<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549
                                   FORM 10-KSB

/X/      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 1997

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

For the transition period from ________________ to ________________

                           COMMISSION FILE NO. 0-14819

                          RENT-A-WRECK OF AMERICA, INC.
                      (EXACT NAME OF ISSUER IN ITS CHARTER)

           DELAWARE                                     95-3926056
(State or other Jurisdiction of                         (I.R.S. Employer
 Incorporation or Organization)                         Identification No.)

11460 Cronridge Drive, Suite 120, Owings Mills, MD    21117
(Address of Principal Executive Offices)           (Zip Code)

Issuer's telephone number: (410) 581-5755

Securities registered pursuant to Section 12(b) of the Act: None


Securities registered pursuant to Section 12(g) of the Act:

                  Common Stock, par value $0.01

         Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

                           Yes X          No
                              ---   
         Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

         State issuer's revenues for its most recent fiscal year.  $3,785,000

         4,244,767 shares of common stock were outstanding as of May 1, 1997.

         Aggregate market value of voting stock held by nonaffiliates of
         registrant, based upon the average of the last bid and asked price of
         the Common Stock on the Nasdaq SmallCap Market, was $2,997,266 on May
         1, 1997. Shares of Common Stock held by each officer and director and
         by each person who owns 10% or more of the outstanding Common Stock
         have been excluded in that such persons may be deemed to be affiliates.
         This determination of affiliate status is not necessarily conclusive.

         The following documents are incorporated by reference and made a part
         of the Form 10-KSB:

         1.       Portions of the Registrant's Proxy Statement for the 1997
                  Annual Meeting of Stockholders are incorporated by reference
                  in Part III hereof.

         Transitional Small Business Disclosure Format (check one):
         Yes    No  X
                   ---

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                                TABLE OF CONTENTS


PART I

     Item 1.   Description of Business....................................    3

     Item 2.   Description of Property....................................    9

     Item 3.   Legal Proceedings..........................................    9

     Item 4.   Submission of Matters to a Vote of
               Security Holders...........................................   10

PART II

     Item 5.   Market for the Common Equity and
               Related Stockholder Matters................................   11

     Item 6.   Management's Discussion and Analysis of
               Financial Condition and Results of Operations..............   14

     Item 7.   Financial Statements.......................................   19

     Item 8.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure........................   41

PART III

     Item  9.  Directors and Executive Officers,
               Promoters and Control Persons; Compliance
               with Section 16(a) of the Exchange Act.....................   41

     Item 10.  Executive Compensation.....................................   41

     Item 11.  Security Ownership of Certain Beneficial
               Owners and Management......................................   41

     Item 12.  Certain Relationships and Related
               Transactions...............................................   41

     Item 13.  Exhibits and Reports on Form 8-K...........................   41



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                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

General

         Rent-A-Wreck of America, Inc. (the "Company" or "RAWA") (incorporated
in Delaware on October 12, 1983), which conducts its operations primarily
through its wholly owned subsidiary Bundy American Corporation ("Bundy")
(incorporated in California on April 22, 1977 and redomesticated in Maryland
effective October 22, 1996), markets and administers the Rent-A-Wreck (R)
vehicle rental franchise program. The Rent-A-Wreck franchisees in aggregate
operate one of the largest used vehicle rental fleets in the nation, offering
rentals of cars, trucks and vans at rates that are generally less than those
charged by new car rental companies. The Company also has franchisees in Europe
and Asia. Reference to the "Company" includes Rent-A-Wreck of America, Inc. and
its subsidiaries unless the context otherwise requires.

The Franchise Program

         The Company sells to qualified persons the right to operate a
Rent-A-Wreck and/or PRICELE$$ franchise renting and leasing used motor vehicles
(automobiles, vans and trucks) to the general public. Further, the Company
offers each franchise territory rights in which the Company will not open
another franchise.

         Franchisees purchase the right to use certain of the Company's
resources, experience and knowledge in connection with the operation of the
business for a specified period of time, typically ten years. The franchisee
utilizes the Company's systems, methods, specifications, standard operating
procedures, guidance, trade and service marks.

         The Company believes the Rent-A-Wreck name is unique and currently
enjoys national recognition. Ongoing marketing programs further promote name
recognition, including internationally. The Company develops and executes
advertising and marketing programs that have included radio and television
commercials, direct mail, print advertising and promotional items.

         On January 1, 1997, the Company began actively marketing its existing
trademark "PRICELE$$" (R). The franchisees who participate in this used vehicle
rental franchise program are required by the Company to meet higher standards
such as utilizing vehicles that are under three years old. As of March 31, 1997,
19 of the Company's franchisees are participating in this program. The Company
believes the PRICELE$$ name will appeal to a different clientele and therefore
will be a complement to the Rent-A-Wreck program.


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         On December 3, 1996, the Company purchased the assets of Insurance
Rentals, Inc. (a subsidiary of Baltimore Car and Truck Rental) to provide a
central reservation system and marketing force for the insurance replacement
business. This business is based in Baltimore, Maryland and the Company is
developing this program so that it can be used nationwide. Insurance Rentals,
Inc. utilizes its established insurance company client base to provide the
Company's franchisees with referrals for insureds requiring temporary
replacement vehicles after an accident. The Company collects reservation fees
from its franchisees for these referrals.

         During the fiscal year ended March 31, 1997, Rent-A-Wreck One Way, Inc.
started a truck rental program which is being developed and tested in the
immediate area of the Company's headquarters in Maryland. The Company has
purchased two trucks to operate under this program. These trucks and an existing
Company-owned van are placed with one or more of the Company's franchisees which
are utilizing them in their fleets. The franchisees pay fees to the Company for
these vehicles based on the mileage used.

         Public relations activities conducted on the franchisees' behalf
include a franchise award announcement, grand opening press release and
anniversary press releases. Assistance in planning and implementing local
promotional activities is available to franchisees. The Public Relations
Department also publishes the "Rent-A-Wreck Reporter", which is distributed
internally to franchisees and externally to trade and consumer media, and the
Company's sources of referral such as insurance adjusters, automotive repair
shops, travel agents and corporate travel managers.

         The Company maintained a national insurance program with an "A" rated
carrier which offered group insurance rates available to most franchisees. The
program was discontinued on February 16, 1997.

         The Company offers its physical damage insurance program through its
wholly owned subsidiary Central Life and Casualty, Limited ("CLC") to its
franchisees. Franchisees pay monthly premiums based on their vehicles' wholesale
value, and in return CLC provides them with coverage for damage to their
vehicles up to their wholesale value. CLC utilizes Lindsey Morden as its
insurance adjuster and pays claims from premiums collected. As of March 31,
1997, approximately 3% of the Company's franchisees participate in this program.
The Company intends to replace this program with the Company's new insurance
program which is discussed in the following paragraph.

         On March 1, 1997, the Company formed a wholly owned insurance
subsidiary domiciled in Bermuda to provide automobile liability and physical
damage reinsurance through American International Group ("AIG") for the vehicles
belonging to its franchisees. The company


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name for this captive is Consolidated American Rental Insurance Company, LTD
("CAR Insurance").

         AIG provides insurance coverage for the Company's franchisees. CAR
Insurance reinsures AIG's coverage subject to a per loss limit of $100,000 per
person and $300,000 per accident. AIG also provides an aggregate stop loss
protection of $1,300,000 for the first year of this agreement, thus capping CAR
Insurance's exposure to loss. The other operational components of the program
include Willis Corroon as the broker, Hertz Claims Management as the Third Party
Administrator, and AICCO Premium Financing. AICCO is providing premium financing
to participants in the program. CAR Insurance intends to limit its exposure to
1,500 vehicles during the first year. The focus of growth for CAR Insurance will
be in those states where the Company's broker believes the driver's insurance is
deemed to be primarily responsible for any losses. Franchisees apply for this
insurance coverage with Willis Corroon. Willis Corroon processes the
franchisees' application and if approved the franchisee is required to pay
premiums in advance on a monthly basis. Hertz Claims Management is responsible
for processing all claims. As of March 31, 1997, approximately twenty of the
Company's franchisees were insuring an approximate total of 350 of their
vehicles under this program.

         The Company has arranged a vehicle financing program whereby
franchisees may finance vehicles over a 24-30 month period. The program is
available to qualified applicants which maintain a level of creditworthiness
that the Company has assessed on a case by case basis. The franchisees'
qualification is based on their credit history with the Company, as well as
their credit standing as reported by national credit bureaus. The franchisees
are responsible for purchasing the vehicles with funds loaned by the Company,
and the Company is listed on the vehicles' title as a lienholder. As of March
31, 1997, the Company has financed twenty-four vehicles for eight of its
franchisees.

         The Company is committed to educating and training its franchisees. The
Company conducts Rent-A-Wreck School at its headquarters in Maryland every 45
days. All new franchisees are required to attend. School is also available at no
charge to current franchisees and their staff. During an intensive five-day
period, attendees learn all aspects of the Rent-A-Wreck program. This includes
vehicle acquisition, maintenance and sales, telephone techniques, counter
procedures, and rental operations, promotion, publicity, advertising and sales
tactics, relevant aspects of insurance, accounting and other general business
skills.

         The Company employs field service staff who have many years of
experience in the car rental industry. Their responsibility is to provide
continuous advice via personal visits and a toll-free telephone number.


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         Additionally, the Company has organized several franchisee state
associations that meet periodically to discuss regional issues and exchange
ideas. Finally, the Company holds and strongly encourages franchisees to attend
regional meetings which are held annually in eastern and western regions of the
United States. The Company utilizes these meetings to present new programs to
franchisees and to provide continued training and advice.

