**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**

| **x**  |   | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                      |
|   |   | **For the fiscal year ended April 30, 2007**                                                                                                                              |
|   |   |                                                                                                                                                                      |
|   |   | **OR**                                                                                                                                                                    |
|   |   |                                                                                                                                                                      |
| **o**  |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                             |
|   |   |                                                                                                                                                                      |
|   |   | **For the transition period  from           to           ** |
|   |   | ** **                                                                                                                                                                |
|   |   | **Commission  File Number 0-26686**                                                                                                                                       |

 

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

(ExactName of Registrant as Specified in its Charter)

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

 

**(713) 977-2600**

(Registrant’sTelephone Number, Including Area Code)

Securities registered pursuant to Section 12(b)of the Act:  **NONE**

Securitiesregistered pursuant to Section 12(g) of the Act:

**Title of each class**

CommonStock - $.001 par value

Indicate by check markif the registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

Indicate by check markif the registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes o  No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o.

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statement incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Large accelerated filer  o  Accelerated filer  o  Non-accelerated filer  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act Yes o  No x

The aggregate marketvalue of the voting stock of the registrant held by non-affiliates of theregistrant as of June 30, 2007 based on the closing price of the Common Stockon the Over The Counter Bulletin Board Market on said date was $19,718,113.

There were4,477,694 shares of Common Stock of the registrant outstanding as of June 30,2007.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive proxy statement for its 2007 annual meeting ofshareholders, which is to be filed with the Securities and Exchange Commissionnot later than 120 days after April 30, 2007, are incorporated by referenceinto part III hereof.

 

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

**AND SUBSIDIARIES**

**FORM 10-K**

**APRIL 30, 2007**

**TABLE OF CONTENTS**
| **PART I**   |
|--------------|
| Item  1.     | Business |
| Item  2.     | Properties |
| Item 3.      | Legal Proceedings |
| Item 4.      | Submission  of Matters to a Vote of Security Holders |
|         |
| **PART II**  |
| Item 5.      | Market for Registrants’  Common Equity and Related Shareholder Matters |
| Item 6.      | Selected  Consolidated Financial Data |
| Item 7.      | Management’s  Discussion and Analysis of Financial Condition and Results Of Operations |
| Item 7A.     | Quantitative  and Qualitative Disclosures about Market Risks |
| Item 8.      | Financial  Statements and Supplementary Data |
| Item 9.      | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure |
| Item 9A.     | Controls and  Procedures |
|         |
| **PART III** |
| Item 10.     | Directors  and Executive Officers |
| Item 11.     | Executive  Compensation |
| Item 12.     | Security  Ownership of Certain Beneficial Owners and Management |
| Item 13.     | Certain  Relationships and Related Transactions |
| Item 14.     | Principal  Accountant Fees and Services |
|         |
| **PART IV**  |
| Item 15.     | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |

 

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**PART I**

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

**ITEM 1.  *BUSINESS***

**General**

First Investors Financial Services Group,Inc., together with its wholly-owned subsidiaries, (“Company”) is a consumerfinance company engaged in originating and holding for investment retailinstallment sales contracts and promissory notes receivable secured by new andused automobiles and light trucks arising from the sale of the vehicle byfactory authorized franchised dealers (“indirect loans”), or through arefinancing transaction with the vehicle owner (“direct loans”). The Companyspecializes in lending to consumers with impaired credit profiles.Additionally, the Company has purchased receivables in portfolio acquisitionsor from other third party originators. The Company does not utilize off-balancesheet securitization to finance its Receivables Held for Investment. As ofApril 30, 2007, the Company had Receivables Held for Investment in theaggregate principal amount of approximately $458,586 having an effective yield of12.7% and a net interest spread of 7.1% (net of cost of funds and othercarrying costs).

The Company performs servicing andcollection activities for third parties through First Investors ServicingCorporation (“FISC”), a wholly owned subsidiary located in Atlanta,Georgia.  The total managed portfolioserviced by FISC was $507,995 as of April 30, 2007.

**History**

The Company was organized in 1989 byTommy A. Moore, Jr. and Walter A. Stockard to conduct an automobile financebusiness, with Mr. Moore providing the operating expertise and Mr. Stockard andmembers of his family furnishing the initial financial support. During thefirst three years of the Company’s existence, its operations consistedprimarily of purchasing and pooling receivables for resale to financialinstitutions and others. In March 1992, the Company obtained additional capitalfrom a group of private investors and expanded its operations and reorientedits business towards originating receivables for retention.  In October 1995, the Company completed theinitial public offering of common stock which resulted in net proceeds of$18,500.

On October 2, 1998, the Company completedthe acquisition of First Investors Servicing Corporation (“FISC”), formerlyknown as Auto Lenders Acceptance Corporation, from Fortis, Inc.  Headquartered in Atlanta, Georgia,  FISC engaged in essentially the same businessas the Company and additionally performed servicing and collection activitieson a portfolio of receivables originated for investment as well as on a portfolioof receivables originated and sold pursuant to two asset securitizations. As aresult of the acquisition, the Company increased the total dollar value on itsbalance sheet of receivables, acquired an interest in certain trustcertificates related to the asset securitizations and acquired certainservicing rights, along with furniture, fixtures, equipment and technology toperform the servicing and collection functions for the portfolio of receivablesunder management.

**Industry**

The automobile finance industry is thesecond largest consumer finance market in the United States. Most automobilefinancing is provided by captive finance subsidiaries of major automobilemanufacturers, banks, thrifts, credit unions and independent finance companiessuch as the Company. The overall industry is generally segmented according tothe type of vehicle sold (new vs. used), the nature of the dealership(franchised vs. independent) and the credit characteristics of the borrower(prime vs. non-prime). The non-prime market is comprised of individuals who arerelatively high credit risks and who have limited access to traditionalfinancing sources, generally due to unfavorable past credit experience, lowincome or limited financial resources and/or the absence or limited extent ofprior credit history.

**Originating Base**

*General*.  The Company primarily originates receivablesfrom refinancing existing loans originally financed by an unaffiliated thirdparty originator and through the automobile dealers that operate under franchisesfrom the major automobile manufacturers. The Company does not generally dobusiness with “independent” dealers who operate

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usedcar lots with no manufacturer affiliation. No dealer or group of dealers (whoare affiliated with each other through common ownership) accounted for morethan 5% of the receivables owned by the Company at April 30, 2007, and nodealer or group of related dealers originated more than 5% of the receivablesheld by the Company at that date. The volume and frequency of receivableoriginations from particular dealers vary widely with the size of thedealerships as well as market and competitive factors in the various dealershiplocations.

*Location of Dealers*.  Approximately 31% of the dealers with whomthe Company has agreements are located in Texas, where the Company has operatedsince 1989, 22% in Georgia, 19% in Ohio and 10% in Tennessee.  The Company’s expansion beyond Texas began in1992.  Currently, the Company is licensedto conduct business in 23 states for direct to consumer loans and 24 states forindirect loans, and is actively originating loans in 17 states for both directto consumer loans and indirect loans.

The following table summarizes, withrespect to each state in which the Company operates, the number of receivables(and percentage of total receivables) outstanding based on the obligor’s stateof residence:
|                    | ** ** | **Receivables Held for Investment** | ** ** |
|--------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **As of  30-Apr-06**                          | ** ** | **As of  30-Apr-07** | ** ** |
| **State (1)** | ** ** | **Loan Count**                                | ** ** | **%** | ** ** | **Loan Count** | ** ** | **%** | ** ** |
| Texas              |       | 6,910                                              |       | 30.2 | % | 8,744 |   | 31.5 | % |
| Georgia            |       | 3,569                                              |       | 15.6 | % | 3,884 |   | 14.0 | % |
| California         |       | 1,632                                              |       | 7.1 | % | 2,244 |   | 8.1 | % |
| Ohio               |       | 1,918                                              |       | 8.4 | % | 2,136 |   | 7.7 | % |
| Florida            |       | 1,330                                              |       | 5.8 | % | 1,757 |   | 6.3 | % |
| North Carolina     |       | 1,058                                              |       | 4.6 | % | 1,374 |   | 4.9 | % |
| Tennessee          |       | 976                                                |       | 4.3 | % | 1,208 |   | 4.3 | % |
| Indiana            |       | 684                                                |       | 3.0 | % | 887 |   | 3.2 | % |
| Illinois           |       | 767                                                |       | 3.3 | % | 769 |   | 2.8 | % |
| Missouri           |       | 654                                                |       | 2.9 | % | 753 |   | 2.7 | % |
| Arizona            |       | 442                                                |       | 1.9 | % | 600 |   | 2.2 | % |
| Washington         |       | 350                                                |       | 1.5 | % | 476 |   | 1.7 | % |
| South Carolina     |       | 303                                                |       | 1.3 | % | 425 |   | 1.5 | % |
| Colorado           |       | 249                                                |       | 1.1 | % | 396 |   | 1.4 | % |
| Kentucky           |       | 162                                                |       | 0.7 | % | 278 |   | 1.0 | % |
| New Mexico         |       | 188                                                |       | 0.8 | % | 276 |   | 1.0 | % |
| Minnesota          |       | 179                                                |       | 0.8 | % | 265 |   | 1.0 | % |
| All others (2)     |       | 1,538                                              |       | 6.7 | % | 1,295 |   | 4.7 | % |
|               |       | 22,909                                             |       | 100.0 | % | 27,767 |   | 100.0 | % |

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(1)          Representsobligor’s current state of residence

(2)          Includesloans located in Alabama, Arkansas, Connecticut, Delaware, Iowa, Idaho, Kansas,Massachusetts, Maryland, Michigan, Mississippi, Nebraska, Nevada, NewHampshire, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, South Dakota,Utah, Vermont, Virginia, West Virginia and Wisconsin.

*Marketing Representatives*.  For indirect loans, the Company utilizes asystem of regional marketing representatives to recruit, enroll and to providenew dealers with the Company’s underwriting guidelines and credit policies aswell as to maintain relationships with the Company’s existing dealers. Therepresentatives are full-time employees who reside in the region for which theyare responsible.

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In addition to soliciting and enrollingnew dealers, the regional representatives assist new dealers in assimilatingthe Company’s system of credit application submission, review, acceptance andfunding, as well as dealing with routine dealer relations on a daily basis. Therole of the regional representatives is generally limited to marketing theCompany’s indirect finance programs, maintaining relationships with the Company’soriginating dealer base and acts as a liaison between the dealerships and theCompany’s credit department. The representatives do not enter into or modifydealer agreements on behalf of the Company, do not evaluate credit or loanfunding decisions and do not handle funds belonging to the Company or itsdealers. Each representative reports to, and is supervised by, the Company’ssales and marketing manager in Houston.

It has been the policy of the Company toavoid the establishment of branch offices because it believes that the expensesand administrative burden of such offices are generally unjustified. Moreover,in view of the availability of modern data transmission technology, the Companyhas concluded that the critical functions of credit evaluation and loanorigination are best performed and controlled on a centralized basis from itsHouston facility. Accordingly, as the marketing representative system hasoperated satisfactorily, the Company does not currently expect to create branchoffices.

**Financing Programs**

The Company originates loans from twosources: (i) dealer indirect (“indirect program”) and (ii) consumer direct (“directprogram”).  The indirect programgenerated 36.2% of the Company’s origination volume for the year ended April30, 2007, and consisted of loans originated directly from dealerships in statesin which the Company operates.  Thedirect program’s originations contributed 63.8% of origination volume for theyear ended April 30, 2007, and involved applications for credit obtainedthrough direct marketing efforts from consumers who are primarily seeking toacquire a vehicle or refinance an existing automobile loan.

Credit applications generated by each ofthe above sources are forwarded to the Company’s centralized credit departmentin Houston with decisions made based on the Company’s standard underwritingguidelines and credit scoring model. The internal credit decision andacceptance process is essentially the same regardless of the originationsource. Third party originators have no credit approval authority and aresubject to individual contracts that specify the obligations of the parties.Essentially all of the Company’s indirect receivables are originated on anon-recourse basis.

In addition to originating receivablesfrom the indirect and direct programs, the Company has acquired seasonedreceivables in portfolio acquisitions or from other third party originators andmay continue to do so from time to time.

The Company had active dealershipagreements with 435 dealers at April 30, 2007 compared to 273 at April 30,2006. The increase in active dealership agreements is due to the Companyaggressively pursuing additional agreements with new dealerships.  These are non-exclusive agreements terminableat any time by either party and they require no specific volume levels. Theagreements with the dealers contain customary representations and warrantiesconcerning title to the receivables sold, validity of the liens on theunderlying vehicles, compliance with applicable laws and related matters.Although the dealers are obligated to purchase receivables that do not conformto these warranties, the dealers do not guarantee collectibility or obligatethemselves to purchase receivables solely because of payment default. Thereceivables are originated at par or at prices that may reflect a discount orpremium depending on the annual percentage rates of particular receivables andthe Company’s assessment of relative credit risk. The pricing and credit termsupon which the Company agrees to originate receivables is governed by theCompany’s credit policy and a credit score generated by the Company’sproprietary, empirical scoring model.

**Credit Evaluation**

In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which(i) the creditworthiness of the borrower and the terms of the proposedtransaction are evaluated and either approved, declined or modified by theCompany’s credit verification department, (ii) the loan documentation andcollateralization is reviewed by the Company’s funding department, and (iii)additional collateral verification procedures and customer interviews areconducted by the Company. During the course of this process, the Company’scredit verification and funding personnel coordinate closely with the financeand insurance departments of the dealers or with individuals to whom

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theCompany lends directly. The Company has developed financing programs underwhich it approves loans that vary in pricing and loan terms depending on therelative credit risk determined for each loan. Credit or default risk isevaluated by the Company’s loan officers in conjunction with a proprietary,empirical credit scoring and loan pricing models developed from the Company’s18 year database of non-prime lending results.

In addition to this credit underwritingprocess, and prior to the origination of a receivable by the Company, theCompany performs additional procedures to validate the details of the creditapplication, including income and/or employment information, to verify that thecollateral is insured, and to confirm that the material terms of the saleconform to the purchaser’s understanding of the transaction.  The Company will originate a receivable onlyafter receipt and review of a satisfactory audit report.

**Servicing**

The Company believes that competent,attentive and efficient loan servicing is as important as sound creditevaluation for purposes of assuring the integrity of a receivable.

In addition to servicing its ownedportfolio, in December 2002, the Company began servicing and collectionactivities for third parties in exchange for servicing fees.   The Company completed two transactionsduring the fiscal year ended April 30, 2003, both of which related to portfolioacquisitions from collateral previously originated by Union AcceptanceCorporation.  Under the first transaction,the Company invested $475,061 for 40% of the common stock and $712,591 injunior mezzanine debt of First Auto Receivables Corporation (“FARC”). FARCpurchased a $197,500 automobile loan portfolio. In addition to the equity and debt investments, the Company collects afee for servicing the portfolio.  Thesecond transaction was an agreement to service, for a third party, a $276,000auto loan portfolio.  The Company willcontinue to seek opportunities to increase servicing income through investmentsin portfolio acquisitions.

**Portfolio Characteristics**

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

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

Certain information concerning theCompany’s obligors for the past two fiscal years (based on credit informationcompiled at the time of loan origination) is set forth in the following table:
| ** **                                      | ** ** | **April 30,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2006**           | ** ** | **2007** | ** ** |
| Average monthly  gross income                   |       | $                  | 4,528      |   | $ | 4,628 |   |
| Average ratio of  consumer debt to gross income |       | 37                 | %          | 36 | % |
| Average years in  current employment            |       | 7                  |       | 7 |   |
| Average years in  current residence             |       | 6                  |       | 6 |   |
| Residence owned                                 |       | 52                 | %          | 45 | % |
| Residence rented                                |       | 42                 | %          | 48 | % |
| Other residence  arrangements (1)               |       | 6                  | %          | 7 | % |
|                                                 |            |                    |            |  |  |  |  |

 

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(1)          Includesmilitary personnel and persons residing with relatives.

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*Portfolio Profile*.  In order to manage the risks associated withthe relatively high yields available in the non- prime market, the Companyendeavors to maintain a receivables portfolio having characteristics that, inits judgment, reflect an optimal balance between achievable yield andacceptable risk. The following table sets forth certain information concerningthe composition of the Company’s portfolio as of the end of the past two fiscalyears:
| ** **                                             | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|
| ** **                                             | ** ** | **2006**           | ** ** | **2007** | ** ** |
| New Vehicles:                                          |       |               |       |   |   |
| Percentage of portfolio (1)                            |       | 22                 | %          | 21 | % |
| Number of receivables outstanding                      |       | 4,403              |       | 5,066 |   |
| Average amount at date of origination                  |       | $                  | 23,750     |   | $ | 24,474 |   |
| Average term (months) at date of origination (2)       |       | 70                 |       | 70 |   |
| Average remaining term (months) (2)                    |       | 47                 |       | 48 |   |
| Average monthly payment.                               |       | $                  | 497        |   | $ | 512 |   |
| Average annual percentage rate                         |       | 14.3               | %          | 14.3 | % |
| Used Vehicles:                                         |       |               |       |   |   |
| Percentage of portfolio (1)                            |       | 78                 | %          | 79 | % |
| Number of receivables outstanding                      |       | 18,506             |       | 22,701 |   |
| Average age of vehicle at date of origination  (years) |       | 2                  |       | 2 |   |
| Average amount at date of origination                  |       | $                  | 19,297     |   | $ | 19,838 |   |
| Average term (months) at date of origination (2)       |       | 63                 |       | 65 |   |
| Average remaining term (months) (2)                    |       | 45                 |       | 47 |   |
| Average monthly payment.                               |       | $                  | 432        |   | $ | 437 |   |
| Average annual  percentage rate                        |       | 14.1               | %          | 14.0 | % |

 

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(1)          Calculatedon the basis of dollar value of receivables outstanding as of the dateindicated.

(2)          Because theactual life of many receivables will differ from the stated term by reason ofprepayments and defaults, data reflecting the average contractual term ofreceivables included in a portfolio will not correspond with actual averagelife.

**Financing Arrangements**

*General.*  The Company’s financing strategy is toutilize credit and commercial paper facilities with financial institutions tofund originations.  When sufficientvolume is originated, the Company will complete an on balance sheetsecuritization and issue term notes, thereby freeing up capacity in thewarehouse and credit facilities. Additionally, the Company has a working capital term loan that isutilized for working capital and general corporate purposes.  Lastly, the Company has an agreement with alimited partnership that is affiliated with a current shareholder and member ofthe board of directors, to borrow up to $2,500. Proceeds of the borrowings are to be used to fund private and openmarket purchases of the Company’s common stock pursuant to a Stock RepurchasePlan and for general corporate purposes. The following chart summarizes theborrowing status at April 30, 2007, under these facilities:

 
| **Facility Type**          | ** ** | **Outstanding Balance** | ** ** | **Available Credit** | ** ** | **Total** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------|------------|-----------|------------|
| FIRC Credit Facility            |       | $                            | 36,805     |                      | $          | 13,195    |       | $ | 50,000 |   |
| FIARC Commercial Paper Facility |       | 246,477                      |       | 53,523                    |       | 300,000   |       |
| Term Notes.                     |       | 169,987                      |       | —                    |       | 169,987   |       |
| Working Capital Term Loan       |       | 22,753                       |       | 5,747                     |       | 28,500    |       |
| Shareholder                     |       | 2,500                        |       | —                    |       | 2,500     |       |
| Total                           |       | $                            | 478,522    |                      | $          | 72,465    |       | $ | 550,987 |   |

 

Please see Note 7 to the consolidatedfinancial statements for further information regarding interest rates,expiration dates and other terms of the various facilities.

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**Risk Areas**

*Warehouse**Credit**Facilities.* The Company’s credit and commercial paperfacilities with financial institutions, collectively referred to as warehousecredit facilities, are renewed periodically. On February 14, 2007, the maturitydate of the FIRC facility was extended to February 13, 2008.  No other material changes were made.  On March 15, 2006, following a short-termextension of the then current maturity date, the FIARC facility was renewed toFebruary 14, 2007.  In connection withthe renewal, the Company obtained approval from the lender to eliminate therequirement that a surety bond be maintained to provide additional enhancementto the commercial paper investors as well as eliminating the requirement topurchase interest rate caps.  As aresult, the 0.35% surety bond premium and the 0.25% unused surety bond premiumwere eliminated.  In exchange, theCompany agreed to increase the program fee paid to the lender from 0.30% to0.55% and to increase the unused fee paid to the lender from 0.25% to0.30%.  On October 11, 2006, the Companyamended the facility to increase the commitment from $150,000 to $300,000 inorder to fund the growth in origination volume. On February 14, 2007, the maturity date of the FIARC facility wasextended to its current maturity date of February 13, 2008.  If the facility is not extended beyondthe  current maturity date, receivablespledged as collateral would be allowed to amortize; however, no new receivableswould be allowed to be funded under the credit facility.  The Company intends to seek a renewal of thefacilities from its lenders prior to maturity. Management considers its relationship with its lenders to besatisfactory and has no reason to believe that these credit facilities will notbe renewed.  If these facilities are notrenewed, however, or if material changes are made to its terms and conditions,it could have a material adverse effect on the Company.

*Term Notes.*  The Company relies on its ability to pool andsell receivables in the asset-backed market in order to generate cash used topay down the warehouse facilities. Adverse terms or unfavorable occurrences in the auto asset-backed marketcould make securitizations more expensive or could impair the ability tocomplete securitizations which would have an adverse effect on the Company’sliquidity and financial position.

*Working Capital. *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 facility would convert to a term loan,and amortize with the terms of the receivables that secure the facility.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed.  If thefacility is not renewed, however, or if material changes are made to its termsand conditions, it could have a material adverse effect on the Company.

*Loan Covenants*.  The documentation governing each of theCompany’s financing arrangements contains numerous covenants relating to theCompany’s business, the maintenance of credit enhancement insurance coveringthe receivables (if applicable), the observance of certain financial covenants,the avoidance of certain levels of delinquency experience, and other matters.The breach of these covenants, if not cured within the time limits specified,could precipitate events of default that might result in the acceleration ofthe FIRC credit facility and working capital facility or the termination of thecommercial paper facilities. Through the operation of the collateral agencyarrangements, which are in the nature of a “lock-box” security device coveringthe collection of principal and interest on almost all of the Company’sreceivables, such a default could cause the immediate termination of theCompany’s primary sources of liquidity. The Company was not in default withrespect to any financial or nonfinancial covenants governing these financingarrangements at April 30, 2007.

*Interest Rate Management*.  The Company’s warehouse credit facilitiesbear interest at floating interest rates which are reset on a short-term basiswhile the secured Term Notes bear interest at a fixed rate of interest. TheCompany’s receivables bear interest at fixed rates that generally do not varywith changes in market interest rates. Since a primary contributor to theCompany’s profitability is its ability to manage its net interest spread, theCompany seeks to maximize the net interest spread while minimizing exposure tochanges in interest rates.  Accordingly,the Company may periodically enter into interest rate swaps or caps to minimizethe effects of market interest rate fluctuations on the net interest spread. Tothe extent that the Company has outstanding floating rate borrowings or haselected to convert a portion of its borrowings from fixed rates to floatingrates, the Company will be exposed to fluctuations in short-term interestrates.  Please see Market Risk under Item7A for quantification.

*Credit Enhancement — FIRC Credit Facility*.  — Inorder to obtain a lower cost of funding, the Company has agreed to maintaincredit enhancement insurance covering the receivables pledged as collateralunder the FIRC credit facility. The facility lenders, collectively, are namedas additional insureds under this policy. The coverage is obtained on eachreceivable at the time it is originated by the Company and the applicable premiumsare prepaid for

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the life of thereceivable. The insurance enhancing this facility is default insurance under astandard auto loan protection policy (known as “ALPI” insurance) which coversthe difference between the outstanding balance of a receivable and theliquidation proceeds in the event the underlying collateral is repossessed.Solely at its expense, the Company carries this coverage.  Neither the vehicle purchasers nor thedealers are charged for the coverage and they are unaware of its existence. TheCompany’s ALPI insurance policy is written by National Union Fire InsuranceCompany of Pittsburgh (“National Union”), which is a wholly-owned subsidiary ofAmerican International Group.

The premiums that the Company paid duringits past fiscal year for its credit enhancement insurance coverages, of whichthe largest component is the basic ALPI insurance, represented approximately1.3% of the principal amount of the receivables originated during the year.Aggregate premiums paid for ALPI coverage alone during the fiscal years endedApril 30, 2005, 2006 and 2007 were $3,669, $3,769, and $2,883, respectively,and accounted for 2.3%, 1.4% and 1.1% of the aggregate principal balance of thereceivables originated during such respective periods.

