UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549-1004

                                    FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
                    For the fiscal year ended March 31, 2006
                                              --------------

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
                for the transition period from _______ to _______

                           Commission File No. 0-13084


                               [GRAPHIC OMITTED]

                             WARRANTECH CORPORATION
             (Exact name of registrant as specified in its charter)

                Nevada                                  13-3178732
    -------------------------------         ---------------------------------
    (State or other jurisdiction of         (IRS Employer Identification No.)
     incorporation or organization

      2200 Highway 121, Suite 100 Bedford, Texas               76021
      ------------------------------------------             ----------
       (Address of Principal Executive Offices)              (Zip Code)

        Registrant's telephone number, including area code (800) 544-9510
                                                           --------------
           Securities registered pursuant to Section 12(b) of the Act:

       Title of Each Class           Name of Each Exchange on Which Registered
  ----------------------------       -----------------------------------------
  Common Stock $.007 par value                         None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.007 par value
--------------------------------------------------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ ]

     The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of September 30, 2005, based upon the
closing price of the registrant's common stock on September 30, 2005, was
$7,269,495 (For purposes of calculating the preceding amount only, all directors
and executive officers of the registrant are assumed to be affiliates.)

     The number of shares outstanding of the registrant's common stock as of May
31, 2006 was 13,967,586.

                       Documents Incorporated By Reference
<PAGE>

         Part III - Portions of the registrant's proxy statement for its 2006
Annual Meeting of Shareholders, are incorporated by reference into Part III of
this report

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                                TABLE OF CONTENTS
                                -----------------
                                                                        Page No.
                                                                        --------
                                     PART I
Item 1.    Business..................................................       3
               General...............................................       3
               Sales and Marketing...................................       7
               Significant Customers.................................       8
               Competition...........................................       8
               Contract Obligors.....................................       8
               Insurance Coverage....................................       9
               Federal and State Regulation..........................      10
               Intellectual Property.................................      11
               Employees.............................................      11
Item 2.    Properties................................................      11
Item 3.    Legal Proceedings.........................................      12
Item 4.    Submission of Matters to a Vote of Security Holders.......      12

                                     PART II
Item 5.    Market of the Warrantech's Common Equity and Related
           Stockholder Matters  .....................................      13
Item 6.    Selected Financial Data...................................      14
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.................................      15
               SEC Review of Company's Filings.......................      16
               Butler Contracts......................................      16
               Dealer-Obligor Contracts..............................      17
               Insurer in Liquidation................................      18
               Butler Financial Solutions, LLC.......................      19
               Significant Customer in Bankruptcy....................      20
               Insurance Relationships...............................      21
               Results of Operations.................................      21
               Agreements............................................      24
               Liquidity and Capital Resources.......................      26
               Loans to Directors....................................      27
               Commitments...........................................      28
               Subsequent Events - Merger............................      28
               Critical Accounting Policies..........................      30
Item 7A.   Qualitative and Quantitative Disclosures About Market Risk      32
Item 8.    Financial Statements and Supplementary Data...............      34
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosures.................................      67
Item 9A.   Controls and Procedures...................................      67
Item 9B.   Other Information.........................................      67

                                    PART III
Item 10.   Directors and Executive Officers of the Registrant .......      68
Item 11.   Executive Compensation....................................      70
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management................................................      73
Item 13.   Certain Relationships and Related Transactions............      74
Item 14.   Principle Accounting Fees and Services....................      75

                                     PART IV
Item 15.   Exhibits, Financial Statement Schedules and Reports on
           Form 8-K..................................................      76
           Index to Exhibits.........................................      77
           Signatures................................................      81
           Certifications of the CEO and CFO.........................      83

           Index to Consolidated Financial Statements................      34
           Financial Statement Schedules.............................      67

                                       2
<PAGE>

                                     PART I
                                     ------


Item 1.           Business
                  --------

General
-------

     Warrantech Corporation, a Nevada corporation, and its subsidiaries
(collectively, "Warrantech" or the "Company") maintains executive offices and
operating facilities at 2200 Highway 121 Suite 100 Bedford, Texas 76021, where
the telephone number is (800) 544-9510. Prior to February 28, 2005 and since its
inception, the Company had been incorporated in Delaware.

