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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________.

COMMISSION FILE NUMBER: 1-11416

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


California 33-0459135
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

16355 Laguna Canyon Road, Irvine, California 92618
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER: (949) 753-6800

FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: N/A

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of August 12, 2004 the registrant had 21,354,069 common shares outstanding.

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004


PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003............................3

Unaudited Condensed Consolidated Statements of Operations
for the three-month and six-month periods ended June 30,
2004 and 2003 .................................................4

Unaudited Condensed Consolidated Statements of Cash Flows
for the six-month periods ended June 30, 2004 and 2003.........5

Notes to Unaudited Condensed Consolidated Financial
Statements.....................................................6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................21

Item 3. Quantitative and Qualitative Disclosures About Market Risk....36

Item 4. Controls and Procedures.......................................37


PART II. OTHER INFORMATION

Item 1. Legal Proceedings.............................................38

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities..........................................38

Item 4 Submission of Matters to a Vote of Security Holders...........39

Item 6. Exhibits and Reports on Form 8-K..............................39

Signatures....................................................................40

Certifications................................................................41


2



ITEM 1. FINANCIAL STATEMENTS

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


JUNE 30, DECEMBER 31,
2004 2003
---------- ----------

ASSETS
Cash $ 15,292 $ 33,209
Restricted cash 70,049 67,277

Finance receivables 460,005 302,078
Less: Allowance for finance credit losses (38,731) (35,889)
---------- ----------
Finance receivables, net 421,274 266,189

Servicing fees receivable 5,573 3,942
Residual interest in securitizations 81,304 111,702
Furniture and equipment, net 1,740 826
Deferred financing costs 4,443 1,529
Other assets 13,925 7,796
---------- ----------
$ 613,600 $ 492,470
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 23,088 $ 22,920
Warehouse lines of credit 57,114 33,709
Tax liabilities, net 3,083 2,768
Capital lease obligation 424 --
Notes payable 2,132 3,330
Residual interest financing 33,799 --
Securitization trust debt 337,058 245,118
Senior secured debt 59,829 49,965
Subordinated debt 15,000 35,000
Related party debt -- 17,500
---------- ----------
531,527 410,310
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; 21,286,769 and 20,588,924
shares issued and outstanding at June 30, 2004 and
December 31, 2003, respectively 65,701 64,397
Retained earnings 19,411 20,992
Comprehensive loss - minimum pension benefit obligation, net (2,426) (2,426)
Deferred compensation (613) (803)
---------- ----------
82,073 82,160
---------- ----------
$ 613,600 $ 492,470
========== ==========

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



3



CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)



THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------

2004 2003 2004 2003
--------- --------- --------- ---------

REVENUES:
Gain on sale of contracts, net $ -- $ 4,109 $ -- $ 8,664
Interest income 25,722 11,442 46,145 20,770
Servicing fees 3,507 4,463 6,831 9,065
Other income 3,458 4,333 7,233 8,763
--------- --------- --------- ---------
32,687 24,347 60,209 47,262
--------- --------- --------- ---------
EXPENSES:
Employee costs 9,794 9,442 19,447 17,889
General and administrative 6,466 4,049 10,433 8,081
Interest 7,500 5,086 13,412 10,617
Provision for credit losses 6,300 -- 13,050 --
Marketing 1,784 1,395 3,317 2,728
Occupancy 808 1,004 1,751 1,984
Depreciation and amortization 209 239 380 477
--------- --------- --------- ---------
32,861 21,215 61,790 41,776
--------- --------- --------- ---------
Income (loss) before income tax expense (benefit) (174) 3,132 (1,581) 5,486
Income tax expense (benefit) -- 490 -- (3,434)
--------- --------- --------- ---------
Net income (loss) $ (174) $ 2,642 $ (1,581) $ 8,920
========= ========= ========= =========

Earnings (loss) per share:
Basic $ (0.01) $ 0.13 $ (0.08) $ 0.44
Diluted (0.01) 0.12 (0.08) 0.41

Number of shares used in computing
earnings (loss) per share:
Basic 21,016 20,209 20,827 20,239
Diluted 21,016 21,565 20,827 22,160



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4



CONSUMER PORTFOLIO SERVICES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)


SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,581) $ 8,920
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 380 477
Amortization of deferred financing costs 1,206 1,413
Provision for credit losses 13,050 526
NIR gains recognized -- (6,676)
Loss on sale of furniture and equipment 8 --
Stock-based compensation expense 148 447
Releases of cash from Trusts to Company 12,140 13,859
Initial deposits to Trusts -- (17,299)
Net deposits to Trusts to increase Credit Enhancement (1,344) (1,325)
Decrease in receivables from Trusts and investment in
subordinated certificates 19,602 7,769
Changes in assets and liabilities:
Restricted cash (2,772) 2,819
Purchases of contracts held for sale -- (182,045)
Amortization and liquidation of contracts held for sale -- 216,769
Servicing fees receivable and other assets (7,825) 3,885
Accounts payable and accrued expenses 168 (1,299)
Tax liabilities, net 315 (1,348)
---------- ----------
Net cash provided by operating activities 33,495 46,892

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of contracts held for investment (255,422) --
Amortization of contracts held for investment 87,287 --
Purchase of furniture and equipment (758) (67)
Purchase of subsidiary, net of cash acquired -- (10,181)
---------- ----------
Net cash used in investing activities (168,893) (10,248)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior secured debt 25,000 25,000
Proceeds from issuance of securitization trust debt 160,728 --
Proceeds from issuance of residual financing debt 44,000 --
Net proceeds from warehouse lines of credit 23,405 2,188
Repayment of residual interest financing debt (10,201) --
Repayment of securitization trust debt (68,788) (37,205)
Repayment of senior secured debt (15,136) (22,576)
Repayment of subordinated debt (20,000) (34)
Repayment of capital lease obligations (56) (51)
Repayment of notes payable (1,198) (1,058)
Repayment of related party debt (16,500) --
Payment of financing costs (4,120) (1,300)
Purchase of common stock (25) (1,116)
Exercise of options and warrants 372 172
---------- ----------
Net cash provided by (used in) financing activities 117,481 (35,980)
---------- ----------
Increase (decrease) in cash (17,917) 664

Cash at beginning of period 33,209 32,947
---------- ----------
Cash at end of period $ 15,292 $ 33,611
========== ==========

Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest $ 12,425 $ 7,849
Income taxes 831 (2,085)

Supplemental disclosure of non-cash investing and financing activities:
Stock compensation $ 42 $ 447
Conversion of related party debt to common stock 1,000 --
Furniture and equipment acquired through capital leases 480 --


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED 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
primarily in purchasing, selling and servicing retail automobile installment
sale contracts ("Contracts" or "finance receivables") originated by licensed
motor vehicle dealers ("Dealers") located throughout the United States. The
Company purchases 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.

ACQUISITION OF MFN FINANCIAL CORPORATION

On March 8, 2002, CPS acquired 100% of MFN Financial Corporation, a Delaware
corporation ("MFN") and its subsidiaries, by the merger (the "MFN Merger") of a
direct wholly-owned subsidiary of CPS with and into MFN. MFN thus became a
wholly-owned subsidiary of CPS, and CPS thus acquired the assets of MFN, which
consisted principally of interests in automobile installment sales finance
Contracts and the facilities for originating and servicing such Contracts. The
MFN Merger was accounted for as a purchase.

MFN, through its primary operating subsidiary, Mercury Finance Company LLC, was
in the business of purchasing automobile installment sales finance Contracts
from Dealers, and securitizing and servicing such Contracts. CPS continues to
use the assets acquired in the MFN Merger in the automobile finance business,
but has disposed of a portion of such assets. MFN has ceased to purchase
automobile installment sales finance Contracts, and does not anticipate
recommencing such purchasing. In connection with the termination of MFN
origination activities and the integration and consolidation of certain
activities, the Company has 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. These costs include the following:


JUNE 30, DECEMBER 31, MARCH 8,
2004(1) ACTIVITY 2003 ACTIVITY 2002
------- ------- ------- ------- -------
(IN THOUSANDS)

Severance payments and consulting contracts ........................ $ -- $ -- $ -- $3,215 $3,215
Facilities closures ................................................ 1,551 338 1,889 263 2,152
Termination of contracts, leases, services and other obligations.... -- -- -- 597 597
Acquisition expenses accrued but unpaid ............................ -- -- -- 250 250
------- ------- ------- ------- -------

Total liabilities assumed .......................................... $1,551 $ 338 $1,889 $4,325 $6,214
======= ======= ======= ======= =======


- -----------
(1) The initial accrual amount recorded was $6.2 million on March 8, 2002 and
the remaining accrual recorded in the Condensed Consolidated Balance Sheet of
the Company is approximately $1.6 million, $1.9 million, and $2.9 million as of
June 30, 2004, December 31, 2003 and December 31, 2002, respectively. The
Company believes that this amount provides adequately for anticipated remaining
costs related to exiting certain activities of MFN, and that amounts indicated
above are reasonably allocated.


