Risk Factors

     There are various risks in purchasing our debt securities,  including those
described below. You should carefully  consider these risk factors together with
all other information included in this Form 10-Q.

     We make  forward-looking  statements.  This Report includes statements that
constitute  forward-looking  statements  within the  meaning of the safe  harbor
provisions of the Private and Securities Litigation Reform Act of 1995. We claim
the  protection  of  the   safe-harbor  for  our   forward-looking   statements.
Forward-looking   statements  are  often   characterized  by  the  words  "may,"
"anticipates,"   "believes,"   "estimates,"  "projects,"  "expects"  or  similar
expressions and do not reflect historical facts.  Forward-looking  statements in
this report relate, among other matters,  to: economic  conditions;  anticipated
financial  results,  such as  sales,  profitability,  other  revenues  and  loan
portfolios,  improvements in underwriting including credit scoring,  adequacy of
the allowance for credit losses, and improvements in loan performance, including
delinquencies  and charge offs;  retaining the warehouse and inventory  lines of
credit; the success of cost savings initiatives and restructurings; improvements
in  inventory  and  inventory  mix;  release  of  trapped  cash;  repurchase  of
securitization  trusts;  continued  servicing in connection with  securitization
trusts  which hit  termination  events;  continuing  to complete  securitization
transactions;  renewing the term credit facility;  and internet  generated sales
growth  and  loan  performance.   Forward  looking   statements  include  risks,
uncertainties and other factors which may cause our actual results,  performance
or  achievements  to be materially  different from those expressed or implied by
such forward  looking  statements,  some of which we cannot predict or quantify.
Factors that could  affect our results and cause or  contribute  to  differences
from these  forward-looking  statements  include,  but are not  limited  to: any
decline  in  consumer  acceptance  of our  car  sales  strategies  or  marketing
campaigns;  any  inability to finance our  operations in light of a tight credit
market for the sub-prime industry and our current financial  circumstances;  any
deterioration in the used car finance  industry or increased  competition in the
used car sales and finance  industry;  any  inability to monitor and improve our
underwriting and collection processes;  any changes in estimates and assumptions
in, and the ongoing adequacy of, our allowance for credit losses;  any inability
to continue to reduce operating expenses as a percentage of sales;  increases in
interest rates;  the failure to efficiently and profitably  manage  acquisitions
and/or new car dealerships; adverse economic conditions; any material litigation
against us or material,  unexpected developments in existing litigation; and any
new or revised accounting,  tax or legal guidance that adversely affect used car
sales  or  financing  and  developments   with  respect  to  the  going  private
transaction.  Forward-looking statements speak only as of the date the statement
was made.  Future  events and actual  results could differ  materially  from the
forward-looking statements. When considering each forward-looking statement, you
should keep in mind the risk factors and cautionary  statements found throughout
this Form 10-K and  specifically  those found  below.  We are not  obligated  to
publicly update or revise any forward looking statements, whether as a result of
new  information,  future  events,  or for any other reason.  References to Ugly
Duckling  Corporation  as the  largest  chain  of  buy-here  pay-here  used  car
dealerships in the United States is management's belief based upon the knowledge
of the industry and not on any current independent third party study.

     Our majority stockholder can control substantially all matters. As a result
of the  closing of the going  private  transaction  on March 4, 2002,  Ernest C.
Garcia II, our Chairman,  and Gregory B. Sullivan,  our Chief Executive  Officer
and President,  are the beneficial  owners of all our outstanding  common stock.
They  control  the  election  of our  directors  or the  approval of any merger,
reorganization  or other business  combination  transaction.  They could vote to
approve such a transaction on terms, which might be considered more favorable to
them than to unaffiliated and/or subordinated debtholders.

     Our public debtholders are subordinated to almost all other classes of debt
we have and, as a result,  they are particularly  vulnerable to material adverse
financial changes, including material adverse changes in our liquidity.

