UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

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

For the transition period from                      to                     

CREDIT ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)

MICHIGAN (State or other jurisdiction of incorporation or organization)		38-1999511 (IRS Employer Identification)
25505 WEST TWELVE MILE ROAD SOUTHFIELD, MICHIGAN (Address of principal executive offices)		48034-8339 (Zip Code)

Registrant’s telephone number, including area code: 248-353-2700

Indicate by check mark whether the registrant (1) has 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 þ No o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.

The number of shares of Common Stock, par value $0.01, outstanding on July 31, 2008 was 30,560,715.

 

 

TABLE OF CONTENTS

		PART I. — FINANCIAL INFORMATION
ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Income Statements — Three and six months ended June 30, 2008 and 2007			1
		Consolidated Balance Sheets — As of June 30, 2008 and December 31, 2007			2
		Consolidated Statements of Cash Flows — Six months ended June 30, 2008 and 2007			3
		Notes to Consolidated Financial Statements			4
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			18
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			30
ITEM 4.		CONTROLS AND PROCEDURES			30
		PART II. — OTHER INFORMATION
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			31
ITEM 6.		EXHIBITS			32
SIGNATURES					33
INDEX OF EXHIBITS					34
EX-31.(a)
EX-31.(b)
EX-32.(a)
EX-32.(b)

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands, except per share data)		2008				2007				2008				2007
Revenue:
Finance charges		$	70,827			$	54,084			$	134,502			$	105,497
Other income			4,178				4,202				11,281				10,140
Total revenue			75,005				58,286				145,783				115,637
Costs and expenses:
Salaries and wages			16,699				13,092				34,439				24,953
General and administrative			6,627				7,359				13,751				13,276
Sales and marketing			4,542				4,144				9,184				8,616
Provision for credit losses			20,760				3,798				23,409				7,671
Interest			9,884				9,463				20,748				17,751
Other expense			23				33				57				58
Total costs and expenses			58,535				37,889				101,588				72,325
Operating income			16,470				20,397				44,195				43,312
Foreign currency (loss) gain			—				34				(13	)			38
Income from continuing operations before provision for income taxes			16,470				20,431				44,182				43,350
Provision for income taxes			6,091				7,938				16,222				15,470
Income from continuing operations			10,379				12,493				27,960				27,880
Discontinued operations
(Loss) gain from discontinued United Kingdom operations			(12	)			(233	)			44				(271	)
Provision (credit) for income taxes			23				(70	)			40				(81	)
(Loss) gain from discontinued operations			(35	)			(163	)			4				(190	)
Net income		$	10,344			$	12,330			$	27,964			$	27,690
Net income per common share:
Basic		$	0.34			$	0.41			$	0.93			$	0.92
Diluted		$	0.33			$	0.39			$	0.90			$	0.88
Income from continuing operations per common share:
Basic		$	0.34			$	0.41			$	0.93			$	0.93
Diluted		$	0.33			$	0.40			$	0.90			$	0.89
(Loss) gain from discontinued operations per common share:
Basic		$	—			$	(0.01	)		$	—			$	(0.01	)
Diluted		$	—			$	(0.01	)		$	—			$	(0.01	)
Weighted average shares outstanding:
Basic			30,252,873				30,140,590				30,179,877				30,097,387
Diluted			31,088,428				31,312,139				30,970,387				31,297,484

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS

		As of
		June 30,				December 31,
(Dollars in thousands, except per share data)		2008				2007
		(Unaudited)
ASSETS:
Cash and cash equivalents		$	82			$	712
Restricted cash and cash equivalents			86,892				74,102
Restricted securities available for sale			4,243				3,290
Loans receivable (including $16,723 and $16,125 from affiliates as of June 30, 2008 and December 31, 2007, respectively)			1,144,409				944,698
Allowance for credit losses			(132,259	)			(134,145	)
Loans receivable, net			1,012,150				810,553
Property and equipment, net			21,844				20,124
Income taxes receivable			12,426				20,712
Other assets			14,464				12,689
Total Assets		$	1,152,101			$	942,182
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Accounts payable and accrued liabilities		$	81,896			$	79,834
Line of credit			38,100				36,300
Secured financing			658,284				488,065
Mortgage note and capital lease obligations			6,975				7,765
Deferred income taxes, net			69,116				64,768
Total Liabilities			854,371				676,732
Shareholders’ Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued			—				—
Common stock, $.01 par value, 80,000,000 shares authorized, 30,544,145 and 30,240,859 shares issued and outstanding as of June 30, 2008 and December 31, 2007, respectively			306				302
Paid-in capital			8,647				4,134
Retained earnings			288,965				261,001
Accumulated other comprehensive (loss) income, net of tax of $109 and $(7) at June 30, 2008 and December 31, 2007, respectively			(188	)			13
Total Shareholders’ Equity			297,730				265,450
Total Liabilities and Shareholders’ Equity		$	1,152,101			$	942,182