         The Company's National Franchisee Advisory Council, which consists of
seven members, meets quarterly. Six of the members are elected by the
franchisees in their region. The seventh member is a franchisee appointed by the
Company. The Council is a forum through which franchisees can express opinions
and concerns to the Company. The Council also provides suggestions as to how the
Company's national advertising fund is allocated.

         When the Company sells a franchise, it charges an initial franchise fee
that varies according to the population of the franchisee's primary service area
at the time the franchise is granted. The Company may finance the initial fee
over a period not to exceed twelve months based on the creditworthiness of the
franchisee. Additionally, franchisees are required to pay the Company monthly
royalties and contribute to the national advertising fund. These fees vary
according to franchisees' fleet size or gross revenues.

         Advertising monies paid into the national advertising fund are expended
by the Company on the franchisees' behalf after consultation with the National
Franchisee Advisory Council. Based on the Council's recommendations, the Company
has expended these funds on different programs such as advertising on the
Weather Channel and the Travel Channel and sponsoring a race car to further
promote the Company's national exposure.

         The Company markets its franchise programs primarily by attending
various trade shows and by conducting an ongoing direct mailing campaign. The
Company employs three full time salespeople at its corporate headquarters and in
addition the Company utilizes the services of four independent franchise brokers
located throughout the United States. These representatives are responsible for
responding to potential franchisees' inquiries.

         During the fiscal year ended March 31, 1997, 68 new franchises were
granted, 10 existing franchise locations were transferred to new ownership and
40 franchises were terminated by the Company. The majority of these terminations
resulted from monetary default. This resulted in approximately 448 franchised
locations throughout the United States, as well as 9 franchised locations
located in Europe and Asia at the end of this fiscal year compared to
approximately 420 franchised locations throughout the United States, as well as
9 franchised locations in Europe and Asia at the end of the fiscal year ended
March 31, 1996.


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EMPLOYEES

         As of March 31, 1997, the Company employed twenty two people,
consisting of twelve full-time and three part-time employees engaged in
franchise sales and service and seven full-time employees engaged in
administrative activities. In addition, the Company retains the services of four
franchise brokers who sell the Company's franchises. None of the employees is
covered by a collective bargaining agreement, and management believes that its
relations with its employees are good.

COMPETITION

         The Company pioneered the concept of used car rentals. Unlike the
traditional airport rental companies, Rent-A-Wreck developed its niche serving
the "neighborhood" rental market. The Company emphasizes convenience and service
and offers rentals of used cars, trucks and vans at rates that are typically
lower than those charged by new car rental companies.

         The Company's customers generally are people from the local community,
although most franchisees service some business and leisure travelers from
outside the community. The Company's franchisees generally serve customers
needing vehicles for insurance and service replacement, commercial, short-term
moving and general use.

         Rent-A-Wreck franchisee fleets usually consist of a variety of used
vehicles, although some locations rent new cars as well. The franchisees offer
to customers various vehicles according to local demand. Trucks, passenger vans
and cargo vans are available at many locations. This allows the franchisees the
flexibility to offer an appropriate range of vehicles for their area.

         Significant competition exists in the local markets. Large systems like
Enterprise and U-Save compete nationwide. Dozens of local independent companies
also compete with the Company in various areas. In most major urban areas,
companies like Hertz, Avis, National and Budget also operate city, and suburban
offices, as well as operating in airport terminals.

         Earlier this decade, many of the new car rental companies were owned,
wholly or partially, by automobile manufacturers who sold their rental
subsidiaries cars at discounted prices and guaranteed to repurchase cars after
four to nine months in rental service. This enabled the rental companies to pass
along their savings to retail customers in the form of lower rental prices. Over
the last few years, the rental companies have been returning to independent
ownership, the new car discounts and buybacks have been reduced, and new car
retail rental prices have risen, reflecting real costs more accurately. Because
the Company's franchisees generally attempt to provide substantial discounts off
the retail prices


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charged by the large new car rental companies, the Company believes that the
increase in prices charged by such companies has enabled the Company's
franchisees to compete more effectively and profitably.

GOVERNMENT REGULATION

         The offering and sale of franchises is subject to Federal and State
regulation and regulations by foreign governments.

         The Federal Trade Commission ("FTC"), pursuant to the Federal Trade
Commission Act, has adopted regulations requiring full pre-sale disclosure to
prospective franchisees of certain information, including information about the
franchisor, its existing franchises, the rights and obligations of franchisees,
and termination, cancellation and renewal of franchises. Disclosure is required
to be made prior to the sale in the form of an offering circular.

         Many states in which the Company sells or may sell franchises may
require pre-sale registration of the Company and/or the Company's offering
circular and franchise agreement to be used in selling franchises from or in the
state. The Company must apply for renewal with many of these states annually.

         Many states also regulate various aspects of the franchisor- franchisee
relationship, including regulations regarding awarding, renewing, and
terminating franchise relationships.

         Compliance with the laws of the state from or in which the sale is to
be made, in addition to the Federal regulations, may be required because the FTC
has determined that its franchising regulations will not preempt state or local
laws and regulations which are consistent with its Federal regulations, or which
if inconsistent, would provide protection to prospective franchisees equal to or
greater than that imposed by the Federal franchising regulations.

         The Company is currently authorized to sell franchises in all 50 states
under its "Rent-A-Wreck" and "PRICELE$$" trade and service marks. The Company
has registered its "Rent-A-Wreck" trade and service mark in approximately 24
foreign countries and is in the process of registering its "PRICELE$$" trade and
service mark in 17 foreign countries.

TRADEMARKS

         The Company believes that name recognition of its primary trademark
"Rent-A-Wreck" is important to its franchise program. A trademark may be held
for an indefinite duration, but it may be lost or its value diminished if
adequate steps to police its use


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are not taken. The Company believes that its efforts to police the use of its
trademarks are adequate.

         The Company is actively promoting its existing "PRICELE$$" trademark.
The Company believes this trademark will provide additional sales opportunities
for its franchisees due to new target customers of "PRICELE$$" rental fleets.


ITEM 2.    DESCRIPTION OF PROPERTY

         The Company currently leases approximately 6,790 square feet of
executive office space at 11460 Cronridge Drive, Suite 120, Owings Mills, MD
21117, which lease will expire in November 1999. The Company also rents on a
month-to-month basis approximately 1,000 square feet of executive office space
at 11460 Cronridge Drive, Suite 118, Owings Mills, MD 21117 (see Item 12 Certain
Relationships and Related Transactions).

         Management believes that the facilities leased by the Company are
adequate for the Company's current and foreseeable future operations or that
adequate alternative space is readily available.


ITEM 3.    LEGAL PROCEEDINGS

         Suit was initiated against the Company, an officer of the Company, and
another defendant on August 17, 1994 in the Supreme Court of the State of New
York, County of Suffolk, by Mongo, Inc. and John and Roberta Batcher. The suit
subsequently was removed by the defendants to the United States District Court
for the Eastern District of New York. The suit alleged breach of contract, fraud
and RICO violations in connection with alleged promises of automobile financing
to be provided by the Company to a former franchisee, and sought damages of
approximately $4.1 million (of which $4.0 million represented claims for
punitive damages and treble damages under RICO). On September 6, 1996 all
allegations against all defendants were dismissed in the lawsuit, except the
claim against the Company's wholly owned subsidiary, Bundy American Corporation
("Bundy"). On April 16, 1997, the court also dismissed with prejudice the claim
against Bundy before it was submitted to the jury.

         Bundy initiated a lawsuit on November 21, 1994 in the United States
District Court for the Southern District of New York to collect amounts owed by
a former franchisee, Motorcar Exchange, Inc., and its principals, Gary and
Debbie Blankfort. In April 1996, Bundy obtained a default judgment against the
defendants for approximately $140,000 in addition to a contempt judgment for
approximately $70,000 plus interest. Subsequently, one of the defendants, Debbie
Blankfort, filed a petition as a debtor under the United States bankruptcy laws.
On July 13, 1996, Bundy filed


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a petition in the Southern District of New York for a determination that the
amounts due pursuant to the judgment it received in April 1996 are not
dischargeable as a result of the bankruptcy petition filed by Debbie Blankfort.

         On April 26, 1996, suit was initiated against Bundy and one of its
officers in the Circuit Court for Baltimore County, Maryland by a former
employee claiming $1.5 million in damages for wrongful discharge. The suit was
dismissed for failure to state a proper cause of action. On July 29, 1996, the
lawsuit was refiled against Bundy. On June 2, 1997, the suit was dismissed on
Bundy's motion with prejudice. On June 11, 1997, the plaintiff filed a motion
for reconsideration of the dismissal. On April 14, 1997, the same plaintiff
filed a lawsuit against Bundy under the Americans with Disabilities Act in the
U.S. District Court for the District of Maryland. The federal lawsuit is based
on the same circumstances as the state case. The plaintiff claims $1.5 million
in damages. The Company believes that the lawsuit is without merit and intends
to defend it vigorously.


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

         No matters were submitted to a vote of security holders during the 4th
quarter of the fiscal year ended March 31, 1997.


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                           PART II. OTHER INFORMATION

ITEM 5.    MARKET FOR THE COMMON EQUITY AND
           RELATED STOCKHOLDER MATTERS

         The Company's Common Stock, $.01 par value, trades on the Nasdaq
SmallCap Market under the symbol RAWA.

