The following discussion is intended to help the reader understand our results of operations and financial condition and is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements, the accompanying notes to the consolidated financial statements, and the other information included or incorporated by reference herein.

Overview

We are a specialty finance company engaged in automobile finance, which includes the purchase and servicing of automobile installment sales contracts, or automobile contracts, originated by independent and franchised dealers of used automobiles. We conduct our automobile finance business through our wholly-owned subsidiaries, United Auto Credit Corporation, or UACC and United Auto Business Operations, LLC, or UABO, which provide financing to borrowers who typically have limited or impaired credit histories that restrict their ability to obtain loans through traditional sources. Financing arms of automobile manufacturers generally do not make these loans to non-prime borrowers, nor do many other traditional automotive lenders. Non-prime borrowers generally pay higher interest rates and loan fees than do prime borrowers.

As a result of the continued disruptions in the capital markets, including the uncertainty for use of securitizations as a source of financing, as well as the lack of available borrowing capacity under a warehouse facility for an extended period of time, we determined to downsize our operations and reduce our branch footprint in order to lower expenses and meet required liquidity needs. During the quarter ended September 30, 2008, we closed an additional 27 branches bringing the total number of branches to 79 branches in operation as of September 30, 2008. The majority of closures were from the consolidation of branches within the same market. The closures of the 63 branches year-to-date resulted in a decrease in the number of employees of approximately 400 or 35% of the work force since December 31, 2007. These closures will result in a significant reduction in overall operating expenses. In addition, we suspended new loan originations during the end of the third quarter of 2008 to allow our outstanding receivables to shrink to a level where our capital base will be able to finance future originations at the lower advance structures available in the market.

On August 22, 2008, we restructured our $300 million warehouse facility, which we have historically used to fund our automobile finance operations to purchase automobile contracts pending securitization. As part of the restructuring, which effectively extinguished the existing warehouse facility, UPFC incurred a fee payable in the amount of $7.3 million. The fee has been recorded as part of non-recurring charges during the quarter ended September 30, 2008. The restructuring continued the revolving nature of the warehouse facility through its previously scheduled maturity of October 16, 2008. Subsequently, the credit facility converted to a term loan for an additional one-year term, which amortizes pursuant to a pre-determined schedule, providing that the Company will pay all amounts owed under the credit facility by October 16, 2009. Management is currently pursuing and evaluating alternative sources of financing and is also considering selling loans on a whole-loan basis. At this time, there is no assurance we will be able to arrange for other types of interim financing or be able to sell receivables on a whole-loan basis in the future.

Critical Accounting Policies

We have established various accounting policies, which govern the application of accounting principles generally accepted in the United States of America, or GAAP, in the preparation of our consolidated financial statements. Our accounting policies are integral to understanding the results reported. Certain accounting policies are described in detail in Note 3 to our Notes to Consolidated Financial Statements presented in our 2007 Annual Report on Form 10-K.

Certain accounting policies require us to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the date of the statement of financial condition and our results of operations for the reporting periods. The following is a brief description of our current accounting policies involving significant management valuation judgments.

Securitization Transactions

The transfer of our automobile contracts to securitization trusts is treated as a secured financing under Statement of Financial Accounting Standard ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The trusts are considered variable interest entities. The assets, liabilities and results of operations of the trusts have been included in our consolidated financial statements. The contracts are retained on the statement of financial condition with the securities issued to finance the contracts recorded as securitization notes payable. We record interest income on the securitized contracts and interest expense on the notes issued through the securitization transactions. Debt issuance costs are amortized over the expected term of the securitization using the interest method.

As servicer of these contracts, we remit funds collected from the borrowers on behalf of the trustee to the trustee and direct the trustee how the funds should be invested until the distribution dates. We have retained an interest in the securitized contracts, and have the ability to receive future cash flows as a result of that retained interest.

Allowance for Loan Losses

The allowance for loan losses is calculated based on incurred loss methodology for the determination of the amount of probable credit losses inherent in the finance receivables as of the reporting date. Our loan loss allowance is estimated by management based upon a variety of factors including an assessment of the credit risk inherent in the portfolio and prior loss experience.

