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: anticipated financial results, such
as continuing growth of sales, other revenues and loan portfolios,  improvements
in underwriting,  adequacy of the allowance for credit losses,  and improvements
in loan  performance,  including  delinquencies  and charge  offs;  roll-out  of
collectors  to  our  dealerships;   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; 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 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.  For a  description  of his most recent  offer to
purchase our outstanding common stock, see Footnote (9) of Notes to Consolidated
Financial statements included herein.

     Future losses could impair our ability to raise capital or borrow money and
consequently  affect  our  stock  price.  Although  we  recorded  earnings  from
continuing  operations of $1.8 million for the three months ended March 31, 2001
and $4.5 million for the three months ended March 31, 2000, 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  three
primary sources:

o        a warehouse facility with Greenwich Capital Financial Products, Inc.
         ("Greenwich");
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.  This facility  contains numerous  restrictive  covenants and financial
tests. Failure to satisfy these could result in a default,  which could preclude
us from  further  borrowing  under the  warehouse  facility;  could  cause cross
defaults  to our  other  debt and  securitizations,  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
profitability.

     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 recent  periods,  we have  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.

     Recent  Waivers.  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 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
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 in favor of an
accelerated  stock buy back  program.  Our ability to continue our growth is now
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.  We do not expect a  slowdown  in growth to  adversely
impact  revenues or earnings  in 2001.  Thereafter,  we expect that a failure to
grow could eventually affect our earnings and/or profitability.

     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  counterparties.  Even if we can identify  suitable
parties,  we may not be able to consummate  these  transactions on terms that we
find favorable.

     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 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-her pay-here
used car dealers  that  operate in the  sub-prime  segment of the used car sales
industry.  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 industry. Although these companies do not currently compete with us in
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 the sub-prime segment of the market 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 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 none or all of the following
securities may dilute the value of the securities that our existing stockholders
now hold:

o      we have granted warrants to purchase a total of approximately 870,000
       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 may issue common stock in the First Merchants transaction in exchange
       for an increased share of collections on certain loans that we service
       for First Merchants.
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."