         The range of high and low bid quotations for the quarterly periods of
the current and prior fiscal years were as follows:


<TABLE>
<CAPTION>
                  Year Ended
                March 31, 1997                 High*              Low*

<S>                                           <C>              <C>
              First Fiscal Quarter            $ 1 1/2           $   31/32
              Second Fiscal Quarter             1 1/2            1  1/16
              Third Fiscal Quarter              1 5/16              29/32
              Fourth Fiscal Quarter             2 1/4            1

                  Year Ended
                March 31, 1996                 High*              Low*

              First Fiscal Quarter            $ 1 1/32          $   15/16
              Second Fiscal Quarter             1 5/16           1  1/8
              Third Fiscal Quarter              1 1/4               31/32
              Fourth Fiscal Quarter             1 3/16              15/16
</TABLE>

* Bid quotations as reported by Nasdaq reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not represent actual
transactions.

         The Company has never paid any cash dividends on its Common Stock, nor
does it anticipate paying dividends on its Common Stock in the foreseeable
future. The Company currently has preferred stock issued with 1,439,125 shares
outstanding. This stock has a quarterly cumulative dividend of two cents per
share. Based on current outstanding preferred shares, the annual dividend is
$115,130. The terms of the outstanding preferred stock provide that the Company
may not declare or pay dividends, whether in cash or in property, on the common
stock unless the full dividends on the preferred stock for all past dividend
periods and the current dividend period have been paid or declared and a sum set
aside for payment thereof. The preferred stock is convertible into common on a
share for share basis. There is no public market for the preferred stock. At
June 1, 1997, undeclared and unpaid cumulative preferred dividends amounted to
$232,159.

         The number of stockholders of record of the Company's Common Stock as
of May 1, 1997 was 258. This figure does not include individual participants in
securities position listings of registered clearing agencies. The number of
beneficial


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stockholders was approximately 1,000 as of May 1, 1997. Trading activity with
respect to the Common Stock has been limited and the volume of transactions
should not of itself be deemed to constitute an "established public trading
market." A public trading market having the characteristics of depth, liquidity
and orderliness depends upon the existence of market makers as well as the
presence of willing buyers and sellers, which are circumstances over which the
Company does not have control.

RECENT SALES OF UNREGISTERED SECURITIES

         The Company issued 25,250 and 34,375 shares of its common stock on
January 16, 1997, pursuant to Section 3(a) (9) of the Securities Act of 1933, as
amended (the "Act"). The shares were issued to holders of the Company's
preferred shares who converted their preferred shares into common shares on a
one-for-one basis.

         On March 31, 1997, the Company issued an aggregate of 100,000 shares of
common stock pursuant to Section 4 (2) of the Act. The shares were issued upon
the exercise of outstanding common stock purchase warrants at $1.25 per share.
William L. Richter, a director of the Company, purchased 20,000 of the common
shares directly and 60,000 of the common shares through a corporation he
controls. The remaining 20,000 shares were purchased by an investment banker who
formerly was an employee of the corporation controlled by Mr. Richter, which
corporation provides financial management services to the Company. Both Mr.
Richter and the other investment banker received these warrants from the
corporation controlled by Mr. Richter pursuant to their employment with that
firm.

SELECTED FINANCIAL DATA

         Set forth below are selected financial data with respect to the
consolidated statements of operations of the Company and its subsidiaries for
each of the five years in the period ended March 31, 1997, and with respect to
the balance sheets thereof at March 31 in each of those years.

         The selected financial data have been derived from the Company's
audited consolidated financial statements and should be read in conjunction with
the financial statements and related notes thereto and other financial
information appearing elsewhere herein. The selected financial data is not
required by Form 10-KSB and has been included herein to provide an overview of
the Company's operations.


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<TABLE>
<CAPTION>
                                                                Year ended March 31,
                                           -----------------------------------------------------------
                                             1993          1994         1995        1996        1997
                                             ----          ----         ----        ----        ----
                                                          (in thousands except per share
                                                              and number of franchises)

FRANCHISEES' RESULTS (UNAUDITED)

<S>                                        <C>           <C>           <C>         <C>         <C>    
Franchisees' Revenue (1)                   $ 23,998      $ 25,522      $26,482     $29,864     $34,661

Number of Franchises                            350           365          384         429         457

COMPANY'S RESULTS OF OPERATIONS

Total Revenue                              $  4,508      $  3,224      $ 3,003     $ 3,455     $ 3,785

Costs and expenses and Other                  4,910         3,511        2,655       3,029       3,252

Income (loss) before income
  taxes                                        (438)         (262)         416         489         600

Net income (loss)                              (443)         (236)         383         459         537

Earnings (loss) per common share               (.18)         (.10)         .06         .07         .08

Weighted average number of
  shares outstanding                          3,241         3,773        4,301       4,668       5,333

COMPANY'S BALANCE SHEET DATA

Working Capital                            $    117      $    572      $   850     $   902     $ 1,191

Total assets                                  2,579         2,553        2,102       2,164       2,594

Long-term obligations                           421           119           --          36          30

Shareholders' Equity                            694         1,048        1,299       1,372       1,755
</TABLE>

(1) The franchisees' revenue data have been derived from unaudited license fee
reports provided by franchisees.


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ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Year ended March 31, 1997 vs. year ended March 31, 1996

         Revenue from franchising operations which includes initial license
fees, continuing license fees and direct financing leases increased by $288,447
(11%). This increase occurred primarily due to an increase in continuing license
fees by $287,799 (16%) due to the Company's dedication of more resources to the
collection effort. Other revenue decreased by $44,128 (14%). This decrease
occurred primarily due to a reduction in the level of activity of the physical
damage insurance program ("CLC") by $31,932 (26%), and the termination of the
national insurance program ('URM") in February 1997 by $7,663 (10%).

         Total operating expenses increased by $222,237 (7%) in fiscal 1997
compared to the prior year. Salary expense increased by $73,793 (11%) due
primarily as a result of additional hires in response to the growth of the
Company. General and administrative expenses increased by $21,720 (3%), which
resulted primarily from an increase in management fees and expenses. In April,
1996, the Board approved an increase in management fees to KAB, Inc. from
$200,000 to $250,000 per year. (See "Item 12 - Certain Relationships and Related
Transactions"). Sales and marketing expenses decreased by $49,449 (8%), which
resulted primarily from a reduction in bad debt expenses due to collection of
outstanding notes receivable and a reduction in commission expense due to a
greater percentage of sales made by salespeople receiving a lower commission
rate.

         Net interest income increased $3,131, primarily due to the Company's
collection effort.

         Depreciation and amortization expense increased by $41,441 (57%) in
fiscal 1997 compared to the prior year. This increase was primarily due to the
additional investment in computer software and hardware.

         The Company realized operating income of $533,363, before taxes and
interest, in 1997 compared to operating income of $425,386 for 1996, reflecting
an increase of $107,977. This increase resulted primarily from the increase in
continuing license fees due to the Company's collection efforts.

         Income tax expense for the year ended March 31, 1997 increased by
$32,189 (106%) over 1996 due to higher pre-tax earnings and the depletion of the
Company's federal income tax net operating loss carryforward.

         Inflation has had no material impact on the operations and financial
condition of the Company for all years presented.


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<PAGE>   15
LIQUIDITY AND CAPITAL RESOURCES

         At March 31, 1997, the Company had working capital of $1,191,019
compared to $901,774 at March 31, 1996. This increase of $289,245 primarily
resulted from net income for the year ended March 31, 1997.

         The Company is pursuing a letter of credit with Chase-Manhattan Bank in
connection with the Company's new CAR Insurance subsidiary. This letter of
credit is part of the reinsurance agreement with AIG to insure payment of
claims. The Company intends to secure this letter of credit with cash and
receivables totaling $800,000. In event the $800,000 security is insufficient,
the Company may be responsible for the payments from its other assets.

         The Company is committed under capital lease agreements for various
equipment, and rents its office facilities under the terms of an operating
lease. The Company is utilizing its working capital to pay for these
obligations.

         Cash provided by operations was $857,467 resulting from an increase in
net income, plus depreciation and amortization and a decrease in accounts and
notes receivable due to the Company's collection effort. This increase also
resulted from an increase in accounts payable and accrued expenses due to the
growth of the Company. Cash used in investing activities of $191,341 related
primarily to the acquisition of computer software and hardware and maintaining
trademarks. Cash used in financing activities during the same period was
$168,419, which was applied to payments of preferred dividends, and the
retirement of common and preferred stock, offset by issuance of common stock in
connection with warrants exercised and the acquisition of assets.

         During the year ended March 31, 1996, the Company announced a buyback
of up to 250,000 shares of its common stock and/or its Series A convertible
preferred stock. On April 8, 1996, the Board of Directors authorized to
repurchase up to an additional 250,000 shares of the Company's outstanding
common and preferred stock. During the year ended March 31, 1996, the Company
bought back 116,400 shares of its common stock at a cost of $118,562, and also
bought back 89,375 shares of its preferred stock at a cost of $117,907. These
shares were retired in the year ended March 31, 1996. During the year ended
March 31, 1997, the Company bought back 66,500 shares of its common stock at a
cost of $66,749, and also bought back 67,625 shares of its preferred stock at a
cost of $85,301. These shares were retired in the year ended March 31, 1997.

         The Company believes it has sufficient working capital to support its
business plan through fiscal 1998.


                                       15
<PAGE>   16
IMPORTANT FACTORS

         The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders. This Report
contains forward-looking statements made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, including
the statements regarding anticipated growth of the Company and trends in the
industry. In connection with these "safe harbor" provisions, the Company
identifies important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
behalf of the Company. Any such forward-looking statement is qualified by
reference to the following cautionary statements.