The allowance for credit losses is established through provisions for losses recorded in income as necessary to provide for estimated contract losses in the next 12 months at each reporting date. We account for such contracts by static pool, stratified into three-month buckets, so that the credit risk in each individual static pool can be evaluated independently in order to estimate the future losses within each pool. Any such adjustment is recorded in the current period as the assessment is made.

Despite these analyses, we recognize that establishing an allowance is an estimate, which is inherently uncertain and depends on the outcome of future events. Our operating results and financial condition are sensitive to changes in our estimate for loan losses and the estimate's underlying assumptions. Our operating results and financial condition are immediately impacted as changes in estimates for calculating loan loss reserves are immediately recorded in our consolidated statement of income as an addition or reduction in provision expense.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, which requires that the compensation cost relating to share-based payment transactions (including the cost of all employee stock options) be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion ("APB Opinion") No. 25, Accounting for Stock Issued to Employees. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB No. 107") relating to SFAS No. 123(R).

We adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of our 2006 fiscal year. Our Consolidated Financial Statements after December 31, 2005 reflect the impact of SFAS No. 123(R). In accordance with the modified prospective transition method, our Consolidated Financial Statements prior to January 1, 2006 have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). Stock-based compensation expense recognized under SFAS No. 123(R) was $35,000 and $207,000 for the three months ended September 30, 2008 and 2007, respectively. Stock-based compensation expense recognized under SFAS No. 123(R) was $521,000 and $1,400,000 for the nine months ended September 30, 2008 and 2007, respectively.

Lending Activities

Summary of Loan Portfolio

The following table sets forth the composition of our loan portfolio at the
dates indicated.

                                      September 30, 2008     December 31, 2007
                                               (Dollars in Thousands)
Automobile Contracts                 $            837,533   $           927,921
Unearned finance charges (1)                         (741 )              (1,571 )
Unearned acquisition discounts (1)                (35,775 )             (43,699 )
Allowance for loan losses (1)                     (47,800 )             (48,386 )
Total loans, net                     $            753,217   $           834,265

Allowance for Loan Losses

Our policy is to maintain an allowance for loan losses to absorb inherent losses which may be realized on our portfolio. These allowances are general valuation allowances for estimates for probable losses, not specifically identified to individual loans, that will occur in the next twelve months. The total allowance for loan losses was $47.8 million at September 30, 2008 compared with $48.4 million at December 31, 2007, representing 5.97% of loans at September 30, 2008 and 5.48% at December 31, 2007.

Following is a summary of the changes in our consolidated allowance for loan losses for the periods indicated.

                                            At or For the Nine Months Ended
                                       September 30, 2008      September 30, 2007
                                                 (Dollars in Thousands)
   Allowance for Loan Losses
   Balance at beginning of period     $             48,386    $             36,037
   Provision for loan losses (1)                    51,544                  48,536
   Net charge-offs                                 (52,130 )               (38,523 )
   Balance at end of period           $             47,800    $             46,050
   Annualized net charge-offs to
   average loans                                      7.65 %                  5.80 %
   Ending allowance to period end
   loans                                              5.97 %                  5.13 %

Past Due and Nonaccrual Loans

 The following table sets forth the remaining balances of all loans (net of
unearned finance charges, excluding loans for which vehicles have been
repossessed) that were more than 30 days delinquent at the periods indicated.

                         September 30, 2008            December 31, 2007            September 30, 2007
                                                     (Dollars in Thousands)
                                     % of Total                   % of Total                    % of Total
Loan Delinquencies     Balance         Loans        Balance          Loans        Balance          Loans
30 to 59 days        $      9,423           1.13 % $     7,194           0.78 % $      6,729           0.71 %
60 to 89 days               2,403           0.29 %       2,756           0.30 %        2,641           0.28 %
90+ days                    1,271           0.15 %       1,534           0.16 %        1,674           0.18 %
Total                $     13,097           1.57 % $    11,484           1.24 % $     11,044           1.17 %

Our policy is to charge off loans delinquent in excess of 120 days.

