Summary of CONSUMER PORTFOLIO SERVICES INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a specialty finance company engaged in purchasing and servicing new and used retail automobile contracts originated primarily by franchised automobile dealerships and, to a lesser extent, by select independent dealers of used automobiles in the United States. We serve as an alternative source of financing for dealers, facilitating sales to sub-prime customers, who have limited credit history, low income or past credit problems and who otherwise might not be able to obtain financing from traditional sources. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) acquired installment purchase contracts in three merger and acquisition transactions described below, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) began lending money directly to consumers for an immaterial amount of vehicle purchase money loans. In this report, we refer to all of such contracts and loans as "automobile contracts." We are headquartered in Irvine, California and have three additional strategically located servicing branches in Virginia, Florida and Illinois.

On March 8, 2002, we acquired MFN Financial Corporation and its subsidiaries in a merger. On May 20, 2003, we acquired TFC Enterprises, Inc. and its subsidiaries in a second merger. Each merger was accounted for as a purchase. MFN Financial Corporation and its subsidiaries and TFC Enterprises, Inc. and its subsidiaries were engaged in businesses similar to ours: buying automobile contracts from dealers and servicing those automobile contracts. MFN Financial Corporation and its subsidiaries ceased acquiring automobile contracts in May 2002; we suspended purchases of automobile contracts under our "TFC programs" in July 2008.

On April 2, 2004, we purchased a portfolio of automobile contracts and certain other assets from SeaWest Financial Corporation and its subsidiaries. In addition, we were named the successor servicer of three term securitization transactions originally sponsored by SeaWest. We do not intend to offer financing programs similar to those previously offered by SeaWest.

SECURITIZATION AND WAREHOUSE CREDIT FACILITIES

Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through our warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities to fund the transactions. Depending on the structure, these transactions may properly be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings.

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, (ii) recognize interest expense on the securities issued in the transaction and (iii) record as expense a provision for credit losses on the contracts.

Since the third quarter 2003 through June 2008, we have conducted 23 term securitizations. Of these 23, 18 were quarterly securitizations of automobile contracts that we purchased from automobile dealers under our regular programs. In addition, in March 2004 and November 2005, we completed securitizations of our retained interests in other securitizations that we and our affiliates previously sponsored. The debt from the March 2004 transaction was repaid in August 2005 and the debt from the November 2005 transaction was repaid in May 2007. In September 2004, we completed a securitization of automobile contracts purchased in the SeaWest asset acquisition and under our TFC programs. In December 2005 and again in May 2007 we completed securitizations that included automobile contracts purchased under the TFC programs, automobile contracts purchased under the CPS programs and automobile contracts we repurchased upon termination of prior securitizations. All such securitizations since the third quarter of 2003 have been structured as secured financings.

UNCERTAINTY OF CAPITAL MARKETS

We are dependent upon the continued availability of warehouse credit facilities and access to long-term financing through the issuance of asset-backed securities collateralized by our automobile contracts. Since 1994, we have completed 48 term securitizations comprising approximately $6.4 billion in contracts. We conducted four term securitizations in 2006, four in 2007, and one in 2008. However, since the fourth quarter of 2007, we have observed unprecedented adverse changes in the market for securitized pools of automobile contracts. These changes include reduced liquidity, increased financial guaranty premiums and reduced demand for asset-backed securities, including for securities carrying a financial guaranty and for securities backed by sub-prime automobile receivables. We believe that these adverse changes in the capital markets are primarily the result of widespread defaults of sub-prime mortgages securing a variety of term securitizations and related financial instruments, including instruments carrying financial guarantees similar to those we typically obtain for our own term securitizations.

The terms of our most recent securitization, completed in April 2008, required substantially greater credit enhancement than recent past securitizations, including a larger spread account and a greater portion of subordinated bonds. Greater credit enhancement requirements reduce the amount of cash available to us, both at inception of the securitization, and over the life of the transaction. Moreover, the recently completed securitization resulted in significantly higher costs to us in the form of higher premiums for financial guaranty insurance, higher interest rates paid on bonds sold by the securitization trust and greater discounts given to purchasers of such bonds. Due to current conditions in the capital markets, we believe that any additional securitization transactions that we may execute during 2008 are likely to be structured to include similar credit enhancement levels and result in similar costs to the recently completed transaction.

The adverse changes that have taken place in the market to date have caused us to curtail our purchases of automobile contracts in order to extend the time when our warehousing financing capacity would require us to conduct a term securitization. If the current adverse circumstances that have affected the capital markets should worsen such that we are precluded from completing a future securitization of our receivables, we may exhaust the capacity of our warehouse credit facilities which would cause us to further curtail or cease our purchases of new automobile contracts. Further adverse changes in the capital markets might result in our inability to securitize automobile contracts, which could lead to a material adverse effect on our operations.

