Edgar Filing: CONSUMER PORTFOLIO SERVICES INC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________

FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
COMMISSION FILE NUMBER: 1-14116

CONSUMER PORTFOLIO SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 33-0459135
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

16355 LAGUNA CANYON ROAD, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 753-6800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ]

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ]. No [ X ]

The aggregate market value of the 12,103,138 shares of the registrant's common
stock held by non-affiliates, based upon the closing price of the registrant's
common stock of $4.55 per share reported by Nasdaq as of June 30, 2005, was
approximately $55,069,278. For purposes of this computation, a registrant
sponsored pension plan and all directors, executive officers, and beneficial
owners of 10 percent or more of the registrant's common stock are deemed to be
affiliates. Such determination is not an admission that such plan, directors,
executive officers, and beneficial owners are, in fact, affiliates of the
registrant. The number of shares of the registrant's Common Stock outstanding on
March 6, 2006, was 21,729,543.

DOCUMENTS INCORPORATED BY REFERENCE

The proxy statement for registrant's 2006 annual shareholders meeting is
incorporated by reference into Part III hereof.
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PART I

ITEM 1. BUSINESS

GENERAL

Consumer Portfolio Services, Inc. ("CPS," and together with its subsidiaries,
the "Company") is a consumer finance company specializing in purchasing, selling
and servicing retail automobile installment purchase contracts ("Contracts")
originated by licensed motor vehicle dealers ("Dealers") in the sale of new and
used automobiles, light trucks and passenger vans. Through its purchases, the
Company provides indirect financing to Dealer customers with limited credit
histories, low incomes or past credit problems ("Sub-Prime Customers"). The
Company serves as an alternative source of financing for Dealers, allowing sales
to customers who otherwise might not be able to obtain financing. The Company
does not lend money directly to consumers. Rather, it purchases installment
Contracts from Dealers. CPS purchases Contracts under any of several programs
(the "CPS Programs") that it offers to Dealers.

CPS was incorporated and began its operations in 1991. From inception through
December 31, 2005, the Company has purchased approximately $6.1 billion of
Contracts from Dealers. In addition, the Company obtained a total of
approximately $605 million of Contracts in its 2002, 2003 and 2004 acquisitions,
described below. As of December 31, 2005, the Company had a total managed
portfolio, net of unearned interest on pre-computed Contracts, of approximately
$1.1 billion, including the remaining outstanding balance of Contracts acquired
in the acquisitions and $18.0 million of Contracts serviced for non-affiliated
owners of the Contracts.

ACQUISITIONS

In March 2002, the Company acquired MFN Financial Corporation and its
subsidiaries in a merger (the "MFN Merger"). In May 2003, the Company acquired
TFC Enterprises, Inc. and its subsidiaries in a second merger (the "TFC
Merger"). MFN Financial Corporation and its subsidiaries ("MFN") and TFC
Enterprises, Inc. and its subsidiaries ("TFC") were engaged in businesses
similar to that of the Company; buying Contracts from Dealers, financing those
Contracts through securitization transactions, and servicing those Contracts.
The Company acquired approximately $380 million of Contracts in the MFN Merger,
and approximately $150 million in the TFC Merger. MFN ceased acquiring Contracts
in March 2002; TFC continues to acquire Contracts under its "TFC Programs," on
terms and conditions similar to those it used prior to the TFC Merger. Contracts
purchased by TFC during the year ended December 31, 2005 accounted for less than
5% of the Company's total purchases during the year.

The Company on April 2, 2004 acquired (in the "SeaWest Asset Acquisition") $74.9
million in automotive finance receivables and $3.6 million in other assets from
SeaWest Financial Corporation and its subsidiaries (collectively, "SeaWest").
The other assets included a $2.8 million note to an affiliate of SeaWest and
certain furniture and equipment. In addition, the Company was appointed the
successor servicer of three separate term securitization transactions originally
sponsored by SeaWest (the "SeaWest Third Party Portfolio").

SECURITIZATIONS

GENERALLY

Throughout the periods for which information is presented in this report, the
Company has purchased Contracts with the intention of repackaging them in
securitizations. All such securitizations have involved identification of
specific Contracts, sale of those Contracts (and associated rights) to a special
purpose subsidiary of the Company, and issuance of asset-backed securities to
fund the transactions. Depending on the structure of the securitization, the
transaction may be properly accounted for as a sale of the Contracts, or as a
secured financing.

When structured to be treated as a secured financing, the subsidiary is
consolidated with the Company. Accordingly, the Contracts and the related
securitization trust debt appear as assets and liabilities, respectively, of the
Company on its Consolidated Balance Sheet. The Company then recognizes interest
income on the receivables and interest expense on the securities issued in the
securitization and records as expense a provision for probable credit losses on
the receivables.

When structured to be treated as a sale, the subsidiary is not consolidated with
the Company. Accordingly, the securitization removes the sold Contracts from the
Company's Consolidated Balance Sheet, the asset-backed securities (debt of the
non-consolidated subsidiary) do not appear as debt of the Company, and the
Company shows as an asset a retained residual interest in the sold Contracts.
The residual interest represents the discounted value of what the Company
expects will be the excess of future collections on the Contracts over principal
and interest due on the asset-backed securities and other expenses. That
residual interest appears on the Company's Consolidated Balance Sheet as
"Residual interest in securitizations," and its value is dependent on estimates
of the future performance of the sold Contracts.

CHANGE IN POLICY

Beginning in the third quarter of 2003, the Company began to structure its term
secruitization transactions so that they would be treated for financial
accounting purposes as borrowings secured by receivables, rather than as sales
of receivables. All subsequent term securitizations of such finance receivables
have been so structured.

CREDIT RISK RETAINED

Whether a securitization is treated as a secured financing or as a sale for
financial accounting purposes, the related special purpose subsidiary may be
unable to release excess cash to the Company if the credit performance of the
securitized Contracts falls short of pre-determined standards. Such releases
represent a material portion of the cash that the Company uses to fund its
operations. An unexpected deterioration in the performance of securitized
Contracts could therefore have a material adverse effect on both the Company's
liquidity and its results of operations, regardless of whether such Contracts
are treated as having been sold or as having been financed. For estimation of
the magnitude of such risk, it may be appropriate to look to the size of the
Company's "managed portfolio," which represents both financed and sold Contracts
as to which such credit risk is retained. The Company's managed portfolio as of
December 31, 2005 was approximately $1.1 billion (this amount includes $18.0
million related to the SeaWest Third Party Portfolio on which the Company earns
only servicing fees and has no credit risk). See "-- Securitization of
Contracts," "-- The Servicing Agreements," "--Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "--Liquidity and
Capital Resources."

THE MARKET WE SERVE

The Company's automobile financing programs are designed to serve customers who
generally would not qualify for automobile financing from traditional sources,
such as commercial banks, credit unions and the captive finance companies
affiliated with major automobile manufacturers. Such customers generally have
limited credit histories, low incomes or past credit problems, and are therefore
often unable to obtain credit from traditional sources of automobile financing.
(The terms "prime" and "sub-prime" reflect the Company's categorization of
customers and bear no relationship to the prime rate of interest or persons who
are able to borrow at that rate.) Because the Company serves customers who are
unable to meet the credit standards imposed by most traditional automobile
financing sources, the Company generally receives interest at rates higher than
those charged by traditional automobile financing sources. The Company also
sustains a higher level of credit losses than traditional automobile financing
sources since the Company provides financing in a relatively high risk market.

MARKETING

The Company directs its marketing efforts to Dealers, rather than to consumers.
As of December 31, 2005, the Company was a party to its standard form dealer
agreements ("Dealer Agreements") with over 7,300 Dealers. Approximately 92% of
these Dealers are franchised new car dealers that sell both new and used cars
and the remainder are independent used car dealers. For the year ended December
31, 2005, approximately 81% of the Contracts purchased under the CPS Programs
consisted of financing for used cars and the remaining 19% for new cars, as
compared to 85% used and 15% new in the year ended December 31, 2004.

The Company establishes relationships with Dealers through employee
representatives who contact a prospective Dealer to explain the Company's
Contract purchase programs, and thereafter provide Dealer training and support
services. As of December 31, 2005, the Company had 84 representatives. The
representatives are obligated to represent the Company's financing program
exclusively. The Company's representatives present the Dealer with a marketing
package, which includes the Company's promotional material containing the terms
offered by the Company for the purchase of Contracts, a copy of the Company's
standard-form Dealer Agreement, and required documentation relating to
Contracts. Marketing representatives have no authority relating to the decision
to purchase Contracts from Dealers.

Most of the Dealers under contract with CPS regularly submit Contracts to the
Company for purchase, although they are under no obligation to submit any
Contracts to the Company, nor is the Company obligated to purchase any
Contracts. During the year ended December 31, 2005, no Dealer accounted for more
than 1% of the total number of Contracts purchased by the Company under the CPS
Programs. Contracts purchased by TFC after the TFC Merger under the TFC Programs
are purchased with a dealer marketing strategy that is similar to that of CPS as
described above except that the marketing efforts are directed at independent
used car dealers and the target obligors are enlisted personnel of the U.S.
Armed Forces. The following table sets forth the geographical sources of the
Contracts purchased by the Company under the CPS Programs (based on the
addresses of the customers as stated on the Company's records) during the years
ended December 31, 2005 and 2004. Contracts purchased by TFC after the TFC
Merger are not included because such purchases accounted for less than 10% of
the total purchases during the year. All Contracts are acquired from Dealers
located within the United States.

CONTRACTS PURCHASED DURING THE YEAR ENDED (1)
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DECEMBER 31, 2005 DECEMBER 31, 2004
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NUMBER PERCENT (2) NUMBER PERCENT (2)
------------ ------------- ------------ ------------
Texas 4,734 10.7% 3,422 12.1%
California 3,981 9.0% 2,431 8.6%
Ohio 3,311 7.5% 1,437 5.1%
Florida 3,151 7.1% 1,731 6.1%
Pennsylvania 2,732 6.2% 1,676 5.9%
Lousiana 2,268 5.1% 1,949 6.9%
Illinois 2,188 4.9% 1,312 4.6%
North Carolina 2,003 4.5% 1,390 4.9%
Maryland 1,933 4.4% 1,373 4.8%
Kentucky 1,851 4.2% 1,118 3.9%
Michigan 1,883 4.2% 1,121 4.0%
New York 1,617 3.6% 1,102 3.9%
Virginia 1,379 3.1% 1,043 3.7%
Georgia 1,277 2.9% 1,263 4.5%
Other States 10,068 22.7% 6,008 21.2%
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Total 44,376 100.0% 28,376 100.0%
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(1) EXCLUDES PURCHASES UNDER THE TFC PROGRAMS.
(2) AMOUNTS MAY NOT TOTAL 100% DUE TO ROUNDING.

ORIGINATION OF CONTRACTS

DEALER ORIGINATION

When a retail automobile buyer elects to obtain financing from a Dealer, the
Dealer takes a credit application to submit to its financing sources. Typically,
a Dealer will submit the buyer's application to more than one financing source
for review. The Company believes the Dealer's decision to choose the Company,
rather than other financing sources, is based primarily on the monthly payment
that will be offered to the automobile buyer, the purchase price offered for the
Contract, the timeliness, consistency and predictability of response, and any
conditions to purchase.

Upon receipt of information from a Dealer, the Company's proprietary automated
decisioning system orders a credit report to document the buyer's credit
history. If, upon review by the automated decisioning systems, or in some cases,
a Company credit analyst, it is determined that the Contract meets the Company's
underwriting criteria, or would meet such criteria with modification, the
Company requests and reviews further information and supporting documentation
and, ultimately, decides whether to approve the Contract for purchase. When
presented with an application, the Company attempts to notify the Dealer within
two hours as to whether it would purchase the related Contract.

The actual agreement for purchase of the vehicle ("Contract") is prepared by the
Dealer. The Dealer also arranges for recording the Company's lien on the
vehicle. After the appropriate documents are signed by the Dealer and the
customer, the Dealer sends the Contract and related supporting documentation to
the Company. Upon receipt, the Company performs certain other underwriting and
review procedures after which, if all the appropriate criteria are satisfied,
the Contract is purchased by the Company.

The Company purchases Contracts under the CPS Programs from Dealers at a price
generally equal to the total amount financed under the Contracts, adjusted for
an acquisition fee, which may either increase or decrease the Contract purchase
price paid by the Company. The amount of the acquisition fee, and whether it
results in an increase or decrease to the Contract purchase price, is based on
the perceived credit risk and, in some cases, the interest rate on the Contract.
For the years ended December 31, 2005, 2004 and 2003, the average acquisition
fee charged per Contract purchased under the CPS Programs was $150, $226 and
$372, respectively, or 1.0%, 1.6% and 2.7%, respectively, of the amount
financed.

The Company attempts to control misrepresentation regarding the customer's
credit worthiness by carefully screening the Contracts it purchases, by
establishing and maintaining professional business relationships with Dealers,
and by including certain representations and warranties by the Dealer in the
Dealer Agreement. Pursuant to the Dealer Agreement, the Company may require the
Dealer to repurchase any Contract in the event that the Dealer breaches its
representations or warranties. There can be no assurance, however, that any
Dealer will have the willingness or the financial resources to satisfy its
repurchase obligations to the Company.

OBJECTIVE CONTRACT PURCHASE CRITERIA

To be eligible for purchase by the Company, a Contract must have been originated
by a Dealer that has entered into a Dealer Agreement to sell Contracts to the
Company. The Contract must be secured by a first priority lien on a new or used
automobile, light truck or passenger van and must meet the Company's
underwriting criteria. In addition, each Contract requires the customer to
maintain physical damage insurance covering the financed vehicle and naming the
Company as a loss payee. The Company or any purchaser of the Contract from the
Company may, nonetheless, suffer a loss upon theft or physical damage of any
financed vehicle if the customer fails to maintain insurance as required by the
Contract and is unable to pay for repairs to or replacement of the vehicle or is
otherwise unable to fulfill his or her obligations under the Contract.

The Company believes that its objective underwriting criteria enable it to
evaluate effectively the creditworthiness of Sub-Prime Customers and the
adequacy of the financed vehicle as security for a Contract. These criteria
include standards for price, term, amount of down payment, installment payment
and interest rate; mileage, age and type of vehicle; principal amount of the
Contract in relation to the value of the vehicle; customer income level,
employment and residence stability, credit history and debt service ability; and
other factors. Specifically, the Company's guidelines for the CPS Programs
generally limit the maximum principal amount of a purchased Contract to 115% of
wholesale book value in the case of used vehicles or to 115% of the
manufacturer's invoice in the case of new vehicles, plus, in each case, sales
tax, licensing and, when the customer purchases such additional items, a service
contract or a credit life or disability policy. The Company does not finance
vehicles that are more than eight model years old or have in excess of 85,000
miles. Under most CPS Programs, the maximum term of a purchased Contract is 72
months; a shorter maximum term may be applied based on the mileage of the
vehicle, and Contracts with the maximum term of 72 months may be purchased if
the customer is among the more creditworthy of CPS's obligors and the vehicle is
generally not more than two model years old and has less than 35,000 miles.
Contract purchase criteria are subject to change from time to time as
circumstances may warrant. Upon receiving this information with the customer's
application, the Company's underwriters verify the customer's employment,
residency, insurance and credit information provided by the customer by
contacting various parties noted on the customer's application, credit
information bureaus and other sources. In addition, prior to purchasing a
Contract under the CPS Programs, CPS contacts each customer by telephone to
confirm that the Customer understands and agrees to the terms of the related
Contract.

CREDIT SCORING. Under the CPS Programs, the Company uses a proprietary scoring
model to assign to each Contract a "credit score" at the time the application is
received from the Dealer and the customer's credit information is retrieved from
the credit reporting agencies. The credit score is based on a variety of
parameters, such as the customer's employment and residence stability, the
customer's income, the monthly payment amount, the loan-to-value ratio and the
age and mileage of the vehicle. The Company has developed the credit score as a
means of improving its allocation of credit evaluation resources, and managing
the risk inherent in the sub-prime market.

CHARACTERISTICS OF CONTRACTS. All of the Contracts purchased by the Company are
fully amortizing and provide for level payments over the term of the Contract.
The average original principal amount financed, under the CPS Programs and in
the year ended December 31, 2005, was $14,875, with an average original term of
62 months and an average down payment amount of 13.4%. Based on information

contained in customer applications, for this 12-month period, the retail
purchase price of the related automobiles averaged $15,278 (which excludes tax,
license fees, and any additional costs such as a maintenance contract), the
average age of the vehicle at the time the Contract was purchased was three
years, and CPS customers averaged approximately 38 years of age, with
approximately $39,596 in average annual household income and an average of 5.0
years history with his or her current employer.

All Contracts may be prepaid at any time without penalty. In the event a
customer elects to prepay a Contract in full, the payoff amount is calculated by
deducting the unearned interest from the Contract balance, in the case of a
pre-computed Contract, or by adding accrued interest to the Contract balance, in
the case of a simple interest Contract, plus, in either case, adding any accrued
fees such as late fees.

Each Contract purchased by the Company prohibits the sale or transfer of the
financed vehicle without the Company's consent and allows for the acceleration
of the maturity of a Contract upon a sale or transfer without such consent. The
Company generally does not consent to a sale or transfer of a financed vehicle
unless the related Contract is prepaid in full.

DEALER COMPLIANCE. The Dealer Agreement and related assignment contain
representations and warranties by the Dealer that an application for state
registration of each financed vehicle, naming the Company as secured party with
respect to the vehicle, was effected at the time of sale of the related Contract
to the Company, and that all necessary steps have been taken to obtain a
perfected first priority security interest in each financed vehicle in favor of
the Company under the laws of the state in which the financed vehicle is
registered. If a Dealer or the Company, because of clerical error or otherwise,
has failed to take such action in a timely manner, or to maintain such interest
with respect to a financed vehicle, neither the Company nor any purchaser of the
related Contract from the Company would have a perfected security interest in
the financed vehicle and its security interest may be subordinate to the
interest of, among others, subsequent purchasers of the financed vehicle,
holders of perfected security interests and a trustee in bankruptcy of the
customer. The security interest of the Company or the purchaser of a Contract
may also be subordinate to the interests of third parties if the interest is not
perfected due to administrative error by state recording officials. Moreover,
fraud or forgery could render a Contract unenforceable. In such events, the
Company could suffer a loss with respect to the related Contract. In the event
the Company suffers such a loss, it will generally have recourse against the
Dealer from which it purchased the Contract. This recourse will be unsecured,
and there can be no assurance that any particular Dealer will satisfy its
obligations to the Company.

SERVICING OF CONTRACTS

GENERAL. The Company's servicing activities consist of mailing monthly billing
statements; collecting, accounting for and posting of all payments received;
responding to customer inquiries; taking all necessary action to maintain the
security interest granted in the financed vehicle or other collateral;
investigating delinquencies; communicating with the customer to obtain timely
payments; repossessing and liquidating the collateral when necessary; collecting
deficiency balances; and generally monitoring each Contract and the related
collateral.

COLLECTION PROCEDURES. The Company believes that its ability to monitor
performance and collect payments owed from Sub-Prime Customers is primarily a
function of its collection approach and support systems. The Company believes
that if payment problems are identified early and the Company's collection staff
works closely with customers to address these problems, it is possible to
correct many of them before they deteriorate further. To this end, the Company
utilizes pro-active collection procedures, which include making early and
frequent contact with delinquent customers; educating customers as to the
importance of maintaining good credit; and employing a consultative and customer
service approach to assist the customer in meeting his or her obligations, which
includes attempting to identify the underlying causes of delinquency and cure
them whenever possible. In support of its collection activities, the Company
maintains a computerized collection system specifically designed to service
automobile installment sale contracts with Sub-Prime Customers and similar
consumer obligations.

With the aid of its high-penetration automatic dialer, as well as manual efforts
made by collection staff, the Company typically attempts to make telephonic
contact with delinquent customers on the sixth day after their monthly payment
due date. Using coded instructions from a collection supervisor, the automatic
dialer will attempt to contact customers based on their physical location, state
of delinquency, size of balance or other parameters. If the automatic dialer
obtains a "no-answer" or a busy signal, it records the attempt on the customer's
record and moves on to the next call. If a live voice answers the automatic
dialer's call, the call is transferred to a waiting collector as the customer's
pertinent information is simultaneously displayed on the collector's
workstation. The collector then inquires of the customer the reason for the
delinquency and when the Company can expect to receive the payment. The
collector will attempt to get the customer to make a promise for the delinquent
payment for a time generally not to exceed one week from the date of the call.
If the customer makes such a promise, the account is routed to a promise queue
and is not contacted until the outcome of the promise is known. If the payment
is made by the promise date and the account is no longer delinquent, the account
is routed out of the collection system. If the payment is not made, or if the
payment is made, but the account remains delinquent, the account is returned to
the queue for subsequent contacts.

If a customer fails to make or keep promises for payments, or if the customer is
uncooperative or attempts to evade contact or hide the vehicle, a supervisor
will review the collection activity relating to the account to determine if
repossession of the vehicle is warranted. Generally, such a decision will occur
between the 45th and 90th day past the customer's payment due date, but could
occur sooner or later, depending on the specific circumstances. At the time the
vehicle is repossessed the Company will stop accruing interest in this Contract,
and reclassify the remaining Contract balance to other assets. In addition the
Company will apply a specific reserve to this Contract so that the net balance
represents the estimated fair value less costs to sell.

If the Company elects to repossess the vehicle, it assigns the task to an
independent local repossession service. Such services are licensed and/or bonded
as required by law. When the vehicle is recovered, the repossessor delivers it
to a wholesale automobile auction, where it is kept until sold. The Uniform
Commercial Code ("UCC") and other state laws regulate repossession sales by
requiring that the secured party provide the customer with reasonable notice of
the date, time and place of any public sale of the collateral, the date after
which any private sale of the collateral may be held and of the customer's right
to redeem the financed vehicle prior to any such sale and by providing that any
such sale be conducted in a commercially reasonable manner. Financed vehicles
that have been repossessed are generally resold by the Company through
unaffiliated automobile auctions, which are attended principally by car dealers.
Net liquidation proceeds are applied to the customer's outstanding obligation
under the Contract. Such proceeds usually are insufficient to pay the customer's
obligation in full, resulting in a deficiency.

Under the UCC and other laws applicable in most states, a creditor is entitled
to obtain a judgment against a customer for such a deficiency. However, some
states impose prohibitions or limitations on deficiency judgments. When
obtained, deficiency judgments are entered against defaulting individuals who
may have little capital or income. Therefore, in many cases, it may not be
useful to seek a deficiency judgment against a customer or, if one is obtained,
it may be settled at a significant discount.

Once a Contract becomes greater than 90 days delinquent, the Company does not
recognize additional interest income until the borrower under the Contract makes
sufficient payments to be less than 90 days delinquent. Any payments received by
a borrower that is greater than 90 days delinquent is first applied to accrued
interest and then to principal reduction.

CREDIT EXPERIENCE

The Company's financial results are dependent on the performance of the
Contracts in which it retains an ownership interest. The tables below document
the delinquency, repossession and net credit loss experience of all Contracts
that the Company was servicing (excluding Contracts from the SeaWest Third Party
Portfolio) as of the respective dates shown. Credit experience for CPS, MFN
(since the date of the MFN Merger), TFC (since the date of the TFC Merger) and
SeaWest (since the date of the SeaWest Asset Acquisition) is shown on both a
combined and individual basis in the tables below.

DELINQUENCY EXPERIENCE (1)
CPS, MFN, TFC AND SEAWEST COMBINED

Gross servicing portfolio (1) ....................... 95,942 $1,117,085 83,018 $ 873,880 84,860 $ 773,220
Period of delinquency (2)
31-60 days .......................................... 2,353 24,050 2,106 19,010 2,506 17,982
61-90 days .......................................... 1,076 10,190 1,069 8,051 1,340 8,942
91+ days ............................................ 1,056 7,985 1,176 7,758 1,522 9,452
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies (2) ............................. 4,485 42,225 4,351 34,819 5,368 36,376
Amount in repossession (3) .......................... 1,337 13,538 1,408 14,090 1,242 11,751
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies and
amount in repossession (2) ....................... 5,822 $ 55,763 5,759 $ 48,909 6,610 $ 48,127
========== ========== ========== ========== ========== ==========

Delinquencies as a percentage
of gross servicing portfolio ..................... 4.7 % 3.8 % 5.2 % 4.0 % 6.3 % 4.7 %

Total delinquencies and
amount in repossession as a
percentage of gross servicing
portfolio ........................................ 6.1 % 5.0 % 6.9 % 5.6 % 7.8 % 6.2 %

EXTENSION EXPERIENCE
Contracts with One Extension (4) .................... 10,602 $ 95,413 9,661 $ 86,138 10,004 $ 76,617
Contracts with Two or More
Extensions (4) ................................... 4,575 29,428 4,383 23,659 7,347 34,224
---------- ---------- ---------- ---------- ---------- ----------

Total Contracts with Extensions ..................... 15,177 $ 124,841 14,044 $ 109,797 17,351 $ 110,841
========== ========== ========== ========== ========== ==========

CPS

DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- ----------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
DELINQUENCY EXPERIENCE (Dollars in thousands)
Gross servicing portfolio (1) ....................... 83,643 $1,017,273 59,124 $ 706,810 47,615 $ 543,776
Period of delinquency (2)
31-60 days .......................................... 1,950 21,949 1,302 14,546 1,175 11,766
61-90 days .......................................... 798 8,518 520 5,430 657 5,719
91+ days ............................................ 473 4,807 288 3,139 393 3,105
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies (2) ............................. 3,221 35,274 2,110 23,115 2,225 20,590
Amount in repossession (3) .......................... 1,148 11,676 891 9,929 725 8,434
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies and
amount in repossession (2)........................ 4,369 $ 46,950 3,001 $ 33,044 2,950 $ 29,024
========== ========== ========== ========== ========== ==========

Delinquencies as a percentage
of gross servicing portfolio ..................... 3.9 % 3.5 % 3.6 % 3.3 % 4.7 % 3.8 %

Total delinquencies and
amount in repossession as a
percentage of gross servicing
portfolio ........................................ 5.2 % 4.6 % 5.1 % 4.7 % 6.2 % 5.3 %

EXTENSION EXPERIENCE
Contracts with One Extension (4)..................... 9,120 $ 87,784 6,226 $ 68,156 4,500 $ 52,997
Contracts with Two or More
Extensions (4) ................................... 3,247 24,797 1,324 12,963 1,354 9,702
---------- ---------- ---------- ---------- ---------- ----------

Total Contracts with Extensions...................... 12,367 $ 112,581 7,550 $ 81,119 5,854 $ 62,699
========== ========== ========== ========== ========== ==========

MFN

DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- ----------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
DELINQUENCY EXPERIENCE (Dollars in thousands)
Gross servicing portfolio (1) ....................... 1,468 $ 3,036 6,647 $ 18,255 20,282 $ 77,717
Period of delinquency (2)
31-60 days .......................................... 98 167 233 457 769 2,128
61-90 days .......................................... 73 108 175 365 327 843
91+ days ............................................ 69 112 137 254 227 532
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies (2) ............................. 240 387 545 1,076 1,323 3,503
Amount in repossession (3) .......................... 15 45 111 475 369 1,899
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies and
amount in repossession (2) ....................... 255 $ 432 656 $ 1,551 1,692 $ 5,402
========== ========== ========== ========== ========== ==========

Delinquencies as a percentage
of gross servicing portfolio ..................... 16.3 % 12.7 % 8.2 % 5.9 % 6.5 % 4.5 %

Total delinquencies and
amount in repossession as a
percentage of gross servicing
portfolio ........................................ 17.4 % 14.2 % 9.9 % 8.5 % 8.3 % 7.0 %

EXTENSION EXPERIENCE
Contracts with One Extension (4) .................... 281 $ 531 1,530 $ 4,352 5,197 $ 21,560
Contracts with Two or More
Extensions (4) ................................... 716 1,469 2,609 8,043 5,707 23,050
---------- ---------- ---------- ---------- ---------- ----------

Total Contracts with Extensions ..................... 997 $ 2,000 4,139 $ 12,395 10,904 $ 44,610
========== ========== ========== ========== ========== ==========

TFC

DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------- ----------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
DELINQUENCY EXPERIENCE (Dollars in thousands)
Gross servicing portfolio (1) ....................... 7,856 $ 81,016 11,278 $ 107,635 16,963 $ 151,727
Period of delinquency (2)
31-60 days .......................................... 190 1,409 342 2,589 562 4,088
61-90 days .......................................... 140 1,208 226 1,375 356 2,380
91+ days ............................................ 336 2,295 409 2,225 902 5,815
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies (2) ............................. 666 4,912 977 6,189 1,820 12,283
Amount in repossession (3) .......................... 98 1,191 180 1,977 148 1,418
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies and
amount in repossession (2) ....................... 764 $ 6,103 1,157 $ 8,166 1,968 $ 13,701
========== ========== ========== ========== ========== ==========

Delinquencies as a percentage
of gross servicing portfolio ..................... 8.5 % 6.1 % 8.7 % 5.8 % 10.7 % 8.1 %

Total delinquencies and
amount in repossession as a
percentage of gross servicing
portfolio ........................................ 9.7 % 7.5 % 10.3 % 7.6 % 11.6 % 9.0 %

EXTENSION EXPERIENCE
Contracts with One Extension (4) .................... 424 $ 3,272 446 $ 3,599 307 $ 2,061
Contracts with Two or More
Extensions (4) ................................... 55 209 114 446 286 1,472
---------- ---------- ---------- ---------- ---------- ----------

Total Contracts with Extensions ..................... 479 $ 3,481 560 $ 4,045 593 $ 3,533
========== ========== ========== ========== ========== ==========

SEAWEST ACQUIRED

DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------- -----------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ----------
DELINQUENCY EXPERIENCE (DOLLARS IN THOUSANDS)

Gross servicing portfolio (1) ...... 2,975 $ 15,758 5,969 $ 41,181
Period of delinquency (2)
31-60 days ......................... 115 525 229 1,418
61-90 days ......................... 65 356 148 881
91+ days ........................... 178 771 342 2,140
---------- ---------- ---------- ----------
Total delinquencies (2) ............ 358 1,652 719 4,439
Amount in repossession (3) ......... 76 626 226 1,714
---------- ---------- ---------- ----------
Total delinquencies and
amount in repossession (2) ...... 434 $ 2,278 945 $ 6,153
========== ========== ========== ==========

Delinquencies as a percentage
of gross servicing portfolio .... 12.0 % 10.5 % 12.1 % 10.8 %

Total delinquencies and
amount in repossession as a
percentage of gross servicing
portfolio ....................... 14.6 % 14.5 % 15.8 % 14.9 %

EXTENSION EXPERIENCE
Contracts with One Extension (4) ... 777 $ 3,826 1,459 $ 10,031
Contracts with Two or More
Extensions (4) .................. 557 2,953 336 2,208
---------- ---------- ---------- ----------

Total Contracts with Extensions .... 1,334 $ 6,779 1,795 $ 12,239
========== ========== ========== ==========

------------------
(1) ALL AMOUNTS AND PERCENTAGES ARE BASED ON THE AMOUNT REMAINING TO BE REPAID
ON EACH CONTRACT, INCLUDING, FOR PRE-COMPUTED CONTRACTS, ANY UNEARNED INTEREST.
THE INFORMATION IN THE TABLE REPRESENTS THE GROSS PRINCIPAL AMOUNT OF ALL
CONTRACTS PURCHASED BY THE COMPANY, INCLUDING CONTRACTS SUBSEQUENTLY SOLD BY THE
COMPANY IN SECURITIZATION TRANSACTIONS THAT IT CONTINUES TO SERVICE. THE TABLE
DOES NOT INCLUDE CONTRACTS FROM THE SEAWEST THIRD PARTY PORTFOLIO.
(2) THE COMPANY CONSIDERS A CONTRACT DELINQUENT WHEN AN OBLIGOR FAILS TO MAKE AT
LEAST 90% OF A CONTRACTUALLY DUE PAYMENT BY THE FOLLOWING DUE DATE, WHICH DATE
MAY HAVE BEEN EXTENDED WITHIN LIMITS SPECIFIED IN THE SERVICING AGREEMENTS. THE
PERIOD OF DELINQUENCY IS BASED ON THE NUMBER OF DAYS PAYMENTS ARE CONTRACTUALLY
PAST DUE. CONTRACTS LESS THAN 31 DAYS DELINQUENT ARE NOT INCLUDED.
(3) AMOUNT IN REPOSSESSION REPRESENTS THE CONTRACT BALANCE ON FINANCED VEHICLES
THAT HAVE BEEN REPOSSESSED BUT NOT YET LIQUIDATED. THIS AMOUNT IS NOT NETTED
WITH THE SPECIFIC RESERVE TO ARRIVE AT THE ESTIMATED ASSET VALUE LESS COSTS TO
SELL.
(4) THE AGING CATEGORIES SHOWN IN THE TABLES REFLECT THE IMPACT OF EXTENSIONS.