In April 1994, the Company organizedFirst Investors Insurance Company (the “Insurance Subsidiary”) under thecaptive insurance company laws of the State of Vermont. The InsuranceSubsidiary is an indirect wholly-owned subsidiary of the Company and is a partyto a reinsurance agreement whereby the Insurance Subsidiary reinsures 100percent of the risk under the Company’s ALPI insurance policy. At the time eachreceivable is insured by National Union, the risk is automatically reinsured toits full extent and approximately 96% of the premium paid by the Company toNational Union with respect to such receivable is ceded to the InsuranceSubsidiary. When a loss covered by the ALPI policy occurs, National Union paysit after the claim is processed, and National Union is then reimbursed in fullby the Insurance Subsidiary. As of April 30, 2007, gross premiums had beenceded to the Insurance Subsidiary since its inception by National Union in theamount of $41,722 and the Insurance Subsidiary reimbursed National Union for aggregatereinsurance claims in the amount of $9,962. In addition to the monthly premiumsand 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 reinsurancestructure is that National Union, as the “fronting” insurer under the captivearrangement, is unconditionally obligated to the Company’s credit facilitylenders for all losses covered by the ALPI policy, and the Company, through itsInsurance Subsidiary, is obligated to indemnify National Union for all suchlosses. As of April 30, 2007, the Insurance Subsidiary had capital and surplusof $2,474 and unencumbered cash reserves of $1,023 in addition to $3,355 in atrust account.

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

*Credit Enhancement — Term Note*.  A surety bond issued by MBIA InsuranceCorporation enhances the 2005-A Term Notes issued on May 5, 2005. The suretybond provides payment of principal and interest to the note holders in theevent of payment default by the 2005-A Trust. MBIA is paid a surety premiumequal to 0.35% per annum on the outstanding balance of the 2005-A Term Notes.The surety bond was issued for the term of the underlying notes, which matureon July 16, 2012. Termination of the surety bond would result in default underthe governing documents.

A surety bond issued by MBIA InsuranceCorporation enhances the 2006-A Term Notes issued on January 26, 2006. Thesurety bond provides payment of principal and interest to the note holders inthe event of payment default by the 2006-A Trust. MBIA is paid a surety premiumequal to 0.28% per annum on the outstanding balance of the 2006-A Term Notes.The surety bond was issued for the term of the underlying notes, which matureon April 15, 2013. Termination of the surety bond would result in default underthe governing documents.

*Economy. *Periods of weakened economic conditionand slow or negative growth will tend to have an unfavorable effect on delinquencies,defaults and losses, particularly with non-prime borrowers.  Recent periods have

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been positively impactedby increasing wholesale prices of used vehicles which decreases losses to theCompany upon repossession.  Losses haveadverse effects on the Company’s liquidity and operating results.

*Servicer Default. *The Company performs servicing andcollection activities for its owned portfolio as well as two pools of loansowned or partially owned by third parties. Each of the servicing agreements identifies areas of servicer defaultwhich are generally defined as the inability to protect the assets underagreement or failing trigger tests of the portfolios.  Triggers are related to negative default andloss performance as compared to specified levels.  An event of servicer default would haveadverse effects on liquidity and profitability and could result in having theportfolios transferred to another servicer.

**Securitization**

Many finance companies similar to theCompany engage in “securitization” transactions whereby receivables are pooledand conveyed to a trust or other special purpose entity, with interests in theentity being sold to investors. As the pooled receivables amortize, financecharge collections are passed through to the investors at a specified rate forthe life of the pool and an interest in collections exceeding the specifiedrate is retained by the sponsoring finance company. For accounting purposes,the sponsor often recognizes as revenue the discounted present value of thisexcess interest as estimated over the life of the pool. This revenue, or “gainon sale”, is recognized for the period in which the transaction occurs.

The Company does not use off-balancesheet financing structures for receivables originated by the Company and therefore,recognizes interest income on the accrual method over the life of thereceivables rather than recording gains when those receivables are sold. TheCompany does not currently intend to engage in off-balance sheet securitizationtransactions resulting in gains on sale of receivables.

**Employees**

The Company had 198 employees as of April30, 2007, including 103 located at its headquarters in Houston, 91 located atits loan servicing center in Atlanta and 4****regionalmarketing representatives. The Company’s employees are covered by group healthinsurance.  The Company sponsors aparticipant-directed 401(k) retirement plan for its employees. An employeebecomes eligible to participate in the plan effective the first enrollmentperiod after 90 days of employment. The Company pays the administrativeexpenses of the 401(k) plan. The Company also matches a percentage of eachparticipant’s voluntary contributions up to a maximum voluntary contribution of3% of the participant’s compensation. In fiscal years 2005, 2006, and 2007, theCompany recorded matching contributions to the 401(k) plan of $23, $42, and$89, respectively.  Effective April 28,1998, the Company established a participant-directed Deferred Compensation Planfor certain executive officers of the Company. The Deferred Compensation Plan was terminated during the fourth quarterof the fiscal year ended 2005 in response to changes in the tax law associatedwith such plans.  The assets in the planwere distributed to the participants.

**Information Systems**

The Company utilizes advanced informationmanagement systems including a fully integrated software program designed toexpedite each element in the receivables underwriting process, including theentry and verification of credit application data, credit analysis and thecommunication of credit decisions to originating dealers. The Company alsoutilizes a number of analytical tools in managing credit risk including anempirical scoring model, trend and discriminant analysis, and pricing modelswhich are designed to optimize yield given an expected default rate.

The servicing and collection platform isprovided by an application service provider through which the Company accessesa mainframe system which is designed to provide support for all collections andservicing activities including billing, collection process management, accountactivity history, repossession management, loan accounting information andpayment posting.  The Company pays amonthly usage fee to the service provider based on the number of accountsserviced.  The Company also utilizes autodialer software that interfaces with the system and serves as an efficiencytool in the collection process.

Both the front-end and back-end platformsare highly compatible from an integration standpoint with all loans boardedelectronically following funding from the origination system to the collectionsystem.

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In addition to its two primary operatingsystems, the Company also utilizes third-party software in its accounting,human resources, and data management functions, all of which are products wellknown in the marketplace.

The Company believes that its dataprocessing and information management capacity is sufficient to accommodatesignificantly increased volumes of receivables without material additionalcapital expenditures for this purpose.

**Competition**

The business of direct and indirectlending for the origination of new and used automobiles is intenselycompetitive in the United States. Such financing is provided by commercialbanks, thrifts, credit unions, the large captive finance companies affiliatedwith automobile manufacturers, and many independent finance companies such asthe Company. Many of these competitors and potential competitors havesignificantly greater financial resources than the Company, and particularly inthe case of the captive finance companies, enjoy ready access to large numbersof dealers. The Company believes that a number of factors including historicalmarket orientations, traditional risk-aversion preferences and in some casesregulatory constraints, have discouraged many of these entities from enteringthe non-prime sector of the market where the Company operates. However, ascompetition intensifies, these well-capitalized concerns could enter themarket, and the Company could find itself at a competitive disadvantage.

The non-prime market in which the Companyoperates also consists of a number of both large and mid-sized independentfinance companies doing business on a local, regional or national basis,including some which are affiliated with captive finance companies or largeinsurance groups. Reliable data regarding the number of such companies andtheir market shares is unavailable; however, the market is highly fragmentedand intensely competitive.

**Regulation**

The operations of the Company are subjectto regulation, supervision and licensing under various federal and state lawsand regulations. State consumer protection laws, motor vehicle installmentsales acts and usury laws impose ceilings on permissible finance charges,require licensing of finance companies as consumer lenders, and prescribe manyof the substantive provisions of the retail installment sales contracts thatthe Company originates. Federal consumer credit statutes and regulationsprimarily require disclosure of credit terms in consumer finance transactions,although rules adopted by the Federal Trade Commission (including the so-calledholder-in-due-course rule) also affect the substantive rights and remedies offinance companies originating automobile installment sales contracts.

The Company’s business requires it tohold consumer lending licenses issued by individual states, under which theCompany is subject to periodic examinations. State consumer credit regulatoryauthorities generally enjoy broad discretion in the revocation and renewal ofsuch licenses and the loss of one or more of these in states in which theCompany conducts material business could adversely affect the Company’soperations.

In addition to specific licensing andconsumer regulations applicable to the Company’s business, the Company’sability to enforce and collect its receivables is limited by several laws ofgeneral application, including the Fair Debt Collection Practices Act, Federalbankruptcy laws and the Uniform Commercial Codes of the various states. Theseand similar statutes govern the procedures, and in many instances limit therights of creditors, in connection with asserting defaults, repossessing andselling collateral, realizing the proceeds thereof, and enforcing deficiencies.

The Company’s insurance subsidiary issubject to regulation by the Department of Banking, Insurance and Securities ofthe State of Vermont. The plan of operation of the subsidiary, described aboveunder “Financing Arrangements” and “Credit Enhancement”, was approved by theDepartment and any material changes in those operations would likewise requirethe Department’s approval. The subsidiary is subject to minimum capital andsurplus requirements, restrictions on dividend payments, annual reporting, andperiodic examination requirements.

The Company believes that its operationscomply in all material respects with the requirements of laws and regulationsapplicable to its business. These requirements and the interpretations thereof,change from time to time

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andare not uniform among the states in which the Company operates. The Companyretains a specialized consumer credit legal counsel that engages and superviseslocal legal counsel in each state where the Company does business, to monitorcompliance on an ongoing basis and to respond to changes in applicablerequirements as they occur.

**ITEM 2.  *PROPERTIES***

The Company’s principal physicalproperties are its data processing and communications equipment and furnitureand fixtures, all of which the Company believes to be adequate for theirintended use.

The Company’s offices in suburban Houstonconsist of approximately 17,304 square feet on the seventh floor of aneight-story office building. This space is held under a lease requiring averageannual rentals of approximately $311 and expiring on February 28, 2011, with anoption to renew for five years at the market rate then prevailing.

The Company’s offices in suburban Atlantaconsist of approximately 28,133 square feet on the third and fourth floors of afour-story office building. This space is held under a lease requiring averageannual rentals of approximately $519 and expiring on December 31, 2015, with anoption to renew for an additional five years at the market rate thenprevailing.  The Company owns no realproperty.

**ITEM 3.  *LEGAL PROCEEDINGS***

Other than as discussed herin, theCompany is not a party to any material litigation and is currently not aware ofany threatened litigation that could have a material adverse effect on theCompany’s business, results of operations or financial condition.

**ITEM 4.  *SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS***

No matters were submitted to a vote ofthe Company’s securities holders during the fourth quarter of the past fiscalyear.

**PART II**

**ITEM 5.  *MARKET FOR REGISTRANTS’ COMMON EQUITY AND RELATED SHAREHOLDER MATTERS***

The Company’s common stock was traded onthe NASDAQ National Market System, under the symbol “FIFS” from the completionof the Company’s initial public offering on October 4, 1995 through December 1,2004.  On December 2, 2004, the Company’scommon stock started trading on the over-the-counter bulletin board market.High and low closing prices of the common stock are set forth below for theperiods indicated.

| Three Months Ended | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------|------------|----------|------------|---------|------------|
| April 30, 2007               |       | $        | 7.40       |    | $          | 7.08 |   |
| January 31, 2007             |       | $        | 7.29       |    | $          | 6.90 |   |
| October 31, 2006             |       | $        | 8.05       |    | $          | 6.90 |   |
| July 31, 2006                |       | $        | 8.05       |    | $          | 7.30 |   |
| April 30, 2006               |       | $        | 8.00       |    | $          | 6.91 |   |
| January 31, 2006             |       | $        | 8.30       |    | $          | 6.15 |   |
| October 31, 2005             |       | $        | 6.50       |    | $          | 4.51 |   |
| July 31, 2005                |       | $        | 4.75       |    | $          | 4.53 |   |
| April 30, 2005               |       | $        | 5.00       |    | $          | 4.25 |   |
| January 31, 2005             |       | $        | 5.25       |    | $          | 4.00 |   |
| October 31, 2004             |       | $        | 5.35       |    | $          | 4.00 |   |
| July 31, 2004                |       | $        | 5.51       |    | $          | 4.57 |   |

 

As of May 31, 2007, there wereapproximately 56 shareholders of record of the Company’s common stock.  The Company believes that the number ofbeneficial owners is significantly greater than the number of shareholders ofrecord.

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TheCompany has not declared or paid any cash dividends on its common stock sinceits inception. The payment of cash dividends in the future will depend on theCompany’s earnings, financial condition and capital needs and on other factorsdeemed pertinent by the Company’s Board of Directors. It is currently thepolicy of the Board of Directors to retain earnings to finance the operationand expansion of the Company’s business. The Company has no plans to pay cash dividends on the common stock inthe foreseeable future.

**ITEM 6.  *SELECTED CONSOLIDATED FINANCIAL DATA***

The following selected consolidatedfinancial data of the Company for each of the five fiscal years ended April 30,2007, has been derived from the audited consolidated financial statements ofthe Company and should be read in conjunction with such statements (dollars inthousands, except per share data).
| ** **                                                          | ** ** | **Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                          | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Statement of Operations:**                                        | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                     |       | $                                       | 32,940     |   | $ | 30,498 |   | $ | 28,272 |   | $ | 39,300 |   | $ | 54,568 |   |
| Interest expense                                                    |       | 10,166                                  |       | 8,438 |   | 7,616 |   | 15,042 |   | 23,969 |   |
| Net interest  income                                                |       | 22,774                                  |       | 22,060 |   | 20,656 |   | 24,258 |   | 30,599 |   |
| Provision for credit  losses                                        |       | 10,338                                  |       | 12,428 |   | 9,520 |   | 7,503 |   | 11,205 |   |
| Net interest  income after provision for credit losses              |       | 12,436                                  |       | 9,632 |   | 11,136 |   | 16,755 |   | 19,394 |   |
| Servicing revenue                                                   |       | 1,080                                   |       | 4,889 |   | 3,398 |   | 1,884 |   | 1,174 |   |
| Other finance charges  and fees                                     |       | 1,220                                   |       | 1,666 |   | 2,439 |   | 2,432 |   | 3,288 |   |
| Insurance products                                                  |       | —                                  |       | 107 |   | 735 |   | 928 |   | 1,149 |   |
| Income from investment                                              |       | 418                                     |       | 1,009 |   | 669 |   | 413 |   | 578 |   |
| Other interest income                                               |       | 283                                     |       | 460 |   | 427 |   | 1,371 |   | 1,783 |   |
| Other income                                                        |       | —                                  |       | 139 |   | 660 |   | 586 |   | — |   |
| Realized and unrealized  loss on interest rate derivative positions |       | (329                                    | )          | (34 | ) | (373 | ) | (175 | ) | — |   |
| Total other  income                                                 |       | 2,672                                   |       | 8,236 |   | 7,955 |   | 7,439 |   | 7,972 |   |
| Salaries and benefits                                               |       | 7,785                                   |       | 8,538 |   | 8,917 |   | 10,506 |   | 11,197 |   |
| Operating expenses                                                  |       | 2,488                                   |       | 5,098 |   | 4,801 |   | 3,965 |   | 6,319 |   |
| General and  administrative.                                        |       | 3,554                                   |       | 3,723 |   | 3,732 |   | 4,655 |   | 4,063 |   |
| Other interest expense                                              |       | 643                                     |       | 468 |   | 565 |   | 1,323 |   | 1,891 |   |
| Total operating  expenses                                           |       | 14,470                                  |       | 17,827 |   | 18,015 |   | 20,449 |   | 23,470 |   |
| Earnings before  provision for income taxes and                     |       |                                    |       |   |   |   |   |   |   |   |   |
| minority  interest                                                  |       | 638                                     |       | 41 |   | 1,076 |   | 3,745 |   | 3,896 |   |
| Provision for income  taxes                                         |       | 191                                     |       | 19 |   | 392 |   | 1,300 |   | 704 |   |
| Minority interest                                                   |       | 114                                     |       | (11 | ) | — |   | — |   | — |   |
| Net earnings                                                        |       | $                                       | 333        |   | $ | 33 |   | $ | 684 |   | $ | 2,445 |   | $ | 3,192 |   |
|                                                                |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic net earnings per  common share                                |       | $                                       | 0.07       |   | $ | 0.01 |   | $ | 0.14 |   | $ | 0.55 |   | $ | 0.71 |   |
| Diluted net earnings per common share                               |       | $                                       | 0.07       |   | $ | 0.01 |   | $ | 0.14 |   | $ | 0.53 |   | $ | 0.67 |   |

 
| ** **                                       | ** ** | **As of April 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Balance  Sheet Data:**                         | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Receivables Held  for Investment, net            |       | $                                  | 231,693    |   | $ | 210,967 |   | $ | 249,618 |   | $ | 377,399 |   | $ | 468,022 |   |
| Restricted cash                                  |       | 19,303                             |       | 19,037 |   | 19,097 |   | 25,538 |   | 33,473 |   |
| Interest rate  derivative positions              |       | 4,105                              |       | — |   | — |   | — |   | — |   |
| Other assets.                                    |       | 17,895                             |       | 15,752 |   | 14,795 |   | 16,351 |   | 14,886 |   |
| Total assets                                     |       | $                                  | 272,996    |   | $ | 245,756 |   | $ | 283,510 |   | $ | 419,288 |   | $ | 516,381 |   |
| Debt:                                            |       |                               |       |   |   |   |   |   |   |   |   |
| Term notes                                       |       | $                                  | 87,359     |   | $ | 164,718 |   | $ | 70,051 |   | $ | 316,584 |   | $ | 169,987 |   |
| Warehouse credit facilities                      |       | 141,945                            |       | 42,706 |   | 171,562 |   | 47,080 |   | 283,282 |   |
| Working capital facility                         |       | 8,715                              |       | 8,761 |   | 10,500 |   | 16,454 |   | 22,753 |   |
| Other borrowings                                 |       | 746                                |       | — |   | 2,500 |   | 2,500 |   | 2,500 |   |
| Interest rate  derivative positions.             |       | 5,248                              |       | — |   | — |   | — |   | — |   |
| Other  liabilities                               |       | 1,758                              |       | 2,267 |   | 3,405 |   | 8,549 |   | 6,110 |   |
| Minority  interest                               |       | 732                                |       | — |   | — |   | — |   | — |   |
| Shareholders’  equity                       |       | 26,493                             |       | 27,304 |   | 25,492 |   | 28,121 |   | 31,749 |   |
| Total  liabilities and shareholders’ equity |       | $                                  | 272,996    |   | $ | 245,756 |   | $ | 283,510 |   | $ | 419,288 |   | $ | 516,381 |   |

 

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**ITEM 7.  *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**RESULTS OF OPERATIONS***

**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 financialstatements includes a summary of the significant accounting policies andmethods 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*.  ReceivablesHeld for Investment represents the aggregate outstanding balance of installmentsales contracts and promissory notes originated by the Company through itsautomobile dealer relationships or directly with consumers.  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 fromservicing activities, late fees and other loan-related fees, income frominvestments, reinvestment revenue, GAP insurance and extended servicecontracts, and unrealized loss on interest rate derivative positions.  Servicing revenue is accrued as services arerendered. Late fees and other loan-related fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.  Revenue from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized loss on interest rate derivatives is recognized whenincurred.

*Advertising Costs. *The Company expenses advertising costs asincurred.

*Allowance for Credit Losses*.  The Company calculates the allowance forcredit losses in accordance with SFAS No. 5*, Accounting forContingencies.*   SFAS No. 114,*Accounting by Creditors for Impairment of a Loan*does not apply to loans currently held by the Company because they comprise alarge group of smaller balance homogenous loans that are evaluated collectivelyfor 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 Assets Held for Sale.  Fair value isdetermined by estimating the proceeds from the sale of the collateral, whichprimarily are comprised of auction proceeds on the sale of the automobile lessselling related expenses.  Aftercollection of all proceeds, the Company records an adjustment, positive ornegative, based on the difference between the fair value estimate and theproceeds received.  In the event thecollateral 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.

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Companycompares the aging status of each loan on a date which is six months prior tothe reporting date, to the aging status of each loan as of the reportingdate.  These factors are then applied tothe aging status of each loan at the reporting date in order to 

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

*Stock-Based Compensation*.  The Company expenses stock-based compensationexpense 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)”).  Prior to SFAS 123(R) adoption, we accountedfor share-based payments under APB 25 and accordingly, accounted for our stock*-*based compensation using the intrinsic value method.

**General**

Net earnings for the year ended April 30,2007, was $3,192 or $0.71 per common share. Net earnings for the year ended April 30, 2006, was $2,445 or $0.55 percommon share.  For the year ended April30, 2007, the Company grew the average portfolio of receivables outstanding,resulting in an increase in net interest income, other  interest income and other finance charges andfees as compared to the year ended April 30, 2006.  These were partially offset by lowerservicing revenue, lower net interest margin due to lower effective yields, ahigher cost of borrowing for the year ended April 30, 2007, higher operatingcosts, and higher salary expense to support the increase in originationvolume.  Net earnings for the year endedApril 30, 2005, was $684 or $0.14 per common share.  See Results of Operations.

**Overview**

The primary source of the Company’srevenues is interest income from receivables retained as investments andservicing income, while its primary cost has been interest expense arising fromthe financing of the Company’s investment in such receivables. Theprofitability of the Company has been impacted by the growth of the receivablesportfolio, inclusion of two new servicing transactions, and effectivemanagement of net interest income and fixed operating expenses. As of April 30,2007, First Investors Servicing Corporation (“FISC”) performed servicing andcollection functions on a portfolio balance of $507,995 of loans.

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TheCompany’s managed receivables are (dollars in thousands):
| ** **                                                                            | ** ** | **As of or for the** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **Year Ended April 30,**  | ** ** |
| ** **                                                                            | ** ** | **2006**                                 | ** ** | **2007** | ** ** |
| Receivables Held for Investment:                                                      |       |                                     |       |   |   |
| Number                                                                                |       | 22,909                                   |       | 27,767 |   |
| Principal balance                                                                     |       | $                                        | 368,878    |   | $ | 458,586 |   |
| Average principal balance of  receivables outstanding  during the twelve-month period |       | $                                        | 314,227    |   | $ | 429,193 |   |
| Other Servicing:                                                                      |       |                                     |       |   |   |
| Number                                                                                |       | 9,944                                    |       | 6,598 |   |
| Principal balance                                                                     |       | $                                        | 105,712    |   | $ | 49,409 |   |
| Average principal balance of  receivables outstanding  during the twelve-month period |       | $                                        | 145,964    |   | $ | 75,300 |   |
| Total Managed Receivables Portfolio:                                                  |       |                                     |       |   |   |
| Number                                                                                |       | 32,853                                   |       | 34,365 |   |
| Principal balance                                                                     |       | $                                        | 474,590    |   | $ | 507,995 |   |
| Average principal balance of receivables outstanding  during the twelve-month period  |       | $                                        | 460,191    |   | $ | 504,493 |   |

 

The following table sets forthinformation with regard to the Company’s net interest spread, which representsthe difference between the effective yield on Receivables Held for Investmentand the Company’s average cost of debt utilized to fund these receivables, andits net interest margin (averages based on month-end balances):
| ** **                                              | ** ** | **Year Ended** | ** ** |
|---------------------------------------------------------|------------|---------------------|------------|
| ** **                                              | ** ** | **April 30,**  | ** ** |
| ** **                                              | ** ** | **2006**            | ** ** | **2007** | ** ** |
| Receivables Held for Investment:         |       |                |       |   |   |
| Effective yield on Receivables Held for Investment  (1) |       | 12.5                | %          | 12.7 | % |
| Average cost of debt (2)                                |       | 4.7                 | %          | 5.6 | % |
| Net interest spread (3)                                 |       | 7.8                 | %          | 7.1 | % |
| Net interest  margin (4)                                |       | 7.7                 | %          | 7.1 | % |

 

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

(2)   Represents interest expense as a percentageof average debt outstanding.

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

(4)   Represents net interest income as a percentageof average Receivables Held for Investment outstanding.

The Company intends to increase itsreceivables by increasing the amount of originations obtained from its existingdealer base and by increasing the volume of originations in its direct lendingbusiness.  To the extent that the Company’sreceivables acquisitions exceed the extinguishment of receivables throughprincipal payments, payoffs or defaults, its receivables portfolio and interestincome will increase. The following table summarizes the activity in theCompany’s receivables portfolio (dollars in thousands):

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| ** **                                    | ** ** | **Year Ended** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **April 30,**  | ** ** |
| ** **                                    | ** ** | **2006**            | ** ** | **2007** | ** ** |
| Receivables Held  for Investment:             |       |                |       |   |   |
| Principal balance, beginning of period        |       | $                   | 245,582    |   | $ | 368,878 |   |
| Originations                                  |       | 263,858             |       | 275,112 |   |
| Principal payments and payoffs                |       | (133,142            | )          | (172,726 | ) |
| Defaults prior to liquidations and recoveries |       | (7,420              | )          | (12,678 | ) |
| Principal  balance, end of period             |       | $                   | 368,878    |   | $ | 458,586 |   |

 

Receivables may be paid earlier thantheir contractual term, primarily due to prepayments and liquidation ofcollateral after defaults. See discussion on delinquency and credit lossexperience.

**Analysis of Net Interest Income**

Net interest income is the differencebetween interest earned from the receivables portfolio and interest expenseincurred on the credit facilities used to acquire the receivables. Net interestincome was $30,599 in 2007, an increase of $6,341 or 26.1% when compared toamounts reported in 2006 and an increase of $9,943 or 48.1% when compared toamounts reported in 2005.