Although we believe that such reductions in contract purchases would allow us to continue operations, such reductions have resulted in a decrease in the size of our portfolio of automobile contracts. A continuing decrease in portfolio size could have a material adverse effect on our cash flows and results of operations. However, continuing cashflows otherwise available to us would be sufficient to meet our remaining operating needs in the near term.

RESULTS OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTHS ENDED JUNE 30, 2008 WITH THE THREE-MONTHS ENDED JUNE 30, 2007

REVENUES. During the three months ended June 30, 2008, revenues were $98.8 million, an increase of $3.0 million, or 3.1%, from the prior year revenue of $95.8 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the three months ended June 30, 2008 increased $5.4 million, or 6.0%, to $94.9 million from $89.5 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries (resulting in an increase of $7.2 million in interest income). This increase was partially offset by decreased interest earned on restricted cash balances and a decrease in interest earned on our residual interest in securitizations.

Servicing fees totaling $280,000 in the three months ended June 30, 2008 increased $167,000, or 148.1%, from $113,000 in the prior year. The increase in servicing fees is the result of recoveries on the SeaWest Third Party portfolio. Such recoveries have been treated as servicing fees since September 2007; prior to that time they were applied to an outstanding note obligation of SeaWest to CPS, in accordance with the terms of the related agreements. We expect servicing fees generally to decrease as the SeaWest Third Party portfolio and related recoveries decline.

As of June 30, 2008 and 2007, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

  <C>
                                                June 30, 2008         June 30, 2007
                                             ------------------    ------------------
                                               Amount       %        Amount       %
                                             ----------   -----    ----------   -----
TOTAL MANAGED PORTFOLIO                                     ($ in millions)
Owned by Consolidated Subsidiaries .......   $  1,979.4   100.0%   $  1,889.4    99.4%
Owned by Non-Consolidated Subsidiaries ...         --       0.0%          9.6     0.5%
SeaWest Third Party Portfolio ............          0.1     0.0%          1.3     0.1%
                                             ----------   -----    ----------   -----

Total ....................................   $  1,979.5   100.0%   $  1,900.3   100.0%
                                             ==========   =====    ==========   =====


At June 30, 2008, we were generating income and fees on a managed portfolio with
an outstanding principal balance of $1,979.5 million (this amount includes
$128,000 of automobile contracts securitized by SeaWest, on which we earn only
servicing fees), compared to a managed portfolio with an outstanding principal
balance of $1,900.3 million as of June 30, 2007. At June 30, 2008 and 2007, the
managed portfolio composition was as follows:

                                                June 30, 2008         June 30, 2007
                                             ------------------    ------------------
                                               Amount       %        Amount       %
                                             ----------   -----    ----------   -----
ORIGINATING ENTITY                                          ($ in millions)
CPS ......................................   $  1,920.1    97.0%   $  1,834.6    96.5%
TFC ......................................         59.0     3.0%         62.1     3.3%
MFN ......................................          0.0     0.0%          0.2     0.0%
SeaWest ..................................          0.3     0.0%          2.1     0.1%
SeaWest Third Party Portfolio ............          0.1     0.0%          1.3     0.1%
                                             ----------   -----    ----------   -----

Total ....................................   $  1,979.5   100.0%   $  1,900.3   100.0%
                                             ==========   =====    ==========   =====

Other income decreased $2.6 million, or 41.6%, to $3.6 million in the three months ended June 30, 2008 from $6.2 million during the prior year. The year over year decrease is the result of a variety of factors. In the prior year period, we sold a portfolio of charged off receivables for a gain of $1.7 million. In addition, prior year other income includes $1.1 million resulting from an increase in the carrying value of our residual interest in securitizations. The carrying value was increased primarily as a result of the underlying receivables having incurred fewer losses than we had previously estimated, which in turn resulted in actual cash flows exceeding cash flows that were estimated in our valuation of the residual asset at March 31, 2007. We do not expect that future cash flows will significantly exceed the estimates we are currently using for the valuation of our residual interest. In addition, recoveries on MFN and certain other automobile contracts decreased by $265,000 compared to the 2007 period. Partially offsetting these declines in other income, in 2008 we experienced increases in convenience fees charged to obligors for certain transaction types (an increase of $662,000). The level of convenience fees we earn is closely related to the size of our managed portfolio. Consequently, increases or decreases in convenience fees will result from increases or decreases in our managed portfolio.