The Company's Condensed Consolidated Balance Sheet and Condensed Consolidated
Statements of Operations as of and for the three and six months ended June 30,
2004 and 2003, include the balance sheet accounts and results of operations of
MFN Financial Corporation.

The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition.

6


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 8, 2002
---------
(IN THOUSANDS)
Cash ...................................................... $ 93,782
Restricted cash ........................................... 25,499
Finance Contracts, net .................................... 186,554
Residual interest in securitizations ...................... 32,485
Other assets .............................................. 12,006
---------
Total assets acquired ............................... 350,326
---------
Securitization trust debt ................................. 156,923
Subordinated debt ......................................... 22,500
Accounts payable and other liabilities .................... 30,242
---------
Total liabilities assumed ........................... 209,665
--------
Net assets acquired ................................. 140,661
Less: purchase price ................................ 123,249
---------
Excess of net assets acquired over purchase price.... $ 17,412
=========


ACQUISITION OF TFC ENTERPRISES, INC.

On May 20, 2003, CPS acquired TFC Enterprises, Inc., a Delaware corporation
("TFC") and its subsidiaries, by the merger (the "TFC Merger") of a direct,
wholly-owned subsidiary of CPS, with and into TFC. In the TFC Merger, TFC became
a wholly-owned subsidiary of CPS. CPS thus acquired the assets of TFC and its
subsidiaries, which consisted principally of interests in motor vehicle
installment sales finance Contracts, interests in securitized pools of such
Contracts, and the facilities for originating and servicing such Contracts. The
TFC Merger was accounted for as a purchase.

TFC, through its primary operating subsidiary, "The Finance Company," purchases
motor vehicle installment sales finance Contracts from automobile Dealers, and
securitizes and services such Contracts. CPS has continued to use the assets
acquired in the TFC Merger in the automobile finance business.

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


JUNE 30, DECEMBER 31,
2004(1) ACTIVITY 2003
------ ------ ------
(IN THOUSANDS)

Severance payments and consulting contracts.... $1,860 $ 466 $2,326
Facilities closures ........................... 1,006 225 1,231
Other obligations ............................. 75 159 234
------ ------ ------

Total liabilities assumed ................. $2,941 $ 850 $3,791
====== ====== ======


- ------------
(1) The initial accrual amount recorded was $4.5 million on May 20, 2003 and the
remaining accrual recorded in the Condensed Consolidated Balance Sheet of the
Company is approximately $2.9 million and $3.8 million as of June 30, 2004 and
December 31, 2003, respectively. 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.


7


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


At the closing of the TFC Merger, each outstanding share of common stock of TFC
became a right to receive $1.87 per share in cash. The total merger
consideration paid to stockholders of TFC was approximately $21.6 million. The
recipients of the total merger consideration had no material relationship
with CPS, its directors, its officers or any associates of such directors or
officers, to the best of CPS's knowledge. The merger consideration was paid with
existing cash of CPS. The aggregate purchase price, including expenses related
to the transaction, was approximately $23.7 million.

The Company's Condensed Consolidated Balance Sheet and Condensed Consolidated
Statements of Operations as of and for the three and six months ended June 30,
2004, include the balance sheet accounts of TFC Enterprises, Inc. as of June 30,
2004 and the results of operations subsequent to May 20, 2003, the merger date.
The Company has recorded certain purchase accounting adjustments on its
Condensed Consolidated Balance Sheet, which are estimates based on available
information.

The following table summarizes the recorded amounts of the assets acquired and
liabilities assumed at the date of acquisition.

MAY 20, 2003
------------
(IN THOUSANDS)
Cash ..................................... $ 13,545
Restricted cash .......................... 17,723
Finance Contracts, net ................... 125,108
Other assets ............................. 502
--------
Total assets acquired .............. 156,878
--------
Securitization trust debt ................ 115,597
Subordinated debt ........................ 6,321
Capital lease obligations ................ 17
Accounts payable and other liabilities.... 11,217
--------
Total liabilities assumed .......... 133,152
--------
Purchase price ..................... 23,726
========


PRO FORMA RESULTS OF OPERATIONS

Selected unaudited pro forma combined results of operations for the three- and
six-month periods ended June 30, 2003, assuming the TFC Merger occurred on
January 1, 2003, are as follows:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2003 2003
---------------- ----------------
(IN THOUSANDS)
Total revenue ................ $ 26,340 $ 52,926
Net earnings ................. $ 2,646 $ 9,349
Basic net earnings per share . $ 0.13 $ 0.46
Diluted net earnings per share $ 0.12 $ 0.43



ACQUISITION OF RECEIVABLES AND OTHER ASSETS FROM SEAWEST FINANCIAL CORPORATION

The Company acquired on April 2, 2004 automotive receivables and other assets
(the "SeaWest Asset Acquisition") of SeaWest Financial Corporation ("SeaWest").
The aggregate purchase price was approximately $63.2 million, which was funded
with the proceeds of an acquisition financing facility and existing cash. The
other assets included a $2.8 million note to an affiliate of SeaWest and certain
furniture and equipment. In addition, the Company has been appointed the
successor servicer on three separate term securitization transactions originally
sponsored by SeaWest (the "SeaWest Third Party Portfolio").


BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements of the Company have
been prepared in conformity with accounting principles generally accepted in the
United States of America, with the instructions to Form 10-Q and with Article 10
of Regulation S-X of the Securities and Exchange Commission, and include all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such


8


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


adjustments are, in the opinion of management, of a normal recurring nature. In
addition, certain items in prior period financial statements have been
reclassified for comparability to current period presentation. Results for the
three- and six-month periods ended June 30, 2004 are not necessarily indicative
of the operating results to be expected for the full year.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.


RECENT DEVELOPMENTS

In July 2003, the Company agreed with the other parties to its continuous or
"warehouse" securitization facilities to amend the terms of such facilities. The
effect of the amendments is to cause use of those facilities to be treated for
financial accounting purposes as borrowings secured by pledged Contracts, rather
than as sales of such Contracts.

In addition, the Company announced in August 2003 that it would structure its
future term securitization transactions so that they would be treated for
financial accounting purposes as borrowings secured by receivables, rather than
as sales of receivables. The new structure for the warehouse facilities
described in the preceding paragraph and the change in structure of the
Company's term securitizations 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 on its
balance sheet; (iii) cash deposited to enhance the credit of the securitization
transactions 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) the portion of scheduled payments
on the receivables representing interest is recorded as revenue as accrued 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. The changes initially have resulted in the Company reporting lower
earnings than it would have reported if it had continued structuring its
securitizations to require recognition of gain on sale.


TREATMENT OF SECURITIZATIONS

Gain on sale may be 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, retained 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).

As of June 30, 2004 and December 31, 2003, the line item "Residual interest in
securitizations" on the Company's Condensed Consolidated Balance Sheet
represents the residual interests in certain term securitizations but no
residual interest in warehouse securitizations, because the Company's warehouse
securitizations were restructured in July 2003 as secured financings. Subsequent
term securitizations of receivables purchased under the CPS programs in


9


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


September 2003, December 2003 and May 2004 were also structured as secured
financings. In addition, in June 2004, an affiliate of the Company completed a
term securitization of Contracts purchased in the SeaWest Asset Acquisition and
under TFC's programs, which was structured as a secured financing. The warehouse
securitizations are accordingly reflected in the line items "Finance
receivables" and "Warehouse lines of credit" on the Company's Condensed
Consolidated Balance Sheet, and the term securitizations are reflected in the
line items "Finance receivables" and "Securitization trust debt." The "Residual
interest in securitizations" represents the discounted sum of expected future
releases from securitization trusts. Accordingly, the valuation of the residual
is heavily dependent on estimates of future performance.


The Company's securitization structure is generally 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 (the "Notes"), generally in a principal
amount equal to 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. 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 (a "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, and then maintained at
those levels. The specified levels are generally computed as a percentage of the
remaining unpaid principal amount under the related Contracts. The specified
levels at which the Credit Enhancements are 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 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 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 in those prior securitizations 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 in those prior
securitizations are not consolidated into the Company's Condensed Consolidated
Balance Sheet.

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 that it issues, (ii) the promissory notes are in an
aggregate principal amount of not more than 73.0% to 73.5% of the aggregate
principal balance of the Contracts (that is, at least 26.5%
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 provide for the
transactions to be reflected as secured financings for financial accounting
purposes. The Contracts held by the warehouse SPS and the promissory notes that
it issues are therefore included in the Company's Condensed Consolidated
Financial Statements as of June 30, 2004 and December 31, 2003 as assets and
liabilities, respectively.

10


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Upon each sale of Contracts in a securitization structured as a secured
financing, whether a term securitization or a continuous securitization, the
Company retains on its Condensed 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 Condensed Consolidated Balance Sheet the
Contracts sold and added to its Condensed Consolidated Balance Sheet (i) the
cash received 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
Condensed Consolidated Balance Sheet will reflect securitization transactions
structured both as sales and as secured financings.