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Six Months Ended
		June 30,
(Dollars in thousands)		2008				2007
Cash Flows From Operating Activities:
Net income		$	27,964			$	27,690
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses			23,408				7,671
Depreciation			2,571				2,072
Loss on retirement of property and equipment			—				72
Provision for deferred income taxes			4,464				6,353
Stock-based compensation			1,807				1,845
Change in operating assets and liabilities:
Increase in accounts payable and accrued liabilities			1,737				2,461
Decrease in income taxes receivable			8,286				7,230
(Decrease) increase in other assets			(1,775	)			1,131
Net cash provided by operating activities			68,462				56,525
Cash Flows From Investing Activities:
Increase in restricted cash and cash equivalents			(12,790	)			(26,718	)
Purchases of restricted securities available for sale			(1,514	)			(550	)
Proceeds from sale of restricted securities available for sale			271				—
Maturities of restricted securities available for sale			298				355
Principal collected on Loans receivable			314,264				306,964
Advances to dealers and accelerated payments of dealer holdback			(321,396	)			(352,208	)
Purchases of Consumer Loans			(185,274	)			(41,915	)
Payments of dealer holdback			(32,746	)			(38,948	)
Net change in other receivables			98				63
Purchases of property and equipment			(4,291	)			(3,028	)
Net cash used in investing activities			(243,080	)			(155,985	)
Cash Flows From Financing Activities:
Borrowings under line of credit			415,900				354,700
Repayments under line of credit			(414,100	)			(348,600	)
Proceeds from secured financing			407,700				365,000
Repayments of secured financing			(237,481	)			(277,513	)
Principal payments under mortgage note and capital lease obligations			(790	)			(736	)
Repurchase of common stock			(66	)			(2,225	)
Proceeds from stock options exercised			1,911				1,027
Tax benefits from stock based compensation plans			865				1,256
Net cash provided by financing activities			173,939				92,909
Effect of exchange rate changes on cash			49				(148	)
Net decrease in cash and cash equivalents			(630	)			(6,699	)
Cash and cash equivalents, beginning of period			712				8,528
Cash and cash equivalents, end of period		$	82			$	1,829
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest		$	20,843			$	17,350
Cash paid during the period for income taxes			2,039				383
Supplemental Disclosure of Non-Cash Transactions:
Property and equipment acquired through capital lease obligations		$	—			$	122

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years. The consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2007 for Credit Acceptance Corporation (the “Company”, “Credit Acceptance”, “we”, “our” or “us”). Certain prior period amounts have been reclassified to conform to the current presentation.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

2. DESCRIPTION OF BUSINESS

     Since 1972, Credit Acceptance has provided auto loans to consumers, regardless of their credit history. Our product is offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

     We refer to dealers who participate in our program and who share our commitment to changing consumers’ lives as “dealer-partners”. Upon enrollment in our financing program, the dealer-partner enters into a dealer servicing agreement with Credit Acceptance that defines the legal relationship between Credit Acceptance and the dealer-partner. The dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on retail installment contracts (referred to as “Consumer Loans”) from the dealer-partners to us.

     We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the dealer-partner and immediately assigned to us. If we discover a misrepresentation by the dealer-partner relating to a Consumer Loan assigned to us, we can demand that the Consumer Loan be repurchased for the current balance of the Consumer Loan less the amount of any unearned finance charge plus the applicable termination fee, which is generally $500. Upon receipt of such amount in full, we will reassign the Consumer Loan and our security interest in the financed vehicle to the dealer-partner.

     We have two primary programs: the Portfolio Program and the Purchase Program. The following table shows the percentage of loans assigned to us under each of the programs:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Portfolio Program			65.4	%			83.8	%			68.1	%			90.2	%
Purchase Program			34.6	%			16.2	%			31.9	%			9.8	%

     Prior to January 1, 2008, dealer-partners had the option to assign Consumer Loans under either program and signed a separate agreement for each program type. Beginning January 1, 2008, dealer-partners that enroll in our program have two options. Dealer-partners choosing option one pay a one-time enrollment fee of $9,850 and have access to both the Portfolio Program and the Purchase Program. Dealer-partners choosing the second option to defer payment of the enrollment fee only have access to the Portfolio Program and agree to allow us to keep 50% of their first accelerated dealer holdback payment. This payment, called Portfolio Profit Express, is paid to qualifying dealer-partners after a pool of 100 Consumer Loans has been closed. After the first accelerated dealer holdback payment, the dealer-partner is granted access to the Purchase Program. Under the Portfolio Program, we advance money to dealer-partners (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loan. Under the Purchase Program, we buy the Consumer Loan from the dealer-partner (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as “Loans”.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

2. DESCRIPTION OF BUSINESS — (Concluded)

     Portfolio Program

     As payment for the vehicle, the dealer-partner generally receives the following:

	(i)		a down payment from the consumer;
	(ii)		a cash advance from us; and
	(iii)		after the advance has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee (“dealer holdback”).

     We record the amount advanced to the dealer-partner as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets. Cash advanced to dealer-partners is automatically assigned to the originating dealer-partner’s open pool of advances. At the dealer-partner’s option, a pool containing at least 100 Consumer Loans can be closed and subsequent advances assigned to a new pool. All advances due from a dealer-partner are secured by the future collections on the dealer-partner’s portfolio of Consumer Loans assigned to us. For dealer-partners with more than one pool, the pools are cross-collateralized so the performance of other pools is considered in determining eligibility for dealer holdback. We perfect our security interest in the Dealer Loans by taking possession of the Consumer Loans.

     The dealer servicing agreement provides that collections received by us during a calendar month on Consumer Loans assigned by a dealer-partner are applied on a pool-by-pool basis as follows:

	•		First, to reimburse us for certain collection costs;
	•		Second, to pay us our servicing fee;
	•		Third, to reduce the aggregate advance balance and to pay any other amounts due from the dealer-partner to us; and
	•		Fourth, to the dealer-partner as payment of dealer holdback.

     Dealer-partners have an opportunity to receive a portion of the dealer holdback on an accelerated basis at the time a pool of 100 or more Consumer Loans is closed. The amount paid to the dealer-partner is calculated using a formula that considers the forecasted collections and the advance balance on the closed pool. If the collections on Consumer Loans from a dealer-partner’s pool are not sufficient to repay the advance balance, the dealer-partner will not receive dealer holdback or accelerated dealer holdback.

     Since typically the combination of the advance and the consumer’s down payment provides the dealer-partner with a cash profit at the time of sale, the dealer-partner’s risk in the Consumer Loan is limited. We cannot demand repayment from the dealer-partner of the advance except in the event the dealer-partner is in default of the dealer servicing agreement. Advances are made only after the Consumer Loan is approved, accepted and assigned to us and all other stipulations required for funding have been satisfied. The dealer-partner can also opt to repurchase Consumer Loans assigned under the Portfolio Program at their own discretion.

