UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-QSB/A
 (Amendment
No. 1)
 (Mark
      one)[X]           Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended December 31, 2006[   ]           Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from ___________ to
  ____________Commission
      File Number:  0-11582AUTO UNDERWRITERS OF
      AMERICA, INC.
                (Exact
      Name of Small Business Issuer as Specified in its
    Charter)California
                (State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              94-2915849
                (IRS
      Employer
                Identification
      No.)2670
      South White Road
                Suite
      241
                San Jose, CA
      95148
                (Address
      of Principal Executive Offices)
              (408)
      270-3587
                (Issuer’s
      Telephone Number)(Former
      Name, Former Address and Former Fiscal Year, if Changed Since Last
      Report)
 
 Check
whether the issuer (1) filed all reports required to be filed by section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
  Yes   No X
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  Yes   No X
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date:  7,400,575 shares as of
April 30, 2008.
  Transitional
Small Business Disclosure Format (check one):
  Yes   No X








Explanatory
Note:





This
Quarterly Report on Form 10-QSB/A (“Form 10-QSB/A”) is being filed as Amendment
No. 1 to our Quarterly Report on Form 10-QSB for the quarter ended
December 31, 2006, which was originally filed with the Securities and
Exchange Commission on February 20, 2007 (“Original Filing”).  We are
amending and restating the entire Original Filing.  The financial
statements as of and for the three and six months ended December 31, 2006
have been restated resulting from adjustments made to our interim financial
information as a result of the statutorily required review that had not been
previously performed by our independent auditors in advance of the Original
Filing.  Unless expressly noted otherwise, the disclosures in this
Form 10-QSB/A continue to speak as of the date of the Original Filing, and do
not reflect events occurring after the filing of the Original Filing unless
expressly noted otherwise.  Accordingly, this Form 10-QSB/A should be
read in conjunction with our other filings made with the Securities and Exchange
Commission subsequent to the filing of the Original Filing, including any
amendments to these filings.  The filing of this Form 10-QSB/A shall
not be deemed an admission that the Original Filing, when made, included any
untrue statement of a material fact or omitted to state a material fact
necessary to make a statement not misleading.





-1-




AUTO
      UNDERWRITERS OF AMERICA, INC.
              
              TABLE
      OF CONTENTS











PAGEPART I.
            FINANCIAL INFORMATIONItem 1.
            Financial StatementsBalance
      Sheets as of December 31, 2006 and June 30,
      2006
            3Statements of
      Operations for the Three and Six Months Ended December 31 2006
      and2005
            4Statements of Cash Flows for the Six Months Ended
      December 31 2006 and 2005
            5Notes
      to Financial Statements
            6 -
      14Item 2.
            Management’s Discussion and Analysis of Financial
      Condition
            15
      - 18Item 3.
            Controls and Procedures
            18PART II.
            OTHER INFORMATIONItem 1.
            Legal
      Proceedings
            20Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            20Item 3.
            Default Upon Senior Securities
            21Item 4.
            Submission of Matters to a Vote of Security
      Holders
            21Item 5.
            Other
      Information
            22Item 6.
            Exhibits
            22





-2-




Part I. Financial Information





Item 1 . Financial Statements


Auto Underwriters of America, Inc.


Balance
Sheets


(Unaudited)








(RESTATED)Assets:
            
            December
      31,
              2006
            
            
            June
      30, 2006Cash
      and cash equivalents
            
            $
            682,523
            
            
            $
            4,161Finance
      receivables, net of allowance $2,057,391 and $2,417,300,
      respectively
            
            
            7,339,055
            
            
            
            8,430,105Other
      receivables
            
            
            60,442
            
            
            
            47,022Fixed
      assets, net of accumulated depreciation $79,426 and $59,646,
      respectively
            
            
            129,751
            
            
            
            138,152Inventory
            
            
            1,110,749
            
            
            
            285,135Prepaid
      and other assets
            
            
            23,590
            
            
            
            63,502Deferred
      financing cost
            
            
            139,560
            
            
            
            261,595Total
      assets
            
            $
            9,485,670
            
            
            $
            9,229,672






Liabilities
      and stockholders’ equity (deficit):Accounts
      payable and accrued liabilities
            
            $
            847,571
            
            
            $
            1,048,670Drafts
      payable and floor plan liabilities
            
            
            698,616
            
            
            
            -Dividends
      payable
            
            
            36,555
            
            
            
            -Other
      notes payable
            
            
            1,561,944
            
            
            
            2,590,695Senior
      debts - revolving line of credit
            
            
            8,255,367
            
            
            
            9,013,025Deferred
      sales tax
            
            
            799,459
            
            
            
            794,990Advances
      from related parties
            
            
            673,846
            
            
            
            677,794Total
      liabilities
            
            
            12,873,358
            
            
            
            14,125,174Commitments
      and contingencies








Stockholders’
      equity/(deficit):Preferred
      stock: no par value: 10,000,000 authorized 1,280,020 issued and
      outstanding
            
            
            2,727,205
            
            
            
            -Common
      stock: no par value: 100,000,000 authorized issued and outstanding:
      6,418,570 and 6,018,570 respectively
            
            
            9,069,513
            
            
            
            5,768,364Retained
      deficit
            
            
            (15,184,406
            )
            
            
            (10,663,868
            )Total
      stockholders’ equity/(deficit)
            
            
            (3,387,688
            )
            
            
            (4,895,504
            )Total
      liabilities and stockholders’ equity/(deficit)
            
            
            9,485,670
            
            
            $
            9,229,672





See
Notes to Financial Statements.


-3-





Auto Underwriters of America, Inc.


Statements
of Operations


(Unaudited)








Three
      Months Ended
              December
      31,
            
            
            Six
      Months Ended
              December 31,2006
            
            
            2005
            
            
            2006
            
            
            2005(RESTATED)
            
            
            
            
            
            (RESTATED)Revenues:Sales
            
            $
            1,808,605
            
            
            $
            1,768,682
            
            
            $
            2,671,595
            
            
            $
            7,258,960Interest
      income
            
            
            349,578
            
            
            
            532,647
            
            
            
            740,015
            
            
            
            1,068,596Other
            
            
            23,652
            
            
            
            -
            
            
            
            43,624
            
            
            
            254,1312,181,836
            
            
            
            2,370,363
            
            
            
            3,455,234
            
            
            
            8,581,687Costs
      and expenses:Cost
      of sales
            
            
            972,743
            
            
            
            1,869,788
            
            
            
            1,539,140
            
            
            
            5,390,502Selling,
      general and administrative
            
            
            1,383,928
            
            
            
            792,753
            
            
            
            2,099,266
            
            
            
            2,012,941Provision
      for credit losses
            
            
            549,963
            
            
            
            1,359,447
            
            
            
            763,230
            
            
            
            2,481,826Discount
      on sales of receivables
            
            
            -
            
            
            
            5,289
            
            
            
            -
            
            
            
            83,744Interest
      expense – warrants
            
            
            -
            
            
            
            -
            
            
            
            561,045
            
            
            
            -Interest
      expense – other
            
            
            368,574
            
            
            
            324,847
            
            
            
            756,332
            
            
            
            614,796Depreciation
      and amortization
            
            
            97,088
            
            
            
            91,185
            
            
            
            200,191
            
            
            
            106,9893,372,296
            
            
            
            4,437,309
            
            
            
            5,919,204
            
            
            
            10,690,798Loss
      before income taxes
            
            
            (1,190,460
            )
            
            
            (2,066,946
            )
            
            
            (2,463,970
            )
            
            
            (2,109,111
            )Provision
      for income tax benefit
            
            
            -
            
            
            
            121,676
            
            
            
            -
            
            
            
            121,676Net
      loss
            
            
            (1,190,460
            )
            
            
            (1,945,270
            )
            
            
            (2,463,970
            )
            
            
            (1,987,435
            )Preferred
      deemed dividends
            
            
            (1,093,555
            )
            
            
            -
            
            
            
            (2,056,629
            )
            
            
            -Net
      loss available to common stockholders
            
            $
            (2,284,015
            )
            
            $
            (1,945,270
            )
            
            $
            (4,520,599
            )
            
            $
            (1,987,435
            )Basic
      and diluted net loss per share
            
            $
            (0.36
            )
            
            $
            (0.32
            )
            
            $
            (0.72
            )
            
            $
            (0.33
            )Weighted
      average shares outstanding
            
            
            6,418,570
            
            
            
            6,020,021
            
            
            
            6,302,723
            
            
            
            6,020,037





See
Notes to Financial Statements.













-4-


Auto Underwriters of America, Inc.