         Limited Insurance Experience; Potential for Negative Claims Experience.
The Company's reinsurance business exposes its assets to significant liability
for claims and losses under the program. There can be no assurance that the
premiums collected will be adequate to cover the liabilities incurred. Because
of the Company's limited experience with insurance risks and the inherent
uncertainties in estimating the ultimate costs of claims, losses and adjustment
expenses may deviate substantially from expectations. Furthermore, the timing,
frequency and extent of liabilities under this program cannot be predicted
accurately because the conditions and events which established the Company's
loss expectancies may not recur in the future. Unexpected losses associated with
this program could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, if the Company
expands the program as anticipated, the effect of such losses could be
compounded. Because the Company recently began its reinsurance program, its
arrangements with the participants in the program are not yet formalized. If the
Company's expectations and understandings are not reflected in the actual
operations of the program, there may be a material adverse effect on the
Company.

         Government Regulation Relating to Insurance Program. As part of the
insurance program, the Company utilizes Consolidated American Rental Insurance
Company, Ltd ("CAR Insurance"), its wholly owned subsidiary based in Bermuda.
Insurance companies such as CAR Insurance are subject to the laws and
regulations in the jurisdictions in which they are chartered and do business.
Such laws and regulations generally are designed to protect the interests of
policyholders rather than the interests of shareholders or the Company. In
general, insurance regulatory agencies have broad authority over insurers'
capital and surplus levels, dividend payments, financial disclosure, reserve
requirements, investment parameters and premium rates. The regulation of CAR
Insurance and its insurance program involving AIG, Hertz Claims Management and
AICCO Premium Financing, could have a material effect on the Company's business,
financial condition and results of operations.

         The Company's insurance program offered through CAR Insurance is
conducted via "fronting" arrangements with AIG. Because some states currently
restrict or limit such arrangements, the ability of the Company


                                       16
<PAGE>   17
to expand the program into those states is also limited. In addition, the
National Association of Insurance Commissioners ("NAIC") adopted a model act
concerning such "fronting" arrangements. The model act requires reporting and
prior approval of reinsurance transactions relating to these arrangements, and
limits the amount of premiums that can be written under certain circumstances.
No determination can be made as to whether, or in what form, such act may
ultimately be adopted by any state, and the Company is therefore unable to
predict whether the model act will affect its operations or relationships with
insurers. Some states currently regulate third party administration and premium
financing arrangements, such as those used by the Company. Any or all of these
regulations could have a material effect on the program being offered by the
Company.

         State regulation requires licensing of persons soliciting the sale of
insurance within that state. In certain states, licenses are obtained by
individual agents rather than a corporate entity. Due to the Company's recent
development of the reinsurance program and limited experience with its other
insurance programs, there can be no assurance that its activities will not be
deemed to be in violation of licensing or other insurance laws or regulations.
Such violations could subject the Company to significant fines and penalties
which could have a material adverse effect on its business, financial condition
and results from operations.

         Dependence on Franchisees; Credit Risks. The Company's revenues are
substantially dependent on fees paid by its franchisees. These fees fluctuate
based on the franchisee's performance. Franchisees are independent contractors
who operate their business independent of the Company. Any failure of
franchisees to operate their businesses, or inability of the Company to collect
fees owed by franchisees could have a material adverse effect on the Company's
business, financial condition and results of operations.

         Dependence on Trademarks. The Company's success depends in significant
part on its ability to maintain and protect its primary trademarks involving the
"Rent-A-Wreck" name. The Company's revenues are almost exclusively derived from
the goodwill associated with the name. Significant negative publicity related to
the name or the inability of the Company to pursue infringements and maintain
its proprietary rights would have a material adverse effect on the Company's
business, financial condition and results of operations.

         Intense Competition. The vehicle rental industry in which the Company
and its franchisees operate is characterized by intense competition,
particularly with respect to price and service, from national, regional and
local vehicle rental companies. Many of these competitors, particularly national
competitors and those with relationships with vehicle manufacturers, have
substantially greater resources than the Company. In addition, competition
exists from many smaller, independent operations in local markets. Any failure
by the Company and its franchisees to offer services and prices that compete
favorably in the marketplace would have a material adverse effect on the
Company's business, financial condition and results of operations.


                                       17
<PAGE>   18
         Compliance with Governmental Regulations. The Company operations are
subject to numerous federal, state, local and foreign laws, including federal
and state laws governing the offer and sale of franchises and relationship with
franchisees. Several states' laws require the Company to renew its state
franchise registration annually. If the Company does not maintain required state
registrations, it must terminate franchise sales activity in those states. While
the Company has suspended franchise sales activity in the past until such
registrations were properly renewed, the Company believes that it is currently
in material compliance with such laws. Changes in franchise laws could require
the Company to make material alterations to its core business. Additionally,
failure to comply with franchise or other laws could subject the Company to
significant fines and penalties and have a material adverse effect on the
Company's business, financial condition and results of operations.

         During the past several years, a number of states have interpreted
existing laws as requiring out-of-state companies which generate income by
granting franchises in the state to file returns and pay tax in the state.
Following this trend, other states have adopted laws specifically designed to
impose tax on out-of-state companies granting franchises in the state. While
many companies, along with many tax practitioners and commentators, contend that
the application of such laws violates the federal constitution, the United
States Supreme Court has not yet ruled on the issue directly. If the application
of these laws is constitutional, if the laws apply to the activities of the
Company, or if the states' interpretation of existing laws is applied
retroactively, any resulting taxes and associated interest and penalties for
which the Company may be liable also could have a material adverse effect on the
Company.

         Risks of International Operations. During the fiscal year ended March
31, 1997, approximately 1% of the Company's revenues were derived from
international operations. The Company's international operations are subject to
certain risks, including adverse developments in foreign political and economic
environment, varying government regulations, including regulations regarding the
protection of trademarks and the offer and sale of franchises, foreign currency
fluctuations and potential adverse tax consequences. There can be no assurance
that any of these factors, especially if the Company is successful in expanding
its international presence, will not have a material effect on the Company's
business, financial condition and results of operations.

         Developments in any of these areas, which are more fully described
elsewhere in "Item 1 -- Description of Business" which is incorporated into this
section by reference, could cause the Company's results to differ materially
from results that have been or may be projected by or on behalf of the Company.

         The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.


                                       18
<PAGE>   19
ITEM 7.    FINANCIAL STATEMENTS

Index to Consolidated Financial Statements and Supporting Schedules

                                                         Page

Report of Independent Certified Public Accountants...     20

Financial Statements:

  Consolidated Balance Sheet as of March 31,
    1997.............................................     21

  Consolidated Statements of Earnings for
    the Years Ended March 31, 1996 and
    1997.............................................     23

  Consolidated Statements of Shareholders'
    Equity for the Years Ended March 31, 1996
    and 1997.........................................     24

  Consolidated Statements of Cash Flows for the
    Years Ended March 31, 1996 and 1997..............     25

  Notes to Consolidated Financial
    Statements.......................................     26

  Supporting Schedules:

    Schedule II - Valuation and Qualifying
                  Accounts...........................     42


  Schedules other than those listed above have been omitted because they are
either not required, inapplicable, or the required information is included in
the Consolidated Financial Statements or notes thereto.


                                       19
<PAGE>   20
                                                              GRANT THORNTON LLP
                                          Accountants and Management Consultants
                                                         The U.S. Member Firm of
                                                    Grant Thornton International







               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Rent-A-Wreck of America, Inc.

We have audited the accompanying consolidated balance sheet of Rent-A-Wreck of
America, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1997,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for the years ending March 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rent-A-Wreck of
America, Inc. as of March 31, 1997, and the consolidated results of their
operations and their consolidated cash flows for the years ending March 31, 1997
and 1996 in conformity with generally accepted accounting principles.

We have also audited Schedule II for the years ended March 31, 1997 and 1996. In
our opinion, this schedule presents fairly in all material respects, the
information required to be set forth therein.



/s/ Grant Thornton LLP

Baltimore, Maryland
June 2, 1997


                                       20
<PAGE>   21
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 MARCH 31, 1997

                                     ASSETS

<TABLE>
<CAPTION>
                                                                1997
                                                                ----

<S>                                                         <C>        
CURRENT ASSETS:
Cash and Cash Equivalents, including restricted cash ..     $ 1,077,578
Accounts Receivable, net of allowance
  for doubtful accounts of $762,757:
    Continuing License Fees and
      Advertising Fees ................................         291,181
    Current Portion of Notes Receivable ...............         415,072
    Current Portion of Direct Financing
      Leases ..........................................          47,228
    Insurance Premiums Receivable .....................          25,784
    Other .............................................          25,136
Prepaid Expenses ......................................         117,566
                                                             ----------

    TOTAL CURRENT ASSETS ..............................       1,999,545
                                                             ----------

PROPERTY AND EQUIPMENT:
  Vehicles ............................................          53,025
  Furniture, Equipment and Leasehold
    Improvements ......................................         738,130
  Less:  Accumulated Depreciation and
         Amortization .................................        (448,472)
                                                             ----------
NET PROPERTY AND EQUIPMENT ............................         342,683
                                                             ----------
OTHER ASSETS:
  Trademarks and other Intangible Assets, net of
    accumulated amortization of $14,207 ...............         219,086
  Long-term Portion of Notes and Direct Financing Lease
    Receivables, net of allowance of $16,278 ..........          32,629
                                                             ----------

                                                                251,715
                                                             ----------

    TOTAL ASSETS ......................................     $ 2,593,943
                                                            ===========
</TABLE>



The accompanying notes are an integral part of this financial statement.



