006, the Company amended thefacility to increase the commitment from $150,000 to $300,000 in order to fundthe growth in origination volume.  As ofApril 30, 2006 and October 31, 2006, there was $0 and $148,062, respectively,outstanding.

Management presently intends to seek furtherextensions 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 information on the Term Notes asof October 31, 2006.
| Term Notes | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** ** | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|-----------------|------------|------------------------|------------|----------------------|------------|------------------------|--------------------|-----------------|------------|--------------------|------------|
| 2003-A          |       | November  11, 2003     |       | $                    | 139,661    |                   | April  20, 2011    |            | $          | 26,561             |       | 2.58 | % |
| 2005-A Class 2  |       | May  5, 2005           |       | $                    | 106,493    |                   | July  16, 2012     |            | $          | 79,359             |       | 4.23 | % |
| 2006-A Class 2  |       | January  26, 2006      |       | $                    | 47,000     |                   | March  16, 2009    |            | $          | 29,353             |       | 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, through its indirect,wholly-owned subsidiary, First Investors Auto Owner Trust 2003-A (“2003 AutoTrust”), completed the issuance of $139,661 of 2.58% Class A asset-backed notes(“2003-A Term Notes”). The initial pool of automobile receivables transferredto the 2003 Auto Trust totaled $114,727, which was previously owned by FIRC andFIARC, secure the 2003-A Term Notes.  Inaddition to the issuance of the Class A Notes, the 2003 Auto Trust also issueda $5,066 Class B Note that was retained by the Company and pledged to securethe Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$139,657, 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 2003-A Term Noteissuance, and (v) fund an initial cash reserve account of 0.5%, or $574, of theinitial receivables pledged.  The Class ATerm Notes bear interest at 2.58% and requires monthly principal reductionssufficient to reduce the balance of the Class A Term Notes to 96.1% of theoutstanding balance of the underlying receivables pool. The final maturity ofthe 2003-A Term Notes is April 20, 2011. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 3.9% 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 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2006, and October 31, 2006,the outstanding principal balances on the 2003-A term notes were $37,715 and$26,561, respectively.

OnMay 5, 2005, the Company, through its indirect, wholly-owned subsidiary, FirstInvestors Auto Owner Trust 2005-A (“2005 Auto Trust”), completed the issuanceof $69,000 of 3.57% Class A-1 asset-backed notes and $106,493 of 4.23% ClassA-2 asset-backed notes (collectively “2005-A Term Notes”), for a total of$175,493 of asset backed notes. The initial pool of automobile receivablestransferred to the 2005 Auto Trust totaled $150,921, which was previously ownedby FIRC and FIARC, and secures the 2005-A Term Notes.  In addition to the issuance of the Class A-1and Class A-2 Notes, the 2005 Auto Trust also issued a $5,428 Class B Note thatwas retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $175,488, 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 2005-A Term Note issuance, and (v) fund an initial cashreserve account of 1%, or $1,509, of the initial receivables pledged.  The Class A-1 and Class A-2 Term Notes bearinterest at 3.57% and 4.23%, respectively, and require monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 95.75%of the outstanding balance of the underlying receivables pool. The Class A-1notes were paid off during the fiscal year ended April 30, 2006.  The final maturity of the Class A-2 TermNotes is July 16, 2012.  The Class B Notedoes not bear interest but requires principal reductions sufficient to reducethe balance of the Class B Note to

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4.25% of the outstanding balance of the underlying receivablespool.  A surety bond issued by MBIAInsurance Corporation 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 October 31, 2006,the outstanding principal balances on the 2005-A Term Notes were $106,162 and$79,359, respectively.

On January 26, 2006, the Company, through itsindirect, wholly-owned subsidiary, First Investors Auto Owner Trust 2006-A (“2006Auto Trust”), completed the issuance of $32,000 of 4.57% Class A-1 asset-backednotes, $47,000 of 4.87% Class A-2 asset-backed notes, $74,000 of 4.93% ClassA-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 backednotes. The initial pool of automobile receivables transferred to the 2006 AutoTrust totaled $151,939, was previously owned by FIRC and FIARC, and secures the2006-A Term Notes.  In addition to theissuance of the Class A-1, Class A-2, Class A-3, and Class A-4 notes, the 2006Auto Trust also issued a $2,879 Class B Note that was retained by the Companyand pledged to secure the Working 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 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 October 31, 2006, the outstanding principal balances on the2006-A Class A term notes were $172,708 and $139,413, 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%.  OnNovember 7, 2006, the Company amended the facility to increase the commitmentamount from $23,500 to $28,500.  As ofApril 30, 2006 and October 31, 2006, there was $16,454 and $21,504,respectively, outstanding under this facility.