Statements
of Cash Flows


(Unaudited)





Six
      Months Ended
              December
      31,2006
            
            
            2005Operating
      activities:
            
            (RESTATED)Net
      Loss
            
            $
            (2,463,970
            )
            
            $
            (1,987,435
            )Adjustments
      to reconcile net loss from continuing operations to net cash used in
      operating activities:Stock
      compensation expense
            
            
            -
            
            
            
            20,000Imputed
      interest
            
            
            20,030
            
            
            
            -Warrant
      expense
            
            
            561,045
            
            
            
            -Bad
      debt expense
            
            
            35,000
            
            
            
            -Depreciation
      and amortization
            
            
            200,191
            
            
            
            106,989Discount
      on sale of finance receivables
            
            
            -
            
            
            
            83,744Changes
      in finance receivables, net:Finance
      receivables originations and purchased, net of
payments
            
            
            (493,473
            )
            
            
            (3,465,895
            )Provision
      for credit losses
            
            
            763,230
            
            
            
            2,481,826Inventory
      acquired in repossession
            
            
            821,291
            
            
            
            1,771,860Subtotal
      finance receivables
            
            
            1,091,048
            
            
            
            787,791Changes
      in operating assets and liabilities:Deferred
      financing cost
            
            
            (52,361
            )
            
            
            (145,500
            )Other
      receivables
            
            
            (13,419
            )
            
            
            (185,997
            )Inventory
            
            
            (825,614
            )
            
            
            (465,351
            )Prepaid
      and other assets
            
            
            4,912
            
            
            
            (23,375
            )Accounts
      payable and accrued liabilities
            
            
            (201,039
            )
            
            
            (426,315
            )Drafts
      payable
            
            
            698,616
            
            
            
            -Income
      tax payable
            
            
            -
            
            
            
            (121,676
            )Deferred
      sales tax
            
            
            4,470
            
            
            
            107,873Net
      cash used in operating activities
            
            
            (941,091
            )
            
            
            (1,396,622
            )Investing
      activities:Purchase
      of property, equipment and leasehold improvements
            
            
            (11,380
            )
            
            
            (3,564
            )Proceeds
      from sale of finance receivables
            
            
            -
            
            
            
            -Purchase
      of loan portfolio
            
            
            -
            
            
            
            64,526Net
      cash used in investing activities
            
            
            (11,380
            )
            
            
            60,962Financing
      activities:Proceeds
      from Series A Preferred Stock
            
            
            2,727,205
            
            
            
            (33,252
            )Repayments
      on other notes payable
            
            
            (334,766
            )
            
            
            970,000Proceeds
      from revolving credit facilities, net
            
            
            (757,658
            )
            
            
            346,603Proceeds
      from (repayments to) related party
            
            
            (3,948
            )
            
            
            (400
            )Net
      cash provided by financing activities
            
            
            1,630,833
            
            
            
            1,282,951Increase
      (Decrease) in cash and cash equivalents
            
            
            678,362
            
            
            
            (52,709
            )Cash
      at beginning of period
            
            
            4,161
            
            
            
            68,112Cash
      at end of period
            
            $
            682,523
            
            
            $
            15,403Cash
      paid for:Income
      tax
            
            $
            -
            
            
            $
            -Interest
            
            
            736,302
            
            
            
            597,314Non-cash
      supplemental disclosures:Preferred
      deemed dividend
            
            $
            2,020,074
            
            
            
            -Common
      stock issued to repay debt
            
            $
            700,000
            
            
            
            -





See
Notes to Financial Statements.


-5-





Auto Underwriters of America,
      Inc.
              Notes
      to Financial Statements
              (Unaudited)





NOTE
1 – BASIS OF PRESENTATION





The
accompanying unaudited interim financial statements of Auto Underwriters of
America, Inc. ("Auto Underwriters") have been prepared in accordance with
accounting principles generally accepted in the United States of America and the
rules of the Securities and Exchange Commission ("SEC"), and should be read in
conjunction with the audited consolidated financial statements and notes thereto
contained in Auto Underwriters' Annual Report filed with the SEC on Form 10-KSB.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited consolidated financial statements for fiscal 2006 as
reported in the 10-KSB have been omitted.





NOTE
2 – RESTATEMENT





The
financial statements as of and for the three months ended December 31, 2006 have
been restated resulting from adjustments made to our interim financial
information as a result of the statutorily required review that had not been
previously performed by the our independent auditors in advance of the original
filing. The following table presents the effects of the restatement adjustment
on the accompanying financial statements as of and for the three months ended
December 31, 2006:




Balance
      Sheets
            
            As
      Previously Reported
            
            
            Effect
      of Restatement
            
            
            As
      RestatedAssetsFinance
      receivables
            
            
            7,539,055
            
            
            
            (200,000
            )
            
            
            7,339,055Prepaid
      and other current assets
            
            
            58,590
            
            
            
            (35,000
            )
            
            
            23,590Total
      assets
            
            
            9,720,670
            
            
            
            (235,000
            )
            
            
            9,485,670Liabilities
      and Stockholders’ DeficitLiabilitiesAccounts
      payable and accrued liabilities
            
            
            (824,810
            )
            
            
            (22,761
            )
            
            
            (847,571
            )Dividends
      payable
            
            
            -
            
            
            
            (36,555
            )
            
            
            (36,555
            )Deferred
      sales tax
            
            
            (430,228
            )
            
            
            (369,231
            )
            
            
            (799,459
            )Total
      liabilities
            
            
            (12,444,811
            )
            
            
            (428,547
            )
            
            
            (12,873,358
            )Stockholders’
      equity/(deficit)Common
      stock
            
            
            (6,468,364
            )
            
            
            (2,601,149
            )
            
            
            (9,069,513
            )Retained
      deficit
            
            
            11,919,709
            
            
            
            3,264,697
            
            
            
            15,184,406Total
      stockholders’ equity/(deficit)
            
            
            2,724,141
            
            
            
            663,547
            
            
            
            3,387,688




Statements
      of Operations – three months ended December 31, 2006
            
            As
      Previously Reported
            
            
            Effect
      of Restatement
            
            
            As
      RestatedSelling,
      general and administrative
            
            
            1,070,082
            
            
            
            313,846
            
            
            
            1,383,928Provision
      for credit losses
            
            
            349,963
            
            
            
            200,000
            
            
            
            549,963Interest
      expense – other
            
            
            358,559
            
            
            
            10,015
            
            
            
            368,574Net
      loss
            
            
            (666,597
            )
            
            
            (523,863
            )
            
            
            (1,190,460
            )Preferred
      deemed dividends
            
            
            -
            
            
            
            (1,093,555
            )
            
            
            (1,093,555
            )Net
      loss available to common stockholders
            
            
            (666,597
            )
            
            
            (1,617,418
            )
            
            
            (2,284,015
            )Loss
      per share – basic and diluted
            
            
            (0.10
            )
            
            
            (0.26
            )
            
            
            (0.36
            )







-6-





Statements
      of Operations – six months ended December 31, 2006
            
            As
      Previously Reported
            
            
            Effect
      of Restatement
            
            
            As
      RestatedSelling,
      general and administrative
            
            
            1,672,273
            
            
            
            426,993
            
            
            
            2,099,266Interest
      expense – warrants
            
            
            -
            
            
            
            561,045
            
            
            
            561,045Interest
      expense – other
            
            
            736,302
            
            
            
            20,030
            
            
            
            756,332Net
      income (loss)
            
            
            (1,255,902
            )
            
            
            (1,208,068
            )
            
            
            (2,463,970
            )Preferred
      deemed dividends
            
            
            -
            
            
            
            (2,056,629
            )
            
            
            (2,056,629
            )Net
      loss available to common stockholders
            
            
            (1,255,902
            )
            
            
            (3,264,697
            )
            
            
            (4,520,599
            )Income
      (loss) per share – basic and diluted
            
            
            (0.20
            )
            
            
            (0.52
            )
            
            
            (0.72
            )








Statements of Cash
      Flows
            
            As
      Previously Reported
            
            
            Effect
      of Restatement
            
            
            As
      RestatedNet
      cash used in Operating Activities
            
            
            (3,003,224
            )
            
            
            2,062,133
            
            
            
            (941,091
            )Net
      cash provided by Financing Activities
            
            
            3,692,966
            
            
            
            (2,062,133
            )
            
            
            1,630,833








NOTE
3 – GOING CONCERN





As
shown in the accompanying financial statements, Auto Underwriters has incurred
recurring losses from operations in 2006 and 2005 and has an accumulated deficit
of $15,184,406 as of December 31, 2006. These conditions raise substantial doubt
as to Auto Underwriters’ ability to continue as a going concern. Management
believes that it has the ability to borrow additional funds from third parties
such as financial institutions or will be successful in a debt or equity
financing that will be sufficient to fund its operations for the next twelve
months.  Therefore, for at least the next twelve months, the Company
can continue to operate as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities or any
other adjustment that might be necessary should the Company be unable to
continue as a going concern.








NOTE
4 – FINANCE RECEIVABLES





Auto
Underwriters originates installment sale contracts from the sale of used
vehicles at its dealerships. These installment sale contracts typically include
interest rates ranging from approximately 12% to 27% per annum and provide for
payments over periods ranging from 18 to 60 months.