                                       21
<PAGE>   22
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 MARCH 31, 1997


                      LIABILITIES AND SHAREHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                                      1997
                                                                                  -----------


<S>                                                                               <C>        
CURRENT LIABILITIES:
  Accounts Payable and Accrued Expenses .....................................     $   720,338
  Dividends Payable .........................................................          28,782
  Insurance Premiums, Deposits, and Provision for
    Loss ....................................................................          50,828
  Current Maturities of Capital Lease Obligations ...........................           8,578
                                                                                  ----------- 
    TOTAL CURRENT LIABILITIES ...............................................         808,526
                                                                                  ----------- 

CAPITAL LEASE OBLIGATIONS, Less Current Maturities ..........................          30,089
                                                                                  ----------- 
    TOTAL LIABILITIES .......................................................         838,615
                                                                                  ----------- 


COMMITMENTS AND CONTINGENCIES ...............................................              --

SHAREHOLDERS' EQUITY:

  Convertible Cumulative Series A Preferred Stock, $.01 par value; authorized
    10,000,000 shares; issued and outstanding 1,439,125 shares
    (aggregate liquidation preference $1,151,300) ...........................          14,391
  Common Stock, $.01 par value; authorized
    25,000,000 shares; issued and
    outstanding 4,234,767 shares ............................................          42,347
  Additional Paid-In Capital ................................................       3,021,490
  Accumulated Deficit .......................................................      (1,322,900)
                                                                                  ----------- 
    TOTAL SHAREHOLDERS' EQUITY ..............................................       1,755,328
                                                                                  ----------- 
    TOTAL LIABILITIES AND SHAREHOLDERS'
      EQUITY ................................................................     $ 2,593,943
                                                                                  ===========
</TABLE>




The accompanying notes are an integral part of this financial statement.



                                       22
<PAGE>   23
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                   FOR THE YEARS ENDED MARCH 31, 1996 AND 1997



<TABLE>
<CAPTION>
                                                    1996             1997
                                                -----------      -----------

<S>                                             <C>              <C>        
REVENUES:
  Initial License Fees ....................     $   750,494      $   751,000
  Advertising Fees ........................         588,927          673,090
  Continuing License Fees .................       1,791,858        2,079,657
  Vehicle Rental Operations ...............           3,750            5,482
  Direct Financing Leases to Franchisees ..           6,781            6,923
  Other ...................................         312,976          268,848
                                                -----------      -----------
                                                  3,454,786        3,785,000
                                                -----------      -----------
EXPENSES:
  Salaries, Consulting Fees, and
    Employee Benefits .....................         673,950          747,743
  Advertising and Promotion ...............         827,578          938,563
  Sales and Marketing .....................         636,425          610,723
  General and Administrative ..............         818,224          839,944
  Depreciation and  Amortization ..........          73,223          114,664
                                                -----------      -----------
                                                  3,029,400        3,251,637
                                                -----------      -----------

         OPERATING INCOME .................         425,386          533,363


INTEREST INCOME, NET ......................          63,436           66,567
                                                -----------      -----------
         INCOME BEFORE INCOME TAX 
                EXPENSE ...................         488,822          599,930

INCOME TAX EXPENSE ........................          30,250           62,439
                                                -----------      -----------
         NET INCOME .......................         458,572          537,491

DIVIDENDS ON CONVERTIBLE CUMULATIVE
  PREFERRED STOCK .........................        (130,122)        (119,648)
                                                -----------      -----------
NET INCOME APPLICABLE TO COMMON
  AND COMMON EQUIVALENT SHARES ............     $   328,450      $   417,843
                                                ===========      ===========

EARNINGS PER COMMON SHARE .................     $       .07      $       .08
                                                ===========      ===========


WEIGHTED AVERAGE NUMBER OF COMMON AND
  COMMON EQUIVALENT SHARES OUTSTANDING ....       4,668,068        5,332,737
                                                ===========      ===========
</TABLE>



The accompanying notes are an integral part of these financial statements.



                                       23
<PAGE>   24
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  FOR THE YEARS ENDED MARCH 31, 1996 AND 1997

<TABLE>
<CAPTION>
                                         Preferred Stock             Common Stock           Additional
                                      ---------------------     ----------------------        Paid-in     Accumulated
                                        Shares       Amount        Shares       Amount        Capital        Deficit        Total
                                      ---------    --------     ---------    --------    -----------    -----------    -----------
<S>                                   <C>          <C>          <C>          <C>         <C>            <C>            <C>        
Balance, April 1, 1995 .........      1,655,750    $ 16,558     4,238,042    $ 42,380    $ 3,198,920    $(1,959,139)   $ 1,298,719

  Retirement of common stock ...             --          --      (116,400)     (1,164)      (123,741)         6,343       (118,562)

  Retirement of 
    preferred stock ............        (89,375)       (894)           --          --        (82,981)       (34,032)      (117,907)

  Preferred dividends paid ($.08
    per share) .................             --          --            --          --             --       (130,122)      (130,122)

  Preferred dividends arrearages
    paid .......................             --          --            --          --             --        (18,307)       (18,307)

  Net income ...................             --          --            --          --             --        458,572        458,572
                                      ---------    --------     ---------    --------    -----------    -----------    -----------
Balance, March 31, 1996 ........      1,566,375    $ 15,664     4,121,642    $ 41,216    $ 2,992,198    $(1,676,685)   $ 1,372,393


  Issuance of common stock and
    exercise of warrants .......             --          --       120,000       1,200        148,800             --        150,000

  Retirement of common stock ...             --          --       (66,500)       (665)       (66,084)            --        (66,749)

  Retirement of 
    preferred stock ............        (67,625)       (677)           --          --        (53,424)       (31,200)       (85,301)

  Conversion of preferred stock
  into common stock ............        (59,625)       (596)       59,625         596             --             --             --


  Preferred dividends paid ($.08
    per share) .................             --          --            --          --             --       (119,648)      (119,648)

  Preferred dividends arrearages
    paid .......................             --          --            --          --             --        (32,858)       (32,858)

  Net income ...................             --          --            --          --             --        537,491        537,491
                                      ---------    --------     ---------    --------    -----------    -----------    -----------
Balance, March 31, 1997 ........      1,439,125    $ 14,391     4,234,767    $ 42,347    $ 3,021,490    $(1,322,900)   $ 1,755,328
                                     ==========    ========    ==========    ========    ===========    ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                       24
<PAGE>   25
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED MARCH 31, 1996 AND 1997



<TABLE>
<CAPTION>
                                                              1996             1997
Increase (decrease) in cash and cash                        ---------      -----------
equivalents

<S>                                                         <C>            <C>        
Cash flows from operating activities:
  Net Income ..........................................     $ 458,572      $   537,491
  Adjustments to reconcile net income
    to net cash provided by operating activities:
      Depreciation and amortization ...................        73,223          114,664
      Loss (Gain) on disposal of 
        property and equipment ........................        (1,800)          (2,403)
      Provision for doubtful accounts .................       146,418          (13,945)
      Changes in assets and liabilities:
      Accounts and notes receivables ..................       (34,265)         192,949
      Prepaid expenses ................................        13,603          (31,779)
      Accounts payable and accrued
        expenses ......................................        22,722          119,357
      Insurance premiums, deposits, and
        loss reserves .................................        (5,760)         (58,867)
                                                            ---------      -----------
         Net cash provided by operating activities ....       672,713          857,467
                                                            ---------      -----------
Cash flows from investing activities:
  Proceeds from sale of property and equipment ........        37,200           29,075
  Acquisition of property and equipment ...............      (234,265)        (144,460)
  Additions to trademarks and other ...................       (19,518)         (75,956)
                                                            ---------      -----------
         Net cash used in investing activities ........      (216,583)        (191,341)
                                                            ---------      -----------
Cash flows from financing activities:
  Issuance of common stock ............................            --          150,000
  Repayments of long-term debt ........................       (57,733)         (13,863)
  Retirement of common stock ..........................      (118,562)         (66,749)
  Retirement of preferred stock .......................      (117,907)         (85,301)
  Preferred dividends paid ............................      (148,429)        (152,506)
                                                            ---------      -----------
         Net cash used in financing activities ........      (442,631)        (168,419)
                                                            ---------      -----------
         Net increase in cash and cash
         equivalents ..................................        13,499          497,707

Cash and cash equivalents at beginning of year ........       566,372          579,871
                                                            ---------      -----------
Cash and cash equivalents at end of year ..............     $ 579,871      $ 1,077,578
                                                            =========      ===========

Supplemental disclosure of cash flow information:
  Interest paid .......................................     $   6,349      $     6,096
  Taxes paid ..........................................     $  33,857      $    38,722

Non-cash transactions:
  Capital Lease Obligations ...........................     $  29,568      $        --
</TABLE>



   The accompanying notes are an integral part of these financial statements.


                                       25
<PAGE>   26
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1997


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements presented herein include the
accounts of Rent-A-Wreck of America, Inc. ("RAWA, Inc.") and its wholly owned
subsidiaries, Rent-A-Wreck Operations, Inc. ("RAW OPS"), Rent-A-Wreck One Way,
Inc. ("RAW One Way"), Consolidated American Rental Insurance Company, LTD ("CAR
Insurance") and Bundy American Corporation ("Bundy"), and Bundy's subsidiaries,
Rent-A- Wreck Leasing, Inc. ("RAW Leasing"), URM Corporation ("URM") and Central
Life and Casualty Company, Limited ("CLC").

         All of the above entities are collectively referred to as the "Company"
unless the context provides or requires otherwise. All material intercompany
balances and transactions have been eliminated.

         The Company markets and administers the Rent-A-Wreck and PRICELE$$
vehicle rental franchise program throughout the United States, as well as
various foreign countries.