The Company presentlyintends to seek a renewal of the working capital facility from its lender priorto maturity.  Should the facility not berenewed, the outstanding balance of the receivables would be amortized inaccordance with the borrowing base. Management considers its relationship with its lenders to besatisfactory and has no reason to believe that this credit facility will not berenewed.  If the facility is not renewed,however, or if material changes are made to its terms and conditions, it couldhave a material adverse effect on the Company.

*Related Party Loans. *On December 3, 2001 the Company entered intoan agreement with one of its shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to$2,500.  On December 6, 2004, theoriginal $2,500 shareholder loan was replaced with a $2,500 loan containingidentical terms and conditions between the Company and a limited partnershipthat is affiliated with a current shareholder and member of the Board ofDirectors The proceeds of the borrowings have been utilized to fund certainprivate and open market purchases of the Company’s common stock pursuant to aStock Repurchase

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Plan authorized by the Board of Directors and for general corporatepurposes.  Borrowings under the facilitybear interest at a fixed rate of 10% per annum. The facility is unsecured and expressly subordinated to the Company’ssenior credit facilities. The facility matures on December 3, 2008 but may berepaid at any time 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 October 31, 2006.  For the three and six months ended October31, 2005 and October 31, 2006, the Company recorded interest expense underthese facilities of $63 and $126, respectively.

*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 commercial paperfacilities. The Company was not in default with respect to any financial andnon-financial covenants governing these financing arrangements at October 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.

On July 18, 2005, as arequirement of the FIARC commercial paper facility, the Company entered into aninterest rate cap transaction, with a strike rate of 6%.  The aggregate initial notional amount of thecap was $18,804 which amortizes over six years. The Company paid $59 in premium to purchase this cap.  The interest rate cap was not designated as ahedge, and accordingly, changes in the fair value of the interest rate capswere recorded as an unrealized loss and are reflected in net income.  During the three and six months ended October31, 2005, the Company recorded an unrealized gain of $23 and $20, respectively,that is included as a separate line under other income.  This requirement was eliminated as part ofthe facility’s renewal.

**Delinquency and Credit LossExperience**

The Company’s results of operations,financial condition and liquidity may be adversely affected by nonperformingreceivables. The Company seeks to manage its risk of credit loss through (i)prudent credit evaluations, (ii) risk management activities, (iii) effectivecollection procedures, and (iv) by maximizing recoveries on defaulted loans.The allowance for credit losses of $2,728 as of October 31, 2006, and $2,332 asof April 30, 2006, as a percentage of Receivables Held for Investment of$428,416 as of October 31, 2006, and $368,878 as of April 30, 2006, was 0.6%.

The Company considers aloan to be delinquent when the borrower fails to make a scheduled payment ofprincipal and interest. Accrual of interest is suspended when the payment fromthe borrower is over 90 days past due. Generally, repossession procedures areinitiated 60 to 90 days after the payment default.

The Company retains thecredit risk associated with the receivables originated. The Company purchasescredit enhancement insurance from third party insurers which covers the risk ofloss upon default and certain other risks. The Company established a captiveinsurance subsidiary to reinsure certain risks under the credit enhancementinsurance coverage for all receivables. In addition, receivables financed under the Auto Trust and FIARCcommercial paper facilities do not carry default insurance.  Provisions for credit losses of $2,677 and$5,195 for the three and six months ended October 31, 2006 compared to $2,065and $3,716 for the three and six months ended October 31, 2005 have beenrecorded.

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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 are comprised of a large group ofsmaller balance homogenous loans that are evaluated collectively forimpairment.

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanon a date which is six months prior to the reporting date, to the aging loanstatus as of the reporting date.  Thesefactors are then applied to the aging status of each loan at the reporting datein order to calculate the number of loans that are expected to migrate toimpaired status.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  Effective thequarter ended April 30, 2005, the Company elected to increase its allowance forloan losses against loans that were greater than 120 days past due and loans inwhich the collateral had been assigned for repossession but had not yet beenrepossessed as of the reporting date. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy 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.

Thefollowing table sets forth certain information regarding the Company’sdelinquency and charge-off experience over the six month periods indicated(dollars in thousands):

|                                                                                           | ** ** | **For the Six Months Ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                                               | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | **Number**                                                             | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **of Loans**                                                           | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                         |       |                                                                   |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                       |       |                                                                   |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 110                                                                    |       | $ | 907 |   | 96 |   | $ | 1,053 |   |
| 60 - 89 days                                                                              |       | 53                                                                     |       | 288 |   | 37 |   | 291 |   |
| 90 days or more                                                                           |       | 48                                                                     |       | 289 |   | 35 |   | 266 |   |
| Total  delinquencies                                                                      |       | 211                                                                    |       | $ | 1,484 |   | 168 |   | $ | 1,610 |   |
| Total  delinquencies as a percentage of outstanding receivables.                          |       | 1.0                                                                    | %          | 0.5 | % | 0.7 | % | 0.4 | % |
| Net charge-offs as a  percentage of average receivables outstanding during the period (2) |       |                                                                   |       | 2.6 | % |   |   | 2.4 | % |

 

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(1)           Delinquent amounts outstanding do not include loans in bankruptcy statussince collection activity is limited and highly regulated for bankruptaccounts.