With respect to the prior securitizations structured as sales for financial
accounting purposes, the Company allocated 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 recognized 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 and timing 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 approximately 14% per
annum except for certain collections from charged off receivables related to the
Company's securitizations in 2001 and later for which the Company has used a
discount rate of approximately 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 Residuals 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 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, the excess is released to the Company,
or in certain cases is transferred to other Spread Accounts that may be below
their required levels. If the Spread Account balance is not at the required
credit enhancement level, then the excess cash collected is retained in the
Spread Account 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


11


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED 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. 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
June 30, 2004, the Company has used prepayment estimates of approximately 18.9%
to 23.5% 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 and projected
future recovery levels. In valuing the Residuals as of June 30, 2004, the
Company estimates that charge-offs as a percentage of the original principal
balance will approximate 15.6% to 23.5% cumulatively over the lives of the
related Contracts, with recovery rates approximating 2.5% to 5.4% of the
original principal balance.

Following a securitization that is structured as a sale for financial accounting
purposes, interest income is generally recognized on the balance of the
Residuals at the same rate as used for calculating the present value of the
NIRs, which is equal to 14% per annum. In addition, the Company will recognize
additional revenue from the Residuals if the actual performance of the Contracts
is better than the original estimate. If the actual performance of the Contracts
were worse than the original estimate, then an impairment loss would be required
to reduce the carrying value of the Residuals. 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 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 have no recourse to the Company for failure of the
Contract obligors to make payments on a timely basis. The Company's Residuals,
however, are subordinate to the Notes until the Noteholders are fully paid, and
the Company is therefore at risk to that extent.


OTHER INCOME

Other income consists primarily of recoveries on certain previously charged off
Contracts and state sales tax refunds.


STOCK BASED COMPENSATION

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 measurement date.
The Company provides the pro forma net income (loss), pro forma earnings (loss)
per share, and stock based compensation plan disclosure requirements as set
forth in SFAS No. 123. The Company accounts for re-priced options as variable
awards.

12


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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 reduced to the pro
forma amounts indicated below.


THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------------

2004 2003 2004 2003
----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss), as reported ............................. $ (174) $ 2,642 $ (1,581) 8,920
Stock-based employee compensation expense,
fair value method, net of tax .............................. (209) (162) (396) (425)
Previously recorded stock-based employee
compensation expense, intrinsic value method, net of tax.... 85 340 86 259
----------- ---------- ---------- ----------

Pro forma net income (loss) ................................ $ (298) $ 2,820 $ (1,891) 8,754
=========== ========== ========== ==========

Net income (loss) per share
Basic, as reported ......................................... $ (0.01) $ 0.13 $ (0.08) $ 0.44
Diluted, as reported (1) ................................... $ (0.01) $ 0.12 $ (0.08) $ 0.41

Pro forma Basic ............................................ $ (0.01) $ 0.14 $ (0.09) $ 0.43
Pro forma Diluted (1) ...................................... $ (0.01) $ 0.13 $ (0.09) $ 0.41



- ----------
(1) The assumed conversion of certain subordinated debt during the three- and
six-month periods ended June 30, 2003, resulted in an increase to income for
purposes of the diluted earnings per share calculation of $18,000 and $268,000,
respectively.


Pro forma net income (loss) and income (loss) per share reflect only options
granted in the years ended December 31, 1996 to June 30, 2004. Therefore, the
full effect of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma amounts presented above, as compensation
expense for options granted prior to 1996 is not considered.

PURCHASES OF COMPANY STOCK

During the six-month periods ended June 30, 2004 and 2003, the Company purchased
6,738 and 519,926 shares, respectively, of its common stock at an average price
of $3.75 and $2.15, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003, FIN 46R), CONSOLIDATION OF VARIABLE INTEREST ENTITIES, which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in Variable
Interest Entities ("VIEs") created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, the Interpretation will be


13


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


applied beginning on January 1, 2005. For any VIEs that must be consolidated
under FIN 46R that were created before January 1, 2004, the assets, liabilities
and noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used. Certain
of the Company's subsidiaries are qualifying special purpose entities formed in
connection with off-balance sheet securitizations and are not subject to the
requirements of FIN 46R. The Company's subsidiaries that are considered VIEs
subject to the requirements of FIN 46R consist of Trusts related to the
Company's on-balance sheet securitizations, which are currently consolidated and
in the Company's consolidated financial statements. The adoption of FIN 46R did
not have a material effect on the Company.


(2) FINANCE RECEIVABLES

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


JUNE 30, DECEMBER 31,
2004 2003
---------- ----------

Finance Receivables (IN THOUSANDS)
Automobile
Simple Interest ............................................ $ 375,104 $ 178,679
Pre-compute or "Rule of 78's", net of unearned interest .... 110,845 133,339
---------- ----------
Finance Receivables, net of unearned interest .............. 485,949 312,018
Less: Unearned acquisition fees and discounts .............. (25,944) (9,940)
---------- ----------
Finance Receivables ........................................ $ 460,005 $ 302,078
========== ==========


14


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following table presents the contractual maturities of Finance Receivables,
net of unearned income as of June 30, 2004:

AMOUNT %
-------- -------
(DOLLARS IN THOUSANDS)
Due in 2004 ......................... $ 6,238 1.29%
Due in 2005 ......................... 27,435 5.65%
Due in 2006 ......................... 45,602 9.38%
Due in 2007 ......................... 60,204 12.39%
Due in 2008 ......................... 142,405 29.30%
Due thereafter ...................... 204,065 41.99%
-------- -------

Total ............................. $485,949 100.00%
======== =======


The following table presents a summary of the activity for the allowance for
credit losses for the six-month periods ended June 30, 2004 and 2003:

JUNE 30, JUNE 30,
2004 2003
--------- ---------
(IN THOUSANDS)

Balance at beginning of period ........... ......$35,889$25,828
Addition to allowance for credit losses from
acquisitions ................................. -- 24,271
Provision for credit losses .................... 13,050 526
Net charge offs ................................ (10,208) (10,283)
--------- ---------
Balance at end of period ....................... $ 38,731 $ 40,342
========= =========

(3) RESIDUAL INTEREST IN SECURITIZATIONS

The following table presents the components of the residual interest in
securitizations:

JUNE 30, DECEMBER 31,
2004 2003
--------- ---------
(IN THOUSANDS)

Cash, commercial paper, United States government
securities and other qualifying investments
(Spread Account) ................................. $ 29,363 $ 35,693
Receivables from Trusts (NIRs) ..................... 20,097 20,959
Overcollateralization .............................. 27,540 38,548
Investment in subordinated certificates ............ 4,304 16,502
--------- ---------

Residual interest in securitizations ............... $ 81,304 $111,702
========= =========

15


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following table presents estimated remaining undiscounted credit losses
included in the estimated fair value of the residual interest in securitizations
as a percentage of the Company's servicing portfolio subject to recourse
provisions:


JUNE 30, DECEMBER 31,
2004 2003
-------- --------
(DOLLARS IN THOUSANDS)


Undiscounted estimated credit losses .................. $ 29,428 $ 47,935
Managed portfolio held by non-consolidated subsidiary.. 322,953 425,534
Undiscounted estimated credit losses as percentage of
managed portfolio held by non-consolidated subsidiary.. 9.1% 11.3%



(4) RESIDUAL INTEREST FINANCING

On March 16, 2004, a special-purpose subsidiary of CPS issued $44 million of
asset-backed 10% notes. The notes, issued by CPS Auto Receivables Trust 2004-R,
are rated BBB by Standard & Poor's and have a final maturity date of October 16,
2009. The notes are secured by the Company's retained interest in four
securitizations sponsored by CPS, two securitizations sponsored by MFN, and two
securitization transactions sponsored by TFC. The notes are non-recourse
obligations of the Company and will be repaid solely from the cash distributions
on the retained interests securing the notes.


(5) SECURITIZATION TRUST DEBT

The Company's MFN and TFC subsidiaries have completed a number of securitization
transactions that are treated as secured borrowings for financial accounting
purposes, rather than as sales. CPS completed two such term securitization
transactions in 2003 and one in the six months ended June 30, 2004. In addition,
a subsidiary created as part of the SeaWest Asset Acquisition, Pacific Coast
Receivables Corp., completed a similarly structured transaction in June 2004.
The debt issued in these transactions is shown on the Company's consolidated
balance sheet as "Securitization Trust Debt," and the components of such debt
are summarized in the following table:


Outstanding Outstanding Weighted Average
Initial Principal at Principal at Coupon as of
Series Issue Date Principal June 30, 2004 December 31, 2003 June 30, 2004
- --------------- ------------------------ ----------------- -------------------- ------------------- ----------------
(Dollars in thousands)

PCR2004-1 June 24, 2004 $ 76,257 $ 76,257 $ N/A 3.07%
CPS2004-A May 5, 2004 76,347 73,001 N/A 3.16%
CPS2003-D December 16, 2003 71,250 63,907 71,250 2.88%
CPS2003-C September 30, 2003 83,125 66,828 77,928 2.76%
TFC2003-1 May 20, 2003 52,365 26,127 37,114 2.69%
TFC2002-2 October 9, 2002 62,589 15,550 25,436 2.95%
TFC2002-1 March 19, 2002 64,552 6,009 12,403 4.23%
MFN2001-A June 28, 2001 301,000 9,379 20,987 5.07%
----------------- -------------------- -------------------
$ 787,485 $ 337,058 $ 245,118
================= ==================== ===================


All of the securitization trust debt was sold in private placement transactions
to qualified institutional buyers. 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.