The
components of finance receivables as of December 31, 2006 and June 30, 2006 are
as follows:





December
      31
            
            
            June
      30Finance
      receivables
            
            $
            9,396,446
            
            
            $
            10,847,405Less:
      allowance for credit losses
            
            
            (2,057,391
            )
            
            
            (2,417,300
            )Finance
      receivables, net
            
            $
            7,339,055
            
            
            $
            8,430,105





Changes
in the finance receivables allowance for credit losses for the periods ended
December 31, 2006 and June 30, 2006 are as follows:





2007
            
            
            2006Balance
      at beginning of the period
            
            $
            2,417,300
            
            
            $
            2,323,089Provision
      for credit losses
            
            
            763,230
            
            
            
            5,056,597Recoveries
            
            
            821,291
            
            
            
            3,343,683Net
      charge-offs
            
            
            (1,944,430
            )
            
            
            (8,306,069
            )Balance
      at end of year
            
            $
            2,057,391
            
            
            $
            2,417,300





-7-


NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





A
summary of accounts payable and accrued liabilities is as
follows:





December
      31, 2006
            
            
            June
      30,
              2006Accounts
      payable
            
            $
            291,698
            
            
            $
            289,081Payroll
      and related taxes
            
            
            270,045
            
            
            
            372,641Recourse
      obligation
            
            
            175,000
            
            
            
            152,440Other
            
            
            110,828
            
            
            
            234,508Total
      liabilities
            
            $
            847,571
            
            
            $
            1,048,670








NOTE
6 – DEBT





Revolving
Credit Facilities





Auto Underwriters has a $9,000,000
senior debt revolving line of credit (“LOC”) with Oak Rock Financial, LLC, (“Oak
Rock”) bearing interest at the greater of prime + 7% or 15.25%. The LOC is
secured by all of Auto Underwriters’ assets and a personal validity guarantee by
its President. At December 31, 2006, the balance of LOC was $8,255,367 of
which Auto Underwriters had availability of approximately $745,000 under the
facility, maturing on March 31, 2007.





Interest on the LOC is payable
monthly. Auto Underwriters’ LOC facility contains various reporting and
performance covenants including maintenance of certain financial ratios and
tests, limitations on borrowings from other sources, restrictions on certain
operating activities, and restrictions on the payment of dividends or
distributions.  Oak Rock is involved with the day-to-day operations
pertaining to collections, cash payments, and repossessions including procedural
monitoring of Auto Underwriters’ operations.





A summary of Auto Underwriters’Revolving Credit Facilities
as of December 31, 2006 and June 30, 2006 is as follows:





Lender
            
            Facility
              Amount
            
            Interest
              Rate
            
            Maturity
            
            December 31,
      2006
              Balance
            
            June 30,
      2006
              BalanceOak
      Rock Financial, LLC
            
            $ 9,000,000
            
            Prime
      + 7%
            
            March
      31, 2007
            
            $  8,255,367
            
            $ 
      9,013,025





Other
Notes Payable





A summary ofOther Notes Payable as of
December 31, 2006 and June 30, 2006 is as follows:





December
      31,
              2006
            
            
            June
      30, 2006Unsecured
      Convertible Promissory Notes
            
            $
            979,977
            
            
            $
            990,000Secured
      Promissory Notes
            
            
            50,000
            
            
            
            1,000,000Notes
      Payable – Gunnels Interests, Inc.
            
            
            505,477
            
            
            
            590,243Notes
      Payable – Other
            
            
            26,490
            
            
            
            26,490$
            1,561,944
            
            
            $
            2
      ,590,695





All
debt is due within the next 12 months.


-8-


Unsecured
Convertible Promissory Notes





In fiscal 2006, Auto Underwriters
issued $990,000 in unsecured convertible promissory notes pursuant to a private
placement.  These notes bear interest at 9.25% per annum from the date
of issuance and are convertible into common stock at the request of the investor
at $1.50 per share. These notes mature on February 28, 2007.  See Note
10.




Secured
Promissory Notes





In fiscal 2006, Auto Underwriters
issued $1,000,000 in secured promissory notes pursuant to a private
placement.  These notes bear interest at 10% per annum from the date
of issuance, and are secured with our inventory and cash in our draft payment
account. These notes matured on August 31, 2006. In August 2006, notes totaling
(i) $700,000 were converted into 400,000 shares of common stock at $1.75 per
share with five-year stock purchase warrants exercisable for a total of 140,000
shares of the Company’s Common Stock at an exercise price of $1.75 per share.
See Note 7; (ii) $50,000 were extended with a maturity date of August 31,
2007; and (iii) $250,000 were repaid in cash plus accrued interest to the
remaining investors that elected to not convert or extend the term of their
loans. See Note 10.





Notes
Payable – Gunnels Interests, Inc.




Amounts due to Gunnels Interests,
Inc. relates to the purchase of certain assets by AUA from Gunnels Interests,
Inc. in March 2004 and vehicle wholesaling and flooring services provided by
Gunnels Interests, Inc. to AUA. See Note 9“Litigation, Claims, and
Assessments.”




Notes
Payable – Other




Notes
Payable – Other represents various immaterial amounts owed during the ordinary
course of business.








NOTE
7 – STOCKHOLDERS’ EQUITY




During
the quarter ended December 31, 2006, the Company issued 400,000 shares of common
stock for the conversion of $700,000 of Secured Notes.  See Note
6.





Issuance
of Series A Stock





During the six months ended December
31, 2006, the Company issued a total of 1,280,020 shares of Series A convertible
preferred stock (“Series A Stock”) at $2.50 per share, for net total proceeds of
$2,727,205 (net of issuance costs totaling $472,845).  See Note 10.
For every two shares of Series A Stock issued, investors received a warrant to
purchase the Company’s common stock at $2.50 per share.  The warrants
are immediately vested and exercisable and expire five years from the date of
issuance.  During the year ended June 30, 2006, the Company entered an
agreement with a NASD-licensed broker-dealer to act as the placement agent in
connection with the Series A Stock.  In connection with the agreement,
the Company issued the placement agent a warrant to purchase up to 1,000,000
shares of the Company’s common stock, depending on the total proceeds of the
offering.  The warrant was adjusted down to 578,000 shares due to a
“clawback provision” in the placement agreement.  The fair value of
the warrants was $40,576. No accounting entry was made for the stock issuance
costs as the debit and credit are to the same financial statement caption. See
further discussion below.





The holders of the Company’s Series
A Stock are entitled to the following rights, preferences, restrictions and
other matters as follows:





Dividends.  The
Preferred Stock accrues dividends at a rate of 8% per annum, payable in cash or
in shares of common stock. Subject to certain terms and conditions, the decision
whether to pay for dividends in cash or in shares of common stock, shall be at
the discretion of the Company’s board of directors.  The dividends are
cumulative and in preference to any dividends declared and paid to the holders
of common stock.  As of December 31, 2006, the Company has not paid
any dividends, but accrued $36,555 in dividends.





Liquidation Preference. Upon
any liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, holders of Series A Stock shall be entitled to receive an amount
equal to $2.50 per share (adjusted for stock splits, stock dividends and
reclassifications) plus any accrued but unpaid dividends.  If assets
of the Company are insufficient to pay in full such amounts, then the entire
assets to be distributed to the holders of the Series A Stock shall be
distributed among such holders ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full.





Conversion Rights. All or any
portion of the stated value of the Series A Stock outstanding may be converted
into common stock at anytime by the investors. The conversion rate of the
preferred stock is on a two-to-one basis, subject to anti-dilution protection
adjustments.


-9-




Rights of First
Refusal.  In the event that the Company decides to offer
additional securities, either through a debt or equity offering, holders of
Series A Stock have the first right of refusal to participate in that
offering.





Automatic Conversion. Each
share of Series A Stock shall automatically be converted into shares of common
stock, at the conversion price in effect, if and when the following three
requirements simultaneously exist: (1) the shares of Common Stock underlying the
Series A Preferred Stock have been registered with the SEC, (2) the Common Stock
is publicly traded, and (3) the 30 trading-day average closing price reported on
the national securities exchange on which the Common Stock is then listed or the
closing bid price of the Common Stock in the NASDAQ Reporting System is at least
$3.50 per share.  Additionally, each share of Series A Stock will be
automatically converted into Common Stock upon the consent of at least
two-thirds of the then-outstanding shares of Series A Stock.   If
the Series A Stock has not converted into common stock within 720 days after the
Series A Stock final closing, each share of Series A Stock will automatically
covert into two shares of common stock.





Voting
Rights.  Holders of preferred stock shall be entitled to the
number of votes equal to the number of shares of common stock into which such
shares of preferred stock could be converted.  Fractional shares, on
an as-converted basis, shall be rounded to the nearest whole
number.





