UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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: 001-12117

First Acceptance Corporation

(Exact name of registrant as specified in its charter)

Delaware		75-1328153
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)
3322 West End Ave, Suite 1000
Nashville, Tennessee		37203
(Address of principal executive offices)		(Zip Code)

(615) 844-2800
(Registrant’s telephone number, including area code)

3813 Green Hills Village Drive
Nashville, Tennessee 37215
(Former name, former address and former fiscal year, if changed since last report)

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

Yes x             No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                      Accelerated filer ý                      Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o             No x

As of May 10, 2007, there were outstanding 47,602,524 shares of the registrant’s common stock, par value $0.01 per share.

FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007

INDEX

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 6. Exhibits
SIGNATURES
Ex-10.1 Second Amendment to the First Acceptance Corporation 2002 Long Term Incentive Plan
Ex-10.2 Form of Restricted Stock Award Agreement of Outside Directors
Ex-10.3 Form of Indemnification Agreement between the Company and each of the Company's directors and executive officers
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

		March 31, 2007
		(Unaudited)				June 30, 2006
ASSETS
Fixed maturities, available for sale at fair value (amortized cost $161,830 and $131,291, respectively)		$	162,084			$	127,828
Cash and cash equivalents			29,522				31,534
Premiums and fees receivable			83,676				64,074
Reinsurance recoverables			688				1,344
Receivable for securities			1,025				999
Deferred tax asset			44,405				48,068
Other assets			7,105				7,796
Property and equipment, net			3,957				3,376
Foreclosed real estate held for sale			234				87
Deferred acquisition costs			6,052				5,330
Goodwill			138,082				137,045
Identifiable intangible assets			6,514				6,825
TOTAL ASSETS		$	483,344			$	434,306
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves		$	77,019			$	62,822
Unearned premiums and fees			102,665				78,331
Notes payable and capitalized lease obligations			24,931				24,026
Payable for securities			—				4,914
Other liabilities			12,937				10,790
Total liabilities		$	217,552			$	180,883
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000 shares authorized			—				—
Common stock, $.01 par value, 75,000 shares authorized; 47,603 and 47,535 shares issued and outstanding, respectively			476				475
Additional paid-in capital			460,528				459,049
Accumulated other comprehensive income (loss)			165				(3,463	)
Accumulated deficit			(195,377	)			(202,638	)
Total stockholders’ equity		$	265,792			$	253,423
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	483,344			$	434,306

See notes to consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
Revenues:
Premiums earned		$	79,282			$	55,147			$	219,126			$	142,717
Fee income			10,412				7,311				29,179				20,340
Transaction service fee			—				3,100				850				3,100
Gains on sales of foreclosed real estate			—				2,817				—				3,638
Investment income			2,292				1,646				6,336				3,961
(Losses) gains on sales of investments			(3	)			47				(85	)			51
		$	91,983			$	70,068			$	255,406			$	173,807
Costs and expenses:
Losses and loss adjustment expenses		$	60,202			$	38,374			$	167,508			$	97,303
Insurance operating expenses			25,244				21,046				71,082				52,774
Other operating expenses			560				742				2,186				1,964
Stock-based compensation			295				72				752				418
Depreciation and amortization			404				346				1,192				779
Interest expense			445				457				1,275				457
		$	87,150			$	61,037			$	243,995			$	153,695
Income before income taxes		$	4,833			$	9,031			$	11,411			$	20,112
Provision for income taxes			1,767				3,167				4,150				6,735
Net income		$	3,066			$	5,864			$	7,261			$	13,377
Net income per share:
Basic		$	0.06			$	0.12			$	0.15			$	0.28
Diluted		$	0.06			$	0.12			$	0.15			$	0.27
Number of shares used to calculate net income per share:
Basic			47,603				47,510				47,578				47,474
Diluted			49,691				49,570				49,666				49,541
Reconciliation of net income to comprehensive income:
Net income		$	3,066			$	5,864			$	7,261			$	13,377
Net unrealized appreciation (depreciation) on investments			568				(1,652	)			3,628				(2,945	)
Comprehensive income		$	3,634			$	4,212			$	10,889			$	10,432