The amount of net interest income is theresult of the relationship between the average principal amount of receivablesheld and average rate earned thereon and the average principal amount of debtincurred to finance such receivables and the average rates paid thereon.Changes in the principal amount and rate components associated with thereceivables and debt can be segregated to analyze the periodic changes in netinterest income. The following table analyzes the changes attributable to the principalamount and rate components of net interest income (dollars in thousands):
| ** **                        | ** ** | **Year Ended April 30,**         | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **2005 to 2006**                      | ** ** | **2006 to 2007** | ** ** |
| ** **                        | ** ** | **Increase**                                    | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **(Decrease)  Due to Change in** | ** ** | ** ** | ** ** | **(Decrease)  Due to Change in** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Average**                                     | ** ** | ** ** | ** ** | **Total Net** | ** ** | **Average** | ** ** | ** ** | ** ** | **Total Net** | ** ** |
| ** **                        | ** ** | **Principal**                                   | ** ** | **Average** | ** ** | **Increase** | ** ** | **Principal** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                        | ** ** | **Amount**                                      | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| Receivables Held  for Investment: |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                   |       | $                                               | 12,127     |   | $ | (1,099 | ) | $ | 11,028 |   | $ | 14,452 |   | $ | 816 |   | $ | 15,268 |   |
| Interest expense                  |       | 3,528                                           |       | 3,898 |   | 7,426 |   | 5,083 |   | 3,844 |   | 8,927 |   |
| Net interest  income              |       | $                                               | 8,599      |   | $ | (4,997 | ) | $ | 3,602 |   | $ | 9,369 |   | $ | (3,028 | ) | $ | 6,341 |   |

 

**Results of Operations**

***FiscalYear Ended April 30, 2007, Compared to Fiscal Year Ended April 30, 2006 (dollarsin thousands)***

*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; (ii) 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;(iii) the level of provision for credit losses; (iv) the amount of incomederived from other activities; and (v) the ability of the Company to controloperating expenses relative to the total amount of the managed portfolio.

*Executive Summary. *Net income for the yearended April 30, 2007 was $3,192 compared to $2,445 for the year ended April 30,2006.  Basic earnings per common sharewere $0.71 and $0.55 and diluted earnings per common share were $0.67 and $0.53for the years ended April 30, 2007, and April 30, 2006, respectively.

The31% increase in net income for the year ended April 30, 2007 compared to April30, 2006 is due to several factors, including (i) a $15,268 increase in interest income for the year ended April 30,2007 due to a 37% increase

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in the averagebalance of Receivables Held for Investment for the year ended April 30, 2007 ascompared to April 30, 2006, (ii) an increase in other interest income due tohigher average cash balances, (iii) a decrease in general and administrativeexpenses primarily due to the settlement and defense of a class action lawsuitduring the year ended April 30, 2006, and (iv) a decrease in the effectiveincome tax rate for the year ended April 30, 2007, primarily due to therecognition of a $669 income tax benefit that was previously recorded as anuncertain tax provision.

This is partially offset by several factors, including(i) an increase in interest expense of $8,927 for the year ended April 30,2007, due to a 34% increase in the average debt outstanding and a 90 basispoint increase in interest rates for the year ended April 30, 2007, (ii) a$3,702 increase in provision for credit losses for the year ended April 30,2007, primarily associated with the growth in the portfolio of Receivables Heldfor Investment and an associated increase in the allowance for credit losses,(iii) a $692 increase in salaries and benefits expense for the year ended April30, 2007, to support staffing for the Company’s inbound call center which wasmoved from a third party provider during the fiscal year ended April 30, 2006and the implementation of FASB 123(R) during the period, (iv) a $2,354 increasein operating costs for the year ended April 30, 2007, associated with anincrease in origination volume and a decrease in the dollar amount of expenseswhich the Company was able to capitalize as deferred acquisition costs and, (v)a $568 increase in other interest expense for the year ended April 30, 2007,due to an increase in the average outstanding balance of the Company’s workingcapital facility.  The increase in netinterest income was partially offset by a reduction in the net interest spreadcreated by effective yields on the portfolio of Receivables Held for Investmentincreasing at a slower pace than the cost of funds.  The decline in net interest spread created byeffective yields on the portfolio of Receivables Held for Investment increasingat a slower pace than the cost of funds, reduced net interest income by $3,028for the year ended April 30, 2007 as compared to the year ended April 30, 2006.

*Interest Income*. Total interest income for the year ended April30, 2007 increased to $54,568 compared to $39,300 for the year ended April 30,2006.

The level of interest income, a primary driver offinancial results, is impacted by the average outstanding balance of theportfolio of Receivables Held for Investment, the weighted average interestrate on receivables originated by the Company, the mix of direct and indirectlending activities and the level of prepayments and charge-offs.  Interest income on Receivables Held forInvestment increased****39% for theyear ended April 30, 2007 compared to the year ended April 30, 2006.  This is primarily due to a 37% increase inthe average portfolio of Receivables Held for Investment.

*Interest Expense*. Interest expense for the year ended April 30,2007 increased to $23,969 compared to $15,042 for the year ended April 30,2006.  Interest expense related toReceivables Held for Investment increased 59% for the year ended April 30,2007.  The increase in interest expenseis primarily due to (i) a 34% increase in the average debt outstanding during2007 due to a 37% increase in the average portfolio of Receivables Held forInvestment, (ii) an increase in overall market interest rates as a result ofshort-term market rate increases and (iii) the Company’s decision to lock ininterest rates on $189,060 of debt in January 2006 through the issuance of termnotes to minimize the risk of future interest rate increases, as longer termfixed rate term notes typically carry higher interest rates than shorter termfloating rate debt.  The combined effectsof the increase in overall market interest rates and the decision to lock in afixed interest rate on $189,060 of debt resulted in a 90 basis point increasein the average interest rate for the year ended April 30, 2007, as compared tothe year ended April 30, 2006.

*Provisionfor Credit Losses*. The provision forcredit losses for the year ended April 30, 2007 increased to $11,205 ascompared to $7,503 for the year ended April 30, 2006. The increase in provisionfor credit losses is primarily due to a 37% increase in the average portfoliooutstanding for the year ended April 30, 2007, compared to the year ended April30, 2006.  Provision for credit losses asa percentage of average Receivables Held for Investment increased to 2.6% forthe year ended April 30, 2007, as compared to 2.4% for the year ended April 30,2006.

Net charge-offs forthe year ended April 30, 2007 increased to $10,603 as compared to $7,420 forthe year ended April 30, 2006.  Theincrease in net charge-offs for the year ended April 30, 2007 is primarily dueto a 37% increase in the average portfolio outstanding for the year ended April30, 2007, compared to the year ended April 30, 2006.  This is partially offset by an increase inrecoveries from defaulted loans.  Theallowance for loan loss as a percentage of the portfolio of Receivables Heldfor Investment remained constant at 0.6% for the years ended April 30, 2007,and April 30, 2006.

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The level ofprovision for credit losses is a key driver of overall financial performanceand should be positively impacted by improvement in general economicconditions, improvements in wholesale used car prices and lower delinquencyrates and net losses projected for the portfolio of Receivables Held for Investment.  Any additional economic deterioration ordecline in wholesale used car prices will negatively impact provision expenseto the extent that these events cause an increase in delinquency rates,bankruptcy rates or net charge-off rates in the portfolio of Receivables Heldfor Investment.

*Servicing Revenue*.  On December 24, 2002, the Company enteredinto an agreement to provide loan servicing and collection activities on behalfof FARC.  FARC, which is 40% owned by theCompany, purchased a portfolio of approximately $200,000 of installment loanreceivables.  On March 19, 2003, theCompany entered into an agreement to provide loan servicing and collectionactivities on $276,000 of installment loan receivables for unrelated thirdparties.  Servicing revenue decreased to$1,174****for the year ended April 30, 2007compared to $1,884 for year ended April 30, 2006.  The decrease in servicing revenue for theyear ended April 30, 2007 is due to the liquidation of serviced receivablesduring 2007.  Revenue derived fromservicing activities will increase or decrease in direct proportion to theaverage outstanding balance of serviced receivables.

*OtherFinance Charges and Fees*.  Other finance charges and fees increased to$3,288 for the year ended April 30, 2007, compared to $2,432 for the year endedApril 30, 2006.  The increaseis primarily attributable to (i) increased assessment and collection of feesdue to a 37% increase in the average portfolio of Receivables Held forInvestment and (ii) an increase in fees charged related to collectionactivities.  Income derived from late fees and collection activities is recognizedwhen received, and therefore can be potentially volatile from period to periodbased on overall cash collection, seasonality, delinquency rates and otherfactors.  Late and loan related fees aredriven by a number of factors including overall delinquency rates, thepercentage of customers utilizing electronic payment products and growth ratesin the Company’s direct lending business.

*InsuranceProducts. *Insurance products revenue increased to $1,149 for the year ended April30, 2007, compared to $928 for the year ended April 30, 2006.  The increase is attributable to (i) increasedpenetration rates and (ii) a 4% increase in originations for the year endedApril 30, 2007 as compared to April 30, 2006. This is partially offset by  theCompany’s decision to stop selling extended warranties.  Insurance products revenue is primarilydriven by growth rates in the Company’s direct lending business, which will affectthe ability of the Company to generate fee income from marketing insuranceproducts.

*Income from Investment*.  Income from investment increased to $578 forthe year ended April 30, 2007 compared to $413****forthe year ended April 30, 2006.  Theincrease is primarily attributable to the increase in earnings in FARC, whichis accounted for under the equity method of accounting for investments.

*Other Interest Income.* Otherinterest income increased to $1,783 for the year ended April 30, 2007, comparedto $1,371 for the year ended April 30, 2006. The increase in other interest income is due to (i) an increase inaverage cash due to increased collections as a result of a 37% increase in theaverage portfolio of Receivables Held for Investment in 2006 and (ii) anincrease in overall market interest rates as a result of the current economicenvironment and market rate increases adopted by the Federal Reserve Board.

*Other Income.*  Other income decreased to $0 for the yearended April 30, 2007, compared to $586 for the year ended April 30, 2006.  The decrease is attributable to thecancellation of a marketing program with several dealerships.

*Realized and Unrealized Loss onInterest Rate Derivative Positions*. In conjunction with the adoption of SFAS 133, the Company is required toreport the fair value of interest rate derivative positions.  The net losses of $0 for the year ended April30, 2007 and $175 for the year ended April 30, 2006 are due to the Company’selimination of the requirement to purchase interest rate caps under the FIARCcredit facility.  The Company had nopurchases during the year ended April 30, 2007.

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to$11,197 for the year ended April 30, 2007, compared to $10,506 for the yearended April 30, 2006.  The increase isprimarily due to (i) the Company implementing a call center that was previouslyoutsourced, (ii) additional staffing levels necessary to support the

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increase in loan origination volume, and (iii) an additional $306 ofexpense for the year ended January 31, 2007, due to the implementation of SFAS123(R).

*Operating Expenses.* Operating expenses increased to $6,319 for theyear ended April 30, 2007, compared to $3,965 for the year ended April 30,2006.  Expenses characterized asoperating expenses are generally variable in nature and are typically dependenton a number of factors including origination volume, the outstanding balance ofthe managed portfolio, credit quality and operating efficiency levels.  The increase was primarily due to (i) anincrease in postage and printing expense associated with the growth in theCompany’s direct originations, (ii) an increase in other loan origination costsincluding credit bureau and verification fees associated with the increase intotal origination volume, (iii) increased repossession and collection relatedcosts, and (iv) a decrease in the dollar amount of expenses which the Companywas 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$4,063 for the year ended April 30, 2007, compared to $4,655 for the year endedApril 30, 2006.  The year ended April 30,2006 experienced an increase in professional fees due to the Company’s defenseof a class action lawsuit.  General andadministrative costs tend to be more fixed in nature and not as dependent onthe overall level of managed receivables.

For the year ended April 30, 2006, the Company incurredlegal expenses of $350 and settlement costs of $450 in connection with itsdefense and settlement of a class action lawsuit filed against a wholly-ownedsubsidiary alleging violations of the Fair Credit Reporting Act.  The Company’s decision to settle the lawsuitwas prompted by the trial court’s granting the plaintiff’s motion for summaryjudgment on January 20, 2006.  TheCompany and its counsel believe that the court’s ruling is contrary to thestatute and the facts in the case, and believe that an appeal would besuccessful.  However, given the trialcourt’s ruling, the Company concluded that settlement is preferable tocontinuing to incur the costs associated with the appeal and defense of thelawsuit.

*Other Interest Expense*. Other interest expense increased to $1,891 foryear ended April 30, 2007, compared to $1,323 for the year ended April 30,2006. The increase was primarily due to (i) a 57% increase for the year endedApril 30, 2007 in the average outstanding borrowings on the Company’s workingcapital line and (ii) an increase in overall market interest rates as a resultof short-term rate increases adopted by the Federal Reserve System.

***Fiscal Year Ended April 30, 2006, Compared to Fiscal Year Ended April30, 2005 (dollars in thousands)***

*Executive Summary. *Net income for the yearended April 30, 2006 was $2,445 compared to $684 for the year ended April 30,2005.  Basic earnings per common sharewere $0.55 and $0.14 and diluted earnings per common share were $0.53 and $0.14for the years ended April 30, 2006, and April 30, 2005, respectively.

The258% increase in net income for the year ended April 30, 2006 compared to April30, 2005 is due primarily to an increase in net interest income and otherinterest income, and a decline in provision for credit losses during the 2006period.  The increase in net interestincome was due to a 43% increase in the average portfolio of Receivables Heldfor Investment, partially offset by (i) a 46% increase in the average debtbalance and (ii) an increase in the average cost of debt from 3.5% during 2005to 4.7% during 2006 as a result of two securitizations and an increase inoverall market interest rates as a result of the current economic environmentand market rate increases adopted by the Federal Reserve Board.  Provision for credit losses decreased 21%during the year as a result of lower repossessions and charge-offs andimproving recovery rates.  Thisimprovement in overall credit quality is due to (i) improvements in generaleconomic conditions including a lower unemployment rate, (ii) an increase inthe percentage of loans originated under the Direct Program which exhibit muchlower default rates than the Indirect Program and (iii) higher recovery rateson the sale of repossessed collateral due to improvements in the used carmarket.  Other interest income increased221% due to (i) an increase in average cash due to increased collections as aresult of a 43% increase in the average portfolio of Receivables Held forInvestment in 2006 and (ii) an increase in overall market interest rates as aresult of the current economic environment and market rate increases adopted bythe Federal Reserve Board.

These factors were partially offset by (i) a 45%decrease in servicing income, (ii) an 18% increase in salaries and benefits,and (iii) a 381% increase in legal fees. The decline in servicing revenue and income from investment is due to adecrease in the portfolio of 

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receivables serviced for third parties and a decrease in the portfolio ofreceivables serviced on behalf of FARC. The increase in salaries and benefits is primarily due to a 61% increasein the average portfolio of Receivables Held for Investment, partially offsetby a decrease in staff due to the decrease in the Company’s servicedportfolio.  The increase in legal fees isprimarily due to settlement costs and legal fees totaling $800 associated withdefending and settling a lawsuit brought against a wholly-owned subsidiary ofthe Company.

*Interest Income*. Total interest income for the year ended April30, 2006 increased to $39,300 compared to $28,272 for the year ended April 30,2005.

The level of interest income, a primary driver offinancial results, is impacted by the average outstanding balance of theportfolio of Receivables Held for Investment, the weighted average interestrate on receivables originated by the Company, the mix of direct and indirectlending activities and the level of prepayments and charge-offs.  Interest income on Receivables Held forInvestment increased****39% for theyear ended April 30, 2006 compared to the year ended April 30, 2005.  This is primarily due to a 43% increase inthe average portfolio of Receivables Held for Investment, partially offset by a35 basis point reduction in the average effective yield  during the year ended April 30, 2006  due to (i) a lower weighted average interestrate on the performing portfolio which reflects the Company’s increased focuson receivables originated directly to consumers which typically carry lowerinterest rates and (ii) the overall competitive environment for receivablesoriginated through dealerships.

*Interest Expense*. Interest expense for the year ended April 30,2006 increased to $15,042 compared to $7,616 for the year ended April 30, 2005.Interest expense on Receivables Held for Investment increased 98% for the yearended April 30, 2006.  The increase ininterest expense is primarily due to (i) a 46% increase in the average debtoutstanding during 2006 due to a 43% increase in the average portfolio ofReceivables Held for Investment and (ii) an increase in the average cost ofdebt from 3.5% during 2005 to 4.7% during 2006 as a result of twosecuritizations and an increase in overall market interest rates as a result ofthe current economic environment and market rate increases adopted by theFederal Reserve Board.

*Provisionfor Credit Losses*. The provision forcredit losses for the year ended April 30, 2006 decreased to $7,503 as comparedto $9,520 for the year ended April 30, 2005. The decrease in provision forcredit losses is primarily due to (i) improving economic trends, (ii) a changein portfolio mix to loans originated directly with the customer which typicallyhave a lower loss frequency and (iii) the increase in recovery rates onrepossessions and general defaults.

Net charge-offs forthe year ended April 30, 2006 decreased to $7,420 compared to $9,470 for theyear ended April 30, 2005.  The decreasein net charge-offs for the year ended April 30, 2006 is primarily due to (i) adecrease in loss frequency and loss severity from repossessions and (ii) anincrease in recoveries from defaulted loans.

The level ofprovision for credit losses is a key driver of overall financial performanceand should be positively impacted by improvement in general economicconditions, improvements in wholesale used car prices and lower delinquencyrates and net losses projected for the portfolio of Receivables Held forInvestment.  Any additional economicdeterioration or decline in wholesale used car prices will negatively impactprovision expense to the extent that these events cause an increase indelinquency rates, bankruptcy rates or net charge-off rates in the portfolio ofReceivables Held for Investment.

*Servicing Revenue*.  On December 24, 2002, the Company enteredinto an agreement to provide loan servicing and collection activities on behalfof FARC.  FARC, which is 40% owned by theCompany, purchased a portfolio of approximately $200,000 of installment loanreceivables.  On March 19, 2003, theCompany entered into an agreement to provide loan servicing and collectionactivities on $276,000 of installment loan receivables for unrelated thirdparties.  Servicing revenue decreased to$1,884****for the year ended April 30, 2006compared to $3,398 for year ended April 30, 2005.  The decrease in servicing revenue for theyear ended April 30, 2006 is due to the liquidation of serviced receivablesduring 2006.  Revenue derived fromservicing activities will increase or decrease in direct proportion to theaverage outstanding balance of serviced receivables.

*InsuranceProducts. *Insurance products revenue increased to $928 for year ended April 30,2006, compared to $735 for the year ended April 30, 2005.  The increase is due to an increase of 61% inloan originations for the year ended April 30, 2006.  This is partially offset by lower grossmargins due to the Company’s increased costs in purchasing the insuranceproducts.  Insurance products revenue isprimarily driven by growth rates in the Company’s 

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direct lending business which will affect the ability ofthe Company to generate fee income from marketing insurance and warrantyproducts.

*Income from Investment*.  Income from investment decreased to $413 forthe year ended April 30, 2006 compared to $669****forthe year ended April 30, 2005.  Thedecrease in income from investment is due to the liquidation of servicedreceivables during the year.  Revenuederived from income from investment will increase or decrease in directproportion to the average outstanding balance of serviced receivables.

*Other Interest Income.* Otherinterest income increased to $1,371 for the year ended April 30, 2006, comparedto $427 for the year ended April 30, 2005. The increase in other interest income is due to (i) an increase inaverage cash due to increased collections as a result of a 43% increase in theaverage portfolio of Receivables Held for Investment in 2006, (ii) an increasein restricted cash due to prefunding accounts related to securitizations,  and (iii) an increase in overall marketinterest rates as a result of the current economic environment and market rateincreases adopted by the Federal Reserve Board.

*Realized and Unrealized Loss onInterest Rate Derivative Positions*. In conjunction with the adoption of SFAS 133, the Company is required toreport the fair value of interest rate derivative positions.  The net losses of $175 for the year endedApril 30, 2006 and $373 for the year ended April 30, 2005 are principally dueto the termination and mark to market of these positions.  The realized loss recognized during 2006 and2005 was the result of the termination of certain interest rate cap agreementswhich are required by the credit enhancement provider under the FIARC CreditFacility. The agreements were terminated in connection with the issuance of the2005-A term notes on May 5, 2005 and the issuance of the 2006-A term notesissued on January 26, 2006.

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to$10,506 for the year ended April 30, 2006, compared to $8,917 for the yearended April 30, 2005.  The increase isprimarily due to an increase in staff due to a 61% increase in loan originationsfor the year ended April 30, 2006.  Thisis partially offset by a decrease in staff associated with a decrease in theCompany’s serviced portfolio.  Theoverall number of employees of the Company is primarily correlated to (i) thetotal number of receivables managed, since the majority of the Company’semployees are involved in loan collection activities and (ii) originationgrowth rates which require additional marketing and credit underwritingpersonnel.

*Operating Expenses.* Operating expenses decreased to $3,965 for theyear ended April 30, 2006, compared to $4,801 for the year ended April 30,2005.  The decrease in operating expensesfor the fiscal year 2006 period is due to the decreased servicing costsassociated with improvements in delinquency and repossession rates and adecline in total managed receivables. Overall operating expenses are generally correlated to the total numberof receivables managed by the Company, delinquency and repossession rates andthe composition of loans originated between indirect and direct consumerloans.  The decrease for the year endedApril 30, 2006 was primarily due to an increase in the dollar amount ofexpenses which the Company was able to capitalize as deferred acquisitioncosts.  Although expenses increasedduring the year, the Company was able to capitalize a higher level of theseexpenses due to the significant increase in origination volume and increasedefficiency in its loan origination functions. The decline in operating expenses was also positively impacted by lowercollection-related costs as a result of improving credit quality.

*General and Administrative.* General and administrative expenses increased to$4,655 for the year ended April 30, 2006, compared to $3,732 for the year endedApril 30, 2005.  The year ended April 30,2006 experienced an increase in professional fees due to the Company’s defenseof a class action lawsuit.  General andadministrative costs tend to be more fixed in nature and not as dependent onthe overall level of managed receivables.

For the year ended April 30, 2006, the Company incurredlegal expenses of $350 and settlement costs of $450 in connection with itsdefense and settlement of a class action lawsuit filed against a wholly-ownedsubsidiary alleging violations of the Fair Credit Reporting Act.  The Company’s decision to settle the lawsuitwas prompted by the trial court’s granting the plaintiff’s motion for summaryjudgment on January 20, 2006.  TheCompany and its counsel believe that the court’s ruling is contrary to thestatute and the facts in the case, and believe that an appeal would besuccessful.  However, given the trialcourt’s ruling, the Company concluded that settlement is preferable tocontinuing to incur the costs associated with the appeal and defense of thelawsuit.

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*Other Interest Expense*. Other interest expense increased to $1,323 foryear ended April 30, 2006, compared to $565 for the year ended April 30, 2005.The increase was primarily due to (i) a 40% increase for the year ended April30, 2006 in the average outstanding borrowings on the Company’s working capitalline and (ii) the related party note having an outstanding balance of $2,500for the entire year ended April 30, 2006, as compared to an outstanding balanceof $2,500 for one month for the year ended April 30, 2005.

**Liquidity and Capital Resources (dollars inthousands)**

*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, refinanceother originators and fund required reserve accounts, (ii) amounts necessary tofund premiums for credit enhancement insurance or other credit enhancementsrequired by the Company’s financing programs, and (iii) amounts necessary tofund costs to retain receivables, primarily interest expense. The Company alsorequires a significant amount of cash flow for working capital to fund fixedoperating expenses, primarily salaries and benefits.

TheCompany’s most significant cash flow requirement is for the origination ofreceivables. The Company originated $275,112 of Receivables Held for Investmentfor 2007 compared to $263,858 in 2006.

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 have accumulatedin the FIRC credit facility may be transferred to the FIARC commercial paperfacility at the option of the Company. The FIARC commercial paper facilityprovides an additional financing source of up to $300,000. Additionally, theCompany has transferred receivables from the warehouse credit facilities andissued term notes. Substantially all of the Company’s receivables are pledgedto collateralize these credit facilities and term notes.  The Company is obligated to meet certainfinancial covenants.  Noncompliance maysignificantly affect cash flow.