EXTENSIONS

The Company may offer a customer an extension, under which the customer and the
Company agree to move past due payments to the end of the Contract term. In such
cases the customer must sign an agreement for the extension, and may pay a fee
representing partial payment of accrued interest. The Company's policies, and
its contractual arrangements for its warehouse and securitization transactions,
limit the number of extensions that may be granted. In general, a customer may
arrange for an extension no more than once every 12 months, not to exceed four
extensions over the life of the Contract.

If a customer is granted such an extension, the date next due is advanced and
the Contract is classified as current for delinquency aging purposes. Subsequent
delinquency aging classifications would be based on the future payment
performance of the Contract.

Included in Total Contracts with Extensions in the tables above, as of December
31, 2005, there were 1,449, five, one, and ten Contracts, in the CPS, MFN, TFC
and SeaWest Acquired portfolios respectively, that received extensions as a
result of the impact of the hurricanes that took place during August and
September of 2005.

NET CHARGE-OFF EXPERIENCE (1)

YEAR ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
--------- --------- ---------
(DOLLARS IN THOUSANDS)
CPS, MFN, TFC and SeaWest Combined

Average servicing portfolio outstanding ...... $ 966,295 $ 796,436 $ 674,523
Net charge-offs as a percentage of average
servicing portfolio (2) ...................... 5.3 % 7.8 % 6.8 %

CPS
Average servicing portfolio outstanding ...... $ 856,436 $ 623,639 $ 483,647
Net charge-offs as a percentage of average
servicing portfolio (2) ...................... 4.9 % 5.7 % 4.7 %

MFN
Average servicing portfolio outstanding ...... $ 7,376 $ 38,569 $ 123,140
Net charge-offs as a percentage of average
servicing portfolio (2) ...................... (54.8)% (0.5)% 12.6 %

TFC
Average servicing portfolio outstanding ...... $ 77,745 $ 102,467 $ 133,428
Net charge-offs as a percentage of average
servicing portfolio (2) (3) .................. 8.4 % 11.9 % 11.3 %

SEAWEST ACQUIRED (4) (5)
Average servicing portfolio outstanding....... $ 2,738 $ 54,040
Net charge-offs as a percentage of average
servicing portfolio (2) ...................... 26.5 % 37.4 %

-------------------------
(1) ALL AMOUNTS AND PERCENTAGES ARE BASED ON THE PRINCIPAL AMOUNT SCHEDULED TO
BE PAID ON EACH CONTRACT, NET OF UNEARNED INCOME ON PRE-COMPUTED CONTRACTS. THE
INFORMATION IN THE TABLE REPRESENTS ALL CONTRACTS SERVICED BY THE COMPANY
(EXCLUDING CONTRACTS FROM THE SEAWEST THIRD PARTY PORTFOLIO).
(2) NET CHARGE-OFFS INCLUDE THE REMAINING PRINCIPAL BALANCE, AFTER THE
APPLICATION OF THE NET PROCEEDS FROM THE LIQUIDATION OF THE VEHICLE (EXCLUDING
ACCRUED AND UNPAID INTEREST) AND AMOUNTS COLLECTED SUBSEQUENT TO THE DATE OF
CHARGE-OFF.
(3) TFC CONTRACTS ARE EXPECTED TO CHARGE-OFF AT RATES GREATER THAN CPS. TO
PARTIALLY COMPENSATE FOR THIS HIGHER RISK, TFC CONTRACTS ARE PURCHASED WITH A
HIGHER ACQUISITION FEE THAN CPS CONTRACTS.
(4) CHARGE-OFF AMOUNTS ARE BEFORE CONSIDERATION OF THE ACQUISITION PURCHASE
DISCOUNT.
(5) THE 2004 PERIOD REPRESENTS THE PERIOD MARCH 1, 2004 THROUGH DECEMBER 31,
2004.

SECURITIZATION OF CONTRACTS

The Company purchases Contracts for resale in or to be financed through
securitization transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 1 of Notes to Consolidated Financial Statements. During
2005, the Company funded such purchases primarily with proceeds from three
short-term revolving warehouse lines of credit. As of December 31, 2005, the
Company had $350 million in warehouse credit capacity, in the form of a $200
million facility and a $150 million facility. The first facility provides

funding for Contracts purchased under the TFC Programs while both warehouse
facilities provide funding for Contracts purchased under the CPS Programs. A
third facility in the amount of $125 million, which the Company utilized to fund
Contracts under the CPS and TFC Programs, was terminated by the company on June
29, 2005. These facilities are independent of each other. With the two currently
existing facilities, two different financial institutions purchase the notes
issued by these facilities. Up to 80% of the principal balance of Contracts may
be advanced to the Company under these facilities, subject to collateral tests
and certain other conditions and covenants. Long-term funding for the purchase
of Contracts is achieved by the Company through term securitization
transactions, in which the liabilities (the asset-backed securities) are repaid
as the underlying Contracts amortize. Proceeds from term securitization
transactions are used primarily to repay the warehouse facilities. The Company
completed five term securitization transactions in each of 2004 and 2005.

In a securitization, the Company is required to make certain representations and
warranties, which are generally similar to the representations and warranties
made by Dealers in connection with the Company's purchase of the Contracts. If
the Company breaches any of its representations or warranties to a purchaser of
the Contracts, the Company will be obligated to repurchase the Contract from
such purchaser at a price equal to the principal balance plus accrued and unpaid
interest. The Company may then be entitled under the terms of its Dealer
Agreement to require the selling Dealer to repurchase the Contract at a price
equal to the Company's purchase price, less any principal payments made by the
customer. Subject to any recourse against Dealers, the Company will bear the
risk of loss on repossession and resale of vehicles under Contracts that it
repurchases.

Upon the sale or financing of a portfolio of Contracts in a securitization
transaction, generally utilizing a trust that is specifically created for such
purpose ("Trust"), the Company retains the obligation to service the Contracts,
and receives a monthly fee for doing so. Among other services performed, the
Company mails to obligors monthly billing statements directing them to mail
payments on the Contracts to a lockbox account. The Company engages an
independent lockbox processing agent to retrieve and process payments received
in the lockbox account. This results in a daily deposit to the Trust's bank
account of the entire amount of each day's lockbox receipts and the simultaneous
electronic data transfer to the Company of customer payment data records.
Pursuant to the Servicing Agreements, as defined below, the Company is required
to deliver monthly reports to the Trust reflecting all transaction activity with
respect to the Contracts. The reports contain, among other information, a
reconciliation of the change in the aggregate principal balance of the Contracts
in the portfolio to the amounts deposited into the Trust's bank account as
reflected in the daily reports of the lockbox processing agent.

In its securitization transactions, the Company generally warrants that, to the
best of the Company's knowledge, no such liens or claims are pending or
threatened with respect to a financed vehicle that may be or become prior to or
equal with the lien of the related Contracts. In the event that any of the
Company's representations or warranties proves to be incorrect, the Trust would
be entitled to require the Company to repurchase the Contract relating to such
financed vehicle.

THE SERVICING AGREEMENTS

The Company currently services all Contracts that it owns, as well as those
Contracts included in portfolios that it has sold to securitization Trusts.
Pursuant to the Company's usual form of servicing agreement (the Company's
servicing agreements with purchasers of portfolios of Contracts are collectively
referred to as the "Servicing Agreements"), CPS is obligated to service all
Contracts sold to the Trusts in accordance with the Company's standard
procedures. The Servicing Agreements generally provide that the Company will
bear all costs and expenses incurred in connection with the management,
administration and collection of the Contracts serviced.

The Company is entitled under most of the Servicing Agreements to receive a base
monthly servicing fee between 2.5% and 3.5% per annum computed as a percentage
of the declining outstanding principal balance of the non-charged-off Contracts
in the pool. Each month, after payment of the Company's base monthly servicing
fee and certain other fees, the Trust receives the paid principal reduction of
the Contracts in its pool and interest thereon at the fixed rate that was agreed

when the Contracts were sold to the Trust. If, in any month, collections on the
Contracts are insufficient to pay such amounts and any principal reduction due
to charge-offs, the shortfall is satisfied from the Spread Account established
in connection with the sale of the pool. The "Spread Account" is an account
established at the time the Company sells a pool of Contracts, to provide
security to the Note Insurers, as defined below. If collections on the Contracts
exceed such amounts, the excess is utilized, first, to build up or replenish the
Spread Account or other credit enhancement to the extent required, second, in
certain cases to cover deficiencies in Spread Accounts for other pools, and the
balance, if any, constitutes excess cash flows, which are distributed to the
Company.

Pursuant to the Servicing Agreements, the Company is generally required to
charge off the balance of any Contract by the earlier of the end of the month in
which the Contract becomes five scheduled installments past due or, in the case
of repossessions, the month that the proceeds from the liquidation of the
financed vehicle are received by the Company or if the vehicle has been in
repossession inventory for more than 90 days. In the case of repossession, the
amount of the charge-off is the difference between the outstanding principal
balance of the defaulted Contract and the net repossession sale proceeds. In the
event collections on the Contracts are not sufficient to pay to the holders of
interests in the Trust ("Noteholders") the entire principal balance of Contracts
charged off during the month, the trustee draws on the related Spread Account to
pay the Noteholders. The amount drawn would then have to be restored to the
Spread Account from future collections on the Contracts remaining in the pool
before the Company would again be entitled to receive excess cash. In addition,
the Company would not be entitled to receive any further monthly servicing fees
with respect to the charged-off Contracts. Subject to any recourse against the
Company in the event of a breach of the Company's representations and warranties
with respect to any Contracts and after any recourse to any Note Insurer
guarantees backing the Notes, as defined below, the Noteholders bear the risk of
all charge-offs on the Contracts in excess of the Spread Account. The
Noteholders'rights with respect to distributions from the Trusts are senior to
the Company's rights. Accordingly, variation in performance of pools of
Contracts affects the Company's ultimate realization of value derived from such
Contracts.

The Servicing Agreements are terminable by the insurers of certain of the
Trust's payment obligations ("Note Insurers") in the event of certain defaults
by the Company and under certain other circumstances. Were a Note Insurer in the
future to exercise its option to terminate the Servicing Agreements, such a
termination would have a material adverse effect on the Company's liquidity and
results of operations. The Company continues to receive Servicer extensions on a
monthly and/or quarterly basis, pursuant to the Servicing Agreements.

COMPETITION

The automobile financing business is highly competitive. The Company competes
with a number of national, regional and local finance companies with operations
similar to those of the Company. In addition, competitors or potential
competitors include other types of financial services companies, such as
commercial banks, savings and loan associations, leasing companies, credit
unions providing retail loan financing and lease financing for new and used
vehicles, and captive finance companies affiliated with major automobile
manufacturers such as General Motors Acceptance Corporation, Ford Motor Credit
Corporation, Chrysler Finance Corporation and Nissan Motors Acceptance
Corporation. Many of the Company's competitors and potential competitors possess
substantially greater financial, marketing, technical, personnel and other
resources than the Company. Moreover, the Company's future profitability will be
directly related to the availability and cost of its capital in relation to the
availability and cost of capital to its competitors. The Company's competitors
and potential competitors include far larger, more established companies that
have access to capital markets for unsecured commercial paper and investment
grade-rated debt instruments and to other funding sources that may be
unavailable to the Company. Many of these companies also have long-standing
relationships with Dealers and may provide other financing to Dealers, including
floor plan financing for the Dealers' purchase of automobiles from
manufacturers, which is not offered by the Company.

The Company believes that the principal competitive factors affecting a Dealer's
decision to offer Contracts for sale to a particular financing source are the
purchase price offered for the Contracts, the reasonableness of the financing
source's underwriting guidelines and documentation requests, the predictability
and timeliness of purchases and the financial stability of the funding source.
The Company believes that it can obtain from Dealers sufficient Contracts for
purchase at attractive prices by consistently applying reasonable underwriting
criteria and making timely purchases of qualifying Contracts.

GOVERNMENT REGULATION

Several federal and state consumer protection laws, including the federal
Truth-In-Lending Act, the federal Equal Credit Opportunity Act, the federal Fair
Debt Collection Practices Act and the Federal Trade Commission Act, regulate the
extension of credit in consumer credit transactions. These laws mandate certain
disclosures with respect to finance charges on Contracts and impose certain
other restrictions on Dealers. In many states, a license is required to engage
in the business of purchasing Contracts from Dealers. In addition, laws in a
number of states impose limitations on the amount of finance charges that may be
charged by Dealers on credit sales. The so-called Lemon Laws enacted by various
states provide certain rights to purchasers with respect to motor vehicles that
fail to satisfy express warranties. The application of Lemon Laws or violation
of such other federal and state laws may give rise to a claim or defense of a
customer against a Dealer and its assignees, including the Company and
purchasers of Contracts from the Company. The Dealer Agreement contains
representations by the Dealer that, as of the date of assignment of Contracts,
no such claims or defenses have been asserted or threatened with respect to the
Contracts and that all requirements of such federal and state laws have been
complied with in all material respects. Although a Dealer would be obligated to
repurchase Contracts that involve a breach of such warranty, there can be no
assurance that the Dealer will have the financial resources to satisfy its
repurchase obligations to the Company. Certain of these laws also regulate the
Company's servicing activities, including its methods of collection.

Although the Company believes that it is currently in material compliance with
applicable statutes and regulations, there can be no assurance that the Company
will be able to maintain such compliance. The past or future failure to comply
with such statutes and regulations could have a material adverse effect upon the
Company. Furthermore, the adoption of additional statutes and regulations,
changes in the interpretation and enforcement of current statutes and
regulations or the expansion of the Company's business into jurisdictions that
have adopted more stringent regulatory requirements than those in which the
Company currently conducts business could have a material adverse effect upon
the Company. In addition, due to the consumer-oriented nature of the industry in
which the Company operates and the application of certain laws and regulations,
industry participants are regularly named as defendants in litigation involving
alleged violations of federal and state laws and regulations and consumer law
torts, including fraud. Many of these actions involve alleged violations of
consumer protection laws. A significant judgment against the Company or within
the industry in connection with any such litigation could have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. See "Legal Proceedings."

EMPLOYEES

As of December 31, 2005, the Company had 742 full-time and 7 part-time
employees. The breakdown of the employees is as follows: 6 are senior management
personnel, 396 are collections personnel, 153 are Contract origination
personnel, 99 are marketing personnel (84 of whom are marketing
representatives), 68 are operations and systems personnel, and 27 are
administrative personnel. The Company believes that its relations with its
employees are good. The Company is not a party to any collective bargaining
agreement.

ITEM 1A. RISK FACTORS

WE REQUIRE A SUBSTANTIAL AMOUNT OF CASH TO SERVICE OUR DEBT

To service our existing indebtedness, we require a significant amount
of cash. Our ability to generate cash depends on many factors, including our
successful financial and operating performance. We cannot assure you that our
business strategy will succeed or that we will achieve our anticipated financial
results. Our financial and operational performance depends upon a number of
factors, many of which are beyond our control. These factors include, without
limitation:

o the current economic and competitive conditions in the
asset-backed securities market;
o the current credit quality of our motor vehicle contracts;
o the performance of our residual interests;
o any operating difficulties or pricing pressures we may experience;
o our ability to obtain credit enhancement;
o our ability to establish and maintain dealer relationships;
o the passage of laws or regulations that affect us adversely;
o any delays in implementing any strategic projects we may have;
o our ability to compete with our competitors; and
o our ability to acquire motor vehicle contracts

Depending upon the outcome of one or more of these factors, we may not
be able to generate sufficient cash flow from operations or to obtain sufficient
funding to satisfy all of our obligations. If we were unable to pay our debts,
we would be required to pursue one or more alternative strategies, such as
selling assets, refinancing or restructuring our indebtedness or selling
additional equity capital. These alternative strategies might not be feasible at
the time, might prove inadequate or could require the prior consent of our
senior secured and unsecured lenders.

WE NEED SUBSTANTIAL LIQUIDITY TO OPERATE OUR BUSINESS

We have historically funded our operations principally through
internally generated cash flows, sales of debt and equity securities, including
through securitizations and warehouse credit facilities, borrowings from a
private equity fund and sales of subordinated notes. However, we may not be able
to obtain sufficient funding for our operations through either or a combination
of (1) future access to the capital markets for equity or debt issuances,
including securitizations or (2) future borrowings or other financings on
acceptable terms to us.

If we were unable to access the capital markets or obtain acceptable
financing, our results of operations, financial condition and cash flows would
be materially and adversely affected. We require a substantial amount of cash
liquidity to operate our business. Among other things, we use such cash
liquidity to:

o acquire motor vehicle contracts;
o fund overcollateralization in warehouse facilities and
securitizations;
o pay securitization fees and expenses;
o fund spread accounts in connection with securitizations;
o satisfy working capital requirements and pay operating expenses;
and
o pay interest expense.

Prior to the third quarter of 2003, when we securitized our motor
vehicle contracts, we reported a gain on the sale of those contracts. This gain
represented a substantial portion of our revenues prior to the third quarter of
2003. However, although we reported this gain at the time of sale, we received
the monthly cash payments on those contracts (representing revenue previously
recognized) over the life of the motor vehicle contracts, rather than at the
time of sale. As a result, a substantial portion of our reported revenues prior
to the third quarter of 2003 did not represent immediate cash liquidity.

OUR RESULTS OF OPERATIONS WILL DEPEND ON OUR ABILITY TO SECURE AND MAINTAIN
CREDIT AND WAREHOUSE FINANCING ON FAVORABLE TERMS.

We depend on credit and warehouse facilities to finance our purchases
of motor vehicle contracts. Our business strategy requires that these credit and
warehouse financing sources continue to be available to us from the time of
purchase or origination of a motor vehicle contract until its sale through a
securitization.

Our primary source of day-to-day liquidity is our warehouse lines of
credit, in which we sell or pledge motor vehicle contracts, as often as twice a
week, to special-purpose affiliated entities where they are "warehoused" until
they are securitized. We depend substantially on two warehouse lines of credit:
(i) a $150 million warehouse line of credit, which we opened in November 2005
and, unless earlier terminated upon the occurrence of certain events, will
expire in November 2006 and (ii) a $200 million warehouse line of credit, which
was executed in June 2004 and, unless earlier terminated upon the occurrence of
certain events, will expire in June 2007. Both lines are renewable with the
mutual agreement of the parties. These warehouse facilities will remain
available to us only if, among other things, we comply with certain financial
covenants contained in the documents governing these facilities. These warehouse
facilities may not be available to us in the future and we may not be able to
obtain other credit facilities on favorable terms to fund our operations.

If we were unable to arrange new warehousing or credit facilities or
extend our existing warehouse or credit facilities when they come due, our
results of operations, financial condition and cash flows could be materially
and adversely affected.

OUR RESULTS OF OPERATIONS WILL DEPEND ON OUR ABILITY TO SECURITIZE OUR PORTFOLIO
OF MOTOR VEHICLE CONTRACTS.

We are dependent upon our ability to continue to finance pools of
motor vehicle contracts in term securitizations in order to generate cash
proceeds for new purchases of motor vehicle contracts. We have historically
depended on securitizations of motor vehicle contracts to provide permanent
financing of those contracts. By "permanent financing" we mean financing that
extends to cover the full term of the contracts. By contrast, our warehouse
credit facilities permit us to borrow against the value of such receivables only
for limited times. There can be no assurance that any securitization transaction
will be available on terms acceptable to us, or at all. The timing of any
securitization transaction is affected by a number of factors beyond our
control, any of which could cause substantial delays, including, without
limitation,

o market conditions;
o the approval by all parties of the terms of the securitization;
o the availability of credit enhancement on acceptable terms; and
o our ability to acquire a sufficient number of motor vehicle
contracts for securitization

Adverse changes in the market for securitized contract pools may result
in our inability to securitize contracts and may result in a substantial
extension of the period during which our contracts are financed through our
warehouse facilities, which would burden our financing capabilities, could
require us to curtail our purchase of contracts, and could have a material
adverse effect on us.

OUR RESULTS OF OPERATIONS WILL DEPEND ON CASH FLOWS FROM OUR RESIDUAL INTERESTS
IN OUR SECURITIZATION PROGRAM AND OUR WAREHOUSE CREDIT FACILITIES.

When we sell or pledge our motor vehicle contracts in securitizations
and warehouse credit facilities, we receive cash and a residual interest in the
securitized assets. This residual interest represents the right to receive the
future cash flows to be generated by the motor vehicle contracts in excess of
(i) the interest and principal paid to investors on the indebtedness issued in
connection with the financing (ii) the costs of servicing the contracts and
(iii) certain other costs incurred in connection with completing and maintaining
the securitization or warehousing. We sometimes refer to these future cash flows
as "excess spread cash flows."

Under the financial structures we have used to date in our
securitizations and warehouse credit facilities, excess spread cash flows that
would otherwise be paid to the holder of the residual interest are used to
increase overcollateralization or are retained in a spread account within the
securitization trusts or the warehouse facility to provide liquidity and credit
enhancement for the related securities.

While the specific terms and mechanics of each spread account vary
among transactions, our securitization and warehousing agreements generally
provide that we will receive excess spread cash flows only if the amount of
overcollateralization and spread account balances have reached specified levels
and/or the delinquency, defaults or net losses related to the contracts in the
motor vehicle contract pools are below certain predetermined levels. In the
event delinquencies, defaults or net losses on contracts exceed these levels,
the terms of the securitization or warehouse facility:

o may require increased credit enhancement, including an increase in
the amount required to be on deposit in the spread account, to be
accumulated for the particular pool;
o may restrict the distribution to us of excess spread cash flows
associated with other securitized or warehoused pools; and
o in certain circumstances, may permit affected parties to require
the transfer of servicing on some or all of the securitized or
warehoused contracts to another servicer.

We typically retain or sell residual interests or use them as
collateral to borrow cash. In any case, the future excess spread cash flow
received in respect of the residual interests are integral to the financing of
our operations. The amount of cash received from residual interests depends in
large part on how well our portfolio of securitized and warehoused motor vehicle
contracts performs. If our portfolio of warehoused and securitized motor vehicle
contracts has higher delinquency and loss ratios than expected, then the amount
of money realized from our retained residual interests, or the amount of money
we could obtain from the sale or other financing of our residual interests,
would be reduced, which could have an adverse effect on our operations,
financial condition and cash flows.

IF WE ARE UNABLE TO OBTAIN CREDIT ENHANCEMENT FOR OUR SECURITIZATION PROGRAM OR
OUR WAREHOUSE CREDIT FACILITIES UPON FAVORABLE TERMS, OUR RESULTS OF OPERATIONS
MAY BE IMPAIRED.

In our securitizations, we typically utilize credit enhancement in the
form of one or more financial guaranty insurance policies issued by financial
guaranty insurance companies. Each of these policies unconditionally and
irrevocably guarantees certain interest and principal payments on the securities
issued in our securitizations. These guarantees enable these securities to
achieve the highest credit rating available. This form of credit enhancement
reduces the costs of our securitizations relative to alternative forms of credit
enhancements currently available to us. None of such financial guaranty
insurance companies is required to insure future securitizations. As we pursue
future securitizations, we may not be able to obtain:

o credit enhancement in any form from financial guaranty insurance
companies or any other provider of credit enhancement on
acceptable terms; or
o similar ratings for future securitizations.

IF OUR PORTFOLIO OF MOTOR VEHICLE CONTRACTS EXPERIENCES HIGHER LEVELS OF
DEFAULTS, DELINQUENCIES OR LOSSES THAN WE ANTICIPATE, OUR RESULTS OF OPERATIONS
MAY BE IMPAIRED.

We specialize in the purchase, sale and servicing of contracts to
finance automobile purchases by customers with impaired or limited credit
histories or "sub-prime" customers, which entail a higher risk of
non-performance, higher delinquencies and higher losses than contracts with more
creditworthy customers. While we believe that the underwriting criteria and
collection methods we employ enable us to control the higher risks inherent in
contracts with sub-prime customers, no assurance can be given that such criteria
and methods will afford adequate protection against such risks. We have in the
past experienced fluctuations in the delinquency and charge-off performance of
our contracts. In the event that portfolios of contracts securitized and
serviced by us experience greater defaults, higher delinquencies or higher net
losses than anticipated, our income could be negatively affected. A larger
number of defaults than anticipated could also result in adverse changes in the
structure of future securitization transactions, such as a requirement of
increased cash collateral or other credit enhancement in such transactions.

IF THE ECONOMY OF ALL OR CERTAIN REGIONS OF THE UNITED STATES SLOWS OR ENTERS
INTO A RECESSION, OUR RESULTS OF OPERATIONS MAY BE IMPAIRED.

Our business is directly related to sales of new and used automobiles,
which are sensitive to employment rates, prevailing interest rates and other
domestic economic conditions. Delinquencies, repossessions and losses generally
increase during economic slowdowns or recessions. Because of our focus on
"sub-prime" customers, the actual rates of delinquencies, repossessions and
losses on our motor vehicle contracts could be higher under adverse economic
conditions than those experienced in the automobile finance industry in general,
particularly in the states of Texas, California, Ohio, Florida and Pennsylvania,
states in which our motor vehicle contracts are geographically concentrated. Any
sustained period of economic slowdown or recession could adversely affect our
ability to sell or securitize pools of contracts. The timing of any economic
changes is uncertain, and weakness in the economy could have an adverse effect
on our business and that of the dealers from which we purchase contracts and
result in reductions in our revenues or the cash flows available to us.

IF AN INCREASE IN INTEREST RATES RESULTS IN A DECREASE IN OUR CASH FLOW FROM
EXCESS SPREAD, OUR RESULTS OF OPERATIONS MAY BE IMPAIRED.

Our profitability is largely determined by the difference, or "spread,"
between the effective interest rate received by us on the motor vehicle
contracts that we acquire and the interest rates payable under our warehouse
credit facilities during the warehousing period and on the securities issued in
our securitizations.

Several factors affect our ability to manage interest rate risk.
Specifically, we are subject to interest rate risk during the period between
when motor vehicle contracts are purchased from dealers and when such contracts
are sold and financed in a securitization. Interest rates on our warehouse
credit facilities are adjustable while the interest rates on the contracts are
fixed. Therefore, if interest rates increase, the interest we must pay to the
lenders under our warehouse credit facilities is likely to increase while the
interest realized by us under those warehoused contracts remains the same, and
thus, during the warehousing period, the excess spread cash flow received by us
would likely decrease. Additionally, contracts warehoused and then securitized
during a rising interest rate environment may result in less excess spread cash
flow realized by us under those securitizations as, historically, our
securitization facilities pay interest to securityholders on a fixed rate basis
set at prevailing interest rates at the time of the closing of the
securitization, which may be several months after the contracts securitized were
originated and entered the warehouse, while our customers pay fixed rates of
interest on the contracts. A decrease in excess spread cash flow could adversely
affect our earnings and cash flow.

To mitigate, but not eliminate, the short-term risk relating to
interest rates payable by us under the warehouse facilities, we generally hold
motor vehicle contracts in the warehouse facilities for less than four months.
To mitigate, but not eliminate, the long-term risk relating to interest rates
payable by us in securitizations, we have in the past, and intend to continue
to, structure some of our securitization transactions to include pre-funding
structures, whereby the amount of securities issued exceeds the amount of
contracts initially sold into the securitization. In pre-funding, the proceeds
from the pre-funded portion are held in an escrow account until we sell the
additional contracts into the securitization in amounts up to the balance of the
pre-funded escrow account. In pre-funded securitizations, we effectively lock in
our borrowing costs with respect to the contracts we subsequently sell into the
securitization. However, we incur an expense in pre-funded securitizations equal
to the difference between the money market yields earned on the proceeds held in
escrow prior to subsequent delivery of contracts and the interest rate paid on
the securities outstanding, the amount as to which there can be no assurance.
Despite these mitigation strategies, an increase in prevailing interest rates
would cause us to receive less excess spread cash flows on motor vehicle
contracts, and thus could adversely affect our earnings and cash flows.

IF WE ARE UNABLE TO SUCCESSFULLY COMPETE WITH OUR COMPETITORS, OUR RESULTS OF
OPERATIONS MAY BE IMPAIRED.

The automobile financing business is highly competitive. We compete
with a number of national, local and regional finance companies. In addition,
competitors or potential competitors include other types of financial services
companies, such as commercial banks, savings and loan associations, leasing
companies, credit unions providing retail loan financing and lease financing for
new and used vehicles and captive finance companies affiliated with major
automobile manufacturers such as General Motors Acceptance Corporation and Ford
Motor Credit Corporation. Many of our competitors and potential competitors
possess substantially greater financial, marketing, technical, personnel and
other resources than we do, including greater access to capital markets for
unsecured commercial paper and investment grade rated debt instruments, and to
other funding sources which may be unavailable to us. Moreover, our future
profitability will be directly related to the availability and cost of our
capital relative to that of our competitors. Many of these companies also have
long-standing relationships with automobile dealers and may provide other
financing to dealers, including floor plan financing for the dealers' purchases
of automobiles from manufacturers, which we do not offer. There can be no
assurance that we will be able to continue to compete successfully and, as a
result, we may not be able to purchase contracts from dealers at a price
acceptable to us, which could result in reductions in our revenues or the cash
flows available to us.

IF OUR DEALERS DO NOT SUBMIT A SUFFICIENT NUMBER OF SUITABLE MOTOR VEHICLE
CONTRACTS TO US FOR PURCHASE, OUR RESULTS OF OPERATIONS MAY BE IMPAIRED.

We are dependent upon establishing and maintaining relationships with a
large number of unaffiliated automobile dealers to supply us with motor vehicle
contracts. During the year ended December 31, 2005, no dealer accounted for more
than 1.0% of the contracts we purchased. The agreements we have with dealers to
purchase contracts do not require dealers to submit a minimum number of
contracts for purchase. The failure of dealers to submit contracts that meet our
underwriting criteria could result in reductions in our revenues or the cash
flows available to us, and, therefore, could have an adverse effect on our
results of operations.

IF A SIGNIFICANT NUMBER OF OUR MOTOR VEHICLE CONTRACTS PREPAY OR EXPERIENCE
DEFAULTS, OUR RESULTS OF OPERATIONS MAY BE IMPAIRED.

If motor vehicle contracts that we purchase or service are prepaid or
experience defaults, this could materially and adversely affect our results of
operations, financial condition and cash flows. Our results of operations,
financial condition, cash flows and liquidity, depend, to a material extent, on
the performance of motor vehicle contracts that we purchase, warehouse and
securitize. A portion of the motor vehicle contracts acquired by us will default
or prepay. In the event of payment default, the collateral value of the motor
vehicle securing a motor vehicle contract will most likely not cover the
outstanding principal balance on that contract and the related costs of
recovery. We maintain an allowance for credit losses on motor vehicle contracts
held on our balance sheet, which reflects our estimates of probable credit
losses which can be reasonably estimated for on-balance sheet securitizations
and warehoused contracts. If the allowance is inadequate, then we would
recognize the losses in excess of the allowance as an expense and our results of
operations could be adversely affected. In addition, under the terms of our
warehouse facilities, we are not able to borrow against defaulted motor vehicle
contracts.

Our servicing income can also be adversely affected by prepayment of,
or defaults under, motor vehicle contracts in our servicing portfolio. Our
contractual servicing revenue is based on a percentage of the outstanding
principal balance of the motor vehicle contracts in our servicing portfolio. If
motor vehicle contracts are prepaid or charged off, then our servicing revenue
will decline while our servicing costs may not decline proportionately.

The value of our residual interest in the securitized assets in each
off-balance sheet securitization reflects our estimate of expected future credit
losses and prepayments for the motor vehicle contracts included in that
securitization. If actual rates of credit loss or prepayments, or both, on such
motor vehicle contracts exceed our estimates, the value of our residual interest

and the related cash flow would be impaired. We periodically review our credit
loss and prepayment assumptions relative to the performance of the securitized
motor vehicle contracts and to market conditions. Our results of operations and
liquidity could be adversely affected if actual credit loss or prepayment levels
on securitized motor vehicle contracts substantially exceed anticipated levels.
Under certain circumstances, we could be required to record an impairment charge
through a reduction to interest income.