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

The lower annualized charge-off rateresults from an improving economic environment coupled with an increase in theCompany’s direct to consumer lending program.

As of October 31, 2006,there were 182 accounts totaling $2,522 that were in bankruptcy status and weremore than 30 days past due.  As ofOctober 31, 2005, there were 460 accounts totaling $5,280 that were in 

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bankruptcy statusand were more than 30 days past due.  Asof October 31, 2006 and 2005, 86% of the bankruptcy delinquencies filed forprotection under Chapter 13.

**NewAccounting Pronouncements**

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 August 1,2006, 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,the FASB 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, “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-only stripsare 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 passive derivativefinancial instruments that pertain to beneficial interests that are or containa derivative financial instrument. The standard also requires presentationwithin the financial statements that identifies those hybrid financialinstruments for which the fair value election has been applied and informationon the income statement impact of the changes in fair value of thoseinstruments. The Company is required to apply SFAS 155 to all financialinstruments acquired, issued or subject to a remeasurement event beginningMay 1, 2007 although early adoption is permitted as of the beginning of anentity’s fiscal year. The provisions of SFAS 155 are not expected to have afinancial statement impact at adoption; however, the standard could affect thefuture income recognition for securitized financial assets because there may bemore embedded derivatives identified with changes in fair value recognized innet income.

InMarch 2006, the FASB issued SFAS No. 156, “*Accountingfor Servicing of Financial Assets – an amendment of FASB Statement No. 140*”(“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract in specific situations.Additionally, the servicing asset or servicing liability shall be initiallymeasured at fair value, if practicable. SFAS 156 permits an entity to chooseeither the amortization method or fair value measurement method for subsequentmeasurement of the servicing asset or servicing liability. SFAS 156 iseffective for the fiscal year ending April 30, 2008. The Company iscurrently evaluating the impact of adopting SFAS 156 on its financialposition, cash flows, and results of operations; however it is not expected tohave a material impact on our consolidated financial position, results ofoperations or cash flows.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “*Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*” (“SAB 108”). SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prioryear misstatements should be considered in quantifying a current yearmisstatement. Under this bulletin, registrants should quantify errors usingboth a balance sheet and an income statement approach and evaluate whethereither approach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is material. SAB 108 iseffective for the fiscal year ending April 30, 2007.  The Company is currently evaluating theimpact of adopting SAB 108 on its financial position, cash flows, and resultsof operations.

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

The market riskdiscussion and the estimated amounts generated from the analysis that followsare forward-looking statements of market risk assuming certain adverse marketconditions occur. Actual results in the future may differ materially due tochanges in the Company’s product and debt mix, developments in the financialmarkets, and further utilization by the company of risk-mitigating strategiessuch as hedging.

The Company’s operatingrevenues are derived almost entirely from the collection of interest on thereceivables it retains and its primary expense is the interest that it pays onborrowings incurred to purchase and retain such receivables. The Company’scredit facilities bear interest at floating rates which are reset on ashort-term basis, whereas its receivables bear interest at fixed rates which donot generally vary with changes in interest rates. The Company is thereforeexposed primarily to market risks associated with movements in interest rateson its credit facilities. The Company believes that it takes the necessarysteps to appropriately reduce the potential impact of interest rate increaseson the Company’s financial position and operating performance.

The Company reliesalmost exclusively on revolving credit facilities to fund its origination ofreceivables. Periodically, the Company will transfer receivables from arevolving to a term credit facility. Currently all of the Company’s creditfacilities in bear interest at floating rates tied to either a commercial paperindex or LIBOR.

As of October 31, 2006, the Company had$206,090 of floating rate secured debt outstanding under the FIRC warehouse andworking capital facilities.  For every 1%increase in LIBOR annual after-tax earnings would decrease by approximately$1,309 assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates. As of October 31, 2005, the Company had $153,096 of floating ratesecured debt outstanding net of swap and cap agreements. For every 1% increasein commercial paper rates or LIBOR, annual after-tax earnings would decrease byapproximately $972 assuming the Company maintains a level amount of floatingrate debt and assuming an immediate increase in rates.

**Forward Looking Information**

Statements and financial discussion andanalysis included in this report that are not historical are considered to beforward-looking in nature. Forward-looking statements involve a number of risksand 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.

