UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-QSB
 
 (Mark
      one)[X]           Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended December 31, 2007[   ]           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
May 12, 2008.
 
 Transitional
Small Business Disclosure Format (check one):
 
 Yes   No X








AUTO
UNDERWRITERS OF AMERICA, INC.




TABLE
OF CONTENTS











PAGEPART I.
            FINANCIAL INFORMATIONItem 1.
            Financial StatementsBalance
      Sheets as of December 31, 2007 and June 30,
      2007
            3Statements of
      Operations for the Three and Six Months Ended December 31 2007
      and2006
            4Statements of Cash Flows for the Six Months Ended
      December 31 2007 and 2006
            5Notes
      to Financial Statements
            6
      – 7Item 2.
            Management’s Discussion and Analysis of Financial
      Condition
            8
      – 12Item 3.
            Controls
      and Procedures
            12PART II.
            OTHER INFORMATIONItem 1.
            Legal
      Proceedings
            13Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            13Item 3.
            Default Upon Senior Securities
            14Item 4.
            Submission of Matters to a Vote of Security
      Holders
            14Item 5.
            Other
      Information
            14Item 6.
            Exhibits
            14





2




Part I. Financial Information





Item 1. Financial Statements





Auto Underwriters of America, Inc.


Consolidated
Balance Sheets


December
31, 2007 and June 30, 2007


(Unaudited)





December
      31,
                2007
              
              
              June
      30, 2007Assets:Cash
      and cash equivalents
              $
              560,190
              
              $
              1,671,430Finance
      receivables, net
              
              9,348,252
              
              
              8,932,091Refund receivables
              
              964,000
              
              
              -Fixed
      assets, net
              
              85,200
              
              
              111,408Inventory
              
              1,126,363
              
              
              1,507,276Prepaid
      and other assets
              
              87,104
              
              
              -Deferred
      financing cost
              
              -
              
              
              -Total
      assets
              $
              12,171,109
              
              $
              12,285,675
 
 
 Liabilities
      and stockholders’ deficit:Accounts
      payable and accrued liabilities
              
              $
              1,522,244
              
              
              $
              989,818Drafts
      payable and floor plan liabilities
              
              
              660,735
              
              
              
              1,103,250Dividends
      payable
              
              
              398,225
              
              
              
              187,749Other
      notes payable
              
              
              1,145,364
              
              
              
              961,198Senior
      debts - revolving line of credit
              
              
              11,650,086
              
              
              
              10,086,070Deferred
      sales tax
              
              
              929,331
              
              
              
              892,763Advances
      from related parties
              
              
              673,846
              
              
              
              673,846Total
      liabilities
              
              
              16,979,831
              
              
              
              14,894,694Commitments
      and contingencies
 
 
 Stockholders’
      deficit:Series
      A convertible preferred stock: no par value: 10,000,000 authorized
      2,426,420 and 1,280,020 respectively, issued and outstanding. Liquidation
      preference of $5,058,050
              
              
              896,806
              
              
              
              4,253,735Series B convertible preferred stock: no par value, 4,800,000 authorized,
      0 issued and outstanding.
              
              
              -
              
              
              
              -Common
      stock: no par value: 100,000,000 authorized issued and outstanding:
      7,400,575 and 6,018,570 respectively
              
              
              8,468,273
              
              
              
              8,450,586Retained
      deficit
              
              
              (18,173,801
              )
              
              
              15,313,340
              )Total
      stockholders’ deficit
              
              
              (4,808,722
              )
              
              
              (2,609,019
              )Total
      liabilities and stockholders’ deficit
              
              
              12,171,109
              
              
              $
              12,285,675


3





Auto Underwriters of America, Inc.