The adverse changes that have taken place in the market to date have caused us to curtail our purchases of automobile contracts in order to extend the time when our warehousing financing capacity would require us to conduct a term securitization. As a result, our managed portfolio has decreased from $2,126.2 million at December 31, 2007 to $1,979.5 at June 30, 2008. If the adverse conditions continue and our managed portfolio continues to decline, our revenues will decline proportionately.

EXPENSES. Our operating expenses consist largely of provisions for credit losses, interest expense, employee costs and general and administrative expenses. Provisions for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during a period and by the outstanding balance of finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and the unemployment level.

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing and advertising expenses, and depreciation and amortization.

Total operating expenses were $96.1 million for the three months ended June 30, 2008, compared to $89.6 million for the prior year, an increase of $6.5 million, or 7.3%. The increase is primarily due to an increase in interest expense of $7.2 million, or 21.5%.

Employee costs increased by 13.7% to $12.9 million during the three months ended June 30, 2008, representing 13.4% of total operating expenses, from $11.3 million for the prior year, or 12.7% of total operating expenses. During and through the end of 2007, we gradually increased our number of employees, generally throughout all areas of the Company, to accommodate greater volumes of contract purchases and the resulting higher balance of our managed portfolio. For the three-month period ended June 30, 2008 we averaged 872 employees compared to 858 employees for the same period of the prior year.

General and administrative expenses increased by 24.5% to $7.6 million and represented 7.9% of total operating expenses in the three months ending June 30, 2008. General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables including expenses for facilities, credit services, telecommunications and marketing.

Interest expense for the three months ended June 30, 2008 increased $7.2 million, or 21.5%, to $41.0 million, compared to $33.7 million in the previous year. The increase is primarily the result of changes in the amount and composition of securitization trust debt carried on our consolidated balance sheet. Interest on securitization trust debt increased by $7.2 million in the three months ended June 30, 2008 compared to the prior year. We also experienced increases in residual interest financing interest expenses of $1.6 million. A portion of the increase in interest expense can also be attributed to a gradual increase in market interest rates during 2007 during which time new securitization trust debt was added at fixed rates that were generally higher than the fixed rates on older securitization trust debt that was fully or partially repaid. Moreover, due to the securitization market disruption discussed above, the interest rates and discounts on the securitization trust debt from our April 2008 securitization transaction were significantly higher than those on our September 2007 transaction, which also contributed to the increase. Increases in interest expense for securitization trust debt and residual interest financing were somewhat offset by a decrease of $333,000 in interest expense for subordinated debt and a decrease of $1.3 million for warehouse debt interest expense. The decrease in the warehouse debt interest expense can be attributed to our lower level of new contract purchases in 2008 as compared to 2007.

At June 30, 2008 we borrowed $10 million in new senior secured debt. Subsequently, and prior to this filing, we borrowed an additional $15 million in senior secured debt and amended our existing residual financing indebtedness resulting in a higher interest rate on that indebtedness. As a result, we can expect that our interest expense on these components of debt will increase in future periods although such increases may be somewhat offset by decreases in our securitization trust debt should our portfolio of managed receivables continue to decline.

Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives and decreased by $2.1 million, or 44.3%, to $2.6 million, compared to $4.7 million in the previous year. These expenses represented 2.7% of total operating expenses. The decrease is primarily due to the decrease in automobile contracts we purchased during the three months ended June 30, 2008 as compared to the prior year. During the three months ended June 30, 2008, we purchased 5,268 automobile contracts aggregating $79.8 million, compared to 22,327 automobile contracts aggregating $346.0 million in the prior year. The adverse changes that have taken place in the securitization market since the fourth quarter of 2007 have caused us to curtail our purchases of automobile contracts in order to preserve liquidity.

Occupancy expenses increased slightly by $109,000 or 11.6%, to $1.0 million compared to $934,000 in the previous year and represented 1.2% of total operating expenses.

Depreciation and amortization expenses decreased by $25,000, or 20.0%, to $98,000 from $123,000 in the previous year.

For the three months ended June 30, 2008, we recorded tax expense of $1.2 million or 45.0% of income before income taxes. For the three months ended June 30, 2007, we recorded income taxes of $2.7 million or 44.1% of income before income taxes. The increased effective tax rate is primarily related to the impact of 2008 projected permanent differences from various items including stock based compensation. As of June 30, 2008, we had net deferred tax assets of $58.8 million.

COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTHS ENDED JUNE 30, 2008 WITH THE SIX-MONTHS ENDED JUNE 30, 2007

REVENUES. During the six months ended June 30, 2008, revenues were $202.1 million, an increase of $19.8 million, or 10.9%, from the prior year revenue of $182.3 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the six months ended June 30, 2008 increased $24.3 million, or 14.3%, to $194.2 million from $169.9 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries (resulting in an increase of $27.7 million in interest income). This increase was partially offset by decreased interest earned on restricted cash balances and a decrease in interest earned on our residual interest in securitizations.