     For accounting purposes, the transactions described under the Portfolio Program are not considered to be loans to consumers. Instead, our accounting reflects that of a lender to the dealer-partner. The classification as a Dealer Loan for accounting purposes is primarily a result of (i) the dealer-partner’s financial interest in the Consumer Loan and (ii) certain elements of our legal relationship with the dealer-partner. The cash amount advanced to the dealer-partner is recorded as an asset on our balance sheet. The aggregate amount of all advances to an individual dealer-partner, plus accrued income, less repayments comprises the amount of the Dealer Loan recorded in Loans receivable.

Purchase Program

     We began offering a Purchase Program on a limited basis in March of 2005. The Purchase Program differs from our traditional Portfolio Program in that the dealer-partner receives a single payment from us at the time of origination instead of a cash advance and dealer holdback. Purchase Program volume increased significantly beginning in 2007 as the program was offered to additional dealer-partners.

     For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the dealer-partner and then purchased by us. The cash amount paid to the dealer-partner is recorded as an asset on our balance sheet. The aggregate amount of all amounts paid to purchase Consumer Loans from dealer-partners, plus accrued income, less repayments, comprises the amount of Purchased Loans recorded in Loans receivable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

3. SIGNIFICANT ACCOUNTING POLICIES

Restricted Cash and Cash Equivalents

     The carrying amount of restricted cash and cash equivalents approximate their fair value due to the short maturity of these instruments. Restricted cash and cash equivalents increased to $86.9 million as of June 30, 2008 from $74.1 million at December 31, 2007. The balance consists of: (i) $61.0 million of cash collections related to secured financings, and (ii) $25.9 million of cash held in trusts for future vehicle service contract claims. The claims reserve associated with the trusts are included in accounts payable and accrued liabilities in the consolidated balance sheets.

Deferred Debt Issuance Costs

     As of June 30, 2008 and December 31, 2007, deferred debt issuance costs were $4.1 million (net of accumulated amortization of $3.7 million) and $3.3 million (net of accumulated amortization of $2.0 million), respectively, and are included in other assets in the consolidated balance sheets. Expenses associated with the issuance of debt instruments are capitalized and amortized as interest expense over the term of the debt instrument on a level-yield basis for term secured financings and on a straight-line basis for lines of credit and revolving secured financings.

New Accounting Pronouncements

     Fair Value Measurements. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods of those fiscal years. However, on February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of FSP FAS 157-2. We adopted the applicable portions of SFAS 157 on January 1, 2008 (See Note 7). The deferred portions of SFAS 157 will not have an impact on our financial statements. The adoption of the applicable portions of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial statements.

     Fair Value Option for Financial Assets and Liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically exempted from SFAS 159) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. At this time, we have not elected to measure any financial asset or liabilities at fair value under SFAS 159.

     Disclosures About Derivative Instruments and Hedging Activities. In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact that SFAS 161 will have on our consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

4. LOANS RECEIVABLE

A summary of changes in Loans receivable is as follows (in thousands):

		Three Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	831,605			$	216,788			$	1,048,393
New loans (1)			141,423				91,214				232,637
Transfers (2)			(584	)			584				—
Dealer holdback payments			15,504				—				15,504
Net cash collections on loans			(125,920	)			(23,871	)			(149,791	)
Write-offs			(2,368	)			(6	)			(2,374	)
Recoveries			—				9				9
Other			13				—				13
Currency translation			18				—				18
Balance, end of period		$	859,691			$	284,718			$	1,144,409

		Three Months Ended June 30, 2007
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	798,679			$	37,171			$	835,850
New loans (1)			138,988				28,959				167,947
Transfers (2)			(811	)			811				—
Dealer holdback payments			18,328				—				18,328
Net cash collections on loans			(139,186	)			(6,676	)			(145,862	)
Write-offs			(3,028	)			(23	)			(3,051	)
Recoveries			—				7				7
Other			90				—				90
Currency translation			132				—				132
Balance, end of period		$	813,192			$	60,249			$	873,441

		Six Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	804,245			$	140,453			$	944,698
New loans (1)			321,396				185,274				506,670
Transfers (2)			(2,098	)			2,098				—
Dealer holdback payments			32,746				—				32,746
Net cash collections on loans			(271,451	)			(43,103	)			(314,554	)
Write-offs			(25,096	)			(19	)			(25,115	)
Recoveries			—				15				15
Other			(2	)			—				(2	)
Currency translation			(49	)			—				(49	)
Balance, end of period		$	859,691			$	284,718			$	1,144,409

		Six Months Ended June 30, 2007
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	724,645			$	29,926			$	754,571
New loans (1)			352,208				41,915				394,123
Transfers (2)			(1,979	)			1,979				—
Dealer holdback payments			38,948				—				38,948
Net cash collections on loans			(293,821	)			(13,430	)			(307,251	)
Write-offs			(7,183	)			(160	)			(7,343	)
Recoveries			—				19				19
Other			226				—				226
Currency translation			148				—				148
Balance, end of period		$	813,192			$	60,249			$	873,441

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

4. LOANS RECEIVABLE — (Concluded)

     Our forecast as of March 31, 2008 assumed that Loans within our current portfolio would produce similar collection rates as produced by historical Loans with the same attributes and we expected net cash flows of $1.3 billion from our Loan portfolio. During the second quarter of 2008 we modified our forecasting methodology which now assumes that Loans originated in 2006, 2007 and 2008 will perform 100 to 300 basis points lower than historical Loans with the same attributes. As a result we reduced our estimate of future cash flows on these same Loans by $22.2 million, or 1.7%. Of the total reduction, $20.8 million was recorded as a current period expense, $1.0 million was recorded as a current period reduction in Loan revenue and $0.5 million will be recorded as a reduction in Loan revenue in future periods. This new expectation is consistent with recent experience and includes both the lower realized collection rates experienced during the second quarter of 2008 as well as lower expected recoveries on repossession sales as a result in a decline in used vehicle values that occurred during the second quarter of 2008. We did not modify our forecast related to 2005 and prior Loans as these Loans continue to perform as expected.