16


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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 a minimum net worth and meet other financial tests. As of June
30, 2004, the Company was not in default of any provisions of the agreements as
amended. 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 June 30,
2004, restricted cash under the various agreements totaled approximately $61.3
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 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.


(6) SENIOR SECURED DEBT

On February 3, 2003, the Company borrowed $25 million from Levine Leichtman
Capital Partners II, L.P. ("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 paid the fees
to extend the maturity to January 2004.

The Company had previously borrowed other amounts from LLCP in the form of the
"Term B Note" and the "Term C Note." 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 Note and the
Term D Note were extended to December 15, 2005 and the interest rates applicable
to both notes were decreased to 11.75% per annum. The Company paid LLCP fees
equal to $921,000 for these amendments, which will be amortized over the
remaining life of the notes. As of June 30, 2004, the outstanding principal
balances of the Term B Note and the Term D Note were $19.8 million and $15.0
million, respectively.

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 have maturities two years from their
respective funding dates. As of June 30, 2004, the outstanding principal
balances of the Term E Note and the Term F Note were $15.0 million and $10.0
million, respectively.

The Senior Secured Debt is secured by all of the assets of the Company.

17


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(7) NET GAIN ON SALE OF CONTRACTS

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

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
(IN THOUSANDS)

Gain recognized on sale ................. $ -- $ 3,375 $ -- $ 6,676
Deferred acquisition fees and discounts.. -- 2,299 -- 4,590
Expenses related to sales ............... -- (1,105) -- (2,076)
Provision for credit losses ............. -- (460) -- (526)
-------- -------- -------- --------

Net gain on sale of Contracts ........... $ -- $ 4,109 $ -- $ 8,664
======== ======== ======== ========


No gain on sale was recorded in the three-month and six-month periods ended June
30, 2004, due to the July 2003 decision to structure future securitizations as
secured financings, rather than as sales.


(8) INTEREST INCOME

The following table presents the components of interest income:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
(IN THOUSANDS)

Interest on finance receivables.... 23,511 6,658 40,710 12,110
Residual interest income, net ..... 1,890 4,647 4,634 8,388
Other interest income ............. 321 137 801 272
------ ------ ------ ------

Net interest income ............... 25,722 11,442 46,145 20,770
====== ====== ====== ======



(9) EARNINGS (LOSS) PER SHARE

Diluted earnings (loss) per share for the three-month and six-month periods
ended June 30, 2004 and 2003, were calculated using the weighted average number
of shares outstanding for the related period. The following table reconciles the
number of shares used in the computations of basic and diluted earnings (loss)
per share for the three-month and six-month periods ended June 30, 2004 and
2003:


THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2004 2003 2004 2003
------ ------ ------ ------
(IN THOUSANDS)

Weighted average number of common shares outstanding during the
period used to compute basic earnings (loss) per share........... 21,016 20,209 20,827 20,239
Incremental common shares attributable to exercise of
outstanding options and warrants................................. -- 1,022 -- 842
Incremental common shares attributable to convertible debt ...... -- 334 -- 1,079
------ ------ ------ ------
Weighted average number of common shares used to compute
diluted earnings per share....................................... 21,016 21,565 20,827 22,160
====== ====== ====== ======


18


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The assumed conversion of certain subordinated debt during the three-month and
six-month periods ended June 30, 2003, resulted in an increase to income for
purposes of the diluted earnings per share calculation of $18,000 and $268,000,
respectively, representing interest attributable to convertible debt that would
not have been incurred if the convertible debt had been converted. Diluted net
earnings for purposes of the diluted earnings per share calculation totaled $2.8
million for the three months ended June 30, 2003 and $9.2 million for the six
months ended June 30, 2003.

If the anti-dilutive effects of common stock equivalents were not considered,
additional shares included in the diluted earnings (loss) per share calculation
for the three-month and six-month periods ended June 30, 2004 would have
included an additional 973,000 and 780,000 shares, respectively, attributable to
the conversion of certain subordinated debt and 1.8 million shares attributable
to the exercise of outstanding options and warrants. No such anti-dilution
existed for the three-month and six-month periods ended June 30, 2003.

(10) INCOME TAXES

As of December 31, 2003, the Company had a net deferred tax asset of $411,000,
which included a valuation allowance of $37.4 million against certain deferred
tax assets of $44.6 million. Tax liabilities, net, at June 30, 2004 were $3.1
million. The Company increased its valuation allowance by the income tax benefit
for the period to result in no net income tax provision for the three- and
six-month periods ended June 30, 2004. The tax benefit for the six months ended
June 30, 2003 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. The Company has
evaluated its deferred tax assets and believes that it is more likely than not
that certain deferred tax assets will not be realized due to limitations imposed
by the Internal Revenue Code and expected future taxable income.


(11) 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, and
releases of cash from securitized pools 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 over collateralization, 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 pools 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.

Contracts are purchased from Dealers for a cash price generally approximating
their principal amount, 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 warehouse credit facilities. As of


19


CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2004, the Company had $225 million in warehouse credit capacity, in the
form of a $125 million facility and a $100 million facility. Both warehouse
facilities provide funding for Contracts purchased under the CPS Programs. A
third facility in the amount of $75 million, which the Company utilized to fund
Contracts under the CPS Programs, expired on February 21, 2004. A fourth
facility in the amount of $25 million, which the Company utilized to fund
Contracts under the TFC Programs, expired on June 24, 2004.

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. Obtaining releases of cash from the Trusts and their related Spread
Accounts is dependent on collections from the related Trusts generating
sufficient cash to maintain the Spread Accounts in excess of their respective
requisite levels. 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 covenants requiring certain minimum financial ratios
and results. As a result of amendments to the related Securitization Agreements
executed during the first six months of 2004, the Company was in compliance with
all of these covenants as of June 30, 2004.


(12) LEGAL PROCEEDINGS

The information provided under the caption "Legal Proceedings" in the Company's
Annual Report of Form 10-K for the year ended December 31, 2003 is incorporated
herein by reference. In addition, the reader should be aware of the following:

On June 2, 2004, Delmar Coleman filed a lawsuit in the circuit court of
Tuscaloosa, Alabama, making allegations similar to those that were asserted in
the LANG case, and seeking damages in an unspecified amount, on behalf of a
purported nationwide class. The LANG case has been tentatively settled, as
disclosed in the Annual Report, and related to alleged defects in the notices
given with respect to repossessed vehicles. CPS believes that it has one or more
defenses to each of the claims made in this lawsuit, and intends to defend the
matter vigorously.

On June 15, 2004, Keywana Booker filed a lawsuit in the federal district court
of Atlanta, Georgia, alleging violations of the Fair Debt Collection Practices
Act, and seeking damages in an unspecified amount on behalf of a purported class
of Georgia residents. CPS believes that it has one or more defenses to each of
the claims made in this lawsuit, and intends to defend the matter vigorously.

The Company is routinely involved in various legal proceedings resulting from
its consumer finance activities and practices, both continuing and discontinued.
The Company believes that there are substantive legal defenses to such claims,
and intends to defend them vigorously. There can be no assurance, however, as to
the outcome.

20


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

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 was incorporated and began its operations in 1991. In March 2002, CPS
acquired by merger (the "MFN Merger") MFN Financial Corp. and its subsidiaries.
In May 2003, CPS acquired by merger (the "TFC Merger") TFC Enterprises Inc. and
its subsidiaries. Both MFN Financial Corp and TFC Enterprises Inc., through
their respective subsidiaries, were engaged in businesses substantially similar
to that of CPS, and in each merger CPS acquired a portfolio of receivables that
had been held by the acquired company. Each merger was accounted for as a
purchase. The indirect financing programs of subsidiaries of TFC Enterprises,
Inc. were directed principally to members of the United States armed forces. The
Company has continued to offer such financing programs (the "TFC Programs")
subsequent to the TFC merger, in addition to its other financing programs (the
"CPS 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.


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 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 sold Contracts and the related
securitization trust debt appear as assets and liabilities, respectively, of the
Company on its Condensed Consolidated Balance Sheet. The Company then recognizes
interest and fee 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 Condensed 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 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.

21


CHANGE IN POLICY

In August 2003, the Company announced that it would structure its future
securitization transactions to be reflected as secured financings for financial
accounting purposes. Its first three term securitizations of finance receivables
originated under the CPS Programs so structured occurred in September 2003,
December 2003 and May 2004. The Company had structured all of its prior term
securitization transactions related to the CPS Programs to be reflected 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. In
addition, the Company acquired finance receivables as part of the SeaWest Asset
Acquisition that were subsequently securitized, together with receivables
purchased under the TFC Programs, in a term securitization transaction in June
2004 that is reflected as a secured financing. As of June 30, 2004, the
Company's Condensed Consolidated Balance Sheet included net finance receivables
of approximately $131.5 million and securitization trust debt of $103.1 million
related to finance receivables acquired in the two mergers and the SeaWest Asset
Acquisition, out of totals of net finance receivables of approximately $421.3
million and securitization trust debt of approximately $337.1 million.