CASH

         Included in cash and cash equivalents is cash restricted for use in the
National Advertising Fund. Restricted cash totaled $296,543 as of March 31,
1997.

ACCOUNTS AND NOTES RECEIVABLE

         Substantially all receivables derived from franchises granted by the
Company are personally guaranteed by the officers or directors of the
franchisees. Initial license fees are collected upon execution of the contract
or financed, generally over a twelve-month period with interest.

PROPERTY AND EQUIPMENT

         Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives, utilizing primarily the straight-line method for financial statement
purposes. Accelerated methods of depreciation are used for substantially all
assets for income tax purposes.


                                       26
<PAGE>   27
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



TRADEMARKS AND OTHER INTANGIBLE ASSETS

         Costs associated with trademarks are capitalized and amortized on the
straight-line method to operations over periods ranging from ten to forty years.
Intangibles represent costs in excess of net assets acquired in connection with
businesses acquired and are being amortized to operations on a straight-line
basis over ten years. The recoverability of carrying values of intangible assets
is evaluated on a recurring basis. The primary indicators are current or
forecasted profitability of the related business. There have been no adjustments
to the carrying values of intangible assets resulting from these evaluations.

INCOME TAXES

         Income taxes are provided for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
liabilities and assets are recognized for the deferred tax consequences of
temporary differences or carryforwards that will result in net taxable income or
deductible amounts in future periods. Deferred tax expense or benefit is the
result of changes in the net asset or liability for deferred taxes. The
principal items giving rise to temporary differences are depreciation, reserves
and accrued liabilities.

REVENUE RECOGNITION

         Initial License, Advertising and Continuing License Fees

         Revenues are composed primarily of initial license fees, continuing
license fees, and advertising fees. Franchisees have certain rights to use the
Company's trademarked names, "Rent-A-Wreck" and "PRICELE$$" in a specified
territory. Although the franchisee has continuing access to the use of certain
of the Company's resources, experience and knowledge, the Company recognizes the
initial license fee as revenue upon completion of an initial orientation and
training course since this represents substantially all of the initial services
required. Many franchisees have had prior business experience and, therefore,
require little assistance in commencing business. There is no obligation beyond
the initial training as related to the initial license fee. Continuing license
and advertising fees are recognized as revenues on a monthly basis over the
contract year based primarily on franchisees' reported gross revenues.


                                       27
<PAGE>   28
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997


         Direct Financing Leases

         The Company offers, on a selective basis to qualified franchisees, the
opportunity to finance vehicles for their rental fleets under a direct financing
program. The Company recognizes the related interest, documentation and
administrative revenues as they are received. The Company accounts for the
financing of the vehicles with the franchisees as direct financing leases (see
Note 3).

         Other

         Insurance administration and physical damage program revenues are
recognized ratably over the term of the coverage. Promotional material revenues
are recorded when shipped.

ADVERTISING

         Advertising costs are expensed as incurred and are classified as
advertising and promotion expenses.

EARNINGS PER COMMON SHARE

         Earnings per common share for the years ended March 31, 1996 and 1997
are presented on a fully diluted basis and are based upon the combined weighted
average number of shares of common stock outstanding during each year. The
dilutive effect of stock options and warrants was considered in the computations
of earnings per common share, and preferred dividends for each year were
subtracted from net income to arrive at the earnings applicable to common
shareholders.

         Primary earnings per common share for the years ended March 31, 1996
and 1997 were the same as fully diluted earnings per common share.

STATEMENT OF CASH FLOWS

         For purposes of the statement of cash flows, the Company considers all
highly liquid financial instruments purchased with a maturity of three months or
less to be cash equivalents.

ESTIMATES

         In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make


                                       28
<PAGE>   29
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997


estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and reported revenues and
expenses. Actual results could differ from those estimates.

NEWLY ISSUED ACCOUNTING STANDARDS

         The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, which became effective in
1997. As permitted by SFAS No. 123, the Company has disclosed the impact of
stock based employee compensation on operations and will continue to follow the
accounting provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, for applicable transactions with
employees. The adoption of SFAS No. 123 did not have a material effect on the
Company's financial statements.

         The provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, which is effective for years beginning after December 15, 1995,
did not impact the Company's 1997 financial statements.

RECLASSIFICATIONS

         Certain prior year amounts have been reclassified to conform to the
1997 presentation.


2.       FORMATION OF CAPTIVE INSURANCE COMPANY

         In March, 1997, Rent-A-Wreck of America, Inc. formed a wholly owned,
Bermuda-based captive insurance subsidiary, Consolidated American Rental
Insurance Company, LTD ("CAR Insurance"), to provide automobile liability and
physical damage insurance for vehicles owned by participating franchisees.
American International Group (AIG) provides policy fronting, excess insurance
coverage, and an aggregate stop loss protection of $1,300,000. CAR Insurance
reinsures AIG's coverage subject to a per loss limit of $100,000 per person and
$300,000 per accident. Operations of the new entity through March 31, 1997 were
not significant.


                                       29
<PAGE>   30
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



3.       DIRECT FINANCING LEASES

         The components of the Company's net investment in direct financing
leases are as follows: 

<TABLE>
<CAPTION>
                                                                       March 31,
                                                                          1997
                                                                       ---------
<S>                                                                     <C>     
Total Minimum Lease Payments to be Received ..................          $106,645
     Less Amounts Representing
         Administration Costs Included in
         Total Minimum Lease Payments ........................             2,582
                                                                        --------
Minimum Lease Payment Receivable .............................           104,063

     Less Allowance for Uncollectibles .......................            13,939
                                                                        --------
Net Minimum Lease Payments Receivable ........................            90,124

     Less Unearned Income ....................................            10,267
                                                                        --------
Net Investment in Direct Financing Leases ....................            79,857
                                                                        --------
     Current Portion Less Administration Cost ................          $ 47,228

     Non-Current Portion .....................................            32,629
                                                                        --------
Net Investment in Direct Financing Leases ....................          $ 79,857
                                                                        ========
</TABLE>


         The total minimum lease payments receivable in the two succeeding
fiscal years are as follows:

<TABLE>
<S>                                         <C>     
         1998..........................     $ 71,631
         1999..........................       35,014
                                            --------
                  Total                     $106,645
                                            ========
</TABLE>



                                       30
<PAGE>   31
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997




4.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                March 31,
                                                  1997
                                                ---------
<S>                                            <C>      
Accounts Payable.........................      $ 158,768
National Advertising Fund................        219,152
Payroll..................................         31,570
Commissions and Royalties................        136,000
Professional Fees........................         79,613
Other....................................         95,235
                                               --------- 
                                               $ 720,338
                                               =========
</TABLE>

5.       CAPITAL LEASE OBLIGATIONS

         Equipment leased under capital lease agreements are summarized below.

<TABLE>
<S>                                                   <C>    
         Equipment                                    $71,663
         Less accumulated amortization                 31,142
                                                      -------
                                                      $40,521
                                                      =======
</TABLE>

         Future minimum lease payments under the capital leases at March 31,
1997 are as follows:

<TABLE>
<S>                                                                        <C>    
         Year ended March 31,
         --------------------
         1998                                                              $13,929
         1999                                                               13,929
         2000                                                               13,502
         2001                                                                8,801
         2002                                                                  733
                                                                           -------
         Total minimum lease payments                                       50,894
         Less amount representing interest                                  12,227
                                                                           -------
                                                                           $38,667
                                                                           -------  

         Current portion                                                   $ 8,578
         Long-term portion                                                  30,089
                                                                           -------
                                                                           $38,667
                                                                           =======
</TABLE>


                                       31
<PAGE>   32
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997




6.       INCOME TAXES

         The Company accounts for income taxes on the liability method, as
prescribed by Statement of Financial Accounting Standards 109, Accounting for
Income Taxes (SFAS 109). The provision for income taxes for the years ended
March 31, 1996 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                            1996         1997
                                            ----         ----
<S>                                       <C>           <C>    
  Currently payable
    State income taxes.................   $23,250       $28,214
    Federal income taxes...............     7,000        34,225
                                          -------       -------
          Total...... .................   $30,250       $62,439
                                          =======       =======
</TABLE>

         The reconciliation of the provision for income taxes computed at
statutory rates to the provision for income taxes provided on pre-tax income for
the year ended March 31, 1996 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                     1996              1997
                                                     ----              ----
<S>                                               <C>               <C>      
  Federal taxes at statutory
    rate .................................        $ 210,000         $ 189,825

  Utilization of tax loss
    carryforward .........................         (207,200)         (155,600)

  Federal alternative minimum tax ........            4,200                --
                      
  State and local taxes, net .............           23,250            28,214
                                                  ---------         ---------
            Total ........................        $  30,250         $  62,439
                                                  =========         =========
</TABLE>



                                       32
<PAGE>   33
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



6.       INCOME TAXES - CONTINUED

         The significant components of the deferred income tax asset and
(liability), stated by source of the difference between financial accounting and
tax basis as of March 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                     1996              1997
                                                     ----              ----
<S>                                               <C>               <C>      
         Deferred tax assets:
           Reserve for doubtful accounts ...      $ 303,000         $ 304,000
           Accrued expenses ................         69,000            72,000
           Operating loss carryforwards ....        151,000                --
           Other reserves ..................             --             4,000
                                                  ---------         --------- 
                                                    523,000           380,000
         Deferred tax liabilities:
           Fixed assets ....................        (10,000)           (3,000)
                                                  ---------         ---------
         Net deferred tax asset before
           valuation allowance .............        513,000           377,000

         Valuation allowance ...............       (513,000)         (377,000)
                                                  ---------         ---------
         Net deferred tax asset ............      $      --         $      --
                                                  =========         =========
</TABLE>

7.       COMMITMENTS AND CONTINGENCIES

         Lease Commitments

         The Company's corporate offices are occupied under the terms of
operating leases from both related and non-related parties, the longest of which
expires in November, 1999. Future minimum lease payments under non-cancelable
agreements are as follows:

<TABLE>
<S>                                  <C>    
         March 31,
         ---------
         1998.....................   $64,132
         1999.....................   $66,712
         2000.....................   $45,357
</TABLE>


         Total rent expense for the years ended March 31, 1996 and 1997 was
$62,946 and $70,064, of which $25,814 and $7,189, respectively was to the
related party (see Note 8).