See notes to consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

		Nine Months Ended
		March 31,
		2007				2006
Cash flows from operating activities:
Net income		$	7,261			$	13,377
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization			1,192				779
Stock-based compensation			752				418
Amortization of premium on fixed maturities			174				386
Deferred income taxes			3,574				6,523
Gains on sales of foreclosed real estate			—				(3,638	)
Losses (gains) on sales of investments			85				(51	)
Change in:
Premiums and fees receivable			(19,602	)			(22,905	)
Reinsurance recoverables			656				2,396
Deferred acquisition costs			(722	)			(2,136	)
Loss and loss adjustment expense reserves			14,197				14,725
Unearned premiums and fees			24,334				30,138
Other			2,838				(373	)
Net cash provided by operating activities			34,739				39,639
Cash flows from investing activities:
Purchases of fixed maturities, available-for-sale			(79,849	)			(49,778	)
Maturities and paydowns of fixed maturities, available-for-sale			5,119				6,065
Sales of fixed maturities, available-for-sale			43,932				9,789
Sales of investment in mutual fund			—				10,679
Net (decrease) increase in payable/receivable for securities			(4,940	)			1,436
Acquisitions of property and equipment			(1,305	)			(1,301	)
Proceeds from sales of foreclosed real estate			—				4,512
Improvements to foreclosed real estate			(147	)			—
Cash paid for acquisition, net of cash acquired			(1,037	)			(29,831	)
Net cash used in investing activities			(38,227	)			(48,429	)
Cash flows from financing activities:
Proceeds from borrowings			5,000				30,000
Payments on borrowings			(4,252	)			—
Net proceeds from issuance of common stock			728				121
Exercise of stock options			—				421
Net cash provided by financing activities			1,476				30,542
Net (decrease) increase in cash and cash equivalents			(2,012	)			21,752
Cash and cash equivalents at beginning of period			31,534				24,762
Cash and cash equivalents at end of period		$	29,522			$	46,514

See notes to consolidated financial statements.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(Unaudited)

1. General

     The consolidated financial statements of First Acceptance Corporation (the “Company”) included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods. Certain reclassifications have been made to the prior year’s consolidated financial statements to conform with the current year presentation.

     The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2006.

2. Net Income Per Share

     The following table sets forth the computation of basic and diluted net income per share:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
Net income		$	3,066			$	5,864			$	7,261			$	13,377
Weighted average common basic shares			47,603				47,510				47,578				47,474
Effect of dilutive securities — options			2,088				2,060				2,088				2,067
Weighted average common dilutive shares			49,691				49,570				49,666				49,541
Basic net income per share		$	0.06			$	0.12			$	0.15			$	0.28
Diluted net income per share		$	0.06			$	0.12			$	0.15			$	0.27

3. Stock-Based Compensation

     During the nine months ended March 31, 2007, the Company issued 635 stock options to employees under its 2002 Long Term Incentive Plan (the “Plan”). The options were issued at a weighted average exercise price of $11.61 per share. The options expire over ten years and vest equally in annual installments with 285 shares vesting over five years and 350 shares vesting over four years. Compensation expense related to these options was $3,976, of which $1,596 will be amortized through September 2010, $599 through October 2010, $1,596 through September 2011, and $185 through February 2012. None of these options were exercisable at March 31, 2007. There were no options exercised or forfeited during the nine months ended March 31, 2007. Shares remaining available for issuance under the Plan were 3,337 at March 31, 2007.

4. Business Combination

     In accordance with the terms of the acquisition agreement related to the purchase of certain assets of two non-standard automobile insurance agencies under common control in Chicago, Illinois effective January 12, 2006, additional consideration of $1,037 was paid to the seller in March 2007 based on the attainment of certain financial targets, as defined. No further amounts are due from the Company. The payment of additional consideration increased goodwill at March 31, 2007.

5. Segment Information

     The Company operates in two business segments with its primary focus being the selling, servicing and underwriting of non-standard personal automobile insurance. The real estate and corporate segment consists of activities related to the disposition of foreclosed real estate held for sale, interest expense associated with all debt and other general corporate overhead expenses.