     Warrantech, through its wholly owned subsidiaries, designs, develops,
markets and acts as a third party administrator for programs ("Programs") for
service contracts, limited warranties and replacement plans (collectively,
"Plans"). The Company provides these services to a variety of clients in
selected industries. On a Program by Program basis in the Automotive, Consumer
Products and Direct segments, the Company contracts with highly rated
independent insurance companies or risk retention groups to provide coverage for
the Plans to be sold or issued under the Programs. This coverage obligates the
insurer to pay the cost of repairs or replacements of the products covered by
the Plans. In the Home segment, the Company is self insured.

     Plans issued under the Company's Programs provide consumers with expanded
and/or extended product breakdown coverage for a specified period of time
(and/or mileage in the case of automobiles and recreational vehicles), similar
to that provided by manufacturers under the terms of their product warranties.
Coverage generally provides for the repair or replacement of the product, or a
component thereof, in the event of its failure. The Company's Programs provide
clients with the opportunity for increased revenue and income without incurring
the costs and responsibilities of operating their own programs.

     The Plans for the Automotive, Consumer Products and Direct segments
generally have terms extending up to one hundred twenty (120) months or, in the
case of mileage based Plans, up to one hundred fifty thousand (150,000) miles.
All repairs and/or replacements required under the Plans are performed by
independent third party repair facilities or dealers. The cost of any repair or
replacement under these plans is generally paid by the insurance company.
Notwithstanding the forgoing, however, certain Plans were insured by Reliance
Insurance Company ("Reliance") which was placed in liquidation in 2002. For a
more detailed discussion of claims handling under Plans insured by Reliance, see
"Management's Discussion and Analysis-Insurer in Liquidation" below. Plans for
the Home segment are generally for twelve months. The cost of any repair or
replacement for plans in the Home segment is paid for by the Company. For a more
detailed discussion of the responsibilities of obligors and insurers under the
Plans, see "Contract Obligors" and "Insurance" below.

     Essential to the Company's success is its ability to capture, maintain,
track and analyze all relevant information regarding its Plans. The Company has
internally developed, and continues to develop and operate proprietary computer
software that allows it to maintain millions of Plans. The software includes
custom designed relational databases with interactive capabilities. The
Company's computer systems provide ample capacity and processing speed for its
current and future requirements. Additionally, Warrantech's web-enabled
applications such as VSCOnline(R) and WCPSOnline(R) facilitate information
exchange with outside businesses such as clients and service centers via the
Internet. These applications optimize the data acquisition, service processing
and claims processing functions. The software programs also allow for the
analysis of current and historical statistical data which the Company uses to
monitor its Programs and support future growth.

     Until April 2006, the Company operated in four major business segments:
Automotive, Consumer Products, Direct and International, each of which is
discussed below. Effective with April 2006, the Company ceased operations in its
International segment.

                                       3
<PAGE>

Warrantech Automotive Segment
-----------------------------

     The Company's Automotive segment designs, develops, markets and acts as a
third party administrator for vehicle service contract ("VSC") Programs and
other related automotive after-sale products, all of which enhance the dealer's
profitability from the sale of automobiles, light trucks, recreational vehicles,
personal watercraft and automotive components. These products are sold
principally by franchised and independent automobile dealers, leasing companies,
repair facilities, retail stores, financial institutions and other specialty
marketers.

     As a result of the Company's leadership in the use of advanced technology
for processing and adjudicating of claims, Warrantech has also become a supplier
of choice for several Insurance Companies for their claims runoff projects and
for providing administrative services to the provider companies of automotive
products. VSCOnline, a complete front-end business rating and processing system,
teams with VSC Claims Online to make available a totally paperless environment
for all of Warrantech Automotive's clients.

     Warrantech Automotive utilizes the services of approximately one hundred
fifty (150) independent sales representatives to call on clients to solicit
their use of the VSC Programs. At this time, VSC's are being sold in forty-nine
(49) states

     The VSC is a contract between the dealer/lessor or third party obligor
(except in California and Florida, where the contract is between Warrantech
Automotive and the vehicle purchaser/lessee) and the vehicle purchaser/lessee
that offers coverage for a term extending up to one hundred twenty (120) months
or, in the case of mileage based VSC's, up to one hundred fifty thousand
(150,000) miles. Coverage is available in the event of the failure of a broad
range of mechanical components occurring during the term of the VSC, other than
failures covered by a manufacturer's warranty.