                                       33
<PAGE>   34
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997

7.       COMMITMENTS AND CONTINGENCIES - CONTINUED

         Litigation

         The Company is party to legal proceedings incidental to its business
from time to time. Certain claims, suits and complaints arise in the ordinary
course of business and may be filed against the Company. Based on facts now
known to the Company, management believes all such matters are adequately
provided for, covered by insurance or, if not so covered or provided for, are
without merit, or involve such amounts that would not materially adversely
affect the consolidated results of operations or financial position of the
Company.


8.       RELATED PARTY TRANSACTIONS

         The Company has entered into a Management Agreement with K.A.B., Inc.
(KAB), a management consulting group controlled by and affiliated with Kenneth
L. Blum, Sr., Chairman of the Board of Directors and Chief Executive Officer of
the Company, which expires July 1, 2003. As a part of this agreement, KAB
provides direct overall management of the Company's operations. Total annual
fees paid to KAB under the management agreement for the years ended March 31,
1996 and 1997 were $200,000 and $250,000 respectively. KAB has also been granted
an option to purchase up to 2,250,000 shares of the Company's common stock (see
note 9).

         The Company leases a portion of its corporate offices under the terms
of a month-to-month operating lease with American Business Information Systems,
Inc. (ABIS), a related party of KAB. The Company paid $25,814 and $7,189 for the
years ended March 31, 1996 and 1997 to ABIS under this agreement.

         In 1995, the Company entered into an agreement with ABIS, a related
party of KAB, to develop computer software and related documentation over a
five-year term. For the years ended March 31, 1996 and 1997, $77,005 and $34,204
have been paid to ABIS under this agreement.



                                       34
<PAGE>   35
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



8.       RELATED PARTY TRANSACTIONS - CONTINUED

         In 1995, the Company retained Richter & Co., Inc., a related party, to
serve as exclusive financial advisor and placement agent for the Company. For
its role of placement agent and financial advisor, Richter & Co., Inc.'s fees
will be contingent and based upon transactions completed, as defined in the
agreement. For the years ended March 31, 1996 and 1997, there were no fees paid
to Richter & Co., Inc. pursuant to this agreement.

         Richter & Co., Inc. provides substantial ongoing financial management
services to the Company at no charge. In the opinion of management, the terms of
the Company's agreements with Richter, KAB and ABIS taken as a whole are at
least as favorable to the Company as could be obtained from third parties.


9.       STOCK OPTION PLANS AND COMMON STOCK WARRANTS

         Options and warrants to acquire shares of the Company's common stock
are granted at a value not less than 100% of the fair market value of the
underlying stock on the date of issuance.

         Under the Company's stock option plans, 300,000 shares of the Company's
common stock are reserved for issuance upon the exercise of options granted to
employees, including officers and directors. Certain options granted are not
qualified as incentive stock options. At March 31, 1997, options have been
granted and are outstanding for a total of 15,000 shares under the plan, and
options for 285,000 shares are available.

         The Company has issued stock options to acquire 2,250,000 shares of its
common stock to KAB in conjunction with its management agreement. These options
are not part of the foregoing plan. During the year ended March 31, 1996, KAB
transferred (a) 483,333 and 604,167 vested and unvested options, respectively,
to each of Kenneth L. Blum Jr., the Company's president, and Mr. Blum's sister,
Robin Cohn; (b) 20,000 and 25,000 vested and unvested options, respectively, to
Richter & Co., Inc., an affiliate of William L. Richter, a director of the
Company and financial advisor; and 13,333 and 16,666 vested and unvested
options, respectively, to Mr. Richter. In April 1996, the Company approved the
extension of the term of the KAB Management Agreement for five years expiring
June 30, 2003, the extension of the options originally granted to KAB by five
years (with a corresponding delay


                                       35
<PAGE>   36
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



9.       STOCK OPTION PLANS AND COMMON STOCK WARRANTS -- CONTINUED

in the fixed vesting date until July 1, 2002), and the addition of a cashless
exercise feature to the options held by KAB.

         The fair value of each option grant is estimated on the date of grant,
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants issued in fiscal years 1996 and
1997, respectively: risk free interest rates of 5.75% and 6.870%; expected
volatility of 76.580% and 57.880%, and expected lives of 2.92 and 6.21 years.

         The following table summarizes option activity:

<TABLE>
<CAPTION>
                                                                    1996         1997
                                                                    Weighted     Weighted
                                                                    Average      Average
                                  1996              1997            Exercise     Exercise
                                 Shares            Shares             Price        Price
                              ----------         ----------         --------     --------     
<S>                            <C>                <C>               <C>          <C>     
Options outstanding at
  beginning of year            2,305,000          2,305,000         $   1.08     $   1.17
Options exercised                     --                 --               --           --
Options granted                1,250,000          2,250,000         $   1.08     $   1.15
Options canceled              (1,250,000)        (2,250,000)        $   1.08     $   1.30
Options expired                       --            (40,000)        $   1.31           --
                              ----------         ----------
Options outstanding at
  end of year                  2,305,000          2,265,000         $   1.08     $   1.08


Option price range at
  end of year                  $ 1.00 to          $ 1.00 to
                               $ 1.44             $ 1.44

Option price range for
  exercised shares                    --                 --

Weighted-average fair
 value of options,
 granted during
   the year                    $ 0.46             $ 0.70
</TABLE>

At March 31, 1996 and 1997, 1,015,000 options were exercisable.


                                       36
<PAGE>   37
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



9.       STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED

         The following table summarizes options outstanding at March 31, 1997:

<TABLE>
<CAPTION>
                                                   Weighted Average
   Number        Exercise     Weighted Average     Remaining
  Outstanding     Price        Exercise Prices     Contractual Life
  -----------    --------     ----------------     ----------------
<S>             <C>              <C>                 <C>       
  2,265,000     $ 1.00 to        $ 1.08              6.21 years
                $ 1.44
</TABLE>


         The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock options plans. Had compensation cost been determined based on the fair
value at the grant date for the fiscal 1996 and 1997 awards consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                 1997       1996
                                                 ----       ----
<S>                                           <C>        <C>     
 Net income applicable to common
   and common equivalent shares
     As reported                              $417,843   $328,450
     Pro forma                                $190,546   $295,231
 Earnings per share
     As reported                              $    .08   $    .07
     Pro forma                                $    .04   $    .06
</TABLE>


         This disclosure is not likely to be representative of the effects on
reported net earnings for future years, because options are subject to a vesting
schedule.

         In consideration of services rendered in connection with the
negotiation of the management agreement with KAB, the Company granted Richter &
Co., Inc. five-year warrants, expiring June 30, 1998, to purchase 155,000 shares
of the Company's Common Stock for its services as investment banker. The
exercise price of 20,000 of such warrants was $.80, and the exercise price of
the remaining 135,000 warrants is tied to the exercise and vesting provisions of
the options issued to KAB in connection with the management agreement. Richter &
Co., Inc. assigned 62,000 of these warrants to William L. Richter.


                                       37
<PAGE>   38
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



         In April, 1996, the Company also extended 135,000 of the warrants
originally issued to Richter & Co., Inc. for an additional five years in
consideration of services rendered in connection with the renegotiation of the
KAB Management Agreement and related services.

         Warrants for 30,000 shares of the Company's common stock exercisable at
$.80 per share have been issued to Richter & Co., Inc. in connection with
previous private placement transactions for which Richter & Co., Inc. acted as
agent. Richter & Co., Inc. has assigned 12,000 of these warrants to William L.
Richter and 4,000 warrants to Richter & Co., Inc. employees.

         On September 30, 1994, the Company issued warrants for 100,000 shares
of the Company's common stock to Whale Securities Co., L.P. for consulting
services. The exercise price is $1.25 per share.

         A summary of changes in outstanding warrants for the year ended March
31, 1997 is as follows:

<TABLE>
<CAPTION>
                                      Number of   Exercise Price
                                       Warrants    per Warrant
                                      ---------   --------------
<S>                                    <C>          <C>        
   Outstanding, beginning of year..    396,750      $.80 - $1.50
   Issued..........................         --
   Exercised.......................   (100,000)            $1.25
   Canceled........................     (6,750)            $1.50
                                      --------
   Outstanding, end of year........    290,000      $.80 - $1.50
                                      ========
</TABLE>


10.      PREFERRED STOCK

         The terms of the outstanding preferred stock provide that the Company
may not declare or pay dividends, whether in cash or in property, on the common
stock unless all dividends on the preferred stock for all past dividend periods
and the then current dividend period shall have been paid or declared and a sum
set aside for payment thereof. Holders of Preferred Stock, voting as a class,
are entitled to elect up to four members of a seven member Board of Directors
and are also entitled to vote as a class on other significant corporate actions.
Pursuant to the terms of a voting trust, Richter Investment Corp. holds a proxy
to vote approximately 94% of the Preferred Stock and by virtue of his control
over Richter Investment Corp., William L. Richter can be deemed to have


                                       38
<PAGE>   39
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



voting control over such shares. The holders of the Series A Preferred are
entitled to cumulative dividends at an annual rate of eight cents per share. The
Series A Preferred is convertible, at the option of the holder, into common
shares on the basis of one share of common for each share of Series A Preferred.