TheCompany’s most significant source of cash flow is the principal and interestpayments received from its receivable portfolios.  The Company received such payments in theamount of $215,948 in 2007 and $146,422 in 2006.  These funds are used to repay the amountsborrowed under the Company’s credit facilities and other holding costs,primarily interest expense and servicing and custodial fees.  During the years ended April 30, 2007 and2006, the Company required net cash of $59,164 and $117,436, respectively, asthe receivables originated exceeded portfolio collections.  The Company relies on borrowed funds toprovide cash flow in periods of growth. As of April 30, 2007, the Company had $66,718 of available capacity inthe 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 servicingfees.  Servicing fees range from 1.4% to2.5% of the outstanding principal balance of the loans in the portfolio.  Cash flow and servicing fees are receivedafter month end, but relate to the prior month activity.  Thus upon filing of the monthly servicing statements,a portion of the restricted cash is converted to cash available to fundoperations.  At April 30, 2007 and 2006the Company’s unencumbered cash was $1,669 and $3,380 respectively.  Cash and servicing fees collected afteryear-end, but related to the prior year’s activity totaled $225 and $154 as ofApril 30, 2007 and 2006, respectively. The increase in cash and servicing fees collected after year-end isprimarily due to $145 of accrued incentive fees present as of April 30, 2007,that were not present as of April 30, 2006. Management believes the unencumbered cash and cash inflows and amountsavailable under the working capital facility are adequate to fund cashrequirements for operations.

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*Contractual Obligations. *The following tablesummarizes the expected scheduled payments, excluding interest, whereapplicable, under the Company’s contractual obligations:
|                                           | ** ** | **Payments due by period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**          | ** ** | **Total**                                 | ** ** | **<1 yr** | ** ** | **1-3 yrs** | ** ** | **3-5 yrs** | ** ** | **>5 yrs** | ** ** |
| Warehouse credit facility obligations (1) |       | $                                         | 283,282    |   | $ | 119,356 |   | 142,210 |   | 21,716 |   | — |   |
| Term notes obligations (1)                |       | 169,987                                   |       | 71,621 |   | 85,335 |   | 13,031 |   | — |   |
| Working capital facility obligation (1)   |       | 22,753                                    |       | 9,587 |   | 11,422 |   | 1,744 |   | — |   |
| Related party note obligation             |       | 2,500                                     |       | — |   | 2,500 |   | — |   | — |   |
| Operating lease obligations               |       | 5,834                                     |       | 755 |   | 1,675 |   | 1,333 |   | 2,071 |   |
| Total                                     |       | $                                         | 484,356    |   | $ | 201,319 |   | $ | 243,142 |   | $ | 37,824 |   | $ | 2,071 |   |
|                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Yearlycontractual obligations may vary as principal payments are determined by cashreceived on the underlying asset, and may differ from the expected scheduledpayments.

*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 financesits loan originations through two warehouse credit facilities. The Company’scredit facilities 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 January, 2002 the Company issued $159,000 in asset-backed notes (“TermNotes”) secured by discrete pools of receivables. These notes were subsequentlycalled and redeemed in March, 2005.  InNovember, 2003, the Company issued $140,000 in Term Notes secured by a discretepool of receivables.  In May, 2005, theCompany issued $175,000 in Term Notes secured by a discrete pool ofreceivables.  In January, 2006, theCompany issued $189,000 in Term Notes secured by a discrete pool ofreceivables.  Substantially allreceivables retained by the Company are pledged as collateral for the creditfacilities and the Term Notes. The weighted average interest rate for theCompany’s secured borrowings including the effect of program fees and dealerfees was 5.6% and 4.5% for the fiscal years ending April 30, 2007 and 2006,respectively.

*WarehouseFacilities as of April 30, 2007*
| Facility | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**              | ** ** | **Borrowing   Rate At  April 30,   2007** | ** ** |
|----------|------------|--------------|------------|-----------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| FIARC    | ** ** | $            | 300,000    |            | $          | 246,477                |       | Commercial paper  rate plus .3%                                                                       |       | .25%  of   Unused Facility |       | None                                                          |       | 5.3 | % |
| FIRC     | ** ** | $            | 50,000     |            | $          | 36,805                 |       | 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                                                     |       | 5.8 | % |

 

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*WarehouseFacilities – Credit Enhancement as of April 30, 2007*
| 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 agreed tomaintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders, collectively,are named as additional insureds under this policy. The coverage is obtained oneach receivable at the time it is originated 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.  Neither thevehicle purchasers nor the dealers are charged for the coverage and they areunaware of its existence. The Company’s ALPI insurance policy is written byNational Union Fire Insurance Company of Pittsburgh (“National Union”), whichis a wholly-owned subsidiary of American International Group.

The premiums that the Company paid duringits past fiscal year for its credit enhancement insurance coverages, of whichthe largest component is the basic ALPI insurance, represented approximately 1.3%of the principal amount of the receivables originated during the year.Aggregate premiums paid for ALPI coverage alone during the fiscal years endedApril 30, 2005, 2006 and 2007 were $3,669, $3,769, and $2,883, respectively,and accounted for 2.3%, 1.4% and 1.1% of the aggregate principal balance of thereceivables originated during such respective periods.

 InApril 1994, the Company organized First Investors Insurance Company (the “InsuranceSubsidiary”) under the captive insurance company laws of the State of Vermont.The Insurance Subsidiary is an indirect wholly-owned subsidiary of the Companyand is a party to a reinsurance agreement whereby the Insurance Subsidiaryreinsures 100 percent of the risk under the Company’s ALPI insurance policy. Atthe time each receivable is insured by National Union, the risk isautomatically reinsured to its full extent and approximately 96% of the premiumpaid by the Company to National Union with respect to such receivable is cededto the Insurance Subsidiary. When a loss covered by the ALPI policy occurs,National Union pays it after the claim is processed, and National Union is thenreimbursed in full by the Insurance Subsidiary. As of April 30, 2007, grosspremiums had been ceded to the Insurance Subsidiary since its inception byNational Union in the amount of $41,722 and the Insurance Subsidiary reimbursedNational Union for aggregate reinsurance claims in the amount of $9,962. Inaddition to the monthly premiums and liquidity reserves of the Insurance Subsidiary,a trust account is maintained by National Union to secure the InsuranceSubsidiary’s obligations for losses it has reinsured.

The result of the foregoing reinsurancestructure is that National Union, as the “fronting” insurer under the captivearrangement, is unconditionally obligated to the Company’s credit facilitylenders for all losses covered by the ALPI policy, and the Company, through itsInsurance Subsidiary, is obligated to indemnify National Union for all suchlosses. As of April 30, 2007, the Insurance Subsidiary had capital and surplusof $2,474 and unencumbered cash reserves of $1,023 in addition to $3,355 in atrust account.

TheALPI coverage as well as the Insurance Subsidiary’s liability under theReinsurance Agreement, remains in effect for each receivable that is pledged ascollateral under the warehouse credit facility. Once receivables aretransferred from FIRC to FIARC and financed under the commercial paperfacility, ALPI coverage and the Insurance Subsidiary’s liability under the ReinsuranceAgreement is cancelled with respect to the transferred receivables. Anyunearned premium associated with the transferred receivables is returned to theCompany. The Company believes the losses its Insurance Subsidiary will berequired to indemnify will be less than the premiums ceded to it. However,there can be no assurance that losses will not exceed the premiums ceded andthe capital and surplus of the Insurance Subsidiary.

FIARC– Credit Enhancement for the FIARC warehouse facility is provided to thecommercial paper investors by a 6% overcollaterization level and a cash reserveaccount 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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*WarehouseFacilities – Agents and Expirations*
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**     | ** ** | **Event if not Renewed**                                                                                                                                                 |
|--------------|------------|-----------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 13,  2008 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC         |       | Wachovia  |       | February 13,  2008 |       | 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. |

 

OnFebruary 15, 2006, the FIRC facility was renewed, under similar terms andconditions, at the $50,000 commitment level until February 13, 2007.  On February 14, 2007, the FIRC facility wasextended to its current maturity date of February 13, 2008.  As of April 30, 2006 and 2007, there was$47,080 and $36,805, respectively, outstanding.

On March 15, 2006,following a short-term extension of the then current maturity date, the FIARCfacility was renewed to February 14, 2007. In connection with the renewal, the Company obtained approval from thelender to eliminate the requirement that a surety bond be maintained to provideadditional enhancement to the commercial paper investors as well as eliminatingthe requirement to purchase interest rate caps. As a result, the 0.35% surety bond premium and the 0.25% unused suretybond premium were eliminated.  Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from0.25% to 0.30%.  On October 11, 2006, theCompany amended the facility to increase the commitment from $150,000 to$300,000 in order to fund the growth in origination volume.  On February 14, 2007, the maturity date ofthe FIARC facility was extended to its current maturity date of February 13,2008.  As of April 30, 2006 and 2007,there was $0 and $246,477, respectively, outstanding.

Managementpresently intends to seek further extensions to these warehouse facilitiesprior to the current expiration dates. Management considers its relationship with its lenders to be satisfactoryand has no reason to believe that the FIRC and FIARC facilities will not berenewed at each of their respective expiration dates.

The followingtable contains pertinent information on the Term Notes as of April 30, 2007.

| Term Notes | ** ** | **Issuance Date** | ** ** | **Issuance   Amount** | ** ** | **Maturity Date** | ** **        | **Outstanding** | ** ** | **Interest   Rate** | ** ** |
|-----------------|------------|------------------------|------------|----------------------------|------------|------------------------|-------------------|-----------------|------------|--------------------------|------------|
| 2005-A Class 2  |       | May 5, 2005            |       | $                          | 106,493    |                   | July 16, 2012     |            | $          | 59,685                   |       | 4.23 | % |
| 2006-A Class 2  |       | January 26, 2006       |       | $                          | 47,000     |                   | March 16, 2009    |            | $          | 242                      |       | 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 enhancementon the Term Notes are as follows:
| Facility | ** ** | **Cash Reserve**                                                                                    | ** ** | **Advance Rate**                            | ** ** | **Insurance** |
|----------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|
| 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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TermNotes - On November 20, 2003, the Company, through itsindirect, wholly-owned subsidiary, First Investors Auto Owner Trust 2003-A (“2003Auto Trust”), completed the issuance of $139,661 of 2.58% Class A asset-backednotes (“2003-A Term Notes”). The initial pool of automobile receivablestransferred to the 2003 Auto Trust totaled $114,727, which was previously ownedby FIRC and FIARC, secure the 2003-A Term Notes.  In addition to the issuance of the Class ANotes, the 2003 Auto Trust also issued a $5,066 Class B Note that was retainedby the Company and pledged to secure the Working Capital Facility as furtherdescribed below.  Proceeds from theissuance, which totaled $139,657, were used to (i) fund a $30,000 pre-fundingaccount to be used for future loan originations, (ii) repay all outstandingborrowings under the FIARC commercial paper facility, (iii) reduce theoutstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2003-A Term Note issuance, and (v) fund an initial cashreserve account of 0.5%, or $574, of the initial receivables pledged.  The Class A Term Notes bear interest at 2.58%and require monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 96.1% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2003-A Term Notes is April 20,2011.  The Class B Note does not bearinterest but requires principal reductions sufficient to reduce the balance ofthe Class B Note to 3.9% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6% of the then current principal balance of the receivables pool.  The 2003-A Term Notes were called on March20, 2007.  As of April 30, 2006, and2007, the outstanding principal balances on the 2003-A Term Notes were $37,715and $0, 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, was previously owned byFIRC 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 4.25% of the outstanding balance of theunderlying receivables pool.  A suretybond issued by MBIA Insurance Corporation provides credit enhancement for theClass A Notes.  In the event that certainasset quality covenants are not met, the reserve account target level willincrease to 2% of the then current principal balance of the receivablespool.  As of April 30, 2006 and 2007, theoutstanding principal balances on the 2005-A Term Notes were $106,162 and$59,685, 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 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 maturities ofthe Class A-2, Class A-3, and Class A-4 Term Notes are March 16, 2009, February15, 2011, and April 15, 2013, respectively. The Class B Note does not bear interest but requires principal 

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reductionssufficient to reduce the balance of the Class B Note to 3.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset 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 2007, the outstanding principal balances on the 2006-A ClassA Term Notes were $172,708 and $110,302, respectively.

*Working Capital Facility*.  The facility is provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.  This facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve account for each of the Company’sother credit facilities.  The facility issecured solely by the residual cash flow and cash reserve accounts related tothe Company’s warehouse credit facilities and the existing and future term notefacilities.  The outstanding borrowingsunder the facility bear interest at one-month LIBOR plus 2.25%.  In addition, a commitment fee of 1.5% is paidon the total amount of this facility.  OnOctober 26, 2004, the Working Capital Facility was extended until October 10,2005, increasing the commitment amount from $9,000 to $13,500.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  On August 15,2005, the Working Capital Facility was extended until February 15, 2006,increasing the commitment amount to $23,500, and was subsequently extended onFebruary 15, 2006 until February 14, 2007. The interest rate remained at LIBOR plus 2.25% and the commitment feepaid on the total available amount of the facility was maintained at 1.5%.  On November 7, 2006, the Company amended thefacility to increase the commitment amount from $23,500 to $28,500.  On February 14, 2007, the working capitalfacility was extended to its current maturity date of February 13, 2008, undersimilar terms and conditions.  As ofApril 30, 2006 and 2007, there was $16,454 and $22,753, 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 facility would convert to a term loan,and amortize with the terms of the receivables that secure the facility.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed.  If thefacility is not renewed, however, or if material changes are made to its termsand conditions, it could have a material adverse effect on the Company.

*Related Party Loans. *On December 3, 2001 theCompany entered into an agreement with one of its shareholders who is a memberof its Board of Directors under which the Company may, from time to time,borrow up to $2,500.  On December 6,2004, the original $2,500 shareholder loan was replaced with a $2,500 loancontaining identical terms and conditions between the Company and a limitedpartnership that is affiliated with a current shareholder and member of theBoard of Directors  The proceeds of theborrowings have been utilized to fund certain private and open market purchasesof the Company’s common stock pursuant to a Stock Repurchase Plan authorized bythe Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2,500 outstandingunder these facilities as of April 30, 2006 and 2007.  For the fiscal years ended April 30, 2005,2006, 2007, the Company recorded interest expense under these facilities of$18, $250 and $250, 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 was not in defaultwith respect to any financial and non-financial covenants governing thesefinancing arrangements at April 30, 2007.

*Interest Rate Management*.  The Company’s warehouse credit facilities andworking capital facilities bear interest at floating interest rates which arereset on a short-term basis while the secured Term Notes bear interest at afixed rate of interest. The Company’s receivables bear interest at fixed ratesthat do not generally vary with a change in market interest rates. Since aprimary contributor to the Company’s profitability is its ability to manage itsnet 

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interest spread,the Company seeks to maximize the net interest spread while minimizing exposureto changes in interest rates. In connection with managing the net interestspread, the Company may periodically enter into interest rate swaps or caps tominimize the effects of market interest rate fluctuations on the net interestspread. To the extent that the Company has outstanding floating rate borrowingsor has elected to convert a portion of its borrowings from fixed rates tofloating rates, the Company will be exposed to fluctuations in short-terminterest rates.

Duringfiscal year 2006, as a requirement of the FIARC commercial paper facility, theCompany entered into seven interest rate cap transactions, with a strike rateof 6%.  The aggregate initial notionalamount of the caps was $131,710 which amortized over six years.  The Company paid $450 in premium to purchasethese caps.  The interest rate caps were not designated as hedges, and accordingly,changes in the fair value of the interest rate caps were recorded as realizedgains or losses and reflected in net income.  On January 26, 2006, the Company terminatedall interest rate caps outstanding in exchange for proceeds of $275.  The caps were terminated following therepayment of all balances outstanding under the FIARC facility prior to theissuance of the 2006-A Term Notes.  As aresult, a realized loss of $175 was incurred relative to the aggregate marketvalue of the interest rate caps.  Thisrequirement was eliminated as part of the facility’s renewal.

During fiscal year 2005, as a requirement of the FIARCcommercial paper facility, the Company entered into nine interest rate captransactions, with strike rates between 5% and 6%.  The aggregate initial notional amount of thecaps was $126,087 which amortized over six years.  The Company paid an aggregate of $1,213 inpremiums to purchase these caps.  Theinterest rate caps were not designated as hedges, and accordingly, changes inthe fair value of the interest rate caps were recorded as unrealized gains orlosses and reflected in net income.  OnApril 28, 2005, the Company terminated all interest rate caps outstanding inexchange for proceeds of $840.  The capswere terminated following the repayment of all amounts outstanding under theFIARC facility prior to the issuance of the 2005-A term notes.  As a result, a realized loss of $373 wasincurred relative to the aggregate market value of the interest rate caps.

**Delinquency and Credit Loss Experience (dollars inthousands)**

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 $2,934 as of April 30, 2007 and $2,332 as ofApril 30, 2006 as a percentage of Receivables Held for Investment of $458,586as of April 30, 2007 and $368,878 as of April 30, 2006 was 0.6% respectively.

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 cover 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, FIARC and FIACCcommercial paper facilities do not carry default insurance.  Provisions for credit losses of $11,205, $7,503,and $9,520 have been recorded for the years ended April 30, 2007, April 30,2006, and April 30, 2005, respectively.

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 loans currentlyheld by the Company because they are comprised of a large group of smallerbalance homogenous loans that are evaluated collectively for impairment.

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Companycompares the aging status of each loan on a date which is six months prior tothe reporting 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.  Effective the quarter endedApril 30, 2005, the 

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Company elected toincrease its allowance for loan losses against loans that were greater than 120days past due and loans in which the collateral had been assigned forrepossession but had not yet been repossessed as of the reporting date.  The Company believes that this increase iswarranted in light of the change in federal bankruptcy laws enacted during theperiod and the recognition that the migration trends of severely delinquentloans and loans subject to bankruptcy are expected to become moreprotracted.  Based on this, the Companyhas assigned a specific allowance against these loans equal to the outstandingbalance of loans in these categories less the estimated recovery amount basedon current data regarding liquidation of the collateral and collection of anyadditional payments.  The Companyutilized its most recent recovery rates in order to assess fair value of theseloans.  For loans that are not classifiedinto these categories, the historical migration pattern is utilized in order toestablish the estimated impairment.  Theallowance for credit losses is based on estimates and 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 its last two fiscal years:
|                                                                                       | ** ** | **As of or for the Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                                                          | ** ** | **2007** | ** ** |
| ** **                                                                            | ** ** | **Number**                                                                        | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **of Loans**                                                                 | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                     |       |                                                                              |       |   |   |   |   |   |   |
| Delinquent amount  outstanding (1):                                                   |       |                                                                              |       |   |   |   |   |   |   |
| 30 - 59 days                                                                          |       | 81                                                                                |       | $ | 658 |   | 115 |   | 1,336 |   |
| 60 - 89 days                                                                          |       | 36                                                                                |       | 224 |   | 40 |   | 411 |   |
| 90 days or more                                                                       |       | 15                                                                                |       | 166 |   | 56 |   | 530 |   |
| Total  delinquencies                                                                  |       | 132                                                                               |       | $ | 1,048 |   | 211 |   | $ | 2,277 |   |
| Total  delinquencies as a percentage of outstanding receivables                       |       | 0.6                                                                               | %          | 0.3 | % | 0.8 | % | 0.5 | % |
| Net charge-offs as a  percentage of average receivables outstanding during the period |       |                                                                              |       | 2.4 | % |   |   | 2.5 | % |
|                                                                                       |            |                                                                                   |            |  |  |  |  |  |  |  |  |

 

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

The higher annualized charge-off rateresults from a higher number of repossessions in 2007.

As of April 30, 2007, there were 313accounts totaling $3,675 that were in bankruptcy status and were more than 30days past due.  As of April 30, 2006,there were 239 accounts totaling $2,463 that were in bankruptcy status and weremore than 30 days past due.   As of April30, 2007 and 2006, 92% of the bankruptcy delinquencies filed for protectionunder Chapter 13.

**New Accounting 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 reversed on audit, based on the technical merits of the position.The provisions of FIN 48 are effective for the Company on May 1,2007, with the cumulative effect of the change in accounting principle, if any,recorded as an adjustment to opening retained earnings.  The Company iscurrently evaluating the impact of adopting FIN 48 on its financialposition, cash flows, and results of operations.

In February 2006,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, *Application of Statement 133 to Beneficial Interest in SecuritizedFinancial Assets*. 

29

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This Statement:(a) permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation;(b) clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS 133; (c) establishes a requirement toevaluate beneficial interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation;(d) clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives; and, (e) eliminatesrestrictions on a qualifying special-purpose entity’s ability to hold passivederivative financial instruments that pertain to beneficial interests that areor contain a derivative financial instrument. The standard also 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 beembedded derivatives identified with changes in fair value recognized in netincome.

In March 2006, the FASBissued SFAS No. 156, *Accounting for Servicingof Financial Assets — an amendment of FASB Statement No. 140* (“SFAS156”). SFAS 156 requires an entity to recognize a servicing asset or servicingliability each time it undertakes an obligation to service a financial asset byentering into a servicing contract in specific situations. Additionally, theservicing asset or servicing liability shall be initially measured at fairvalue, if practicable. SFAS 156 permits an entity to choose either theamortization method or fair value measurement method for subsequent measurementof the servicing asset or servicing liability. SFAS 156 is effective for thefiscal year ending April 30, 2008. The Company is currently evaluating theimpact of adopting SFAS 156 on its financial position, cash flows, andresults of operations; however it is not expected to have a material impact onour consolidated financial position, results of operations or cash flows.

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*.This statement enhances existing guidance for measuring assets and liabilitiesusing fair value. Prior to the issuance of SFAS No. 157, guidance forapplying fair value was incorporated in several accounting pronouncements. Thisstatement provides a single definition of fair value, together with a frameworkfor measuring it, and requires additional disclosure about the use of fairvalue to measure assets and liabilities. SFAS No. 157 also emphasizes thatfair value is a market-based measurement, not an entity-specific measurement,and sets out a fair value hierarchy with the highest priority being quotedprices in active markets. Under this statement, fair value measurements aredisclosed by level within that hierarchy. While SFAS No. 157 does not addany new fair value measurements, it does change current practice. Changes topractice include: (1) a requirement for an entity to include its owncredit standing in the measurement of its liabilities; (2) a modificationof the transaction price presumption; (3) a prohibition on the use ofblock discounts when valuing large blocks of securities for broker-dealers andinvestment companies; and (4) a requirement to adjust the value ofrestricted stock for the effect of the restriction even if the restrictionlapses within one year. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. The Company is currently evaluating theimpact of adopting SFAS 157 on its financial position, cash flows, andresults of operations.

In February 2007,the Financial Accounting Standards Board (FASB) issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment to FASB Statement No. 115*.This statement allows a company to irrevocably elect fair value as ameasurement attribute for certain financial assets and financial liabilitieswith changes in fair value recognized in the results of operations. The statementalso establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. The Companyis currently evaluating the impact of adopting SFAS 159 on its financialposition, cash flows, and results of operations.

**ITEM 7A.  *QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*(dollars in thousands)**

The market risk discussion and theestimated amounts generated from the analysis that follows are forward-lookingstatements of market risk assuming certain adverse market conditions occur.Actual results in the future may 

30

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differmaterially due to changes in the Company’s product and debt mix, developmentsin the financial markets, and further utilization by the company ofrisk-mitigating strategies such as hedging.

The Company’s operating revenues arederived almost entirely from the collection of interest on the receivables itretains and its primary expense is the interest that it pays on borrowingsincurred to purchase and retain such receivables. The Company’s creditfacilities bear interest at floating rates which are reset on a short-termbasis, whereas its receivables bear interest at fixed rates which do notgenerally vary with changes in interest rates. The Company is therefore exposedprimarily to market risks associated with movements in interest rates on itscredit facilities. The Company believes that it takes the necessary steps toappropriately reduce the potential impact of interest rate increases on theCompany’s financial position and operating performance.

The Company relies almost exclusively onrevolving credit facilities to fund its origination of receivables.Periodically, the Company will transfer receivables from a revolving to a termcredit facility. Currently all of the Company’s credit facilities bear interestat floating rates tied to either a commercial paper index or LIBOR.

As of April 30, 2007, the Company had$306,035 of floating rate secured debt outstanding.  For every 1% increase in the commercial paperrate or LIBOR, annual after-tax earnings would decrease by approximately $1,980assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates. As of April 30, 2006, the Company had $63,534 of floating rate secureddebt outstanding.  For every 1% increasein commercial paper rates or LIBOR, annual after-tax earnings would decrease byapproximately $416 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 throughout Item 1.

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

**ITEM 8.  *FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA***

The Consolidated Financial Statements ofthe Company included in this Form 10-K are listed under Item 14(a). The Companyis not required to file any supplementary financial data under this item.

**ITEM 9.  *CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**FINANCIAL DISCLOSURE***

None.

**ITEM 9A.  *CONTROLS AND PROCEDURES***

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Companycarried out an evaluation, under the supervision and with the participation ofmanagement, including the Company’s Chief Executive Officer and Chief 

31

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Financial Officer,of the effectiveness of the Company’s disclosure controls and procedures as ofthe end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were effective as of April 30, 2007 to provide reasonable assurancethat information required to be disclosed in the Company’s reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

Therehas been no change in the Company’s internal controls over financial reportingthat occurred during the year ended April 30, 2007 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrols over financial reporting, other than increased controls surroundingthe Company’s reporting for income taxes. Historically, the Company has utilized third parties to prepare federaland state tax returns, and to provide accounting entries to record differencesbetween the current and deferred tax accounts on the Company’s balancesheet.  In an effort to provide adequateassurances that federal and state tax returns continue to be filed in a timelyand accurate manner, and specifically to ensure that entries made to recordcurrent and deferred tax assets and liabilities are fully documented, theCompany has instituted additional reconciliation and testing procedures whichwill enhance internal controls and provide additional information to managementon the nature of these assets and liabilities. The Company has also elected to engage a national accounting firm toprovide advisory and compliance services with respect to the Company’s federaland state tax obligations.

