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: our name change to DriveTime and
strategic  operating  changes,  including  the impacts of new  programs  such as
DriveCare and RateAdvantage (including the impact on our portfolio average APR),
funding for DriveTime improvements;  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  recoveries  and  loan  performance,
including   delinquencies  and  charge  offs;  selling  and  marketing  expenses
remaining constant through year end; retaining the warehouse and inventory lines
of  credit;  the  success  of  cost  savings   initiatives  and  restructurings;
improvements in inventory,  inventory acquisition,  and inventory mix, including
higher priced inventory and improved loan performance on such inventory; release
of deposits held in escrow; continuing to complete securitization  transactions;
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 now  Gregory B.  Sullivan,  our Chief  Executive
Officer and  President,  and Ray Fidel,  the Executive  Vice President and Chief
Operating  Officer of Ugly Duckling Car Sales and Finance  Corporation,  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 currently obtain financing through five primary sources:

     o    a warehouse facility with Greenwich Capital Financial  Products,  Inc.
          ("Greenwich");
     o    an inventory facility with Automotive Finance Corporation ("AFC")
     o    a senior  secured term facility  secured by the residual  interests in
          our securitizations;
     o    securitization transactions; and
     o    loans from other sources.

     Warehouse Facility with Greenwich. Our warehouse facility with Greenwich is
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  was  recently  renewed  until  March  2003.  Under our
securitizations, we are required to have a credit facility reasonably acceptable
to the insurer and in good  standing.  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.

     Senior Secured Term Facility.  We recently  renewed our senior secured term
loan  facility  with certain  lenders.  The loan facility was increased to $45.0
million and has a term of approximately  30 months.  If we are unable to finance
the residual interests in our securitizations, 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.

     Each  securitization   transaction  is  structured  to  have  cash  reserve
enhancements,  portfolio  performance tests and other covenants specific to each
deal.  Changes in the  structure  as they relate to the items  listed  above are
impacted by, among other things,  the insurer and rating  agencies  comfort with
the current and forecast  performance of the Company, the past loan portfolio of
the Company and the current portfolio of loans being securitized.

     The portfolio  performance  tests are measured for both  delinquencies  and
charge-offs  at two levels.  The first and lower tests,  "portfolio  performance
events",  when  breached  will  cause the  trusts  to trap  cash in the  reserve
account, otherwise distributable to the junior obligors of the trusts, until the
cash balance  reaches a  pre-determined  level or the  performance  of the trust
returns to a level  below the test and is "cured".  The second and higher  test,
"termination  event",  when  breached  will cause the trusts to trap cash in the
reserve account,  otherwise  distributable to the junior obligors of the trusts,
until the A bondholder is paid in full or the event is waived by the insurer. In
addition,  the  termination  event also  allows for the  insurer to replace  the
servicer on the trust.  Termination  events can also be triggered by breaches in
certain other covenants in the structure  including  financial covenants and the
requirement  of having a  warehouse  facility  acceptable  to the insurer at all
times.

     The  occurrence of  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.
<PAGE>

     We are changing  insurers for our  securitizations  from MBIA to XL Capital
Assurance.  We may be unable to secure an  insurer  for  future  securitizations
based upon several  factors,  including the  performance of our  contracts,  our
financial performance, the economy, and the securities markets. If we are unable
to secure an insurer for our  securitizations  it could have a material  adverse
affect on our profitability  and liquidity,  including a higher interest rate on
the A bonds or an inability to complete our securitizations.

     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,  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.

     If we make acquisitions, such acquisitions may be unsuccessful or strain or
divert our resources from more  profitable  operations.  Although we have slowed
our  growth,  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,  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.
<PAGE>

     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
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.  We  estimate  the  overall  impact on
interest income related to lower rates offered under  RateAdvantage  and the VIP
Program is to lower the weighted average contract APR by approximately 100 basis
points.  However,  this estimate may not be accurate and a significant reduction
in our average APR could have a material adverse impact on our profitability, if
not offset by a corresponding reduction in our loan losses.

     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 are  targeting  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.

<PAGE>

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
and we will be undergoing a name and strategic change September 1st. 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  (e.g.,  RateAdvantage
and our VIP program), quality vehicles (e.g., Experian Auto Check certifications
and DriveCare, our 90 day/3,000 mile limited warranty), and outstanding customer
service.  In conjunction  with these  changes,  we are also changing our name to
DriveTime.  We believe these changes will have a positive effect on future sales
volume,  the  credit mix of our  customer  base,  losses,  and  ultimately,  our
profitability.  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.