         During the year ended March 31, 1997, the Company repurchased and
retired 67,625 shares of preferred stock and 59,625 preferred shares were
converted to common shares, reducing the total outstanding preferred shares from
1,566,375 to 1,439,125. At March 31, 1997, undeclared and unpaid cumulative
preferred dividends amounted to $274,180. During the year ended March 31, 1997,
the Company declared preferred dividends totaling $119,648, plus $32,858 of
dividend arrearages, and at March 31, 1997, unpaid declared preferred dividends
totaled $28,782.


11.      OTHER REVENUES

         Components of other revenues for the years ended March 31, 1996 and
1997 were as follows:
<TABLE>
<CAPTION>
                                       1996             1997
                                     --------         --------
<S>                                  <C>              <C>     
Insurance administration
  and physical damage
  program...................         $199,357         $159,761

Promotional materials.......           97,123           94,685

Other.......................           16,496           14,402
                                     --------         --------
                                     $312,976         $268,848
                                     ========         ========
</TABLE>

12.      CONCENTRATIONS OF CREDIT RISK - CASH

         The Company maintains its cash balances in a financial institution
located in Maryland, which at times may exceed federally insured limits. The
Company has not experienced any losses in such accounts, and management believes
the Company is not exposed to significant credit risk.



                                       39
<PAGE>   40
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 MARCH 31, 1997



13.      SUBSEQUENT EVENTS

         On May 15, 1997, the Company paid 15% of the dividend arrearages on all
preferred shares outstanding as of March 31, 1997. These paid arrearages totaled
$41,127, which was paid with and in addition to the regular quarterly preferred
dividend on May 15, 1997. Remaining undeclared and unpaid cumulative preferred
dividends were reduced to $232,159.


                                       40
<PAGE>   41
ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable. (The Company need not provide the disclosure called for by this
Item because it has been previously reported, as that term is defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended).


                                    PART III


ITEM  9.   DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
           CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
           OF THE EXCHANGE ACT

         Reference is made to Company's 1997 Proxy Statement under the caption
"Election of Directors."

ITEM 10.   EXECUTIVE COMPENSATION

         Reference is made to the Company's 1997 Proxy Statement under the
caption "Executive Compensation."

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
           AND MANAGEMENT

         Reference is made to the Company's 1997 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Reference is made to the Company's 1997 Proxy Statement under the
caption "Certain Transactions."

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

(a)      The following documents are filed as part of this report:

         1.       The financial statements, notes thereto and Report of
                  Independent Public Accountants listed in the Index to
                  Consolidated Financial Statements set forth in Item 7.

         2.       The Exhibits listed in the Exhibit Index following the
                  Signatures page, which is incorporated herein by this
                  reference.

         3.       Financial Statement Schedules for the years in the period
                  ended March 31, 1996 and 1997, as applicable.



                                       41
<PAGE>   42
                 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
                  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
                       YEARS ENDED MARCH 31, 1996 and 1997


<TABLE>
<CAPTION>
                                                          ADDITIONS
                                                -------------------------------
                               BALANCE AT       CHARGED TO                                             BALANCE
                               BEGINNING        COSTS AND          CHARGED TO                           AT END
DESCRIPTION                    OF PERIOD        EXPENSES         OTHER ACCOUNTS     DEDUCTIONS         OF PERIOD
-----------                    ---------        -----------      --------------     ----------         ---------    
<S>                             <C>             <C>                <C>              <C>                <C>     
MARCH 31, 1996

Allowance for
  doubtful accounts             $646,562        $   272,518        $      --        $126,100(1)        $792,980
                                ========        ===========        =========        ========           ========

Valuation allowance on
 net deferred tax assets        $577,000        $        --        $      --        $ 64,000           $513,000
                                ========        ===========        =========        ========           ========


MARCH 31, 1997

Allowance for
  doubtful accounts             $792,980        $   203,217        $      --        $217,162(1)        $779,035
                                ========        ===========        =========        ========           ========


Valuation allowance on
 net deferred tax assets        $513,000        $        --        $      --        $136,000           $377,000
                                ========        ===========        =========        ========           ========
</TABLE>


         (1)      Accounts written off


                                       42
<PAGE>   43
(b)      No reports on Form 8-K were filed during the last quarter of the period
         covered by this report.



                                       43
<PAGE>   44
                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, Rent-A-Wreck of America, Inc. has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:


Rent-A-Wreck of America, Inc.
Registrant

By:                                          Date:


 /s/ Mitra Khosravi                             June 25, 1997
Mitra Khosravi
Chief Accounting Officer


         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates as indicated:

Signature and Title                          Date


 /s/ Kenneth L. Blum, Sr.                      June 25, 1997
Kenneth L. Blum, Sr.
Chairman of the Board
and Director (Principal
Executive Officer)

 /s/ Mitra Khosravi                            June 25, 1997
Mitra Khosravi
Chief Accounting Officer
(Principal Financial and
Accounting Officer)

 /s/ David Schwartz                            June 25, 1997
David Schwartz
Vice Chairman of the Board

 /s/ William L. Richter                        June 25, 1997
William L. Richter
Vice Chairman of the Board


 /s/ Alan Aufzien                              June 25, 1997
Alan Aufzien, Director



                                       44

<PAGE>   45
                          RENT-A-WRECK OF AMERICA, INC.
                                  EXHIBIT INDEX
                                   FORM 10-KSB
                                 FOR FISCAL YEAR
                              ENDED MARCH 31, 1997

                                          Incorporated
Exhibit No.     Exhibit                   by Reference from

3.1             Certificate of            Filed herewith.
                Incorporation

3.2             Bylaws,                   Form 10-K for the fiscal year ended
                as amended                March 31, 1986, in which the Bylaws,
                                          are incorporated by reference and 
                                          amendments to Bylaws are filed 
                                          therein.

9               Voting Trust              Form 10-K for the fiscal
                Agreement                 year ended March 31, 1990
                                          is incorporated by
                                          reference.

10.1            Asset Purchase            Form 10-QSB for the
                Agreement dated           quarter ending December
                December 3, 1996          31, 1996.
                Between Baltimore
                Car and Truck
                Rental, Inc.,
                Insurance Rentals,
                Inc., Mark Eisenberg,
                and the Company.

10.2            Commercial Installment    Form 8-K, Dated
                Sales and Finance         February 21, 1992 and is
                Agreement, as Amended     incorporated by reference;
                                          Amendment filed with Form 10-KSB
                                          for the fiscal year ended March 31, 
                                          1995 and is incorporated by reference.

10.3            Promissory Note -         Form 10-K for the fiscal
                David Schwartz,           year ended March 31, 1993
                Shareholder as Amended    is incorporated by
                                          reference.


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<PAGE>   46



10.4            Option Plan               Form 10-K for the fiscal
                                          year ended March 31, 1993
                                          is incorporated by
                                          reference.

10.5 *          Management Agreement -    Form 8-K, dated June 30,
                K.A.B., Inc., Related     1993 and is incorporated
                party dated June 30,      by reference.
                1993


10.5.1 *        Amendment to Management   Filed herewith.
                Agreement with K.A.B.,
                Inc., Related party
                dated March 27, 1996



10.6.  *        Stock Option Grant to     Form 8-K, dated June 30,
                K.A.B., Inc. dated        1993, incorporated by
                June 30, 1993             reference.
                                          Amendment filed herewith.

10.6.1 *        Amendment to Stock        Filed herewith.
                Option Grant to
                K.A.B., Inc. dated
                July 20, 1995

10.7.  *        Registration Rights       Form 8-K, dated June 30,
                Agreement dated June      1993, incorporated by
                30, 1993, among K.A.B.,   reference.
                Inc., Kenneth L. Blum,
                Jr., Alan S. Cohn and
                the Company

10.8            Commercial Installment    Form 10-KSB for the
                Sales and Finance         fiscal year ending
                Agreement-K.A.B., Inc.    March 31, 1994.
                dated August 1, 1993

10.9            Franchise Agreement -     Form 10-KSB for the
                standard form             fiscal year ending
                                          March 31, 1994.

10.10           Warrant Agreement -       Form 8-K, dated June 30,
                Richter & Co., Inc.       1993, incorporated by
                                          reference.

10.11           Software Development      Form 10-KSB for the
                and Computer Usage        fiscal year ending
                Agreement effective       March 31, 1995.
                January 1, 1995 between

                                       46

<PAGE>   47



                National Computer
                Services, Inc. and
                the Company.

10.12           Financial Advisory              Form 10-KSB for the
                Agreement between               fiscal year ending
                the Company and                 March 31, 1995.
                Richter & Co., Inc.
                dated March 20, 1995.


10.13           Lease between the               Form 10-KSB for the
                Company and Owings              fiscal year ending
                Mills Commerce                  March 31, 1996.
                Centre Limited
                Partnership dated
                September 19, 1995 and 
                subordination, Attornment and
                Non-Disturbance Agreement.

10.14           Franchise Agreement -           Form 10-KSB for the
                standard form as of             fiscal year ending
                August 3, 1995                  March 31, 1996.

21              List of Subsidiaries            Filed herewith.

27              Financial Data Schedule         Filed herewith.



*  Management contract or compensatory plan or arrangement.






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