Deemed Dividend on Preferred
Stock.  In accordance with EITF Issue No. 98-5,Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios , and EITF Issue No. 00-27,Application of Issue No.
98-5 to Certain Convertible Instruments , the Series A Stock is
considered to have an embedded beneficial conversion feature because the
conversion price was less than the fair value of the Company's common stock at
the issuance date. This non-cash dividend is to reflect the implied economic
value to the preferred stockholder of being able to convert its shares into
common stock at a price which was in excess of the fair value of the Series A
Stock at the time of issuance. The fair value allocated to the Series A Stock
together with the original conversion terms were used to calculate the value of
the deemed dividend on the Series A Stock of $2,020,074 on the date of issuance.
The fair value was calculated using the difference between the agreed-upon
conversion price of the Series A Stock into shares of common stock of $2.50 per
share and the fair market value of the Company's common stock on the date of
issuance of the Series A Stock.  This amount has been charged to
accumulated deficit with the offsetting credit to additional paid-in-capital.
The Company has treated the deemed dividend on preferred stock as a reconciling
item on the consolidated statements of operations to adjust its reported net
loss, together with any preferred stock dividends recorded during the applicable
period, to the loss available to common stockholders line item on the statements
of operations.





The terms of the Series A Preferred,
including but not limited to its rights and preferences, are set forth in the
Certificate of Determination of Preferences of Series A Convertible Preferred
Stock attached as Exhibit 3.2 to the Company’s Form 8-K filed under Item 5.03 on
September 7, 2006 and are incorporated by reference herein.





Warrants





During August 2006, the Company
issued warrants to purchase 150,000 shares of common stock at $1.75 per share to
holders of the $700,000 Secured Notes as incentive to convert the Secured Notes
into 400,000 shares of the Company’s common stock.  See Note 6. These
warrants were recognized at the fair value, as calculated by the Black-Scholes
pricing model, on the date of issuance in the amount of $561,045.  The
warrants vested immediately resulting in the non-cash interest expense of
$561,045 on the date of issuance.  The warrants expire in August
2011.





During
the six months ended December 31, 2006, the Company issued warrants to purchase
a total of 640,010 shares of the Company’s common stock, for $5.00 per share, as
part of the Series A Stock offering.  The fair value of these
warrants, $1,919,955 as calculated by the Black-Scholes pricing model, was
accounted for as a non-cash Series A Stock issuance cost.  The
warrants expire five years from the date of issuance.





The Company calculates the initial
fair value of all its warrants under the Black-Scholes pricing model with the
following assumptions: contractual term of five years, 4.8% risk-free interest
rate, expected volatility of 141% and expected dividend yield of
0%.




The
following table summarizes warrant activity as of December 31,
2006:





Number
      of Common Stock Shares
              
              
              Weighted
      Average Exercise PriceBalance
      at June 30, 2005
              
              
              0
              
              
              
              -Granted
              
              
              1,250,000
              
              
              $
              1.10Balance
      at June 30, 2006
              
              
              1,250,000
              
              
              
              1.10Granted
              
              
              790,010
              
              
              
              4.38Cancelled
              
              
              (422,000
              )
              
              
              1.00Balance
      at December 31, 2006
              
              
              1,618,010
              
              
              
              2.73


-10-




The
weighted-average remaining contractual life and weighted-average exercise price
of all warrants outstanding and of warrants exercisable as of December 31,
2006 were as follows:





Exercise
      Price
            
            Number
      Outstanding
            
            Weighted
      Average Remaining
              Contractual
      Life (Years)$1.00
            
            578,000
            
            4.251.50
            
            250,000
            
            4.161.75
            
            150,000
            
            4.585.00
            
            640,010
            
            5.421,618,010





All
warrants were exercisable at December 31, 2006.





Stock
Options





General.On March
20, 2004, Auto Underwriters’ board of directors adopted the 2004 Stock Option
Plan (the “2004 Plan”), which was approved by the shareholders at the 2004
annual meeting.  The purpose of the 2004 Plan is to provide a means
whereby directors and selected employees, officers, agents, consultants and
independent contractors may be granted incentive stock options and/or
nonqualified stock options to purchase shares of common stock in order to
attract and retain the services or advice of such directors, employees,
officers, agents, consultants and independent contractors and to provide an
additional incentive for such persons to exert maximum efforts for Auto
Underwriters’ and its affiliates’ success by encouraging stock
ownership.  The maximum number of shares of common stock with respect
to which awards may be presently granted pursuant to the 2004 Plan is 450,000
shares.  Shares issuable under the 2004 Plan may be either treasury
shares or authorized but unissued shares.  The number of shares
available for issuance will be subject to adjustment to prevent dilution in the
event of stock splits, stock dividends or other changes in Auto Underwriters’
capitalization.





Subject
to compliance with Rule 16b-3 of the Securities Exchange Act of 1934 (the
“Exchange Act”), the 2004 Plan is administered by the board of directors or, in
the event the Board shall appoint and/or authorize a committee, such as the
compensation committee, of two or more members of the Board to administer the
2004 Plan, by such committee (the “Plan Administrator”).  Except for
the terms and conditions explicitly set forth in the 2004 Plan, and subject to
applicable provisions of the Internal Revenue Code of 1986, as amended (the
“Code”), the Plan Administrator shall have the authority, in its discretion, to
determine all matters relating to the options to be granted under the Plan,
including, without limitation, selection of whether an option will be an
incentive stock option or a nonqualified stock option, selection of the
individuals to be granted options, the number of shares to be subject to each
option, the exercise price per share, the timing of grants and all other terms
and conditions of the options.





Options granted under the 2004 Plan
do not have a vesting period, are exercisable for 10 years from the date of
grant, do not provide for a “cashless exercise” option, and provide for an
exercise price equal to the fair market value of the stock on the date of
grant.





Stock
Option Activity and Outstanding





At December 31, 2006, the Company
had outstanding vested options totaling 50,000 shares with a weighted-average
exercise price of $0.50 and a weighted-average exercise life of 8.42 years. As
of December 31, 2006, there were 400,000 remaining shares available for issuance
under the 2004 Stock Option Plan.






NOTE
8 – RELATED PARTY TRANSACTIONS





Advances
from related parties represent unsecured, non-interest bearing funds advanced to
Auto Underwriters by Gateway Credit Holdings, Inc. (“Gateway”). The balance of
the unsecured, non-interest bearing funds advanced as of December 31, 2006 and
June 30, 2006, were $673,846 and $677,794, respectively, and the imputed
interest for the three and six months ended December 31, 2006 was $10,015 and
$20,030, respectively, and for the year ended June 30, 2006 was $40,400. Gateway
has a common officer and shareholder with Auto Underwriters.




-11-





NOTE
9 – COMMITMENTS AND CONTINGENCIES





Litigation,
claims and assessments





As
a consumer finance company, Auto Underwriters is subject to various consumer
claims and litigation seeking damages and statutory penalties, based upon, among
other things, usury, disclosure inaccuracies, wrongful repossession, violations
of bankruptcy stay provisions, certificate of title disputes, fraud, breach of
contract and discriminatory treatment of credit applicants. Some litigation
against Auto Underwriters could take the form of class action complaints by
consumers. Auto Underwriters believes that they have taken prudent steps to
address the litigation risks associated with Auto Underwriters’ business
activities.





In
the opinion of management, the resolution of these types of current matters will
not have a material adverse effect on Auto Underwriters’ financial position or
results of operations. However, Auto Underwriters cannot provide assurance
damages that result in a material adverse effect on its financial position or
results of operations will not be imposed in potential future matters. Auto
Underwriters accounts for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably
estimated.





Mid-Atlantic





Mid-Atlantic Finance Company, Inc.
filed a lawsuit against us on December 13, 2006 in the 6th
Judicial Circuit of Pinellas County, Florida, seeking damages in excess of
$450,000 concerning a dispute over certain non-prime installment contracts.
Mid-Atlantic alleged that the Company failed to repurchase certain finance
contracts that were in default.  We counter clamed and alleged that
Mid-Atlantic breached its agreement by not remitting to us certain amounts due
in relation to a hold back under the installment contracts.  As a
result of this dispute, we charged-off our receivable balance due from this
finance company of approximately $1,100,000 during fiscal 2006 and have
maintained a payable of approximately $152,000 for future repurchase
obligations.  On December 12, 2007, we settled this matter and
agreed to make periodic payments totaling $175,000.  The entire amount
of $175,000 was accrued as of December 31, 2006, and is included in the balance
sheet caption “Accounts
payable and accrued liabilities.”  As of the date of issuance
of these financial statements, $87,500 has been
paid.