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
June 30, 2004 was approximately $900.3 million (this amount includes $85.3
million related to the SeaWest Third Party Portfolio on which the Company earns
only servicing fees and has no credit risk).


RESULTS OF OPERATIONS

ACQUISITION

The Company's Condensed Consolidated Balance Sheet and Condensed Consolidated
Statements of Operations as of and for the three and six months ended June 30,
2004 and 2003, include the results of operations of TFC Enterprises, Inc. for
the period subsequent to May 20, 2003, which is the date on which the Company
acquired that corporation and its subsidiaries in the TFC Merger. See Note 1 of
Notes to Condensed Consolidated Financial Statements, Acquisition of TFC
Enterprises, Inc.


EFFECTS OF CHANGE IN SECURITIZATION STRUCTURE

The Company's decision to structure future 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


22


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) the portion of scheduled payments
on the receivables representing interest is recorded as revenue as accrued 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. The changes initially have resulted in the Company's reporting lower
earnings than it would have reported if it had continued structuring its
securitizations to require recognition of gain on sale. Accordingly, reported
net earnings may continue to be negative through 2004. Management expects that
for the next six to 12 months, growth in the Company's portfolio of receivables
in excess of current expectations would further delay achievement of positive
net earnings. The Company's cash availability and cash requirements have been
unaffected by the change in structure.

The Company's first three term securitizations of Contracts originated under the
CPS Programs structured as secured financings closed in September 2003, December
2003 and May 2004. In March 2004, the Company completed a securitization of its
retained interest in eight securitization transactions previously sponsored by
the Company and its affiliates, which was also structured as a secured
financing. In addition, in June 2004, the Company completed a term
securitization of Contracts purchased in the SeaWest Asset Acquisition and under
the TFC Programs, which was structured as a secured financing. The Company's MFN
and TFC subsidiaries completed term securitizations structured as secured
financings prior to their becoming subsidiaries of the Company. The structures
of the Company's two warehouse securitization transactions that related to the
CPS Programs were amended in July 2003 to be treated as secured financings for
financial accounting purposes. The Company's third warehouse securitization
credit facility available to the Company at the time, which related to the TFC
Programs, was structured as a secured financing for financial accounting
purposes since the date of the TFC Merger. Such third warehouse facility expired
on June 24, 2004.

THE THREE-MONTH PERIOD ENDED JUNE 30, 2004 COMPARED TO THE THREE-MONTH PERIOD
ENDED JUNE 30, 2003

REVENUES. During the three months ended June 30, 2004, revenues were $32.7
million, an increase of $8.3 million, or 34.3%, from the prior year period
revenue amount of $24.3 million. The primary reason for the increase in revenues
is an increase in interest income. Interest income for the three-month period
ended June 30, 2004 increased $14.3 million, or 124.8%, to $25.7 million in 2004
from $11.4 million for the same period 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 and the interest
income earned on the portfolios of Contracts acquired in the TFC Merger and the
SeaWest Asset Acquisition. This increase was partially offset by the decline in
the balance of the portfolio of Contracts acquired in the MFN Merger and a
decrease in residual interest income.

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 the current period, compared to $4.1 million in the year earlier
period. Net gain on sale of Contracts is not expected to be a significant
component of the Company's revenues in future periods.

Servicing fees of $3.5 million in the three months ended June 30, 2004 decreased
$1.0 million, or 21.4%, from $4.5 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. The decrease was partially offset by the
servicing fees earned on the SeaWest Third Party Portfolio. The Contracts in the
Company's managed portfolio held by non-consolidated subsidiaries were


23


securitized in structures treated as sales for financial accounting purposes
and, therefore, do not appear on the Company's Condensed Consolidated Balance
Sheet. As a result of the decision to structure future securitizations as
secured financings, the Company's managed portfolio held by non-consolidated
subsidiaries will decline in future periods, and servicing fee revenue is
anticipated to continue to decline proportionately. As of June 30, 2004 and
2003, the Company's managed portfolio owned by consolidated vs. non-consolidated
subsidiaries was as follows:


JUNE 30, 2004 JUNE 30, 2003
------------------ ------------------
AMOUNT % AMOUNT %
-------- -------- -------- --------
Total Managed Portfolio ($ IN MILLIONS)

Owned by Consolidated Subsidiaries ..... $ 492.0 54.6% $ 243.2 32.3%
Owned by Non-Consolidated Subsidiaries.. 323.0 35.9% 510.8 67.7%
SeaWest Third Party Portfolio .......... 85.3 9.5% -- 0.0%
-------- -------- -------- --------

Total .................................. $ 900.3 100.0% $ 754.0 100.0%
======== ======== ======== ========


At June 30, 2004, the Company was generating income and fees on a managed
portfolio with an outstanding principal balance approximating $900.3 million
(this amount includes $85.3 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 $754.0 million as of June
30, 2003. As the portfolio of Contracts acquired in the MFN Merger and the TFC
Merger decreases, the portfolio of Contracts originated under the CPS Programs
continues to expand. At June 30, 2004 and 2003, the managed portfolio
composition was as follows:

JUNE 30, 2004 JUNE 30, 2003
-------------------- --------------------

AMOUNT % AMOUNT %
-------- -------- --------- --------
Originating Entity ($ IN MILLIONS)
CPS ............................ $ 614.8 68.3% $ 482.9 64.0%
TFC ............................ 101.1 11.2% 146.3 19.4%
MFN ............................ 38.7 4.3% 124.8 16.6%
SeaWest ........................ 60.4 6.7% -- --
SeaWest Third Party Portfolio... 85.3 9.5% -- --
-------- -------- --------- --------

Total .......................... $ 900.3 100.0% $ 754.0 100.0%
======== ======== ========= ========

Other income decreased $0.9 million, or 20.2%, to $3.5 million during the
quarter ended June 30, 2004 from $4.3 million during the same 2003 period. The
period over period decrease resulted primarily from decreased recoveries on
previously charged off MFN Contracts. Such recoveries were $2.0 million for the
three months ended June 30, 2004, compared to $3.1 million for the same period
in 2003.

EXPENSES. The Company's operating expenses consist primarily of personnel costs
and other operating expenses, which are incurred as applications and Contracts
are received, processed and serviced. Factors that affect margins and net
earnings include changes in the automobile and automobile finance market
environments and macroeconomic factors such as interest rates and the
unemployment level.

Personnel 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 include interest expense, provision for credit losses,
facilities expenses, telephone and other communication services, credit
services, computer services (including personnel costs associated with
information technology support), professional services, marketing and
advertising expenses, and depreciation and amortization.

24


Total operating expenses were $32.9 million for the second quarter of 2004,
compared to $21.2 million for the second quarter of 2003. The increase is
primarily due to the $6.3 million expense recorded as provision for credit
losses during the 2004 period. Increased general and administrative expenses and
increased interest expense also contributed.

Personnel costs increased to $9.8 million during the three months ended June 30,
2004, representing 29.8% of total operating expenses, from $9.4 million for the
comparable 2003 period, or 44.5% of total operating expenses. The increase is
primarily the result of staff additions related to the TFC Merger in May 2003
and the SeaWest Asset Acquisition in April 2004. 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. The decrease as a percentage of total operating expenses reflects the
higher operating expenses incurred in the current period, primarily a result of
the provision for credit loss.

General and administrative expenses increased to $6.5 million, or 19.7% of total
operating expenses, in the second quarter of 2004, as compared to $4.0 million,
or 19.1% of total operating expenses, in the second quarter of 2003. The
increase is due primarily to increased legal expenses and incremental corporate
expenses associated with the TFC Merger, which closed in May 2003.

Interest expense for the three-month period ended June 30, 2004, increased $2.4
million, or 47.5%, to $7.5 million, compared to $5.1 million in the comparable
period in 2003. The increase is primarily the result of changes in the amount
and composition of securitization trust debt carried on the Company's Condensed
Consolidated Balance Sheet, such debt increased as a result of the SeaWest Asset
Acquisition and the change in securitization structure implemented beginning in
July 2003, partially offset by the decrease in the balance of the securitization
trust debt acquired in the MFN Merger. As the Company continues to structure
future securitization transactions as secured financings, securitization trust
debt and the related interest expense are expected to increase.

The Company increased its valuation allowance by the income tax benefit for the
period to result in no net income tax provision for the three-month period ended
June 30, 2004. An income tax expense of $0.5 million recorded during the 2003
period.


THE SIX-MONTH PERIOD ENDED JUNE 30, 2004 COMPARED TO THE SIX-MONTH PERIOD ENDED
JUNE 30, 2003

REVENUES. During the six months ended June 30, 2004, revenues were $60.2
million, an increase of $12.9 million, or 27.4%, from the prior year period
revenue amount of $47.3 million. The primary reason for the increase in revenues
is an increase in interest income. Interest income for the six-month period
ended June 30, 2004 increased $25.4 million, or 122.2%, to $46.1 million in 2004
from $20.8 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 and the interest income earned on the
portfolios of Contracts acquired in the TFC Merger and the SeaWest Asset
Acquisition. This increase was partially offset by the decline in the balance of
the portfolio of Contracts acquired in the MFN Merger and a decrease in residual
interest income.