The following table sets forth the aggregate amount of nonaccrual loans (net of unearned finance charges, including loans over 30 days delinquent and loans for which vehicles have been repossessed) at the periods indicated.

                                 September 30, 2008     December 31, 2007     September 30, 2007
                                                     (Dollars in Thousands)
Nonaccrual loans                $             23,634   $            21,185   $             19,970
Nonaccrual loans to gross
loans                                           2.82 %                2.29 %                 2.12 %
Allowance for loan losses to
gross loans, net of unearned
acquisition discounts                           5.97 %                5.48 %                 5.13 %

Cumulative Losses for Contract Pools

The following table reflects our cumulative losses (i.e., net charge-offs as a
percent of original net contract balances) for contract pools (defined as the
total dollar amount of net contracts purchased in a three-month period)
purchased from October 2003 through June 2008. Contract pools subsequent to June
2008 were not included in this table because the loan pools were not seasoned
enough to provide a meaningful comparison with prior periods.

 Number of     Oct-03      Jan-04      Apr-04      Jul-04      Oct-04      Jan-05      Apr-05      Jul-05      Oct-05      Jan-06      Apr-06      Jul-06      Oct-06      Jan-07      Apr-07      Jul-07      Oct-07      Jan-08      Apr-08
  Months          -           -           -           -           -           -           -           -           -           -           -           -           -           -           -           -           -           -           -
Outstanding    Dec-03      Mar-04      Jun-04      Sep-04      Dec-04      Mar-05      Jun-05      Sep-05      Dec-05      Mar-06      Jun-06      Sep-06      Dec-06      Mar-07      Jun-07      Sep-07      Dec-07      Mar-08      Jun-08
     1             0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %      0.00 %
     4             0.11 %      0.02 %      0.04 %      0.08 %      0.05 %      0.03 %      0.06 %      0.12 %      0.05 %      0.02 %      0.06 %      0.09 %      0.10 %      0.05 %      0.08 %      0.08 %      0.10 %      0.04 %      0.05 %
     7             0.48 %      0.37 %      0.45 %      0.65 %      0.49 %      0.40 %      0.64 %      0.59 %      0.47 %      0.40 %      0.62 %      0.88 %      0.64 %      0.54 %      0.84 %      0.82 %      0.61 %      0.47 %
    10             1.20 %      1.37 %      1.33 %      1.29 %      1.19 %      1.35 %      1.63 %      1.36 %      1.28 %      1.61 %      2.00 %      1.84 %      1.73 %      1.77 %      2.28 %      1.90 %      1.77 %
    13             2.13 %      2.44 %      2.13 %      2.21 %      2.41 %      2.48 %      2.57 %      2.37 %      2.71 %      2.96 %      3.13 %      3.23 %      3.09 %      3.29 %      3.51 %      3.30 %
    16             3.29 %      3.20 %      2.88 %      3.12 %      3.56 %      3.32 %      3.47 %      3.56 %      4.07 %      3.90 %      4.35 %      4.95 %      4.87 %      4.54 %      4.90 %
    19             4.06 %      3.96 %      3.87 %      4.20 %      4.44 %      4.21 %      4.70 %      4.85 %      5.01 %      5.03 %      5.92 %      6.73 %      6.23 %      5.89 %
    22             4.78 %      4.87 %      4.77 %      4.95 %      5.17 %      5.50 %      5.95 %      5.76 %      5.96 %      6.42 %      7.41 %      7.98 %      7.53 %
    25             5.53 %      5.63 %      5.35 %      5.56 %      6.12 %      6.56 %      6.69 %      6.69 %      7.05 %      7.66 %      8.59 %      9.07 %
    28             6.07 %      6.16 %      5.96 %      6.31 %      7.02 %      7.23 %      7.41 %      7.67 %      8.08 %      8.56 %      9.65 %
    31             6.42 %      6.76 %      6.62 %      7.05 %      7.66 %      7.86 %      8.24 %      8.62 %      8.78 %      9.41 %
    34             6.77 %      7.37 %      7.20 %      7.47 %      8.24 %      8.52 %      9.04 %      9.25 %      9.45 %
    37             7.14 %      7.95 %      7.52 %      7.81 %      8.73 %      9.11 %      9.54 %      9.69 %
    40             7.61 %      8.24 %      7.83 %      8.21 %      9.12 %      9.43 %      9.91 %
    43             7.78 %      8.44 %      8.12 %      8.47 %      9.34 %      9.70 %
    46             7.93 %      8.63 %      8.33 %      8.63 %      9.59 %
    49             8.11 %      8.81 %      8.43 %      8.82 %
    52             8.16 %      8.85 %      8.49 %
    55             8.24 %      8.91 %
    58             8.30 %
 Original
Pool ($000)   $  68,791   $  94,369   $  91,147   $  89,688   $  86,697   $ 118,883   $ 120,502   $ 112,487   $ 101,482   $ 142,873   $ 143,988   $ 136,167   $ 113,767   $ 164,019   $ 162,873   $ 144,586   $  91,581   $ 127,243   $  95,869
 Remaining
Pool ($000)   $     678   $   1,800   $   2,745   $   4,205   $   5,664   $  11,619   $  14,424   $  16,965   $  19,709   $  36,133   $  43,190   $  48,802   $  48,272   $  85,171   $  95,105   $  98,003   $  68,542   $ 109,005   $  88,659
 Remaining
 Pool (%)           1.0 %       1.9 %       3.0 %       4.7 %       6.5 %       9.8 %      12.0 %      15.1 %      19.4 %      25.3 %      30.0 %      35.8 %      42.4 %      51.9 %      58.4 %      67.8 %      74.8 %      85.7 %      92.5 %