Consolidated
Statements of Operations


For
the three months and six months ended December 31, 2007 and 2006


(Unaudited)








Three
      Months Ended
              December
      31,
            
            
            Six
      Months Ended
              December 31,2007
            
            
            2006
            
            
            2007
            
            
            2006Revenues:Sales
            
            $
            2,280,153
            
            
            $
            1,808,605
            
            
            $
            6,152,006
            
            
            $
            2,671,595Interest
      income
            
            
            436,516
            
            
            
            349,578
            
            
            
            854,180
            
            
            
            740,015Other
            
            
            154,081
            
            
            
            23,652
            
            
            
            185,368
            
            
            
            43,6242,870,750
            
            
            
            2,181,835
            
            
            
            7,191,554
            
            
            
            3,455,234Costs
      and expenses:Cost
      of sales
            
            
            1,355,358
            
            
            
            972,743
            
            
            
            4,226,650
            
            
            
            1,539,140Selling,
      general and administrative
            
            
            1,350,689
            
            
            
            1,383,928
            
            
            
            2,764,614
            
            
            
            2,099,266Provision
      for credit losses
            
            
            557,012
            
            
            
            549,963
            
            
            
            1,560,281
            
            
            
            763,230Interest
      expense
            
            
            548,644
            
            
            
            368,574
            
            
            
            1,471,416
            
            
            
            1,317,377Depreciation
      and amortization
            
            
            13,104
            
            
            
            97,088
            
            
            
            26,208
            
            
            
            200,1913,824,807
            
            
            
            3,372,296
            
            
            
            10,049,169
            
            
            
            5,919,204Loss
      before income taxes
            
            
            (954,057
            )
            
            
            (1,190,461
            )
            
            
            (2,857,615
            )
            
            
            (2,463,970
            )Net
      loss
            
            
            (954,057
            )
            
            
            (1,190,461
            )
            
            
            (2,857,615
            )
            
            
            (2,463,970
            )Preferred
      dividends
            
            
            (109,314
            )
            
            
            (1,093,555
            )
            
            
            (210,473
            )
            
            
            (2,056,629
            )Net
      loss available to common stockholders
            
            $
            (1,063,371
            )
            
            $
            (2,284,016
            )
            
            $
            (3,068,088
            )
            
            $
            (4,520,599
            )Basic
      and diluted net loss per share
            
            $
            (.15
            )
            
            $
            (0.36
            )
            
            $
            (.44
            )
            
            $
            (0.72
            )Weighted
      average shares outstanding
            
            
            7,040,575
            
            
            
            6,418,570
            
            
            
            7,040,575
            
            
            
            6,302,723








4





Auto Underwriters of America, Inc.


Statements
of Cash Flows


For
the six months ended December 31, 2007 and 2006


(Unaudited)





2007
            
            
            2006Operating
      activities:Net
      Loss
            
            $
            (2,857,615
            )
            
            $
            (2,463,970
            )Adjustments
      to reconcile net loss from continuing operations to net cash used in
      operating activities:Imputed interest
            
            
            17,688
            
            
            
            20,030Warrant expense
            
            
            -
            
            
            
            561,045Bad debt expense
            
            
            -
            
            
            
            35,000Depreciation
      and amortization
            
            
            26,208
            
            
            
            200,191Amortization
      of loan discounts
            
            
            546,151
            
            
            
            -Changes
      in finance receivables, net:Finance
      receivables originations and purchased, net of payments
            
            
            (3,401,857
            )
            
            
            (493,473
            )Provision
      for credit losses
            
            
            1,560,281
            
            
            
            763,230Inventory
      acquired in repossession
            
            
            1,425,415
            
            
            
            821,291Subtotal
      finance receivables
            
            
            (416,161
            )
            
            
            1,091,048Changes
      in operating assets and liabilities:Deferred
      financing cost
            
            
            -
            
            
            
            (52,361
            )Accounts
      receivable and other receivables
            
            
            -
            
            
            
            (13,419
            )Inventory
            
            
            380,914
            
            
            
            (825,614
            )Prepaid
      and other assets
            
            
            (24,369
            )
            
            
            4,912Accounts
      payable and accrued liabilities
            
            
            532,426
            
            
            
            (201,039
            )Drafts
      payable
            
            
            (442,515
            )
            
            
            698,616Deferred
      sales tax
            
            
            36,568
            
            
            
            4,470Net
      cash used in operating activities
            
            
            (2,199,970
            )
            
            
            (941,091
            )Investing
      activities:Purchase
      of property, equipment and leasehold improvements
            
            
            -
            
            
            
            (11,380
            )Purchase of finance receivable
            
            
            (964,000
            )
            
            
            -Net
      cash used in investing activities
            
            
            (964,000
            )
            
            
            (11,380
            )Financing
      activities:Proceeds
      from sale of Series A convertible preferred stock
            
            
            850,698
            
            
            