     Future losses could impair our ability to raise capital or borrow money and
consequently affect our future  profitability and liquidity.  While we have been
profitable in the past, we were not  profitable in 2001 and we cannot assure you
that we will be profitable  in future  periods.  Losses in future  periods could
impair our ability to raise additional capital or borrow money as needed.
<PAGE>

     We may not be able to continue to obtain the  financing we need to fund our
operations and, as a result, our business,  profitability and liquidity could be
materially adversely affected.  Our operations require large amounts of capital.
We have borrowed,  and will continue to borrow,  substantial amounts to fund our
operations.  If we cannot  obtain the financing we need on a timely basis and on
favorable terms, our business,  profitability  and liquidity could be materially
adversely  affected.  We have recently  experienced a less  favorable  borrowing
environment than in the past. We currently obtain financing through four primary
sources:

o    a warehouse  facility  with  Greenwich  Capital  Financial  Products,  Inc.
     ("Greenwich");
o    an inventory facility with Automotive Finance Corporation ("AFC")
o    securitization transactions; and
o    loans from other sources.

     Warehouse  Facility with  Greenwich.  When our prior warehouse  lender,  GE
Capital  Corporation,  announced  that it was  exiting  the  automobile  finance
market,  we had to replace our GE credit  facility with a new facility.  Our new
warehouse  facility  with  Greenwich  is now our  primary  source  of  operating
capital. We have pledged  substantially all of our assets to Greenwich to secure
the borrowings we make under this facility.  The warehouse facility recently was
renewed until March 2003. Under our  securitizations,  we are required to have a
credit facility reasonably acceptable to the insurer on April 30th of each year.
Failure to maintain such a facility  would  constitute an event of default under
our  securitizations  and, if that occurred,  our liquidity  would be materially
adversely affected.

     Inventory Line of Credit with Automotive  Finance  Corporation.  We entered
into a $36 million  inventory  line of credit with AFC in August of 2001,  which
matures  in June of 2003.  If we are unable to  maintain  an  inventory  line of
credit, our liquidity would be materially adversely affected.

     Securitization  Transactions.  We  restore  capacity  under  the  warehouse
facility from time to time by  securitizing  portfolios of finance  receivables.
Our ability to successfully  and  efficiently  complete  securitizations  may be
affected by several factors, including:

o    the condition of securities markets generally;
o    conditions in the asset-backed securities markets specifically;
o    the credit quality of our loan portfolio; and
o    the performance of our servicing operations.

     In past periods,  we experienced a tightening of the restrictive  covenants
in  our  securitization   transactions  as  well  as  increases  in  the  credit
enhancements required to close our securitizations.  High delinquency levels and
charge offs or other  events,  such as our failure to have a warehouse  facility
acceptable to the insurer of our  securitization  transactions in place on April
30 of each year, can also cause a "termination  event" under our  securitization
transactions.  Four of our  securitizations  experienced  termination  events as
previously discussed in our 2001 form 10-K "Management's Discussion and Analysis
of  Financial  Condition  and  Results  of   Operations--Securitizations".   The
occurrence  of  termination  events  could result in the trapping of cash in the
Reserve Account up to the amount of the A bond for those securitizations, and/or
our being replaced as servicer under those  securitizations  or in a liquidation
and sale of the securitized portfolios.  In addition, these types of occurrences
could also cause a "portfolio performance event," which could result in all cash
flow from the  securitized  receivables  otherwise  distributable  on the junior
obligations  held by us being  retained in the trust as additional  security for
senior  securities until the event has been cured.  One of our  securitizations,
2000A, is currently  experiencing  such an event,  although we expect that to be
remedied in 2002. The  continuance  of  termination  events or the occurrence of
additional  termination or portfolio events could have a material adverse effect
on our  ability  to  access  the  securitization  market  and/or  our  business,
liquidity and financial condition.

     Contractual  Restrictions.  The warehouse  facility,  the inventory line of
credit,  the  securitization  program,  and our other credit facilities  contain
various restrictive covenants, including financial tests. Failure to satisfy the
covenants in our credit facilities or our securitization program could result in
a default (and could  preclude us from  further  borrowing  under the  defaulted
facility),  could cause cross  defaults to our other debt,  and could prevent us
from securing alternate sources of funds necessary to operate our business.  Any

<PAGE>

of these events would have a material adverse effect on our business,  liquidity
and financial condition. From time to time, we incur technical or other breaches
under our material  credit  facilities,  and we have  obtained  waivers from the
applicable  lenders.  There can be no  assurance  we will  continue  to  receive
waivers and our  inability to obtain these  waivers may cause cross  defaults to
our other debt and have a material  impact on our  liquidity  and our ability to
obtain or retain operating capital.