Loan Maturities

The following table sets forth the principal dollar amount of automobile
contracts maturing in our automobile contracts portfolio at September 30, 2008
based on final maturity. Automobile contract balances are reflected before
unearned acquisition discounts and allowance for loan losses.

                One      More Than     More Than      More Than
              Year or    1 Year to     3 Years to     5 Years to      Total
                Less      3 Years       5 Years        10 Years       Loans
                                  (Dollars in thousands)
Total loans   $ 28,364   $  347,614   $    397,521   $     63,293   $ 836,792

All loans are fixed rate loans.

Liquidity and Capital Resources

General

We require substantial cash and capital resources to operate our business. Our primary funding sources in the past have been a warehouse credit line, securitizations and retained earnings. However, as discussed in more detail below, due to the restructuring of our warehouse credit line and increasing challenges in the credit markets, we are currently evaluating alternative sources of financing.

Our primary uses of cash include:

• acquisition of automobile contracts;

• interest expense;

• operating expenses; and

• securitization costs.

The capital resources currently available to us include:

• interest income and principal collections on automobile contracts;

• servicing fees that we earn under our securitizations;

• releases of excess cash from the spread accounts relating to the securitizations; and

• releases of excess cash from our warehouse credit facility.

Recent Market Developments

A number of factors have adversely impacted our liquidity in 2008 and we anticipate these factors will continue to adversely impact our liquidity through 2008 and 2009. The disruptions in the capital markets and, to a lesser extent, the credit deterioration we are experiencing in our portfolio and substantially weakened demand for securities guaranteed by insurance policies, are making the execution of securitization transactions more challenging and expensive. We may also realize decreased cash distributions from our securitization trusts due to weaker credit performance and higher borrowing costs.

The asset-backed securities market, along with credit markets in general, has been experiencing unprecedented disruptions. Market conditions began deteriorating in mid-2007 and remain impaired in 2008. Further, the prime quality automobile securitizations that were executed in 2008 utilized senior-subordinated structures and sold only the highest rated securities. In addition, the financial guaranty insurance providers used by us in the past are facing financial stress and rating agency downgrades. As a result, demand for asset-backed securities backed by a financial guarantee insurance policy has substantially weakened and there has been a limited number of public issuances of insured automobile asset-backed securities since November 2007. We have not accessed the securitization market with a transaction since November 2007 and do not anticipate accessing the securitization market during the remainder of the year.