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 the current period, compared to $8.7 million in the year earlier
period. The 2003 gain on sale of Contracts amount is net of a negative fair
value adjustment of $1.8 million 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.

Servicing fees of $6.8 million in the six months ended June 30, 2004 decreased
$2.2 million, or 24.6%, from $9.1 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.

25


Other income decreased $1.5 million, or 17.5%, to $7.2 million during the six
months ended June 30, 2004 from $8.8 million during the 2003 period. The period
over period decrease resulted primarily from decreased recoveries on previously
charged off MFN Contracts. Such recoveries were $4.6 million for the six months
ended June 30, 2004, compared to $6.8 million for the same period in 2003.

EXPENSES. The Company's operating expenses consist primarily of personnel costs
and other operating expenses, which are incurred as applications and Contracts
are received, processed and serviced. Factors that affect margins and net
earnings include changes in the automobile and automobile finance market
environments and macroeconomic factors such as interest rates and the
unemployment level.

Personnel 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 include interest expense, provision for credit losses,
facilities expenses, telephone and other communication services, credit
services, computer services (including personnel costs associated with
information technology support), professional services, marketing and
advertising expenses, and depreciation and amortization.

Total operating expenses were $61.8 million for the second quarter of 2004,
compared to $40.8 million for the second quarter of 2003. The increase is
primarily due to the $13.1 million expense recorded as provision for credit loss
during the 2004 period. Increased general and administrative expenses and
increased interest expense also contributed.

Personnel costs increased to $19.4 million during the six months ended June 30,
2004, representing 31.5% of total operating expenses, from $17.9 million for the
comparable 2003 period, or 42.8% of total operating expenses. The increase is
primarily the result of staff additions related to the TFC Merger in May 2003
and the SeaWest Asset Acquisition in April 2004. 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. The decrease as a percentage of total operating expenses reflects the
higher operating expenses, primarily a result of the provision for credit loss.

General and administrative expenses increased to $10.4 million, or 16.9% of
total operating expenses, in the second quarter of 2004, as compared to $8.1
million, or 19.3% of total operating expenses, in the second quarter of 2003.
The increase is due primarily to increased legal expenses and incremental
corporate expenses associated with the TFC Merger, which closed in May 2003. The
decrease as a percentage of total operating expenses reflects the higher
operating expenses primarily a result of the provision for credit loss.

Interest expense for the six-month period ended June 30, 2004, increased $2.8
million, or 26.3%, to $13.4 million, compared to $10.6 million in the comparable
period in 2003. The increase is primarily the result of changes in the amount
and composition of securitization trust debt carried on the Company's Condensed
Consolidated Balance Sheet, such debt increased as a result of the SeaWest Asset
Acquisition and the change in securitization structure implemented beginning in
July 2003, partially offset by the decrease in the balance of the securitization
trust debt acquired in the MFN Merger.

The Company increased its valuation allowance by the income tax benefit for the
period to result in no net income tax provision for the six-month period ended
June 30, 2004. In the 2003 period, an income tax benefit of $3.4 million was
recorded. The income tax benefit in the prior period was primarily the result of
the resolution of certain IRS examinations of tax returns filed by MFN prior to
the MFN Merger. The resulting tax benefit of $4.9 million was offset in part by
an income tax provision of $1.5 million.

26


LIQUIDITY AND CAPITAL RESOURCES

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, and
releases of cash from securitized pools 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 pools 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 six-month periods ended June
30, 2004 and 2003 was $33.5 million and $46.9 million, respectively. Cash from
operating activities is generally provided by the net releases from the
Company's securitization Trusts.

Net cash used in investing activities for the six-month periods ended June 30,
2004 and 2003 was $168.9 million and $10.2 million, respectively. Cash used in
investing activities has generally related to purchases of Contracts, the cost
of acquiring TFC and the purchase of furniture and equipment.

Net cash provided by financing activities for the six months ended June 30,
2004, was $117.5 million compared with net cash used in financing activities of
$36.0 million for the six months ended June 30, 2003. Cash used or provided by
financing activities is primarily attributable to the repayment or issuance of
debt.

The primary reason for the significant increase in cash used in investing
activities and cash provided by financing activities period over period is the
change in the securitization structure implemented in the third quarter of 2003.

Contracts are purchased from Dealers for a cash price generally approximating
their principal amount, 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 warehouse credit facilities. As of
June 30, 2004 the Company had $225 million in warehouse credit capacity, in the
form of a $125 million facility and a $100 million facility. Both warehouse
facilities provide funding for Contracts purchased under the CPS Programs. A
third facility in the amount of $75 million, which the Company utilized to fund
Contracts under the CPS Programs, expired on February 21, 2004. A fourth
facility in the amount of $25 million, which the Company utilized to fund
Contracts under the TFC Programs, expired on June 24, 2004.

27


The $125 million warehouse facility is 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 CPS Warehouse Trust. This facility was
established on March 7, 2002, in the maximum amount of $100 million. Such
maximum amount was increased to $125 million in November 2002. Approximately 73%
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 bear interest at a rate of one-month
commercial paper plus 1.18% per annum. This facility was renewed in April 2004
and expires on April 3, 2005.

The $100 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 Page Funding LLC. Approximately 73.5% 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. This facility was entered into on June 30, 2004 and
expires on June 30, 2007. The lender has annual termination options.

The $75 million warehouse facility was 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 CPS Funding LLC. Approximately 72.5% of the
principal balance of Contracts could be advanced to the Company under this
facility, subject to collateral tests and certain other conditions and
covenants. Notes under this facility accrued interest at a rate of one-month
LIBOR plus 0.75% per annum. This facility expired on February 21, 2004.

The $25 million warehouse facility was similarly structured to allow TFC to fund
a portion of the purchase price of Contracts by drawing against a floating rate
variable funding note issued by TFC Warehouse I LLC. Approximately 71% of the
principal balance of Contracts could be advanced to TFC under this facility,
subject to collateral tests and certain other conditions and covenants. Notes
under this facility accrued interest at a rate of one-month LIBOR plus 1.75% per
annum. This facility was entered into as part of the TFC Merger on May 20, 2003
and expired on June 24, 2004. The Company is currently in discussions with
several parties regarding a replacement facility.

These facilities are independent of each other. With the two currently existing
facilities, two different financial institutions purchase the notes issued by
these facilities, and two different insurers insure the notes (each a "Note
Insurer"). The Note Insurer on the $125 million facility is the controlling
party whereas the lender on the $100 million facility is the controlling party.
Up through June 30, 2003, sales of Contracts to the special purpose subsidiaries
("SPS") related to two of the three then existing facilities had been treated as
sales for financial accounting purposes. The Company, therefore, removed these
securitized Contracts and related debt from its Condensed Consolidated Balance
Sheet and recognized a gain on sale in the Company's Condensed Consolidated
Statement of Operations related to Contracts financed through this facility.
Indebtedness related to Contracts funded by the third facility existing as of
June 30, 2003, however, was on the Company's Condensed Consolidated Balance
Sheet and no gain on sale has ever been recognized in the Company's Condensed
Consolidated Statement of Operations. During July 2003, each of the first two
facilities was amended, with the effect that subsequent use of such facilities
is treated for financial accounting purposes as a borrowing secured by such
receivables, rather than as a sale of receivables. The effects of that amendment
are similar to those discussed above with respect to the change in
securitization structure. Both existing facilities as of June 30, 2004 are
treated for financial accounting purposes as secured financings.

For the portfolio owned by non-consolidated subsidiaries, cash used to increase
Credit Enhancement amounts to required levels for the six-month periods ended
June 30, 2004 and 2003 was $1.3 million and $1.3 million, respectively. Cash
released from Trusts and their related Spread Accounts to the Company for the
six-month periods ended June 30, 2004 and 2003, was $12.1 million and $13.9
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


28


portfolio to which the respective Spread Accounts are related. The Company did
not make any initial deposits to Spread Accounts or fund initial
over-collateralization related to term securitization transactions owned by
non-consolidated subsidiaries during the six-months ended June 30, 2004 compared
to $17.3 million during the six-months ended June 30, 2003.

The acquisition of Contracts for subsequent sale in securitization transactions,
and the need to fund Spread Accounts and initial over collateralization, 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 advance
rate on the warehouse facilities, 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 limited in its ability to purchase Contracts by its available cash and the
capacity of its warehouse facilities. As of June 30, 2004, the Company had cash
on hand of $15.3 million and available Contract purchase commitments from its
warehouse credit facilities of $167.9 million. The Company's plans to manage its
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. Obtaining releases of cash from the Trusts and their related Spread
Accounts is dependent on collections from the related Trusts generating
sufficient cash to maintain the Spread Accounts in excess of their respective
requisite levels. 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 covenants requiring certain minimum financial ratios
and results. As a result of amendments to the related Securitization Agreements
executed during the first six months of 2004, the Company was in compliance with
all of these covenants as of June 30, 2004.