            2,727,205Repayments
      on other notes payable
            
            
            (361,985
            )
            
            
            (334,766
            )Proceeds
      from revolving credit facilities, net
            
            
            1,564,017
            
            
            
            (757,658
            )Proceeds
      from (repayments to) related party
            
            
            -
            
            
            
            (3,948
            )Net
      cash provided by financing activities
            
            
            2,052,730
            
            
            
            1,630,833Increase
      (Decrease) in cash and cash equivalents
            
            
            (1,111,240
            )
            
            
            678,362Cash
      at beginning of period
            
            
            1,671,430
            
            
            
            4,161Cash
      at end of period
            
            $
            560,190
            
            
            $
            682,523Cash
      paid for:Interest
            
            $
            851,327
            
            
            $
            736,302Non-cash
      supplemental disclosures:Preferred
      dividend
            
            $
            210,473
            
            
            $
            2,020,074Common
      stock issued to repay debt
            
            $
            -
            
            
            $
            700,000Common
      stock issued for convertible preferred stock sale offering
      costs
            
            $
            720,000
            
            
            $
            -











5





Auto Underwriters of America, Inc.


Notes
to Financial Statements


(Unaudited)








NOTE
1 – BASIS OF PRESENTATION





The
accompanying unaudited interim consolidated financial statements of Auto
Underwriters of America, Inc. 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, 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/A. 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
consolidated financial statements which would substantially duplicate the
disclosure contained in the audited consolidated financial statements for fiscal
2007 as reported in the 10-KSB/A have been omitted.








NOTE
2 – GOING CONCERN





As
shown in the accompanying consolidated financial statements, Auto Underwriters
has incurred recurring losses from operations in 2008 and 2007 and has an
accumulated deficit of $18,173,801 as of December 31, 2007. These conditions
raise substantial doubt as to Auto Underwriters’ ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.








NOTE
3 – 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 18% 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, 2007 are as follows:





Finance
      receivables
            
            $
            12,199,179Allowance
      for credit losses
            
            
            (2,850,927
            )Finance
      receivables, net
            
            $
            9,348,252





Changes
in the finance receivables allowance for credit losses for the three months
ended December 31, 2007 are as follows:





Balance
      at beginning of period
            
            $
            2,505,938Provision
      for credit losses
            
            
            1,560,281Net
      charge offs
            
            
            (2,640,708
            )Net
      recoveries
            
            
            1,425,416Balance
      at end of period
            
            $
            2,850,927








NOTE
4 – REVOLVING CREDIT FACILITIES





Auto
Underwriters has a $12,000,000 revolving line of credit with Oak Rock Financial,
LLC, bearing interest at the greater of prime+7% and expires on March 31,
2009.  The LOC is secured by all of Auto Underwriters’ assets and a
personal validity guarantee by our President.  At December 31, 2007,
the balance outstanding on this LOC was $11,650,086.








NOTE
5 – SHORT TERM DEBTS





In
June 2007, Auto Underwriters borrowed $1,100,000 from 8 investors under secured
promissory notes.  The principal amount of these notes plus 10%
interest thereon, plus $110,000 in loan fees, became due on October 15,
2007.  We have re-paid $300,000 out of the total of $1,210,000 due to
the note holders thus far.


6


NOTE
6 – PAYROLL TAX LIABILITIES





Auto
Underwriters is delinquent in the payment of its payroll tax liabilities with
the Internal Revenue Service.  As of December 31, 2007, unpaid payroll
taxes total approximately $836,000 plus estimated related penalties and interest
which are included in current liabilities.  The final amount due will
be subject to negotiations with the Internal Revenue Service. Auto Underwriters
intends to pay these delinquent taxes as soon as possible.







NOTE
7 – EQUITY





During
the three months ended December 31, 2007, Auto Underwriters sold 151,600 units
at $5.00 per unit. Each unit consists of two shares of Series A Convertible
Preferred Stock, convertible into common stock at $2.50 per share, and one
warrant to purchase one common share exercisable for five years at
$5.00.





Auto
Underwriters analyzed these instruments for derivative accounting consideration
under SFAS 133 and EITF 00-19. Auto Underwriters determined the convertible
securities were conventional and the warrants met the criteria for
classification in stockholders equity under SFAS 133 and EITF 00-19. Therefore,
derivative accounting is not applicable for these instruments. Auto Underwriters
also analyzed these instruments for Beneficial Conversion Features under EITF
98-5 and EITF 00-27. Because the conversion price exceeds the market trading
price of Auto Underwriters’ common stock when the loans were issued, a
Beneficial Conversion Feature was not created.