     Although each VSC sold or issued under a Program designates an obligor that
is legally responsible for the cost of valid repairs or replacements made
thereunder, those liabilities are fully insured by an independent insurance
company that is ultimately responsible for such costs. Currently, Great American
Insurance Company ("GAIC") is the primary insurer of Warrantech Automotive's VSC
Programs. On reinsurance Programs offered to automobile dealerships and other
specialty marketers, the Company has an agreement with Heritage Warranty
Insurance Risk Retention Group, Inc. ("Heritage") and an agreement with
Automotive Underwritwers Insurance Company, Inc., a Risk Retention Group
("AUIC"). During the immediately preceding five-year period, a portion of the
Warrantech VSC Programs were insured by either Reliance (see "Management's
Discussion and Analysis - Insurer in Liquidation" below), the New Hampshire
Insurance Company or other American International Group, Inc. companies

     In 2006, 2005 and 2004 the Automotive segment received $0, $0 million and
$7.6 million, respectively in gross revenues from one significant client, which
accounted for 0%, 0% and 7% of the Automotive segment's total gross revenues,
respectively. Additionally, in 2006, 2005 and 2004 the Automotive segment
received from a second client, gross revenues of $4.9 million, $5.8 million and
$12.1 million, respectively, which accounted for 6%, 8% and 12% of the
Automotive segment's total gross revenues. Additionally, in 2006, 2005 and 2004
the Automotive segment received from a third client, gross revenues of $7.3
million, $7.1 million and $9.6 million, respectively, which accounted for 9%,
10% and 9% of the Automotive segment's total gross revenues. Additionally, in
2006, 2005 and 2004 the Automotive segment received from a fourth client, gross
revenues of $11.1 million, $7.1 million and $0, respectively, which accounted
for 14%, 10% and 0% of the Automotive segment's total gross revenues.

                                       4
<PAGE>

Warrantech Consumer Products Segment
------------------------------------

     The Company's Consumer Products segment develops, markets and administers
extended warranties and product replacement plans on household appliances,
consumer electronics, televisions, computers and home office equipment, which
are sold principally through retailers, distributors, manufacturers, utility
companies, financial institutions and other specialty marketers. Warrantech also
markets these warranties and plans directly to the ultimate consumer on behalf
of the retailer/dealer and/or the manufacturer through telemarketing and direct
mail campaigns. It also offers call center and technical computer services. The
extended warranties and product replacement plans administered by Warrantech
Consumer Products are service contracts between the purchaser and the
retailer/dealer and/or the insurance company that typically offers coverage
ranging from twelve (12) to sixty (60) months.

     The Consumer Products segment also develops, markets and administers
service contract programs in the United States and Canada covering mechanical
breakdowns of the working systems and components in homes. These programs
protect homeowners against the cost of repairs in case of a breakdown of one or
more of the major home systems including heating and air conditioning, plumbing,
electrical and built-in appliances.

     The programs marketed and administered by Warrantech Consumer Products
require that the selling dealer, distributor or manufacturer enter into an
agreement outlining the duties of each party. Those duties specifically assumed
by Warrantech Consumer Products include the development and distribution of
marketing materials, sales and motivational training, processing of service
contracts, operating a call center and the adjustment and payment of claims. It
has also entered into service center agreements with independent third party,
authorized repair facilities located throughout the United States and Canada.
These service center agreements bind the amount of reimbursement the repair
facility will receive for performance on a repair claim.

     Effective June 1, 2006 the Company entered into an agreement on consumer
products with Amtrust North America, Inc pursuant to which Amtrust will insure
any new service contracts. Insurance for service contracts issued between
February 12, 2000 until May 31, 2006 are covered by GAIC. Insurance for service
contracts issued between August 1, 1997 until February 12, 2000 are covered by
Cigna Insurance Company. On September 1, 2004, the Company began offering
one-year extended home product warranties which will not be insured by third
party insurance companies, but will be obligations solely of the Company.