     We have a high risk of credit losses  because of the poor  creditworthiness
of our  borrowers.  Substantially  all of the sales  financing we extend and the
loans  that we  service  are with  "sub-prime"  borrowers.  Sub-prime  borrowers
generally cannot borrow money from  traditional  lending  institutions,  such as
banks,  savings and loans, credit unions, and captive finance companies owned by
automobile  manufacturers,  because of their poor  credit  histories  and/or low
incomes.  Loans to sub-prime  borrowers are difficult to collect and are subject
to a high risk of loss.  We have  established  an allowance for credit losses to
cover our anticipated credit losses over a twelve-month  period. We periodically
review and may make upward or downward  adjustments to the allowance  based upon
whether we believe the  allowance  is adequate to cover our  anticipated  credit
losses.  However, our allowance may not be sufficient to cover our credit losses
and we may need to  increase  our  provision  or  allowance  if certain  adverse
factors  arise,  including  adverse  economic  events or material  increases  in
delinquencies  or  charge-offs.  A  significant  variation  in the  timing of or
increase in credit  losses in our  portfolio  or a  substantial  increase in our
allowance or  provision  for credit  losses would have,  and in 2001 did have, a
material adverse effect on our net earnings.

     We could  have a system  failure  if our  current  contingency  plan is not
adequate,  which  could  adversely  affect  our  ability to collect on loans and
comply  with  statutory  requirements.  We  depend  on our  loan  servicing  and
collection facilities and on long-distance and local  telecommunications  access
to transmit  and process  information  among our  various  facilities.  We use a
standard  program to prepare and store off-site  backup tapes of our main system
applications  and  data  files on a  routine  basis.  We  regularly  revise  our
contingency plan. However, the plan as revised may not prevent a systems failure
or allow us to timely resolve any systems  failures.  Also, a natural  disaster,
calamity,  or other  significant  event that causes  long-term  damage to any of
these facilities or that interrupts our telecommunications networks could have a
material adverse effect on our operations, profitability and liquidity.

     We have slowed our  growth,  which  negatively  affects  our  earnings  and
profitability.  Since 1999,  we have slowed our growth.  Our ability to continue
our growth is limited by our access to capital. We are also committed to slowing
our  growth  until we  improve  our loan loss  experience,  which  appears to be
occurring.  As additional capital is secured, we will consider whether to resume
or accelerate our expansion  plans or use the capital for other purposes such as
repurchasing our debt.

     Even if we make  acquisitions,  such  acquisitions  may be  unsuccessful or
strain or divert our resources from more profitable operations. Although we have
decided to slow our growth during the foreseeable  future, we intend to consider
additional  acquisitions,  alliances, and transactions involving other companies
that could  complement  our existing  business if we can do so with little or no
capital or if we can raise capital sufficient for any such transaction. However,
we may not be able to  identify  suitable  acquisition  parties,  joint  venture
candidates,  or transaction  counter parties.  Even if we can identify  suitable
parties,  we may not be able to consummate  these  transactions on terms that we
find favorable or obtain required consents or approvals.

     We may also not be able to  successfully  integrate any businesses  that we
acquire into our existing  operations.  If we cannot successfully  integrate any
future acquisitions, our operating expenses may increase, which would affect our
net earnings and/or liquidity.  Moreover, these types of transactions may result
in the incurrence of additional  debt and  amortization  of expenses  related to
goodwill  and  intangible  assets,  all of  which  could  adversely  affect  our
profitability  and/or liquidity.  These transactions also involve numerous other
risks,  including  the  diversion of management  attention  from other  business
concerns, entry into markets in which we have had no or only limited experience,
and the potential loss of key employees of acquired companies. Occurrence of any
of these risks could have a material adverse effect on us.

     We are considering  opening a new car dealership or  dealerships.  If we do
so, it will also require  additional  capital and would entail the same types of
risks noted above for acquisitions.

     Interest  rates  affect  our  profitability  and  cash  flows.  Much of our
financing  income results from the difference  between the rate of interest that
we pay on the funds we borrow and the rate of interest that we earn on the loans
in our  portfolio.  While we earn  interest  on the loans that we own at a fixed
rate, we pay interest on our borrowings under our warehouse facility and certain

<PAGE>

other debt at a floating  rate.  When  interest  rates  increase,  our  interest
expense  increases  and our net  interest  margins  decrease.  Increases  in our
interest  expense that we cannot  offset by  increases  in interest  income will
lower our profitability and liquidity.