Gunnels
Interests





On October 18, 2007, AUA was sued in
the 190th
Judicial Court of Harris County, Texas, by Gunnels Interests, Inc., Advantage
Autoplex, Inc., TAB Enterprises, Inc., and Lawrence E. Gunnels in the state
court of Harris County, Texas.  Case No. 2007-51824, Gunnels Interests, Inc., Advantage
Autoplex, Inc., TAB Enterprises, Inc., and Lawrence E. Gunnels v. Auto
Underwriters of America, Inc., f/k/a Advanced Cellular Technology, Inc., d/b/a
Affordable Cars and Trucks, Dean P. Antonis, and William J.
Kellagher.  The lawsuit relates to the purchase of certain assets by
AUA from Gunnels Interests, Inc. in March 2004 and vehicle wholesaling and
flooring services provided by Gunnels Interests, Inc. to AUA.  Plaintiffs
allege, among other things, fraud and breach of contract, and Plaintiffs seek
money damages, including exemplary and mental anguish damages.   The
Company is currently defending the lawsuit. As of December 31, 2006, the
Company’s books reflect a payable due to Gunnels Interests, Inc. of
approximately $505,000. The Plaintiffs have not specified any damages, but the
estimated contingent liability ranges from $800,000 to $1,000,000, should they
be successful. The Company is vigorously defending its position and believes the
case is without merit.  Mr. Gunnels is currently an 8.8%
shareholder.





AGM,
LLC





Auto Underwriters of America, Inc.
and its subsidiaries filed litigation against AGM, LLC on or about
December 20, 2007 in the U.S. District Court for the Northern District of
Illinois alleging that AGM materially breached the Escrow, Servicing and
Consignment Sales Agreement dated July 19, 2007.   Specifically,
AGM terminated the Escrow Agreement, but failed and refused to refund down
payment funds in the amount of $964,000.  Further, we allege that AGM
failed to pay Plaintiffs the amounts due and owing for services rendered under
the terms of the Escrow Agreement, totaling approximately $155,000. As a result,
Auto Underwriters and its subsidiaries have been damaged cumulatively in an
amount totaling approximately $1,119,000, exclusive of prejudgment interest,
attorneys’ fees and/or additional costs related to bringing this action.
Plaintiffs believe that by its improper actions at the expense of Auto
Underwriters and its subsidiaries, AGM has been unjustly enriched with monies
rightfully belonging to Auto Underwriters and subsidiaries. Further, AGM’s
willful and wanton disregard for the rights of Auto Underwriters and
subsidiaries constitute an unlawful conversion of monies to which Auto
Underwriters and subsidiaries are entitled to immediate
possession.  Finally, by falsely and materially misrepresenting the
financial bases and prospects for completing this Escrow Agreement, Defendant
AGM fraudulently induced Auto Underwriters and subsidiaries into entering the
Escrow Agreement and related agreements thereto.  Auto Underwriters
and its subsidiaries hope that the court will grant these monies owed to them
along with damages. AGM, LLC filed a counter claim on December 28, 2007 in
Circuit Court, Cook County, Illinois to keep the $964,000 cash payment and
recover other payments of approximately $3,000,000. Auto Underwriters and its
subsidiaries believe they have no liability in this claim.


-12-


Delinquent
payroll taxes





The
Company is delinquent in the payment of its payroll tax liabilities with the
Internal Revenue Service. As of December 31, 2006, unpaid payroll taxes
total approximately $217,330. The Company has estimated related penalties and
interest at $52,715 computed through December 31, 2006, which are included in
current liabilities at December 31, 2006. The Company expects to pay these
delinquent payroll tax liabilities as soon as possible. The final amount due
will be subject to the statutes of limitations related to such liabilities and
to negotiations with the Internal Revenue Service. As of the date of issuance of
these financial statements, the entire balance remains payable.





Delinquent
sales taxes





The Company had a deferred sales tax
balance of $799,459 as of December 31, 2006.  The deferred sales tax
becomes due on the 20th day of
the following month that a principal payment is collected on an installment
contract.  Deferred sales tax also becomes due if the installment
sales contract is sold to an unaffiliated third
party.





Contingent
liability





The Series A Preferred Stock
includes registration rights that require the Company to file a registration
statement with the Securities and Exchange Commission (the "SEC") registering
the shares of common stock underlying the preferred stock within 60 days after
the final closing (March 31, 2008). For every day the Company is late in filing
the Registration Statement beyond 60 days, the Company is obligated to issue to
the Investors on a pro rata basis additional Series A Preferred shares in whole
share increments equal to 1% of the Series A Preferred shares purchased in this
Offering.





The
Company accounts for the registrations rights agreement under EITF-00-19-2,
Accounting for Registration
Payment Arrangements (“EITF-00-19-2”).  Because EITF 00-19-2
specifically states that an entity should recognize and measure a registration
payment arrangement as a separate unit of account from the financial
instrument(s) subject to that arrangement, the registration rights agreement
does not in and of itself cause the host contract (Series A Stock) to be
considered a derivative instrument.





In
management’s opinion, payment of the registrations rights contingent liability
is not probable, and therefore, not reflected in the Company’s financials
statements as of December 31, 2006. The Company will continue to evaluate the
registration rights contingent liability and the probability of the occurrence
of payment under the registration rights at each reporting period to determine
if the liability should be reflected in the Company’s financial
statements.








NOTE
10 – SUBSEQUENT EVENTS





Debt


·
            Unsecured Convertible
      Promissory Notes –During the fiscal year ended June 30, 2007,
      notes totaling $933,000 were converted into common stock and the balance
      of $57,000 was returned to the investors.·
            Secured Promissory Notes –
      Outstanding notes totaling $50,000 were repaid in November
    2007.·
            Short-term Bridge Loans –On or about June 8, 2007, Auto Underwriters sold $1,100,000 in
      Secured Promissory Notes in a private placement to a limited number of
      accredited investors. The offer and sale was conducted on behalf of the
      Company by a NASD-licensed broker-dealer who served as managing dealer
      (the “Managing Dealer”)and received a sales commission of 6%, a due
      diligence fee of 1% and a non-accountable expense allowance of 3% of the
      gross proceeds. In addition to the cash payment, we also issued to the
      Managing Dealer a five year warrant to purchase 110,000 shares of our
      common stock at an exercise price of $1.50 per share.  The Secured
      Promissory Notes consist of: (i) Secured Promissory Notes which have in
      the aggregate a principal amount of $1,100,000 bearing interest at a rate
      of 10% per annum (issuable in individual notes in $100,000 increments)
      (the “Note”); (ii) for each $100,000 Note, a five-year warrant to purchase
      15,000 shares of common stock of the Company at an exercise price of $2.50
      per share with piggyback registration rights and cashless exercise and net
      issuance provisions (the “Bridge Warrant”); and (iii) possibly, for each
      $100,000 Note, a five-year warrant with the same terms as the Bridge
      Warrant to purchase 15,000 shares of the common stock of the Company for
      every 30 days that the Company fails to repay the Note (the “Liquidated
      Damages Warrant”) (the Bridge Warrant and the Liquidated Damages Warrant
      may be referred to collectively as the “Warrants”).  There were
      165,000 warrants issued with the Secured Promissory Notes. In November
      2007, the Company repaid $302,500 of the notes leaving a balance of
      $797,500.




Issuance
of Series A Stock


From
August 2006 through June 2007, the Company issued a total of 2,023,220 shares of
Series A Stock at $2.50 per share, for net total proceeds of $4,253,735 (net of
issuance costs totaling $804,315).


-13-


Private
Placement of Series A Convertible Preferred





During
August 2007, Auto Underwriters of America, Inc. (the “Company”) and an
NASD-registered broker-dealer (the “Placement Agent”) executed a Financial
Representative Agreement.  The Placement Agent has been engaged to
conduct a best efforts private placement offering of units consisting of two (2)
shares of Series A Convertible Preferred Stock and one warrant (the “Investor
Warrant”) to purchase one (1) share of the Company’s common stock exercisable
for a period of 5 years at an exercise price of $5.00.




The
Agreement details the services to be provided by the Placement Agent and sets
forth the compensation to be paid in return.  The Company shall pay
the Placement Agent a total cash fee equal to 14.00% of the gross proceeds
received by the Company in the private placement.  The Company shall
also pay the Placement Agent a cash fee equal to 7.00% of the gross proceeds
received by the Company upon exercise of any of the Investor
Warrants.  Upon the final closing of the offering, the Company shall
also issue the Placement Agent a success warrant to purchase a number of shares
of the Company’s common stock equal to 14.00% of the gross proceeds received by
the Company in the private placement.  The warrant shall have an
exercise price of $2.50 and a term of 5 years.  The Placement Agent
sold 403,164 units of the offering which resulted in $1,007,911 being raised.
The final closing occurred in March 2008.





Issuance
of Common Stock




During
August 2007, the Company and the Placement Agent executed an Investment Banking
Agreement.  The Placement Agent has been engaged to provide ongoing
investor awareness and business advisory services to the Company for one year in
exchange for 360,000 shares of the Company’s common stock.