Servicing fees totaling $708,000 in the six months ended June 30, 2008 increased $313,000, or 79.3%, from $395,000 in the prior year. The increase in servicing fees is the result of recoveries on the SeaWest Third Party portfolio. Such recoveries have been treated as servicing fees since September 2007; prior to that time they were applied to an outstanding note obligation of SeaWest to CPS, in accordance with the terms of the related agreements. We expect servicing fees generally to decrease as the SeaWest Third Party portfolio and related recoveries decline.

At June 30, 2008, we were generating income and fees on a managed portfolio with an outstanding principal balance of $1,979.5 million (this amount includes $128,000 of automobile contracts securitized by SeaWest, on which we earn only servicing fees), compared to a managed portfolio with an outstanding principal balance of $1,900.3 million as of June 30, 2007.

Other income decreased $4.8 million, or 40.2%, to $7.2 million in the six months ended June 30, 2008 from $12.0 million during the prior year. The year over year decrease is the result of a variety of factors. In the prior year period, we sold a portfolio of charged off receivables for a gain of $1.7 million. In addition, prior year other income includes $3.6 million resulting from an increase in the carrying value of our residual interest in securitizations. The carrying value was increased primarily as a result of the underlying receivables having incurred fewer losses than we had previously estimated, which in turn resulted in actual cash flows exceeding cash flows that were estimated in our valuation of the residual asset at December 31, 2006. We do not expect that future cash flows will significantly exceed the estimates we are currently using for the valuation of our residual interest. In addition, recoveries on MFN and certain other automobile contracts decreased by $515,000 compared to the 2007 period. Partially offsetting these declines in other income, in 2008 we experienced increases in convenience fees charged to obligors for certain transaction types (an increase of $1.4 million). The level of convenience fees we earn is closely related to the size of our managed portfolio. Consequently, increases or decreases in convenience fees will result from increases or decreases in our managed portfolio.

The adverse changes that have taken place in the securitization market since the fourth quarter of 2007 have caused us to curtail our purchases of automobile contracts in order to preserve liquidity. As a result, our managed portfolio has decreased from $2,126.2 million at December 31, 2007 to $1,979.5 at June 30, 2008. If the adverse conditions continue and our managed portfolio continues to decline, our revenues will decline proportionately.

Total operating expenses were $195.6 million for the six months ended June 30, 2008, compared to $170.6 million for the prior year, an increase of $25.0 million, or 14.6%. The increase is primarily due to an increase in interest expense of $16.8 million, or 26.5%.

Employee costs increased by 19.1% to $26.4 million during the six months ended June 30, 2008, representing 13.5% of total operating expenses, from $22.1 million for the prior year, or 13.0% of total operating expenses. The increase in employee costs is the result of additions to our staff, generally throughout all areas of the Company, to accommodate greater volumes of contract purchases and the resulting higher balance of our managed portfolio. For the six-month period ended June 30, 2008 we averaged 911 employees compared to 835 employees for the same period of the prior year.

General and administrative expenses increased by 23.8% to $14.9 million and represented 7.6% of total operating expenses in the six months ending June 30, 2008. General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables including expenses for facilities, credit services, telecommunications and marketing.

Interest expense for the six months ended June 30, 2008 increased $16.8 million, or 26.5%, to $80.0 million, compared to $63.2 million in the previous year. The increase is primarily the result of changes in the amount and composition of securitization trust debt carried on our consolidated balance sheet. Interest on securitization trust debt increased by $13.8 million in the six months ended June 30, 2008 compared to the prior year. We also experienced increases in warehouse interest expense and residual interest financing interest expenses of $710,000 and $3.0 million, respectively. A portion of the increase in interest expense can also be attributed to a gradual increase in market interest rates during 2007 during which time new securitization trust debt was added at fixed rates that were generally higher than the fixed rates on older securitization trust debt that was fully or partially repaid. Moreover, due to the securitization market disruption discussed above, the interest rates and discounts on the securitization trust debt from our April 2008 securitization transaction were higher than those on our September 2007 transaction, which also contributed to the increase. Increases in interest expense for securitization trust debt, warehouse and residual interest financing were somewhat offset by a decrease of $711,000 in interest expense for subordinated debt.

Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives and decreased by $2.7 million, or 30.1%, to $6.2 million, compared to $8.9 million in the previous year and represented 3.2% of total operating expenses. The decrease is primarily due to the decrease in automobile contracts we purchased during the six months ended June 30, 2008 as compared to the prior year. During the six months ended June 30, 2008, we purchased 17,051 automobile contracts aggregating $255.9 million, compared to . . .