A summary of changes in the Allowance for credit losses is as follows (in thousands):

		Three Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	112,653			$	1,172			$	113,825
Provision for credit losses (1)			15,513				5,269				20,782
Write-offs			(2,368	)			(6	)			(2,374	)
Recoveries			—				10				10
Currency translation			16				—				16
Balance, end of period		$	125,814			$	6,445			$	132,259

		Three Months Ended June 30, 2007
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	127,191			$	1,058			$	128,249
Provision for credit losses (2)			4,151				(185	)			3,966
Write-offs			(3,028	)			(23	)			(3,051	)
Recoveries			—				7				7
Currency translation			111				—				111
Balance, end of period		$	128,425			$	857			$	129,282

		Six Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	133,201			$	944			$	134,145
Provision for credit losses (3)			17,751				5,505				23,256
Write-offs			(25,096	)			(19	)			(25,115	)
Recoveries			—				15				15
Currency translation			(42	)			—				(42	)
Balance, end of period		$	125,814			$	6,445			$	132,259

		Six Months Ended June 30, 2007
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	127,881			$	910			$	128,791
Provision for credit losses (4)			7,602				88				7,690
Write-offs			(7,183	)			(160	)			(7,343	)
Recoveries			—				19				19
Currency translation			125				—				125
Balance, end of period		$	128,425			$	857			$	129,282

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT

     We currently use four primary sources of debt financing: (i) a revolving secured line of credit with a commercial bank syndicate; (ii) revolving secured warehouse facilities with institutional investors; (iii) SEC Rule 144A asset-backed secured financings (“Term ABS 144A”) with qualified institutional investors; and (iv) a residual credit facility with an institutional investor. General information for each of our financing transactions in place as of June 30, 2008 is as follows (dollars in thousands):

Wholly owned

Issue

Revolving Maturity

Financing

Interest Rate at

Financings

Subsidiary *

Number

Close Date

Date

Amount

June 30, 2008

Revolving Line of Credit

n/a

n/a

January 25, 2008

June 22, 2010

$

153,500

Either Eurodollar rate plus 125 basis points (3.72%) or the prime rate minus 165 basis points (3.35%)

Revolving Secured Warehouse Facility*

CAC Warehouse Funding Corp. II

2003-2

February 12, 2008

February 11, 2009

$

325,000

Commercial paper rate plus 65 basis points (3.36%)

Revolving Secured Warehouse Facility*

CAC Warehouse Funding III, LLC

2008-2

May 27, 2008

May 23, 2010

$

50,000

Commercial paper rate plus 77.5 basis points (3.49%)

Term ABS 144A 2006-2*

Credit Acceptance Funding LLC 2006-2

2006-2

November 21, 2006

November 15, 2007**

$

100,000

Fixed rate (5.38%)

Term ABS 144A 2007-1*

Credit Acceptance Funding LLC 2007-1

2007-1

April 12, 2007

April 15, 2008**

$

100,000

Fixed rate (5.32%)

Term ABS 144A 2007-2*

Credit Acceptance Funding LLC 2007-2

2007-2

October 29, 2007

October 15, 2008**

$

100,000

Fixed rate (6.22%)***

Term ABS 144A 2008-1*

Credit Acceptance Funding LLC 2008-1

2008-1

April 18, 2008

April 15, 2009**

$

150,000

Fixed rate (6.43%)***

Residual Credit Facility*

Credit Acceptance Residual Funding LLC

2006-3

September 11, 2007

September 9, 2008

$

50,000

LIBOR plus 145 basis points (3.91%) or the commercial paper rate plus 145 basis points (4.16%)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Continued)

Additional information related to the amounts outstanding on each facility is as follows (dollars in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revolving Line of Credit
Maximum outstanding balance		$	128,400			$	70,200			$	128,400			$	70,200
Average outstanding balance			74,819				43,764				60,431				42,092
Revolving Secured Warehouse Facility (2003-2)*
Maximum outstanding balance		$	297,211			$	293,500			$	297,211			$	293,500
Average outstanding balance			272,398				219,049				264,245				215,420
Revolving Secured Warehouse Facility (2008-2)
Maximum outstanding balance		$	50,000			$	—			$	50,000			$	—
Average outstanding balance			50,000				—				50,000				—

		As of June 30,				As of December 31,
		2008				2007
Revolving Line of Credit
Balance outstanding		$	38,100			$	36,300
Letter(s) of credit			173				173
Amount available for borrowing			115,227				38,527
Interest rate			3.35	%			5.60	%
Revolving Secured Warehouse Facility (2003-2)
Balance outstanding		$	264,061			$	198,100
Amount available for borrowing			60,939				226,900
Contributed eligible Loans			328,507				254,294
Interest rate			3.36	%			5.76	%
Revolving Secured Warehouse Facility (2008-2)
Balance outstanding		$	50,000			$	—
Amount available for borrowing			—				—
Contributed eligible Loans			62,565				—
Interest rate			3.49	%			—
Term ABS 144A 2006-2
Balance outstanding		$	27,927			$	89,965
Contributed eligible Dealer Loans			107,484				129,950
Interest rate			5.38	%			5.38	%
Term ABS 144A 2007-1
Balance outstanding		$	81,295			$	100,000
Contributed eligible Dealer Loans			117,376				130,841
Interest rate			5.32	%			5.32	%
Term ABS 144A 2007-2
Balance outstanding		$	100,000			$	100,000
Contributed eligible Dealer Loans			125,009				132,695
Interest rate			6.22	%			6.22	%
Term ABS 144A 2008-1
Balance outstanding		$	135,000			$	—
Contributed eligible Dealer Loans			176,511				—
Interest rate			6.43	%			—
Residual Credit Facility
Balance outstanding		$	—			$	—
Contributed eligible Dealer Loans			82,993				28,513
Interest rate			4.16	%			6.56	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Continued)

Line of Credit Facility

     During the first quarter of 2008, we increased the amount of our line of credit facility with a commercial bank syndicate from $75.0 million to $153.5 million. In addition, the maturity of the line of credit facility was extended from June 20, 2009 to June 22, 2010. There were no other material changes to the terms of the line of credit facility.