Termination
of “Escrow, Servicing and Consignment Sales Agreement”





On
or about July 20, 2007, the Company entered into the Escrow, Servicing and
Consignment Sale Agreement among Auto Underwriters Portfolio Acquisition
Company, Inc., as Buyer/Borrower, Auto Underwriters Finance Company, Inc., as
Servicer/Guarantor, Auto Underwriters of America, Inc., William Kellagher and
Dean Antonis, as Guarantors, and AGM, LLC, as Administrative Agent and Initial
Lender.  In the agreement, the Company, as a secured obligor, granted
a first priority continuing security interest in and lien on certain consigned
automobile inventory, loans and related documents and receivables to AGM,
LLC.  The Company’s interest in the foregoing stems from its 100%
ownership of its subsidiaries Auto Underwriters Portfolio Acquisition Company,
Inc., and Auto Underwriters Finance Company, Inc.





Contemporaneously
with the aforementioned Escrow, Servicing and Consignment Sale Agreement, the
Company, as a Guarantor, and Auto Underwriters Portfolio Acquisition Company,
Inc., a wholly owned subsidiary of the Company as Borrower, executed the Loan
and Security Agreement among Auto Underwriters Portfolios Acquisition Company,
Inc. (“AUPAC”), as Borrower, Auto Underwrites of America, Inc., William
Kellagher, and Dean Antonis, as Guarantors, and AGM, LLC, as Administrative
Agent and Initial Lender.  The Loan and Security Agreement provides
for a series of term loans to Auto Underwriters Portfolio Acquisition Company,
Inc., totaling an amount equal to $14,719,987.03 to be used to purchase
automobile inventory and automobile loans from the seller/lender, AGM,
LLC.  Although executed, the documents are being held in escrow
contingent upon the issuance by the State of Texas of certain vehicle dealer and
vehicle financing licenses and permits to our subsidiary AUPAC. AUPAC received
the required licenses from the State of Texas on December 12, 2007 but the
agreements were terminated by AGM on or about December 4,
2007.  As more fully described in this quarterly report under “Part
II, Item 1. Legal Proceedings,” we are currently involved in litigation against
AGM, LLC.







-14-




Item 2 . Management's Discussion and Analysis or Plan of
Operations





The
following discussion should be read in conjunction with our financial statements
and notes thereto appearing elsewhere in this report.





Cautionary
Statement Regarding Forward-Looking Information


This
Quarterly Report on Form 10-QSB contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 about Auto
Underwriters of America, Inc. (the “Company”) that are subject to risks and
uncertainties.  Forward-looking statements include information concerning
future financial performance, business strategy, projected plans and
objectives.  Statements preceded by, followed by or that otherwise include
the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”
“may increase,” “may fluctuate” and similar expressions of future or conditional
verbs such as “will,” “should,” “would,” and “could” are generally
forward-looking in nature and not historical facts.  Actual results may
differ materially from those projected, implied, anticipated or expected in the
forward-looking statements.  Readers of this quarterly report should
not rely solely on the forward-looking statements and should consider all
uncertainties and risks throughout this report. The statements are
representative only as of the date they are made.  The Company
(sometimes referred to herein as we, us, or similar phrasing) undertakes no
obligation to update any forward-looking statement.
 
 These
forward-looking statements, implicitly and explicitly, include the assumptions
underlying the statements and other information with respect to the Company's
beliefs, plans, objectives, goals, expectations, anticipations, estimates,
financial condition, results of operations, future performance and business,
including management's expectations and estimates with respect to revenues,
expenses, return on equity, return on assets, efficiency ratio, asset quality
and other financial data and capital and performance ratios.
 
 Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, these statements involve risks and uncertainties that
are subject to change based on various important factors, some of which are
beyond the control of the Company. The following factors, among others, could
cause the Company's results or financial performance to differ materially from
its goals, plans, objectives, intentions, expectations and other forward-looking
statements:
 
 ·
              our
      ability to continue operating as a going
  concern;
 
 ·
              resolution
      and payment of unpaid federal and state
  taxes;
 
 ·
              unfavorable
      outcome with respect to pending
litigation;
 
 ·
              general
      economic and industry
conditions;
 
 ·
              our
      capital requirements and dependence on the sale of our equity
      securities;
 
 ·
              the
      liquidity of the Company’s common stock will be affected by the lack of,
      or limited trading market;
 
 ·
              intense
      industry competition;
 
 ·
              our
      ability to purchase installment
contracts;
 
 ·
              the
      creditworthiness of contract
obligors;
 
 ·
              shortages
      in availability of qualified
personnel;
 
 ·
              legal
      and financial implications of unexpected catastrophic
      events;
 
 ·
              regulatory
      or legislative changes effecting the automobile finance industry;
      and
 
 ·
              reliance
      on, and the ability to attract, key
  personnel.
 
 For
a discussion of these and other risks and uncertainties that could cause actual
results to differ from those contained in the forward-looking statements, see
“Risk Factors” in the Company’s Annual Report for the fiscal year ended
June 30, 2007 filed on Form 10-KSB/A with the SEC, which is available on
the SEC’s website at www.sec.gov.  All forward-looking statements are
qualified in their entirety by this cautionary statement, and the Company
undertakes no obligation to revise or update this Quarterly Report on Form
10-QSB to reflect events or circumstances after the date hereof.  New
factors emerge from time to time, and it is not possible for us to predict which
factors, if any, will arise.  In addition, the Company cannot assess
the impact of each factor on the Company’s business


-15-






Business
Overview





Auto
Underwriters of America, Inc. began operations in August 1983, under the name
Advanced Cellular Technology, Inc. and developed and marketed cellular mobile
telephone control units and resold used PBX telecommunications equipment. 
On December 31, 1990, we suspended operations and remained inactive until
December 2002, when we adopted our current name and began our principal
operations as a specialty finance company and specialty retailer of used cars
and light trucks.





We
use AutoUnderwriter.com credit decision software to finance the sale of used
cars by our four car sales lots in Houston, Texas and by selected third-party
dealers.  We target a selected customer credit profile.  Such
purchasers do not meet the credit standards of traditional lenders, such as
banks and credit unions, because of the age of the vehicle being financed or the
customer’s credit history.  Our borrowers have short or impaired credit
histories.  In making decisions regarding the purchase of a particular
contract, we consider the following factors related to the borrower: place and
length of residence, current and prior job status, history in making installment
payments for automobiles, current income and credit history.  In addition,
we examine the value of the automobile in relation to the purchase price and the
term of the contract.





Our
four car lot operations purchase, recondition, sell and finance used vehicles
under the name Affordable Cars & Trucks.  These car lots also use
AutoUnderwriter.com, which aids in the analysis of the credit worthiness and
develops proper deal structure for each customer contract
financed.





We
are still developing our financing programs and retail concept. The primary
drivers for future earnings growth will be vehicle unit sales growth from
geographic expansion, comparable same store sales increases to maximize our
maturity levels at each lot, and interest income from growth in our contract
portfolio.  During the next two years, we plan to focus our growth
primarily on adding stores to new markets in the state of
Texas.   We also expect used unit comparable store sales
increases, reflecting the ramp up in sales of newly opened stores as they mature
and continued market share gains at stores that have reached mature sales
levels.





The
principal challenges we face in expanding our contract volume growth target
include:





·
            Our
      ability to procure suitable lot locations at reasonable
      costs.


·
            Our
      ability to build our management strength to support the store
      growth.


·
            Our
      ability to maintain competitive direct retail and direct lending
      operations.





We
staff each newly opened store with an experienced management team, including the
general manager, purchasing manager, and business office manager, as well as a
number of experienced sales managers and account servicing
personnel.




Results
of Operations




Three
months ended December 31, 2006 compared to the three months ended December 31,
2005





Revenues





Total
revenues decreased $188,527 for the three month period ended December 31, 2006
compared to the corresponding prior period principally as a result of the
Company’s inability to operate at full capacity because of insufficient
capital.





Cost
of Sales





Cost
of sales as a percentage of automobile and light truck sales was 53.8% or
$972,743 for the three month period ended December 31, 2006 compared to 105.7%
or $1,869,788 for the corresponding prior period ended December 31, 2005. During
the prior period, our gross margin percentages were negatively affected during
the period by short-term supply shortages brought on by Hurricanes Katrina and
Rita, which contributed to the significant slow-down in new car sales in the
Houston area which provide a source of trade-ins, increased vehicle repair
expenses, and by increased fuel costs.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses increased by $591,175 for the three month
period ended December 31, 2006 compared to the corresponding prior period. This
increase was primarily attributable to increased general operating expenses.
Selling, general and administrative expenses as a percentage of total income was
63.4% for the three month period ending December 31, 2006 compared to 33.4% for
the same corresponding prior period.


-16-





Interest
Expense





Interest
expense increased to $368,574 for the three month period ended December 31, 2006
as compared to $324,847 for the corresponding prior period. The increase in
interest expense was primarily due to the increase in borrowings as we financed
our direct and indirect lending operations.





Six
months ended December 31, 2006 compared to the six months ended December 31,
2005





Revenues





Total
revenues decreased to $3,455,234 for the six month period ended December 31,
2006 compared to $8,581,687 for the corresponding prior period principally as a
result of a decrease in unit sales from our automotive specialty retailing
operations.