THE EFFECTS OF TERRORISM AND MILITARY ACTION MAY IMPAIR OUR RESULTS OF
OPERATIONS.

The long-term economic impact of the events of September 11, 2001,
possible future attacks or other incidents and related military action, or
current or future military action by United States forces in Iraq and other
regions, could have a material adverse effect on general economic conditions,
consumer confidence, and market liquidity. No assurance can be given as to the
effect of these events on the performance of the motor vehicle contracts. Any
adverse impact resulting from these events could materially affect our results
of operations, financial condition and cash flows. In addition, activation of a
substantial number of U.S. military reservists or members of the National Guard
may significantly increase the proportion of contracts whose interest rates are
reduced by the application of the Servicemembers' Civil Relief Act, which
provides, generally, that an obligor who is covered by the relief act may not be
charged interest on the related contract in excess of 6% annually during the
period of the obligor's active duty.

IF WE LOSE SERVICING RIGHTS ON OUR PORTFOLIO OF MOTOR VEHICLE CONTRACTS, OUR
RESULTS OF OPERATIONS WILL BE IMPAIRED.

The loss of our servicing rights could materially and adversely affect
our results of operations, financial condition and cash flows. Our results of
operations, financial condition and cash flows, would be materially and
adversely affected if any of the following were to occur:

o the loss of our servicing rights under the sale and servicing
agreements for our warehouse facilities;
o the loss of our servicing rights under the applicable sale and
servicing agreement relating to motor vehicle contracts which we
have sold in our securitizations or service on behalf of third
parties, including servicing rights acquired from Seawest; or
o the occurrence of certain trigger events under our insurance
agreements with financial guaranty insurance companies or with any
other credit enhancer in each of our securitizations that would
block the release of excess spread cash flows or cash releases
from the spread accounts in those securitizations.

We are entitled to receive servicing fees only while we act as servicer
under the applicable sale and servicing agreement for motor vehicle contracts
entered into in connection with our warehouse facilities and securitizations and
the agreements under which we service motor vehicle contracts in connection with
the Seawest securitizations. Under our warehouse facilities and securitizations
and the Seawest securitizations, we may be terminated as servicer upon the
occurrence of certain events, including:

o our failure generally to observe and perform covenants and
agreements applicable to us;
o certain bankruptcy events involving us; or
o the occurrence of certain events of default under the documents
governing the facilities.

IF WE LOSE KEY PERSONNEL, OUR RESULTS OF OPERATIONS MAY BE IMPAIRED

Our future operating results depend in significant part upon the
continued service of our key senior management personnel, none of whom is bound
by an employment agreement. Our future operating results also depend in part
upon our ability to attract and retain qualified management, technical, sales
and support personnel for our operations. Competition for such personnel is

intense. We cannot assure you that we will be successful in attracting or
retaining such personnel. The loss of any key employee, the failure of any key
employee to perform in his or her current position or our inability to attract
and retain skilled employees, as needed, could materially and adversely affect
our results of operations, financial condition and cash flows.

IF WE FAIL TO COMPLY WITH REGULATIONS, OUR RESULTS OF OPERATIONS MAY BE
IMPAIRED.

Failure to materially comply with all laws and regulations applicable
to us could materially and adversely affect our ability to operate our business.
Our business is subject to numerous federal and state consumer protection laws
and regulations, which, among other things:

o require us to obtain and maintain certain licenses and
qualifications;
o limit the interest rates, fees and other charges we are allowed to
charge;
o limit or prescribe certain other terms of our motor vehicle
contracts;
o require specific disclosures;
o define our rights to repossess and sell collateral; and
o maintain safeguards designed to protect the security and
confidentiality of customer information.

We believe that we are in compliance in all material respects with all
such laws and regulations, and that such laws and regulations have had no
material adverse effect on our ability to operate our business. However, we may
be materially and adversely affected if we fail to comply with:

o applicable laws and regulations;
o changes in existing laws or regulations;
o changes in the interpretation of existing laws or regulations; or
o any additional laws or regulations that may be enacted in the
future.

IF WE EXPERIENCE UNFAVORABLE LITIGATION RESULTS, OUR RESULTS OF OPERATIONS MAY
BE IMPAIRED.

Unfavorable outcomes in any of our current or future litigation
proceedings could materially and adversely affect our results of operations,
financial conditions and cash flows. As a consumer finance company, we are
subject to various consumer claims and litigation seeking damages and statutory
penalties based upon, among other things, disclosure inaccuracies and wrongful
repossession, which could take the form of a plaintiff's class action complaint.
We, as the assignee of finance contracts originated by dealers, may also be
named as a co-defendant in lawsuits filed by consumers principally against
dealers. We are also subject to other litigation common to the motor vehicle
industry and businesses in general. The damages and penalties claimed by
consumers and others in these types of matters can be substantial. The relief
requested by the plaintiffs varies but includes requests for compensatory,
statutory and punitive damages.

While we intend to vigorously defend ourselves against such
proceedings, there is a chance that our results of operations, financial
condition and cash flows could be materially and adversely affected by
unfavorable outcomes.

IF WE EXPERIENCE PROBLEMS WITH OUR ACCOUNTING AND COLLECTION SYSTEMS, OUR
RESULTS OF OPERATIONS MAY BE IMPAIRED.

Problems with our in-house receivables accounting and collection
systems could materially and adversely affect our collections and cash flows.
Any significant failures or defects with our accounting and collection systems
could adversely affect our results of operations, financial conditions and cash
flows.

WE HAVE SUBSTANTIAL INDEBTEDNESS

We have and will continue to have a substantial amount of indebtedness.
At December 31, 2005, we had approximately $1.06 billion of debt outstanding.

Our substantial indebtedness could adversely affect our financial
condition by, among other things:

o increasing our vulnerability to general adverse economic and
industry conditions;
o requiring us to dedicate a substantial portion of our cash flow
from operations payments on our indebtedness, thereby reducing
amounts available for working capital, capital expenditures and
other general corporate purposes;
o limiting our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
o placing us at a competitive disadvantage compared to our
competitors that have less debt; and
o limiting our ability to borrow additional funds.

Although we believe we will generate sufficient free cash flow to
service such debt, there is no assurance that we will be able to do so. If we do
not generate sufficient operating profits, our ability to make required payments
on our debt may be impaired.

BECAUSE WE ARE SUBJECT TO MANY RESTRICTIONS IN OUR EXISTING CREDIT FACILITIES,
OUR ABILITY TO PAY DIVIDENDS MAY BE IMPAIRED.

The terms of our existing credit facilities and our outstanding debt
impose significant operating and financial restrictions on us and our
subsidiaries and require us to meet certain financial tests. These restrictions
may have an adverse impact on our business activities, results of operations and
financial condition. These restrictions may also significantly limit or prohibit
us from engaging in certain transactions, including the following:

o incurring or guaranteeing additional indebtedness;
o making capital expenditures in excess of agreed upon amounts;
o paying dividends or other distributions to our stockholders or
redeeming, repurchasing or retiring our capital stock or
subordinated obligations;
o making investments;
o creating or permitting liens on our assets or the assets of our
subsidiaries;
o issuing or selling capital stock of our subsidiaries;
o transferring or selling our assets;
o engaging in mergers or consolidations;
o permitting a change of control of our company;
o liquidating, winding up or dissolving our company;
o changing our name or the nature of our business, or the names or
nature of the business of our subsidiaries; and
o engaging in transactions with our affiliates outside the normal
course of business.

These restrictions may limit our ability to obtain additional sources
of capital, which may limit our ability to generate earnings. In addition, the
failure to comply with any of the covenants of our existing credit facilities or
to maintain certain indebtedness ratios would cause a default under one or more
of our credit facilities or our other debt agreements that may be outstanding
from time to time. A default, if not waived, could result in acceleration of the
related indebtedness, in which case such debt would become immediately due and
payable. A continuing default or acceleration of one or more of our credit
facilities or any other debt agreement, will likely cause a default and other
debt agreements that otherwise would not be in default, in which case all such
related indebtedness could be accelerated. If this occurs, we may not be able to
repay our debt or borrow sufficient funds to refinance our indebtedness. Even if
any new financing is available, it may not be on terms that are acceptable to us
or it may not be sufficient to refinance all of our indebtedness as it becomes
due.

FORWARD-LOOKING STATEMENTS

This report contains certain statements of a forward-looking nature
relating to future events or our future performance. These forward-looking
statements are based on our current expectations, assumptions, estimates and
projections about us and our industry. When used in this prospectus, the words
"expects," "believes," "anticipates," "estimates," "intends" and similar
expressions are intended to identify forward-looking statements. These
statements include, but are not limited to, statements of our plans, strategies
and prospects.

These forward-looking statements are only predictions and are subject
to risks and uncertainties that could cause actual events or results to differ
materially from those projected. The cautionary statements made in this report
should be read as being applicable to all related forward-looking statements
wherever they appear in this report. We assume no obligation to update these
forward-looking statements publicly for any reason. Actual results could differ
materially from those anticipated in these forward-looking statements.

The risk factors discussed above could cause our actual results to
differ materially from those expressed in any forward-looking statements.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not Applicable

ITEM 2. PROPERTY

The Company's headquarters are located in Irvine, California, where it leases
approximately 115,000 square feet of general office space from an unaffiliated
lessor. The annual base rent was approximately $1.9 million through October
2003, and increased to $2.1 million for the following five years. In addition to
base rent, the Company pays the property taxes, maintenance and other expenses
of the premises.

In March 1997, the Company established a branch collection facility in
Chesapeake, Virginia. The Company leases approximately 28,000 square feet of
general office space in Chesapeake, Virginia, at a base rent that is currently
$474,537 per year, increasing to $501,542 over a 10-year term.

The remaining three regional servicing centers occupy a total of approximately
51,000 square feet of leased space in Maitland, Florida; Marietta, Georgia and
Hinsdale, Illinois. The termination dates of such leases range from 2007 to
2010.

ITEM 3. LEGAL PROCEEDINGS

STANWICH LITIGATION. CPS was for some time a defendant in a class action (the
"Stanwich Case") brought in the California Superior Court, Los Angeles County.
The original plaintiffs in that case were persons entitled to receive regular
payments (the "Settlement Payments") under out-of-court settlements reached with
third party defendants. Stanwich Financial Services Corp. ("Stanwich"), an
affiliate of the former chairman of the board of Directors of CPS, is the entity
that was obligated to pay the Settlement Payments. Stanwich has defaulted on its
payment obligations to the plaintiffs and in June 2001 filed for reorganization
under the Bankruptcy Code, in the federal Bankruptcy Court of Connecticut. At
December 31, 2004, CPS was a defendant only in a cross-claim brought by one of
the other defendants in the case, Bankers Trust Company, which asserted a claim
of contractual indemnity against CPS.

CPS subsequently settled the cross-claim of Bankers Trust by payment of $3.24
million, in February 2005. Pursuant to that settlement, the court has dismissed
the cross-claim, with prejudice. The amount paid by the Company was accrued for
and included in Accounts payable and accrued expenses in the Company's balance
sheet as of December 31, 2004.

In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee,
asserted claims for indemnity against the Company in a separate action, which is
now pending in federal district court in Rhode Island. The Company has filed
counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same
court. The litigation between Mr. Pardee and CPS is stayed, awaiting resolution
of an adversary action brought against Mr. Pardee in the bankruptcy court, which
is hearing the bankruptcy of Stanwich.

The reader should consider that an adverse judgment against CPS in the Rhode
Island case for indemnification, if in an amount materially in excess of any
liability already recorded in respect thereof, could have a material adverse
effect.

OTHER LITIGATION. On June 2, 2004, Delmar Coleman filed a lawsuit in the circuit
court of Tuscaloosa, Alabama, alleging that plaintiff Coleman was harmed by an
alleged failure to refer, in the notice given after repossession of his vehicle,
to the right to purchase the vehicle by tender of the full amount owed under the
retail installment contract. Plaintiff seeks damages in an unspecified amount,
on behalf of a purported nationwide class. CPS removed the case to federal
bankruptcy court, and filed a motion for summary judgment as part of its
adversary proceeding against the plaintiff in the bankruptcy court. The federal
bankruptcy court granted the plaintiff's motion to send the matter back to
Alabama state court. CPS has appealed the ruling. Although CPS believes that it
has one or more defenses to each of the claims made in this lawsuit, no
discovery has yet been conducted and the case is still in its earliest stages.
Accordingly, there can be no assurance as to its outcome.

In June 2004, Plaintiff Jeremy Henry filed a lawsuit against the Company in the
California Superior Court, San Diego County, alleging improper practices related
to the notice given after repossession of a vehicle that he purchased.
Plaintiff's motion for a certification of a class has been denied, and is the
subject of an appeal now before the California Court of Appeal. Irrespective of
the outcome of that appeal, as to which there can be no assurance, the Company
has a number of defenses that may be dispositive with respect to the claims of
plaintiff Henry.

In August and September 2005, two plaintiffs represented by the same law firm
filed substantially identical lawsuits in the federal district court for the
northern district of Illinois, each of which purports to be a class action, and
each of which alleges that CPS improperly accessed consumer credit information.
CPS has reached agreements in principle to settle these cases, which await
confirmation by the court.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the Company's executive officers follows:

CHARLES E. BRADLEY, Jr., 46, has been the President and a director of the
Company since its formation in March 1991. In January 1992, Mr. Bradley was
appointed Chief Executive Officer of the Company. From March 1991 until December
1995 he served as Vice President and a director of CPS Holdings, Inc. From April
1989 to November 1990, he served as Chief Operating Officer of Barnard and
Company, a private investment firm. From September 1987 to March 1989, Mr.
Bradley, Jr. was an associate of The Harding Group, a private investment banking
firm.

MARK A. CREATURA, 46, has been Senior Vice President - General Counsel since
October 1996. From October 1993 through October 1996, he was Vice President and
General Counsel at Urethane Technologies, Inc., a polyurethane chemicals
formulator. Mr. Creatura was previously engaged in the private practice of law
with the Los Angeles law firm of Troy & Gould Professional Corporation, from
October 1985 through October 1993.

JEFFREY P. FRITZ, 46, has been Senior Vice President - Accounting since August
2004. He served as a consultant to the Company from May 2004 to August 2004.
Previously, he was the Chief Financial Officer of SeaWest Financial Corp. from
February 2003 to May 2004, and the Chief Financial Officer of AFCO Auto Finance
from April 2002 to February 2003. He practiced public accounting with Glenn M.
Gelman & Associates from March 2001 to April 2002 and was Chief Financial
Officer of Credit Services Group, Inc. from May 1999 to November 2000. He
previously served as the Company's Chief Financial Officer from its inception
through May 1999.

CURTIS K. POWELL, 49, has been Senior Vice President - Contract Origination
since June 2001. Previously, he was the Company's Senior Vice President -
Marketing, from April 1995. He joined the Company in January 1993 as an
independent marketing representative until being appointed Regional Vice
President of Marketing for Southern California in November 1994. From June 1985
through January 1993, Mr. Powell was in the retail automobile sales and leasing
business.

ROBERT E. RIEDL, 42, has been Senior Vice President - Chief Financial Officer
since August 2003. Mr. Riedl joined the Company as Senior Vice President - Risk
Management in January 2003. Mr. Riedl was a Principal at Northwest Capital
Appreciation ("NCA"), a middle market private equity firm, from 2000 to 2002.
For a year prior to joining Northwest Capital, Mr. Riedl served as Senior Vice
President for one of NCA's portfolio companies, SLP Capital. Mr. Riedl was an
investment banker for ContiFinancial Services Corporation from 1995 until
joining SLP Capital in 1999.

CHRISTOPHER TERRY, 38, has been Senior Vice President - Asset Recovery since
January 2003. He joined the Company in January 1995 as a loan officer, held a
series of successively more responsible positions, and was promoted to Vice
President - Asset Recovery in June 1999. Mr. Terry was previously a branch
manager with Norwest Financial from 1990.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq National Market System, under
the symbol "CPSS." The following table sets forth the high and low sale prices
as reported by Nasdaq for the Company's Common Stock for the periods shown.

HIGH LOW
------ ------
January 1 - March 31, 2004 ....................... 3.96 2.94
April 1 - June 30, 2004 .......................... 4.97 3.12
July 1 - September 30, 2004 ...................... 5.21 3.71
October 1 - December 31, 2004 .................... 4.87 3.98
January 1 - March 31, 2005 ....................... 5.50 4.26
April 1 - June 30, 2005 .......................... 5.38 3.50
July 1 - September 30, 2005 ...................... 5.45 4.14
October 1 - December 31, 2005 .................... 6.50 4.82

As of February 22, 2006, there were 82 holders of record of the Company's Common
Stock. To date, the Company has not declared or paid any dividends on its Common
Stock. The payment of future dividends, if any, on the Company's Common Stock is
within the discretion of the Board of Directors and will depend upon the
Company's income, its capital requirements and financial condition, and other
relevant factors. The instruments governing the Company's outstanding debt place
certain restrictions on the payment of dividends. The Company does not intend to
declare any dividends on its Common Stock in the foreseeable future, but instead
intends to retain any cash flow for use in the Company's operations.

The table below presents information regarding outstanding options to purchase
the Company's Common Stock:

Number of securities Weighted average Number of
to be issued upon exercise price of securities remaining
exercise of outstanding outstanding available for future
options, warrants options, warrants issuance under equity
Plan category and rights and rights compensation plans
------------------------------------------ ------------------------ ------------------- ----------------------

Equity compensation plans
approved by security holders........... 4,863,654 $3.38 165,261
Equity compensation plans not
approved by security holders........... - - -
------------------------ ------------------- ----------------------

Total.................................... 4,863,654 $3.38 165,261
======================== =================== ======================

During the year ended December 31, 2005, the Company purchased a total of
198,659 shares of its common stock. The Company's purchases of common stock
during the fourth quarter of 2005 are described in the following table:

ISSUER PURCHASES OF EQUITY SECURITIES IN THE FOURTH QUARTER

Total Number of Approximate Dollar
Total Shares Purchased as Value of Shares that
Number of Average Part of Publicly May Yet be Purchased
Shares Price Paid Announced Plans or Under the Plans or
Period(1) Purchased per Share Programs(2) Programs
----------- -------------- ----------------- ----------------------

October 2005 ........ 35,250 $ 5.84 35,250 $ 5,310,072
November 2005 ....... 22,255 6.32 22,255 5,169,508
December 2005 ....... 25,401 5.82 25,401 5,021,659
----------- -------------- -----------------

Total ............... 82,906 $ 5.96 82,906
=========== ============== =================

-------------------

(1) EACH MONTHLY PERIOD IS THE CALENDAR MONTH.

(2) THE COMPANY ANNOUNCED IN AUGUST 2000 ITS INTENTION TO PURCHASE UP TO $5
MILLION OF ITS OUTSTANDING SECURITIES, INCLUSIVE OF ANNUAL $1 MILLION SINKING
FUND REDEMPTIONS ON ITS RISING INTEREST REDEEMABLE SUBORDINATED SECURITIES DUE
2006. IN OCTOBER 2002, THE AUGUST 2000 PROGRAM HAVING BEEN EXHAUSTED, THE
COMPANY'S BOARD OF DIRECTORS AUTHORIZED THE PURCHASE OF UP TO AN ADDITIONAL $5
MILLION OF SUCH SECURITIES, WHICH PROGRAM WAS FIRST ANNOUNCED IN THE COMPANY'S
ANNUAL REPORT FOR THE YEAR 2002, FILED ON MARCH 26, 2003. ALL PURCHASES
DESCRIBED IN THE TABLE ABOVE WERE UNDER THE PLAN ANNOUNCED IN MARCH 2003, WHICH
HAS NO FIXED EXPIRATION DATE.

ON JUNE 30, 2004, THE COMPANY ISSUED 333,333 SHARES OF ITS COMMON STOCK TO JOHN
G. POOLE, A DIRECTOR OF THE COMPANY, UPON CONVERSION AT MATURITY, AND PURSUANT
TO ITS TERMS, OF A $1,000,000 NOTE HELD BY MR. POOLE SINCE 1998. THE ISSUANCE OF
SHARES WAS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 PURSUANT TO
SECTION 3(A)(9) THEREOF, AS THE SHARES WERE ISSUED IN EXCHANGE FOR THE
OUTSTANDING NOTE, AND NO COMMISSION WAS PAID FOR SOLICITING SUCH EXCHANGE.

ITEM 6. SELECTED FINANCIAL DATA

Statement of Operations Data:
Net gain on sale of Contracts (1) ........................... $ -- $ -- $ 10,421 $ 21,518 $ 32,765
Interest income ............................................. 171,834 105,818 58,164 48,644 17,205
Servicing fees .............................................. 6,647 12,480 17,058 14,621 10,666
Total revenue ............................................... 193,697 132,692 104,986 98,388 62,576
Operating expenses .......................................... 190,325 148,580 108,025 98,326 62,256
Income (loss) before extraordinary item (2) ................. 3,372 (15,888) 395 2,996 320
Extraordinary item (3) ...................................... -- -- -- 17,412 --
Net income (loss) ........................................... 3,372 (15,888) 395 20,408 320
Basic income (loss) per share before extraordinary item ..... 0.16 (0.75) 0.02 0.15 0.02
Diluted income (loss) per share before extraordinary item ... 0.14 (0.75) 0.02 0.14 0.02
Basic income (loss) per share, extraordinary item ........... -- -- -- 0.87 --
Diluted income (loss) per share, extraordinary item ......... -- -- -- 0.83 --
Basic income (loss) per share ............................... 0.16 (0.75) 0.02 1.03 0.02
Diluted income (loss) per share ............................. 0.14 (0.75) 0.02 0.97 0.02

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2005 2004 2003 2002 2001
-------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents ................................... $ 17,789 $ 14,366 $ 33,209 $ 32,947 $ 2,570
Restricted cash and equivalents ............................. 157,662 125,113 67,277 18,912 11,354
Finance receivables, net .................................... 913,576 550,191 266,189 84,592 --
Residual interest in securitizations ........................ 25,220 50,430 111,702 127,170 106,103
Total assets ................................................ 1,155,144 766,599 492,470 285,448 151,204
Term debt ................................................... 1,061,987 675,548 384,622 175,942 82,555
Total liabilities ........................................... 1,081,555 696,679 410,310 202,874 89,158
Total shareholders' equity .................................. 73,589 69,920 82,160 82,574 61,686

-------------------
(1) THE DECREASE IN 2003 AND THEREAFTER IS PRIMARILY THE RESULT OF THE CHANGE IN
SECURITIZATION STRUCTURE IMPLEMENTED IN THE THIRD QUARTER OF 2003.
(2) RESULTS FOR 2003 AND 2002 INCLUDE A TAX BENEFIT OF $3.4 MILLION AND $2.9
MILLION, RESPECTIVELY.
(3) ON MARCH 8, 2002, CPS ACQUIRED 100% OF MFN FINANCIAL CORPORATION AND
SUBSIDIARIES, RESULTING IN THE RECOGNITION OF $17.4 MILLION OF NEGATIVE GOODWILL
AS AN EXTRAORDINARY GAIN, WHICH IS REFLECTED IN THE COMPANY'S 2002 CONSOLIDATED
STATEMENT OF OPERATIONS.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis of the financial condition of the Company should be read
in conjunction with "Selected Financial Data" and the Company's Consolidated
Financial Statements and the Notes thereto and the other financial data included
elsewhere in this report.

OVERVIEW

Consumer Portfolio Services, Inc. ("CPS," and together with its subsidiaries,
the "Company") is a consumer finance company which specializes in purchasing,
selling and servicing retail automobile installment purchase contracts
("Contracts") originated by licensed motor vehicle dealers ("Dealers") in the
sale of new and used automobiles, light trucks and passenger vans. Through its
purchases, the Company provides indirect financing to Dealer customers for
borrowers with limited credit histories, low incomes or past credit problems
("Sub-Prime Customers"). The Company serves as an alternative source of
financing for Dealers, allowing sales to customers who otherwise might not be
able to obtain financing. The Company does not lend money directly to consumers.
Rather, it purchases installment Contracts from Dealers based on its financing
programs (the "CPS Programs").

On March 8, 2002, the Company acquired MFN Financial Corporation and its
subsidiaries in a merger (the "MFN Merger"). On May 20, 2003, the Company
acquired TFC Enterprises, Inc. and its subsidiaries in a second merger (the "TFC
Merger"). Each merger was accounted for as a purchase. MFN Financial Corporation
and its subsidiaries ("MFN") and TFC Enterprises, Inc. and its subsidiaries
("TFC") were engaged in businesses similar to that of the Company: buying
Contracts from Dealers, financing those Contracts through securitization
transactions, and servicing those Contracts. MFN ceased acquiring Contracts in
May 2002; TFC continues to acquire Contracts under its "TFC Programs," which
provide financing for vehicle purchases exclusively by members of the United
States Armed Forces.

On April 2, 2004, the Company purchased (in the "SeaWest Asset Acquisition") a
portfolio of Contracts and certain other assets from SeaWest Financial
Corporation and its subsidiaries (collectively, "SeaWest"). In addition, the
Company was named the successor servicer of three term securitization
transactions originally sponsored by SeaWest (the "SeaWest Third Party
Portfolio"). The Company does not intend to offer financing programs similar to
those previously offered by SeaWest.

From inception through June 2003, the Company generated revenue primarily from
the gains recognized on the sale or securitization of Contracts, servicing fees
earned on Contracts sold, interest earned on Residuals, as defined below, and
interest on finance receivables. Since July 2003, the Company has not recognized
any gains from the sale of Contracts. Instead, since July 2003 its revenues have
been derived from servicing fees and interest earned on Residuals (for contracts
sold prior to July 2003) and interest on finance receivables (for Contracts
purchased since July 2003).

SECURITIZATION

GENERALLY

Throughout the periods for which information is presented in this report, the
Company has purchased Contracts with the intention of repackaging them in
securitizations. All such securitizations have involved identification of
specific Contracts, sale of those Contracts (and associated rights) to a special
purpose subsidiary of the Company, and issuance of asset-backed securities to
fund the transactions. Depending on the structure of the securitization, the
transaction may properly be accounted for as a sale of the Contracts, or as a
secured financing.

When structured to be treated as a secured financing, the subsidiary is
consolidated with the Company. Accordingly, the sold Contracts and the related
securitization trust debt appear as assets and liabilities, respectively, of the
Company on its Consolidated Balance Sheet. The Company then periodically (i)
recognizes interest and fee income on the receivables (ii) recognizes interest
expense on the securities issued in the securitization and (iii) records as
expense a provision for credit losses on the receivables.

When structured to be treated as a sale, the subsidiary is not consolidated with
the Company. Accordingly, the securitization removes the sold Contracts from the
Company's Consolidated Balance Sheet, the asset-backed securities (debt of the
non-consolidated subsidiary) do not appear as debt of the Company, and the
Company shows, as an asset, a retained residual interest in the sold Contracts.
The residual interest represents the discounted value of what the Company
expects will be the excess of future collections on the Contracts over principal
and interest due on the asset-backed securities. That residual interest appears
on the Company's Consolidated Balance Sheet as "Residual interest in
securitizations," and the determination of its value is dependent on estimates
of the future performance of the sold Contracts.

CHANGE IN POLICY

Beginning in the third quarter of 2003, the Company began to structure its term
securitization transactions so that they would be treated for financial
accounting purposes as borrowings secured by receivables, rather than as sales
of receivables. All subsequent term securitizations of such finance receivables
have been so structured. Prior to August 2003, the Company had structured its
term securitization transactions related to the CPS Programs to be treated as
sales for financial accounting purposes. In the MFN Merger and in the TFC Merger
the Company acquired finance receivables that had been previously securitized in
term securitization transactions that were reflected as secured financings. As
of December 31, 2005, the Company's Consolidated Balance Sheet included net
finance receivables of approximately $13.9 million and securitization trust debt
of $6.6 million related to finance receivables acquired in the two mergers, out
of totals of net finance receivables of approximately $913.6 million and
securitization trust debt of approximately $924.0 million.

CREDIT RISK RETAINED

CRITICAL ACCOUNTING POLICIES

The Company believes that its accounting policies related to (a) Allowance for
Finance Credit Losses, (b) Residual Interest in Securitizations and Gain on Sale
of Contracts and (c) Income Taxes are considered to be the most critical to
understanding and evaluating the Company's reported financial results. Such
policies are described below.

(a) ALLOWANCE FOR FINANCE CREDIT LOSSES

In order to estimate an appropriate allowance for losses to be incurred on
finance receivables, the Company uses a loss allowance methodology commonly
referred to as "static pooling," which stratifies its finance receivable
portfolio into separately identified pools. Using analytical and formula driven
techniques, the Company estimates an allowance for finance credit losses, which
management believes is adequate for probable credit losses that can be
reasonably estimated in its portfolio of finance receivable Contracts. Provision
for loss is charged to the Company's Consolidated Statement of Operations. Net
losses incurred on finance receivables are charged to the allowance. Management
evaluates the adequacy of the allowance by examining current delinquencies, the
characteristics of the portfolio and the value of the underlying collateral. As
conditions change, the Company's level of provisioning and/or allowance may
change as well.

(b) RESIDUAL INTEREST IN SECURITIZATIONS AND GAIN ON SALE OF CONTRACTS

Gain on sale was recognized on the disposition of Contracts either outright or
in securitization transactions. In those securitization transactions that were
treated as sales for financial accounting purposes, the Company, or a
wholly-owned, consolidated subsidiary of the Company, retains a residual
interest in the Contracts that were sold to a wholly-owned, unconsolidated
special purpose subsidiary. The Company's securitization transactions include
"term" securitizations (the purchaser holds the Contracts for substantially
their entire term) and "continuous" or "warehouse" securitizations (which
finance the acquisition of the Contracts for future sale into term
securitizations).

The line item "Residual interest in securitizations" on the Company's
Consolidated Balance Sheet represents the residual interests in term
securitizations completed prior to July 2003. This line represents the
discounted sum of expected future cash flows from these securitization trusts.
Accordingly, the valuation of the residual is heavily dependent on estimates of
future performance of the Contracts included in the term securitizations.

All subsequent securitizations were structured as secured financings. The
warehouse securitizations are accordingly reflected in the line items "Finance
receivables" and "Warehouse lines of credit" on the Company's Consolidated
Balance Sheet, and the term securitizations are reflected in the line items
"Finance receivables" and "Securitization trust debt."

The key economic assumptions used in measuring all residual interests in
securitizations as of December 31, 2005 and 2004 are included in the table
below. The Company has used an effective pre-tax discount rate of 14% per annum
except for certain collections from charged off receivables related to the
Company's securitizations in 2001 and later, where the Company has used a
discount rate of 25% per annum.

2005 2004
------------- -------------
Prepayment speed (Cumulative)................. 22.2% - 35.8% 20.0% - 30.5%
Net credit losses (Cumulative)................ 11.9% - 20.2% 13.0% - 20.5%

Key economic assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10% and 20% adverse changes in those
assumptions are as follows:

DECEMBER 31,
----------------------
2005
----------------------
(DOLLARS IN THOUSANDS)

Carrying amount/fair value of residual interest in securitizations ..... $ 25,220
Weighted average life in years ......................................... 2.24

Prepayment Speed Assumption (Cumulative) ............................... 22.2% - 35.8%
Estimated fair value assuming 10% adverse change ....................... $ 25,168
Estimated fair value assuming 20% adverse change ....................... 25,119

Expected Net Credit Losses (Cumulative) ................................ 11.9% - 20.2%
Estimated fair value assuming 10% adverse change ....................... $ 23,937
Estimated fair value assuming 20% adverse change ....................... 22,656

Residual Cash Flows Discount Rate (Annual) ............................. 14.0% - 25.0%
Estimated fair value assuming 10% adverse change ....................... $ 24,636
Estimated fair value assuming 20% adverse change ....................... 24,071

These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on 10% and 20% percent variation
in assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market rates may result in lower prepayments and
increased credit losses), which could magnify or counteract the sensitivities.