     Borrowings under the credit facility are subject to a borrowing-base limitation. This limitation equals 80% of the net book value of Loans, less a hedging reserve (not exceeding $1.0 million), the amount of letters of credit issued under the line of credit, and the amount of other debt secured by the collateral which secures the line of credit. Borrowings under the credit agreement are secured by a lien on most of our assets. We must pay annual and quarterly fees on the amount of the facility.

Revolving Secured Warehouse Facilities

     We have two revolving secured warehouse facilities that are provided to wholly owned subsidiaries of the Company. One is a $325.0 million facility with an institutional investor and the other is a $50.0 million facility with another institutional investor.

     During the first quarter of 2008, we extended the maturity of $325.0 million facility from February 13, 2008 to February 11, 2009. The amount of the facility was reduced from $425.0 million to $325.0 million. The reduction in the amount of the facility is due to one of the two institutional investors (the “Nonextending Investor”) not renewing their participation in the facility. The amount owing to the Nonextending Investor has been reduced to zero.

     During the second quarter of 2008, we entered into a $50.0 million revolving warehouse facility with an institutional investor. This facility was fully drawn as of June 30, 2008.

     Under these facilities we can contribute Loans to our wholly owned subsidiaries in return for cash and equity in each subsidiary. In turn, each subsidiary pledges the Loans as collateral to institutional investors to secure financing that will fund the cash portion of the purchase price of the Loans. The financing provided to each subsidiary under the applicable facility is limited to the lesser of 80% of the net book value of the contributed Loans or the facility limit.

     The subsidiaries are liable for any amounts due under the applicable facility. Even though the subsidiaries and the Company are consolidated for financial reporting purposes, the financing is non-recourse to us. As the subsidiaries are organized as separate legal entities from the Company, assets of the subsidiaries (including the conveyed Loans) will not be available to satisfy the general obligations of the Company. All of each subsidiaries assets have been encumbered to secure its obligations to its respective creditors.

     Interest on borrowings under the facilities has been limited to a maximum rate of 6.75% through interest rate cap agreements. The subsidiaries pay us a monthly servicing fee equal to 6% of the collections received with respect to the conveyed Loans. The fee is paid out of the collections. Except for the servicing fee and holdback payments due to dealer-partners, we do not have any rights in any portion of such collections until all outstanding principal, accrued and unpaid interest, fees and other related costs are paid in full.

Term ABS 144A Financings

     In 2006, 2007 and 2008, five of our wholly owned subsidiaries (the “Funding LLCs”), each completed a secured financing transaction. In connection with these transactions, we conveyed Loans on an arms-length basis to each Funding LLC for cash and the sole membership interest in that Funding LLC. In turn, each Funding LLC conveyed the Loans to a respective trust that issued notes to qualified institutional investors. Financial insurance policies were issued in connection with the 2006 and 2007 transactions. The policies guarantee the timely payment of interest and ultimate repayment of principal on the final scheduled distribution date. In the 2006 and 2007 transactions, the notes were initially rated “Aaa” by Moody’s Investor Service (“Moody’s”) and “AAA” by Standard & Poor’s Rating Services (“S&P”) based upon the financial insurance policy. Due to downgrades in the debt ratings of the insurers, at June 30, 2008 the 2006 transaction was rated “A” by S&P and “A3” by Moody’s. The 2007 transactions were rated “A-” by S&P and “A3” by “Moody’s. The 2008 transaction was rated “A” by S&P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Continued)

     Each financing has a specified revolving period during which we may be required, and are likely, to convey additional Loans to each Funding LLC. Each Funding LLC will then convey the Loans to their respective trust. At the end of the revolving period, the debt outstanding under each financing will begin to amortize.

     The financings create loans for which the trusts are liable and which are secured by all the assets of each trust. Such loans are non-recourse to us, even though the trusts, the Funding LLCs and the Company are consolidated for financial reporting purposes. Because the Funding LLCs are organized as separate legal entities from the Company, their assets (including the conveyed Loans) are not available to satisfy our general obligations. We receive a monthly servicing fee on each financing equal to 6% of the collections received with respect to the conveyed Loans. The fee is paid out of the collections. Aside from the servicing fee and payments due to dealer-partners, we do not receive, or have any rights in the collections. However, in our capacity as Servicer of the Loans, we do have a limited right to exercise a “clean-up call” option to purchase Loans from the Funding LLCs under certain specified circumstances. Alternatively, when a trust’s underlying indebtedness is paid in full, either through collections or through a prepayment of the indebtedness, the trust is to pay any remaining collections over to its Funding LLC as the sole beneficiary of the trust. The collections will then be available to be distributed to us as the sole member of the respective Funding LLC.