Cost
of sales as a percentage of automobile and light truck sales was 57.6% or
$1,539,140 for the six month period ended December 31, 2006. During the
corresponding period ended December 31, 2005, cost of sales as a percentage of
automobile and light truck sales was 74.3% or $5,390,502.  Our gross
margin percentages were negatively affected during the prior period by
short-term supply shortages brought on by Hurricanes Katrina and Rita, which
contributed to the significant slow-down in new car sales in the Houston area
which provide a source of trade-ins, increased vehicle repair expenses, and by
increased fuel costs.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses increased by $86,325 for the six month
period ended December 31, 2006 compared to the corresponding period ended
December 31, 2005. This decrease was primarily attributable to decreased
general operating expenses.





Interest
Expense – Warrants





Interest
expense warrants represents the fair value of warrants to purchase 150,000
shares of common stock at $1.75 per share to holders of the $700,000 Secured
Notes. The warrants were issued as incentive to convert the Secured Notes into
400,000 shares of the Company’s common stock.  See Note 7 to the
financial statements. These warrants were recognized at the fair value, as
calculated by the Black-Scholes pricing model, on the date of issuance in the
amount of $561,045.  The warrants vested immediately resulting in the
non-cash interest expense of $561,045 on the date of
issuance.


Interest
Expense





Interest
expense increased to $756,332 for the six month period ended December 31,
2006 as compared to $614,796 for the corresponding period ended
December 31, 2005. The increase in interest expense was primarily due to
the increase in borrowings as we financed our direct and indirect lending
operations.





Liquidity
and Capital Resources





The
following table summarizes our liquidity and capital resources for the six
months ended December 31, 2006 and 2005.





Six
      Months Ended
                December
      31,2006
              
              
              2005Operating
      activities:Net
      loss
              
              $
              (2,463,970
              )
              
              $
              (1,987,435
              )Imputed
      interest
              
              
              20,030Stock
      compensation expense
              
              
              -
              
              
              
              20,000Depreciation
      and amortization
              
              
              200,191
              
              
              
              106,989Warrant
      expense
              
              
              561,045
              
              
              
              -Bad
      debt expense
              
              
              35,000Discount
      on sale of loans
              
              
              -
              
              
              
              83,744Changes
      in finance receivables, net:
              
              
              1,091,048
              
              
              
              787,791Changes
      in operating assets and liabilities:
              
              
              (384,435
              )
              
              
              (407,711
              )Net
      cash used in operating activities
              
              
              (941,091
              )
              
              
              (1,396,622
              )Cash
      used in investing activities:
              
              
              (11,380
              )
              
              
              60,962Cash
      provided by financing activities:
              
              
              1,630,833
              
              
              
              1,282,951Increase
      (decrease) in cash
              
              $
              678,362
              
              
              $
              (52,709
              )


-17-


Our
primary use of working capital was the funding of the origination and purchase
of contracts and inventory. The contracts were financed substantially through
borrowings on the revolving line of credit. The line of credit is secured
primarily by contracts, and available borrowings are based on a percentage of
qualifying contracts. We have also funded a portion of our working capital needs
through the issuance of subordinated notes.
 
 We
believe that borrowings available under the line of credit as well as cash flow
from operations and, if necessary, the issuance of additional subordinated debt,
or the sale of additional securities, will be sufficient to meet our short-term
funding needs.
 
 Critical
Accounting Policies
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires us to make
estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from our estimates. We
believe the most significant estimate made in the preparation of the
accompanying consolidated financial statements relates to the determination of
our allowance for credit losses. Below is a discussion of our accounting policy
concerning such allowance. Other accounting policies are disclosed in the
footnotes of our consolidated financial statements which are included in our
annual report on Form 10-KSB for the year ended June 30,
2006.
 
 We
maintain an allowance for credit losses at a level we consider sufficient to
cover anticipated losses in the collection of our finance receivables. The
allowance for credit losses is determined based upon a review of historical,
recent credit losses, and the finance receivable portfolio. The allowance for
credit losses is periodically reviewed by management with any changes reflected
in current operations. It is at least reasonably possible that actual credit
losses may be materially different from the recorded allowance for credit
losses.




Seasonality





Our
automobile sales and finance business is seasonal in nature. In such business,
the second fiscal quarter (October through December) is historically the slowest
period for vehicle sales. The third fiscal quarter (January through March) is
historically the busiest time for vehicle sales as many of our customers use
income tax refunds as a down payment on the purchase of a
vehicle.








Item 3 . Controls and Procedures





Conclusion
Regarding Effectiveness of Disclosure Controls and Procedures





Under
the supervision and with the participation of our management, including our
principal executive officer (PEO) and principal financial officer (PFO), we
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this
evaluation, our management, including our PEO and our PFO, concluded that our
disclosure controls and procedures were not effective as of the end of the
period covered by this report, to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
(i) is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
our management, including our PEO and our PFO, as appropriate, to allow timely
decisions regarding required disclosure.





We,
along with our independent auditors, have identified several “significant
deficiencies” that collectively constituted a "material weakness" in our
internal control over financial reporting under standards established by the
Public Company Accounting Oversight Board.





A SIGNIFICANT DEFICIENCY is a
control deficiency, or combination of control deficiencies, that adversely
affects the Company's ability to initiate, authorize, record, process or report
external financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a
misstatement of the Company's annual or interim financial statements that is
more than inconsequential and will not be prevented or
detected.





A MATERIAL WEAKNESS is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement or the annual or
interim financial statements will not be prevented or
detected.


-18-


The
following conditions were identified:
 
 ·
              The
      current organization of the accounting department does not provide the
      Company with the adequate skills to accurately account for and disclose
      significant transactions or disclosures within the time periods as
      specified by SEC rules and
forms.
 
 ·
              Substantive
      matters are not being addressed appropriately by the Board resulting in
      inadequate oversight from the
Board.
 
 ·
              The
      process that the Company is currently using to monitor the ongoing quality
      of internal controls performance, identify deficiencies and trigger timely
      corrective action is not working
  effectively.
 
 ·
              There
      is no adequate means of accurately capturing and recording certain
      significant and complex business
  transactions.
 
 Accordingly,
the Company's internal controls over financial reporting are not
effective.
 
 Based
upon the Company's evaluation, which considered the above findings of our
independent auditors, the Company’s management, including the PEO and PFO,
concluded that, as of December 31, 2006, the Company's internal controls
over financial reporting were not effective.
 
 In
response to these deficiencies, the Company has interviewed three public
accounting firms and narrowed the search down to one such firm who was
contracted, beginning March 2008, The firm will be engaged to assist the Company
in establishing additional financial and disclosure controls.  They
will also help ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules. Lastly,
they will assist in a search for a qualified CFO.  Additionally, we
are in the process of improving our internal control over financial reporting in
an effort to remediate other deficiencies through improved supervision and
training of our accounting staff.  This deficiency has been disclosed
to our Board of Directors. Additional effort is needed to fully remedy these
deficiencies and we are continuing our efforts to improve and strengthen our
control processes and procedures.





Changes
In Internal Control Over Financial Reporting





Other
than as described above, there were no changes in our internal control over
financial reporting during the quarter ended December 31, 2006 that
materially affected or are reasonably likely to materially affect, our internal
control over financial reporting.








-19-





PART
II.  OTHER
INFORMATION





ITEM 1 .    LEGAL
PROCEEDINGS





Set
forth below are the material pending legal proceedings as of the filing of this
report.





Mid-Atlantic





Mid-Atlantic
Finance Company, Inc. filed a lawsuit against us on December 13, 2006 in the
6th
Judicial Circuit of Pinellas County, Florida, seeking damages in excess of
$450,000 concerning a dispute over certain non-prime installment contracts.
Mid-Atlantic alleged that the Company failed to repurchase certain finance
contracts that were in default.  We counter clamed and alleged that
Mid-Atlantic breached its agreement by not remitting to us certain amounts due
in relation to a hold back under the installment contracts.  As a
result of this dispute, we charged-off our receivable balance due from this
finance company of approximately $1,100,000 during fiscal 2006 and have
maintained a payable of approximately $152,000 for future repurchase
obligations.  On December 12, 2007, we settled this matter and
agreed to make periodic payments totaling $175,000.





