Risk Factors

     There are various risks in purchasing  our  securities and investing in our
business,  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:  adverse  economic  conditions;
anticipated   financial  results,   such  as  sales,  other  revenues  and  loan
portfolios,  improvements in underwriting,  adequacy of the allowance for credit
losses,   and  improvements  in  recoveries  and  loan  performance,   including
delinquencies and charge offs; retaining the inventory lines of credit; roll-out
of  collectors  to our  dealerships;  the success of cost  savings  initiatives;
improvements  in inventory and inventory mix; and e-commerce  related 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;  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 any offer by Mr.  Garcia's offer to
take us  private.  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-Q 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 put to a
vote of stockholders. Ernest C. Garcia II, our Chairman, is the beneficial owner
of a majority of our outstanding  common stock.  Mr. Garcia is now in a position
to  control  the  election  of our  directors  or the  approval  of any  merger,
reorganization or other business combination  transaction submitted to a vote of
our shareholders or other  extraordinary  transaction.  Mr. Garcia could vote to
approve such a transaction on terms, which might be considered more favorable to
Mr. Garcia than to unaffiliated stockholders.  The terms of any such transaction
could require  stockholders  other than Mr. Garcia to dispose of their shares of
common  stock for cash or other  consideration  even if the  stockholders  would
prefer to continue to hold their shares of our common stock for investment.  Any
such  transaction  could  also  result in Ugly  Duckling's  common  stock  being
delisted from the Nasdaq  National  Market or being held of record by fewer than
300 persons and, therefore, eligible for termination of registration pursuant to
Section  12(g)(4) of the  Securities  Exchange Act of 1934.  In filings with the
Securities  and  Exchange  Commission,  Mr.  Garcia has  expressed a  continuing
interest in taking us private.

     Future losses could impair our ability to raise capital or borrow money and
consequently  affect our stock price. While we have been profitable in the past,
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 and could affect our stock price.

     We may not be able to continue to obtain the  financing we need to fund our
operations and, as a result, our business and profitability  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 and  profitability  could be materially  adversely
affected. As a result of our primary lender, GE Capital Corporation, exiting the
automobile finance business, our portfolio performance, and a general tightening
in the credit markets,  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  expires in
April 2002. 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  a  termination  event  under  our
securitizations and, our liquidity would be materially adversely affected.

     Inventory  Line of Credit  with GECC.  We have  entered  into a $36 million
inventory  line of  credit  with AFC in  August  of 2001.  If we are  unable  to
maintain  an  inventory  line of  credit,  our  liquidity  could  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,  which could result in our being  replaced as servicer under those
securitizations  or in a  liquidation  and sale of the  securitized  portfolios.
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.  Any of these consequences could
have a material adverse effect on our business 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
of these  events  would  have a  material  adverse  effect on our  business  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  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 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. 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 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 and profitability.

     We have slowed our growth, which,  eventually,  could negatively affect 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.  As
additional capital is secured,  we will consider whether to resume or accelerate
our expansion plans or to continue repurchasing our stock or debt. This slowdown
in growth has adversely  impacted  earnings in 2001. We expect that a failure to
grow could affect our earnings and/or profitability in future periods as well.

     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. 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.  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 have continuing risks relating to the First Merchants  transactions.  We
have entered into several  transactions  in the bankruptcy  proceedings of First
Merchants  Acceptance  Corporation.  We have the right to 17.5% of recoveries on
First Merchants'  residual interests in certain securitized loan pools and other
loans.  However, if we lose our right to service these loans, our share of these
residual interests could be reduced or eliminated.  This could affect our future
cash flow and profitability.

     Interest  rates  affect our  profitability.  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 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.

     Laws that limit the interest rates that we can charge can adversely  affect
our profitability.  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.

     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 fines,  injunctions  or damages),
there can be no assurance in this regard.

     Increased   competition   could   adversely   affect  our   operations  and
profitability.  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.  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
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.

     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 the value of our securities.

     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  senior  management  team other than  Gregory B.
Sullivan, our President and Chief Executive Officer.

     We may issue stock in the future that will dilute the value of our existing
stock.  We have the ability to issue common stock or securities  exercisable for
or convertible  into common stock,  which may dilute the securities our existing
stockholders  now hold. In particular,  issuance of some or all of the following
securities may dilute the value of the securities that our existing stockholders
now hold:

o    since we went  public  we have  granted  warrants  to  purchase  a total of
     approximately  700,000 shares of our common stock to various parties,  with
     exercise prices ranging from $6.75 to $10.81 per share;

o    we may issue additional warrants in connection with future transactions;

o    we may issue common stock under our various stock option plans; and

o    we have committed to issue 1.5 million  warrants to Mr. Garcia,  subject to
     certain conditions.

     There is a potential anti-takeover or dilutive effect if we issue preferred
stock.  Our  certificate of  incorporation  authorizes us to issue "blank check"
preferred  stock. Our board of directors may fix or change from time to time the
designation,  number, voting powers, preferences, and rights of this stock. Such
issuances  could  make it more  difficult  for a third  party to  acquire  us by
reducing the voting  power or other  rights of the holders of our common  stock.
Preferred stock can also reduce the market value of the common stock.

     There may be adverse  consequences  from issuing  blank check common stock,
including a potential  anti-takeover  or dilutive  effect.  Our  certificate  of
incorporation authorizes us to issue additional series of common stock, which we
refer to as "blank check"  common  stock.  Our board of directors may create new
series of common  stock from time to time in  addition  to the  existing  common
stock and may fix:

o    the designation,  voting powers,  liquidation  rights,  conversion  rights,
     redemption rights,  dividends and distributions,  preferences and relative,
     participating, optional and other rights, if any, of each such series;
o    the  qualifications,  limitations  or  restrictions,  if any,  of each such
     series; and
o    the number of shares constituting each such series.
Blank check common stock could also:

o    negatively  affect  shareholder  rights  and the value of  existing  common
     stock;
o    have rights that are preferential or superior to the existing common stock;
o    track the  performance of certain assets,  groups of assets,  businesses or
     subsidiaries of the company;
o    increase the complexity and administrative  costs of our capital structure,
     which could negatively impact our financial  condition and the value of our
     common stock;
o    create  potential  conflicts of interest  and our board of directors  could
     make decisions that adversely  affect holders of our existing common stock;
     and/or
o    give rise to  occasions  when the  interests of holders of one series might
     diverge  or appear to  diverge  from the  interests  of  holders of another
     series.

Blank check common stock also may be viewed as being an "anti-takeover"  device.
Our board could  create and issue  series of common  stock with terms that could
make a takeover  attempt by a third party more  difficult  to complete  and such
stock may also be used in connection  with the issuance of a stockholder  rights
plan, sometimes called a "poison pill."