     The following table presents selected financial data by business segment:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
Revenues:
Insurance		$	91,977			$	66,876			$	255,244			$	169,470
Real estate and corporate			6				3,192				162				4,337
Consolidated total		$	91,983			$	70,068			$	255,406			$	173,807
Income (loss) before income taxes:
Insurance		$	6,123			$	7,110			$	15,445			$	18,614
Real estate and corporate			(1,290	)			1,921				(4,034	)			1,498
Consolidated total		$	4,833			$	9,031			$	11,411			$	20,112

		March 31,				June 30,
		2007				2006
Total assets:
Insurance		$	445,403			$	383,337
Real estate and corporate			37,941				50,969
Consolidated total		$	483,344			$	434,306

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006. The following discussion should be read in conjunction with the Company’s consolidated financial statements included with this report and our consolidated financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended June 30, 2006 included in our Annual Report on Form 10-K.

General

     As of March 31, 2007, we leased and operated 468 retail locations, staffed by employee-agents. Our employee-agents exclusively sell insurance products either underwritten or serviced by us. As of March 31, 2007, we wrote non-standard personal automobile insurance in 12 states and were licensed in 13 additional states. See the discussion in Item 1. “Business — General” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 for additional information with respect to our business.

     The following table shows the changes in the number of our retail locations for the periods presented. Retail location counts are based upon the date that a location commenced writing business. In prior years, we reported this information based upon the date that a location was leased. Information for all prior periods presented has been restated to conform to the current period’s method of presentation.

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
Retail locations — beginning of period			467				351				460				248
Opened			5				28				18				132
Acquired			—				72				—				72
Closed			(4	)			(4	)			(10	)			(5	)
Retail locations — end of period			468				447				468				447

     The following tables show the number of our retail locations by state.

		March 31,								December 31,								June 30,
		2007				2006				2006				2005				2006				2005
Alabama			25				25				25				25				25				25
Florida			42				40				41				35				39				20
Georgia			63				63				63				63				63				62
Illinois			82				86				85				15				86				5
Indiana			27				25				26				26				26				21
Mississippi			8				8				8				8				8				8
Missouri			15				20				15				19				18				14
Ohio			30				30				30				30				30				29
Pennsylvania			25				20				26				18				25				7
South Carolina			28				12				26				4				21				—
Tennessee			20				20				20				20				20				20
Texas			103				98				102				88				99				37
Total			468				447				467				351				460				248

Critical Accounting Policies

     There have been no significant changes to our critical accounting policies and estimates during the nine months ended March 31, 2007 compared with those disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.

Consolidated Results of Operations

Overview

Our primary focus is the selling, servicing and underwriting of non-standard personal automobile insurance. Our real estate and corporate segment consists of activities related to the disposition of foreclosed real estate held for sale, interest expense associated with debt, and other general corporate overhead expenses. Our insurance operations generate revenues from selling, servicing and underwriting non-standard personal automobile insurance policies in 12 states. We conduct our underwriting operations through three insurance company subsidiaries, First Acceptance Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance Company of Tennessee, Inc. Our insurance revenues are primarily generated from:

	•		premiums earned, including policy and renewal fees, from (i) sales of policies issued by our insurance company subsidiaries, net of the portion of those premiums ceded to reinsurers, and (ii) the sales of policies issued by our managing general agency (“MGA”) subsidiaries that are assumed 100% by our insurance company subsidiaries through quota-share reinsurance;
	•		fee income, including installment billing fees on policies written and fees for other ancillary services (principally a motor club product); and
	•		investment income earned on the invested assets of the insurance company subsidiaries.

     The following table presents gross premiums earned by state and includes policies written by the insurance company subsidiaries and policies issued by our MGA subsidiaries on behalf of other insurance companies that are assumed 100% by one of our insurance company subsidiaries through quota-share reinsurance. Although we are licensed in Texas, we currently write some business in Texas through the Texas county mutual insurance company system that is assumed 100% by one of our insurance company subsidiaries. Premiums ceded during the nine months ended March 31, 2006 reflect only the cost of catastrophic reinsurance. Effective April 14, 2006, we elected to not renew our catastrophic reinsurance.