The Securitization Agreements of the Company's term securitization transactions
and one of the warehouse credit facilities are terminable by the Note Insurers
in the event of certain defaults by the Company and under certain other
circumstances. Similar termination rights are held by the lender in the other
warehouse credit facility. Were a Note Insurer (or the lender in such warehouse
facility) in the future to exercise its option to terminate the Securitization
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
Securitization Agreements.


CRITICAL ACCOUNTING POLICIES

(a) ALLOWANCE FOR FINANCE CREDIT LOSSES

In order to estimate an appropriate allowance for losses incurred on finance
receivables held on the Company's Condensed Consolidated Balance Sheet, 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 known and inherent losses in its portfolio of finance receivable


29


Contract. Provision for losses 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) TREATMENT OF SECURITIZATIONS

Gain on sale may be 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).

As of June 30, 2004 and December 31, 2003 the line item "Residual interest in
securitizations" on the Company's Consolidated Balance Sheet represents the
residual interests in certain term securitizations but no residual interest in
warehouse securitizations, because the Company's warehouse securitizations were
restructured in July 2003 as secured financings. Subsequent term securitizations
of receivables purchased were also 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 "Residual interest in
securitizations" represents the discounted sum of expected future releases from
securitization trusts. Accordingly, the valuation of the residual is heavily
dependent on estimates of future performance.

The Company's securitization structure is generally 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 (the "Notes"), generally in a principal
amount equal to 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. The Company purchases
a financial guaranty insurance policy, guaranteeing timely payment of principal
and interest on the senior Notes, from 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 (a "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, and then maintained at those levels. 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
Enhancements are 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 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 has amortized to a specified percentage of the initial aggregate
balance.

30


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
Condensed Consolidated Balance Sheet.

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 73.0% to 73.5% of the aggregate
principal balance of the Contracts (that is, at least 26.5%
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 provide for the
transactions to be reflected as secured financings for financial accounting
purposes. The Contracts held by the warehouse SPS and the promissory notes that
it issues are therefore included in the Company's Condensed Consolidated
Financial Statements as of June 30, 2004 and December 31, 2003 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 Condensed 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 Condensed Consolidated Balance Sheet the
Contracts sold and added to its Condensed 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
Condensed Consolidated Balance Sheet will reflect securitization transactions
structured both as sales and as secured financings.

With respect to the prior 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 recognized 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 and timing 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 approximately 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 approximately 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).


31


Required principal payments 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 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 and 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 June 30, 2004, the Company has used prepayment
estimates of approximately 18.9% to 23.5% 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 and projected future recovery levels. In valuing the Residuals,
the Company estimates that charge-offs as a percentage of the original principal
balance will approximate 15.6% to 23.5% cumulatively over the lives of the
related Contracts, with recovery rates approximating 2.5% to 5.4% of the
original principal balance.

Following a securitization that is structured as a sale for financial accounting
purposes, interest income is generally recognized on the balance of the
Residuals at the same rate as used for calculating the present value of the
NIRs, which is equal to 14% per annum. In addition, the Company will recognize
additional revenue from the Residuals if the actual performance of the Contracts
is better than the original estimate. If the actual performance of the Contracts
were worse than the original estimate, then a downward adjustment to the
carrying value of the Residuals and a related expense 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 have no recourse to the Company for failure of the Contract obligors to
make payments on a timely basis. The Company's Residuals, however, are
subordinate to the Notes until the Noteholders are fully paid, and the Company
is therefore at risk to that extent.

32


(c) INCOME TAXES

The Company and its subsidiaries file consolidated federal income and combined
state franchise tax returns. 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.


FORWARD LOOKING STATEMENTS

This report on Form 10-Q 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 18.9% to 23.5%
cumulatively over the lives of the related Contracts, that charge-offs as a
percentage of original balances will approximate 15.6% to 23.5% cumulatively
over the lives of the related Contracts, with recovery rates approximating 2.5%
to 5.4% 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.

33


Additional risk factors, any of which could have a material effect on the
Company's performance, are set forth below:

DEPENDENCE ON WAREHOUSE FINANCING. The Company's primary source of day-to-day
liquidity is continuous securitization of Contracts, under which it sells or
pledges Contracts, as often as once a week, to either of two special-purpose
affiliated entities. Such transactions function as a "warehouse" in which
Contracts are held. The Company expects to continue to effect similar
transactions (or to obtain replacement or additional financing) as current
arrangements expire or become fully utilized; however, there can be no assurance
that such financing will be obtainable on favorable terms. To the extent that
the Company is unable to maintain its existing structure or is unable to arrange
new warehouse facilities, the Company may have to curtail Contract purchasing
activities, which could have a material adverse effect on the Company's
financial condition, results of operations and liquidity.

DEPENDENCE ON SECURITIZATION PROGRAM. The Company is dependent upon its ability
to continue to finance pools of Contracts in term securitizations in order to
generate cash proceeds for new purchases. Adverse changes in the market for
securitized Contract pools, or a substantial lengthening of the warehousing
period, would burden the Company's financing capabilities, could require the
Company to curtail its purchase of Contracts, and could have a material adverse
effect on the Company. In addition, as a means of reducing the percentage of
cash collateral that the Company would otherwise be required to deposit and
maintain in Spread Accounts, all of the Company's securitizations since June
1994 have utilized credit enhancement in the form of financial guaranty
insurance policies issued by monoline financial guaranty insurers. The Company
believes that financial guaranty insurance policies reduce the costs of
securitizations relative to alternative forms of credit enhancements available
to the Company. No insurer is required to insure Company-sponsored
securitizations and there can be no assurance that any will continue to do so.
Similarly, there can be no assurance that any securitization transaction will be
available on terms acceptable to the Company, or at all. The timing of any
securitization transaction is affected by a number of factors beyond the
Company's control, any of which could cause substantial delays, including,
without limitation, market conditions and the approval by all parties of the
terms of the securitization.

RISK OF GENERAL ECONOMIC DOWNTURN. The Company's business is directly related to
sales of new and used automobiles, which are affected by employment rates,
prevailing interest rates and other domestic economic conditions. Delinquencies,
repossessions and losses generally increase during economic slowdowns or
recessions. Because of the Company's focus on Sub-Prime Customers, the actual
rates of delinquencies, repossessions and losses on such Contracts could be
higher under adverse economic conditions than those experienced in the
automobile finance industry in general. Any sustained period of economic
slowdown or recession could adversely affect the Company's ability to sell or
securitize pools of Contracts. The timing of any economic changes is uncertain,
and sluggish sales of automobiles and weakness in the economy could have an
adverse effect on the Company's business and that of the Dealers from which it
purchases Contracts.

DEPENDENCE ON PERFORMANCE OF SECURITIZED CONTRACTS. Under the financial
structures the Company has used to date in its term securitizations, certain
excess cash flows generated by the Contracts sold in the term securitizations
are used to increase overcollateralization or are retained in a Spread Account
within the securitization trusts to provide liquidity and credit enhancement.
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 or losses related to the
Contracts in the pool are below certain predetermined levels. In the event
delinquencies and 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. Any of these conditions could
materially adversely affect the Company's liquidity, financial condition and
operations.

34


CREDITWORTHINESS OF CONSUMERS. The Company specializes in the purchase, sale and
servicing of Contracts to finance automobile purchases by Sub-Prime Customers,
which entail a higher risk of non-performance, higher delinquencies and higher
losses than Contracts with more creditworthy customers. While the Company
believes that the underwriting criteria and collection methods it employs enable
it 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. The Company has experienced fluctuations in the
delinquency and charge-off performance of its Contracts. In the event that
portfolios of Contracts sold and serviced by the Company experience greater
defaults, higher delinquencies or higher net losses than anticipated, the
Company's income could be negatively affected. A larger number of defaults than
anticipated could also result in adverse changes in the structure of the
Company's future securitization transactions, such as a requirement of increased
cash collateral or other Credit Enhancement in such transactions.

PROBABLE INCREASE IN COST OF FUNDS. The Company's profitability is determined
by, among other things, the difference between the rate of interest charged on
the Contracts purchased by the Company and the rate of interest payable to
purchasers of Notes issued in securitizations. The Contracts purchased by the
Company generally bear finance charges close to or at the maximum permitted by
applicable state law. The interest rates payable on such Notes are fixed, based
on interest rates prevailing in the market at the time of sale. Consequently,
increases in market interest rates tend to reduce the "spread" or margin between
Contract finance charges and the interest rates required by investors and, thus,
the potential operating profits to the Company from the purchase, securitization
and servicing of Contracts. Operating profits expected to be earned by the
Company on portfolios of Contracts previously securitized are insulated from the
adverse effects of increasing interest rates because the interest rates on the
related Notes were fixed at the time the Contracts were sold. With interest
rates near historical lows as of the date of this report, it is reasonable to
expect that interest rates will increase in the near to intermediate term. Any
future increases in interest rates would likely increase the interest rates on
Notes issued in future term securitizations and could have a material adverse
effect on the Company's results of operations and liquidity.