TheCompany believes the factors discussed in its reports are important factorsthat could cause actual results to differ materially from those expressed inany forward looking statement made herein or elsewhere by the Company or on itsbehalf.  The factors listed are notnecessarily all of the important factors. Unpredictable or unknown factors not discussed could also have materialadverse effects on actual results.  TheCompany does not intend to update its description of important factors eachtime a potential important factor arises. The Company advises its stockholders that they should:  (1) be aware that important factors notdescribed herein could affect the accuracy of our forward looking statements,and (2) use caution and common sense when analyzing our forward lookingstatements in this document or elsewhere. All of such forward looking statements are qualified in their entiretyby this cautionary statement.

**ITEM 4.    CONTROLS ANDPROCEDURES**

Inaccordance with Exchange Act Rules 13a-15 and 15d-15, we carried out anevaluation, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report.  Based onthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as ofOctober 31, 2006 to provide reasonable assurance that information required tobe disclosed in our reports filed or submitted under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.

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

**PART II – OTHER INFORMATION**

**ITEM 4.    SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

OnSeptember 6, 2006, the Company held its Annual Meeting of Shareholders to electthe Company’s Board of Directors for a term of one year, (ii) approve a 200,000share increase in the number of shares available for issuance under the of the2005 Employee Stock Option Plan and receive authorization to make available200,000 shares of common stock for issuance under the plan, and (iii) ratifythe appointment of Grant Thornton LLP as the Company’s independentauditors.  Below are the results of thevote:

Proposal Number 1: Electionof Directors of the Company
|                      | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|----------------------|------------|-----------|------------|-------------|------------|-------------|------------|---------------------------|------------|
|                 |       |      |       |        |       |        |       |                      |       |
| Tommy A. Moore,  Jr. |       | 3,849,947 |       | 535,213     |       | 0           |       | 0                         |       |
|                 |       |      |       |        |       |        |       |                      |       |
| Robert L. Clarke     |       | 4,339,713 |       | 45,447      |       | 0           |       | 0                         |       |
|                 |       |      |       |        |       |        |       |                      |       |
| W.A. Stockard,  Jr.  |       | 4,339,713 |       | 45,447      |       | 0           |       | 0                         |       |
|                 |       |      |       |        |       |        |       |                      |       |
| Roberto  Marchesini  |       | 3,858,947 |       | 526,213     |       | 0           |       | 0                         |       |
|                 |       |      |       |        |       |        |       |                      |       |
| Seymour M.  Jacobs   |       | 4,339,713 |       | 45,447      |       | 0           |       | 0                         |       |
|                 |       |      |       |        |       |        |       |                      |       |
| John H. Buck         |       | 4,339,713 |       | 45,447      |       | 0           |       | 0                         |       |
|                 |       |      |       |        |       |        |       |                      |       |
| Daniel M. Theriault  |       | 4,339,713 |       | 45,447      |       | 0           |       | 0                         |       |

 

Proposal Number 2: Approve a 200,000 share increase in thenumber of shares available for issuance under the of the 2005 Employee StockOption Plan
| For       | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------------------|------------|
|      |       |        |       |        |       |                      |       |
| 2,941,771 |       | 400,831     |       | 0           |       | 1,042,558                 |       |

 

Proposal Number 3:  Appointment of Grant Thornton LLP asindependent auditors
| For       | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------------------|------------|
|      |       |        |       |        |       |                      |       |
| 3,979,926 |       | 300         |       | 404,934     |       | 0                         |       |

 

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

(a)          Exhibits
| 10.131(w) |   | Amendment No. 1 to Second  Amendment and Restated Security Agreement dated October 11, 2006, between  First Investors Auto Receivables Corp., First Investors Financial Services,  Inc., First Investors Servicing Corporation, Variable Funding Capital Company  LLC, Wachovia Capital Markets, LLC, and Wells Fargo Bank, National  Association. |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                               |
| 31.1      |   | Certification of Chief  Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                               |
| 31.2      |   | Certification of Chief  Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                               |
| 32.1      |   | Certification of Chief  Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                               |
| 32.2      |   | Certification of Chief  Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                               |
|      |   |   Filed with this  10-Q                                                                                                                                                                                                                                                                                                                  |

 

(b)         Reports on Form 8-K

Form8-K filed September 7, 2006, press release announcing the quarter end July 31,2006 financial results.

**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                          | First  Investors Financial Services Group, Inc.   |   |
|-------------------------------|---------------------------------------------------|--------|
|                          | (Registrant)                                      |   |
|                          |                                              |
| Date:  December 13, 2006 | By:  /s/TOMMY A. MOORE, JR.                       |   |
|                          | Tommy  A. Moore, Jr.                              |   |
|                          | President  and Chief Executive Officer            |   |
|                          |                                              |
| Date:  December 13, 2006 | By:  /s/BENNIE H. DUCK                            |   |
|                          | Bennie  H. Duck                                   |   |
|                          | Secretary,  Treasurer and Chief Financial Officer |   |

 

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