		Three Months Ended March 31,												Nine Months Ended March 31,
		2007				2006				Change				2007				2006				Change
		(in thousands)
Gross premiums earned:
Georgia		$	18,087			$	17,409			$	678			$	52,863			$	51,481			$	1,382
Florida			14,993				8,028				6,965				40,833				15,241				25,592
Illinois			8,410				2,196				6,214				22,681				2,574				20,107
Alabama			7,845				7,426				419				22,417				21,357				1,060
Texas			8,098				5,025				3,073				22,051				10,327				11,724
Tennessee			6,082				6,082				—				17,865				18,293				(428	)
Ohio			4,289				3,613				676				12,132				10,184				1,948
South Carolina			4,520				331				4,189				9,361				365				8,996
Indiana			2,110				1,689				421				6,040				4,217				1,823
Pennsylvania			1,961				612				1,349				4,717				1,055				3,662
Missouri			1,600				1,409				191				4,487				3,866				621
Mississippi			1,287				1,355				(68	)			3,679				3,833				(154	)
Total gross premiums earned			79,282				55,175				24,107				219,126				142,793				76,333
Premiums ceded			—				(28	)			28				—				(76	)			76
Total net premiums earned		$	79,282			$	55,147			$	24,135			$	219,126			$	142,717			$	76,409

     The following table presents the change in the total number of policies in force for the insurance operations for the periods presented. Policies in force increase as a result of new policies issued and decrease as a result of policies that cancel or expire and are not renewed.

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
Policies in force — beginning of period			217,560				132,861				200,401				119,422
Net increase during period			29,474				54,187				46,633				67,626
Policies in force — end of period			247,034				187,048				247,034				187,048

     Insurance companies present a combined ratio as a measure of their overall underwriting profitability. The components of the combined ratio are as follows:

     Loss Ratio — Loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses incurred to premiums earned and is a basic element of underwriting profitability. We calculate this ratio based on all direct and assumed premiums earned, net of ceded reinsurance.

     Expense Ratio — Expense ratio is the ratio (expressed as a percentage) of operating expenses to premiums earned. This is a measurement that illustrates relative management efficiency in administering our operations. We calculate this ratio on a net basis as a percentage of net premiums earned. Insurance operating expenses are reduced by fee income from insureds and, for the period from January 1, 2006 through December 31, 2006, the transaction service fee we received for servicing the run-off business previously written by the Chicago agencies whose business we acquired in January 2006.

     Combined Ratio — Combined ratio is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%, an insurance company cannot be profitable without sufficient investment income. The following table presents the combined ratios for the insurance operations for the periods presented.

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
Loss and loss adjustment expense			75.9	%			69.6	%			76.5	%			68.2	%
Expense			18.7	%			19.3	%			18.7	%			20.6	%
Combined			94.6	%			88.9	%			95.2	%			88.8	%

     The invested assets of the insurance operations are generally highly liquid and consist substantially of taxable, readily marketable, investment grade, municipal and corporate bonds and collateralized mortgage obligations. We invest in certain securities issued by political subdivisions in the states of Georgia and Tennessee, as these investments enable our insurance company subsidiaries to obtain premium tax credits. Investment income is comprised primarily of interest earned on these securities, net of related investment expenses. Realized gains and losses on our investment portfolio may occur from time to time as changes are made to our holdings to enable premium tax credits or based upon changes in interest rates and changes in the credit quality of securities held.

Three and Nine Months Ended March 31, 2007 Compared With Three and Nine Months Ended March 31, 2006

     Consolidated Results

     Revenues for the three months ended March 31, 2007 increased 31% to $92.0 million from $70.1 million in the same period last year. Net income for the three months ended March 31, 2007 was $3.1 million, compared with $5.9 million for the three months ended March 31, 2006. Both basic and diluted net income per share were $0.06 for the three months ended March 31, 2007, compared with $0.12 for the three months ended March 31, 2006.

     Revenues for the nine months ended March 31, 2007 increased 47% to $255.4 million from $173.8 million in the same period last year. Net income for the nine months ended March 31, 2007 was $7.3 million, compared with $13.4 million for the nine months ended March 31, 2006. Both basic and diluted net income per share were $0.15 for the nine months ended March 31, 2007, compared with $0.28 and $0.27, respectively, for the nine months ended March 31, 2006.

     Insurance Operations

     Revenues from insurance operations were $92.0 million for the three months ended March 31, 2007, compared with $66.9 million for the three months ended March 31, 2006. For the nine months ended March 31, 2007, revenues from insurance operations were $255.2 million, compared with $169.5 million for the nine months ended March 31, 2006.

     Income before income taxes was $6.1 million for the three months ended March 31, 2007, compared with $7.1 million for the three months ended March 31, 2006. Income before income taxes for the nine months ended March 31, 2007 was $15.4 million, compared with $18.6 million for the nine months ended March 31, 2006.