**Part III**

**ITEM 10.  *DIRECTORS AND EXECUTIVE OFFICERS***

Information responsive to this itemappears under the caption “Election of Directors” in the Company’s ProxyStatement for the 2007 Annual Meeting of Shareholders, which is to be filedwith the Securities and Exchange Commission, and is incorporated herein byreference.

Informationrelated to the nomination of directors appears under the caption “CorporateGovernance” in the Company’s Proxy Statement for the 2007 Annual Meeting ofShareholders, which is to be filed with the Securities and Exchange Commission,and is incorporated herein by reference.

Informationrelated to the Company’s Code of Business Conduct and Ethics, adopted April 28,2004, appears under the caption “Corporate Governance” in the Company’s ProxyStatement for the 2007 Annual Meeting of Shareholders, which is to be filedwith the Securities and Exchange Commission, and is incorporated herein byreference.  The Code of Business Conductand Ethics has also been filed under Item 15 as an exhibit to this Form 10-K.

TheAudit Committee of the Board of Directors has designated one or more persons asfinancial experts.  Information relatedto the financial expert designation and the Audit Committee appears under thecaption “Other Information Concerning the Board of Directors” in the Company’sProxy Statement for the 2007 Annual Meeting of Shareholders, which is to befiled with the Securities and Exchange Commission, and is incorporated hereinby reference.

**ITEM 11.  *EXECUTIVE COMPENSATION***

Information responsive to this itemappears under the caption “Executive Compensation” in the Company’s ProxyStatement for the 2007 Annual Meeting of Shareholders, which is to be filedwith the Securities and Exchange Commission, and is incorporated herein byreference.

**ITEM 12.  *SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT***

Information responsive to this itemappears under the caption “Security Ownership of Management and CertainBeneficial Owners” in the Company’s Proxy Statement for the 2007 Annual Meetingof Shareholders, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.

32

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**ITEM 13.  *CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS***

Information responsive to this itemappears under the caption “Related Party Transactions” in the Company’s ProxyStatement for the 2007 Annual Meeting of Shareholders, which is to be filedwith the Securities and Exchange Commission, and is incorporated herein byreference.

**ITEM 14.  *PRINCIPAL ACCOUNTANT FEES AND SERVICES***

Information related to this item appearsunder the caption “Proposal 2: Ratification of appointment of IndependentAuditors” in the Company’s proxy statement for the 2007 annual meeting ofshareholders, which is to be filed with the Securities and Exchange Commission,and is incorporated herein by reference.

**Part IV**

**ITEM 15.  *EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K***

(a)   *(1)(2) FinancialStatements and Financial Statement Schedules*

See Index toConsolidated Financial Statements on Page F-1.

*(3) Exhibits*
| 2.1(j)   |   | — |   | Stock Purchase Agreement, dated as of September 9,  1998, between First Investors Financial Services Group, Inc. and Fortis, Inc.  to purchase Auto Lenders Acceptance Corporation, a wholly-owned subsidiary of  Fortis, Inc.                                                                                                                                                                                                                                                                                                                    |
|----------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(a)   |   | — |   | Articles of Incorporation, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2(a)   |   | — |   | Bylaws, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1(a)   |   | — |   | Excerpts from the Articles of Incorporation, as  amended (included in Exhibit 3.1).                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3(a)   |   | — |   | Specimen Stock Certificate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5(a)  |   | — |   | Credit Agreement dated as of October 16, 1992 among  F.I.R.C., Inc. (“FIRC”) and NationsBank of Texas, N.A., individually and as  agent for the banks party thereto, as amended by First Amendment to Credit  Agreement and Loan Documents dated as of November 5, 1993, Second Amendment  to Credit Agreement and Loan Documents dated as of March 3, 1994, Third  Amendment to Credit Agreement and Loan Documents dated as of March 17, 1995  and Fourth Amendment to Credit Agreement and Loan Documents dated as of July  7, 1995. |
| 10.6(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.12(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.13(a) |   | — |   | Facultative Reinsurance Agreement between National  Fire Insurance Company of Pittsburgh and First Investors Insurance Company,  as reinsurer, dated as of May 26, 1995.                                                                                                                                                                                                                                                                                                                                                                          |
| 10.14(a) |   | — |   | Blanket Collateral Protection Insurance Policy dated  October 5, 1992 issued by Agricultural Excess & Surplus Insurance Company  to FIRC as insured.                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.16(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.17(a) |   | — |   | Lease Agreement between A.I.G. Realty, Inc. and  First Investors dated as of June 1, 1992, as amended by Amendment One dated  October 29, 1993 and Amendment Two dated October 26, 1994.                                                                                                                                                                                                                                                                                                                                                          |
| 10.18(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.21(a) |   | — |   | 1995 Employee Stock Option Plan of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.22(a) |   | — |   | Form of Stock Option Agreement between the  Registrant and Robert L. Clarke dated August 25, 1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.23(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

33

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| 10.24(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|----------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25(b) |   | — |   | Amendment Three dated October 10, 1995 to the Lease  Agreement between A.I.G. Realty, Inc. and the Registrant, filed as Exhibit  10.17.                                                                                                                                                                                                                                |
| 10.26(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.27(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.28(c) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.29(d) |   | — |   | Security Agreement dated as of October 22, 1996  among First Investors Auto Receivables Corporation, Enterprise Funding  Corporation, Texas Commerce Bank National Association, MBIA Insurance  Corporation, NationsBank N.A., and First Investors Financial Services, Inc.                                                                                            |
| 10.30(d) |   | — |   | Note Purchase Agreement dated as of October 22, 1996  between First Investors Auto Receivables Corporation and Enterprise Funding  Corporation.                                                                                                                                                                                                                        |
| 10.31(d) |   | — |   | Purchase Agreement dated as of October 22, 1996  between First Investors Financial Services, Inc. and First Investors Auto  Receivables Corporation.                                                                                                                                                                                                                   |
| 10.32(d) |   | — |   | Insurance Agreement dated as of October 1, 1996  among First Investors Auto Receivables Corporation, MBIA Insurance  Corporation, First Investors Financial Services, Inc., Texas Commerce Bank  National Association, and NationsBank N.A.                                                                                                                            |
| 10.33(d) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.34(d) |   | — |   | Amended and Restated Credit Agreement dated as of  October 30, 1996 among F.I.R.C., Inc. and NationsBank of Texas, N.A.,  individually and as Agent for the financial institutions party thereto.                                                                                                                                                                      |
| 10.35(d) |   | — |   | Amended and Restated Collateral Security Agreement  dated as of October 30, 1996 between F.I.R.C., Inc. and Texas Commerce Bank  National Association as collateral agent for the ratable benefit of  NationsBank of Texas, N.A. individually and as agent for the financial  institutions party to the Amended and Restated Credit Agreement filed as  Exhibit 10.34. |
| 10.36(d) |   | — |   | Amended and Restated Purchase Agreement dated as of  October 30, 1996 between First Investors Financial Services, Inc. and  F.I.R.C., Inc.                                                                                                                                                                                                                             |
| 10.37(d) |   | — |   | Amended and Restated Servicing Agreement between  F.I.R.C., Inc. and General Electric Capital Corporation.                                                                                                                                                                                                                                                             |
| 10.38(e) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.39(f) |   | — |   | First Amendment to the Amended and Restated Credit  Agreement dated January 31, 1997 by and among F.I.R.C., Inc. and NationsBank  of Texas, N.A., individually and as agent for the banks party thereto.                                                                                                                                                               |
| 10.40(f) |   | — |   | Second Amendment to the Amended and Restated Credit  Agreement dated May 15, 1997 by and among F.I.R.C., Inc. and NationsBank of  Texas, N.A., individually and as agent for the banks party thereto.                                                                                                                                                                  |
| 10.41(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.42(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.43(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.44(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.45(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.46(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.47(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.48(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.49(h) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.50(h) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.51(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.52(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.53(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.54(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.55(k) |   | — |   | Third Amendment to the Amended and Restated Credit  Agreement dated January 25, 1999 by and among F.I.R.C., Inc. and NationsBank  of Texas, N.A., individually and as agent for the banks party thereto.                                                                                                                                                               |
| 10.56(k) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
| 10.57(l) |   | — |   | Amendment Number 2 to Security Agreement dated March  31, 1999 among First Investors Auto Receivables Corporation, Enterprise  Funding Corporation, Chase Bank of Texas, National Association, Norwest Bank  Minnesota, National Association, MBIA Insurance Corporation, NationsBank  N.A., and First Investors Financial Services, Inc.                              |

 

34

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| 10.58(l)       |   | — |   | Amendment Number 1 to Note Purchase Agreement dated  as of March 31, 1999 among First Investors Auto Receivables Corporation and  Enterprise Funding Corporation.                                                                                                                                                                                                                                                                                                                          |
|----------------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.59(l)       |   | — |   | Amendment Number 1 to Insurance Agreement dated March  31, 1999 among First Investors Auto Receivables Corporation, MBIA Insurance  Corporation, First Investors Financial Services, Inc., Auto Lenders  Acceptance Corporation, Norwest Bank Minnesota, National Association and  NationsBank, N.A.                                                                                                                                                                                       |
| 10.60(l)       |   | — |   | Servicing Agreement dated March 31, 1999 among First  Investors Auto Receivables Corporation, Norwest Bank Minnesota, National  Association and Auto Lenders Acceptance Corporation.                                                                                                                                                                                                                                                                                                       |
| 10.61(l)       |   | — |   | Guaranty dated March 31, 1999 by First Investors  Financial Services, Inc., First Investors Auto Receivables Corporation, Auto  Lenders Acceptance Corporation and Norwest Bank Minnesota, National  Association.                                                                                                                                                                                                                                                                          |
| 10.62(m)       |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.63(m)       |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.64(m)       |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.65(m)       |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.66(m)       |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.67(m)       |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|  10.68(n) |   | — |   | Administrative Services Agreement dated as of August  8, 2000 between Project Brave Limited Partnership and First Union Securities,  Inc.                                                                                                                                                                                                                                                                                                                                                  |
| 10.69 (n)      |   | — |   | Project Brave Limited Partnership Agreement of  Limited Partnership dated as of July 1, 2000.                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.70 (n)      |   | — |   | Amended and Restated NIM Collateral Purchase  Agreement dated as of August 8, 2000.                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.71 (n)      |   | — |   | Amended and Restated Contract Purchase Agreement  dated as of August 8, 2000.                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.72 (n)      |   | — |   | First Amendment to Amended and Restated NIM  Collateral Purchase Agreement dated as of September 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.73 (n)      |   | — |   | First Amendment to Servicing Agreement dated as of  September 13, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.74 (n)      |   | — |   | First Amendment to Transfer and Servicing Agreement  dated as of September 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.75 (n)      |   | — |   | Project Brave Limited Partnership Asset-Backed Notes  Indenture dated as of August 8, 2000.                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.76 (n)      |   | — |   | Note Purchase Agreement between Project Brave  Limited Partnership as Issuer, First Union Securities, Inc., as Deal Agent,  the Note Investors named herein, First Union National Bank as Liquidity Agent  and Variable Funding Capital Corporation, as an Initial Note Investor, dated  as of August 8, 2000.                                                                                                                                                                             |
| 10.77 (n)      |   | — |   | Supplemental Indenture No. 1 (Project Brave Limited  Partnership) dated as of September 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.78 (n)      |   | — |   | Third Amendment to Security Agreement dated as of  September 13, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.79 (n)      |   | — |   | Transfer and Servicing Agreement among Project Brave  Limited Partnership, Issuer, FIFS Acquisition Funding Company, L.L.C., as  Transferor, First Investors Servicing Corporation as Servicer and a  Transferor Party, ALAC Receivables Corp., as a Transferor Party, First Union  Securities, Inc., as Deal Agent and Collateral Agent and Wells Fargo Bank  Minnesota, National Association as Backup Servicer, Collateral Custodian and  Indenture Trustee dated as of August 8, 2000. |
| 10.80 (o)      |   | — |   | Second Amended and Restated Credit Agreement dated  as of November 15, 2000 Among F.I.R.C., Inc. as Borrower and the Financial  Institutions Now or Hereafter Parties Hereto as Banks and Bank of America, N.  A. as Agent.                                                                                                                                                                                                                                                                |
| 10.81 (o)      |   | — |   | Third Amended and Restated Collateral Security  Agreement dated as of November 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.82 (o)      |   | — |   | Fourth Amendment to Amended and Restated Purchase  Agreement dated as of November 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.83 (o)      |   | — |   | First Amendment to Servicing Agreement dated as of  November 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.84 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.85 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.86 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.87 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.88 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.89 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.90 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.91 (o)      |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.92 (o)      |   | — |   | Amendment No. 2 To Insurance Agreement for First  Investors Auto Receivables Corporation Revolving Automobile Receivables  Financing Facility dated as of November 29, 2000.                                                                                                                                                                                                                                                                                                               |
| 10.93 (o)      |   | — |   | Amendment Number 3 To Security Agreement dated as of  November 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.94 (o)      |   | — |   | Warrant No. 1 to Purchase 111,334 Shares of Common  Stock, $.01 par value.                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.95 (o)      |   | — |   | Warrant No. 2 to Purchase 55,667 Shares of Common  Stock, $.01 par value.                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.96 (o)      |   | — |   | Amendment Number 3 To Purchase Agreement dated as of  November 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

35

----

 
| 10.97 (o) |   | — |   | Amendment Number 1 To Servicing Agreement dated as  of November 29, 2000.                                                                                                                                                                                                                                                                                                                                                       |
|-----------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.98 (p) |   | — |   | First Omnibus Amendment to the Transaction Documents  dated December 6, 2001 between F.I.R.C., Inc., First Investors Financial  Services, Inc., First Investors Servicing Corporation, Bank of America, N.A.,  First Union Securities, Inc. and Wells Fargo Bank Minnesota, National  Association                                                                                                                               |
| 10.99 (p) |   | — |   | Security Agreement dated December 6, 2001 between  First Investors Residual Funding L.P. and First Union Securities, Inc.                                                                                                                                                                                                                                                                                                       |
| 10.100(p) |   | — |   | Sale and Servicing Agreement dated December 6, 2001  between First Investors Residual Funding L.P., First Investors Financial  Services, Inc. and First Union Securities, Inc.                                                                                                                                                                                                                                                  |
| 10.101(p) |   | — |   | Note Purchase Agreement dated December 6, 2001  between First Investors Residual Funding L.P, First Union Securities, Inc.,  First Union National Bank and Variable Funding Capital Corporation                                                                                                                                                                                                                                 |
| 10.102(p) |   | — |   | Asset Purchase Agreement dated December 6, 2001  between First Investors Residual Funding L.P., FIFS Acquisition Funding  Company LLC, First Investors Auto Investment Corp. and First Investors Auto  Receivables Corporation                                                                                                                                                                                                  |
| 10.103(p) |   | — |   | Indenture dated January 1, 2002 between First  Investors Auto Owner Trust 2002-A, First Investors Financial Services, Inc.  and Wells Fargo Bank Minnesota, National Association                                                                                                                                                                                                                                                |
| 10.104(p) |   | — |   | Sale and Allocation Agreement dated January 1, 2002  between First Investors Auto Owner Trust 2002-A, First Investors Financial  Services, Inc., First Investors Servicing Corporation, First Investors Auto  Funding Corporation and Wells Fargo Bank Minnesota, National Association                                                                                                                                          |
| 10.105(p) |   | — |   | Amended and Restated Trust Agreement dated January  1, 2002 between First Investors Auto Funding Corporation and Bankers Trust  (Delaware)                                                                                                                                                                                                                                                                                      |
| 10.106(p) |   | — |   | First Omnibus Amendment to Transaction Documents  dated January 14, 2002 between First Investors Auto Receivables Corporation,  First Investors Financial Services, Inc., First Investors Servicing  Corporation, Enterprise Funding Corporation, Bank of America, N.A., Variable  Funding Capital Corporation, First Union Securities, Inc., MBIA Insurance  Corporation, and Wells Fargo Bank Minnesota, National Association |
| 10.107(p) |   | — |   | Amendment No. 3 to Note Purchase Agreement dated  January 14, 2002 between First Investors Auto Receivables Corporation and  Variable Funding Capital Corporation                                                                                                                                                                                                                                                               |
| 10.108(p) |   | — |   | Amendment No. 4 to Security Agreement dated January  14, 2002 between First Investors Auto Receivables Corporation, First Investors  Financial Services, Inc., First Investors Servicing Corporation, Variable  Funding Capital Corporation, First Union Securities, Inc., MBIA Insurance  Corporation and Wells Fargo Bank Minnesota, National Association                                                                     |
| 10.109(q) |   | — |   | 2002 Non-Employee Director Stock Option Plan dated  July 18, 2002                                                                                                                                                                                                                                                                                                                                                               |
| 10.110(r) |   | — |   | Amended and Restated Trust Agreement dated November  20, 2003 between First Investors Auto Funding Corporation and Deutsche Bank  Trust Company Delaware.                                                                                                                                                                                                                                                                       |
| 10.111(r) |   | — |   | Indenture dated November 20, 2003 between First  Investors Auto Owner Trust 2003-A and Wells Fargo Bank Minnesota, National  Association.                                                                                                                                                                                                                                                                                       |
| 10.112(r) |   | — |   | Sale and Allocation Agreement dated November 20,  2003 between First Investors Auto Owner Trust 2003-A, First Investors Auto  Funding Corporation, First Investors Servicing Corporation and Wells Fargo  Bank Minnesota, National Association.                                                                                                                                                                                 |
| 10.113(r) |   | — |   | Insurance Agreement dated November 20, 2003 between  MBIA Insurance Corporation, First Investors Servicing Corporation, First  Investors Financial Services, Inc., First Investors Auto Funding Corporation,  First Investors Auto Owner Trust 2003-A, Deutsche Bank Trust Company Delaware  and Wells Fargo Bank Minnesota, National Association.                                                                              |
| 10.114(t) |   | — |   | Amended and Restated Trust Agreement dated May 5,  2005 between First Investors Auto Funding Corporation and Deutsche Bank Trust  Company Delaware.                                                                                                                                                                                                                                                                             |
| 10.115(t) |   | — |   | Indenture dated May 5, 2005 between First Investors  Auto Owner Trust 2005-A and Wells Fargo Bank Minnesota, National Association.                                                                                                                                                                                                                                                                                              |
| 10.116(t) |   | — |   | Sale and Allocation Agreement dated May 5, 2005  between First Investors Auto Owner Trust 2005-A, First Investors Auto Funding  Corporation, First Investors Servicing Corporation and Wells Fargo Bank  Minnesota, National Association.                                                                                                                                                                                       |
| 10.117(t) |   | — |   | Insurance Agreement dated May 5, 2005 between MBIA  Insurance Corporation, First Investors Servicing Corporation, First Investors  Financial Services, Inc., First Investors Auto Funding Corporation, First  Investors Auto Owner Trust 2005-A, Deutsche Bank Trust Company Delaware and  Wells Fargo Bank Minnesota, National Association.                                                                                    |
| 10.118(t) |   | — |   | Servicing Agreement dated May  5, 2005 between Wells Fargo Bank Minnesota, National Association and First  Investors Auto Owner Trust 2005-A.                                                                                                                                                                                                                                                                                   |
| 10.119(t) |   | — |   | Administration Agreement dated  May 5, 2005 between Wells Fargo Bank Minnesota, National Association, First  Investors Financial Services, Inc. and First Investors Auto Owner  Trust 2005-A.                                                                                                                                                                                                                                   |

 

36

----

 
| 10.120(t) |   | — |   | Contribution Agreement dated  May 5, 2005 between First Investors Financial Services, Inc. and First  Investors Auto Funding Corporation.                                                                                                                                                                                                              |
|-----------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.121(u) |   | — |   | 2005 Employee Stock Option  Plan of the Registrant.                                                                                                                                                                                                                                                                                                    |
| 10.122(u) |   | — |   | Amendment No. 5 to Note  Purchase Agreement dated August 15, 2005, between First Investors Residual  Funding LP, Variable Funding Capital Corporation, Wachovia Bank, NA, and  Wachovia Capital Markets, LLC.                                                                                                                                          |
| 10.123(u) |   | — |   | Amendment No. 7 to Security  Agreement dated August 15, 2005, between First Investors Residual Funding LP,  First Investors Financial Services, Inc., and Wachovia Capital Markets, LLC.                                                                                                                                                               |
| 10.124(v) |   | — |   | Amended and Restated Trust  Agreement dated January 26, 2006 between First Investors Auto Funding  Corporation and Wells Fargo Delaware Trust Company.                                                                                                                                                                                                 |
| 10.125(v) |   | — |   | Indenture dated January 26,  2006 between First Investors Auto Owner Trust 2006-A and Wells Fargo Bank,  National Association.                                                                                                                                                                                                                         |
| 10.126(v) |   | — |   | Sale and Allocation Agreement  dated January 26, 2006 between First Investors Auto Owner Trust 2006-A, First  Investors Auto Funding Corporation, First Investors Servicing Corporation and  Wells Fargo Bank, National Association.                                                                                                                   |
| 10.127(v) |   | — |   | Insurance Agreement dated  January 26, 2006 between MBIA Insurance Corporation, First Investors  Servicing Corporation, First Investors Financial Services, Inc., First  Investors Auto Funding Corporation, First Investors Auto Owner Trust 2006-A,  Wells Fargo Delaware Trust Company, and Wells Fargo Bank, National  Association.                |
| 10.128(v) |   | — |   | Servicing Agreement dated  January 26, 2006 between Wells Fargo Bank, National Association, First  Investors Auto Owner Trust 2006-A, and First Investors Servicing Corporation.                                                                                                                                                                       |
| 10.129(v) |   | — |   | Administration Agreement dated January 26, 2006  between Wells Fargo Bank, National Association, First Investors Financial  Services, Inc. and First Investors Auto Owner Trust 2006-A.                                                                                                                                                                |
| 10.130(v) |   | — |   | Contribution Agreement dated  January 26, 2006 between First Investors Financial Services, Inc. and First  Investors Auto Funding Corporation.                                                                                                                                                                                                         |
| 10.131(w) |   | — |   | 2002 Non-Employee Director  Stock Option Plan (Amended and Restated Through July 10, 2006), dated October  4, 2006.                                                                                                                                                                                                                                    |
| 10.132    |   | — |   | 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.    |
| 10.133    |   | — |   | Amendment No. 6 to Note  Purchase Agreement, dated November 7, 2006, between First Investors Residual  Funding LP, Variable Funding Capital Company LLC, Wachovia Bank, National  Association and Wachovia Capital Markets, LLC.                                                                                                                       |
| 10.134    |   | — |   | Amendment No. 10 to Security  Agreement, dated February 14, 2007, between First Investors Residual Funding  LP, First Investors Financial Servicing, Inc. and Wachovia Capital Markets,  LLC.                                                                                                                                                          |
| 10.135    |   | — |   | Amendment No. 12 to Second  Amended and Restated Credit Agreement, dated February 14, 2007, between  F.I.R.C., Inc., Wachovia Bank, National Association and Wachovia Capital  Markets, LLC.                                                                                                                                                           |
| 10.136    |   | — |   | Amendment No. 2 to Second  Amended and Restated Security Agreement, dated February 14, 2007, between  First Investors Auto Receivable Corporation, First Investors Financial  Services, Inc., First Investors Servicing Corporation, Variable Funding  Capital Company LLC, Wachovia Capital Markets, LLC and Wells Fargo Bank,  National Association. |
| 10.137(x) |   | — |   | Employment Agreement between  First Investors Financial Services, Inc., and Tommy A. Moore, Jr., dated  March 12, 2007.                                                                                                                                                                                                                                |
| 10.138(x) |   | — |   | Employment Agreement between  First Investors Financial Services, Inc., and Bennie H. Duck, dated March 12,  2007.                                                                                                                                                                                                                                     |
| 14.1(s)   |   | — |   | Code of Business Conduct and  Ethics adopted April 28, 2004                                                                                                                                                                                                                                                                                            |
| 21.1(j)   |   | — |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                        |
| 23.1      |   | — |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                                              |
| 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.                                                                                                                                                                                                                                                   |
|      |   |   |   |                                                                                                                                                                                                                                                                                                                                                   |

 

37

----

 
| (a) |   | - |   | Exhibit previously filed with the Company’s  Registration Statement on Form S-1, Registration No. 33-94336 and  incorporated herein by reference. |
|-----|--------|---|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | - |   | Exhibit previously filed on 1996 Form 10-K and  incorporated herein by reference.                                                                      |
| (c) |   | - |   | Exhibit previously filed on July 31, 1996 First  Quarter Form 10-Q and incorporated herein by reference.                                               |
| (d) |   | - |   | Exhibit previously filed on October 31, 1996 Second  Quarter Form 10-Q and incorporated herein by reference.                                           |
| (e) |   | - |   | Exhibit previously filed on January 31, 1997 Third  Quarter Form 10-Q and incorporated herein by reference.                                            |
| (f) |   | - |   | Exhibit previously filed on July 31, 1997 First  Quarter Form 10-Q and incorporated herein by reference.                                               |
| (g) |   | - |   | Exhibit previously filed on January 31, 1998 Third  Quarter Form 10-Q and incorporated herein by reference.                                            |
| (h) |   | - |   | Exhibit previously filed on 1998 Form 10-K and  incorporated herein by reference.                                                                      |
| (i) |   | - |   | Exhibit previously filed on October 31, 1998 Second  Quarter Form 10-Q and incorporated herein by reference.                                           |
| (j) |   | - |   | Exhibit previously filed on October 2, 1998 Form 8-K  and incorporated herein by reference.                                                            |
| (k) |   | - |   | Exhibit previously filed on January 31, 1999 Third  Quarter Form 10-Q and incorporated herein by reference.                                            |
| (l) |   | - |   | Exhibit previously filed on 1999 Form 10-K and  incorporated herein by reference.                                                                      |
| (m) |   | - |   | Exhibit previously filed on March 21, 2000 Third  Quarter Form 10-Q/A and incorporated herein by reference.                                            |
| (n) |   | - |   | Exhibit previously filed on October 31, 2000 Second  Quarter Form 10-Q and incorporated herein by reference.                                           |
| (o) |   | - |   | Exhibit previously filed on January 31, 2001 Third  Quarter Form 10-Q and incorporated herein by reference.                                            |
| (p) |   | - |   | Exhibit previously filed on January 31, 2002 Third  Quarter Form 10-Q and incorporated herein by reference.                                            |
| (q) |   | - |   | Exhibit previously filed on July 31, 2002 First  Quarter Form 10-Q/A and incorporated herein by reference.                                             |
| (r) |   | - |   | Exhibit previously filed on January 31, 2004 Third  Quarter Form 10-Q and incorporated herein by reference.                                            |
| (s) |   | - |   | Exhibit previously filed on 2004 Form 10-K and  incorporated herein by reference.                                                                      |
| (t) |   | - |   | Exhibit previously filed on 2005 Form 10-K and  incorporated herein by reference.                                                                      |
| (u) |   | - |   | Exhibit previously filed on October 31, 2005 Second  Quarter Form 10-Q and incorporated herein by reference.                                           |
| (v) |   | - |   | Exhibit previously filed on January 31, 2006 Third  Quarter Form 10-Q and incorporated herein by reference.                                            |
| (w) |   | - |   | Exhibit previously filed on October 31, 2006 Second  Quarter Form 10-Q and incorporated herein by reference.                                           |
| (x) |   | - |   | Exhibit previously filed on March 15, 2007 Form 8-K  and incorporated herein by reference.                                                             |

 

(b)*  Reports on Form 8-K*

Form8-K filed March 12, 2007 reporting third quarter financial results.