     In 2006, 2005 and 2004 the Consumer Products segment received $14.7
million, $11.8 million and $9.1 million, respectively, in gross revenues from a
significant client which accounted for 42%, 32% and 29% of the segment's gross
revenues, respectively. Additionally, in 2006, 2005 and 2004 the Consumer
Products segment received from a second client, gross revenues of $4.5 million,
$3.2 million and $2.5 million, respectively, which accounted for 13%, 8% and 8%
of the Consumer Products segment's total gross revenues, respectively.
Additionally, in 2006, 2005 and 2004 the Consumer Products segment received from
a third client, gross revenues of $3.6 million, $1.7 million and $0.8 million,
respectively, which accounted for 10%, 5% and 3% of the Consumer Products
segment's total gross revenues, respectively. Additionally, in 2006, 2005 and
2004 the Consumer Products segment received from a fourth client, that did not
renew its agreement with the Company during fiscal 2005, gross revenues of $1.2
million, $3.4 million and $4.7 million, respectively, which accounted for 4%, 9%
and 15% of the Consumer Products segment's total gross revenues, respectively.
Finally, in 2006, 2005 and 2004 the Consumer Products segment received from a
fifth client, gross revenues of $3.9 million, $12.5 million and $14.6 million,
respectively, which accounted for 11%, 33% and 46% of the Consumer Products
segment's total gross revenues. In 2005, this client filed for bankruptcy. The
Company's business relationship with this Client has terminated. The Company has
extended its contracts with two of its significant clients through 2006.

                                       5
<PAGE>

Warrantech Direct Segment
-------------------------

     The Company's Direct segment, markets vehicle service contracts on
automobiles and light trucks and extended warranties and product replacement
plans on household appliances, consumer electronics, televisions, computers and
home office equipment. The vehicle service contracts and extended warranties are
sold directly to the ultimate consumer on behalf of the retailer/dealer and/or
the manufacturer through telemarketing and direct mail campaigns. It also offers
call center and technical computer services.

     The consumer product extended warranties and product replacement plans are
service contracts between the purchaser and the retailer/dealer and/or the
insurance company that typically offers coverage ranging from twelve (12) to
sixty (60) months. The VSC is a contract between the dealer/lessor or third
party obligor (except in California and Florida, where the contract is between
Warrantech Automotive and the vehicle purchaser/lessee) and the vehicle
purchaser/lessee that offers coverage for a term extending up to one hundred
twenty (120) months or, in the case of mileage based VSC's, up to one hundred
fifty thousand (150,000) miles. Coverage is available in the event of the
failure of a broad range of mechanical components occurring during the term of
the VSC, other than failures covered by a manufacturer's warranty.

     In 2006, 2005 and 2004 the Direct segment received $2.2 million, $2.0
million and $2.1 million, respectively, in gross revenues from a significant
client which accounted for 20%, 25% and 29% of the segment's gross revenues,
respectively. Additionally, in 2006, 2005 and 2004 the Direct segment received
from a second client, gross revenues of $0.7 million, $0.7 million and $1.1
million, respectively, which accounted for 7%, 10% and 15% of the Direct
segment's total gross revenues, respectively. Additionally, in 2006, 2005 and
2004 the Direct segment received from a third client, gross revenues of $0.7
million, $0.8 million and $0.7 million, respectively, which accounted for 6%,
10% and 10% of the Direct segment's total gross revenues, respectively.

Warrantech International Segment
--------------------------------

     Warrantech International designs, develops, markets and acts as a third
party administrator for many of the same Programs and services outside the
United States that Warrantech Automotive and Warrantech Consumer Products market
and administer in the United States and Canada.

     Warrantech International conducts its efforts on a direct basis and has
developed relationships with retailers and distributors throughout the
Caribbean, Central America and South America. It is currently doing business in
Puerto Rico, Guatemala, El Salvador, and until April 1, 2006 Warrantech
International was conducting business in Chile and Peru. The Company believes
its strategic alliance with Atento, a multi-national call center owned by
Spain's Grupo Telefonica, should allow Warrantech International to readily enter
markets in Latin America where Atento has existing call center operations. It is
actively pursuing leads in other Latin American markets, such as Mexico.

     The Programs administered by Warrantech International consist of Plans
between the purchaser and the retailer/dealer or the insurance company and
typically offer coverage similar to that offered by Warrantech Automotive and
Warrantech Consumer Products. Coverage is available in the event of the failure
of a broad range of mechanical components occurring during the term of the Plan,
other than failures covered by a manufacturer's warranty.