     Premiums Earned

     Premiums earned increased by $24.1 million, or 44%, to $79.3 million for the three months ended March 31, 2007 from $55.1 million for the three months ended March 31, 2006. The increase was due primarily to the development of additional retail locations. Approximately 67% of the premium growth was in Florida and Texas, where we opened 81 locations in fiscal year 2006, and Chicago, where we acquired 72 locations in January 2006. The total number of insured policies in force at March 31, 2007 increased 32% over the same date in 2006 from 187,048 to 247,034. At March 31, 2007, we operated 468 retail locations (or “stores”), compared with 447 stores at March 31, 2006.

     For the nine months ended March 31, 2007, premiums earned increased by $76.4 million, or 54%, to $219.1 million from $142.7 million for the nine months ended March 31, 2006. Approximately 75% of the premium growth was in Florida, Texas and Illinois.

     Fee Income and Transaction Service Fee

     Fee income increased 42% to $10.4 million for the three months ended March 31, 2007, from $7.3 million for the three months ended March 31, 2006. For the nine months ended March 31, 2007, fee income increased 43% to $29.2 million from $20.3 million for the nine months ended March 31, 2006. These increases were the result of the growth in net premiums earned. However, fee income increased at a rate lower than our increase in premiums earned because we charge lower fees in Florida compared with our other states.

     Revenues for the nine months ended March 31, 2007 included $0.9 million from a transaction service fee earned in connection with the Chicago acquisition for servicing the run-off business previously written by the Chicago agencies whose assets we acquired in January 2006. We will not receive this transaction service fee in future periods.

     Investment Income

     Investment income increased primarily as a result of the increase in invested assets generated in connection with our growth and, to a lesser extent, as a result of the shift in our portfolio from tax-exempt to taxable investments. The weighted average investment yields for our fixed maturities portfolio were 5.2% and 5.1% at March 31, 2007 and 2006, respectively, with effective durations of 3.44 years and 3.41 years at March 31, 2007 and 2006, respectively. The yields for the comparable Lehman Brothers indices were 5.0% and 5.1% at March 31, 2007 and 2006, respectively.

     Loss and Loss Adjustment Expenses

     The loss and loss adjustment expense ratio was 75.9% for the three months ended March 31, 2007 compared with 69.6% for the same period last year. The increase in the ratio was the result of a change in our business mix resulting from premium growth in our emerging states of Florida and Texas where we anticipated higher loss ratios and adverse development related to prior accident quarters of approximately $2.3 million. The adverse development primarily related to losses occurring in the preceding accident quarter and was the result of an unanticipated increase in the frequency of Personal Injury Protection (“PIP”) losses in Florida and an unexpected increase in the paid severity of physical and property damage losses in certain states. Excluding this adverse development, the loss and loss adjustment expense ratio for the current quarter was 73.1%, which is an improvement over the re-estimated calendar 2006 accident year ratio of 74.3%, primarily as a result of recent premium rate actions.

     The loss and loss adjustment expense ratio was 76.5% for the nine months ended March 31, 2007 compared with 68.2% for the same period last year. In addition to the factors noted above, we had previously reported that the three months ended September 30, 2006 included adverse development related to prior accident quarters of approximately $3.7 million. This adverse development related primarily to the estimation of the severity of losses in Florida and Texas, where we had significant growth during 2006, and Georgia, where we reduced our physical damage premium rates effective January 2006. We increased premium rates in Florida (effective in December 2006), in South Carolina (effective in both January and March 2007), and in Georgia (effective in March 2007). We are currently in the process of reviewing our rates in Pennsylvania and Texas.

     Operating Expenses

     Insurance operating expenses increased 20% to $25.2 million for the three months ended March 31, 2007 from $21.0 million for the three months ended March 31, 2006. For the nine months ended March 31, 2007, operating expenses increased 34% to $71.1 million from $52.8 million for the nine months ended March 31, 2006. These increases are primarily due to the costs associated with new stores (including those acquired in Chicago) and expenses (such as variable employee-agent compensation and premium taxes) that vary along with the increase in premiums earned.

     The expense ratio decreased from 19.3% and 20.6% for the three and nine-month periods ended March 31, 2006, respectively, to 18.7% for the same periods this year. These decreases are primarily as a result of the increase in premiums earned from new stores without a corresponding increase in fixed operating costs (such as advertising, rent and base compensation of our employee-agents).