Gunnels
Interests





On
October 18, 2007, AUA was sued in the 190th
Judicial Court of Harris County, Texas, by Gunnels Interests, Inc., Advantage
Autoplex, Inc., TAB Enterprises, Inc., and Lawrence E. Gunnels in the state
court of Harris County, Texas.  Case No. 2007-51824, Gunnels Interests, Inc., Advantage
Autoplex, Inc., TAB Enterprises, Inc., and Lawrence E. Gunnels v. Auto
Underwriters of America, Inc., f/k/a Advanced Cellular Technology, Inc., d/b/a
Affordable Cars and Trucks, Dean P. Antonis, and William J.
Kellagher.  The lawsuit relates to the purchase of certain assets by
AUA from Gunnels Interests, Inc. in March 2004 and vehicle wholesaling and
flooring services provided by Gunnels Interests, Inc. to AUA.  Plaintiffs
allege, among other things, fraud and breach of contract, and Plaintiffs seek
money damages, including exemplary and mental anguish damages.   The
Company is currently defending the lawsuit. As of December 31, 2006, the
Company’s books reflect a payable due to Gunnels Interests, Inc. of
approximately $505,000. The Plaintiffs have not specified any damages, but the
estimated contingent liability ranges from $800,000 to $1,000,000, should they
be successful. The Company is vigorously defending its position and believes the
case is without merit.  Mr. Gunnels is currently an 8.8%
shareholder.





AGM,
LLC





Auto
Underwriters of America, Inc. and its subsidiaries filed litigation against AGM,
LLC on or about December 20, 2007 in the U.S. District Court for the
Northern District of Illinois alleging that AGM materially breached the Escrow,
Servicing and Consignment Sales Agreement dated July 19,
2007.   Specifically, AGM terminated the Escrow Agreement, but
failed and refused to refund down payment funds in the amount of
$964,000.  Further, we allege that AGM failed to pay Plaintiffs the
amounts due and owing for services rendered under the terms of the Escrow
Agreement, totaling approximately $155,000. As a result, Auto Underwriters and
its subsidiaries have been damaged cumulatively in an amount totaling
approximately $1,119,000, exclusive of prejudgment interest, attorneys’ fees
and/or additional costs related to bringing this action. Plaintiffs believe that
by its improper actions at the expense of Auto Underwriters and its
subsidiaries, AGM has been unjustly enriched with monies rightfully belonging to
Auto Underwriters and subsidiaries. Further, AGM’s willful and wanton disregard
for the rights of Auto Underwriters and subsidiaries constitute an unlawful
conversion of monies to which Auto Underwriters and subsidiaries are entitled to
immediate possession.  Finally, by falsely and materially
misrepresenting the financial bases and prospects for completing this Escrow
Agreement, Defendant AGM fraudulently induced Auto Underwriters and subsidiaries
into entering the Escrow Agreement and related agreements
thereto.  Auto Underwriters and its subsidiaries hope that the court
will grant these monies owed to them along with damages. AGM, LLC filed a
counter claim on December 28, 2007 in Circuit Court, Cook County, Illinois to
keep the $964,000 cash payment and recover other payments of approximately
$3,000,000. Auto Underwriters and its subsidiaries believe they have no
liability in this claim.





Other





In
the normal course of business we may become involved with various other
litigation.  Other than as described above, we know of no pending or
threatened legal proceedings to which we are or will be a party which, if
successful, might result in a material adverse change in our business,
properties or financial condition.





ITEM 2 .    UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS.





Set
forth below are the sales of unregistered securities that occurred during the
year ended June 30, 2007.  Other than as described below, during
the quarter ended December 31, 2006 and through the year ended
June 30, 2007, we did not have any sales of securities in transactions that
were not registered under the Securities Act of 1933, as amended, that have not
been reported in a Form 8-K or Form 10-QSB.


-20-


During
the fiscal year ended June 30, 2007, Auto Underwriters sold an aggregate of
1,011,610 units of the Company’s securities (the “Units”) in a private placement
to a limited number of accredited investors for gross proceeds of $5,058,049.
The Units were sold at a price of $5.00 per unit, with each Unit consisting of
two shares of the Company’s Series A Convertible Preferred Stock (the “Series A
Preferred”) and one warrant to purchase one share of the Company’s common stock
(the “Common Stock”), exercisable for a period of five years, at an exercise
price of $5.00 per share (the “Investor Warrants”). The offer and sale was
conducted on behalf of the Company by a NASD-licensed broker-dealer who served
as managing dealer (the “Managing Dealer”) and received a sales commission of
7%, and investment banking and marketing fee of 4% and a nonaccountable expense
allowance of 3% of the gross proceeds of $5,058,049.The Managing Dealer also
received a warrant to purchase 578,000 shares of the Company’s Common Stock,
exercisable for a period of 5 years at $1.00 per share. These securities were
offered and sold without registration under the Securities Act of 1933 in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.





During
fiscal 2006, Auto Underwriters borrowed $1,000,000 from several
investors.  These loans were secured by the Company’s inventory,
bearing interest at 10%, and were due September 1, 2006.  In
August 2006, certain investors elected to convert $700,000 of these loans into
400,000 shares of common stock and five-year stock purchase warrants exercisable
for a total of 140,000 shares of the Company’s Common Stock at an exercise price
of $1.75 per share.  In August 2006, certain investors elected to
receive a replacement note with a total balance of $50,000.  These
replacement notes bear interest at 10%, have a new maturity date of
August 31, 2007, and include a five-year stock purchase warrant exercisable
for a total of 10,000 shares of the Company’s Common Stock at an exercise price
of $1.75.  The Company paid $250,000 in cash plus accrued interest to
the remaining investors that elected to not convert or extend the term of their
loans.  The Company paid a NASD-licensed broker dealer a fee of
$32,000 for their assistance in completing this transaction.  These
securities were offered and sold without registration under the Securities Act
of 1933 in reliance upon the exemption provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated
thereunder.





On
March 30, 2007, Auto Underwriters of America, Inc. converted $933,000 of
outstanding principal balance (the “Outstanding Amount”) due on certain 9.25%
unsecured convertible promissory notes that matured on February 28, 2007
into 622,005 shares of the Company’s common stock, determined by dividing the
Outstanding Amount by $1.50.  Fractional shares were paid in
cash.  The shares were issued to a limited number of accredited
investors.  The common stock was offered and sold without registration
under the Securities Act of 1933, as amended, in reliance upon the exemption
provided by Section 4(2) of the Securities Act and by Rule 506 of Regulation D
promulgated thereunder.  An NASD-licensed broker dealer served as
placement agent in connection with the conversion of the Notes and was paid an
investment banking fee of $25,000 in connection with the
transaction.





On
or about June 8, 2007, Auto Underwriters sold $1,100,000 in Secured Promissory
Notes in a private placement to a limited number of accredited investors. The
offer and sale was conducted on behalf of the Company by a NASD-licensed
broker-dealer who served as managing dealer (the “Managing Dealer”) and received
a sales commission of 6%, a due diligence fee of 1% and a non-accountable
expense allowance of 3% of the gross proceeds. In addition to the cash payment,
we also issued to the Managing Dealer a five year warrant to purchase 110,000
shares of our common stock at an exercise price of $2.50 per share. The Secured
Promissory Notes consist of: (i) Secured Promissory Notes which have in the
aggregate a principal amount of $1,100,000 bearing interest at a rate of 10% per
annum due October 15, 2007 (issuable in individual notes in $100,000 increments)
(the “Note”); (ii) for each $100,000 Note, a five-year warrant to purchase
15,000 shares of common stock of the Company at an exercise price of $2.50 per
share with piggyback registration rights and cashless exercise and net issuance
provisions (the “Bridge Warrant”); and (iii) for each $100,000 Note, a five-year
warrant with the same terms as the Bridge Warrant to purchase 15,000 shares of
the common stock of the Company for every 30 days that the Company fails to
repay the Note (the “Liquidated Damages Warrant”) (the Bridge Warrant and the
Liquidated Damages Warrant may be referred to collectively as the
“Warrants”).  These securities were offered and sold without
registration under the Securities Act of 1933 in reliance upon the exemption
provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder.







ITEM 3 .    DEFAULT UPON SENIOR
SECURITIES





As
described above, in June 2007, Auto Underwriters issued $1,100,000 worth of
secured promissory notes to eight investors.  The principal amount of
these notes plus 10% interest thereon, plus $110,000 in loan fees, became due on
October 15, 2007.  The Company has re-paid $300,000 out of the total
of $1,210,000 due to the note holders thus far.  Auto Underwriters is
in default on these notes and any one or more of the note holders could bring a
lawsuit against Auto Underwriters for this default and obtain judgments against
us and our assets, including imposition of attorneys’ fees and court costs which
could increase the amount Auto Underwriters owes to the note
holders.





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





Not
Applicable








-21-




ITEM 5 .    OTHER
INFORMATION





Not
Applicable


ITEM 6 .    EXHIBITS





31.1           Principal
Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of
2002


31.2           Principal
Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of
2002


32.1           Principal
Executive Officer Certification under Section 906 of the Sarbanes-Oxley Act of
2002


32.2           Principal
Financial Officer Certification under Section 906 of the Sarbanes-Oxley Act of
2002








-22-











SIGNATURES





In
accordance with the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.











Auto
      Underwriters of America, Inc.By:   /s/ Dean
      AntonisDean
      AntonisPresident
      and Treasurer (Principal Executive,
              Financial
      and Accounting Officer)











Dated:
May 16, 2008




-23-