The Company's securitization structure has generally been as follows:

The Company sells Contracts it acquires to a wholly-owned Special Purpose
Subsidiary ("SPS"), which has been established for the limited purpose of buying
and reselling the Company's Contracts. The SPS then transfers the same Contracts
to another entity, typically a statutory trust ("Trust"). The Trust issues
interest-bearing asset-backed securities ("Notes"), in a principal amount equal
to or less than the aggregate principal balance of the Contracts. The Company
typically sells these Contracts to the Trust at face value and without recourse,
except that representations and warranties similar to those provided by the
Dealer to the Company are provided by the Company to the Trust. One or more
investors purchase the Notes issued by the Trust; the proceeds from the sale of
the Notes are then used to purchase the Contracts from the Company. The Company
may retain or sell subordinated Notes issued by the Trust or by a related
entity. The Company purchases a financial guaranty insurance policy,
guaranteeing timely payment of principal and interest on the senior Notes, from
an insurance company (a "Note Insurer"). In addition, the Company provides
"Credit Enhancement" for the benefit of the Note Insurer and the investors in
the form of an initial cash deposit to a bank account ("Spread Account") held by
the Trust, in the form of overcollateralization of the Notes, where the
principal balance of the Notes issued is less than the principal balance of the
Contracts, in the form of subordinated Notes, or some combination of such Credit
Enhancements. The agreements governing the securitization transactions
(collectively referred to as the "Securitization Agreements") require that the
initial level of Credit Enhancement be supplemented by a portion of collections
from the Contracts until the level of Credit Enhancement reaches specified
levels which are then maintained. The specified levels are generally computed as
a percentage of the principal amount remaining unpaid under the related
Contracts. The specified levels at which the Credit Enhancement is to be
maintained will vary depending on the performance of the portfolios of Contracts
held by the Trusts and on other conditions, and may also be varied by agreement
among the Company, the SPS, the Note Insurers and the trustee. Such levels have
increased and decreased from time to time based on performance of the various
portfolios, and have also varied by Securitization Agreement. The Securitization
Agreements generally grant the Company the option to repurchase the sold
Contracts from the Trust when the aggregate outstanding balance of the Contracts
has amortized to a specified percentage of the initial aggregate balance.

The prior securitizations that were treated as sales for financial accounting
purposes differ from secured financings in that the Trust to which the SPS sold
the Contracts met the definition of a "qualified special purpose entity" under
Statement of Financial Accounting Standards No. 140 ("SFAS 140"). As a result,
assets and liabilities of the Trust are not consolidated into the Company's
Consolidated Balance Sheet.

The Company's warehouse securitization structures were similar to the above,
except that (i) the SPS that purchases the Contracts pledges the Contracts to
secure promissory notes which it issues, (ii) the promissory notes are in an
aggregate principal amount of not more than 80.0% of the aggregate principal
balance of the Contracts (that is, at least 20.0% overcollateralization), and
(iii) no increase in the required amount of Credit Enhancement is contemplated
unless certain portfolio performance tests are breached. During the quarter
ended September 30, 2003 the warehouse securitizations related to the CPS
Programs were amended to cause the transactions to be treated as secured
financings for financial accounting purposes. The Contracts held by the
warehouse SPSs and the promissory notes that they issue are therefore included
in the Company's Consolidated Financial Statements as of December 31, 2005 and
2004 as assets and liabilities, respectively.

Upon each sale of Contracts in a securitization structured as a secured
financing, whether a term securitization or a warehouse securitization, the
Company retains on its Consolidated Balance Sheet the Contracts securitized as
assets and records the Notes issued in the transaction as indebtedness of the
Company.

Under the prior securitizations structured as sales for financial accounting
purposes, the Company removed from its Consolidated Balance Sheet the Contracts
sold and added to its Consolidated Balance Sheet (i) the cash received, if any,
and (ii) the estimated fair value of the ownership interest that the Company
retains in Contracts sold in the securitization. That retained or residual
interest (the "Residual") consists of (a) the cash held in the Spread Account,
if any, (b) overcollateralization, if any, (c) subordinated Notes retained, if
any, and (d) receivables from Trust, which include the net interest receivables
("NIRs"). NIRs represent the estimated discounted cash flows to be received from
the Trust in the future, net of principal and interest payable with respect to
the Notes, and certain expenses. The excess of the cash received and the assets
retained by the Company over the carrying value of the Contracts sold, less
transaction costs, equals the net gain on sale of Contracts recorded by the
Company. Until the maturity of these transactions, the Company's Consolidated
Balance Sheet will reflect both securitization transactions structured as sales
and others structured as secured financings.

With respect to securitizations structured as sales for financial accounting
purposes, the Company allocates its basis in the Contracts between the Notes
sold and the Residuals retained based on the relative fair values of those
portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value. The Company is not aware of an active market
for the purchase or sale of interests such as the Residuals; accordingly, the
Company determines the estimated fair value of the Residuals by discounting the
amount of anticipated cash flows that it estimates will be released to the
Company in the future (the cash out method), using a discount rate that the
Company believes is appropriate for the risks involved. The anticipated cash
flows include collections from both current and charged off receivables. The
Company has used an effective pre-tax discount rate of 14% per annum except for
certain collections from charged off receivables related to the Company's
securitizations in 2001 and later where the Company has used a discount rate of
25% per annum.

The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Trusts that represent collections on the Contracts in excess of
the amounts required to pay principal and interest on the Notes, the base
servicing fees, and certain other fees (such as trustee and custodial fees).
Required principal payments on the notes are generally defined as the payments
sufficient to keep the principal balance of the Notes equal to the aggregate
principal balance of the related Contracts (excluding those Contracts that have
been charged off), or a pre-determined percentage of such balance. Where that
percentage is less than 100%, the related Securitization Agreements require
accelerated payment of principal until the principal balance of the Notes is
reduced to the specified percentage. Such accelerated principal payment is said
to create overcollateralization of the Notes.

If the amount of cash required for payment of fees, interest and principal
exceeds the amount collected during the collection period, the shortfall is
withdrawn from the Spread Account, if any. If the cash collected during the
period exceeds the amount necessary for the above allocations, and there is no
shortfall in the related Spread Account or other form of Credit Enhancement, the
excess is released to the Company, or in certain cases is transferred to other
Spread Accounts related to transactions insured by the same Note Insurer that
may be below their required levels. If the total Credit Enhancement amount is
not at the required level, then the excess cash collected is retained in the
Trust until the specified level is achieved. Although Spread Account balances
are held by the Trusts on behalf of the Company's SPS as the owner of the
Residuals (in the case of securitization transactions structured as sales for
financial accounting purposes) or the Trusts (in the case of securitization
transactions structured as secured financings for financial accounting
purposes), the cash in the Spread Accounts is restricted from use by the
Company. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Securitization Agreements. The
interest rate payable on the Contracts is significantly greater than the
interest rate on the Notes. As a result, the Residuals described above are a
significant asset of the Company. In determining the value of the Residuals, the
Company must estimate the future rates of prepayments, delinquencies, defaults,
default loss severity, and recovery rates, as all of these factors affect the
amount and timing of the estimated cash flows. The Company estimates prepayments
by evaluating historical prepayment performance of comparable Contracts. As of
December 31, 2005, the Company used prepayment estimates of approximately 22.2%
to 35.8% cumulatively over the lives of the related Contracts. The Company
estimates defaults and default loss severity using available historical loss
data for comparable Contracts and the specific characteristics of the Contracts
purchased by the Company. The Company estimates recovery rates of previously
charged off receivables using available historical recovery data. In valuing the
Residuals as of December 31, 2005, the Company estimates that charge-offs as a
percentage of the original principal balance will approximate 15.9% to 26.1%
cumulatively over the lives of the related Contracts, with recovery rates
approximating 4.0% to 5.9% of the original principal balance.

Following a securitization that is structured as a sale for financial accounting
purposes, interest income is recognized on the balance of the Residuals. In
addition, the Company will recognize as a gain additional revenue from the
Residuals if the actual performance of the Contracts is better than the
Company's estimate of the value of the residual. If the actual performance of
the Contracts were worse than the Company's estimate, then a downward adjustment
to the carrying value of the Residuals and a related impairment charge would be
required. In a securitization structured as a secured financing for financial
accounting purposes, interest income is recognized when accrued under the terms
of the related Contracts and, therefore, presents less potential for
fluctuations in performance when compared to the approach used in a transaction
structured as a sale for financial accounting purposes.

In all the Company's term securitizations, whether treated as secured financings
or as sales, the Company has sold the receivables (through a subsidiary) to the
securitization Trust. The difference between the two structures is that in
securitizations that are treated as secured financings the Company reports the
assets and liabilities of the securitization Trust on its Consolidated Balance
Sheet. Under both structures the Noteholders' and the related securitization
Trusts' recourse to the Company for failure of the Contract obligors to make
payments on a timely basis is limited to the Company's Finance receivables,
Spread Accounts and Residuals.

The Company and its subsidiaries file a consolidated federal income tax return
and combined or stand-alone state franchise tax returns for certain states. The
Company utilizes the asset and liability method of accounting for income taxes,
under which deferred income taxes are recognized for the future tax consequences
attributable to the differences between the financial statement values of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. The
Company has estimated a valuation allowance against that portion of the deferred
tax asset whose utilization in future periods is not more than likely.

In determining the possible realization of deferred tax assets, future taxable
income from the following sources are considered: (a) the reversal of taxable
temporary differences; (b) future operations exclusive of reversing temporary
differences; and (c) tax planning strategies that, if necessary, would be
implemented to accelerate taxable income into periods in which net operating
losses might otherwise expire.

See "Liquidity and Capital Resources" and Note 1 of Notes to Consolidated
Financial Statements.

RESULTS OF OPERATIONS

EFFECTS OF CHANGE IN SECURITIZATION STRUCTURE

The Company's decision in the third quarter of 2003 to structure securitization
transactions as borrowings secured by receivables for financial accounting
purposes, rather than as sales of receivables, has affected and will affect the
way in which the transactions are reported. The major effects are these: (i) the
finance receivables are shown as assets of the Company on its balance sheet;
(ii) the debt issued in the transactions is shown as indebtedness of the
Company; (iii) cash deposited to enhance the credit of the securitization
transactions ("Spread Accounts") is shown as "Restricted cash" on the Company's
balance sheet; (iv) cash collected from borrowers and other sources related to
the receivables prior to making the required payments under the Securitization
Agreements is also shown as "Restricted cash" on the Company's balance sheet;
(v) the servicing fee that the Company receives in connection with such
receivables is recorded as a portion of the interest earned on such receivables
in the Company's statements of operations; (vi) the Company has initially and
periodically recorded as expense a provision for estimated credit losses on the
receivables in the Company's statements of operations; and (vii) of scheduled
payments on the receivables and on the debt issued in the transactions, the
portion representing interest is recorded as interest income and expense,
respectively, in the Company's statements of operations.

These changes collectively represent a deferral of revenue and acceleration of
expenses, and thus a more conservative approach to accounting for the Company's
operations compared to the previous term securitization transactions, which were
accounted for as sales at the consummation of the transaction. The changes have
resulted in the Company's initially reporting lower earnings than it would have
reported if it had continued to structure its securitizations to require
recognition of gain on sale. It should also be noted that growth in the
Company's portfolio of receivables would result in an increase in expenses in
the form of provision for credit losses, and would initially have a negative
effect on net earnings. The Company's cash availability and cash requirements
should be unaffected by the change in structure.

Since July 2003, the Company has conducted 10 term securitizations of Contracts
originated under the CPS Programs structured as secured financings, generally on
a quarterly basis. In March 2004 and November 2005, the Company completed
securitizations of its retained interests in other securitizations previously
sponsored by the Company and its affiliates. The debt from the March 2004
transaction was repaid in August 2005. In June 2004, the Company completed a
term securitization of Contracts purchased in the SeaWest Asset Acquisition and
under the TFC Programs. In December 2005, the Company completed a securitization
that included Contracts purchased under the TFC Programs, the CPS Programs and
Contracts re-acquired by the Company as a result of clean-ups of prior
securitizations of its MFN and TFC subsidiaries. Since July 2003, all of the
Company's securitizations have been structured as secured financings.

THE YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004

REVENUES. During the year ended December 31, 2005, revenues were $193.7 million,
an increase of $61.0 million, or 46.0%, from the prior year revenue of $132.7
million. The primary reason for the increase in revenues is an increase in
interest income. Interest income for the year ended December 31, 2005 increased
$66.0 million, or 62.4%, to $171.8 million in 2005 from $105.8 million in 2004.
The primary reason for the increase in interest income is the growth of the
finance receivables held by consolidated subsidiaries on the Company's balance
sheet. During 2005, the Company purchased $691.3 million of Contracts and
increased its balance of receivables held by consolidated subsidiaries to $1.0
billion at December 31, 2005 from $619.8 million at December 31, 2004, an
increase of 61.4%. Offsetting the increase in interest income were decreases in
the balance of receivables from the SeaWest Acquisitions and the TFC and MFN
subsidiaries, which resulted in decreases in interest income of $1.8 million,
$2.0 million and $2.6 million, respectively.

Servicing fees totaling $6.6 million in the year ended December 31, 2005
decreased $5.8 million, or 46.7%, from $12.5 million in the same period a year
earlier. The decrease in servicing fees is the result of the change in
securitization structure and the consequent decline in the Company's managed
portfolio held by non-consolidated subsidiaries, and the decrease in the SeaWest
Third Party Portfolio. As a result of the decision to structure future
securitizations as secured financings, the Company's managed portfolio held by
non-consolidated subsidiaries will continue to decline in future periods, and
servicing fee revenue is anticipated to decline proportionately. As of December
31, 2005 and 2004, the Company's managed portfolio owned by consolidated vs.
non-consolidated subsidiaries and other third parties was as follows:

December 31, 2005 December 31, 2004
-------------------- ------------------
Amount % Amount %
---------- ------- -------- -------

Total Managed Portfolio (Dollars in millions)
Owned by Consolidated Subsidiaries ....... $ 1,000.6 89.2% $ 619.8 68.3%
Owned by Non-Consolidated Subdiaries ..... 103.1 9.2% 233.6 25.8%
SeaWest Third Party Portfolio ............ 18.0 1.6% 53.5 5.9%
---------- ------- -------- -------
Total .................................... $ 1,121.7 100.0% $ 906.9 100.0%
========== ======= ======== =======

At December 31, 2005, the Company was generating income and fees on a managed
portfolio with an outstanding principal balance approximating $1.1 billion (this
amount includes $18.0 million related to the SeaWest Third Party Portfolio on
which the Company earns only servicing fees), compared to a managed portfolio
with an outstanding principal balance approximating $906.9 million as of
December 31, 2004. As the portfolios of Contracts acquired in the MFN Merger and
the TFC Merger decrease, the portfolio of Contracts originated under the CPS
Programs continues to expand. At December 31, 2005 and 2004, the managed
portfolio composition was as follows:

December 31, 2005 December 31, 2004
-------------------- ------------------
Amount % Amount %
---------- ------- -------- -------
Originating Entity (Dollars in millions)
CPS ...................................... $ 1,017.3 90.7% $ 706.8 77.9%
TFC ...................................... 68.6 6.1% 89.4 9.9%
MFN ...................................... 2.5 0.1% 17.8 2.0%
SeaWest .................................. 15.3 1.4% 39.4 4.3%
SeaWest Third Party Portfolio ............ 18.0 1.6% 53.5 5.9%
---------- ------- -------- -------
Total .................................... $ 1,121.7 100.0% $ 906.9 100.0%
========== ======= ======== =======

Other income increased $822,000, or 5.7%, to $15.2 million during 2005 from
$14.4 million in 2004. During 2005, other income included $2.4 million from the
sale of charged off receivables acquired in the MFN Merger, the TFC Merger and
the SeaWest Asset Acquisition, compared to no such proceeds in 2004. Recoveries
on MFN receivables decreased by $3.1 million to $4.9 million in 2005, compared
to $8.0 million in 2004. Other income associated with direct mail services

increased by $765,000 to $4.5 million compared to $3.8 million in 2004. These
direct mail services are provided to the Company's Dealers and represent direct
mail products which consist of customized solicitations targeted to prospective
vehicle purchasers, in proximity to the Dealer, who are likely to meet the
Company's credit criteria.

EXPENSES. The Company's operating expenses consist primarily of employee costs
and other operating expenses, which are incurred as applications and 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 warrants
and stock options, and are one of the Company's most significant operating
expenses. These costs (other than those relating to stock options) generally
fluctuate with the level of applications and Contracts processed and serviced.

Other operating expenses consist primarily of interest expense, provisions for
credit losses, facilities expenses, telephone and other communication services,
credit services, computer services (including employee costs associated with
information technology support), professional services, marketing and
advertising expenses, and depreciation and amortization.

Total operating expenses were $190.3 million for 2005, compared to $148.6
million for 2004. The increase is primarily due to a $26.4 million increase, or
81.0% in the provision for credit losses to $59.0 million during the 2005 period
as compared to $32.6 million in the 2004 period. Interest expense increased by
$19.5 million to $51.7 million from $32.1 million in 2004, an increase of 60.7%.
The increase is primarily the result of the amount of securitization trust debt
carried on the Company's Consolidated Balance Sheet which increased along with
the growth of the Company's portfolio of finance receivables. The increase was
somewhat offset by the decrease in securitization trust debt acquired in the MFN
Merger and the TFC Merger. For 2005, the provision for credit losses and
interest expense represented 31.0% and 27.1%, respectively, of total operating
expenses, compared to 21.9% and 21.6% in 2004.

Employee costs increased to $40.4 million, or 5.8% during 2005, representing
21.2% of total operating expenses, from $38.2 million for 2004, or 25.7% of
total operating expenses. The decrease as a percentage of total operating
expenses reflects the higher total of operating expenses, primarily a result of
the increased provision for credit losses and interest expense.

General and administrative expenses increased slightly to $23.1 million, or
12.1% of total operating expenses, in 2005, as compared to $21.3 million, or
14.3% of total operating expenses, in 2004. The decrease as a percentage of
total operating expenses reflects the higher operating expenses primarily a
result of the increased provision for credit losses and interest expense. During
the year ended December 31, 2005, the Company recognized what management
believes will be a one-time, non-cash impairment charge of $1.9 million against
certain non Finance receivables related assets.

In December 2005, the Compensation Committee of the Board of Directors approved
accelerated vesting of all the outstanding stock options issued by the Company.
Options to purchase 2,113,998 shares of the Company's common stock, which would
otherwise have vested from time to time through 2010, became immediately
exercisable as a result of the acceleration of vesting. The decision to
accelerate the vesting of the options was made primarily to reduce non-cash
compensation expenses that would have been recorded in the Company's income
statement in future periods upon the adoption of Financial Accounting Standards
Board Statement No. 123R in January 2006. The Company estimates that
approximately $3.5 million of future non-cash compensation expense will be
eliminated as a result of the acceleration of vesting.

At the time of the acceleration of vesting, the Company accounted for its stock
options in accordance with Accounting Principals Board Opinion No. 25,
Accounting for Stock Issued to Employees. Consequently, the acceleration of
vesting resulted in non-cash compensation charge of $427,000 for the year ended
December 31, 2005.

For 2005, the Company recognized no impairment loss on its residual interest in
securitizations compared to $11.8 million in 2004. In 2004, such impairment loss
related to the Company's analysis and estimate of the expected ultimate
performance of the Company's previously securitized pools that are held by
non-consolidated subsidiaries and the residual interest in securitizations. The
impairment loss was a result of the actual net loss and prepayment rates
exceeding the Company's previous estimates for the Contracts held by
non-consolidated subsidiaries.

Marketing expenses increased by $3.7 million, or 43.9%, and represented 6.3% of
total operating expenses. The increase is primarily due to the increase in
Contracts purchased by the Company during the year ended December 31, 2004.

Occupancy expenses decreased by $120,000, or 3.4%, and represented 1.8% of total
operating expenses. The decrease is primarily due to the closure and sub-leasing
during 2005 of certain facilities acquired in the MFN Merger and the TFC Merger.

Depreciation and amortization expenses remained essentially unchanged at
$790,000 for 2005 and represented 0.4% of total operating expenses.

The Company would have recorded income tax expense of $1.4 million for the year
ended December 31, 2005, but the income tax expense was offset primarily by a
$1.4 million decrease in the valuation allowance that has been established to
offset the Company's deferred tax assets.

THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003

REVENUES. During the year ended December 31, 2004, revenues were $132.7 million,
an increase of $27.7 million, or 26.4%, from the prior year revenue of $105.0
million. The primary reason for the increase in revenues is an increase in
interest income. Interest income for the year ended December 31, 2004 increased
$47.7 million, or 81.9%, to $105.8 million in 2004 from $58.2 million in 2003.
The primary reasons for the increase in interest income are the change in
securitization structure implemented during the third quarter of 2003 as
described above (an increase of $56.0 million) and the interest income earned on
the portfolios of Contracts acquired in the TFC Merger (an increase of $7.2
million) and the SeaWest Asset Acquisition (an increase of $6.1 million). This
increase was partially offset by the decline in the balance of the portfolio of
Contracts acquired in the MFN Merger (resulting in a decrease of $10.1 million
in interest income) and a decrease in residual interest income (a decrease of
$11.6 million).

The increase in interest income is offset in part by the elimination of net gain
on sale of Contracts revenue and a decrease in servicing fees. As a result of
the change in securitization structure, zero net gain on sale of Contracts was
recorded in 2004, compared to $10.4 million net gain on sale in the year earlier
period.

Servicing fees totaling $12.5 million in the year ended December 31, 2004
decreased $4.6 million, or 26.8%, from $17.1 million in the same period a year
earlier. The decrease in servicing fees is the result of the change in
securitization structure and the consequent decline in the Company's managed
portfolio held by non-consolidated subsidiaries. The decrease was partially
offset by the servicing fees earned on the SeaWest Third Party Portfolio, which
totaled $2.0 million. As a result of the decision to structure future
securitizations as secured financings, the Company's managed portfolio held by
non-consolidated subsidiaries will continue to decline in future periods, and
servicing fee revenue is anticipated to decline proportionately. As of December
31, 2004 and 2003, the Company's managed portfolio owned by consolidated vs.
non-consolidated subsidiaries and other third parties was as follows:

December 31, 2004 December 31, 2003
------------------ ------------------
Amount % Amount %
-------- ------- -------- -------

Total Managed Portfolio (Dollars in Millions)
Owned by Consolidated Subsidiaries ......... $ 619.8 68.3% $ 315.6 42.6%
Owned by Non-Consolidated Subsidiaries ..... 233.6 25.8% 425.5 57.4%
SeaWest Third Party Portfolio .............. 53.5 5.9% -- 0.0%
-------- ------- -------- -------
Total ...................................... $ 906.9 100.0% $ 741.1 100.0%
======== ======= ======== =======

At December 31, 2004, the Company was generating income and fees on a managed
portfolio with an outstanding principal balance approximating $906.9 million
(this amount includes $53.5 million related to the SeaWest Third Party Portfolio
on which the Company earns only servicing fees), compared to a managed portfolio
with an outstanding principal balance approximating $741.1 million as of
December 31, 2003. As the portfolios of Contracts acquired in the MFN Merger and
the TFC Merger decrease, the portfolio of Contracts originated under the CPS
Programs continues to expand. At December 31, 2004 and 2003, the managed
portfolio composition was as follows:

December 31, 2004 December 31, 2003
------------------ ------------------
Amount % Amount %
-------- ------- -------- -------
ORIGINATING ENTITY (Dollars in Millions)
CPS .................................. $ 706.8 77.9% $ 543.8 73.4%
TFC .................................. 89.4 9.9% 123.6 16.7%
MFN .................................. 17.8 2.0% 73.7 9.9%
SeaWest .............................. 39.4 4.3% -- 0.0%
SeaWest Third Party Portfolio ........ 53.5 5.9% -- 0.0%
-------- ------- -------- -------
Total ................................ $ 906.9 100.0% $ 741.1 100.0%
======== ======= ======== =======

Other income decreased $4.9 million, or 25.6%, to $14.4 million during 2004 from
$19.3 million during 2003. The period over period decrease resulted primarily
from a sales tax refund of $3.0 received in 2003 and decreased recoveries on
previously charged off MFN Contracts, which were $8.0 million during 2004,
compared to $12.2 million for 2003.

Total operating expenses were $148.6 million for 2004, compared to $108.0
million for 2003. The increase is primarily due to a $21.2 million increase in
the provision for credit losses to $32.6 million during the 2004 period as
compared to $11.4 million in the 2003 period. Increased interest expense was
also significant.

Employee costs increased to $38.2 million during 2004, representing 25.7% of
total operating expenses, from $37.1 million for 2003, or 34.4% of total
operating expenses. The slight increase is primarily the result of staff
additions related to increased Contract purchases in 2004 (an increase of $3.9
million). This increase was partially offset by staff reductions since the MFN
Merger in 2002 related to the integration and consolidation of certain service
and administrative activities and the decline in the balance of the portfolio of
Contracts acquired in the MFN Merger (a decrease of $3.2 million). The decrease
as a percentage of total operating expenses reflects the higher total of
operating expenses, primarily a result of the increased provision for credit
losses and interest expense.

General and administrative expenses remained essentially unchanged at $21.3
million, or 14.3% of total operating expenses, in 2004, as compared to $21.3
million, or 19.7% of total operating expenses, in 2003. The decrease as a
percentage of total operating expenses reflects the higher operating expenses
primarily a result of the provision for credit losses and interest expense.

Interest expense for 2004 increased $8.3 million, or 34.7%, to $32.1 million,
compared to $23.9 million in 2003. The increase is primarily the result of
changes in the amount and composition of securitization trust debt carried on
the Company's Consolidated Balance Sheet. Such debt increased as a result of the
change in securitization structure implemented beginning in July 2003, the TFC
Merger in May 2003 and the SeaWest Asset Acquisition in April 2004 (a combined
increase of approximately $10.3 million), partially offset by the decrease in
the balance of the securitization trust debt acquired in the MFN Merger
(resulting in a decrease of approximately $2.0 million in interest expense).

Impairment loss increased by $7.7 million, or 190.0%, to $11.8 million in 2004
as compared to $4.1 million in 2003. Such impairment loss relates to the
Company's analysis and estimate of the expected ultimate performance of the
Company's previously securitized pools that are held by non-consolidated
subsidiaries and the residual interest in securitizations. The impairment loss
is a result of the actual net loss and prepayment rates exceeding the Company's
previous estimates for the Contracts held by non-consolidated subsidiaries.

Marketing expenses increased by $3.0 million, or 55.0%, and represented 5.6% of
total operating expenses. The increase is primarily due to the increase in
Contracts purchased by the Company during the year ended December 31, 2004.

Occupancy expenses decreased by $410,000, or 10.4%, and represented 2.4% of
total operating expenses. The decrease is primarily due to the closure and
sub-leasing during 2004 of certain facilities acquired in the MFN Merger and the
TFC Merger.

Depreciation and amortization expenses decreased by $215,000, or 21.5%, to
$785,000 from $1.0 million.

No income tax benefit was recorded in 2004 as compared to $3.4 million recorded
in 2003 periods. The 2003 benefit is primarily the result of the resolution of
certain Internal Revenue Service examinations of previously filed MFN tax
returns, resulting in a tax benefit of $4.9 million, and other state tax matters
resulting in a tax provision of $1.5 million. The Company does not expect any
comparable income tax benefit in future periods.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

parties, customer payments of principal and interest on finance receivables,
fees for origination of Contracts, and releases of cash from securitized
portfolios of Contracts in which the Company has retained a residual ownership
interest and from the Spread Accounts associated with such pools. The Company's
primary uses of cash have been the purchases of Contracts, repayment of amounts
borrowed under lines of credit and otherwise, operating expenses such as
employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of Spread Accounts and initial
overcollateralization, if any, and the increase of Credit Enhancement to
required levels in securitization transactions, and income taxes. There can be
no assurance that internally generated cash will be sufficient to meet the
Company's cash demands. The sufficiency of internally generated cash will depend
on the performance of securitized pools (which determines the level of releases
from those portfolios and their related Spread Accounts), the rate of expansion
or contraction in the Company's managed portfolio, and the terms upon which the
Company is able to acquire, sell, and borrow against Contracts.

Net cash provided by operating activities for the years ended December 31, 2005,
2004 and 2003 was $36.7 million, $9.9 million and $98.9 million, respectively.
Cash from operating activities is generally provided by the net releases from
the Company's securitization Trusts. The increase in 2005 vs. 2004 is due in
part to the Company's increased net earnings before the significant increase in
the provision for credit losses. The decrease in 2004 vs. 2003 is primarily the
result of the Company's decision, in July 2003, to treat all of its future
securitizations as secured financings. As a result, 2005 and 2004 include no
activity related to Contracts held for sale.

Net cash used in investing activities for the years ended December 31, 2005,
2004 and 2003, was $411.7 million, $314.0 million, and $178.9 million,
respectively. Cash used in investing activities has generally related to
purchases of Contracts, the cost of the SeaWest Asset Acquisition and the
acquisition of TFC. Purchase of finance receivables held for investment were
$691.3, $506.0 and $175.3 in 2005, 2004 and 2003, respectively. Cash used in the
TFC Merger, net of the cash acquired in the transaction, totaled $10.2 million
for the year ended December 31, 2003.

Net cash provided by financing activities for the year ended December 31, 2005,
was $378.4 million compared with $285.3 million in 2004 and $80.3 million for
the year ended December 31, 2003. Cash used or provided by financing activities
is primarily attributable to the issuance or repayment of debt. In connection
with the TFC Merger the Company assumed securitization trust debt related to
three securitization transactions held by consolidated subsidiaries and assumed
additional subordinated debt. With the change in the securitization structure
implemented in the third quarter of 2003, $662.4 million of securitization trust
debt was issued in 2005 as compared to $474.7 million in 2004 and $154.4 million
in 2003.

Contracts are purchased from Dealers for a cash price approximating their
principal amount, adjusted for an acquisition fee which may either increase or
decrease the Contract purchase price, and generate cash flow over a period of
years. As a result, the Company has been dependent on warehouse credit
facilities to purchase Contracts, and on the availability of cash from outside
sources in order to finance its continuing operations, as well as to fund the
portion of Contract purchase prices not financed under revolving warehouse
credit facilities. As of December 31, 2005, the Company had $350 million in
warehouse credit capacity, in the form of a $200 million facility and a $150
million facility. The first facility provides funding for Contracts purchased
under the TFC Programs while both warehouse facilities provide funding for
Contracts purchased under the CPS Programs. A third facility in the amount of
$125 million, which the Company utilized to fund Contracts under the CPS and TFC
Programs, was terminated by the Company on June 29, 2005.

The $150 million warehouse facility is structured to allow CPS to fund a portion
of the purchase price of Contracts by drawing against a floating rate variable
funding note issued by its consolidated subsidiary Page Three Funding, LLC. This
facility was established on November 15, 2005, and expires on November 14, 2006,
although it is renewable with the mutual agreement of the parties. Up to 80% of
the principal balance of Contracts may be advanced to the Company under this
facility, subject to collateral tests and certain other conditions and
covenants. Notes under this facility accrue interest at a rate of one-month
LIBOR plus 2.00% per annum. At December 31, 2005, $34.5 million was outstanding
under this facility.

The $200 million warehouse facility is similarly structured to allow CPS to fund
a portion of the purchase price of Contracts by drawing against a floating rate
variable funding note issued by its consolidated subsidiary Page Funding LLC.
This facility was entered into on June 30, 2004. On June 29, 2005 the facility
was increased from $100 million to $125 million and further amended to provide
for funding for Contracts purchased under the TFC Programs. It was increased
again to $200 million on August 31, 2005. Approximately 77.0% of the principal
balance of Contracts may be advanced to the Company under this facility, subject
to collateral tests and certain other conditions and covenants. Notes under this
facility accrue interest at a rate of one-month LIBOR plus 1.50% per annum. The
lender has annual termination options at its sole discretion on each June 30
through 2007, at which time the agreement expires. At December 31, 2005,
$836,000 was outstanding under this facility, compared to zero at December 31,
2004.

The $125 million warehouse facility was structured to allow the Company to fund
a portion of the purchase price of Contracts by drawing against a floating rate
variable funding note issued by its consolidated subsidiary CPS Warehouse Trust.
This facility was established on March 7, 2002, and the maximum amount was
increased to $125 million in November 2002. Up to 73.0% of the principal balance
of Contracts could have been advanced to the Company under this facility bore
interest at a rate of one-month commercial paper plus 1.50% per annum. This
facility was due to expire on April 11, 2006, but the Company elected to
terminate it on it June 29, 2005. At December 31, 2004, $34.3 million was
outstanding under this facility.