     Overall, the combined ratio increased to 94.6% for the three months ended March 31, 2007 from 88.9% for the three months ended March 31, 2006, and to 95.2% for the nine months ended March 31, 2007 from 88.8% for the nine months ended March 31, 2006 as a result of the higher loss and loss adjustment expense ratio.

     Real Estate and Corporate

     Loss before income taxes for the three months ended March 31, 2007 was $1.3 million compared with income of $1.9 million for the three months ended March 31, 2006. For the nine months ended March 31, 2007, loss before income taxes was $4.0 million, compared with income of $1.5 million for the nine months ended March 31, 2006.

     The three and nine-month periods ended March 31, 2006 included gains on sales of foreclosed real estate held for sale of $2.8 million and $3.6 million, respectively. There were no gains on sales of foreclosed real estate held for sale during the three and nine-month periods ended March 31, 2007.

Liquidity and Capital Resources

     Our primary sources of funds are premiums, fee income and investment income. Our primary uses of funds are the payment of claims and operating expenses. Operating activities for the nine months ended March 31, 2007 provided $34.7 million of cash, compared with $39.6 million provided in the same period in fiscal 2006. Net cash used by investing activities for the nine months ended March 31, 2007 was $38.2 million, compared with $48.4 million in the same period in fiscal 2006. Both periods reflect net additions to our investment portfolio as a result of the increase in premiums earned. During the nine months ended March 31, 2007, we sold fixed maturity investments of $43.9 million that were subsequently reinvested in certain states in order to help obtain premium tax credits in these states. In December 2006, we borrowed $5.0 million from our revolving credit facility and used the proceeds to increase the statutory capital and surplus of the insurance company subsidiaries.

     During the nine months ended March 31, 2007, we increased the statutory capital and surplus of the insurance company subsidiaries by a total of $14.7 million to support additional premium writings. Of this capital contribution, $2.7 million came from funds our holding company received from the insurance company subsidiaries through an intercompany tax allocation agreement under which the holding company was reimbursed for current tax benefits utilized through the recognition of tax net operating loss carryforwards. The balance of the capital contribution came from $7.0 million of unrestricted cash and $5.0 million from the borrowing under the revolving credit facility. At March 31, 2007, we had $0.8 million available in unrestricted cash outside of the insurance company subsidiaries, which was used in April 2007 to pay a scheduled quarterly payment of principal and interest on our notes payable to banks. Future debt payments will be serviced by the additional unrestricted cash from the sources described in the next paragraph.

     We are part of an insurance holding company system with substantially all of our operations conducted by our insurance company subsidiaries. The holding company receives cash from operating activities as a result of fees for ancillary services and the ultimate liquidation of our foreclosed real estate held for sale. Cash could also be made available through loans from financial institutions, the sale of common stock, and dividends from our insurance company subsidiaries. In addition, as a result of our tax net operating loss carryforwards, taxable income generated by the insurance company subsidiaries will provide cash to the holding company through an intercompany tax allocation agreement through which the insurance company subsidiaries reimburse the holding company for current tax benefits utilized through recognition of the net operating loss carryforwards.

     State insurance laws limit the amount of dividends that may be paid from the insurance company subsidiaries. These limitations relate to statutory capital and surplus and net income. In addition, the National Association of Insurance Commissioners Model Act for risk-based capital (“RBC”) provides formulas to determine the amount of statutory capital and surplus that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. A low RBC ratio would prevent an insurance company from paying dividends. Statutory guidelines suggest that the insurance company subsidiaries should not exceed a ratio of net premiums written to statutory capital and surplus of 3-to-1. We believe that the insurance company subsidiaries have sufficient financial resources available to support their net premium writings in both the short-term and the reasonably foreseeable future.

     We believe that existing cash and investment balances, when combined with anticipated cash flows generated from operations and dividends from our insurance company subsidiaries, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future. Our growth strategy includes possible acquisitions. Any acquisitions or other unexpected growth opportunities may require external financing, and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us or that any such financing would not negatively impact our results of operations.

Chicago Acquisition

     In order to gain a presence in the market, on January 12, 2006, we acquired certain assets (principally the trade names, customer lists and relationships and the lease rights to 72 retail locations) of two non-standard automobile insurance agencies under common control in Chicago, Illinois for $30.0 million in cash. In addition, in accordance with the terms of the acquisition, $1.0 million of additional consideration was paid in March 2007 based on attainment of certain financial targets. No further amounts are due from the Company.