PREPAYMENTS AND CREDIT LOSSES. Gains from the sale of Contracts in the Company's
past securitization transactions structured as sales for financial accounting
purposes have constituted a significant portion of the revenue of the Company. A
portion of the gains is based in part on management's estimates of future
prepayments and credit losses and other considerations in light of then-current
conditions. If actual prepayments with respect to Contracts occur more quickly
than was projected at the time such Contracts were sold, as can occur when
interest rates decline, or if credit losses are greater than projected at the
time such Contracts were sold, a charge to income may be required and would be
recorded in the period of adjustment. If actual prepayments occur more slowly or
if net losses are lower than estimated with respect to Contracts sold, total
revenue would exceed previously estimated amounts.

Provisions for credit losses are recorded in connection with the origination and
throughout the life of Contracts that are held on the Company's Condensed
Consolidated Balance Sheet. Such provisions are based on management's estimates
of future credit losses in light of then-current conditions. If actual credit
losses in a given period exceed the allowance for credit losses, a bad debt
expense during the period would be required.

COMPETITION. The automobile financing business is highly competitive. The
Company competes 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 the Company's competitors
and potential competitors possess substantially greater financial, marketing,
technical, personnel and other resources than the Company. Moreover, the


35


Company's future profitability will be directly related to the availability and
cost of its capital relative to that of 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 which 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' purchases of automobiles from
manufacturers, which is not offered by the Company. There can be no assurance
that the Company will be able to continue to compete successfully.

LITIGATION. Because of 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 class-action 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. Although the Company is not involved in
any such material consumer protection litigation, a significant judgment against
the Company or within the industry in connection with any such litigation, or an
adverse outcome in the litigation identified under the caption "Legal
Proceedings" in this report and in the Company's most recently filed report on
Form 10-K, could have a material adverse effect on the Company's financial
condition, results of operations and liquidity.

DEPENDENCE ON DEALERS. The Company is dependent upon establishing and
maintaining relationships with unaffiliated Dealers to supply it with Contracts.
During the three- and six-month periods ended June 30, 2004, no Dealer accounted
for more than 1.0% of the Contracts purchased by the Company. The Dealer
Agreements do not require Dealers to submit a minimum number of Contracts for
purchase by the Company. The failure of Dealers to submit Contracts that meet
the Company's underwriting criteria would have a material adverse effect on the
Company's financial condition, results of operations and liquidity.

GOVERNMENT REGULATIONS. The Company's business is subject to numerous federal
and state consumer protection laws and regulations, which, among other things:
(i) require the Company to obtain and maintain certain licenses and
qualifications; (ii) limit the interest rates, fees and other charges the
Company is allowed to charge; (iii) limit or prescribe certain other terms of
its Contracts; (iv) require the Company to provide specified disclosures; and
(v) regulate certain servicing and collection practices and define its rights to
repossess and sell collateral. An adverse change in existing laws or
regulations, or in the interpretation thereof, the promulgation of any
additional laws or regulations, or the failure to comply with such laws and
regulations could have a material adverse effect on the Company's financial
condition, results of operations and liquidity.


ITEM 3. 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.

36


The Company is subject to market risks due to fluctuations in interest rates
primarily as a result of its commitments to enter into new Contracts. The table
below outlines the carrying values and estimated fair values of financial
instruments:


JUNE 30, 2004 DECEMBER 31, 2003
---------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- ---------
Financial Instrument (IN THOUSANDS)

Finance receivables, net ........... $421,274 421,274 $266,189 266,189
Residual interest in securitizations 81,304 81,304 111,702 111,702
Warehouse lines of credit .......... 57,114 57,114 33,709 33,709
Notes payable ...................... 2,132 2,132 3,330 3,330
Residual interest financing ........ 33,799 33,799 -- --
Securitization trust debt .......... 337,058 337,058 245,118 245,118
Senior secured debt ................ 59,829 59,829 49,965 49,965
Subordinated debt .................. 15,000 15,150 35,000 35,506
Related party debt ................. -- -- 17,500 17,763



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 4. CONTROLS AND PROCEDURES

CPS 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, CPS 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 CPS 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.

37


PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information provided under the caption "Legal Proceedings" in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003, is incorporated
herein by reference. In addition, the reader should be aware of the following:

On June 2, 2004, Delmar Coleman filed a lawsuit in the circuit court of
Tuscaloosa, Alabama, making allegations similar to those that were asserted in
the LANG case, and seeking damages in an unspecified amount, on behalf of a
purported nationwide class. The LANG case has been tentatively settled, as
disclosed in the Annual Report, and related to alleged defects in the notices
given with respect to repossessed vehicles. CPS believes that it has one or more
defenses to each of the claims made in this lawsuit, and intends to defend the
matter vigorously.

On June 15, 2004, Keywana Booker filed a lawsuit in the federal district court
of Atlanta, Georgia, alleging violations of the Fair Debt Collection Practices
Act, and seeking damages in an unspecified amount on behalf of a purported class
of Georgia residents. CPS believes that it has one or more defenses to each of
the claims made in this lawsuit, and intends to defend the matter vigorously.


The Company is routinely involved in various legal proceedings resulting from
its consumer finance activities and practices, both continuing and discontinued.
The Company believes that there are substantive legal defenses to such claims,
and intends to defend them vigorously. There can be no assurance, however, as to
the outcome.


ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES

The Company's 10.50% Participating Equity Notes due 2004 matured on April 15,
2004. On that date, the Company paid the aggregate outstanding principal balance
of such notes, in the amount of $15,000,000, and the accrued interest thereon.

During the three months ended June 30, 2004, the Company purchased a total of
6,738 shares of its common stock, as described in the following table:



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

April 2004 ___ ___ ___ 1,603,130

May 2004 6,738 $3.75 6,738 1,577,863

June 2004 ___ ___ ___ 1,577,863

Total 6,738 $3.75 6,738



(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 July 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.

38


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


The annual meeting of shareholders of the Company was held on April 26, 2004. At
the meeting, each of the eight nominees to the Board of Directors was elected
for a one-year term by the shareholders, with votes cast as follows:


NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
Charles E. Bradley, Jr. 19,435,762 701,700
Thomas L. Chrystie 19,405,562 731,960
E. Bruce Fredrikson 19,405,562 731,960
John E. McConnaughy, Jr. 19,405,562 731,960
John G. Poole 19,405,562 731,960
William B. Roberts 19,435,762 701,700
John C. Warner 19,621,962 515,500
Daniel S. Wood 19,435,762 701,700

The shareholders also approved each other proposal placed before the annual
meeting. Such proposals were (i) approval of an amendment to the Company's 1997
Long-Term Incentive Stock Plan, which increased the number of shares issuable
from 4,900,000 to 6,900,000, and (ii) ratification of the appointment of KPMG
LLP as independent auditors of the Company for the fiscal year ending December
31, 2004. Votes on such proposals were cast as follows:

Ratification of Selection of
Approval of Plan Amendment Independent Auditors
-------------------------- --------------------
For 5,906,270 14,353,475
Against 5,879,905 313,380
Abstain 14,540 4,591,400
Broker Non-votes 8,336,747 879,207

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are filed with this report:

10.33 Receivables Purchase Agreement relating to receivables
purchased from SeaWest Receivables Corporation I (incorporated
by reference to Exhibit 2.1 to the registrant's amended report
on Form 8-K, as filed June 3, 2004).
10.34 Receivables Purchase Agreement relating to receivables
purchased from SeaWest Funding Corporation (incorporated by
reference to Exhibit 2.2 to the registrant's amended report on
Form 8-K, as filed June 3, 2004).
10.35 Receivables Purchase Agreement relating to receivables
purchased from SeaWest Financial Corporation (incorporated by
reference to Exhibit 2.3 to the registrant's amended report on
Form 8-K, as filed June 3, 2004).
10.36 General Assignment and Bill of Sale relating to certain
tangible assets of SeaWest Financial Corporation (incorporated
by reference to Exhibit 2.4 to the registrant's amended report
on Form 8-K, as filed June 3, 2004).
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer of
the registrant.
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer of
the registrant.
32 Section 1350 Certifications.*


39


* These Certifications shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section. These Certifications shall not be
deemed to be incorporated by reference into any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except to the extent that the
registration statement specifically states that such Certifications are
incorporated therein.

(b) The Company filed two reports on Form 8-K during the quarter for which
this report is filed. The first such report was filed on April 19, 2004, and
amended on June 3, 2004. It reported information under item 2 of Form 8-K, to
the effect that the Company had acquired certain assets (predominantly
automotive receivables) by purchase. The second such report was filed on May 10,
2004. It reported information under item 12 of Form 8-K, to the effect that the
Company had issued a quarterly earnings release. Pursuant to Item 7, the text of
such release was attached as an exhibit.



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

CONSUMER PORTFOLIO SERVICES, INC.

(Registrant)

Date: August 16, 2004

/S/ CHARLES E. BRADLEY, JR.
---------------------------------------
Charles E. Bradley, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)

Date: August 16, 2004

/S/ ROBERT E. RIEDL
---------------------------------------
Robert E. Riedl
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial Officer)




40