The Company securitized $674.4 million of Contracts in five private placement
transactions during the year ended December 31, 2005 compared to $463.9 million
in five private placements during 2004. All of these transactions were
structured as secured financings and, therefore, resulted in no gain on sale.
During the year ended December 31, 2003, the Company securitized $416.9 million
of Contracts in four private placement transactions. The first two such
transactions of 2003 were structured as sales for financial accounting purposes,
resulting in a gain on sale of $6.4 million (net of a negative fair value
adjustment of $4.1 million related to the performance of previously securitized
pools). The final two transactions of 2003 were structured as secured financings
and, therefore, resulted in no gain on sale. In March 2004, a wholly-owned
bankruptcy remote consolidated subsidiary of the Company issued $44 million of
asset-backed notes secured by its retained interest in eight term securitization
transactions. The notes had an interest rate of 10% per annum and a final
maturity in October 2009 and were required to be repaid from the distributions
on the underlying retained interests. In connection with the issuance of the
notes, the Company incurred and capitalized issuance costs of $1.3 million. The
Company repaid the notes in full in August 2005. In November 2005, the Company
completed a similar securitization whereby a wholly-owned bankruptcy remote
consolidated subsidiary of the Company issued $45.8 million of asset-backed
notes secured by its retained interest in 10 term securitization transactions.
These notes, which bear interest at a blended interest rate of 8.36% per annum
and have a final maturity in July 2011, are required to be repaid from the
distributions on the underlying retained interests. In connection with the
issuance of the notes, the Company incurred and capitalized issuance costs of
$915,000.

For the portfolio owned by non-consolidated subsidiaries, cash used to increase
Credit Enhancement amounts to required levels for the years ended December 31,
2005, 2004 and 2003 was zero, $2.9 million, $20.9 million, respectively. Cash
released from Trusts and their related Spread Accounts to the Company related to
the portfolio owned by consolidated subsidiaries for the years ended December
31, 2005, 2004 and 2003 was $23.1 million, $21.4 million and $25.9 million,
respectively. Changes in the amount of Credit Enhancement required for term
securitization transactions and releases from Trusts and their related Spread
Accounts are affected by the relative size, seasoning and performance of the
various pools of Contracts securitized that make up the Company's managed
portfolio to which the respective Spread Accounts are related. During the years
ended December 31, 2005 and December 31, 2004 the Company made no initial
deposits to Spread Accounts and funded no initial overcollateralization related
to its term securitization transactions owned by non-consolidated subsidiaries,
compared to $18.7 million in 2003. The acquisition of Contracts for subsequent
sale in securitization transactions, and the need to fund Spread Accounts and
initial overcollateralization, if any, and increase Credit Enhancement levels
when those transactions take place, results in a continuing need for capital.
The amount of capital required is most heavily dependent on the rate of the
Company's Contract purchases, the required level of initial Credit Enhancement
in securitizations, and the extent to which the previously established Trusts
and their related Spread Accounts either release cash to the Company or capture
cash from collections on securitized Contracts. The Company is currently limited
in its ability to

purchase Contracts due to certain liquidity constraints. As of December 31,
2005, the Company had cash on hand of $17.8 million and available Contract
purchase commitments from its warehouse credit facilities of $314.6 million. The
Company's plans to manage the need for liquidity include the completion of
additional term securitizations that would provide additional credit
availability from the warehouse credit facilities, and matching its levels of
Contract purchases to its availability of cash. There can be no assurance that
the Company will be able to complete term securitizations on favorable economic
terms or that the Company will be able to complete term securitizations at all.
If the Company is unable to complete such securitizations, interest income and
other portfolio related income would decrease.

The Company's primary means of ensuring that its cash demands do not exceed its
cash resources is to match its levels of Contract purchases to its availability
of cash. The Company's ability to adjust the quantity of Contracts that it
purchases and securitizes will be subject to general competitive conditions and
the continued availability of warehouse credit facilities. There can be no
assurance that the desired level of Contract acquisition can be maintained or
increased. While the specific terms and mechanics of each Spread Account vary
among transactions, the Company's Securitization Agreements generally provide
that the Company will receive excess cash flows only if the amount of Credit
Enhancement has reached specified levels and/or the delinquency, defaults or net
losses related to the Contracts in the pool are below certain predetermined
levels. In the event delinquencies, defaults or net losses on the Contracts
exceed such levels, the terms of the securitization: (i) may require increased
Credit Enhancement to be accumulated for the particular pool; (ii) may restrict
the distribution to the Company of excess cash flows associated with other
pools; or (iii) in certain circumstances, may permit the insurers to require the
transfer of servicing on some or all of the Contracts to another servicer. There
can be no assurance that collections from the related Trusts will continue to
generate sufficient cash.

Certain of the Company's securitization transactions and the warehouse credit
facilities contain various financial covenants requiring certain minimum
financial ratios and results. Such covenants include maintaining minimum levels
of liquidity and net worth and not exceeding maximum leverage levels and maximum
financial losses. In addition, certain securitization and non-securitization
related debt contain cross-default provisions that would allow certain creditors
to declare a default if a default occurred under a different facility.

The Servicing Agreements of the Company's securitization transactions are
terminable by the Note Insurers in the event of certain defaults by the Company
and under certain other circumstances. Were a Note Insurer in the future to
exercise its option to terminate the Servicing Agreements, such a termination
would have a material adverse effect on the Company's liquidity and results of
operations. The Company continues to receive Servicer extensions on a monthly
and/or quarterly basis, pursuant to the Servicing Agreements.

CONTRACTUAL OBLIGATIONS

The following table summarizes the Company's material contractual obligations as
of December 31, 2005 (dollars in thousands):

PAYMENT DUE BY PERIOD(1)
--------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
---------- ---------- ---------- ---------- ----------

Long Term Debt ....... $ 58,866 $ 55,854 $ 2,642 $ 279 $ 91
Operating Leases ..... $ 11,085 $ 4,353 $ 6,188 $ 545 $ --

-------------------
(1)SECURITIZATION TRUST DEBT, IN THE AGGREGATE AMOUNT OF $924.0 MILLION AS OF
DECEMBER 31, 2005, IS OMITTED FROM THIS TABLE BECAUSE IT BECOMES DUE AS AND WHEN
THE RELATED RECEIVABLES BALANCE IS REDUCED. EXPECTED PAYMENTS, WHICH WILL DEPEND
ON THE PERFORMANCE OF SUCH RECEIVABLES, AS TO WHICH THERE CAN BE NO ASSURANCE,
ARE $328.7 MILLION IN 2006, $223.7 MILLION IN 2007, $160.5 MILLION IN 2008,
$114.6 MILLION IN 2009, $75.1 MILLION IN 2010, AND $21.4 MILLION IN 2011.
RESIDUAL INTEREST FINANCING, OF $43.7 MILLION AS OF DECEMBER 31, 2005, IS ALSO
OMITTED FROM THIS TABLE BECAUSE IT BECOMES DUE AS AND WHEN THE RELATED RESIDUAL
INTEREST AND SPREAD ACCOUNT BALANCES ARE REDUCED. EXPECTED PAYMENTS, WHICH WILL
DEPEND ON THE PERFORMANCE OF THE RELATED RECEIVABLES, AS TO WHICH THERE CAN BE
NO ASSURANCE, ARE $18.0 MILLION IN 2006, $14.4 MILLION IN 2007, $7.6 MILLION IN
2008 AND $3.7 MILLION IN 2009.

Long term debt includes senior secured, subordinated debt and notes payable.

CREDIT FACILITIES

The terms on which credit has been available to the Company for purchase of
Contracts have varied over the three-year period ended December 31, 2005, as
shown in the following recapitulation:

In November 2000, the Company (through its subsidiary CPS Funding LLC) entered
into a floating rate variable note purchase facility under which up to $75
million of notes could be outstanding at any time subject to collateral tests
and other conditions. The Company used funds derived from this facility to
purchase Contracts under the CPS Programs, which were pledged to secure the
notes. The collateral tests and other conditions generally allowed the Company
to borrow up to approximately 72.5% of the price paid for such Contracts. Notes
issued under this facility bore interest at one-month LIBOR plus 0.75% per
annum. This facility expired on February 21, 2004.

Additionally, in March 2002, the Company (through its subsidiary CPS Warehouse
Trust) entered into a second floating rate variable note purchase facility,
under which up to $125.0 million of notes could be outstanding at any time,
subject to collateral tests and other conditions. The Company used funds derived
from this facility to purchase Contracts under the CPS Programs and the TFC
Programs, which were pledged to secure the notes. The collateral tests and other
conditions generally allowed the Company to borrow up to approximately 73% of
the price paid for such Contracts for Contracts purchased under the CPS
Programs. Notes issued under this facility bore interest at commercial paper
plus 1.18% per annum. During November 2004, this facility was amended to allow
the Company to borrow up to approximately 70% for Contracts purchased under the
TFC Programs. This facility was due to expire on April 11, 2006, but the Company
elected to terminate it on June 29, 2005.

In connection with the TFC Merger in May 2003, the Company (through its
subsidiary TFC Warehouse I LLC) entered into a third floating rate variable note
purchase facility, under which up to $25.0 million of notes could be outstanding
at any time, subject to collateral tests and other conditions. The Company used
funds derived from this facility to purchase Contracts under the TFC Programs,
which were pledged to secure the notes. The collateral tests and other
conditions generally allowed the Company to borrow up to approximately 71% of
the price paid for such Contracts. Notes issued under this facility bore
interest at LIBOR plus 1.75% per annum. This facility expired on June 24, 2004.

In June 2004, the Company (through its subsidiary Page Funding LLC) entered into
a floating rate variable note purchase facility. Up to $200 million of notes may
be outstanding under this facility at any time subject to certain collateral
tests and other conditions. The Company uses funds derived from this facility to
purchase Contracts under the CPS Programs, which are pledged to secure the
notes. The collateral tests and other conditions generally allow the Company to
borrow up to approximately 77.0% of the price paid for such Contracts. Notes
issued under this facility bear interest at one-month LIBOR plus 1.50% per
annum. The balance of notes outstanding related to this facility at December 31,
2005 was $836,000.

In November 2005, the Company (through its subsidiary Page Three Funding LLC)
entered into a floating rate variable note purchase facility. Up to $150 million
of notes may be outstanding under this facility at any time subject to certain
collateral tests and other conditions. The Company uses funds derived from this
facility to purchase Contracts under the CPS Programs, which are pledged to
secure the notes. The collateral tests and other conditions generally allow the
Company to borrow up to approximately 80.0% of the price paid for such
Contracts. Notes issued under this facility bear interest at one-month LIBOR
plus 2.00 % per annum. The balance of notes outstanding related to this facility
at December 31, 2005 was $34.5 million.

CAPITAL RESOURCES

As noted above, $55.8 million of long-term debt matures prior to December 15,
2006, although the Company repaid $14.0 million of such debt in January 2006.
The Company plans to repay its long-term debt from a combination of the
following: (i) additional proceeds from the offering of renewable notes; (ii) a
possible transaction similar to the financing that it undertook in March 2004
and November 2005 where the Company issued notes secured by its residual
interests in securitizations; and (iii) possible senior secured financing
similar to its existing outstanding senior secured financing. There can be no
assurance that the Company will be able to complete these transactions.
Securitization trust debt is repaid from collections on the related receivables,
and becomes due in accordance with its terms as the principal amount of the
related receivables is reduced. Although the securitization trust debt also has
alternative maximum maturity dates, those dates are significantly later than the
dates at which repayment of the related receivables is anticipated, and at no
time in the Company's history have any of its sponsored asset-backed securities
reached those alternative maximum maturities.

The acquisition of Contracts for subsequent transfer in securitization
transactions, and the need to fund Spread Accounts and initial
overcollateralization, if any, when those transactions take place, results in a
continuing need for capital. The amount of capital required is most heavily
dependent on the rate of the Company's Contract purchases, the required level of
initial credit enhancement in securitizations, and the extent to which the
Trusts and related Spread Accounts either release cash to the Company or capture
cash from collections on securitized Contracts. The Company plans to adjust its
levels of Contract purchases so as to match anticipated releases of cash from
the Trusts and related Spread Accounts with its capital requirements.

CAPITALIZATION

Over the three-year period ended December 31, 2005 the Company has managed its
capitalization by issuing and restructuring debt as summarized in the following
table:

YEAR ENDED DECEMBER 31,
-----------------------------------
2005 2004 2003
--------- --------- ---------
(IN THOUSANDS)
RESIDUAL INTEREST FINANCING:

Beginning balance ............................. $ 22,204 $ -- $ --
Issuances .................................. 45,800 44,000 --
Payments ................................... (24,259) (21,796) --
--------- --------- ---------
Ending balance ................................ $ 43,745 $ 22,204 $ --
========= ========= =========

SECURITIZATION TRUST DEBT:
Beginning balance ............................. $ 542,815 $ 245,118 $ 71,630
Assumption in connection with TFC Merger ... -- -- 115,597
Issuances .................................. 662,350 474,720 154,375
Payments ................................... (281,139) (177,023) (96,484)
--------- --------- ---------
Ending balance ................................ $ 924,026 $ 542,815 $ 245,118
========= ========= =========

SENIOR SECURED DEBT:
Beginning balance ............................. $ 59,829 $ 49,965 $ 50,072
Issuances .................................. -- 25,000 25,000
Payments ................................... (19,829) (15,136) (25,107)
--------- --------- ---------
Ending balance ................................ $ 40,000 $ 59,829 $ 49,965
========= ========= =========

SUBORDINATED DEBT:
Beginning balance ............................. $ 15,000 $ 35,000 $ 36,000
Payments ................................... (1,000) (20,000) (1,000)
--------- --------- ---------
Ending balance ................................ $ 14,000 $ 15,000 $ 35,000
========= ========= =========

SUBORDINATED RENEWABLE NOTES DEBT:
Beginning balance ............................. $ -- $ -- $ --
Issuances .................................. 4,685 -- --
Payments ................................... (30) -- --
--------- --------- ---------
Ending balance ................................ $ 4,655 $ -- $ --
========= ========= =========

RELATED PARTY DEBT:
Beginning balance ............................. $ -- $ 17,500 $ 17,500
Non-cash conversion ........................ -- (1,000) --
Payments ................................... -- (16,500) --
--------- --------- ---------
Ending balance ................................ $ -- $ -- $ 17,500
========= ========= =========

During the first quarter of 2001, the Company purchased a total of $8,000,000 of
outstanding indebtedness held by Levine Leichtman Capital Partners II, L.P.
("LLCP") and Stanwich Financial Services Corp. ("SFSC"). The Company purchased
and retired $4,000,000 of subordinated debt held by SFSC in exchange for payment
of $3,920,000, and purchased and retired $4,000,000 of senior secured debt held
by LLCP in exchange for payment of $4,200,000. The LLCP debt by its terms called
for a prepayment penalty of 3% (or $120,000); the additional 2% (or $80,000)
paid in connection with its February 2001 prepayment was absorbed by SFSC.

In March 2002, the Company and LLCP entered into an additional series of
agreements under which LLCP provided additional funding to enable the Company to
acquire MFN Financial Corporation. Under the March 2002 agreements, the Company
borrowed $35 million from LLCP as a bridge note (the "Bridge Note") and
approximately $8.5 million (the "Term C Note") on a deemed principal amount of

approximately $11.2 million. The Bridge Note requires principal payments of $2.0
million a month, which began in June 2002, with a final balloon payment in the
amount of $17.0 million, which was made pursuant to the terms of the Bridge Note
in February 2003. The Term C Note repayment schedule is based on the performance
of a certain securitized pool. As the subordinated Note of the pool is repaid
from the Trust, principal payments are due on the Term C Note. The maturity date
of the Term C Note was March 2008. Interest was due monthly on the Bridge Note
at a rate of 13.5% per annum and on the Term C Note at a rate of 12.0% per
annum. In connection with the March 2002 agreements and the acquisition of MFN,
the Company paid LLCP a structuring fee of $1.75 million and an investment
banking fee of $1.0 million, and paid LLCP's out-of-pocket expenses of
approximately $315,000. In addition, the Company paid LLCP certain other fees
and interest amounting to $426,181. Approximately $1.4 million of the fees and
other amounts paid to LLCP were deferred as financing costs and are being
amortized over the life of the related debt. The remaining fees and other costs
were included in the purchase price of MFN.

At the time of the MFN Merger, MFN had outstanding $22.5 million in principal
amount of senior subordinated debt, which was due and repaid in full on March
23, 2002. Such debt bore interest at the rate of 11.00% per annum, payable
quarterly in arrears. At the time of the TFC Merger, TFC had outstanding $6.3
million in principal amount of subordinated debt, which the Company assumed as
part of the TFC Merger. The debt bore interest at the rate of 13.25% per annum
payable monthly in arrears, required monthly amortization and was repaid in full
in June 2005.

On February 3, 2003, the Company borrowed $25.0 million from LLCP, net of fees
and expenses of $1.05 million. The indebtedness, represented by the "Term D
Note," was originally due in April 2003, with Company options to extend the
maturity to May 2003 and January 2004, upon payment of successive extension fees
of $125,000. The Company has paid the fees to extend the maturity to January
2004. Interest on the Term D Note is payable monthly at rates that averaged
4.79% per annum through June 30, 2003, and 12.0% per annum thereafter. In a
separate transaction, the Bridge Note issued to LLCP in connection with the
acquisition of MFN, in an original principal amount of $35.0 million, was due on
February 28, 2003. The outstanding principal balance of $17.0 million was paid
in February 2003. In addition, the maturity of the Term B Note was extended in
October 2003 from November 2003 to January 2004. The Company repaid in full the
Term C Note on January 29, 2004 and repaid $10.0 million of the Term D Note on
January 15, 2004. In addition, on January 29, 2004 the maturities of the Term B
and the Term D Note were extended to December 15, 2005 and the coupons on both
notes were decreased to 11.75% per annum from 14.50% and 12.00%, respectively.
The Company paid LLCP fees equal to $921,000 for these amendments, which will be
amortized over the remaining life of the notes. The Company repaid the remaining
$19.8 million on the Term B Note in December 2005. On December 13, 2005 the
maturity of the Term D Note was extended to December 18, 2006. The Company paid
LLCP fees equal to $150,000 for this amendment, which will be amortized over the
remaining life of the note. As of December 31, 2005, the outstanding principal
balance of the Term D Note was $15.0 million.

On May 28, 2004 and June 25, 2004, the Company borrowed $15 million and $10
million, respectively, from LLCP. The indebtedness, represented by the "Term E
Note," and the "Term F Note," respectively, bears interest at 11.75% per annum.
Both the Term E Note and the Term F Note mature two years from their respective
funding dates. As of December 31, 2005, the outstanding principal balances of
the Term E Note and the Term F Note were $15.0 million and $10.0 million,
respectively.

In the second quarter of 2004, the Company retired an aggregate of $37.5 million
of long-term indebtedness, comprising (i) $20.0 million of partially convertible
debt ("Participating Equity Notes" or "PENs") issued in an April 1997 public
offering and bearing interest at 10.50% per annum, (ii) $15.0 million of debt
issued in June 1997 to SFSC on terms similar to those of the PENs, but bearing
interest at 9.00% per annum, (iii) $1.0 million of convertible debt issued in
1998 to a director of the Company, bearing interest at 12.50% per annum, and
(iv) $1.5 million of debt issued in 1999 to SFSC, bearing interest at 14.50% per
annum. The indebtedness to the director was converted, in accordance with its
terms, into common stock at the rate of $3.00 per share; the remainder of such
indebtedness was repaid.

The Company must comply with certain affirmative and negative covenants related
to debt facilities, which require, among other things, that the Company maintain
certain financial ratios related to liquidity, net worth, capitalization,
investments, acquisitions, restricted payments and certain dividend
restrictions. As a result of waivers and amendments to covenants related to
securitization and non-securitization related debt throughout 2004 and 2005, the
Company was in compliance with all such covenants as of December 31, 2005. In
addition, certain securitization and non-securitization related debt contain
cross-default provisions that would allow certain creditors to declare default
if a default occurred under a different facility.

In July 2000, the Board of Directors authorized the purchase of up to $5,000,000
of outstanding debt and equity securities of the Company, inclusive of the
mandatory annual purchase or redemption of $1,000,000 of the Company's
outstanding "RISRS" subordinated debt securities, due 2006. In October 2002, the
Board of Directors authorized the purchase of an additional $5,000,000 of
outstanding debt or equity securities. In October 2004, the Board of Directors
authorized the purchase of an additional $5,000,000 of outstanding debt or
equity securities. As of December 31, 2005, the Company had purchased $5.0
million in principal amount of the RISRS, and $5.0 million of its common stock,
representing 2,365,695 shares.

FORWARD-LOOKING STATEMENTS

This report on Form 10-K includes certain "forward-looking statements,"
including, without limitation, the statements or implications to the effect that
prepayments as a percentage of original balances will approximate 22.2% to 35.8%
cumulatively over the lives of the related Contracts, that charge-offs as a
percentage of original balances will approximate 15.9% to 26.1% cumulatively
over the lives of the related Contracts, with recovery rates approximating 4.0%
to 5.9% of original principal balances. Other forward-looking statements may be
identified by the use of words such as "anticipates," "expects," "plans,"
"estimates," or words of like meaning. As to the specifically identified
forward-looking statements, factors that could affect charge-offs and recovery
rates include changes in the general economic climate, which could affect the
willingness or ability of obligors to pay pursuant to the terms of Contracts,
changes in laws respecting consumer finance, which could affect the ability of
the Company to enforce rights under Contracts, and changes in the market for
used vehicles, which could affect the levels of recoveries upon sale of
repossessed vehicles. Factors that could affect the Company's revenues in the
current year include the levels of cash releases from existing pools of
Contracts, which would affect the Company's ability to purchase Contracts, the
terms on which the Company is able to finance such purchases, the willingness of
Dealers to sell Contracts to the Company on the terms that it offers, and the
terms on which the Company is able to complete term securitizations once
Contracts are acquired. Factors that could affect the Company's expenses in the
current year include competitive conditions in the market for qualified
personnel, and interest rates (which affect the rates that the Company pays on
Notes issued in its securitizations). The statements concerning the Company
structuring future securitization transactions as secured financings and the
effects of such structures on financial items and on the Company's future
profitability also are forward-looking statements. Any change to the structure
of the Company's securitization transaction could cause such forward-looking
statements not to be accurate. Both the amount of the effect of the change in
structure on the Company's profitability and the duration of the period in which
the Company's profitability would be affected by the change in securitization
structure are estimates. The accuracy of such estimates will be affected by the
rate at which the Company purchases and sells Contracts, any changes in that
rate, the credit performance of such Contracts, the financial terms of future
securitizations, any changes in such terms over time, and other factors that
generally affect the Company's profitability.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123(R) (as amended), "Share-Based Payment" ("FAS 123(R)" or the
"Statement"). FAS 123 (R) and related interpretations require that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. FAS 123(R) permits entities to use any option-pricing model that meets
the fair value objective in the Statement. (Modifications of share-based
payments will be treated as replacement awards with the cost of the incremental
value recorded in the financial statements.)

The Statement is effective at the beginning of 2006 and will therefore be
effective for the Company's first quarter of 2006. As of the effective date, the
Company will apply the Statement using a modified version of prospective
application. Under that transition method, compensation cost is recognized for
(1) all awards granted after the required effective date and to awards modified,
cancelled, or repurchased after that date and (2) the portion of prior awards
for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated for pro forma disclosures under
SFAS 123. As a result of the acceleration of vesting on all options outstanding
in December 2005 (see Note 9) there will be no effect on the Company's adoption
of the statement in 2006 relating to such options currently outstanding.

Statement 155 allows financial instruments that have embedded derivatives to be
accounted for as a whole (eliminating the need to bifurcate the derivative from
its host) if the holder elects to account for the whole instrument on a fair
value basis. The Statement also amends Statement 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument.

Statement 155 is effective for all financial instruments acquired or issued
after January 1, 2007. The Company does not believe the adoption of this
statement will have a material effect on the Company's financial position or
operations.

OFF-BALANCE SHEET ARRANGEMENTS

Prior to July 2003, the Company structured its securitization transactions to
meet the accounting criteria for sales of finance receivables. In this structure
the notes issued by the Company's special purpose subsidiary do not appear as
debt on the Company's consolidated balance sheet. See Critical Accounting
Policies for a detailed discussion of the Company's securitization structure.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company is subject to interest rate risk during the period between when
Contracts are purchased from Dealers and when such Contracts become part of a
term securitization. Specifically, the interest rates on the warehouse
facilities are adjustable while the interest rates on the Contracts are fixed.
Historically, the Company's term securitization facilities have had fixed rates
of interest. To mitigate some of this risk, the Company has in the past, and
intends to continue to, structure certain of its securitization transactions to
include pre-funding structures, whereby the amount of Notes issued exceeds the
amount of Contracts initially sold to the Trusts. In pre-funding, the proceeds

from the pre-funded portion are held in an escrow account until the Company
sells the additional Contracts to the Trust in amounts up to the balance of the
pre-funded escrow account. In pre-funded securitizations, the Company locks in
the borrowing costs with respect to the Contracts it subsequently delivers to
the Trust. However, the Company incurs an expense in pre-funded securitizations
equal to the difference between the money market yields earned on the proceeds
held in escrow prior to subsequent delivery of Contracts and the interest rate
paid on the Notes outstanding, the amount as to which there can be no assurance.

The following table provides information on the Company's interest
rate-sensitive financial instruments by expected maturity date as of December
31, 2005:

2006 2007 2008 2009 2010 THEREAFTER FAIR VALUE
----------- ----------- ----------- ----------- ---------- ---------- ----------
(In thousands)

Assets:
Finance receivables(1) ........ $ 346,881 $ 265,019 $ 190,962 $ 138,300 $ 90,723 $ 26,741 $1,058,626
Weighted average fixed
effective interest rate ... 18.29% 18.56% 18.56% 18.49% 18.44% 18.37%

LIABILITIES:
Warehouse lines
of credit .................. 35,350 -- -- -- -- -- 35,350
Weighted average variable
effective interest rate.... 6.36%
Residual interest
financing .................. 17,986 14,435 7,644 3,680 -- -- 43,745
Fixed interest rate ....... 8.36% 8.36% 8.36% 8.36%
Securitization
trust debt ................. 328,007 224,651 160,530 113,996 75,101 21,741 914,901
Weighted average fixed
effective interest rate ... 3.95% 4.09% 4.13% 4.28% 4.36% 4.73%
Senior secured debt ........... 40,000 -- -- -- -- -- 40,000
Fixed interest rate ....... 11.75%
Subordinated renewable notes .. 1,643 909 1,562 171 279 91 4,655
Weighted average fixed
effective interest rate ... 6.75% 8.42% 9.61% 9.10% 10.10% 9.53%
Subordinated debt ............. 14,000 -- -- -- -- -- 14,000
Fixed interest rate ....... 12.50%

-------------------
(1) INCLUDES APPROXIMATELY $58.0 MILLION IN UNFUNDED CONTRACTS THAT ARE INCLUDED
IN RESTRICTED CASH AT DECEMBER 31, 2005 AS A RESULT OF A PREFUNDING STRUCTURE.

Much of the information used to determine fair value is highly subjective. When
applicable, readily available market information has been utilized. However, for
a significant portion of the Company's financial instruments, active markets do
not exist. Therefore, considerable judgments were required in estimating fair
value for certain items. The subjective factors include, among other things, the
estimated timing and amount of cash flows, risk characteristics, credit quality
and interest rates, all of which are subject to change. Since the fair value is
estimated as of the dates shown in the table, the amounts that will actually be
realized or paid at settlement or maturity of the instruments could be
significantly different.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This report includes Consolidated Financial Statements, notes thereto and an
Independent Auditors' Report, at the pages indicated below. Certain unaudited
quarterly financial information is included in the Notes to Consolidated
Financial Statements, as Note 18.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On October 16, 2004, the Company notified KPMG LLP ("KPMG") that KPMG's
appointment as the Company's independent auditor would cease upon completion of
the review of the Company's consolidated financial statements as of and for the
three- and nine- month periods ended September 30, 2004. The Audit Committee of
the Board of Directors of the Company approved the decision to terminate such
appointment. KPMG's audit reports on the Company's financial statements for the
two fiscal years ended December 31, 2003 and 2002, respectively, did not contain
an adverse opinion or a disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.

On November 15, 2004, KPMG completed its review of the Company's consolidated
financial statements as of and for the three- and nine- month periods ended
September 30, 2004. KPMG's appointment as the Company's independent auditor
ended at that time. On November 23, 2004 the Company engaged McGladrey & Pullen,
LLP to perform the audit of the Company's consolidated financial statements as
of and for the year ending December 31, 2004.

In connection with its audits of the Company's financial statements for the two
fiscal years ended December 31, 2002 and 2003, and through November 15, 2004:

a) there were no disagreements between the Company and KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to KPMG's satisfaction,
would have caused KPMG to make reference to the subject matter of the
disagreements in connection with its opinions on the financial statements; and

b) there were no reportable events (as specified in Item 304(a)(1)(v) of
Regulation S-K).

ITEM 9A. CONTROLS AND PROCEDURES

QUARTERLY EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL CONTROLS

The Company maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of its published financial
statements and other disclosures included in this report. As of the end of the
period covered by this report, The Company evaluated the effectiveness of the
design and operation of such disclosure controls and procedures. Based upon that
evaluation, the principal executive officer (Charles E. Bradley, Jr.) and the
principal financial officer (Robert E. Riedl) concluded that the disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, material information relating to the Company that
is required to be included in its reports filed under the Securities Exchange
Act of 1934. There have been no significant changes in our internal controls
over financial reporting during our most recently completed fiscal quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

CEO AND CFO CERTIFICATIONS

Immediately following the Signatures section of this Annual Report, there are
two separate forms of "Certifications" of the CEO and the CFO. The first form of
Certification (the Rule 13a-14 Certification) is required by Rule 13a-14 of the
Securities Exchange Act of 1934 (the "Exchange Act"). This Controls and
Procedures section of the Annual Report includes the information concerning the
Controls Evaluation referred to in the Rule 13a-14 Certifications and it should
be read in conjunction with the Rule 13a-14 Certifications for a more complete
understanding of the topics presented.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS

Disclosure Controls are procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act, such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the U.S. Securities and Exchange Commission's (the "SEC") rules and
forms. Disclosure Controls are also designed to ensure that such information is
accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Internal
Controls are procedures designed to provide reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our Consolidated Financial Statements
in conformity with accounting principles generally accepted in the United States
of America.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

The Company's management, including the CEO and CFO, does not expect that our
Disclosure Controls or our Internal Controls will prevent all error and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system's objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with its policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

SCOPE OF THE CONTROLS EVALUATION

The evaluation of our Disclosure Controls and our Internal Controls included a
review of the controls' objectives and design, the Company's implementation of
the controls and the effect of the controls on the information generated for use
in this Annual Report. In the course of the Controls Evaluation, we sought to
identify data errors, controls problems or acts of fraud and confirm that
appropriate corrective actions, including process improvements, were being
undertaken. This type of evaluation is performed on a quarterly basis so that
the conclusions of management, including the CEO and CFO, concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K. Our Internal Controls are also evaluated by other personnel
in our organization, as well as independent interested third parties such as
financial guaranty insurers or their designees. The overall goals of these
various evaluation activities are to monitor our Disclosure Controls and our
Internal Controls, and to modify them as necessary; our intent is to maintain
the Disclosure Controls and the Internal Controls as dynamic systems that change
as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the Company's
Internal Controls, and whether the Company had identified any acts of fraud
involving personnel with a significant role in the Company's Internal Controls.
This information was important both for the Controls Evaluation generally, and
because items 5 and 6 in the Rule 13a-14 Certifications of the CEO and CFO
require that the CEO and CFO disclose that information to our Board's Audit
Committee and our independent auditors, and report on related matters in this
section of the Annual Report. In professional auditing literature, "significant

deficiencies" are referred to as "reportable conditions," which are control
issues that could have a significant adverse effect on the ability to record,
process, summarize and report financial data in the Consolidated Financial
Statements. Auditing literature defines "material weakness" as a particularly
serious reportable condition where the internal control does not reduce to a
relatively low level the risk that misstatements caused by error or fraud may
occur in amounts that would be material in relation to the Consolidated
Financial Statements and the risk that such misstatements would not be detected
within a timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Controls Evaluation, and in each case if a problem was identified, we considered
what revision, improvement and/or correction to make in accordance with our
ongoing procedures.