Current conditions in the asset-backed securities market include reduced liquidity, increased risk premiums for issuers, reduced investor demand for asset-backed securities, particularly those securities backed by non-prime collateral, financial stress and rating agency downgrades impacting the financial guaranty insurance providers, and a general tightening of availability of credit. These conditions, which may increase our cost of funding and reduce our access to the asset-backed securities market or other types of receivable financings, may continue or worsen in the future. Due to the current conditions in the asset-backed securities market, along with credit markets in general, the execution of securitization transactions is more challenging and expensive and we are analyzing our liquidity strategies going forward. We are currently pursuing and evaluating alternative sources of financing and are also considering selling receivables on a whole-loan basis. At this time, there is no assurance that we will be able to arrange for other types of interim financing or be able to sell receivables on a whole-loan basis. For a more complete description of the financing risks that we face, see Item 1A. "Risk Factors" in our 2007 Annual Report on Form 10-K and other factors or conditions described under Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.

Securitizations

Our securitizations are structured as on-balance-sheet transactions and recorded as secured financings because they do not meet the accounting criteria for sale of finance receivables under SFAS No. 140. Since 2004, regular contract securitizations have been an integral part of our business plan in order to increase our liquidity and reduce risks associated with interest rate fluctuations. We had developed a securitization program that involves selling interests in pools of our automobile contracts to investors through the public issuance of AAA/Aaa rated asset-backed securities. We retain the servicing rights for the loans which have been securitized. Upon the issuance of securitization notes payable, we retain the right to receive over time excess cash flows from the underlying pool of securitized automobile contracts.

In our securitizations to date, we transferred automobile contracts we purchased from automobile dealers to a newly formed owner trust for each transaction, which trust then issued the securitization notes payable. The net proceeds of our first securitization were used to replace the Bank's deposit liabilities and the net proceeds of our subsequent securitization transactions were used to fund our operations. At the time of securitization of our automobile contracts, we are required to pledge assets equal to a specific percentage of the securitization pool to support the securitization transaction. Typically, the assets pledged consist of cash deposited to a restricted account known as a spread account and additional receivables delivered to the trusts, which create over-collateralization. The securitization transaction documents require the percentage of assets pledged to support the transaction to increase over time until a specific level is attained. Excess cash flow generated by the trusts is used to pay down the outstanding debt of the trusts, increasing the level of over-collateralization until the required percentage level of assets has been reached. Once the required percentage level of assets is reached and maintained, excess cash flows generated by the trusts are released to us as distributions from the trusts.

We had arranged for credit enhancement to improve the credit rating and reduce the interest rate on the asset-backed securities issued to date. This credit enhancement for our securitizations has been in the form of financial guaranty insurance policies insuring the payment of principal and interest due on the asset-backed securities. Agreements with our financial guaranty insurance providers provide that if portfolio performance ratios (delinquency and net charge-offs as a percentage of automobile contract outstanding) in a trust's pool of automobile contracts exceed certain targets, the over-collateralization and spread account levels would be increased. Agreements with our financial guaranty insurance providers also contain additional specified targeted portfolio performance ratios. If, at any measurement date, the targeted portfolio performance ratios with respect to any trust whose securities are insured were to exceed these additional levels, provisions of the agreements permit our financial guaranty insurance providers to terminate our servicing rights to the automobile contracts sold to that trust.

Our financial guaranty insurance providers are not required to insure our future securitizations, and there can be no assurance that they will continue to do so. In addition, a downgrading of any of our financial guaranty insurance providers' credit ratings or the inability to structure alternative credit enhancements, such as senior subordinated transactions, for our securitization program could result in higher interest costs for our future securitizations and larger initial and/or target credit enhancement requirements. The absence of a financial guaranty insurance policy may also impair the marketability of our securitizations.

The following table lists each of our securitizations and its remaining balance as of September 30, 2008.

                                               Current                    Current                    Current                    Total        Current                     Back-up
. . .