Form8-K filed March 15, 2007 reporting employment agreements with Tommy Moore andBennie Duck

38

----

**SIGNATURES**

Pursuant to the requirements of theSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this Annual Report on Form 10-K to be signed on its behalf by theundersigned thereunto duly authorized.
|                      | ** ** | **First  Investors Financial Services Group, Inc.** |
|----------------------|------------|-----------------------------------------------------|
|                 |       | (Registrant)                                        |
|                 |       |                                                |
| Date: July  24, 2007 |       | By: /s/ Tommy A. Moore, Jr.                         |
|                 | ** ** | **Tommy  A. Moore, Jr.**                            |
|                 | ** ** | **President  and Chief Executive Officer**          |
|                 | ** ** | **(Principal  Executive Officer)**                  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of First InvestorsFinancial Services Group, Inc. and in the capacities and on the date indicated.
| Signature                   | ** **    | **Title**                                       |
|-----------------------------|---------------|-------------------------------------------------|
|                        |          |                                            |
| /s/ Tommy A. Moore, Jr.     |          | President and Chief Executive Officer, Director |
| **Tommy A. Moore, Jr.**     |          | (Principal Executive Officer)                   |
|                        |          |                                            |
| /s/ Bennie H. Duck          |          | Vice President and Chief Financial Officer      |
| **Bennie H. Duck**          |          | (Principal Financial and Accounting Officer)    |
|                        |          |                                            |
| /s/ John H. Buck            |          | Director                                        |
| **John H. Buck**            |          |                                            |
|                        |          |                                            |
| /s/ Robert L. Clarke        |          | Director                                        |
| **Robert L. Clarke**        |          |                                            |
|                        |          |                                            |
| /s/ Seymour M. Jacobs       |          | Director                                        |
| **Seymour M. Jacobs**       |          |                                            |
|                        |          |                                            |
| /s/ Roberto Marchesini      |          | Director                                        |
| **Roberto Marchesini**      |          |                                            |
|                        |          |                                            |
| /s/ Walter A. Stockard, Jr. |          | Director                                        |
| **Walter A. Stockard, Jr.** |          |                                            |
|                        |          |                                            |
| /s/ Daniel M. Theriault     |          | Director                                        |
| **Daniel M. Theriault**     |          |                                            |
|                        |          |                                            |
| Date:                       | July 24, 2007 |                                            |   |
|                             |               |                                                 |  |

 

39

----

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

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**
| Report of Independent  Registered Public Accounting Firm                                                |   |   |
|---------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                    |   |   |
| Consolidated  Balance Sheets as of April 30, 2006 and 2007                                              |   |   |
|                                                                                                    |   |   |
| Consolidated  Statements of Earnings for the Years Ended April 30, 2005, 2006 and 2007                  |   |   |
|                                                                                                    |   |   |
| Consolidated  Statement of Shareholders’ Equity for the Years Ended April 30, 2005, 2006  and 2007 |   |   |
|                                                                                                    |   |   |
| Consolidated  Statements of Cash Flows for the Years Ended April 30, 2005, 2006 and 2007                |   |   |
|                                                                                                    |   |   |
| Notes to  Consolidated Financial Statements                                                             |   |   |

 

F-1

----

**REPORT OF INDEPENDENT REGISTERED****PUBLIC ACCOUNTING FIRM**

Boardof Directors and Shareholders of First Investors Financial Services Group, Inc.

Wehave audited the accompanying consolidated balance sheets of First InvestorsFinancial Services Group, Inc. (a Texas corporation) and subsidiaries as ofApril 30, 2007 and 2006, and the related consolidated statements of earnings,shareholders’ equity and cash flows for each of the three years in the periodended April 30, 2007. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  The Company is notrequired to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of FirstInvestors Financial Services Group, Inc. and subsidiaries as of April 30, 2007and 2006, and the results of their operations and their cash flows for each ofthe three years in the period ended April 30, 2007, in conformity withaccounting principles generally accepted in the United States of America.

Asdiscussed in Note 14 to the consolidated financial statements, effective May 1,2006, the Company adopted the provisions of Statement of Financial AccountingStandards No. 123 (revised 2004), “Share Based Payment.”

/s/GRANT THORNTON LLP

Houston,Texas

July10, 2007

F-2

----

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

**CONSOLIDATED BALANCE SHEETS – APRIL 30, 2006 and2007**

**(In thousands, except per share amounts)**
| ** **                                                                                                                                                              | ** ** | **2006** | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| **ASSETS**                                                                                                                                                              |       |     |       |       |       |
| Receivables Held for  Investment, net                                                                                                                                   |       | $        | 377,399    |       | $          | 468,022 |   |
| Cash and Short-Term  Investments                                                                                                                                        |       | 3,380    |       | 1,669      |       |
| Restricted Cash                                                                                                                                                         |       | 25,538   |       | 33,473     |       |
| Accrued Interest  Receivable                                                                                                                                            |       | 3,218    |       | 3,781      |       |
| Assets Held for Sale                                                                                                                                                    |       | 960      |       | 1,200      |       |
| Other Assets:                                                                                                                                                           |       |     | ** ** | ** ** | ** ** |
| Investment in  FARC                                                                                                                                                     |       | 1,025    |       | 1,133      |       |
| Income taxes                                                                                                                                                            |       | —   |       | 12         |       |
| Funds held under  reinsurance agreement                                                                                                                                 |       | 3,431    |       | 3,355      |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $3,514 and $3,788                                                      |       | 4,337    |       | 3,736      |       |
| Total assets                                                                                                                                                            |       | $        | 419,288    |       | $          | 516,381 |   |
| ** **                                                                                                                                                              |       |     | ** ** | ** ** | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                          |       |     | ** ** | ** ** | ** ** |
| Debt:                                                                                                                                                                   |       |     | ** ** | ** ** | ** ** |
| Warehouse credit  facilities                                                                                                                                            |       | $        | 47,080     |       | $          | 283,282 |   |
| Term notes                                                                                                                                                              |       | 316,584  |       | 169,987    |       |
| Working capital  facility                                                                                                                                               |       | 16,454   |       | 22,753     |       |
| Related party  note                                                                                                                                                     |       | 2,500    |       | 2,500      |       |
| Other Liabilities:                                                                                                                                                      |       |     |       |       |       |
| Accounts payable  and accrued liabilities                                                                                                                               |       | 6,397    |       | 5,377      |       |
| Income taxes                                                                                                                                                            |       | 1,386    |       | —     |       |
| Deferred income  taxes payable                                                                                                                                          |       | 766      |       | 733        |       |
| Total  liabilities                                                                                                                                                      |       | 391,167  |       | 484,632    |       |
|                                                                                                                                                                    |       |     | ** ** | ** ** | ** ** |
| 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; 5,650 issued and 4,478 outstanding at April  30, 2007 |       | 6        |       | 6          |       |
| Additional  paid-in capital                                                                                                                                             |       | 18,938   |       | 19,374     |       |
| Retained  earnings                                                                                                                                                      |       | 13,644   |       | 16,836     |       |
| Less, treasury  stock, at cost, 1,172 shares                                                                                                                            |       | (4,467   | )          | (4,467     | )          |
| Total  shareholders’ equity                                                                                                                                        |       | 28,121   |       | 31,749     |       |
| Total liabilities and shareholders’ equity                                                                                                                         |       | $        | 419,288    |       | $          | 516,381 |   |

 

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

F-3

----

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

**CONSOLIDATED STATEMENTS OF EARNINGS**

**For the Years Ended April 30, 2005, 2006 and 2007**

**(In thousands, except per share amounts)**
| ** **                                                         | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                               |       |       |       |       |       |       |       |
| Interest  Income                                                   |       | $          | 28,272     |       | $          | 39,300     |       | $ | 54,568 |   |
| Interest  Expense                                                  |       | 7,616      |       | 15,042     |       | 23,969     |       |
| Net interest income                                                |       | 20,656     |       | 24,258     |       | 30,599     |       |
| Provision  for Credit Losses                                       |       | 9,520      |       | 7,503      |       | 11,205     |       |
| Net  Interest Income After Provision for Credit Losses .           |       | 11,136     |       | 16,755     |       | 19,394     |       |
| Other  Income (Expense):                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Servicing revenue                                                  |       | 3,398      |       | 1,884      |       | 1,174      |       |
| Other finance charges and fees                                     |       | 2,439      |       | 2,432      |       | 3,288      |       |
| Insurance products                                                 |       | 735        |       | 928        |       | 1,149      |       |
| Income from investment                                             |       | 669        |       | 413        |       | 578        |       |
| Other interest income                                              |       | 427        |       | 1,371      |       | 1,783      |       |
| Other income                                                       |       | 660        |       | 586        |       | —     |       |
| Realized and unrealized loss on interest rate derivative positions |       | (373       | )          | (175       | )          | —     |       |
| Total other income                                                 |       | 7,955      |       | 7,439      |       | 7,972      |       |
| Costs  and Expenses:                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and benefits                                              |       | 8,917      |       | 10,506     |       | 11,197     |       |
| Operating expense                                                  |       | 4,801      |       | 3,965      |       | 6,319      |       |
| General and administrative                                         |       | 3,732      |       | 4,655      |       | 4,063      |       |
| Other interest expense                                             |       | 565        |       | 1,323      |       | 1,891      |       |
| Total operating expenses                                           |       | 18,015     |       | 20,449     |       | 23,470     |       |
| Earnings  Before Provision for Income Taxes                        |       | 1,076      |       | 3,745      |       | 3,896      |       |
| Provision  (Benefit) for Income Taxes:                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                                                            |       | 40         |       | 291        |       | 737        |       |
| Deferred                                                           |       | 352        |       | 1,009      |       | (33        | )          |
| Total provision for income taxes                                   |       | 392        |       | 1,300      |       | 704        |       |
| Net  Earnings                                                      |       | $          | 684        |       | $          | 2,445      |       | $ | 3,192 |   |
|                                                               |       |       |       |       |       |       |       |
| Basic  Net Earnings per Common Share                               |       | $          | 0.14       |       | $          | 0.55       |       | $ | 0.71 |   |
| Diluted Net Earnings per Common Share                              |       | $          | 0.14       |       | $          | 0.53       |       | $ | 0.67 |   |

 

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

F-4

----

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

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

**For the Years Ended April 30, 2005, 2006 and 2007**

**(In thousands, except share amounts)**
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained** | ** ** | **Treasury  Stock, at** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|------------------------------|------------|------------|------------|
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**                 | ** ** | **cost**   | ** ** | **Total** | ** ** |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Balance, May 1, 2004                                               |       | 5,583,669             |       | $                       | 6          |         | $          | 18,755                       |       | $          | 10,515     |   | $ | (1,972 | ) | $ | 27,304 |   |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Net earnings                                                       |       | —                |       | —                  |       | —       |       | 684                          |       | —     |       | 684 |   |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Treasury stock  purchases                                          |       | —                |       | —                  |       | —       |       | —                       |       | (2,495     | )          | (2,495 | ) |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Balance, April 30, 2005                                            |       | 5,583,669             |       | $                       | 6          |         | $          | 18,755                       |       | $          | 11,199     |   | $ | (4,467 | ) | $ | 25,493 |   |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Net earnings                                                       |       | —                |       | —                  |       | —       |       | 2,445                        |       | —     |       | 2,445 |   |
| Excess tax  benefits from sharebased arrangements                  |       |                  |       | —                  |       | 21           |       | —                       |       | —     |       | 21 |   |
| Issuance of  common stock related to the exercise of stock options |       | 42,500                |       | —                  |       | 162          |       | —                       |       | —     |       | 162 |   |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Balance, April 30, 2006                                            |       | 5,626,169             |       | $                       | 6          |         | $          | 18,938                       |       | $          | 13,644     |   | $ | (4,467 | ) | $ | 28,121 |   |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Net earnings                                                       |       | —                |       | —                  |       | —       |       | 3,192                        |       | —     |       | 3,192 |   |
|                                                               |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Stock  compensation expense                                        |       | —                |       | —                  |       | 306          |       | —                       |       | —     |       | 306 |   |
| 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, April 30, 2007                                            |       | 5,649,670             |       | $                       | 6          |         | $          | 19,374                       |       | $          | 16,836     |   | $ | (4,467 | ) | $ | 31,749 |   |

 

The accompanying notesare an integral part of this consolidated financial statement.

F-5

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Years Ended April 30, 2005, 2006 and 2007**

**(In thousands)**
| ** **                                                                                 | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Cash  Flows From Operating Activities:                                                     |       |       |       |       |       |       |       |
| Net earnings                                                                               |       | $          | 684        |       | $          | 2,445      |       | $ | 3,192 |   |
| Adjustments to reconcile net earnings to net cash provided by operating  activities — |       |       |       |       |       |       |       |
| Depreciation and amortization expense                                                      |       | 3,881      |       | 5,153      |       | 6,652      |       |
| Provision for credit losses                                                                |       | 9,520      |       | 7,503      |       | 11,205     |       |
| Excess tax benefits related to the exercise of stock options                               |       | —     |       | (21        | )          | (23        | )          |
| Share-based payment arrangements                                                           |       | —     |       | —     |       | 306        |       |
| (Increase) decrease in:                                                                    |       |       |       |       |       |       |       |
| Accrued interest receivable                                                                |       | 336        |       | (978       | )          | (563       | )          |
| Restricted cash                                                                            |       | (60        | )          | (6,441     | )          | (7,935     | )          |
| Deferred financing costs and other assets                                                  |       | (217       | )          | (1,805     | )          | (315       | )          |
| Funds held under reinsurance agreement                                                     |       | 7          |       | 744        |       | 76         |       |
| Current income tax receivable                                                              |       | 3          |       | 5          |       | (12        | )          |
| Increase (decrease) in:                                                                    |       |       |       |       |       |       |       |
| Accounts payable and accrued liabilities                                                   |       | 786        |       | 3,902      |       | (1,020     | )          |
| Income taxes                                                                               |       | —     |       | 1,407      |       | (1,363     | )          |
| Deferred income taxes payable                                                              |       | 353        |       | (145       | )          | (33        | )          |
| Net cash provided by operating activities                                                  |       | 15,293     |       | 11,769     |       | 10,167     |       |
| Cash  Flows From Investing Activities:                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Origination of Receivables Held for Investment                                             |       | (158,017   | )          | (254,313   | )          | (278,941   | )          |
| Payments received from Investment                                                          |       | —     |       | 660        |       | 535        |       |
| Contributions to Investment                                                                |       | —     |       | —     |       | (642       | )          |
| Principal payments from Receivables Held for Investment                                    |       | 100,915    |       | 108,100    |       | 161,943    |       |
| Payments received on assets held for sale                                                  |       | 6,460      |       | 7,211      |       | 9,928      |       |
| Purchase of furniture and equipment                                                        |       | (187       | )          | (650       | )          | (735       | )          |
| Net cash used in investing activities                                                      |       | (50,829    | )          | (138,992   | )          | (107,912   | )          |
| Cash  Flows From Financing Activities:                                                     |       |       |       |       |       |       |       |
| Proceeds from advances on—                                                            |       |       |       |       |       |       |       |
| Warehouse credit facilities                                                                |       | 298,088    |       | 396,703    |       | 568,441    |       |
| Term notes                                                                                 |       | —     |       | 364,553    |       | —     |       |
| Working capital facility                                                                   |       | 2,044      |       | 5,954      |       | 9,033      |       |
| Other borrowings                                                                           |       | 2,500      |       | —     |       | —     |       |
| Principal payments made on—                                                           |       |       |       |       |       |       |       |
| Warehouse credit facilities                                                                |       | (169,231   | )          | (521,185   | )          | (332,239   | )          |
| Term notes                                                                                 |       | (94,668    | )          | (118,019   | )          | (146,597   | )          |
| Working capital facility                                                                   |       | (305       | )          | —     |       | (2,734     | )          |
| Proceeds from the issuance of common stock                                                 |       | —     |       | 162        |       | 107        |       |
| Excess tax benefits from share-based arrangements                                          |       | —     |       | 21         |       | 23         |       |
| Treasury stock purchased                                                                   |       | (2,496     | )          | —     |       | —     |       |
| Net cash provided by financing activities                                                  |       | 35,932     |       | 128,189    |       | 96,034     |       |
| Increase  (Decrease) in Cash and Short-Term Investments                                    |       | 396        |       | 966        |       | (1,711     | )          |
| Cash  and Short-Term Investments at Beginning of Period                                    |       | 2,018      |       | 2,414      |       | 3,380      |       |
| Cash  and Short-Term Investments at End of Period                                          |       | $          | 2,414      |       | $          | 3,380      |       | $ | 1,669 |   |
| Supplemental  Disclosures of Cash Flow Information:                                        |       |       |       |       |       |       |       |
| Cash paid during the period for—                                                      |       |       |       |       |       |       |       |
| Interest                                                                                   |       | $          | 6,561      |       | $          | 13,880     |       | $ | 21,949 |   |
| Income taxes                                                                               |       | 37         |       | 33         |       | 2,113      |       |
| Noncash operating Activities:                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reclassification  of deferred taxes to income taxes                                        |       | $          | —     |       | $          | 1,154      |       | $ | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

F-6

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(In thousands, except per sharedata)**

**April 30, 2005, 2006 and 2007**

**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, First InvestorsResidual Funding L.P., Farragut Financial Corporation, and First Investors AutoFunding Corporation. First Investors, together with its wholly- andmajority-owned subsidiaries, is hereinafter referred to as the Company.

FIFS began operations inMay 1989 and is principally involved in the business of originating and holdingfor investment retail installment contracts and promissory notes secured by newand used automobiles originated by factory authorized franchised dealers ordirectly through consumers. As of April 30, 2007, approximately 31% and 14% ofReceivables Held for Investment had been originated in Texas and Georgia,respectively. The Company currently operates in 28 states.

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

On October 2, 1998, theCompany completed the acquisition of FISC and the operations of FISC areincluded in the consolidated results of the Company since the date ofacquisition. Headquartered in Atlanta, Georgia, FISC performed servicing 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, theCompany entered into a partnership agreement whereby a subsidiary of theCompany was the general partner owning 70% of the partnership interests andFirst Union Investors, Inc. served as the limited partner and owned 30% of thepartnership interests.  On September 19,2003, First Investors Financial Services, Inc. purchased the limitedpartnership interests previously held by First Union Investors, Inc.  The Partnership consists primarily of aportfolio of loans previously owned or securitized by FISC and certain otherfinancial assets including charged-off accounts owned by FISC.

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

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

Intotal, at April 30, 2007, FISC performs servicing and collection functions on amanaged receivables portfolio of $507,995.

F-7

----

**2. Significant Accounting Policies**

*Basis of Presentation*.  The consolidated financial statements includethe accounts of First Investors and its wholly-owned and majority-ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated. Investments inwhich the Company exercises significant influence, but which it does notcontrol (generally a 20% to 50% ownership interest), are accounted for underthe equity method of accounting, except for variable interest entities forwhich 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 April 30, 2007, the Company does not have any entities under whichFIN 46 as amended by Interpretation 46R would apply.

*Use of Estimates*.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. The mostsignificant estimates used by the Company relate to the allowance for creditlosses (see Note 3). Actual results could differ from those estimates.

*Receivables Held for Investment*.  ReceivablesHeld for Investment represents the aggregate outstanding balance of installmentsales contracts and promissory notes originated by the Company through itsautomobile dealer relationships or directly with consumers.  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.  The Company defers and capitalizes certainexpenses related to the origination of receivables held for investment, andamortizes these expenses in proportion to their underlying receivable.

*Other Income*.  Other Income consists of income received fromservicing activities, other finance charges and fees, income from investments,reinvestment revenue, income earned from the sale of GAP insurance and extendedservice contracts, and realized and unrealized loss on interest rate derivativepositions.  Servicing revenue is accruedas services are rendered. Other finance charges and fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.  Income from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized loss on interest rate derivatives is recognized whenincurred.

*Allowance for Credit Losses*.  The Company calculates the allowance forcredit losses in accordance with SFAS No. 5*, Accounting forContingencies.*   SFAS No. 114,*Accounting by Creditors for Impairment of a Loan*does not apply to loans currently held by the Company because they comprise alarge group of smaller balance homogenous loans that are evaluated collectivelyfor impairment.

The Company initiates efforts to make customer contactas early as when the customer is one day past due and become more aggressive asthe loan becomes further past due. Management reviews past due loans and considers various factorsincluding payment history, job status and any events that may have occurredthat 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.

F-8

----

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

*Funds Held Under ReinsuranceAgreement*.  The Companyprovides financial assurance for the third party insurance company it reinsuresby maintaining premiums ceded to it in a restricted trust account for thebenefit of the third party insurance company. The reinsurance agreementprovides, among other things, that the funds held can be withdrawn by the thirdparty insurance company due to an insolvency of the Company or to reimburse thethird party insurance company for the Company’s share of losses paid by thethird party insurance company pursuant to the reinsurance agreement.

*Assets Held for Sale*.  The Company commences repossession proceduresagainst the underlying collateral when the Company determines that collectionefforts are likely to be unsuccessful. Upon repossession, the receivable iswritten down to the estimated fair value of the collateral, less the cost ofdisposition and plus the expected recoveries from third-party insurers, througha charge to the allowance for credit losses. Fair value is determined by estimating the proceeds of the collateral,which primarily are comprised of auction proceeds on the sale of theautomobile, 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.

*Deferred Financing Costs*.  The Company defers financing costs and amortizesthe costs related to the respective warehouse credit facilities and Term Notesover the estimated average life of the receivables financed under thoserespective facilities as the provisions of such facilities generally providethat receivables assigned to each facility would be allowed to amortize shouldthe facility not be extended.  Deferredfinancing costs are expensed proportionately if borrowing capacity is reduced.

*Other Operating Expenses*.  Other operating expenses include primarilydepreciation expense, professional fees, service bureau fees, telephone,repossession related expenses, mail cost associated with the direct businessand rent.