CONCLUSIONS

Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, our Disclosure Controls are effective to ensure
that material information relating to Consumer Portfolio Services, Inc. and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our Consolidated Financial Statements are fairly presented in
conformity with accounting principles generally accepted in the United States of
America.

ITEM 9B. OTHER INFORMATION

Not Applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the registrant is incorporated by reference
to the registrant's definitive proxy statement for its annual meeting of
shareholders to be held in 2006 (the "2006 Proxy Statement"). The 2006 Proxy
Statement will be filed not later than April 30, 2006. Information regarding
executive officers of the registrant appears in Part I of this report, and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to the 2006 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Incorporated by reference to the 2006 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the 2006 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference to the 2006 Proxy Statement.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

The financial statements listed below under the caption "Index to Financial
Statements" are filed as a part of this report. No financial statement schedules
are filed as the required information is inapplicable or the information is
presented in the Consolidated Financial Statements or the related notes.
Separate financial statements of the Company have been omitted as the Company is
primarily an operating company and its subsidiaries are wholly owned and do not
have minority equity interests and/or indebtedness to any person other than the
Company in amounts which together exceed 5% of the total consolidated assets as
shown by the most recent year-end Consolidated Balance Sheet.

The exhibits listed below are filed as part of this report, whether filed
herewith or incorporated by reference to an exhibit filed with the report
identified in the parentheses following the description of such exhibit. Unless
otherwise indicated, each such identified report was filed by or with respect to
the registrant.

Exhibit
Number DESCRIPTION
------ -----------

2.1 Agreement and Plan of Merger, dated as of November 18, 2001, by and
among the Registrant, CPS Mergersub, Inc. and MFN Financial
Corporation. (Form 8-K filed on November 19, 2001 by MFN Financial
Corporation).

3.1 Restated Articles of Incorporation (See Exh 3.1 to Form S-2, No.
333-121913)

3.2 Amended and Restated Bylaws (See Exh 3.2 to Form S-2, No. 333-121913)

4.1 Indenture re Rising Interest Subordinated Redeemable Securities
("RISRS") (See Exh 4.1 to Form S-2, No. 33-99652)

4.1.1 First Supplemental Indenture re RISRS (See Exh 4.2 to Form S-2, No.
33-99652)

4.2 Form of Indenture re Renewable Unsecured Subordinated Notes ("RUS
Notes"), (See Exh 4.1 to Form S-2, no. 333-121913)

4.2.1 Form of RUS Notes, (See Exh 4.2 to Form S-2, no. 333-121913)

4.5 Third Amended and Restated Securities Purchase Agreement ("3rd SPA")
dated as of January 29, 2004, between the registrant and Levine
Leichtman Capital Partners II, L.P. ("LLCP") (see Exhibit 99.16 to
the Schedule 13D filed by LLCP with respect to the registrant on
February 3, 2004)

4.5.1 Amendment to the 3rd SPA, dated as of March 25, 2004. (see Exhibit
99.22 to the Schedule 13D filed by LLCP with respect to the
registrant on June 4, 2004)

4.5.2 Amendment to the 3rd SPA, dated as of April 2, 2004. (see Exhibit
99.23 to the Schedule 13D filed by LLCP with respect to the
registrant on June 4, 2004)

4.5.3 Amendment to the 3rd SPA, dated as of May 28, 2004. (see Exhibit
99.25 to the Schedule 13D filed by LLCP with respect to the
registrant on June 4, 2004)

4.5.4 Amendment to the 3rd SPA, dated as of June 25, 2004. (see Exhibit
99.29 to the Schedule 13D filed by LLCP with respect to the
registrant on June 29, 2004)

4.6 Amended and Restated Secured Senior Note due December 15, 2005 (see
Exhibit 99.18 to the Schedule 13D filed by LLCP with respect to the
registrant on February 3, 2004)

4.6.1 Amendment to Amended and Restated Secured Senior Note due December
15, 2005 (filed herewith)

4.7 11.75% Secured Senior Note Due 2006 (see Exhibit 99.26 to the
Schedule 13D filed by LLCP with respect to the registrant on June 4,
2004)

4.8 11.75% Secured Senior Note Due 2006 (see Exhibit 99.30 to the
Schedule 13D filed by LLCP with respect to the registrant on June 29,
2004)

4.9 Sale and Servicing Agreement, dated as of March 1, 2002, among the
Registrant, CPS Auto Receivables Trust 2002-A, CPS Receivables Corp.,
Systems & Services Technologies, Inc. and Bank One Trust Company,
N.A. (Form 8-K filed on March 25, 2002).

4.10 Indenture, dated as of March 1, 2002, between CPS Auto Receivables
Trust 2002-A and Bank One Trust Company, N.A. (Form 8-K filed on
March 25, 2002).

10.1 1991 Stock Option Plan & forms of Option Agreements thereunder (See
Exh 10.19 to Form S-2, no. 333-121913)

10.2 1997 Long-Term Incentive Stock Plan ("1997 Plan") (See Exh 10.20 to
Form S-2, no. 333-121913)

10.2.1 Form of Option Agreement under 1997 Plan. (filed herewith)

10.3 Lease Agreement re Chesapeake Collection Facility (see Exhibit 10.11
to registrant's Form 10-K filed March 31, 1997)

10.4 Lease of Headquarters Building (see Exhibit 10.22 to registrant's
Form 10-Q filed Nov. 14, 1997)

10.5 Amended & Restated Sale and Servicing Agreement dated June 29, 2005
by and among Page Funding LLC ("PFLLC"), the registrant and Wells
Fargo Bank, N.A. ("WFBNA") (see Exh 10.1 to Form 10-Q filed August 9,
2005)

10.6 Annex A to Agreement filed as Exhibit 10.5 (see Exh 10.2 to Form 10-Q
filed August 9, 2005)

10.7 Indenture dated as of June 30, 2004 by and among PFLLC, UBS Real
Estate Securities, Inc. ("UBSRES") and WFBNA (See Exh 10.37 to Form
S-2, no. 333-121913)

10.7.1 Supplement to Indenture filed as Exhibit 10.7 (see Exh 10.3 to Form
10-Q filed August 9, 2005)

10.8 Note Purchase Agreement dated as of June 30, 2004 by and among PFLLC,
UBSRES and WFBNA (See Exh 10.38 to Form S-2, no. 333-121913)

10.8.1 Amendment to Agreement filed as Exhibit 10.8 (see Exh 10.4 to Form
10-Q filed August 9, 2005)

10.9 Amended & Restated Variable Funding Note dated June 29, 2005 by PFLLC
(see Exh 10.5 to Form 10-Q filed August 9, 2005)

10.10 Sale and Servicing Agreement dated as of November 15, 2005, among
Page Three Funding LLC ("P3FLLC"), the registrant and WFBNA. (filed
herewith)

10.11 Indenture dated as of November 15, 2005 between P3FLLC and WFBNA
(filed herewith)

10.12 Note Purchase Agreement dated as of November 15, 2005 among P3FLLC,
the registrant and Bear, Stearns International Limited (filed
herewith)

10.13 Amendment to Master Spread Account Agreement (Form 10-K dated
December 31, 1999)

14 Registrant's Code of Ethics for Senior Financial Officers (filed
herewith)

21 List of subsidiaries of the registrant (filed herewith)

23.1 Consent of McGladrey & Pullen, LLP (filed herewith)

23.2 Consent of KPMG, LLP (filed herewith)

31.1 Rule 13a-14(a) certification by chief executive officer (filed
herewith)

31.2 Rule 13a-14(a) certification by chief financial officer (filed
herewith)

32 Section 1350 certification (filed herewith)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

CONSUMER PORTFOLIO SERVICES, INC. (REGISTRANT)

March 10, 2006 By: /s/ Charles E. Bradley, Jr.
----------------------------------------
Charles E. Bradley, Jr., PRESIDENT

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

March 10, 2006 /s/ Charles E. Bradley, Jr.
----------------------------------------
Charles E. Bradley, Jr., DIRECTOR,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

March 10, 2006 /s/ E. Bruce Fredrikson
----------------------------------------
E. Bruce Fredrikson, DIRECTOR

March 10, 2006 /s/ John E. McConnaughy, Jr.
----------------------------------------
John E. McConnaughy, Jr., DIRECTOR

March 10, 2006 /s/ John G. Poole
----------------------------------------
John G. Poole, DIRECTOR

March 10, 2006 /s/ William B. Roberts
----------------------------------------
William B. Roberts, DIRECTOR

March 10, 2006 /s/ John C. Warner
----------------------------------------
John C. Warner, DIRECTOR

March 10, 2006 /s/ Daniel S. Wood
----------------------------------------
Daniel S. Wood, DIRECTOR

March 10, 2006 /s/ Robert E. Riedl
----------------------------------------
Robert E. Riedl, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)

March 10, 2006 /s/ Jeffrey P. Fritz
----------------------------------------
Jeffrey P. Fritz, SR. VICE PRESIDENT
(PRINCIPAL ACCOUNTING OFFICER)

INDEX TO FINANCIAL STATEMENTS

PAGE
REFERENCE
---------
Report of Independent Registered Public Accounting Firm - McGladrey
& Pullen, LLP..................................................... F-2
Report of Independent Registered Public Accounting Firm - KPMG, LLP... F-3
Consolidated Balance Sheets as of December 31, 2005 and 2004.......... F-4
Consolidated Statements of Operations for the years ended December
31, 2005, 2004, and 2003.......................................... F-5
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2005, 2004, and 2003........................... F-6
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2005, 2004, and 2003................................. F-7
Consolidated Statements of Cash Flows for the years ended December
31, 2005, 2004, and 2003.......................................... F-8
Notes to Consolidated Financial Statements for the years ended
December 31, 2005, 2004, and 2003................................. F-10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Consumer Portfolio Services, Inc.:

We have audited the consolidated balance sheets of Consumer Portfolio Services,
Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the
related consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Consumer Portfolio
Services, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.

/s/ McGladrey & Pullen, LLP

Irvine, California
February 24, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Consumer Portfolio Services, Inc.:

We have audited the accompanying consolidated statements of operations,
comprehensive income (loss), shareholders' equity, and cash flows of Consumer
Portfolio Services, Inc. and subsidiaries (the "Company") for the year ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Consumer Portfolio Services, Inc. and subsidiaries for the year ended December
31, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Orange County, California
March 15, 2004

F-3

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

December 31, December 31,
2005 2004
----------- -----------
ASSETS
Cash and cash equivalents $ 17,789 $ 14,366
Restricted cash and equivalents 157,662 125,113

Finance receivables 971,304 592,806
Less: Allowance for finance credit losses (57,728) (42,615)
----------- -----------
Finance receivables, net 913,576 550,191

Residual interest in securitizations 25,220 50,430
Furniture and equipment, net 1,079 1,567
Deferred financing costs 8,596 5,096
Deferred tax assets, net 7,532 --
Accrued interest receivable 10,930 6,411
Other assets 12,760 13,425
----------- -----------
$ 1,155,144 $ 766,599
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses $ 19,568 $ 18,153
Warehouse lines of credit 35,350 34,279
Tax liabilities, net -- 2,978
Notes payable 211 1,421
Residual interest financing 43,745 22,204
Securitization trust debt 924,026 542,815
Senior secured debt, related party 40,000 59,829
Subordinated renewable notes 4,655 --
Subordinated debt 14,000 15,000
----------- -----------
1,081,555 696,679
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity
Preferred stock, $1 par value;
authorized 5,000,000 shares; none issued -- --
Series A preferred stock, $1 par value;
authorized 5,000,000 shares;
3,415,000 shares issued; none outstanding -- --
Common stock, no par value; authorized
30,000,000 shares; 21,687,584 and 21,471,478
shares issued and outstanding at December 31,
2005 and December 31, 2004, respectively 66,748 66,283
Additional paid in capital, warrants 794 --
Retained earnings 8,476 5,104
Accumulated other comprehensive loss (2,429) (1,017)
Deferred compensation -- (450)
----------- -----------
73,589 69,920

----------- -----------
$ 1,155,144 $ 766,599
=========== ===========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Year Ended December 31,
----------------------------------
2005 2004 2003
--------- --------- ---------
Revenues:
Net gain on sale of contracts $ -- $ -- $ 10,421
Interest income 171,834 105,818 58,164
Servicing fees 6,647 12,480 17,058
Other income 15,216 14,394 19,343
--------- --------- ---------
193,697 132,692 104,986
--------- --------- ---------

Expenses:
Employee costs 40,384 38,173 37,141
General and administrative 23,095 21,293 21,271
Interest 44,148 25,876 17,867
Interest, related party 7,521 6,271 5,994
Provision for credit losses 58,987 32,574 11,390
Impairment loss on residual asset -- 11,750 4,052
Marketing 12,000 8,338 5,380
Occupancy 3,400 3,520 3,930
Depreciation and amortization 790 785 1,000
--------- --------- ---------
190,325 148,580 108,025
--------- --------- ---------
Income (loss) before income tax benefit 3,372 (15,888) (3,039)
Income tax benefit -- -- (3,434)
--------- --------- ---------
Net income (loss) $ 3,372 $ (15,888) $ 395
========= ========= =========

Earnings (loss) per share:
Basic $ 0.16 $ (0.75) $ 0.02
Diluted 0.14 (0.75) 0.02

Number of shares used in computing
earnings (loss) per share:
Basic 21,627 21,111 20,263
Diluted 23,513 21,111 21,578

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)

Year Ended December 31,
--------------------------------
2005 2004 2003
-------- -------- --------

Net income (loss) $ 3,372 $(15,888) $ 395
Other comprehensive income (loss):
Minimum pension liability, net of tax (1,412) 1,409 (832)
-------- -------- --------
Comprehensive income (loss) $ 1,960 $(14,479) $ (437)
======== ======== ========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

Additional Accumulated
Paid-in Other
Common Stock Capital, Retained Comprehensive Deferred
Shares Amount Warrants Earnings Loss Compensation Total
-------- -------- -------- -------- ----------- ------------ --------

Balance at December 31, 2002 20,528 $ 63,929 $ -- $ 20,597 $ (1,594) $ (358) $ 82,574

Common stock issued upon exercise
of options, including tax benefit 609 974 -- -- -- -- 974
Purchase of common stock (548) (1,195) -- -- -- -- (1,195)
Pension benefit obligation -- -- -- -- (832) -- (832)
Repurchase of warrants issued -- (896) -- -- -- -- (896)
Deferred compensation on
stock options -- 1,585 -- -- -- (1,585) --
Amortization of stock compensation -- -- -- -- -- 1,140 1,140
Net income -- -- -- 395 -- -- 395
-------- -------- -------- -------- ----------- ------------ --------
Balance at December 31,2003 20,589 64,397 -- 20,992 (2,426) (803) 82,160

Common stock issued upon exercise
of options, including tax benefit 575 1,079 -- -- -- -- 1,079
Common stock issued upon
conversion of debt 333 1,000 -- -- -- -- 1,000
Purchase of common stock (26) (111) -- -- -- -- (111)
Pension benefit obligation -- -- -- -- 1,409 -- 1,409
Deferred compensation on
stock options -- (82) -- -- -- 82 --
Amortization of stock compensation -- -- -- -- -- 271 271
Net loss -- -- -- (15,888) -- -- (15,888)
-------- -------- -------- -------- ----------- ------------ --------
Balance at December 31, 2004 21,471 66,283 -- 5,104 (1,017) (450) 69,920

Common stock issued upon exercise
of options, including tax benefit 415 1,311 -- -- -- -- 1,311
Purchase of common stock (199) (1,040) -- -- -- -- (1,040)
Pension benefit obligation -- -- -- -- (1,412) -- (1,412)
Valuation of warrants issued -- -- 794 -- -- -- 794
Deferred compensation on
stock options -- 194 -- -- -- (194) --
Amortization of stock compensation -- -- -- -- -- 644 644
Net income -- -- -- 3,372 -- -- 3,372
-------- -------- -------- -------- ----------- ------------ --------
Balance at December 31, 2005 21,687 $ 66,748 $ 794 $ 8,476 $ (2,429) $ -- $ 73,589
======== ======== ======== ======== =========== ============ ========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-7

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

Year Ended December 31,
-----------------------------------
2005 2004 2003
--------- --------- ---------

Cash flows from operating activities:
Net income (loss) $ 3,372 $ (15,888) $ 395
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Reversal of restructuring accrual -- (1,287) --
Impairment loss on residual asset -- 11,750 4,052
Amortization of deferred acquisition fees (10,851) (6,725) (870)
Amortization of discount on Class B Notes 1,486 588 --
Depreciation and amortization 790 785 1,000
Amortization of deferred financing costs 3,296 3,479 2,695
Provision for credit losses 58,987 32,574 11,916
Gain of sale of Contracts, NIR -- -- (4,381)
Deferred compensation 644 271 1,140
Releases of cash from Trusts to Company 23,074 21,357 25,934
Initial deposits to Trusts -- -- (18,736)
Net deposits to Trusts to increase Credit Enhancement -- (2,858) (20,867)
Interest income on residual assets (5,338) (4,633) (16,178)
Cash received from residual interest in securitizations 30,548 54,154 45,644
Impairment charge against non-auto finanace receivable assets 1,882 -- --
Changes in assets and liabilities:
Payments on restructuring accrual (1,425) (1,969) (1,804)
Restricted cash and equivalents (55,623) (76,336) (30,641)
Purchases of contracts held for sale -- -- (182,045)
Proceeds received on Contracts held for sale -- -- 283,423
Other assets (5,578) (5,415) 6,936
Deferred tax assets, net (7,532) -- --
Accounts payable and accrued expenses 1,928 715 (1,559)
Tax liabilities (2,978) (606) (7,162)
--------- --------- ---------
Net cash provided by operating activities 36,682 9,956 98,892
--------- --------- ---------

Cash flows from investing activities:
Purchases of finance receivables held for investment (691,252) (505,977) (175,275)
Purchases of note receivable -- (2,799) --
Proceeds received on finance receivables held for investment 279,730 196,126 6,611
Purchase of furniture and equipment (166) (1,408) (93)
Purchase of subsidiary, net of cash acquired -- -- (10,181)
--------- --------- ---------
Net cash used in investing activities (411,688) (314,058) (178,938)
--------- --------- ---------

Cash flows from financing activities:
Proceeds from issuance of residual financing debt 45,800 44,000 --
Proceeds from issuance of securitization trust debt 662,350 474,720 154,375
Proceeds from issuance of senior secured debt, related party -- 25,000 25,000
Proceeds from issuance of subordinated renewable notes 4,685 -- --
Net proceeds from warehouse lines of credit 1,071 570 31,332
Repayment of residual interest financing debt (24,259) (21,796) --
Repayment of securitization trust debt (282,625) (177,611) (96,484)
Repayment of senior secured debt, related party (19,829) (15,137) (25,107)
Repayment of subordinated debt and renewable notes (1,030) (20,000) (1,000)
Repayment of notes payable (1,209) (1,909) (3,748)
Repayment of related party debt -- (16,500) --
Payment of financing costs (6,796) (7,046) (2,553)
Repurchase of common stock (1,040) (111) (1,195)
Repurchase of warrants issued -- -- (896)
Exercise of options and warrants 1,311 1,079 584
--------- --------- ---------
Net cash provided by financing activities 378,429 285,259 80,308

Increase (decrease) in cash and cash equivalents 3,423 (18,843) 262

Cash and cash equivalents at beginning of period 14,366 33,209 32,947
--------- --------- ---------
Cash and cash equivalents at end of period $ 17,789 $ 14,366 $ 33,209
========= ========= =========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-8

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

Year Ended December 31,
-----------------------------------
2005 2004 2003
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 45,929 $ 28,228 $ 18,677
Income taxes 9,377 420 3,728

Supplemental disclosure of non-cash investing and financing activities:
Stock-based compensation $ 644 $ 271 $ 1,140
Conversion of related party debt to common stock -- (1,000) --
Pension benefit obligation, net 1,412 (1,409) 832
Value of warrants issued 794 -- --

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-9

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Consumer Portfolio Services, Inc. ("CPS") was incorporated in California on
March 8, 1991. CPS and its subsidiaries (collectively, the "Company") specialize
in purchasing, selling and servicing retail automobile installment sale
contracts ("Contracts") originated by licensed motor vehicle dealers ("Dealers")
located throughout the United States. Dealers located in Texas, California, Ohio
and Florida represented 10.7%, 9.0%, 7.5% and 7.1%, respectively of Contracts
purchased during 2005 compared with 12.1%, 8.6%, 5.1% and 6.1%, respectively in
2004. No other state had a concentration in excess of 7.0%. The Company
specializes in Contracts with obligors who generally would not be expected to
qualify for traditional financing, such as that provided by commercial banks or
automobile manufacturers' captive finance companies.

The Company is subject to various regulations and laws as they relate to the
extension of credit in consumer credit transactions. Although the Company
believes it is currently in material compliance with these regulation and laws,
there can be no assurance that the Company will be able to maintain such
compliance. Failure to comply with such laws and regulations could have a
material adverse effect on the Company.

ACQUISITIONS

On March 8, 2002, the Company acquired MFN Financial Corporation and its
subsidiaries in a merger (the "MFN Merger"). On May 20, 2003, the Company
acquired TFC Enterprises, Inc. and its subsidiaries in a second merger (the "TFC
Merger"). Each merger was accounted for as a purchase. MFN Financial Corporation
and its subsidiaries ("MFN") and TFC Enterprises, Inc. and its subsidiaries
("TFC") were engaged in businesses similar to that of the Company: buying
Contracts from Dealers, financing those Contracts through securitization
transactions, and servicing those Contracts. MFN ceased acquiring Contracts in
March 2002; TFC continues to acquire Contracts under its "TFC Programs."

On April 2, 2004, the Company purchased a portfolio of Contracts and certain
other assets (the "SeaWest Asset Acquisition") from SeaWest Financial
Corporation ("SeaWest"). In addition, the Company was named the successor
servicer for three term securitization transactions originally sponsored by
SeaWest (the "SeaWest Third Party Portfolio"). The Company does not intend to
offer financing programs similar to those previously offered by SeaWest.

PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of Consumer Portfolio
Services, Inc. and its wholly-owned subsidiaries, certain of which are Special
Purpose Subsidiaries ("SPS"), formed to accommodate the structures under which
the Company purchases and securitizes its Contracts. The Consolidated Financial
Statements also include the accounts of CPS Leasing, Inc., an 80% owned
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation.

F-10

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents. Cash equivalents consist of cash on hand and due from banks
and money market accounts. The Company's cash is primarily deposited at three
financial institutions. The Company maintains cash due from banks in excess of
the bank's insured deposit limits. The Company does not believe it is exposed to
any significant credit risk on these deposits. As part of certain financial
covenants related to debt facilities, the Company is required to maintain a
minimum unrestricted cash balance.

FINANCE RECEIVABLES, NET OF UNEARNED INCOME

Finance receivables are presented at cost. All Finance receivable Contracts are
held for investment and include automobile installment sales contracts on which
interest is pre-computed and added to the amount financed. The interest on such
Contracts is included in unearned finance charges. Unearned finance charges are
amortized using the interest method over the contractual term of the
receivables. Generally, payments received on finance receivables are restricted
to certain securitized pools, and the related Contracts cannot be resold.
Finance receivables are charged off pursuant to the controlling documents of
certain securitized pools, generally before they become contractually delinquent
five payments. Contracts that are deemed uncollectible prior to the maximum
delinquency period are charged off immediately. Management may authorize an
extension of payment terms if collection appears likely during the next calendar
month.

The Company's portfolio of finance receivables is comprised of smaller-balance
homogeneous Contracts that are collectively evaluated for impairment on a
portfolio basis. The Company reports delinquency on a contractual basis. Once a
Contract becomes greater than 90 days delinquent, the Company does not recognize
additional interest income until the borrower under the Contract makes
sufficient payments to be less than 90 days delinquent. Any payments received by
a borrower that is greater than 90 days delinquent is first applied to accrued
interest and then to principal reduction.

ALLOWANCE FOR FINANCE CREDIT LOSSES

In order to estimate an appropriate allowance for losses to be incurred on
finance receivables, the Company uses a loss allowance methodology commonly
referred to as "static pooling," which stratifies its finance receivable
portfolio into separately identified pools. Using analytical and formula driven
techniques, the Company estimates an allowance for finance credit losses, which
management believes is adequate for probable credit losses that can be
reasonably estimated in its portfolio of finance receivable Contracts. Provision
for loss is charged to the Company's Consolidated Statement of Operations. Net
losses incurred on finance receivables are charged to the allowance. Management
evaluates the adequacy of the allowance by examining current delinquencies, the
characteristics of the portfolio, the value of the underlying collateral and
historical loss trends. As conditions change, the Company's level of
provisioning and/or allowance may change as well.

CHARGE OFF POLICY

Delinquent Contracts for which the related financed vehicle has been repossessed
are generally charged off no later than the month in which the proceeds from the
sale of the financed vehicle were received (see Repossessed and Other Assets
below). The amount charged off is the remaining principal balance of the
Contract, after the application of the net proceeds from the liquidation of the
financed vehicle. With respect to delinquent Contracts for which the related
financed vehicle has not been sold, the remaining principal balance thereof is
generally charged off no later than the end of the month that the Contract
becomes 120 days past due for CPS Program receivables and for non-CPS Program
receivables, no later than the end of the month that the Contract becomes 180
days past due.

F-11

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONTRACT ACQUISITION FEES

Upon purchase of a Contract from a Dealer, the Company generally charges or
advances the Dealer an acquisition fee. For Contracts securitized in pools which
were structured as sales for financial accounting purposes, the acquisition fees
associated with Contract purchases were deferred until the Contracts were
securitized, at which time the deferred acquisition fees were recognized as a
component of the gain on sale.

For Contracts purchased and securitized in pools which are structured as secured
financings for financial accounting purposes, dealer acquisition fees reduce the
carrying value of finance receivables and are accreted into earnings as an
adjustment to the yield over the life of the loans using the interest method in
accordance with Statement of Financial Accounting Standards No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases".

Effective January 1, 2005, the Company adopted the Accounting Standards
Executive Committee's Statement of Position 03-3, "Accounting for Certain Loans
or Debt Securities Acquired in a Transfer" ("SOP 03-3"), for loans acquired
subsequent to December 31, 2004. Under SOP 03-3, dealer acquisition fees on
loans purchased by the Company are not considered credit-related because there
is no deterioration in credit quality between the time the loan originated and
when it is acquired. The adoption of SOP 03-3 had no impact on the financial
statements of the Company.

REPOSSESSED AND OTHER ASSETS

Included in Other Assets are non-finance receivable assets totaling $2.4 million
as of December 31, 2005, net of a valuation allowance of $1.9 million. The
valuation allowance was established in 2005 and is included in general and
administrative expenses in the Company's Consolidated Statement of Operations
(See Note 13). Included in the $1.9 million valuation allowance, is $900,000
associated with related party receivables.

TREATMENT OF SECURITIZATIONS

Prior to July 2003, the disposition of Contracts in securitization transactions
were structured as sales for financial accounting purposes, therefore, gain on
sale was recognized on those securitization transactions in which the Company,
or a wholly-owned, consolidated subsidiary of the Company, retained a residual
interest in the Contracts that were sold to a wholly-owned, unconsolidated
special purpose subsidiary. These securitization transactions include "term"
securitizations (the purchaser holds the Contracts for substantially their
entire term) and "continuous" or "warehouse" securitizations (which finance the
acquisition of the Contracts for future sale into term securitizations).

F-12

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's securitization structure has generally been as follows:

The Company sells Contracts it acquires to a wholly-owned Special Purpose
Subsidiary ("SPS"), which has been established for the limited purpose of buying
and reselling the Company's Contracts. The SPS then transfers the same Contracts
to another entity, typically a statutory trust ("Trust"). The Trust issues
interest-bearing asset-backed securities ("Notes"), in a principal amount equal
to or less than the aggregate principal balance of the Contracts. The Company
typically sells these Contracts to the Trust at face value and without recourse,
except that representations and warranties similar to those provided by the
Dealer to the Company are provided by the Company to the Trust. One or more
investors purchase the Notes issued by the Trust (the "Noteholders"); the
proceeds from the sale of the Notes are then used to purchase the Contracts from
the Company. The Company may retain or sell subordinated Notes issued by the
Trust or a related entity. The Company purchases a financial guaranty insurance
policy, guaranteeing timely payment of principal and interest on the senior
Notes, from an insurance company (a "Note Insurer"). In addition, the Company
provides "Credit Enhancement" for the benefit of the Note Insurer and the
Noteholders in three forms: (1) an initial cash deposit to a bank account (a
"Spread Account") held by the Trust, (2) overcollateralization of the Notes,
where the principal balance of the Notes issued is less than the principal
balance of the Contracts, and (3) in the form of subordinated Notes. The
agreements governing the securitization transactions (collectively referred to
as the "Securitization Agreements") require that the initial level of Credit
Enhancement be supplemented by a portion of collections from the Contracts until
the level of Credit Enhancement reaches specified levels which are then
maintained. The specified levels are generally computed as a percentage of the
principal amount remaining unpaid under the related Contracts. The specified
levels at which the Credit Enhancement is to be maintained will vary depending
on the performance of the portfolios of Contracts held by the Trusts and on
other conditions, and may also be varied by agreement among the Company, the
SPS, the Note Insurers and the trustee. Such levels have increased and decreased
from time to time based on performance of the various portfolios, and have also
varied by Securitization Agreement. The Securitization Agreements generally
grant the Company the option to repurchase the sold Contracts from the Trust
when the aggregate outstanding balance of the Contracts has amortized to a
specified percentage of the initial aggregate balance.

Securitizations prior to July 2003 that were treated as sales for financial
accounting purposes differ from secured financings in that the Trust to which
the SPS sold the Contracts met the definition of a "qualified special purpose
entity" under Statement of Financial Accounting Standards No. 140 ("SFAS 140").
As a result, assets and liabilities of the Trust are not consolidated into the
Company's Consolidated Balance Sheet.

F-13

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's warehouse securitization structures are similar to the above,
except that (i) the SPS that purchases the Contracts pledges the Contracts to
secure promissory notes which it issues, (ii) the promissory notes are in an
aggregate principal amount of not more than 77.0% to 80.0% of the aggregate
principal balance of the Contracts (that is, at least 20.0%
overcollateralization), and (iii) no increase in the required amount of Credit
Enhancement is contemplated unless certain portfolio performance tests are
breached. Upon each sale of Contracts in a securitization structured as a
secured financing, the Company retains on its Consolidated Balance Sheet the
Contracts securitized as assets and records the Notes issued in the transaction
as indebtedness of the Company.

Under the prior securitizations structured as sales for financial accounting
purposes, the Company removed from its Consolidated Balance Sheet the Contracts
sold and added to its Consolidated Balance Sheet (i) the cash received, if any,
and (ii) the estimated fair value of the ownership interest that the Company
retains in Contracts sold in the securitization. That retained or residual
interest (the "Residual") consists of (a) the cash held in the Spread Account,
if any, (b) overcollateralization, if any, (c) subordinated Notes retained, if
any, and (d) receivables from Trust, which include the net interest receivables
("NIRs"). NIRs represent the estimated discounted cash flows to be received from
the Trust in the future, net of principal and interest payable with respect to
the Notes, and certain expenses. The excess of the cash received and the assets
retained by the Company over the allocated carrying value of the Contracts sold,
less transaction costs, equals the net gain on sale of Contracts recorded by the
Company. Until the maturity of these transactions, the Company's Consolidated
Balance Sheet will reflect securitization transactions structured both as sales
and as secured financings.

With respect to securitizations structured as sales for financial accounting
purposes, the Company allocates its basis in the Contracts between the Contracts
sold and the Residuals retained based on the relative fair values of those
portions on the date of the sale. The Company recognizes gains or losses
attributable to the change in the estimated fair value of the Residuals. Gains
in fair value are recognized in the income statement with losses being recorded
as an impairment loss in the income statement. The Company is not aware of an
active market for the purchase or sale of interests such as the Residuals;
accordingly, the Company determines the estimated fair value of the Residuals by
discounting the amount of anticipated cash flows that it estimates will be
released to the Company in the future (the cash out method), using a discount
rate that the Company believes is appropriate for the risks involved. The
anticipated cash flows include collections from both current and charged off
receivables. The Company has used an effective pre-tax discount rate of 14% per
annum except for certain collections from charged off receivables related to the
Company's securitizations in 2001 and later where the Company has used a
discount rate of 25%.