     In connection with the acquisition, we concurrently entered into, and borrowed under, a credit agreement with two banks consisting of a $5 million revolving facility and a $25 million term loan facility, both maturing on June 30, 2010. Both facilities bear interest at LIBOR plus 175 basis points per annum. We entered into an interest rate swap agreement on January 17, 2006 that fixed the interest rate on the term loan facility at 6.63% through June 30, 2010. The term loan facility is due in equal quarterly installments of $1.4 million, plus interest, beginning April 30, 2006 and ending April 30, 2010 with a final payment of $1.4 million due on June 30, 2010. Both facilities are secured by the common stock and certain assets of our non-regulated subsidiaries. For the three and nine-month periods ended March 31, 2007, we incurred $0.4 million and $1.3 million, respectively, of interest expense in connection with the noted credit agreement. The credit agreement contains certain financial covenants. At March 31, 2007, the unpaid balance due under the facilities was $24.4 million and we were in compliance with all such covenants.

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements, other than leases accounted for as operating leases in accordance with generally accepted accounting principles, or financing activities with special-purpose entities.

Forward-Looking Statements

     This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements made in the report, other than statements of historical fact, are forward-looking statements. You can identify these statements from our use of the words “may,” “should,” “could,” “potential,” “continue,” “plan,” “forecast,” “estimate,” “project,” “believe,” “intent,” “anticipate,” “expect,” “target,” “is likely,” “will,” or the negative of these terms, and similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things:

	•		statements and assumptions relating to future growth, income, income per share and other financial performance measures, as well as management’s short-term and long-term performance goals;
	•		statements relating to the anticipated effects on results of operations or financial condition from recent and expected developments or events;
	•		statements relating to our business and growth strategies; and

•

any other statements or assumptions that are not historical facts.

     We believe that our expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss these and other uncertainties in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.

     You should not place undue reliance on any forward-looking statements contained herein. These statements speak only as of the date of this report. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this report, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We have an exposure to interest rate risk relating to fixed maturity investments. Changes in market interest rates directly impact the market value of our fixed maturity securities. Some fixed maturity securities have call or prepayment options. This subjects us to reinvestment risk as issuers may call their securities, which could result in us reinvesting the proceeds at lower interest rates. We manage exposure to interest rate risks by adhering to specific guidelines in connection with our investment portfolio. We invest primarily in municipal and corporate bonds and collateralized mortgage obligations that have been rated “A” or better by Standard & Poors. At March 31, 2007, 89.7% of our investment portfolio was invested in securities rated “AA” or better by Standard & Poors, and 99.2% was invested in securities rated “A” or better by Standard & Poors. We have not recognized any other than temporary losses on our investment portfolio. We also utilize the services of a professional fixed income investment manager.

     As of March 31, 2007, the impact of an immediate 100 basis point increase in market interest rates on our fixed maturities portfolio would have resulted in an estimated decrease in fair value of 3.6%, or approximately $7.1 million. Conversely, as of the same date, the impact of an immediate 100 basis point decrease in market interest rates on our fixed maturities portfolio would have resulted in an estimated increase in fair value of 3.3%, or approximately $6.6 million.

     In connection with the January 12, 2006 Chicago acquisition, we entered into a new $30.0 million credit facility that includes a $25.0 million term loan facility and a $5.0 million revolving facility. Although we have fixed the interest rate of the $25.0 million term loan facility through an interest rate swap agreement, we have interest rate risk with respect to the revolving facility, which bears interest at a floating rate of LIBOR plus 175 basis points per annum. At March 31, 2007, $5.0 million was borrowed under the revolving facility.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act) as of March 31, 2007. Based on that evaluation, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures effectively ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting

     During the period covered by this report, there has been no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 6. Exhibits

The following exhibits are attached to this report:

	10.1			Second Amendment to the First Acceptance Corporation 2002 Long Term Incentive Plan.
	10.2			Form of Restricted Stock Award Agreement of Outside Directors.
	10.3			Form of Indemnification Agreement between the Company and each of the Company’s directors and executive officers.
	31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
	31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
	32.1			Chief Executive Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2			Chief Financial Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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