*Income Taxes*.  The Company follows SFAS No. 109, *“Accounting for Income Taxes”,*which prescribes that deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates applied to taxableincome in the years in which those temporary differences are expected to berecovered or settled. Under SFAS No. 109, the effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period that includesthe enactment date. Significant judgment is required in determining income taxprovisions and in evaluating tax positions. The Company has established additional provisions for income taxes,despite its belief that the Company’s tax positions are fully supportable, whenthere remain certain positions that are subject to challenge and that may notbe sustained on review by tax authorities. Upon the closure of future audits and the expiration of certain statutesof limitations, significant income tax accrual reversals could occur startingthe year ending April 30, 2008.

F-9

----

*Derivatives*. SFASNo. 133, *Accounting for Derivative Instruments and HedgingActivities,*as amended, establishes accounting and reportingstandards requiring that every derivative instrument (including certainderivative instruments embedded in other contracts) be recorded in the balancesheet as either an asset or liability at its fair value. The Statement requiresthat changes in the derivative’s fair value be recognized currently in earningsunless specific hedge accounting criteria are met.   The Company has determined that it does notmeet the criteria for hedge accounting treatment, and accordingly changes in the fair value are recorded as unrealizedgains or losses and reflected in the statement of earnings.

*Earnings Per Share*.  Earnings per share amounts are calculatedbased on net earnings available to common shareholders divided by the weightedaverage number of shares of common stock outstanding.

*Furniture and Equipment*.  Furniture and equipment are carried at cost,less accumulated depreciation. Depreciable assets are amortized using thestraight-line method over the estimated useful lives (two to five years) of therespective assets.  The Company utilizesstatutory accelerated depreciation rates for income tax purposes.

*Cash and Short-Term Investments*.  The Company considers all investments with amaturity of three months or less when purchased to be short-term investmentsand treated as cash equivalents. See Note 4 for components of restricted cash.

*Advertising Costs. *The Company expenses advertising costs asincurred.  As of April 30, 2005, 2006,and 2007, advertising expense was $1,427, $1,438, and $2,878, respectively.

*Stock-Based Compensation*.  Effective May 1, 2006, the Companyadopted Financial Accounting Standards Board (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment”(“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123, supersedesAccounting Principles Board (APB) No. 25 and related interpretations. SFASNo. 123(R) also amends SFAS No. 95 “Statement of Cash Flows,” torequire that excess tax benefits be reported as financing cash inflows, ratherthan as a reduction of taxes paid, which is included within operating cashflows. SFAS No. 123(R) requires recognition of the cost of employeeservices received in exchange for an award of equity instruments in theconsolidated financial statements over the period the employee is required toperform the services in exchange for the award (presumptively the vestingperiod). SFAS No. 123(R) also requires measurement of the cost of employeeservices received in exchange for an award based on the grant-date fair valueof the award. The Company adopted SFAS No. 123(R) using the modifiedprospective application. Accordingly, prior period amounts have not beenrestated. Under this application, the Company is required to recordcompensation expense for all awards granted after the date of adoption and forthe unvested portion of previously granted awards that remain outstanding atthe date of adoption. Prior to the adoption of SFAS No. 123(R), theCompany used the intrinsic value method as prescribed by APB No. 25 andthus recognized no compensation expense for options granted with exerciseprices equal to the fair market value of the Company’s common stock on the dateof grant (see note 14).

*Reclassifications*.  Certain reclassifications have been made tothe 2006 amounts to conform to the 2007 presentation.

F-10

----

**3. Receivables Held for Investment**

The receivablesgenerally have terms between 48 and 72 months and are collateralized by theunderlying vehicles.  Net receivablebalances consisted of the following at April 30, 2006 and 2007:
|                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Receivables held for investment      |       | $        | 368,878    |     | $          | 458,586 |   |
| Unamortized premium, net (1)         |       | 3,026    |       | 4,118    |       |
| Deferred acquisition costs           |       | 7,827    |       | 8,252    |       |
| Allowance for credit losses          |       | (2,332   | )          | (2,934   | )          |
| Receivables held for investment, net |       | $        | 377,399    |     | $          | 468,022 |   |

 

----

(1) Includes premium anddiscounts paid to dealers.

The accrual of interestincome has been suspended on $1,504 and $1,923 of delinquent financereceivables as of April 30, 2006 and 2007, respectively.

At April 30, 2007, theaverage remaining term of the receivable portfolio is 47 months and theweighted average contractual interest rate is 14.1%.  Principal payments expected to be received onthe receivable portfolio, assuming no defaults and that payments are receivedin accordance with contractual terms are summarized in the followingtable.  Receivables may pay off prior tocontractual due dates, primarily due to defaults and early payoffs.
| Year ending April 30, | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2008                                 |       | $          | 120,763    |   |
| 2009                                 |       | 106,544    |       |
| 2010                                 |       | 95,876     |       |
| 2011                                 |       | 77,398     |       |
| 2012                                 |       | 46,394     |       |
| Thereafter                           |       | 11,611     |       |
|                                 |       | $          | 458,586    |   |

 

Activity in theallowance for credit losses for the years ended April 30, 2005, 2006, and 2007was as follows:

|                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance, beginning of year     |       | $        | 2,199      |     | $          | 2,249    |       | $ | 2,332 |   |
| Provision for credit losses    |       | 9,520    |       | 7,503    |       | 11,205   |       |
| Charge-offs, net of recoveries |       | (9,470   | )          | (7,420   | )          | (10,603  | )          |
| Balance, end of year           |       | $        | 2,249      |     | $          | 2,332    |       | $ | 2,934 |   |

 

**4. Restricted Cash**

The components ofrestricted cash at April 30, 2006 and 2007 are as follows:

|                                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Collection and lockbox  balances                           |       | $        | 15,503     |     | $          | 21,630 |   |
| Warehouse credit  facility and Term Note reserves (Note 7) |       | 9,785    |       | 11,593   |       |
| Other                                                      |       | 250      |       | 250      |       |
| Total restricted cash                                      |       | $        | 25,538     |     | $          | 33,473 |   |

 

F-11

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**5.  DeferredFinancing Costs and Other Assets**

The components ofdeferred financing costs and other assets at April 30, 2006 and 2007 are asfollows:
| ** **                     | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Deferred financing  costs, net |       | $        | 2,318      |     | $          | 1,339 |   |
| Accounts receivable, trade     |       | 425      |       | 249      |       |
| Other, net                     |       | 259      |       | 671      |       |
| Loan service fee  receivable   |       | 154      |       | 225      |       |
| Software, net                  |       | 350      |       | 399      |       |
| Furniture and  equipment, net  |       | 372      |       | 545      |       |
| Prepaid expenses               |       | 459      |       | 308      |       |
| Total                          |       | $        | 4,337      |     | $          | 3,736 |   |

 

**6.  AccountsPayable and Accrued Liabilities**

The components ofaccounts payable and accrued liabilities as of April 30, 2006 and 2007 are asfollows:
| ** **                     | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Accounts payable               |       | $        | 216        |     | $          | 46 |   |
| Accrued expenses               |       | 1,035    |       | 1,364    |       |
| Accrued salaries and  benefits |       | 1,123    |       | 987      |       |
| Interest payable               |       | 749      |       | 1,747    |       |
| Fundings payable               |       | 3,202    |       | 1,177    |       |
| Other                          |       | 72       |       | 56       |       |
| Total                          |       | $        | 6,397      |     | $          | 5,377 |   |

 

**7.  Debt**

The Company finances its loan originations through twowarehouse 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 January,2002 the Company issued $159,000 in asset-backed notes (“Term Notes”) securedby discrete pools of receivables. These notes were subsequently called andredeemed in March, 2005.  In November,2003, the Company issued $140,000 in Term Notes secured by a discrete pool ofreceivables.  In May, 2005, the Companyissued $175,000 in Term Notes secured by a discrete pool of receivables.  In January, 2006, the Company issued $189,000in 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 4.5% and 5.6% for thefiscal years ending April 30, 2006 and 2007, respectively.

F-12

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*WarehouseFacilities as of April 30, 2007*
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                                    | ** ** | **Insurance**            | ** ** | **Borrowing   Rate At  April 30,   2007** | ** ** |
|--------------|------------|--------------|------------|-----------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|
| FIARC        | ** ** | $            | 300,000    |            | $          | 246,477                |       | Commercial  paper   rate plus .3%                                                                           |       | .25%  of Unused Facility |       | None                                                          |       | 5.3 | % |
| FIRC         | ** ** | $            | 50,000     |            | $          | 36,805                 |       | 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                                                     |       | 5.8 | % |

 

*WarehouseFacilities*–*Credit Enhancement as ofApril 30, 2007*
| **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 lowercost of funding, the Company has agreed to maintain credit enhancementinsurance covering the receivables pledged as collateral under the FIRC creditfacility. The facility lenders, collectively, are named as additional insuredsunder this policy. The coverage is obtained on each receivable at the time itis originated by the Company and the applicable premiums are prepaid for thelife of the receivable. The insurance enhancing this facility is defaultinsurance under a standard auto loan protection policy (known as “ALPI”insurance) which covers the difference between the outstanding balance of areceivable and the liquidation proceeds in the event the underlying collateralis repossessed. Solely at its expense, the Company carries this coverage.  Neither the vehicle purchasers nor the dealersare charged for the coverage and they are unaware of its 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.

The premiums that theCompany paid during its past fiscal year for its credit enhancement insurancecoverages, of which the largest component is the basic ALPI insurance,represented approximately 1.3% of the principal amount of the receivablesoriginated during the year. Aggregate premiums paid for ALPI coverage aloneduring the fiscal years ended April 30, 2005, 2006 and 2007 were $3,669,$3,769, and $2,883, respectively, and accounted for 2.3%, 1.4% and 1.1% of theaggregate principal balance of the receivables originated during suchrespective periods.

In April 1994, theCompany organized First Investors Insurance Company (the “Insurance Subsidiary”)under the captive insurance company laws of the State of Vermont. The InsuranceSubsidiary is an indirect wholly-owned subsidiary of the Company and is a partyto a reinsurance agreement whereby the Insurance Subsidiary reinsures 100percent of the risk under the Company’s ALPI insurance policy. At the time eachreceivable is insured by National Union, the risk is automatically reinsured toits full extent and approximately 96% of the premium paid by the Company toNational Union with respect to such receivable is ceded to the InsuranceSubsidiary. When a loss covered by the ALPI policy occurs, National Union paysit after the claim is processed, and National Union is then reimbursed in fullby the Insurance Subsidiary. As of April 30, 2007, gross premiums had beenceded to the Insurance Subsidiary since its inception by National Union in theamount of $41,722 and the Insurance Subsidiary reimbursed National Union foraggregate reinsurance claims in the amount of $9,962. In addition to themonthly premiums and liquidity reserves of the Insurance Subsidiary, a trustaccount is maintained by National Union to secure the Insurance Subsidiary’sobligations for losses it has reinsured.

F-13

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The result of theforegoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses. As of April 30, 2007, the InsuranceSubsidiary had capital and surplus of $2,474 and unencumbered cash reserves of$1,023 in addition to $3,355 in a trust account.

The ALPI coverage as well as the Insurance Subsidiary’sliability under the Reinsurance Agreement, remains in effect for eachreceivable that is pledged as collateral under the warehouse credit facility.Once receivables are transferred from FIRC to FIARC and financed under thecommercial paper facility, ALPI coverage and the Insurance Subsidiary’sliability under the Reinsurance Agreement is cancelled with respect to the transferredreceivables. Any unearned premium associated with the transferred receivablesis returned to the Company. The Company believes the losses its InsuranceSubsidiary will be required to indemnify will be less than the premiums cededto it. However, there can be no assurance that losses will not exceed thepremiums ceded and the capital and surplus of the Insurance Subsidiary.

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

*WarehouseFacilities – Agents and Expirations*
| Facility | ** ** | **Agent** | ** ** | **Expiration**    | ** ** | **Event if not Renewed**                                                                                                                                                                |
|----------|------------|-----------|------------|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC    |       | Wachovia  |       | February 13, 2008 |       | Receivables pledged would be allowed to amortize; however,  no new receivables would be allowed to transfer from the FIRC facility.                                                     |
| FIRC     |       | Wachovia  |       | February 13, 2008 |       | The loan would convert to a term loan which would  mature six months thereafter and amortize monthly in accordance with the  borrowing base with the remaining balance due at maturity. |

 

On February 15, 2006, the FIRC facility was renewed, under similar termsand conditions, at the $50,000 commitment level until February 13, 2007.  On February 14, 2007, the FIRC facility wasextended to its current maturity date of February 13, 2008.  As of April 30, 2006 and 2007, there was$47,080 and $36,805, respectively, outstanding.

On March 15, 2006,following a short-term extension of the then current maturity date, the FIARCfacility was renewed to February 14, 2007. In connection with the renewal, the Company obtained approval from thelender to eliminate the requirement that a surety bond be maintained to provideadditional enhancement to the commercial paper investors as well as eliminatingthe requirement to purchase interest rate caps. As a result, the 0.35% surety bond premium and the 0.25% unused suretybond premium were eliminated.  Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from0.25% to 0.30%.  On October 11, 2006, theCompany amended the facility to increase the commitment from $150,000 to$300,000 in order to fund the growth in origination volume.  On February 14, 2007, the maturity date ofthe FIARC facility was extended to its current maturity date of February 13,2008.  As of April 30, 2006 and 2007,there was $0 and $246,477, respectively, outstanding.

Management presently intends to seek furtherextensions to these warehouse facilities prior to the current expirationdates.  Management 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.

F-14

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Thefollowing table contains pertinent information on the Term Notes as of April30, 2007.
| **Term Notes** | ** ** | **Issuance Date** | ** ** | **Issuance Amount** | ** ** | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest   Rate** | ** ** |
|---------------------|------------|------------------------|------------|--------------------------|------------|------------------------|--------------------|-----------------|------------|--------------------------|------------|
| 2005-A Class 2      |       | May  5, 2005           |       | $                        | 106,493    |                   | July  16, 2012     |            | $          | 59,685                   |       | 4.23 | % |
| 2006-A Class 2      |       | January  26, 2006      |       | $                        | 47,000     |                   | March  16, 2009    |            | $          | 242                      |       | 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 | % |

 

Creditenhancement on the Term Notes are as follows:
| Facility | ** ** | **Cash Reserve**                                                                                        | ** ** | **Advance Rate**                                  | ** ** | **Insurance** |
|----------|------------|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------|
| 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 InvestorsAuto Owner Trust 2003-A (“2003 Auto Trust”), completed the issuance of $139,661of 2.58% Class A asset-backed notes (“2003-A Term Notes”). The initial pool ofautomobile receivables transferred to the 2003 Auto Trust totaled $114,727,which was previously owned by FIRC and FIARC, secure the 2003-A TermNotes.  In addition to the issuance ofthe Class A Notes, the 2003 Auto Trust also issued a $5,066 Class B Note thatwas retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $139,657, were used to (i) fund a $30,000pre-funding account to be used for future loan originations, (ii) repay alloutstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2003-A Term Note issuance, and (v) fund an initial cashreserve account of 0.5%, or $574, of the initial receivables pledged.  The Class A Term Notes bear interest at 2.58%and require monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 96.1% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2003-A Term Notes is April 20,2011.  The Class B Note does not bearinterest but requires principal reductions sufficient to reduce the balance ofthe Class B Note to 3.9% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class 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.  The 2003-A Term Notes were called on March20, 2007.  As of April 30, 2006, and2007, the outstanding principal balances on the 2003-A Term Notes were $37,715and $0, 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,was previously owned by 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 

F-15

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issuance,and (v) fund an initial cash reserve account of 1%, or $1,509, of the initialreceivables pledged.  The Class A-1and Class A-2 Term Notes bear interest at 3.57% and 4.23%, respectively, andrequire monthly principal reductions sufficient to reduce the balance of theClass A Term Notes to 95.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 Notes were paid off during the fiscal yearended April 30, 2006.  The final maturityof the Class A-2 Term Notes is July 16, 2012. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 4.25% 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 2% ofthe then current principal balance of the receivables pool.  As of April 30, 2006 and 2007, theoutstanding principal balances on the 2005-A Term Notes were $106,162 and$59,685, 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 describedbelow.  Proceeds from the issuance, whichtotaled $188,446, were used to (i) fund a $40,000 pre-funding account to be usedfor future loan originations, (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2006-A TermNote issuance, and (v) fund an initial cash reserve account of 1% or $1,519 ofthe initial receivables pledged.  The2006-A Term 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 maturities ofthe Class A-2, Class A-3, and Class A-4 Term Notes are March 16, 2009, February15, 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 2007, the outstanding principal balances on the 2006-A ClassA Term Notes were $172,708 and $110,302, respectively.

*Working Capital Facility*.  The facility is provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.  This facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve account for each of the Company’sother credit facilities.  The facility issecured solely by the residual cash flow and cash reserve accounts related tothe Company’s warehouse credit facilities and the existing and future term notefacilities.  The outstanding borrowingsunder the facility bear interest at one-month LIBOR plus 2.25%.  In addition, a commitment fee of 1.5% is paidon the total amount of this facility.  OnOctober 26, 2004, the Working Capital Facility was extended until October 10,2005, increasing the commitment amount from $9,000 to $13,500.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  On August 15,2005, the Working Capital Facility was extended until February 15, 2006,increasing the commitment amount to $23,500, and was subsequently extended onFebruary 15, 2006 until February 14, 2007. The interest rate remained at LIBOR plus 2.25% and the commitment feepaid on the total available amount of the facility was maintained at 1.5%.  On November 7, 2006, the Company amended thefacility to increase the commitment amount from $23,500 to $28,500.  On February 14, 2007, the working capitalfacility was extended to its current maturity date of February 13, 2008, undersimilar terms and conditions.  As ofApril 30, 2006 and 2007, there was $16,454 and $22,753, respectively,outstanding under this facility.

The Companypresently intends to seek a renewal of the working capital facility from itslender prior to maturity.  Should thefacility not be renewed, the outstanding balance of the facility would convertto a term loan, and amortize with the terms of the receivables that secure thefacility.  Management considers itsrelationship with its lenders to be satisfactory and has no reason to believethat this credit facility will not be renewed. If the facility is 

F-16

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not renewed, however, or if material changes are madeto its terms and conditions, it could have a material adverse effect on theCompany.

*Related Party Loans. *On December 3, 2001 theCompany entered into an agreement with one of its shareholders who is a memberof its Board of Directors under which the Company may, from time to time,borrow up to $2,500.  On December 6,2004, the original $2,500 shareholder loan was replaced with a $2,500 loancontaining identical terms and conditions between the Company and a limitedpartnership that is affiliated with a current shareholder and member of theBoard of Directors  The proceeds of theborrowings have been utilized to fund certain private and open market purchasesof the Company’s common stock pursuant to a Stock Repurchase Plan authorized bythe Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2,500 outstandingunder these facilities as of April 30, 2006 and 2007.  For the fiscal years ended April 30, 2005,2006, 2007, the Company recorded interest expense under these facilities of$18, $250 and $250, 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 was not in defaultwith respect to any financial and non-financial covenants governing thesefinancing arrangements at April 30, 2007.

*Interest Rate Management*.  The Company’s warehouse credit facilities andworking capital facilities bear interest at floating interest rates which arereset on a short-term basis while the secured Term Notes bear interest at afixed rate of interest. The Company’s receivables bear interest at fixed ratesthat do not generally vary with a change in market interest rates. Since aprimary contributor to the Company’s profitability is its ability to manage itsnet interest spread, the Company seeks to maximize the net interest spreadwhile minimizing exposure to changes in interest rates. In connection withmanaging the net interest spread, the Company may periodically enter intointerest rate swaps or caps to minimize the effects of market interest ratefluctuations on the net interest spread. To the extent that the Company hasoutstanding floating rate borrowings or has elected to convert a portion of itsborrowings from fixed rates to floating rates, the Company will be exposed tofluctuations in short-term interest rates.

During fiscal year 2006, as a requirement of the FIARCcommercial paper facility, the Company entered into seven interest rate captransactions, with a strike rate of 6%. The aggregate initial notional amount of the caps was $131,710 whichamortized over six years.  The Companypaid $450 in premium to purchase these caps. The interest rate caps were notdesignated as hedges, and accordingly, changes in the fair value of theinterest rate caps were recorded as realized gains or losses and reflected innet income.  On January 26, 2006,the Company terminated all interest rate caps outstanding in exchange forproceeds of $275.  The caps wereterminated following the repayment of all balances outstanding under the FIARCfacility prior to the issuance of the 2006-A Term Notes.  As a result, a realized loss of $175 wasincurred relative to the aggregate market value of the interest rate caps.  This requirement was eliminated as part ofthe facility’s renewal.

During fiscal year 2005, as arequirement of the FIARC commercial paper facility, the Company entered intonine interest rate cap transactions, with strike rates between 5% and 6%.  The aggregate initial notional amount of thecaps was $126,087 which amortized over six years.  The Company paid an aggregate of $1,213 inpremiums to purchase these caps.  Theinterest rate caps were not designated as hedges, and accordingly, changes inthe fair value of the interest rate caps were recorded as unrealized gains orlosses and reflected in net income.  OnApril 28, 2005, the Company terminated all interest rate caps outstanding inexchange for proceeds of $840.  The capswere terminated following the repayment of all amounts outstanding under theFIARC facility prior to the issuance of the 2005-A term notes.  As a result, a realized loss of $373 wasincurred relative to the aggregate market value of the interest rate caps.

F-17

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**8.  IncomeTaxes**

The temporarydifferences which give rise to deferred tax assets (liabilities) are as followsat April 30, 2006 and 2007, respectively:
| ** **                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets related to:      |       |     |       |     |       |
| Allowance for credit losses           |       | $        | 794        |     | $          | 997 |   |
| Fixed assets and other deferred costs |       | 235      |       | 206      |       |
| Stock based compensation              |       | —   |       | 68       |       |
| Accrued expenses                      |       | 123      |       | 130      |       |
|                                  |       | 1,152    |       | 1,401    |       |
| Deferred tax  liabilities related to: |       |     |       |     |       |
| Receivables Held for Investment, net  |       | (1,825   | )          | (2,103   | )          |
| Prepaid expenses                      |       | (93      | )          | (31      | )          |
|                                  |       | (1,918   | )          | (2,134   | )          |
| Net deferred tax  liabilities         |       | $        | (766       | )        | $          | (733 | ) |

 

The provision (benefit)for income taxes on income before income taxes for the years ended April 30,2005, 2006 and 2007, consists of the following:
| ** ** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current    |       |     |       |     |       |     |       |
| Federal    |       | $        | 19         |     | $          | 264      |       | $ | 679 |   |
| State      |       | 21       |       | 27       |       | 58       |       |
|       |       | $        | 40         |     | $          | 291      |       | $ | 737 |   |
| Deferred   |       |     |       |     |       |     |       |
| Federal    |       | $        | 352        |     | $          | 1,009    |       | $ | (33 | ) |
| State      |       | —   |       | —   |       | —   |       |
|       |       | $        | 352        |     | $          | 1,009    |       | $ | (33 | ) |

 

Thefollowing is a reconciliation between the effective income tax rate and theapplicable statutory federal income tax rate for the years ended April 30,2005, 2006 and 2007.
| ** **                                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax -  statutory rate                 |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income  tax, net of federal benefit    |       | 2.0      | %          | 0.4      | %          | 1.5      | %          |
| Reversal of  uncertain tax position          |       | —   |       | —   |       | (17.2    | )%         |
| Non-deductible  expenses and other (benefit) |       | 0.5      | %          | 0.3      | %          | (0.2     | )%         |
| Effective income  tax rate                   |       | 36.5     | %          | 34.7     | %          | 18.1     | %          |

 

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

On December24, 2002, the Company invested $475 for a 40% ownership interest in First AutoReceivables Corporation (“FARC”) and $713 for junior mezzanine investments ofFARC.  FARC purchased a $197,500automobile loan portfolio from UAFC-2 Corporation, a subsidiary of UnionAcceptance Corporation, with proceeds from $186,000 in senior bridge debt,$8,900 of senior mezzanine debt, $1,800 of junior mezzanine debt and $1,200 ofequity.   The bridge debt interest rateis LIBOR plus 1%, the senior mezzanine interest rate is 22.5% and the juniormezzanine interest rate is 25%.

The Company accounts forits ownership investment in FARC using the equity method in accordance with APBOpinion 18.  In addition to the equityand debt investments, the Company performs loan servicing and collectionactivities on the portfolio.  For theyears ended April 30, 2005, 2006, and 2007, the Company recognized $894,

F-18

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$532, and $304 of servicing revenue, $109, $88, and $9of interest income and $669, $413, and $578 of equity in the income frominvestment in FARC.  As of April 30, 2006and 2007, the equity investment in FARC of $734 and $1,133 and junior mezzaninedebt of $291 and $0, respectively are included in Investment in FARC on thebalance sheet.