The Company receives periodic base servicing fees for the servicing and
collection of the Contracts. In addition, the Company is entitled to the cash
flows from the Trusts that represent collections on the Contracts in excess of
the amounts required to pay principal and interest on the Notes, the base
servicing fees, and certain other fees (such as trustee and custodial fees).
Required principal payments on the Notes are generally defined as the payments
sufficient to keep the principal balance of the Notes equal to the aggregate
principal balance of the related Contracts (excluding those Contracts that have
been charged off), or a pre-determined percentage of such balance. Where that
percentage is less than 100%, the related Securitization Agreements require
accelerated payment of principal until the principal balance of the Notes is
reduced to the specified percentage. Such accelerated principal payment is said
to create "overcollateralization" of the Notes.

F-14

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

transactions structured as secured financings for financial accounting
purposes), the cash in the Spread Accounts is restricted from use by the
Company. Cash held in the various Spread Accounts is invested in high quality,
liquid investment securities, as specified in the Securitization Agreements. In
determining the value of the Residuals, the Company must estimate the future
rates of prepayments, delinquencies, defaults, default loss severity, and
recovery rates, as all of these factors affect the amount and timing of the
estimated cash flows. The Company's estimates are based on historical
performance of comparable Contracts.

In all the Company's term securitizations, whether treated as secured financings
or as sales, the Company has transferred the receivables (through a subsidiary)
to the securitization Trust. The difference between the two structures is that
in securitizations that are treated as secured financings the Company reports
the assets and liabilities of the securitization Trust on its Consolidated
Balance Sheet. Under both structures the Noteholders' and the related
securitization Trusts' recourse to the Company for failure of the Contract
obligors to make payments on a timely basis is limited to the Company's Finance
receivables, Spread Accounts and Residuals.

SERVICING

The Company considers the contractual servicing fee received on its managed
portfolio held by non-consolidated subsidiaries to approximate adequate
compensation. As a result, no servicing asset or liability has been recognized.
Servicing fees received on its managed portfolio held by non-consolidated
subsidiaries are reported as income when earned. Servicing fees received on its
managed portfolio held by consolidated subsidiaries are included in interest
income when earned. Servicing costs are charged to expense as incurred.
Servicing fees receivable, which are included in Other Assets in the
accompanying balance sheets, represent fees earned but not yet remitted to the
Company by the trustee.

FURNITURE AND EQUIPMENT

Furniture and equipment are stated at cost net of accumulated depreciation. The
Company calculates depreciation using the straight-line method over the
estimated useful lives of the assets, which range from three to five years.
Assets held under capital leases and leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the related lease
terms. Amortization expense on assets acquired under capital lease is included
with depreciation expense on Company owned assets.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of

F-15

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell.

OTHER INCOME

Other Income consists primarily of recoveries on previously charged off MFN
Contracts, fees paid to the Company by Dealers for certain direct mail services
the Company provides, refunds of sales taxes paid by obligors under the
Contracts, and, in 2005 $2.7 million in proceeds from sales of previously
charged off Contracts to independent third parties. The recoveries on previously
charged off MFN Contracts relate to Contracts that were acquired in the MFN
acquisition. These recoveries totaled $4.9 million, $8.0 million and $12.2
million for the years ended December 31, 2005, 2004 and 2003, respectively.

EARNINGS PER SHARE

The following table illustrates the computation of basic and diluted earnings
(loss) per share:

2005 2004 2003
-------- -------- --------
(In thousands, except per share data)

Numerator:
Numerator for basic and diluted earnings (loss)
per share ......................................... $ 3,372 $(15,888) $ 395
======== ======== ========
Denominator:
Denominator for basic earnings (loss) per share
- weighted average number of common shares
outstanding during the year ....................... $ 21,627 21,111 20,263
Incremental common shares attributable to exercise
of outstanding options and warrants ............... $ 1,886 -- 1,315
-------- -------- --------
Denominator for diluted earnings (loss) per share .... $ 23,513 21,111 21,578
======== ======== ========
Basic earnings (loss) per share ...................... $ 0.16 $ (0.75) $ 0.02
======== ======== ========
Diluted earnings (loss) per share .................... $ 0.14 $ (0.75) $ 0.02
======== ======== ========

Incremental shares of 1.1 million related to the conversion of subordinated debt
have been excluded from the calculation for the year ended December 31, 2003
because the impact of assumed conversion of such subordinated debt is
anti-dilutive. Incremental shares of 1.8 million shares related to stock options
have been excluded from the diluted earnings (loss) per share calculation for
the year ended December 31, 2004 because the impact is anti-dilutive.

In addition, options to purchase 639,000, 305,000 and 908,000 shares of common
stock for the years ended December 31, 2005, 2004 and 2003, respectively, were
excluded from the calculation of diluted earnings (loss) per share because the
option exercise price was greater than the average market price of the shares.

DEFERRAL AND AMORTIZATION OF DEBT ISSUANCE COSTS

Costs related to the issuance of debt are amortized using the interest method
over the contractual or expected term of the related debt.

F-16

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES

PURCHASES OF COMPANY STOCK

The Company records purchases of its own common stock at cost.

STOCK OPTION PLAN

As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company accounts for
stock-based employee compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations, whereby stock options are recorded at intrinsic value equal to
the excess of the share price over the exercise price at the date of grant. The
Company provides the pro forma net income (loss), pro forma earnings (loss) per
share, and stock based compensation plan disclosure requirements set forth in
SFAS No. 123. The Company accounts for repriced options as variable awards.

The per share weighted-average fair value of stock options granted during the
years ended December 31, 2005, 2004 and 2003, was $3.07, $2.30, and $2.09,
respectively, at the date of grant. That fair value was computed using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

F-17

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year Ended December 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
Expected life (years) ............. 6.50 6.50 7.63
Risk-free interest rate ........... 4.32 % 4.48% 4.16%
Volatility ........................ 56.90 % 54.65% 100.82%
Expected dividend yield ........... -- -- --

Compensation cost has been recognized for certain stock options in the
Consolidated Financial Statements in accordance with APB Opinion No. 25. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock Based Compensation," the Company's net
income (loss) and earnings (loss) per share would have been adjusted to the pro
forma amounts indicated below.

Year Ended December 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
(In thousands, except per share data)
Net income (loss)
As reported ...................... $ 3,372 $ (15,888) $ 395
Pro forma ......................... (648) (16,808) 175
Earnings (loss) per share - basic
As reported ....................... $ 0.16 $ (0.75) $ 0.02
Pro forma ......................... (0.03) (0.80) 0.01
Earnings (loss) per share - diluted
As reported ....................... $ 0.14 $ (0.75) $ 0.02
Pro forma ......................... (0.03) (0.80) 0.01

SEGMENT REPORTING

Operations are managed and financial performance is evaluated on a Company-wide
basis by a chief decision maker. Management has determined that the aggregation
criteria of FASB Statement No. 131 have been met and accordingly, all of the
Company's operations are aggregated in one reportable segment.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123(R) (As Amended), "Share-Based Payment" ("FAS 123(R)" or the
"Statement"). FAS 123 (R) and related interpretations require that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. FAS 123(R) permits entities to use any option-pricing model that meets
the fair value objective in the Statement. Modifications of share-based payments
will be treated as replacement awards with the cost of the incremental value
recorded in the financial statements.

The Statement is effective at the beginning of 2006 and will therefore be
effective for the Company's first quarter of 2006. As of the effective date, the
Company will apply the Statement using a modified version of prospective
application. Under that transition method, compensation cost is recognized for
(1) all awards granted after the required effective date and to awards modified,
cancelled, or repurchased after that date and (2) the portion of prior awards
for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated for pro forma disclosures under
SFAS 123. As a result of the acceleration of vesting on all options outstanding
in December 2005 there will be no effect on the Company's adoption of the
statement in 2006 relating to such options currently outstanding.

F-18

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Instruments". This statement amends the guidance in FASB
Statements No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and No. 140, ""Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". Statement 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder
elects to account for the whole instrument on a fair value basis. The Statement
also amends Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. Statement 155 is effective for all financial instruments acquired or
issued after January 1, 2007. The Company does not believe the adoption of this
statement will have a material effect on the Company's financial position or
operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of income and expenses during the reported periods. Specifically, a
number of estimates were made in connection with determining an appropriate
allowance for finance credit losses, valuing the Residuals, computing the
related gain on sale on the transactions that created the Residuals, and the
recording of the deferred tax asset valuation allowance. These are material
estimates that could be susceptible to changes in the near term and accordingly,
actual results could differ from those estimates.

(2) RESTRICTED CASH

Restricted cash comprised the following components:

December 31,
------------------------
2005 2004
-------- --------
(In thousands)
Securitization trust accounts .................. $157,492 $118,944
Litigation reserve ............................. -- 5,503
Note purchase facility reserve ................. 20 516
Other .......................................... 150 150
-------- --------
Total restricted cash .......................... $157,662 $125,113
======== ========

Certain of the Company's operating agreements require that the Company establish
cash reserves for the benefit of the other parties to the agreements, in case
those parties are subject to any claims or exposure. In addition, certain of
these agreements require that the Company establish amounts in reserve related
to outstanding litigation.

F-19

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) FINANCE RECEIVABLES

The following table presents the components of Finance Receivables, net of
unearned interest:

December 31, December 31,
2005 2004
--------- ---------
Finance Receivables (In thousands)

Automobile
Simple Interest ....................................... $ 933,510 $ 522,346
Pre-compute, net of unearned interest ................. 54,693 86,932
--------- ---------

Finance Receivables, net of unearned interest ......... 988,203 609,278
Less: Unearned acquisition fees and discounts ......... (16,899) (16,472)
--------- ---------
Finance Receivables ................................... $ 971,304 $ 592,806
========= =========

Finance receivables totaling $5.1 million and $5.4 million at December 31, 2005
and 2004, respectively, have been placed on non-accrual status as a result of
their delinquency status.

The following table presents a summary of the activity for the allowance for
credit losses, for the years ended December 31, 2005 and 2004:

December 31,
-------------------------------------
2005 2004 2003
--------- --------- ---------
(In thousands)
Balance at beginning of year .............................. $ 42,615 $ 35,889 $ 25,828
Addition to allowance for credit losses from
acquisitions ............................................ -- -- 24,271
Provision for credit losses ............................... 58,987 32,574 11,667
Charge-offs ............................................... (55,978) (34,636) (32,117)
Recoveries ................................................ 12,104 8,788 6,240
--------- --------- ---------
Balance at end of year .................................... $ 57,728 $ 42,615 $ 35,889
========= ========= =========

(4) RESIDUAL INTEREST IN SECURITIZATIONS

The following table presents the components of the residual interest in
securitizations and shown at their discounted amounts:

December 31,
-----------------------
2005 2004
--------- ---------
(In thousands)
Cash, commercial paper, United States government securities
and other qualifying investments (Spread Accounts) ..... $ 12,748 $ 17,776
Receivables from Trusts (NIRs) ............................ 5,798 12,483
Overcollateralization ..................................... 6,674 16,644
Investment in subordinated certificates ................... -- 3,527
--------- ---------

Residual interest in securitizations ...................... $ 25,220 $ 50,430
========= =========

The following table presents the estimated remaining undiscounted credit losses
included in the fair value estimate of the Residuals as a percentage of the
Company's managed portfolio held by non-consolidated subsidiaries subject to
recourse provisions:

F-20

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
-------------------------------------
2005 2004 2003
--------- --------- ---------
(Dollars in thousands)

Undiscounted estimated credit losses ...................... $ 5,724 $ 23,588 $ 47,935
Managed portfolio held by non-consolidated subsidiary ..... 103,130 233,621 425,534
Undiscounted estimated credit losses as a percentage of
managed portfolio held by non-consolidated subsidiary ..... 5.55% 10.10% 11.30%

The key economic assumptions used in measuring the residual interest in
securitizations at the date of securitization in 2003 are as follows: prepayment
speed of 21.7%, net credit losses of 12.5%, and a discount rate of 14%. There
were no securitizations accounted for as sales for financial accounting purposes
in 2004 and 2005.

The key economic assumptions used in measuring all residual interest in
securitizations as of December 31, 2005 and 2004 are included in the table
below. The pre-tax discount rate remained constant at 14%, except for certain
cash flows from charged off receivables related to the Company's securitizations
from 2001 to 2003 where the Company has used a discount rate of 25%.

2005 2004
------------- -------------
Prepayment speed (Cumulative)..................... 22.2% - 35.8% 20.0% - 30.5%
Net credit losses (Cumulative).................... 11.9% - 20.2% 13.0% - 20.5%

Static pool losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of assets.

Key economic assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10% and 20% adverse changes in those
assumptions are as follows:

December 31,
-------------
2005
-------------
(Dollars in thousands)

Carrying amount/fair value of residual interest in securitizations ... $ 25,220
Weighted average life in years ....................................... 2.24

Prepayment Speed Assumption (Cumulative) ............................. 22.2% - 35.8%
Estimated fair value assuming 10% adverse change ..................... $ 25,168
Estimated fair value assuming 20% adverse change ..................... 25,119

Expected Net Credit Losses (Cumulative) .............................. 11.9% - 20.2%
Estimated fair value assuming 10% adverse change ..................... $ 23,937
Estimated fair value assuming 20% adverse change ..................... 22,656

Residual Cash Flows Discount Rate (Annual) ........................... 14.0% - 25.0%
Estimated fair value assuming 10% adverse change ..................... $ 24,636
Estimated fair value assuming 20% adverse change ..................... 24,071

F-21

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the cash flows received from (paid to) the
Company's unconsolidated securitization Trusts:

For the Year Ended December 31,
------------------------------
2005 2004 2003
-------- -------- --------
(In thousands)
Releases of cash from Spread Accounts ......... $ 7,420 $ 17,175 $ 25,934
Servicing Fees received ....................... 4,490 13,631 17,039
Net deposits to increase Credit Enhancement ... -- (2,106) (20,867)
Initial funding of Credit Enhancement ......... -- -- (18,736)
Purchase of delinquent or foreclosed assets ... (22,682) (44,473) (45,747)
Repurchase of trust assets .................... (9,658) -- --

The following table presents the credit loss and delinquency performance for the
serviced portfolio:

Principal Amount of
Total Principal Contracts 60 Days Net Credit Losses(1)
Amount of Contracts or More Past Due for the Year Ended
----------------------- ----------------------- -----------------------
At December 31, At December 31, December 31,
----------------------- ----------------------- -----------------------
2005 2004 2005 2004 2005 2004
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)

Contracts held by
consolidated subsidiaries ....... $1,000,597 $ 619,794 $ 25,864 $ 17,379 $ 36,511 $ 26,418
Contracts held by
non-consolidated subsidiaries ... 103,130 233,621 4,263 10,037 14,184 36,042
SeaWest Third Party Portfolio ..... 18,018 53,463 1,663 5,065 7,386 18,018
---------- ---------- ---------- ---------- ---------- ----------

Total managed portfolio ........... $1,121,745 $ 906,878 $ 31,790 $ 32,481 $ 58,081 $ 80,478
========== ========== ========== ========== ========== ==========

--------------
(1) INCLUDES RECOVERIES ON PREVIOUSLY CHARGED OFF MFN CONTRACTS INCLUDED IN
OTHER INCOME.

(5) FURNITURE AND EQUIPMENT

The following table presents the components of furniture and equipment:

December 31,
--------------------
2005 2004
------- -------
(In thousands)
Furniture and fixtures ............................... $ 3,780 $ 3,744
Computer equipment ................................... 4,815 4,700
Leasing assets ....................................... 673 673
Leasehold improvements ............................... 666 651
Other fixed assets ................................... 17 17
------- -------
9,951 9,785
Less: accumulated depreciation and amortization ...... (8,872) (8,218)
------- -------
$ 1,079 $ 1,567
======= =======

Depreciation expense totaled $654,000, $660,000 and $878,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.

F-22

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) RESTRUCTURING ACCRUALS

MFN MERGER

In connection with the MFN Merger, the Company subsequently terminated the MFN
origination activities and consolidated certain activities of MFN. In connection
therewith, the Company recognized certain liabilities related to the costs to
exit these activities and terminate the affected employees of MFN. These
activities include service departments such as accounting, finance, human
resources, information technology, administration, payroll and executive
management. Of these liabilities recognized at the merger date in the amount of
$6.2 million, only the accrual related to facility closures remained outstanding
as of December 31, 2005 and 2004 in the amounts of $545,000 and $1.2 million
respectively.

TFC MERGER

In connection with the TFC Merger, the Company consolidated certain activities
of CPS and TFC. As a result of this consolidation, the Company recognized
certain liabilities related to the costs to integrate and terminate affected
employees of TFC. These activities include service departments such as
accounting, finance, human resources, information technology, administration,
payroll and executive management. The total liabilities recognized by the
Company at the time of the merger were $4.5 million. These costs include the
following:

December 31, December 31, December 31,
2005(2) Activity 2004 Activity 2003
-------- -------- -------- -------- --------
(In thousands)

Severance Payments and
consulting contracts (1) .......... $ 109 $ 309 $ 418 $ 1,908 $ 2,326
Facilities closures ............... 345 477 822 409 1,231
Other obligations ................. -- -- -- 234 234
-------- -------- -------- -------- --------

Total liabilities assumed ..... $ 454 $ 786 $ 1,240 $ 2,551 $ 3,791
======== ======== ======== ======== ========

-------------------
(1) FOR THE PERIOD FROM DECEMBER 31, 2003 TO DECEMBER 31, 2004 THE ACTIVITY
RESULTING IN A CHANGE OF $1.9 MILLION, INCLUDES CHARGES AGAINST THE LIABILITY OF
$621,000 AND THE REVERSAL OF $1.3 MILLION OF COSTS THAT THE COMPANY NO LONGER
EXPECTS TO INCUR. THE $1.3 WAS RECORDED IN THE STATEMENT OF INCOME AS A
REDUCTION OF OPERATING EXPENSES DURING THE YEAR ENDED DECEMBER 31, 2004.
(2) THE COMPANY BELIEVES THAT THIS AMOUNT PROVIDES ADEQUATELY FOR ANTICIPATED
REMAINING COSTS RELATED TO EXITING CERTAIN ACTIVITIES OF TFC, AND THAT AMOUNTS
INDICATED ABOVE ARE REASONABLY ALLOCATED.

F-23

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) SECURITIZATION TRUST DEBT

The Company has completed a number of securitization transactions that are
structured as secured borrowings for financial accounting purposes. The debt
issued in these transactions is shown on the Company's consolidated balance
sheets as "Securitization trust debt," and the components of such debt are
summarized in the following table:

Weighted
Final Receivables Outstanding Outstanding Average
Scheduled Pledged at Principal at Principal at Interest Rate at
Payment December 31, Initial December 31, December 31, December 31,
Series Date (1) 2005 Principal 2005 2004 2005
-------------- -------------- --------- ----------- --------- ---------- ------------

MFN 2001-A June 2007 $ - $ 301,000 $ - $ 3,382 -
TFC 2002-1 August 2007 - 64,552 - 2,574 -
TFC 2002-2 March 2008 - 62,589 - 9,152 -
TFC 2003-1 January 2009 7,779 52,365 6,557 17,703 2.69%
CPS 2003-C March 2010 32,063 87,500 30,550 53,456 3.57%
CPS 2003-D October 2010 31,203 75,000 29,688 50,722 3.50%
CPS 2004-A October 2010 40,316 82,094 40,225 66,737 3.62%
PCR 2004-1 March 2010 28,068 76,257 22,873 52,633 3.52%
CPS 2004-B February 2011 53,330 96,369 52,704 84,185 4.17%
CPS 2004-C April 2011 62,360 100,000 61,779 93,071 3.86%
CPS 2004-D December 2011 84,034 120,000 82,801 109,200 4.44%
CPS 2005-A October 2011 109,749 137,500 110,021 N/A 4.93%
CPS 2005-B February 2012 121,440 130,625 113,194 N/A 4.16%
CPS 2005-C May 2012 186,021 183,300 173,509 N/A 4.61%
CPS 2005-TFC July 2012 78,991 72,525 72,525 N/A 5.72%
CPS 2005-D (2) July 2012 86,083 127,600 127,600 N/A 4.98%
--------- ----------- --------- ----------

$ 921,437 $ 1,769,276 $ 924,026 $ 542,815
========= =========== ========= ==========

-------------------
(1) THE FINAL SCHEDULED PAYMENT DATE REPRESENTS FINAL LEGAL MATURITY OF THE
SECURITIZATION TRUST DEBT. SECURITIZATION TRUST DEBT IS EXPECTED TO
BECOME DUE AND TO BE PAID PRIOR TO THOSE DATES, BASED ON AMORTIZATION
OF THE FINANCE RECEIVABLES PLEDGED TO THE TRUSTS. EXPECTED PAYMENTS,
WHICH WILL DEPEND ON THE PERFORMANCE OF SUCH RECEIVABLES, AS TO WHICH
THERE CAN BE NO ASSURANCE, ARE $328.7 MILLION IN 2006, $223.7 MILLION
IN 2007, $160.5 MILLION IN 2008, $114.6 MILLION IN 2009, $75.1 MILLION
IN 2010, AND $21.4 MILLION IN 2011.

(2) RECEIVABLES PLEDGED AT DECEMBER 31, 2005 EXCLUDES APPROXIMATELY $58.0
MILLION IN CONTRACTS DELIVERED TO THE TRUST IN JANUARY 2006 PURSUANT TO
A PRE-FUNDING STRUCTURE.

All of the securitization trust debt was issued in private placement
transactions to qualified institutional investors. The debt was issued through
wholly-owned, bankruptcy remote subsidiaries of CPS, TFC or MFN, and is secured
by the assets of such subsidiaries, but not by other assets of the Company.
Principal and interest payments are guaranteed by financial guaranty insurance
policies.

The terms of the various Securitization Agreements related to the issuance of
the securitization trust debt require that certain delinquency and credit loss
criteria be met with respect to the collateral pool, and require that the
Company maintain minimum levels of liquidity and net worth and not exceed
maximum leverage levels and maximum financial losses. As a result of waivers and
amendments to these covenants throughout 2004 and 2005, the Company was in
compliance with all such covenants as of December 31, 2005. Without the waivers
and amendments obtained in the first quarter of 2005, the Company would have
been in breach of covenants related to maintaining a minimum level of net worth
and incurring a maximum financial loss as of December 31, 2004.

F-24

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is responsible for the administration and collection of the
Contracts. The Securitization Agreements also require certain funds be held in
restricted cash accounts to provide additional collateral for the borrowings or
to be applied to make payments on the securitization trust debt. As of December
31, 2005, restricted cash under the various agreements totaled approximately
$157.5 million. Interest expense on the securitization trust debt is composed of
the stated rate of interest plus amortization of additional costs of borrowing.
Additional costs of borrowing include facility fees, insurance and amortization
of deferred financing costs. Deferred financing costs related to the
securitization trust debt are amortized in proportion to the principal
distributed to the noteholders. Accordingly, the effective cost of borrowing of
the securitization trust debt is greater than the stated rate of interest.

The wholly-owned, bankruptcy remote subsidiaries of CPS, MFN and TFC were formed
to facilitate the above asset-backed financing transactions. Similar bankruptcy
remote subsidiaries issue the debt outstanding under the Company's warehouse
lines of credit. Bankruptcy remote refers to a legal structure in which it is
expected that the applicable entity would not be included in any bankruptcy
filing by its parent or affiliates. All of the assets of these subsidiaries have
been pledged as collateral for the related debt. All such transactions, treated
as secured financings for accounting and tax purposes, are treated as sales for
all other purposes, including legal and bankruptcy purposes. None of the assets
of these subsidiaries are available to pay other creditors of the Company or its
affiliates.

(8) DEBT

The terms of the Company's significant debt outstanding at December 31, 2005 and
2004 are summarized below:

F-25

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31,
-------------------------
2005 2004
----------- -----------
(In thousands)

RESIDUAL INTEREST FINANCING

Notes secured by the Company's residual interests in its
securitizations. The notes outstanding at December 31, 2004 were
secured by eight securitization transactions and bore interest at
10.0% per annum. The notes outstanding at December 31, 2005 are
secured by ten securitizations and bear interest at a blended interest
rate of 8.36% per annum. In each period, the securitizations pledged
include both sale transactions and secured financing transactions. The
notes are non-recourse obligations of the Company with interest and
principal to be paid solely from the cash distributions on the
retained interests securing the notes. The notes outstanding at
December 31, 2004 were issued in March 2004 with issuance costs of
$1.3 million and were repaid in full in August 2005. The notes
outstanding at December 31, 2005 were issued in November 2005 with
issuance costs of $915,000 and have a final maturity of July 2011. $ 43,745 $ 22,204

SENIOR SECURED DEBT, RELATED PARTY

Notes payable to Levine Leichtman Capital Partners II, L.P.
("LLCP"). The notes consists of separate term notes that each
bear interest at 11.75% per annum, require monthly interest
payments and are due on various dates through December 2006,
after having been amended from higher rates and earlier
maturities. The Company incurred issuance and amendment fees
aggregating $1.3 million in relation to these notes. The notes
are secured by all assets of the Company that are not pledged to
securitization debt, and are the last in a series of borrowings
from LLCP that have taken place since November 1998, which have
also included the issuances to LLCP of warrants to purchase the
Company's common stock. As of December 31, 2005 and 2004, a
warrant to purchase 1,000 shares of common stock at $0.01 per
share remained outstanding which expire in April 2009. $ 40,000 $ 59,829

SUBORDINATED DEBT

Notes bearing interest at 12.50% per annum and 12.00% per annum
at December 31, 2005 and 2004 respectively. The Company incurred
issuance costs of $1.1 million when the notes were issued in
December 1995. The $14.0 million outstanding was repaid on its
maturity date in January 2006. $ 14,000 $ 15,000

RENEWABLE SUBORDINATED NOTES

Notes bearing interest ranging from 5.60% to 11.15%, with a
weighted average rate of 8.53%, and with maturities from January
2006 to November 2015 with a weighted maturity of January 2008.
The Company began issuing the notes in June 2005 and incurred
issuance costs of $250,000. Payments may be required monthly,
quarterly, annually or upon maturity based on the terms of the
individual notes. $ 4,655 $ --
----------- -----------
$ 102,400 $ 97,033
=========== ===========

F-26

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The costs incurred in conjunction with the above debt are recorded as deferred
financing costs on the accompanying balance sheets and is more fully described
in Note 1.

The following table summarizes the contractual maturity amounts of debt as of
December 31, 2005:

Contractual Residual Senior Renewable
maturity interest secured Subordinated subordinated
date financing (1) debt debt notes Total
----------- ------------- -------- -------- -------- --------
2006 $ 17,986 $ 40,000 $ 14,000 $ 1,643 $ 73,629
2007 14,435 -- -- 909 15,344
2008 7,644 -- -- 1,562 9,206
2009 3,680 -- -- 171 3,851
2010 -- -- -- 279 279
Thereafter -- -- -- 91 91
--------------------------------------------------------
$ 43,745 $ 40,000 $ 14,000 $ 4,655 $102,400
========================================================

-------------------
(1) THE CONTRACTUAL MATURITY DATE FOR THE RESIDUAL INTEREST FINANCING IS JULY
2011. THE NOTES ARE EXPECTED TO BE PAID PRIOR TO THAT DATE, BASED ON THE
AMORTIZATION OF THE RELATED SECURITIZATIONS. SINCE THE AMORTIZATION OF THE
RELATED SECURITIZATIONS IS BASED ON THE PERFORMANCE OF THE UNDERLYING FINANCE
RECEIVABLES, THERE CAN BE NO ASSURANCE AS TO THE EXACT TIMING OF PAYMENTS.

(9) SHAREHOLDERS' EQUITY

COMMON STOCK

Holders of common stock are entitled to such dividends as the Company's Board of
Directors, in its discretion, may declare out of funds available, subject to the
terms of any outstanding shares of preferred stock and other restrictions. In
the event of liquidation of the Company, holders of common stock are entitled to
receive, pro rata, all of the assets of the Company available for distribution,
after payment of any liquidation preference to the holders of outstanding shares
of preferred stock. Holders of the shares of common stock have no conversion or
preemptive or other subscription rights and there are no redemption or sinking
fund provisions applicable to the common stock.

The Company is required to comply with various operating and financial covenants
defined in the agreements governing the warehouse lines of credit, senior debt,
and subordinated debt. The covenants restrict the payment of certain
distributions, including dividends (See Note 8.).

Included in common stock at December 31, 2003, is additional paid in capital of
$1.6 million related to the valuation of certain stock options as required by
Financial Interpretation No. 44 ("FIN 44") or the valuation of conditionally
granted options as required under Accounting Principals Board Opinion No. 25
("APB 25"). Included in compensation expense for the years ended December 31,
2005, 2004 and 2003, is $644,000, $271,000 and $1.1 million related to the
amortization of deferred compensation expense and valuation of stock options.

F-27

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK PURCHASES

During 2000, the Company's Board of Directors authorized the Company to purchase
up to $5 million of Company securities. In October 2002, the Board of Directors
authorized the purchase of an additional $5 million of outstanding debt or
equity securities. In October 2004, the Board of Directors authorized the
purchase of an additional $5.0 million of outstanding debt or equity securities.
As of December 31, 2005, the Company had purchased $5.0 million in principal
amount of the debt securities, and $5.0 million of its common stock,
representing 2,365,695 shares.

OPTIONS AND WARRANTS

In 1991, the Company adopted and its sole shareholder approved the 1991 Stock
Option Plan (the "1991 Plan") pursuant to which the Company's Board of Directors
may grant stock options to officers and key employees. The Plan, as amended,
authorizes grants of options to purchase up to 2,700,000 shares of authorized
but unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. Stock options have
terms that range from 7 to 10 years and vest over a range of 0 to 7 years. In
addition to the 1991 Plan, in fiscal 1995, the Company granted 60,000 options to
certain directors of the Company that vest over three years and expire nine
years from the grant date. The Plan terminated in December 2001, without
affecting the validity of the outstanding options.

In July 1997, the Company adopted and its shareholders approved the 1997
Long-Term Incentive Plan (the "1997 Plan") pursuant to which the Company's Board
of Directors may grant stock options, restricted stock and stock appreciation
rights to employees, directors or employees of entities in which the Company has
a controlling or significant equity interest. Options that have been granted
under the 1997 Plan have been granted at an exercise price equal to (or greater
than) the stock's fair market value at the date of the grant, with terms of 10
years and vesting generally over 5 years. In 2001, the shareholders of the
Company approved an amendment to the 1997 Plan providing that an aggregate
maximum of 3,400,000 shares of the Company's common shares may be subject to
awards under the 1997 Plan. In 2003, the shareholders of the Company approved an
amendment to the 1997 Plan to further increase the aggregate maximum number of
shares that may be granted within the Plan to 4,900,000 shares. A further
increase to 6,900,000 shares in the aggregate maximum number of shares that may
be granted was approved by the shareholders in 2004.

In October 1998, the Company's Board of Directors approved a plan to cancel and
reissue certain stock options previously granted to key employees of the
Company. All options granted prior to October 22, 1998, with an option price
greater than $3.25 per share, were repriced to $3.25 per share. In conjunction
with the repricing, a one-year period of non-exercisability was placed on all
repriced options, which period ended on October 21, 1999.

In October 1999, the Company's Board of Directors approved a plan to cancel and
reissue certain stock options previously granted to key employees of the
Company. All options granted prior to October 29, 1999, with an option price
greater than $0.625 per share, were repriced to $0.625 per share. In conjunction
with the repricing, a six-month period of non-exercisability was placed on all
repriced options, which period ended on April 29, 2000.

At December 31, 2005, there were a total of 165,261 additional shares available
for grant under the 1997 Plan and the 1991 Plan. Of the options outstanding at
December 31, 2005, 2004 and 2003, 4,863,654, 1,611,182, and 1,168,042,
respectively, were then exercisable, with weighted-average exercise prices of
$3.38, $2.25, and $1.71, respectively.