     Although a Plan sold or issued under a Program may designate an obligor,
other than the applicable insurance company, that is legally responsible for the
cost of valid repairs or replacements made thereunder, those liabilities, are
fully insured by an independent insurance company that is ultimately responsible
for such costs. Insurance coverage has been and/or continues to be provided by
Cruz del Sur in Chile, La Positiva in Peru, Universal Insurance Company and GAIC
in Puerto Rico and GAIC in Guatemala and El Salvador. Effective September 2003,
as a result of terminating its relationship with Universal Insurance Company,
the Company suspended its Automotive program in Puerto Rico. The Company is in
the process initiating a new automotive warranty plan in Puerto Rico in which
the Company will self insure automotive warranties. On June 30, 2004, the

                                       6
<PAGE>

Company terminated its policy with Cruz del Sur, its primary insurance carrier
in Chile, effective December 31, 2004. To arrange for continuity of coverage,
the Company has been issued a policy with Penta Seguros, effective with
contracts written January 1, 2005.

     Effective April 1, 2006, Warrantech International ceased operations in
Chile and Peru, resulting from various clients not renewing their contracts. The
Company recognized that it was no longer profitable to participate in the
warranty business in those countries, ceased operations and will focus its
future efforts expanding its business domestically and in Mexico. Effective June
1, 2006, Edge Company is in contractual discussions with Warrantech
International to help manage the run-off for contracts sold through April 1,
2006 in Chile and Peru. Edge Company is owned by Richard Rodriguez, former
President of Warrantech International, who is also a Company Director.

     In 2006, 2005 and 2004 the International segment received $1.4 million,
$2.9 million and $2.9 million, respectively, in gross revenues from one
significant client, that did not renew its agreement with the Company during
fiscal 2006, which accounted for 39%, 69% and 22% of the International segment's
total gross revenues, respectively. Additionally, in 2006, 2005 and 2004 the
International segment received from a second client, that did not renew its
agreement with the Company during fiscal 2005, gross revenues of $0.0 million,
$1.7 million and $1.7 million, respectively, which accounted for 0%, 22% and 22%
of the segment's gross revenues, respectively. Additionally, in 2006, 2005 and
2004 the International segment received from a third client, gross revenues of
$0.5 million, $0.4 million and $0.3 million, respectively, which accounted for
14%, 9% and 4% of the segment's gross revenues, respectively. Additionally, in
2006, 2005 and 2004 the International segment received from a fourth client,
gross revenues of $0.7 million, $0.5 million and $0.5 million, respectively,
which accounted for 20%, 12% and 7% of the segment's gross revenues,
respectively. Finally, in 2006, 2005 and 2004 the International segment received
from a sixth client, that did not renew its agreement with the Company during
fiscal 2004, gross revenues of $0, $0 and $1.0 million, respectively, which
accounted for 0%, 0% and 14% of the International segment's total gross
revenues.

Sales and Marketing
-------------------

     Each business segment is responsible for its own sales and marketing
activities. These activities are managed by the segment's own personnel. In
certain circumstances, the business segments have entered into marketing
agreements with independent organizations that solicit clients at their own
expense, and receive a commission on all Plans sold by such clients.

     The Warrantech business segments endeavor to improve Program performance
through participation in cooperative marketing programs that may be jointly
funded by Warrantech and the client or independent sales representatives.

     Training and motivational programs are an important form of the specialized
assistance provided by the Company to increase the effectiveness and
profitability of Program sales efforts. The Company also develops informational
and promotional materials and conducts informational meetings either at the
client's place of business or an offsite facility with the goal of improving
Program effectiveness. The Company also uses its modern training facility,
located at its Bedford, Texas corporate offices, to provide a variety of
training and educational programs to its internal personnel, thereby increasing
their effectiveness and efficiency.

     Warrantech also markets directly to the ultimate consumer on behalf of the
retailer and for manufacturer's programs through telemarketing and direct mail
campaigns. These direct marketing campaigns generate sales through renewals of
expiring Plans and initiating sales to customers who did not buy a Plan at the
time of product purchase.

                                       7
<PAGE>

Significant Customers
---------------------

     During the fiscal year ended March 31, 2006, the Company had one customer
which accounted for more than 10% of the Company's consolidated gross revenues.
In 2006, 2005 and 2004 gross revenues from this significant customer were $16.9
million, $13.8 million and $11.2 million, respectively, which accounted for 13%,
12% and 8% of the Company's total gross revenues, respectively.