**10.  NewAccounting Pronouncements**

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes—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 reversed on audit, based on the technical merits of the position.The provisions of FIN 48 are effective for the Company on May 1,2007, with the cumulative effect of the change in accounting principle, if any,recorded as an adjustment to opening retained earnings.  The Company iscurrently evaluating the impact of adopting FIN 48 on its financialposition, cash flows, and results of operations.

InFebruary 2006, the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB StatementsNo. 133 and 140* (“SFAS 155”). This statement amends SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities* (“SFAS 133”), and SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities* and resolves issues addressed in SFAS 133 ImplementationIssue No. D1, *Application of Statement133 to Beneficial Interest in Securitized Financial Assets*. ThisStatement: (a) permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation; (b) clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS 133; (c) establishes arequirement to evaluate beneficial interests in securitized financial assets toidentify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiringbifurcation; (d) clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives; and, (e) eliminatesrestrictions on a qualifying special-purpose entity’s ability to hold passivederivative financial instruments that pertain to beneficial interests that areor contain a derivative financial instrument. The standard also requirespresentation within the financial statements that identifies those hybridfinancial instruments for which the fair value election has been applied andinformation on the income statement impact of the changes in fair value ofthose instruments. The Company is required to apply SFAS 155 to all financialinstruments acquired, issued or subject to a remeasurement event 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 a financialasset 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 FASB issued SFAS No. 157, *Fair Value Measurements*. This statement enhances existingguidance for measuring assets and liabilities using fair value. Prior to theissuance of SFAS No. 157, guidance for applying fair value wasincorporated in several accounting pronouncements. This statement provides asingle definition of fair value, together with a framework for measuring it,and requires additional disclosure about the use of fair value to measureassets and liabilities. SFAS No. 157 also emphasizes that fair value is amarket-based measurement, not an entity-specific measurement, and sets out afair value hierarchy with the highest priority being quoted prices in activemarkets. Under this statement, fair value measurements are disclosed by levelwithin that 

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hierarchy.While SFAS No. 157 does not add any new fair value measurements, it doeschange current practice. Changes to practice include: (1) a requirementfor an entity to include its own credit standing in the measurement of itsliabilities; (2) a modification of the transaction price presumption; (3) aprohibition on the use of block discounts when valuing large blocks ofsecurities for broker-dealers and investment companies; and (4) arequirement to adjust the value of restricted stock for the effect of therestriction even if the restriction lapses within one year. This statement iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. TheCompany is currently evaluating the impact of adopting SFAS 157 on its financialposition, cash flows, and results of operations.

In February 2007, the Financial AccountingStandards Board (FASB) issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities -Including an amendment to FASB Statement No. 115*. Thisstatement allows a company to irrevocably elect fair value as a measurementattribute for certain financial assets and financial liabilities with changesin fair value recognized in the results of operations. The statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the impact of adopting SFAS 159 on its financial position, cashflows, and results of operations.

**11.  Credit Risks**

Approximately 33% and 14% of the Company’s ReceivablesHeld for Investment by principal balance at April 30, 2007, representsreceivables originated in Texas and Georgia. The economy of Texas is primarilydependent on petroleum and natural gas production and sales of related suppliesand services, petrochemical operations, light and medium manufacturing operations,computer and computer service businesses, agribusiness and tourism.  The economy in Georgia is primarilyprofessional, business services, transportation and utilities. Job losses inany or all of these primary economic segments of the economy may result in asignificant increase in delinquencies or defaults in the Company’s receivableportfolio. While vehicles secure the receivables, it is not expected that thevalue of the vehicles if repossessed and sold by the Company would besufficient to recover the principal outstanding under any defaulted loans.

**12.  Fair Value of Financial Instruments**

Thefollowing table summarizes the carrying amounts and estimated fair values ofthe Company’s financial instruments for those financial instruments whose carryingamounts differ from their estimated fair values. SFAS No. 107, *Disclosures About Fair Value of Financial Instruments,*defines the fair value of a financial instrument as the amount at which theinstrument could be exchanged in a current transaction between willing parties.The carrying amounts shown in the table are included in the balance sheet underthe indicated captions.
| ** **                      | ** ** | **April 30, 2006** | ** ** | **April 30, 2007** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **Carrying**                 | ** ** | ** **                   | ** ** | **Carrying** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Amount**                   | ** ** | **Fair Value**               | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| Financial assets  —        |       |                         |       |                         |       |   |   |   |   |
| Receivables Held for Investment |       | $                            | 368,878    |                         | $          | 377,656 |   | $ | 458,586 |   | $ | 486,924 |   |
| Financial  liabilities —   |       |                         |       |                         |       |   |   |   |   |
| Term Notes                      |       | $                            | 316,584    |                         | $          | 314,416 |   | $ | 169,987 |   | $ | 169,383 |   |

 

The following methodsand assumptions were used to estimate the fair value of each category offinancial instruments:

*Cash and Short-Term Investments,Other Receivables, Accounts Payable and Accrued Liabilities*.  The carrying amounts approximate fair valuebecause of the short maturity and market interest rates of those instruments.

*Receivables Held for Investment*.  The fair values were estimated by discountingexpected cash flows at a risk-adjusted rate of return deemed to be appropriatefor investors in such receivables. Expected cash flows take into considerationmanagement’s estimates of prepayments, defaults and recoveries.

F-20

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*Term Notes*.  The fair value was estimated by discountingcash payments using current rates and comparative maturities. Expected cashpayments take into consideration prepayments, defaults and recoveries on theunderlying collateral.

*Credit Facilities*.  The carrying amount approximates fair valuebecause of the floating interest rates on the credit facilities.

**13.  DefinedContribution Plan**

Effective May 1, 1994, the Companyadopted a participant-directed 401(k) retirement plan for its employees. Anemployee becomes eligible to participate in the plan effective the firstenrollment period after 90 days of employment. The Company pays theadministrative expenses of the 401(k) plan. The Company also matches apercentage of each participant’s voluntary contributions up to a maximumvoluntary contribution of 3 percent of the participant’s compensation. Infiscal years 2005, 2006, and 2007, the Company made matching contributions tothe 401(k) plan in the amounts of $23, $42, and $89, respectively. EffectiveApril 28, 1998, the Company established a participant-directed DeferredCompensation Plan for certain executive officers of the Company.  The Deferred Compensation Plan was terminatedduring the fourth quarter of fiscal year 2005 in response to changes in the taxlaw associated with such plans.  Theassets in the plan were distributed to the participants.

**14.  Shareholders’ Equity**

*Preferred Stock*.  The Company has authorized 1,000 shares ofpreferred stock with a $1.00 par value. As of April 30, 2007, 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 shares of common stock, subject to adjustment in theevent of certain changes in capitalization. On September 10, 2002, the numberof shares of common stock available for issuance was increased to 500. Optionsmay be granted either as incentive stock options (which are intended to qualifyfor certain favorable tax treatment) or as non-qualified stock options.  The Compensation Committee selects thepersons to receive options and determines the exercise price, the duration, anyconditions on exercise and other terms of the options. In the case of optionsintended to be incentive stock options, the exercise price may not be less than100% of the fair market value per share of common stock on the date of grant.With respect to non-qualified stock options, the exercise price may be fixed aslow as 50% of the fair market value per share at the time of grant. In no eventmay the duration of an option exceed 10 years and no option may be grantedafter the expiration of 10 years from the adoption of the Plan. As of April 30,2006 and 2007, a total of 361 options had been issued, and 295 and 277,respectively, options remained outstanding. 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 andprovides that options may be granted to officers and other key employees forthe purchase of up to 200 shares of common stock, which was subsequentlyamended on September 6, 2006, increasing the number of available shares to 400,subject to adjustment in the event of certain changes in capitalization.Options may be granted either as incentive stock options (which are intended toqualify for certain favorable tax treatment) or as non-qualified stockoptions.  The Compensation Committeeselects the persons to receive options and determines the exercise price, theduration, any conditions on exercise and other terms of the options. Theexercise price may not be less than 100% of the fair market value per share ofcommon stock on the date of grant, and in no event may the duration of anoption exceed 10 years and no option may be granted after the expiration of 10years from the adoption of the Plan.  Asof April 30, 2006 and 2007, a total of 102 and 197, respectively, options hadbeen issued and remained outstanding, leaving a remaining 98 and 203,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

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amount in cash or in shares of commonstock, or a combination thereof, equal in value to any increase since the dateof grant in the fair market value of the common stock covered by the option.

*Non-Employee Director StockOption Plan.* In September 2002, the Non-Employee Director Stock Option Plan wasestablished to further align the interests of the Company’s directors with theinterests of the shareholders, as well as attracting and retaining qualifieddirectors.   This plan was subsequentlyamended in July 2006 to increase the number of options available for issuanceto 900.  The Board of Directorsadministers the plan and the options will not be qualified as incentive stockoptions.  The duration of an option maynot exceed 10 years and no option may be granted after the expiration of 10years from the adoption of the Plan. Option types will be automatic and discretionary.   Automatic grants of 28 shares for eachnon-employee director, or 140 shares total, were approved in July 2006.  Subsequent automatic grants of an option to purchase28 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 and 2007,a total of 490 and 630, respectively, options had been issued under the plan,and 440 and 570, respectively, remained outstanding, leaving a remaining 10 and270, respectively, available for issuance. In addition to the options granted above, there were an additional 20options granted to a director in 1995, before the adoption of the Non-EmployeeDirector Stock Option Plan.  All optionsissued under this plan were issued with an exercise price equal to the fairmarket value of the underlying common stock on the date of the grant.

EffectiveMay 1, 2006, the Company adopted the provisions of SFAS No. 123(R)for its share-based compensation plans. The Company previously accounted forthese plans under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25,*Accounting for Stock Issued to Employees*, (“APB 25”) and relatedinterpretations and disclosure requirements established by Statement ofFinancial Accounting Standards No. 123,*Accounting for Stock-based Compensation*, (“SFAS No. 123”), asamended by SFAS No. 148,*  Accounting for Stock BasedCompensation—Transition and Disclosure.*

Under APB 25, no compensationexpense was recorded in earnings for the Company’s stock-based options grantedunder the Company’s 1995 Employee Stock Option Plan, 2005 Employee Stock OptionPlan, and Non-Employee Director Stock Option Plan (the “Plans”). The pro formaeffects on net earnings and earnings per share for the awards issued under thePlans were instead disclosed in a footnote to the financial statements. UnderSFAS No. 123(R), all share-based compensation is measured at the grantdate, based on the fair value of the award, and is recognized as an expense inearnings over the requisite service period.

The Companyadopted SFAS No. 123(R) using the modified prospective method. Under thistransition method, for all share-based awards granted prior to May 1, 2006that remain outstanding as of that date, compensation cost is recognized forthe unvested portion over the remaining requisite service period, using thegrant-date fair value measured under the original provisions of SFASNo. 123(R) for pro forma disclosure purposes. Furthermore, compensationcosts will also be recognized for any awards issued, modified, repurchased, orcanceled after May 1, 2006.

The Companyutilizes the Black-Scholes-Merton model for calculating the fair value proforma disclosures under SFAS No.  123(R), which is an acceptablevaluation approach under SFAS No. 123(R).

The followingtable summarizes the option-pricing model assumptions used to compute theweighted average fair value of stock options granted during the periods belowthat remain outstanding as of April 30, 2007:
|                                              | ** ** | **Fiscal** | ** ** |
|----------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2005**   | ** ** | **2006** | ** ** | **2007** | ** ** |
| Dividend yield                               |       | 0          | %          | 0 | % | 0 | % |
| Expected  volatility                         |       | 19.37      | %          | 19.34 | % | 26.44 | % |
| Risk free  interest rate                     |       | 4.49       | %          | 3.93 | % | 5.02 | % |
| Expected life  (in years)                    |       | 5          |       | 4 |   | 6 |   |
| Weighted average  fair-value options granted |       | $          | 1.55       |   | $ | 1.13 |   | $ | 3.06 |   |
|                                              |            |            |            |  |  |  |  |  |  |  |

 

F-22

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The following tablesummarizes the option activity under the Plans as of April 30, 2007, and theoptions exercisable at the end of the reported period:

|                                               | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|-------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding options at April 30, 2004         |       | 572         |       | $                                      | 4.35       |                                                |       |                            |       |   |
| Granted                                       |       | 209         |       | $                                      | 4.99       |                                                |       |                            |       |   |
| Forfeited and Expired                         |       | (10         | )          | $                                      | 3.69       |                                                |       |                            |       |   |
| Exercised                                     |       | —      |       | —                                 |       |                                                |       |                            |       |
| Outstanding options at April 30, 2005         |       | 771         |       | $                                      | 4.86       |                                                |       |                            |       |   |
| Granted                                       |       | 203         |       | $                                      | 4.68       |                                                |       |                            |       |   |
| Forfeited and Expired                         |       | (64         | )          | $                                      | 6.87       |                                                |       |                            |       |   |
| Exercised                                     |       | (43         | )          | $                                      | 3.71       |                                                |       |                            |       |   |
| Outstanding options, April 30, 2006           |       | 867         |       | $                                      | 4.72       |                                                |       |                            |       |   |
| Granted                                       |       | 237         |       | $                                      | 8.05       |                                                |       |                            |       |   |
| Forfeited and Expired                         |       | (17         | )          | $                                      | 8.63       |                                                |       |                            |       |   |
| Exercised                                     |       | (23         | )          | $                                      | 4.56       |                                                |       |                            |       |   |
| Outstanding  options, April 30, 2007          |       | 1,064       |       | $                                      | 5.40       |                                                | 6.8        |                            | $          | 2,127 |   |
|                                          |       |        |       |                                   |       |                                                |       |                            |       |
| Exercisable at  end of period                 |       | 570         |       | $                                      | 4.60       |                                                | 5.6        |                            | $          | 1,514 |   |
| Vested and  expected to vest at end of period |       | 1,021       |       | $                                      | 5.37       |                                                | 6.9        |                            | $          | 2,069 |   |

 

Thetotal intrinsic value of options exercised during the years ended April 30,2006 and 2007 was $61 and $79, respectively. The total grant date fair value of stock options that became fullyvested for the year ended April 30, 2007 was approximately $752.

Cashreceived from option exercises under all share based payment arrangements forthe years ended April 30, 2006 and 2007 was $145 and $107, respectively.  The estimated tax benefit expected to berealized for the years ended April 30, 2006 and 2007 is $0 and $23,respectively.

Asummary of the status of the Company’s nonvested shares as of April 30, 2007,and changes during the year ended April 30, 2007, 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         | )          | 1.39                                                        |       |
| Nonvested at April 30,  2007 |       | 494        |       | $                                                           | 2.12       |   |

 

Asof April 30, 2007, there was $694 of total unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under thePlans.  The cost is expected to berecognized over a weighted average period of 2.6 years.  The total fair value of shares vested duringthe years ended April 30, 2006 and 2007 was $1,186.

SFASNo. 123(R) also requires the Company to estimate forfeitures incalculating the expense relating to stock-based compensation as opposed toaccounting for forfeitures as they occur, as allowed by SFAS No. 123. TheCompany adjusted for this effect with respect to unvested options as ofMay 1, 2006 in the stock-based

F-23

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compensationexpense recognized, which was recorded within general and administrativeexpense on the Company’s consolidated statement of earnings. This adjustmentwas not recorded as a cumulative effect adjustment because no compensation costwas recognized prior to the adoption SFAS No. 123(R). In addition, SFASNo. 123(R) requires the Company to reflect the tax savings resulting fromtax deductions in excess of expense reflected in its financial statements as afinancing cash flow rather than as an operating cash flow as in prior periods.

Totalcompensation costs related to stock-based compensation that have been chargedagainst income during the years ended April 30, 2006 and 2007 were $0 and $239,net of income tax benefits of $67, respectively.  Included in this total are $0 and $239 forthe years ended April 30, 2006 and 2007, respectively, resulting from theadoption of SFAS No. 123(R), which would have previously been presented ina pro forma footnote disclosure, as discussed above.

Followingis a summary of the status of options outstanding at April 30, 2007:
|                   | ** ** | ** **      | ** ** | **Weighted**        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **            | ** ** |
|-------------------|------------|-----------------|------------|---------------------|------------|-----------------------|------------|-------------|------------|-----------------------|------------|
| ** **        | ** ** | ** **      | ** ** | **Average**         | ** ** | **Weighted**          | ** ** | ** **  | ** ** | **Weighted**          | ** ** |
| **Range of** | ** ** | ** **      | ** ** | **Contractual**     | ** ** | **Average**           | ** ** | ** **  | ** ** | **Average**           | ** ** |
| **Exercise**      | ** ** | **Options**     | ** ** | **Life**            | ** ** | **Outstanding**       | ** ** | **Vested**  | ** ** | **Vested**            | ** ** |
| **Price**         | ** ** | **Outstanding** | ** ** | **(in years)** | ** ** | **Strike Price** | ** ** | **Options** | ** ** | **Strike Price** | ** ** |
| $4.75             |       | 50              |       | (1                  | )          | $                     | 4.75       |        | 50         |                  | $          | 4.75 |   |
| $11.00            |       | 20              |       | (1                  | )          | $                     | 11.00      |        | 20         |                  | $          | 11.00 |   |
| $2.95             |       | 128             |       | 5.27                |       | $                     | 2.95       |        | 118        |                  | $          | 2.95 |   |
| $3.98  -$5.25     |       | 596             |       | 6.53                |       | $                     | 4.52       |        | 349        |                  | $          | 4.52 |   |
| $6.75 -$8.05      |       | 270             |       | 8.14                |       | $                     | 7.37       |        | 33         |                  | $          | 7.37 |   |
| ** **        |       | 1,064           |       | 6.81                |       | $                     | 5.14       |        | 570        |                  | $          | 4.60 |   |

 

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(1)  The option will terminate one year after theDirector ceases to be a member of the Board of Directors, except that in theevent of the Director’s death while serving as a Director the option would beexercisable by his heirs or representatives of his estate for a period of twoyears after date of death.

Thefollowing table illustrates the effect on net earnings and earnings per shareas if the Company had applied the fair-value recognition provisions of SFASNo. 123(R) to all of its share-based compensation awards for periods priorto the adoption of SFAS No. 123(R), and the actual effect on net earningsand earnings per share for the period subsequent to the adoption of SFAS No. 123(R):
|                                                                                                                                                      | ** ** | **For the Years Ended April 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2005**                                                   | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net Earnings, as reported                                                                                                                            |       | $                                                          | 684        |   | $ | 2,445 |   | $ | 3,192 |   |
| Add: Total stock  option plan compensation expense included in the determination of reported  net earnings, net of taxes                             |       | —                                                     |       | — |   | 239 |   |
|                                                                                                                                                 |       |                                                       |       |   |   |   |   |
| Deduct: Total stock option plan compensation expense determined under  fair value based method for awards granted, modified or settled, net of taxes |       | (189                                                       | )          | (211 | ) | (239 | ) |
| Pro Forma Net Earnings                                                                                                                               |       | $                                                          | 495        |   | $ | 2,234 |   | $ | 3,192 |   |
|                                                                                                                                                 |       |                                                       |       |   |   |   |   |
| Basic Net Earnings per Common Share, as reported                                                                                                     |       | $                                                          | 0.14       |   | $ | 0.55 |   | $ | 0.71 |   |
| Diluted Net Earnings per Common Share, as reported                                                                                                   |       | $                                                          | 0.14       |   | $ | 0.53 |   | $ | 0.67 |   |
| Basic Net Earnings per Common Share, pro forma                                                                                                       |       | $                                                          | 0.10       |   | $ | 0.50 |   | $ | 0.71 |   |
| Diluted  Net Earnings per Common Share, pro forma                                                                                                    |       | $                                                          | 0.10       |   | $ | 0.48 |   | $ | 0.67 |   |

 

F-24

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**15. Commitments and Contingencies**

        *Litigation*.  The Company from time to time becomesinvolved in various routine legal proceedings which are incidental to thebusiness. Management of the Company vigorously defends such matters. As ofApril 30, 2007, management believes there are no such legal proceedings that willhave a material adverse impact on the Company’s financial position or resultsof operations.

*Leases*.  The Company is a party to a lease agreementfor office space in Houston that expires on February 28, 2011. The Company isparty to a lease agreement for office space in Atlanta which expires onDecember 31, 2015. Rent expense for office space and other operating leases forthe years ended April 30, 2005, 2006 and 2007, was   $1,053 $1,135 and $1,068, respectively.Required minimum lease payments for the remaining terms of the above leasesare:
| Year ending April 30, |   |   |   |
|-----------------------|--------|--------|--------|
| 2008                  |   | $      | 755    |   |
| 2009.                 |   | 838    |   |
| 2010                  |   | 837    |   |
| 2011                  |   | 794    |   |
| 2012                  |   | 539    |   |
| Thereafter            |   | 2,071  |   |
| Total                 |   | $      | 5,834  |   |

 

**16. 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 years ended April 30, 2005, 2006, and 2007 are as follows:

|                                                                     | ** ** | **For the Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Weighted average  shares:                                           |       |                                                      |       |   |   |   |   |
| Weighted average shares outstanding for basic  earnings per share   |       | 4,790                                                     |       | 4,439 |   | 4,472 |   |
| Effect of dilutive stock options and warrants                       |       | 97                                                        |       | 219 |   | 313 |   |
| Weighted average  shares outstanding for diluted earnings per share |       | 4,887                                                     |       | 4,658 |   | 4,785 |   |

 

At April 30, 2005, 2006,and 2007, the Company had 218, 10, and 130 employee stock options and warrants,respectively, and 190, 20, and 160 director options, respectively, which werenot included in the computation of diluted earnings per share because to do sowould have been antidilutive for the period presented.

**17. Quarterly Financial Data (Unaudited)**

The table below sets forth the unauditedconsolidated operating results by quarter for the year ended April 30, 2007.
| ** **                             | ** ** | **For the Three Months Ended,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **July 31, 2006**                         | ** ** | **October 31, 2006** | ** ** | **January 31, 2007** | ** ** | **April 30, 2007** | ** ** |
|                                   |       |                                                |       |   |   |   |   |   |   |
| Interest Income                        |       | $                                                   | 12,330     |   | $ | 13,374 |   | $ | 14,553 |   | $ | 14,311 |   |
| Interest Expense                       |       | 5,206                                               |       | 5,813 |   | 6,364 |   | 6,586 |   |
| Net earnings                           |       | 736                                                 |       | 1,295 |   | 821 |   | 340 |   |
| Basic Net  Earnings per Common Share   |       | $                                                   | 0.17       |   | $ | 0.29 |   | $ | 0.18 |   | $ | 0.07 |   |
| Diluted Net Earnings  per Common Share |       | $                                                   | 0.15       |   | $ | 0.29 |   | $ | 0.17 |   | $ | 0.06 |   |

 

F-25

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Thetable below sets forth the unaudited consolidated operating results by quarterfor the year ended April 30, 2006.
| ** **                             | ** ** | **For the Three Months Ended,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **July 31, 2005**                         | ** ** | **October 31, 2005** | ** ** | **January 31, 2006** | ** ** | **April 30, 2006** | ** ** |
|                                   |       |                                                |       |   |   |   |   |   |   |
| Interest Income                        |       | $                                                   | 8,498      |   | $ | 9,915 |   | $ | 10,332 |   | $ | 10,556 |   |
| Interest Expense                       |       | 2,960                                               |       | 3,476 |   | 3,938 |   | 4,668 |   |
| Net Earnings                           |       | 925                                                 |       | 765 |   | 318 |   | 437 |   |
| Basic Net  Earnings per Common Share   |       | $                                                   | 0.21       |   | $ | 0.17 |   | $ | 0.07 |   | $ | 0.10 |   |
| Diluted Net Earnings  per Common Share |       | $                                                   | 0.21       |   | $ | 0.17 |   | $ | 0.07 |   | $ | 0.09 |   |

 

Thetable below sets forth the unaudited consolidated operating results by quarterfor the year ended April 30, 2005.
| ** **                             | ** ** | **For the Three Months Ended,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **July 31, 2004**                         | ** ** | **October 31, 2004** | ** ** | **January 31, 2005** | ** ** | **April 30, 2005** | ** ** |
|                                   |       |                                                |       |   |   |   |   |   |   |
| Interest Income                        |       | $                                                   | 6,952      |   | $ | 7,001 |   | $ | 7,220 |   | $ | 7,098 |   |
| Interest Expense                       |       | 1,777                                               |       | 1,829 |   | 1,964 |   | 2,046 |   |
| Net Earnings                           |       | 87                                                  |       | 216 |   | 279 |   | 102 |   |
| Basic Net  Earnings per Common Share   |       | $                                                   | 0.02       |   | $ | 0.04 |   | $ | 0.06 |   | $ | 0.02 |   |
| Diluted Net Earnings  per Common Share |       | $                                                   | 0.02       |   | $ | 0.04 |   | $ | 0.06 |   | $ | 0.02 |   |

 

**18. Subsequent Event**

On May 30, 2007, the Company entered intoa servicing agreement with an unrelated third party to service $154,211portfolio of installment loan receivables. Additionally, the Company acquired a fifty percent participation in a$4,279 portfolio of nonperforming loans at a purchase price of $592.

F-26

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