     The table below sets forth certain additional details regarding the outstanding Term ABS 144A Financings (dollars in thousands):

						Net Book Value of Dealer				Expected
Term ABS 144A		Issue				Loans Conveyed at				Annualized
Financing		Number		Close Date		Closing		Revolving Period		Rates *
Term ABS 144A 2006-2		2006-2		November 21, 2006		$125,600		12 months		7.4%
								(Through November 15, 2007)
Term ABS 144A 2007-1		2007-1		April 12, 2007		$125,700		12 months		7.2%
								(Through April 15, 2008)
Term ABS 144A 2007-2		2007-2		October 29, 2007		$125,000		12 months		8.0%
								(Through October 15, 2008)
Term ABS 144A 2008-1		2008-1		April 18, 2008		$  86,615		12 months		7.0%
								(Through April 15, 2009)

Residual Credit Facility

     Another wholly owned subsidiary, Credit Acceptance Residual Funding LLC (“Residual Funding”), has a $50.0 million secured credit facility with an institutional investor. This facility allows Residual Funding to finance its purchase of trust certificates from special-purpose entities (the “Term SPEs”) that have purchased Dealer Loans under our term securitization transactions. Historically, the Term SPEs’ residual interests in Dealer Loans, represented by their trust certificates, have proven to have value that increases as their term securitization obligations amortize. This facility enables the Term SPEs to realize and distribute to us up to 70% of that increase in value prior to the time the related term securitization senior notes are paid in full.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

5. DEBT — (Concluded)

     Residual Funding’s interests in Dealer Loans, represented by its purchased trust certificates, are subordinated to the interests of term securitization senior noteholders. However, the entire arrangement is non-recourse to us. Residual Funding is organized as a separate legal entity from the Company. Therefore its assets, including purchased trust certificates, are not available to satisfy our general obligations, even though Residual Funding and the Company are consolidated for financial reporting purposes.

Debt Covenants

     As of June 30, 2008, we are in compliance with various restrictive debt covenants that require the maintenance of certain financial ratios and other financial conditions. The most restrictive covenants require a minimum ratio of our assets to debt and a minimum ratio of our earnings before interest, taxes and non-cash expenses to fixed charges. The covenants also limit the maximum ratio of our funded debt to tangible net worth. Additionally, we must maintain consolidated net income of not less than $1.00 for the two consecutive quarters. Some of the debt covenants may indirectly limit the payment of dividends on common stock.

6. DERIVATIVE INSTRUMENTS

     Interest Rate Caps. We purchase interest rate cap agreements to manage the interest rate risk on our secured financings. As we have not designated these agreements as hedges as defined under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended by SFAS No. 138 and SFAS No. 149, changes in the fair value of these agreements will increase or decrease net income.

     As of June 30, 2008, six interest rate cap agreements were outstanding with a cap rate of 6.75% and totaled (dollars in thousands):

Notional				Commercial Paper						Fair
Amount				Cap Rate				Term		Value
$	700,000				6.75	%		Various maturities between July 2009 and June 2010.		$	57

     As of December 31, 2007, four interest rate cap agreements were outstanding with a cap rate of 6.75% and totaled (dollars in thousands):

Notional				Commercial Paper						Fair
Amount				Cap Rate				Term		Value
$	525,000				6.75	%		Various maturities between September 2005 and June 2010.		$	6

     Interest Rate Swaps. As of June 30, 2008 we had $159.2 million in fixed rate debt, and $185.0 million in floating rate debt outstanding under Term ABS 144A asset-backed secured borrowings. We have entered into two interest rate swaps to convert $50.0 million and $135.0 million in floating rate Term ABS 144A asset-backed secured borrowings into fixed rate debt bearing a rate of 6.28% and 6.43%, respectively. The fair value of the interest rate swaps is based on quoted market values, which are influenced by a number of factors, including interest rates, amount of debt outstanding, and number of months until maturity. As we have not designated the interest rate swap related to the $50.0 million in floating rate debt as a hedge as defined under SFAS 133, changes in the fair value of this swap will increase or decrease interest expense. For the three and six months ended June 30, 2008, the impact on interest expense was ($0.6) million and $0.2 million, respectively. As of June 30, 2008, the interest rate swap had a fair value of ($0.7) million.

     We have designated the interest rate swap related to the $135.0 million floating rate debt as a cash flow hedge as defined under SFAS 133. The effective portion of changes in the fair value will be recorded in other comprehensive income, net of income taxes, and the ineffective portion of changes in fair value will be recorded in interest expense. There has been no such ineffectiveness since the inception of this hedge through the second quarter of 2008. For the three and six months ended June 30, 2008, the impact on other comprehensive income, net of tax, was ($0.2) million. As of June 30, 2008, the interest rate swap had a fair value of ($0.3) million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

6. DERIVATIVE INSTRUMENTS — (Concluded)

     For those derivative instruments that are designated and qualify as hedging instruments, we formally document all relationships between the hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific assets and liabilities on the balance sheet. We also formally assess (both at the hedge’s inception and on a quarterly basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in the future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we would discontinue hedge accounting prospectively.

     At June 30, 2008, we had minimal exposure to credit loss on the interest rate swaps. We do not believe that any reasonably likely change in interest rates would have a materially adverse effect on our financial position, our results of operations or our cash flows.

     We recognize our derivative financial instruments as either assets or liabilities on our consolidated balance sheets.

7. FAIR VALUE MEASUREMENTS

     Effective January 1, 2008, we adopted SFAS 157, which clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. As required under SFAS 157, we group assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

      The following table provides the fair value measurements of applicable assets and liabilities as of June 30, 2008 (in thousands):

			Level 1				Level 2				Fair Value
Assets
Restricted securities available for sale			$	4,243			$	—			$	4,243
Derivative instruments				—				57				57
Liabilities
Derivative instruments			$	—			$	1,051			$	1,051

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

8. RELATED PARTY TRANSACTIONS

     In the normal course of our business, we have Dealer Loans with affiliated dealer-partners owned or controlled by: (i) our majority shareholder and Chairman; and (ii) a member of the Chairman’s immediate family. Our Dealer Loans to affiliated dealer-partners and non-affiliated dealer-partners are on the same terms.