NOTE
8 – REFUND RECEIVABLE
 
 In
July 2007, Auto Underwriters entered into the Escrow, Servicing and Consignment
Sale Agreement with AGM, LLC. Auto Underwriters has agreed to purchase from AGM,
and AGM has agreed to sell to Auto Underwriters, the Loans and Motor Vehicle
Inventory set forth in the agreement for a purchase price of $16,357,376 and
Auto Underwriters paid to AGM the purchase price with an amount of cash on hand
equal to $964,000 and the remainder of the purchase price with the proceeds of
loans under a separate loan agreement, pursuant to which AGM has agreed to
provide certain loans and other financial accommodations pursuant to the terms
of the loan agreement, including, without limitation, Term Loans in an amount
equal to $14,719,897 and an Inventory Loan Advance in an amount equal to
$673,479.
 
 Auto
Underwriters filed litigation against AGM in December 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, Auto
Underwriters alleges that AGM failed to pay Auto Underwriters 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.
   NOTE 9
- LITIGATION




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.


7





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


8


predict
which factors, if any, will arise.  In addition, the Company cannot
assess the impact of each factor on the Company’s business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.





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
vehicles by our four automotive sales locations 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
operations in Houston purchase, recondition, sell and finance used vehicles
under the name Affordable Cars & Trucks.  These four stores 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.





Escrow,
Servicing and Consignment Sale Agreement





On
July 20, 2007, we entered into both a Loan and Security Agreement and
also a Escrow, Servicing and Consignment Sale Agreement with AGM, LLC, as
Administrative Agent and Initial Lender. The
Loan and Security Agreement provided for a series of term loans to Auto
Underwriters Portfolio Acquisition Company, Inc., totaling an amount equal to
$14,719,987 which was used to purchase automobile inventory and automobile loans
from the seller/lender, AGM, LLC.  Although executed, the documents
were 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
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.


9


Results
of Operations




Three
months ended December 31, 2007 compared to the three months ended December 31,
2006





Revenues





Total
sales revenues increased to $2,280,153 for the three month period ended December
31, 2007 compared to the corresponding period ended December 31, 2006 of
$1,808,605, principally as a result of the Company using its newly acquired
floor plan facility through Got Cars and the direct inventory purchasing program
with area wholesalers.  The increased inventory has resulted in
increased sales.





Cost
of Sales





Cost of sales as a percentage of
automobile and light truck sales was 59% or $1,355,358 for the three month
period ended December 31, 2007 compared to 53.8% or $972,743 for the
corresponding prior period ended December 31, 2006.The cost of sales
decreased primarily as a result of better inventory purchases from the auctions
and from wholesalers via our floor plan. Our buyer was able to purchase more
competitively priced inventory, better condition inventory which directly
reduced the reconditioning cost of the inventory prior to sale and subsequent
service of the vehicle after the sale.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses decreased by $33,239 for the three month
period ended December 31, 2007 compared to the corresponding prior
period.  Selling, general and administrative expenses as a percentage
of total income was 47.2% for the three month period ending December 31, 2007
compared to 58.4 % for the same corresponding prior period.





Interest
Expense





Interest
expense increased to $548,644 for the three month period ended December 31, 2007
as compared to $368,574 for the corresponding prior period. The increase in
interest expense was primarily due to the increase in borrowings.





Six
months ended December 31, 2007 compared to the six months ended December 31,
2006





Revenues





Total
sales revenues increased to $6,152,006 for the six month period ended December
31, 2007 compared to $2,671,595 for the corresponding prior period principally
as a result of a the use of the floor plan and the direct wholesale inventory
purchase program which allowed the Company to purchase more vehicles for
sale.





Cost of sales as a percentage of
automobile and light truck sales was 68.7% or $4,226,650 for the six month
period ended December 31, 2007. During the corresponding period ended
December 31, 2006, cost of sales as a percentage of automobile and light truck
sales was 57.6% or $1,539,140.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses increased by $665,348 for the six month
period ended December 31, 2007 compared to the corresponding period ended
December 31, 2006. This increase was due primarily to increased sales
volume and staffing.