     Laws that limit the interest rates that we can charge can adversely  affect
our profitability and liquidity. We operate in many states that impose limits on
the  interest  rate that a lender may charge.  When a state limits the amount of
interest that we can charge on our  installment  sales loans, we may not be able
to offset any increased  interest  expense  caused by rising  interest  rates or
greater  levels of  borrowings  under our credit  facilities.  Therefore,  these
interest rate limitations can adversely affect our profitability and liquidity.

     Government  regulations  may limit  our  ability  to  recover  and  enforce
receivables  or to  repossess  and sell  collateral.  We are  subject to ongoing
regulation,  supervision,  and licensing under various federal, state, and local
statutes,  ordinances, and regulations.  If we do not comply with these laws, we
could be fined or certain of our  operations  could be interrupted or shut down.
Failure  to comply  could,  therefore,  have a  material  adverse  effect on our
operations.

     We  believe  that we are  currently  in  substantial  compliance  with  all
applicable material federal, state, and local laws and regulations.  We may not,
however,  be able to remain in  compliance  with such  laws.  In  addition,  the
adoption of additional  statutes and regulations,  changes in the interpretation
of existing statutes and regulations,  or our entry into jurisdictions with more
stringent  regulatory  requirements could also have a material adverse effect on
our operations.

     We are  subject to  pending  actions  and  investigations  relating  to our
compliance  with  various  laws and  regulations.  While we do not believe  that
ultimate resolution of these matters will result in a material adverse effect on
our business or financial  condition  (such as material  fines,  injunctions  or
damages), there can be no assurance in this regard.

     Increased competition could adversely affect our operations,  profitability
and liquidity.  Our primary competitors are the numerous small buy-here/pay-here
used car dealers  that  operate in the  sub-prime  segment of the used car sales
industry and the banks and/or finance  companies  that purchase their loans.  We
attempt to distinguish  ourselves from our competitors  through name recognition
and other factors. However, the advertising and infrastructure required by these
efforts  increase our  operating  expenses.  There is no  assurance  that we can
successfully distinguish ourselves and compete in this industry. In addition, in
recent years, a number of larger companies with significant  financial and other
resources  have  entered or  announced  plans to enter the used car sales and/or
finance  industry.  There has also been an increase in dealerships  guaranteeing
financing or loan approvals.  Although these companies may not currently compete
with us in our portion of the sub-prime segment of the market, they compete with
us in the segment of sub-prime  we would like to target for a larger  portion of
our sales and loans.  They compete with us  indirectly  as well,  such as in the
purchase of inventory,  which can result in increased  wholesale  costs for used
cars and lower margins. They could also enter into direct competition with us at
any time at the lower end of the sub-prime market.

     Increased  competition  may cause  downward  pressure on the interest rates
that we charge on loans originated by our dealerships.  Either change could have
a material effect on our earnings and liquidity.

     The success of our operations depends on certain key personnel.  We believe
that our ability to successfully  implement our business strategy and to operate
profitably  depends on the continued  employment of our senior  management team.
The unexpected  loss of the services of any of our key  management  personnel or
our inability to attract new  management  when  necessary  could have a material
adverse effect on our operations.  We do not currently  maintain key person life
insurance on any member of our executive  management  team other than Gregory B.
Sullivan, our President and Chief Executive Officer.

     We continue to make what we believe are improvements to our business model.
Our goal is to be the auto  dealership and finance  company of choice for people
with credit issues, large and small. As a result, we are repositioning ourselves
to focus on providing our customers with innovative  credit  solutions,  quality

<PAGE>

vehicles, and outstanding customer service. We believe this will have a positive
effect on future sales volume and the credit mix of our customer base.  However,
we may not successfully assess, develop, implement and/or execute one or more of
these  strategies,   which  could  have  an  adverse  impact  on  our  revenues,
profitability, servicing and collections, and/or liquidity.



     We have undergone layoffs and restructurings  over the past several months.
While we believe we have done so in a manner  that should not  adversely  impact
our operating  performance or internal controls,  there can be no assurance that
did not occur. If it did occur,  problems may not arise until some indeterminate
time in the future and they may or may not be material.