     Affiliated Dealer Loan balances were $16.7 million and $16.1 million as of June 30, 2008 and December 31, 2007, respectively. Affiliated Dealer Loan balances were 1.9% and 2.0% of total consolidated Dealer Loan balances as of June 30, 2008 and December 31, 2007, respectively. A summary of related party Dealer Loan activity is as follows (dollars in thousands):

		Three Months Ended								Three Months Ended
		June 30, 2008								June 30, 2007
		Affiliated								Affiliated
		dealer-partner				% of				dealer-partner				% of
		activity				consolidated				activity				consolidated
New loans		$	2,832				2.0	%		$	2,346				1.7	%
Affiliated dealer-partner revenue		$	1,028				1.9	%		$	1,195				2.5	%
Dealer holdback payments		$	591				3.8	%		$	466				2.5	%

		Six Months Ended								Six Months Ended
		June 30, 2008								June 30, 2007
		Affiliated								Affiliated
		dealer-partner				% of				dealer-partner				% of
		activity				consolidated				activity				consolidated
New loans		$	6,519				2.0	%		$	6,558				1.9	%
Affiliated dealer-partner revenue		$	2,013				2.0	%		$	2,413				2.5	%
Dealer holdback payments		$	1,130				3.5	%		$	1,023				2.6	%

     Beginning in 2002, entities owned by our majority shareholder and Chairman began offering secured lines of credit to third parties in a manner similar to a program previously offered by us. In December 2004, our majority shareholder and Chairman sold his ownership interest in these entities; however, he continues to have indirect control over these entities and has the right or obligation to reacquire the entities under certain circumstances until December 31, 2014 or the repayment of the related purchase money note.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED)

9. CAPITAL TRANSACTIONS

     Net Income Per Share

     Basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the total of the weighted average number of common shares and dilutive common stock equivalents outstanding. Dilutive common stock equivalents included in the computation represent shares issuable upon assumed exercise of stock options that would have a dilutive effect using the treasury stock method. The share effect is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Weighted average common shares outstanding			30,252,873				30,140,590				30,179,877				30,097,387
Dilutive effect of common stock equivalents			835,555				1,171,549				790,510				1,200,097
Weighted average common shares and common stock equivalents			31,088,428				31,312,139				30,970,387				31,297,484

     There were no stock options that would be anti-dilutive for the three and six months ended June 30, 2008 and 2007.

     Stock Compensation Plans

     Pursuant to our Incentive Compensation Plan (the “Incentive Plan”), which was approved by shareholders on May 13, 2004, we reserved 1.0 million shares of our common stock for the future granting of restricted stock, restricted stock units, stock options, and performance awards to employees, officers, and directors at any time prior to April 1, 2014. Shares available for future grants under the Incentive Plan totaled 426,852 as of June 30, 2008.

     A summary of the activity under the Incentive Plan for the six months ended June 30, 2008 and 2007 is presented below:

Restricted Stock		Number of Shares
Outstanding as of December 31, 2007			201,872
Granted			80,123
Vested			(20,198	)
Forfeited			(9,655	)
Outstanding as of June 30, 2008			252,142

Restricted Stock		Number of Shares
Outstanding as of December 31, 2006			146,028
Granted			56,669
Vested			(708	)
Forfeited			—
Outstanding as of June 30, 2007			201,989

     On February 22, 2007, the compensation committee approved an award of 300,000 restricted stock units to our Chief Executive Officer. Each restricted stock unit represents and has a value equal to one share of our common stock. The restricted stock units will be earned over a five year period based upon the annual increase in our adjusted economic profit. Any earned shares will be distributed on February 22, 2014. As of June 30, 2008, 60,000 restricted stock units have been earned.

     Expenses related to restricted stock grants and the award of restricted stock units is as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Restricted stock compensation expense		$	367			$	384			$	713			$	437
Restricted stock units compensation expense			531				990				1,097				1,404
Total expense		$	898			$	1,374			$	1,810			$	1,841

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Concluded)
(UNAUDITED)

10. BUSINESS SEGMENT INFORMATION

     We have two reportable business segments: United States and Other. The United States segment primarily consists of the United States automobile financing business. We are currently liquidating all businesses classified in the Other segment.

     Selected segment information is set forth below (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenue:
United States		$	74,995			$	58,249			$	145,755			$	115,562
Other			10				37				28				75
Total revenue		$	75,005			$	58,286			$	145,783			$	115,637
Income (loss) from continuing operations before provision for income taxes:
United States		$	16,431			$	20,324			$	44,292			$	43,248
Other			39				107				(110	)			102
Total income from continuing operations before provision for income taxes		$	16,470			$	20,431			$	44,182			$	43,350

		As of				As of
		June 30, 2008				December 31, 2007
Segment Assets
United States		$	1,150,865			$	940,307
Other			1,236				1,875
Total Assets		$	1,152,101			$	942,182

11. COMPREHENSIVE INCOME

     Our comprehensive income information is set forth below (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net income		$	10,344			$	12,330			$	27,964			$	27,690
Unrealized (loss) gain on securities available for sale, net of tax			(38	)			(7	)			5				4
Unrealized (loss) gain on interest rate swap, net of tax			(206	)			—				(206	)			—
Comprehensive income		$	10,100			$	12,323			$	27,763			$	27,694

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

     The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 — Financial Statements and Supplementary Data, of our 2007 Annual Report on Form 10-K, as well as Item 1 — Consolidated Financial Statements, in this Form 10-Q.

Critical Success Factors

     Critical success factors for us include access to capital and the ability to accurately forecast Consumer Loan performance.

     Our strategy for accessing the capital required to grow is to: (i) maintain consistent financial performance, (ii) maintain modest financial leverage, and (iii) maintain multiple funding sources. At June 30, 2008 our funded debt to equity ratio is 2.4:1. We currently use four primary sources of debt financing: (i) a revolving secured line of credit with a commercial bank syndicate; (ii) revolving secured warehouse facilities with institutional investors; (iii) SEC Rule 144A asset-backed secured borrowings (“Term ABS 144A”) with qualified institutional investors; and (iv) a residual credit facility with an institutional investor.