Interest
Expense – Warrants





In
2006, the 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, other, increased to $1,471,416 for the six month period ended
December 31, 2007 as compared to $1,317,377 for the corresponding period
ended December 31, 2006. The increase in interest expense was primarily due
to the increase in borrowings as we financed our direct and indirect lending
operations.





10


Liquidity
and Capital Resources





The
following table summarizes our liquidity and capital resources for the six
months ended December 31, 2007 and 2006.





Six
      Months Ended
              December
      31,2007
            
            
            
            2006Operating
      activities:Net
      loss
            
            $
            (2,857,615
            )
            
            $
            (2,463,970
            )Imputed
      interest
            
            
            17,688
            
            
            
            20,030Stock
      compensation expense
            
            
            
            
            
            
            -Depreciation
      and amortization
            
            
            572,359
            
            
            
            200,191Warrant
      expense
            
            
            -
            
            
            
            561,045Bad
      debt expense
            
            
            -
            
            
            
            35,000Changes
      in finance receivables, net:
            
            
            (416,161
            )
            
            
            1,091,048Changes
      in operating assets and liabilities:
            
            
            483,759
            
            
            
            (384,435
            )Net
      cash used in operating activities
            
            
            (2,199,970
            )
            
            
            (941,091
            )Cash
      used in investing activities:
            
            
            (964,000
            )
            
            
            (11,380
            )Cash
      provided by financing activities:
            
            
            2,052,730
            
            
            
            1,630,833Increase
      (decrease) in cash
            
            $
            (1,111,240
            )
            
            $
            (678,362
            )





The
Company purchases vehicles from auctions and wholesalers.  After these
vehicles are reconditioned, they are placed at our stores and
sold.  Our inventory is primarily financed by two floor plan financing
facilities totaling $1,100,000.  When a vehicle is sold, an
installment contract is executed with our customer and pledged as collateral on
our line of credit.  The funds that are advanced on the installment
contract is used to pay off the floor plan financing for the particular vehicle
and the title is transferred into our customers name with the Company and our
lender as lien holders.





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 our 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 secured and unsecured notes.





We
believe we will be able to continue the line of credit with our existing lender
as well as continuing the search for additional lines of credit from other
financial institutions.  However, we cannot provide any assurance for
the success of acquiring an additional line of credit.  If necessary,
we could issue additional subordinated debt, or sell our existing finance
receivable portfolio at a discount to third party finance companies to meet our
short-term funding needs.  However, we cannot provide any assurance
for the success of acquiring any additional working capital from these potential
funding sources.   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/A for the year ended June 30,
2007.





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.


11


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 of the annual or
interim financial statements will not be prevented or detected.





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, 2007, 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 will be
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, 2007 that materially
affected or are reasonably likely to materially affect, our internal control
over financial reporting.




12


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, 2007, the
Company’s books reflect a payable due to Gunnels Interests, Inc. of
approximately $352,000. 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
quarter ended December 31, 2007.  Other than as described below,
during the quarter ended December 31, 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.


13


During
the quarter ended December 31, 2007, Auto Underwriters sold an aggregate of
151,600 units of the Company’s securities (the “Units”) in a private placement
to a limited number of accredited investors for gross proceeds of $758,000. 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 and one warrant to
purchase one share of the Company’s 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 placement agent (the “Placement Agent”) 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 the
offering.  The Placement Agent will also receive (i) a cash commission
equal to 7% of the proceeds received by the Company upon exercise of any
Investor Warrants and (ii) upon final closing of the offering, will be issued a
warrant to purchase a number of shares of common stock equal to 14% of the gross
proceeds received by the Company in the offering, exercisable for a period of 5
years at an exercise price of $2.50 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.





ITEM 3.    DEFAULT UPON SENIOR
SECURITIES





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





ITEM 5.    OTHER INFORMATION





Not
Applicable





ITEM 6.    EXHIBITS





31.1
            Principal
      Executive Officer Certification under Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            Principal
      Financial Officer Certification under Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            Principal
      Executive Officer Certification under Section 906 of the Sarbanes-Oxley
      Act of 200232.2
            Principal
      Financial Officer Certification under Section 906 of the Sarbanes-Oxley
      Act of 2002





14




SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant 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 20, 2008






15