F-28

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock option activity during the periods indicated is as follows:

Weighted
Number of Average
Shares Exercise Price
-------- --------
(In thousands, except per share data)
Balance at December 31, 2002 ................ 4,032 $ 1.64
Granted .................................. 1,013 2.46
Exercised ................................ 609 0.93
Canceled ................................. 564 1.69
-------- --------
Balance at December 31, 2003 ................ 3,872 1.96
Granted .................................. 958 3.96
Exercised ................................ 575 1.23
Canceled ................................. 173 2.29
-------- --------
Balance at December 31, 2004 ................ 4,082 2.52
Granted .................................. 1,451 5.39
Exercised ................................ 415 2.08
Canceled ................................. 254 3.17
-------- --------
Balance at December 31, 2005 ................ 4,864 $ 3.38
======== ========

The per share weighted average fair value of stock options granted whose
exercise price was equal to the market price of the stock on the grant date
during the years ended December 31, 2005, 2004 and 2003, was $2.77, $2.30, and
$2.09, respectively.

The per share weighted average fair value and exercise price of stock options
granted whose exercise price was above the market price of the stock on the
grant date during the year ended December 31, 2005 was $3.61 and $6.00,
respectively. The Company did not issue any stock options above the market price
of the stock during the year ended December 31, 2004 and 2003.

The Company did not issue any stock options below the market price of the stock
on the grant date.

During 2002, the Company's Board of Directors approved a program whereby
officers of the Company would be loaned amounts sufficient to enable them to
exercise certain of their outstanding options. See Note 13.

At December 31, 2005, the range of exercise prices, the number, weighted-average
exercise price and weighted-average remaining term of options outstanding and
the number and weighted-average price of options currently exercisable are as
follows:

Options Outstanding Options Exercisable
----------------------------------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Exercise Prices Number Remaining Exercise Price Number Exercise Price
(per share) Outstanding Term (Years) Per Share Exercisable Per Share
------------------------- ----------- ------------ -------------- ----------- --------------
(In thousands, except per share data)

$0.63 - $1.50............ 858 6.43 $ 1.47 858 $ 1.47
$1.51 - $2.50............ 1,092 5.61 1.93 1,092 1.93
$2.51 - $4.00............ 1,225 8.00 3.46 1,225 3.46
$4.01 - $5.04............ 1,035 8.53 4.74 1,035 4.74
$5.05 - $6.10............ 654 9.90 5.99 654 5.99

On November 17, 1998, in conjunction with the issuance of a $25.0 million
subordinated promissory note to an affiliate of LLCP, the Company issued
warrants to purchase up to 3,450,000 shares of common stock at $3.00 per share,
exercisable through November 30, 2005. In April 1999, in conjunction with the

F-29

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

issuance of $5.0 million of an additional subordinated promissory note to an
affiliate of LLCP, the Company issued additional warrants to purchase 1,335,000
shares of the Company's common stock at $0.01 per share to LLCP. As part of the
purchase agreement, the existing warrants to purchase 3,450,000 shares at $3.00
per share were exchanged for warrants to purchase 3,115,000 shares at a price of
$0.01 per share. The aggregate value of the warrants, $12.9 million, which is
comprised of $3.0 million from the original warrants issued in November 1998 and
$9.9 million from the repricing and additional warrants issued in April 1999, is
reported as deferred interest expense to be amortized over the expected life of
the related debt, five years. As of December 31, 2005 and 2004, 1,000 warrants
remained unexercised which expire in April 2009. Such warrants, and the
4,449,000 shares of common stock have, upon the exercise of such warrants, not
been registered for public sale. However, the holder has the right to require
the Company register the warrants and common stock for public sale in the
future.

Also in November 1998, the Company entered into an agreement with the Note
Insurer of its asset-backed securities. The agreement committed the Note Insurer
to provide insurance for the securitization of $560.0 million in asset-backed
securities, of which $250.0 million remained at December 31, 1998. The agreement
provides for a 3% initial Spread Account deposit. As consideration for the
agreement, the Company issued warrants to purchase up to 2,525,114 shares of
common stock at $3.00 per share, subject to anti-dilution adjustments. The
warrants were fully exercisable on the date of grant and expired in December
2003. In November 2003, the Company purchased the warrants from the Note Insurer
for $896,415.

The Company on August 4, 2005, issued six-year warrants with respect to 272,000
shares of its common stock, in a transaction exempted from the registration
requirements of the Securities Act of 1933 as a transaction not involving a
public offering. The warrants are exercisable at $4.85 per share, and were
issued to the lender's nominee in settlement of a claim against the Company that
arose out of a loan of $500,000 made in September 1998. The Company and the
claimant dispute whether the loan was to the Company or to Stanwich Financial
Services Corp. ("Stanwich"). The Company received in exchange for the warrants
an assignment of the lender's claim in bankruptcy against Stanwich, as well as a
release of all claims against the Company. The Company estimated the value of
the warrants to be $794,000 using a Black-Scholes model, assuming a risk-free
interest rate of 3.41%, a six year life and stock price volatility of 63%. The
Company included the value of the warrant, net of a previously recorded accrual
of $500,000, in general & administrative expense for the year ended December 31,
2005.

(10) NET GAIN ON SALE OF CONTRACTS

The following table presents the components of the net gain on sale of
Contracts:

Year Ended
December 31,
2003
-------------
(In thousands)
Gain recognized on sale of Contracts ........... $ 8,433
Deferred acquisition fees and discounts ... .... 4,590
Expenses related to sales ...................... (2,076)
Provision for credit losses .................... (526)
-------------
Net gain on sale of Contracts .................. $ 10,421
=============

No gain on sale was recorded in the year ended December 31, 2005 and 2004 due to
the decision in July 2003 to structure future securitizations as secured
financings, rather than as sales.

F-30

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11) INTEREST INCOME

The following table presents the components of interest income:

Year Ended December 31,
2005 2004 2003
-------- -------- --------
(In thousands)
Interest on Finance Receivables ......... $163,552 $ 99,701 $ 40,380
Residual interest income ................ 5,338 4,634 16,178
Other interest income ................... 2,944 1,483 1,606
-------- -------- --------

Net interest income ..................... $171,834 $105,818 $ 58,164
======== ======== ========

As a result of the uncertainty of collection of the residual assets, the Company
ceased accruing interest on the residual assets from May 2004 through December
2004. In January 2005, the Company resumed accretion of interest on the residual
assets after it determined that there was no longer any significant uncertainty
as to the collection of the assets.

(12) INCOME TAXES

Income taxes consist of the following:

Year Ended December 31,
2005 2004 2003
-------- -------- --------
(In thousands)
Current:
Federal .............................. $ 5,340 $ 712 $ 2,781
State ................................ $ 1,687 862 356
-------- -------- --------
7,027 1,574 3,137

Deferred:
Federal .............................. (3,537) (5,859) (25,345)
State ................................ (2,114) (2,282) (4,141)
Change in valuation allowance ........ (1,376) 6,567 22,915
-------- -------- --------
(7,027) (1,574) (6,571)
-------- -------- --------

Income tax benefit ............ $ -- $ -- $ (3,434)
======== ======== ========

The Company's effective tax expense/(benefit) for the years ended December 31,
2005, 2004 and 2003, differs from the amount determined by applying the
statutory federal rate of 35% to income (loss) before income taxes as follows:

Year Ended December 31,
2005 2004 2003
-------- -------- --------
(In thousands)
Expense (benefit) at federal tax rate ...... $ 1,180 $ (5,561) $ (1,064)
State franchise tax, net of federal
income tax benefit ...................... (277) (1,015) (2,460)
Other ...................................... 473 9 92
Debt Forgiveness ........................... -- -- (22,917)
Valuation allowance ........................ (1,376) 6,567 22,915
-------- -------- --------
$ -- $ -- $ (3,434)
======== ======== ========

F-31

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tax effected cumulative temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 2005 and 2004 are as follows:

December 31,
--------------------
2005 2004
-------- --------
(In thousands)
Deferred Tax Assets:
Finance receivables .................................... $ 21,493 $ 18,090
Provision for loan loss ................................ 961 --
Accrued liabilities .................................... 3,141 5,751
Furniture and equipment ................................ 189 1,016
Equity investment ...................................... -- 82
NOL carryforwards and BILs ............................. 24,137 27,702
Minimum tax credit ..................................... -- 697
Pension Accrual ........................................ 1,313 801
Other .................................................. 1,830 831
-------- --------
Total deferred tax assets ........................... 53,064 54,970
Valuation allowance .................................... (43,724) (45,100)
-------- --------
9,340 9,870
-------- --------

Deferred Tax Liabilities:
NIRs ................................................... (1,808) (1,407)
Provision for loan loss ................................ -- (8,463)
-------- --------
Total deferred tax liabilities....................... (1,808) (9,870)
-------- --------
Net deferred tax asset .............................. $ 7,532 $ --
======== ========

As part of the MFN Merger, CPS acquired certain net operating losses and
built-in loss assets. Moreover, MFN has undergone an ownership change for
purposes of Internal Revenue Code ("IRC") section 382. In general, IRC section
382 imposes an annual limitation on the ability of a loss corporation (i.e., a
corporation with a net operating loss ("NOL") carryforward, credit carryforward,
or certain built-in losses ("BILs")) to utilize its pre-change NOL carryforwards
or BILs to offset taxable income arising after an ownership change. During 1999,
MFN recorded an extraordinary gain from the discharge of indebtedness related to
the emergence from Bankruptcy. This gain was not taxable under IRC section 108.
In accordance with the rules under IRC section 108, MFN has reduced certain tax
attributes including unused net operating losses and tax basis in certain MFN
assets. Deferred taxes have been provided for the estimated tax effect of the
future reversing timing differences related to the discharge of indebtedness
gain as reduced by the tax attributes. Additionally, the Company has established
a valuation allowance of $31.0 million against MFN's deferred tax assets, as it
is not more than likely that these amounts will be realized in the future.

As part of the TFC Merger, CPS acquired certain built in loss assets. Moreover,
TFC has undergone an ownership change for purposes of Internal Revenue Code
("IRC") section 382. In general, IRC section 382 imposes an annual limitation on
the ability of a loss corporation (i.e., a corporation with a net operating loss
("NOL") carryforward, credit carryforward, or certain built-in losses ("BILs"))
to utilize its pre-change NOL carryforwards or BILs to offset taxable income
arising after an ownership change. Additionally, the Company has established a
valuation allowance of $10.0 million against TFC's deferred tax assets, as it is
not more than likely that these amounts will be realized in the future.

In determining the possible future realization of deferred tax assets the
Company considers the taxes paid in the current and prior years that may be
available to recapture as well as future taxable income from the following
sources: (a) reversal of taxable temporary differences, (b) future operations
exclusive of reversing temporary differences, and (c) tax planning strategies
that, if necessary, would be implemented to accelerate taxable income into years
in which net operating losses might otherwise expire.

F-32

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2005, the Company has net operating loss carryforwards for
federal and state income tax purposes of $10.2 million (all of which is subject
to IRC 382 limitations) and $4.2 million, respectively, which are available to
offset future taxable income, if any, subject to IRC section 382 limitations,
through 2021 and 2012-2013, respectively.

The statute of limitations on certain of the Company's tax returns are open and
the returns could be audited by the various tax authorities. From time to time,
there may be differences in opinions with respect to the tax treatment accorded
to certain transactions. When, and if, such differences occur and become
probable and estimable, such amounts will be recognized.

(13) RELATED PARTY TRANSACTIONS

CPS LEASING, INC. RELATED PARTY DIRECT LEASE RECEIVABLES

Included in other assets in the Company's Consolidated Balance Sheet are direct
lease receivables due to CPS Leasing, Inc. from related parties, primarily
companies affiliated with the Company's former Chairman of the Board of
Directors. Such related party direct lease receivables net of a valuation
allowance totaled approximately $552,000 and $1.8 million at December 31, 2005
and 2004, respectively.

LOANS TO OFFICERS TO EXERCISE CERTAIN STOCK OPTIONS

During 2002, the Company's Board of Directors approved a program under which
officers of the Company would be advanced amounts sufficient to enable them to
exercise certain of their outstanding options. Such loans were available for a
limited period of time, and available only to exercise previously repriced
options. The loans bear interest at a rate of 5.50% per annum, and are due in
2007. At December 31, 2005 and 2004, there was $434,000 and $454,000,
respectively outstanding related to these loans. Such amounts have been recorded
as contra-equity within common stock in the Shareholders' Equity section of the
Company's Consolidated Balance Sheet.

(14) COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its facilities and certain computer equipment under
non-cancelable operating leases, which expire through 2010. Future minimum lease
payments at December 31, 2005, under these leases are due during the years ended
December 31 as follows:

Amount
-----------
(In thousands)
2006 ....................................................... $ 4,353
2007 ....................................................... 3,781
2008 ....................................................... 2,407
2009 ....................................................... 341
2010 ....................................................... 203
-----------

Total minimum lease payments ............................... $ 11,085
===========

Rent expense for the years ended December 31, 2005, 2004 and 2003, was
$3.4million, $3.5 million, and $3.9 million, respectively.

F-33

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's facility lease contains certain rental concessions and escalating
rental payments, which are recognized as adjustments to rental expense and are
amortized on a straight-line basis over the term of the lease.

During 2005, 2004 and 2003, the Company received $482,000, $385,000 and
$170,000, respectively, of sublease income, which is included in occupancy
expense. Future minimum sublease payments totaled $507,000 at December 31, 2005.

LITIGATION

STANWICH LITIGATION. CPS was for some time a defendant in a class action (the
"Stanwich Case") brought in the California Superior Court, Los Angeles County.
The original plaintiffs in that case were persons entitled to receive regular
payments (the "Settlement Payments") under out-of-court settlements reached with
third party defendants. Stanwich Financial Services Corp. ("Stanwich"), an
affiliate of the former chairman of the board of directors of CPS, is the entity
that was obligated to pay the Settlement Payments. Stanwich has defaulted on its
payment obligations to the plaintiffs and in June 2001 filed for reorganization
under the Bankruptcy Code, in the federal Bankruptcy Court of Connecticut. At
December 31, 2004, CPS was a defendant only in a cross-claim brought by one of
the other defendants in the case, Bankers Trust Company, which asserted a claim
of contractual indemnity against CPS.

CPS subsequently settled the cross-claim of Bankers Trust by payment of $3.24
million, on or about February 8, 2005. Pursuant to that settlement, the court
has dismissed the cross-claim, with prejudice. The amount paid by the Company
was accrued for and included in Accounts payable and accrued expenses in the
Company's balance sheet as of December 31, 2004.

In November 2001, one of the defendants in the Stanwich Case, Jonathan Pardee,
asserted claims for indemnity against the Company in a separate action, which is
now pending in federal district court in Rhode Island. The Company has filed
counterclaims in the Rhode Island federal court against Mr. Pardee, and has
filed a separate action against Mr. Pardee's Rhode Island attorneys, in the same
court. The action of Mr. Pardee against CPS is stayed, awaiting resolution of an
adversary action brought against Mr. Pardee in the bankruptcy court, which is
hearing the bankruptcy of Stanwich.

The reader should consider that any adverse judgment against CPS in the Stanwich
Case (or the related case in Rhode Island) for indemnification, in an amount
materially in excess of any liability already recorded in respect thereof, could
have a material adverse effect on the Company's financial position.

OTHER LITIGATION. On June 2, 2004, Delmar Coleman filed a lawsuit in the circuit
court of Tuscaloosa, Alabama, , alleging that plaintiff Coleman was harmed by an
alleged failure to refer, in the notice given after repossession of his vehicle,
to the right to purchase the vehicle by tender of the full amount owed under the
retail installment contract. Plaintiff seeks damages in an unspecified amount,
on behalf of a purported nationwide class. CPS removed the case to federal
bankruptcy court, and filed a motion for summary judgment as part of its
adversary proceeding against the plaintiff in the bankruptcy court. The federal
bankruptcy court granted the plaintiff's motion to send the matter back to
Alabama state court. CPS has appealed the ruling. Although CPS believes that it
has one or more defenses to each of the claims made in this lawsuit, no
discovery has yet been conducted and the case is still in its earliest stages.
Accordingly, there can be no assurance as to its outcome.

In June 2004, Plaintiff Jeremy Henry filed a lawsuit against the Company in the
California Superior Court, San Diego County, alleging improper practices related
to the notice given after repossession of a vehicle that he purchased.
Plaintiff's motion for a certification of a class has been denied, and is the
subject of an appeal now before the California Court of Appeal. Irrespective of
the outcome of that appeal, as to which there can be no assurance, the Company
has a number of defenses that may be asserted with respect to the claims of
plaintiff Henry.

F-34

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has recorded a liability as of December 31, 2005 that it believes
represents a sufficient allowance for legal contingencies. Any adverse judgment
against the Company, if in an amount materially in excess of the recorded
liability, could have a material adverse effect on the financial position of the
Company. The Company is involved in various legal matters arising in the normal
course of business. Management believes that any liability as a result of those
matters would not have a material effect on the Company's financial position,
Results of Operations or Cash Flows.

(15) EMPLOYEE BENEFITS

The Company sponsors a pretax savings and profit sharing plan (the "401(k)
Plan") qualified under section 401(k) of the Internal Revenue Code. Under the
401(k) Plan, eligible employees are able to contribute up to 15% of their
compensation (subject to stricter limitation in the case of highly compensated
employees). The Company may, at its discretion, match 100% of employees'
contributions up to $1,000 per employee per calendar year. The Company's
contributions to the 401(k) Plan were $439,000 and $409,000 for the year ended
December 31, 2005 and 2004, respectively. The Company did not make a matching
contribution in 2003.

The Company also sponsors the MFN Financial Corporation Pension Plan ("the
Plan"). The Plan benefits were frozen June 30, 2001. The following table sets
forth the plan's benefit obligations, fair value of plan assets, and funded
status at December 31, 2005 and 2004:

December 31,
--------------------
2005 2004
-------- --------
(In thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year ........ $ 13,683 $ 15,023
Service cost ........................................... -- --
Interest cost .......................................... 845 821
Actuarial (gain) loss .................................. 1,867 (1,616)
Benefits paid .......................................... (596) (545)
-------- --------
Projected benefit obligation, end of year ........... $ 15,799 $ 13,683
======== ========

The accumulated benefit obligation for the plan was $15.8 million and $13.7
million at December 31, 2005 and 2004, respectively.

Change in Plan Assets
Fair value of plan assets, beginning of year ........... $ 13,287 $ 11,253
Return on assets ....................................... 973 1,483
Employer contribution .................................. 207 1,149
Expenses ............................................... (59) (53)
Benefits paid .......................................... (596) (545)
-------- --------
Fair value of plan assets, end of year .............. $ 13,812 $ 13,287
======== ========

F-35

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
---------------------
2005 2004
-------- --------
(In thousands)

Reconciliation of funded status of the plan and net amount recognized
Funded status of the plan .............................................. $ (1,987) $ (396)
Unrecognized loss ...................................................... 4,071 2,062
Unrecognized transition asset .......................................... (11) (46)
Unrecognized prior service cost ........................................ -- --
-------- --------
Net amount recognized ............................................... $ 2,073 $ 1,620
======== ========

Weighted average assumptions used to determine benefit obligations and cost at
December 31, 2005 and 2004 were as follows:

Weighted average assumptions used to determine benefit obligations
Discount rate .......................................................... 5.50% 6.25%
Rate of compensation increase .......................................... N/A N/A

Weighted average assumptions used to determine net periodic benefit cost
Discount rate .......................................................... 5.50% 6.25%
Expected return on plan assets ......................................... 8.50% 9.00%
Rate of compensation increase .......................................... N/A N/A

The Company's overall expected long-term rate of return on assets is 8.50% per
annum as of December 31, 2005. The expected long-term rate of return is based on
the weighted average of historical returns on individual asset categories, which
are described in more detail below.

Amounts recognized on Consolidated Balance Sheet
Prepaid benefit cost ................................................... $ -- $ --
Accrued benefit liability .............................................. (1,987) (396)
Intangible asset ....................................................... -- --
Accumulated other comprehensive loss, pretax ........................... 4,060 2,016
-------- --------
Net amount recognized ............................................... $ 2,073 $ 1,620
======== ========

Components of net periodic benefit cost
Service cost ........................................................... $ -- $ --
Interest Cost .......................................................... 845 821
Expected return on assets .............................................. (1,104) (1,041)
Amortization of transition (asset)/obligation .......................... (35) (35)
Amortization of prior service cost ..................................... -- --
Recognized net actuarial loss .......................................... 48 69
-------- --------
Net periodic benefit cost ........................................... $ (246) $ (186)
======== ========
Unfunded Accumulated Benefit Obligation at Year-End
Projected Benefit Obligation ........................................... $ 15,799 $ 13,683
Accumulated Benefit Obligation ......................................... 15,799 13,683
Fair Value of Plan Assets .............................................. 13,812 13,288

The weighted average asset allocation of the Company's pension benefits at
December 31, 2005 and 2004 were as follows:

Weighted Average Asset Allocation at Year-End

Asset Category
Domestic equity funds .................................... 61.9% 60.9%
International equity funds ............................... 13.1% 11.9%
Domestic fixed income funds .............................. 25.0% 27.1%
Other .................................................... 0.0% 0.1%
-------- --------
Total ................................................. 100.0% 100.0%
======== ========

F-36

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash Flows

Expected Benefit Payouts
2006 ........................................................... $ 476
2007 ........................................................... $ 511
2008 ........................................................... $ 570
2009 ........................................................... $ 574
2010 ........................................................... $ 593
Years 2011 - 2015 .............................................. $ 3,859

Anticipated Contributions in 2006 .............................. $ --

The Company's investment policies and strategies for the pension benefits plan
utilize a target allocation of 70% equity securities and 30% fixed income
securities. The Company's investment goals are to maximize returns subject to
specific risk management policies. The Company addresses risk management and
diversification by the use of a professional investment advisor and several
sub-advisors which invest in domestic and international equity securities and
domestic fixed income securities. Each sub-advisor focuses its investments
within a specific sector of the equity or fixed income market. For the
sub-advisors focused on the equity markets, the sectors are differentiated by
the market capitalization and the relative valuation of the underlying issuer.
For the sub-advisors focused on the fixed income markets, the sectors are
differentiated by the credit quality and the maturity of the underlying fixed
income investment. The investments made by the sub-advisors are readily
marketable and can be sold to fund benefit payment obligations as they become
payable.

(16) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgments were
required in estimating fair value for certain items. The subjective factors
include, among other things, the estimated timing and amount of cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. Since the fair value is estimated as of December 31, 2005 and 2004, the
amounts that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different. The estimated fair values of
financial assets and liabilities at December 31, 2005 and 2004, were as follows:

F-37

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
------------------------------------------
2005 2004
--------- ---------- -------- --------
Carrying Fair Carrying Fair
Financial Instrument Value Value Value Value
-------------------- --------- ---------- -------- --------
(In thousands)

Cash and cash equivalents.................................................... $ 17,789 $ 17,789 $ 14,366 $ 14,366
Restricted cash and cash equivalents.......................................... 157,662 157,662 125,113 125,113
Finance receivables, net ..................................................... 913,576 913,576 550,191 550,191
Residual interest in securitizations ......................................... 25,220 25,220 50,430 50,430
Accrued interest receivable .................................................. 10,930 10,930 6,411 6,411
Note receivable and accrued interest ......................................... 2,178 2,178 2,800 2,800
Warehouse lines of credit .................................................... 35,350 35,350 34,279 34,279
Notes payable ................................................................ 211 211 1,421 1,421
Residual interest financing .................................................. 43,745 43,745 22,204 22,204
Securitization trust debt .................................................... 924,026 914,901 542,815 539,749
Senior secured debt .......................................................... 40,000 40,000 59,829 59,829
Subordinated renewable notes ................................................. 4,655 4,655 -- --
Subordinated debt ............................................................ 14,000 14,000 15,000 15,113

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

The carrying value equals fair value.

FINANCE RECEIVABLES, NET

The carrying value approximates fair value because the related interest rates
are estimated to reflect current market conditions for similar types of
instruments.

RESIDUAL INTEREST IN SECURITIZATIONS

The fair value is estimated by discounting future cash flows using credit and
discount rates that the Company believes reflect the estimated credit, interest
rate and prepayment risks associated with similar types of instruments.

ACCRUED INTEREST RECEIVABLE

The carrying value approximates fair value because the related interest rates
are estimated to reflect current market conditions for similar types of
instruments.

NOTE RECEIVABLE

The fair value is estimated by discounting future cash flows using credit and
discount rates that the Company believes reflect the estimated credit and
interest rate risks associated with similar types of instruments.

F-38

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

WAREHOUSE LINES OF CREDIT, NOTES PAYABLE, RESIDUAL INTEREST FINANCING, AND
SENIOR SECURED DEBT AND SUBORDINATED RENEWABLE NOTES

The carrying value approximates fair value because the related interest rates
are estimated to reflect current market conditions for similar types of secured
instruments.

SECURITIZATION TRUST DEBT

The fair value is estimated by discounting future cash flows using interest
rates that the Company believes reflect the current market rates.

SUBORDINATED DEBT

The fair value is based on a market quote.

(17) LIQUIDITY

The Company's business requires substantial cash to support its purchases of
Contracts and other operating activities. The Company's primary sources of cash
have been cash flows from operating activities, including proceeds from sales of
Contracts, amounts borrowed under various revolving credit facilities (also
sometimes known as warehouse credit facilities), servicing fees on portfolios of
Contracts previously sold in securitization transactions or serviced for third
parties, customer payments of principal and interest on finance receivables,
fees for origination of Contracts, and releases of cash from securitized
portfolios of Contracts in which the Company has retained a residual ownership
interest and from the Spread Accounts associated with such pools. The Company's
primary uses of cash have been the purchases of Contracts, repayment of amounts
borrowed under lines of credit and otherwise, operating expenses such as
employee, interest, occupancy expenses and other general and administrative
expenses, the establishment of Spread Accounts and initial
overcollateralization, if any, and the increase of Credit Enhancement to
required levels in securitization transactions, and income taxes. There can be
no assurance that internally generated cash will be sufficient to meet the
Company's cash demands. The sufficiency of internally generated cash will depend
on the performance of securitized pools (which determines the level of releases
from those portfolios and their related Spread Accounts), the rate of expansion
or contraction in the Company's managed portfolio, and the terms upon which the
Company is able to acquire, sell, and borrow against Contracts.

Net cash provided by operating activities for the years ended December 31, 2005,
2004 and 2003 was $36.7 million, $9.9 million and $98.9 million, respectively.
Cash from operating activities is generally provided by the net releases from
the Company's securitization Trusts. The increase in 2005 vs. 2004 is due in
part to the Company's increased net earnings before the significant increase in
the provision for credit losses. The decrease in 2004 vs. 2003 is primarily the
result of the Company's decision, in July 2003, to treat all of its future
securitizations as secured financings. As a result 2005 and 2004 includes no
activity related to Contracts held for sale.

Net cash used in investing activities for the years ended December 31, 2005,
2004 and 2003, was $411.7 million, $314.0 million, and $178.9 million,
respectively. Cash used in investing activities has generally related to
purchases of Contracts, the cost of the SeaWest Asset Acquisition and the
acquisition of TFC. Purchase of finance receivables held for investors were
$691.3, $506.0 and $175.3 in 2005, 2004 and 2003, respectively. Cash used in the
TFC Merger, net of the cash acquired in the transaction, totaled $10.2 million
for the year ended December 31, 2003.

F-39

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

three securitization transactions held by consolidated subsidiaries and assumed
additional subordinated debt. With the change in the securitization structure
implemented in the third quarter of 2003, $662.4 million of securitization trust
debt was issued in 2005 as compared to $474.7 million in 2004 and $154.4 million
in 2003.

The $125 million warehouse facility was structured to allow the Company to fund
a portion of the purchase price of Contracts by drawing against a floating rate
variable funding note issued by its consolidated subsidiary CPS Warehouse Trust.
This facility was established on March 7, 2002, and the maximum amount was
increased to $125 million in November 2002. Up to 73.0% of the principal balance
of Contracts could have been advanced to the Company under this facility bore
interest at a rate of one-month commercial paper plus 1.50% per annum. This
facility was due to expire on April 11, 2006, but the Company elected to
terminate it on June 29, 2005. At December 31, 2004, $34.3 million was
outstanding under this facility.

The Company securitized $674.4 million of Contracts in five private placement
transactions during the year ended December 31, 2005 compared to $463.9 million
in five private placements during 2004. All of these transactions were
structured as secured financings and, therefore, resulted in no gain on sale. In
March 2004 a wholly-owned bankruptcy remote consolidated subsidiary of the
Company issued $44 million of asset-backed notes secured by its retained
interest in eight term securitization transactions. The notes had an interest
rate of 10% per annum and a final maturity in October 2009, were required to be
repaid from the distributions on the underlying retained interests. In
connection with the issuance of the notes, the Company incurred and capitalized
issuance costs of $1.3 million. The Company repaid the notes in full in August
2005. In November 2005, the Company completed similar securitizations whereby a
wholly-owned bankruptcy remote consolidated subsidiary of the Company issued
$45.8 million of asset-backed notes secured by its retained interest in tem term
securitization transactions. These notes, which bear interest at a blended
interest rate of 8.36% per annum and have a final maturity in July 2011, are
required to be repaid from the distributions on the underlying retained
interests. In connection with the issuance of the notes, the Company incurred
and capitalized issuance costs of $915,000.

F-40

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the portfolio owned by non consolidated subsidiaries, cash used to increase
Credit Enhancement amounts to required levels for the years ended December 31,
2005, 2004 and 2003 was zero, $2.9 million and $20.9 million, respectively. Cash
released from Trusts and their related Spread Accounts to the Company related to
the portfolio owned by consolidated subsidiaries for the years ended December
31, 2005, 2004 and 2003 was $23.1 million, $21.4 million and $25.9 million,
respectively. Changes in the amount of Credit Enhancement required for term
securitization transactions and releases from Trusts and their related Spread
Accounts are affected by the relative size, seasoning and performance of the
various pools of Contracts securitized that make up the Company's managed
portfolio to which the respective Spread Accounts are related. During the years
ended December 31, 2005 and December 31, 2004 the Company made no initial
deposits to Spread Accounts and funded no initial overcollateralization related
to its term securitization transactions owned by non-consolidated subsidiaries,
compared to $18.7 million in the 2003 The acquisition of Contracts for
subsequent sale in securitization transactions, and the need to fund Spread
Accounts and initial overcollateralization, if any, and increase Credit
Enhancement levels when those transactions take place, results in a continuing
need for capital. The amount of capital required is most heavily dependent on
the rate of the Company's Contract purchases (other than flow purchases), the
required level of initial Credit Enhancement in securitizations, and the extent
to which the previously established Trusts and their related Spread Accounts
either release cash to the Company or capture cash from collections on
securitized Contracts. The Company is currently limited in its ability to
purchase Contracts due to certain liquidity constraints. As of December 31,
2005, the Company had cash on hand of $17.8 million and available Contract
purchase commitments from its warehouse credit facilities of $314.6 million. The
Company's plans to manage the need for liquidity include the completion of
additional term securitizations that would provide additional credit
availability from the warehouse credit facilities, and matching its levels of
Contract purchases to its availability of cash. There can be no assurance that
the Company will be able to complete term securitizations on favorable economic
terms or that the Company will be able to complete term securitizations at all.
If the Company is unable to complete such securitizations, interest income and
other portfolio related income would decrease.

The Servicing Agreements of the Company's securitization transactions are
terminable by the insurers of certain of the Trust's obligations ("Note
Insurers") in the event of certain defaults by the Company and under certain
other circumstances. Were a Note Insurer in the future to exercise its option to
terminate the Servicing Agreements, such a termination would have a material
adverse effect on the Company's liquidity and results of operations. The Company
continues to receive Servicer extensions on a monthly and/or quarterly basis,
pursuant to the Servicing Agreements.

F-41

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(18) SELECTED QUARTERLY DATA (UNAUDITED)

Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31, June 30, September 30, December 31,
-------- -------- ------------ ------------
(In thousands, except per share data)

2005
Revenues ............................ $ 41,833 $ 47,776 $ 49,374 $ 54,714
Income (loss) before income taxes ... (239) 545 1,398 1,668
Net income (loss) ................... (239) 545 1,398 1,668
Income (loss) per share:
Basic ............................ $ (0.01) $ 0.03 $ 0.06 $ 0.08
Diluted .......................... (0.01) 0.02 0.06 0.07
2004
Revenues ............................ $ 27,522 $ 32,687 $ 34,913 $ 37,570
Loss before income taxes ............ (1,407) (174) (2,061) (12,246)
Net loss ............................ (1,407) (174) (2,061) (12,246)
Loss per share:
Basic ............................ $ (0.07) $ (0.01) $ (0.10) $ (0.57)
Diluted .......................... (0.07) (0.01) (0.10) (0.57)

F-42