     At the time of Consumer Loan acceptance or purchase, we forecast future expected cash flows from the Consumer Loan. Based on these forecasts, an advance or one time payment is made to the related dealer-partner at a level designed to achieve an acceptable return on capital. If Consumer Loan performance equals or exceeds our original expectation, it is likely our target return on capital will be achieved.

Consumer Loan Performance

     The following table compares our forecast of Consumer Loan collection rates as of June 30, 2008, with the forecasts as of March 31, 2008, segmented by year of origination.

		June 30, 2008		March 31, 2008
Loan Origination Year		Forecasted Collection %		Forecasted Collection %		Variance
1999		72.1%		72.1%		0.0%
2000		72.5%		72.4%		0.1%
2001		67.4%		67.3%		0.1%
2002		70.4%		70.4%		0.0%
2003		74.0%		74.0%		0.0%
2004		73.5%		73.5%		0.0%
2005		74.1%		74.1%		0.0%
2006		70.2%		70.6%		-0.4%
2007		68.2%		70.6%		-2.4%
2008		69.0%		69.7%		-0.7%

     We forecast future Loan cash flows by comparing Loans in our current portfolio to historical Loans with the same attributes. The attributes include both variables captured at Loan origination such as credit bureau, application, Loan and vehicle data as well as variables captured subsequent to Loan origination such as collection and delinquency data. Our forecast as of March 31, 2008 assumed that Loans within our current portfolio would produce similar collection rates as produced by historical Loans with the same attributes. During the second quarter of 2008 we modified our forecasting methodology which now assumes that Loans originated in 2006, 2007 and 2008 will perform 100 to 300 basis points lower than historical Loans with the same attributes. The amount of the reduction varies based on the initial Loan term and the number of months the Loan has aged with longer-term, more recent Loans impacted more severely. This new expectation is consistent with recent experience and includes both the lower realized collection rates experienced during the second quarter of 2008 as well as lower expected recoveries on repossession sales as a result in a decline in used vehicle values that occurred during the second quarter of 2008. We did not modify our forecast related to 2005 and prior Loans as these Loans continue to perform as expected.

     Although we cannot guarantee that future revisions to our forecast will not be required, we believe our current estimates are realizable for the following reasons:

	•		The revised forecast applied to historical loans produces a consistent result as the Loans age.
	•		The risk of a future material forecast revision on 2006 Loans has lessened since 73.7% of our forecast has been realized.
	•		2006 Loans have been collected during periods of economic stress including higher levels of unemployment and rising gas prices.
	•		We have assumed significantly lower values for future repossession proceeds based on the decline in used vehicle values experienced to date.
	•		Except for the assumption related to repossession values, we have assumed that Loans originated in 2007 and 2008 will perform similarly to Loans originated in 2006. The reduction in forecasted repossession values has a greater impact on more recently originated Loans.

     During July of 2008, realized net Loan cash flows were consistent with our revised forecast.

     The revised forecasted collection rates are modestly lower than the collection rates we expected when the Loans were originated. The following table compares, for each of the last 10 years, our most current forecast of Loan performance with our initial forecast:

		June 30, 2008
Loan Origination Year		Forecasted Collection %		Initial Forecast		Variance		% of Forecast Realized
1999		72.1%		73.6%		-1.5%		99.6%
2000		72.5%		72.8%		-0.3%		99.2%
2001		67.4%		70.4%		-3.0%		98.6%
2002		70.4%		67.9%		2.5%		98.1%
2003		74.0%		72.0%		2.0%		97.5%
2004		73.5%		73.0%		0.5%		96.2%
2005		74.1%		74.0%		0.1%		92.2%
2006		70.2%		71.4%		-1.2%		73.7%
2007		68.2%		70.7%		-2.5%		40.0%
2008		69.0%		70.4%		-1.4%		9.2%

     Although Loans originated in 2006 through 2008 are not performing as well as Loans originated in 2002 through 2005, they are still expected to produce acceptable returns on capital. Forecasting future collection rates is difficult. Knowing this, we set prices at Loan inception so that an acceptable return on capital will be achieved, even if collection results are materially lower than we forecasted. For Dealer Loans, a 100 basis point change in the collection rate impacts the after tax return on capital by approximately 35 basis points (approximately 70 basis points for Purchased Loans).

     Since the cash flows available to repay Loans are generated, in most cases, from the underlying Consumer Loans, the performance of the Consumer Loans is critical to our financial results. The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of June 30, 2008. Payments of dealer holdback and accelerated payments of dealer holdback are not included in the advance percentage paid to the dealer-partner. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans.

		As of June 30, 2008
		Forecasted						% of Forecast
Loan Origination Year		Collection %		Advance %		Spread %		Realized
1999		72.1%		48.7%		23.4%		99.6%
2000		72.5%		47.9%		24.6%		99.2%
2001		67.4%		46.0%		21.4%		98.6%
2002		70.4%		42.2%		28.2%		98.1%
2003		74.0%		43.4%		30.6%		97.5%
2004		73.5%		44.0%		29.5%		96.2%
2005		74.1%		46.9%		27.2%		92.2%
2006		70.2%		46.6%		23.6%		73.7%
2007		68.2%		46.5%		21.7%		40.0%
2008		69.0%		45.3%		23.7%		9.2%

     The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of June 30, 2008 for Purchased Loans and Dealer Loans separately:

						Forecasted
		Loan Origination Year				Collection %				Advance %				Spread %
Purchased loans			2007				68.2	%			49.2	%			19.0	%
			2008				68.3	%			47.6	%			20.7	%
Dealer loans			2007				68.2	%			45.8	%			22.4	%
			2008				69.4	%			44.0	%			25.4	%