Competition
-----------

     Although accurate information on private companies is difficult to obtain,
the Company believes it is among the ten (10) largest independent third party
administrators in the United States. All of the Company's business segments
compete with subsidiaries and/or divisions of major financial institutions and
insurance companies such as Aon and American International Group. The segments
also compete against programs offered by product manufacturers. This is
particularly true for the Automotive segment which competes against VSC programs
offered by major manufacturers such as General Motors, Ford and Daimler
Chrysler. The Company acknowledges that a number of these competitors have
significantly more employees, greater financial resources and more immediate
name recognition than the Company. It believes, however, that its broad client
base and the competitive strengths and advantages described above have allowed
it to compete effectively and will enable it to grow its business in the future.

Contract Obligors
-----------------

     Each Plan contains the name of a designated obligor that is legally
responsible for the cost of any valid claim submitted under the Plan. The
Company, however, arranges for an independent insurance company to issue a
policy on behalf of the named obligor that covers all of the obligor's
liabilities under the Plan for the Automotive and Consumer Products segments. As
a result, the insurance company is then ultimately responsible for paying the
cost of any and all valid claims submitted under these Plans. In the event,
however, that the insurance company refuses or is unable to pay a covered claim,
the designated obligor will be responsible for the payment and it will have
recourse against the insurance company or its estate (in the event of an
insolvency or liquidation) to recover the payment.

     Prior to April 1, 2000, one of the Company's subsidiaries or a
retailer/dealer would routinely be named the obligor under the Plans. Since
April 1, 2000, however, Butler Financial Services, LLC ("Butler"), a company
unrelated to Warrantech but included in the Company's financial results due to
its close transactional ties with the Company, has served as the obligor under
all Plans sold or issued under a Program in exchange for a fee payable by the
seller or issuer of the Plan. Notwithstanding the forgoing, however, a Company
subsidiary continues to act as the designated obligor for Plans sold in the
States of California and Florida due to regulatory considerations. Furthermore,
Butler has contractually assumed the liabilities of the obligor under all
pre-existing Plans in which one of the Company's subsidiaries was named as the
designated obligor. The liabilities of the designated obligor under these
pre-existing Plans were insured by an independent insurance company and, as a
result of this assumption by Butler, the coverage afforded by these insurance
policies now benefits Butler as the named obligor.

     Certain of the Plans under which Butler is the designated obligor were
insured by Reliance. The liquidation of Reliance (see "Management's Discussion
and Analysis - Insurer in Liquidation" below) has eliminated Butler's insurance
coverage under those Plans. Warrantech Automotive is the obligor, as well as the
administrator, under some of the VSC's that were insured by Reliance. As the
obligor, Warrantech Automotive is ultimately responsible for paying the valid
claims submitted under those VSC's in which Warrantech Automotive is the
designated obligor. Prior to Reliance's liquidation, Reliance paid the cost of
such covered claims under the insurance policies it provided. Subsequent to the
liquidation of Reliance, however, insurance coverage for Warrantech Automotive's
obligations under those VSC's was no longer available

                                       8
<PAGE>

     Funding to cover these uninsured claims is provided by a special surcharge,
which is payable on certain VSC's sold after November 19, 2001. This surcharge
will be paid by clients through which Reliance-insured VSC's were sold. These
funds will be used to pay valid claims submitted under VSC's previously insured
by Reliance.

     For financial reporting purposes, for the reasons stated in Footnote 2 of
the Financial Statements annexed to this Report, the Company has adopted a
policy to treat the Butler-obligor contracts as if they were contracts in which
Warrantech was the legal obligor. As a result, the Company recognizes revenues
under such contracts pursuant to FASB Technical Bulletin 90-1. The Company also
includes, as its own liabilities, liabilities of Butler relating to such
contracts. Additionally, because the Company is treating the Butler-obligor
contracts as Warrantech obligor contracts for financial purposes, the Company
excludes from its financial statements the transactions between Warrantech and
Butler. Adopting these policies for accounting reporting purposes does not alter
the legal obligations under the applicable agreements in which the Company is
not responsible for, and has not assumed, the obligations of Butler. Butler
remains legally obligated under such agreements and the service contracts in
which it is the named obligor.

     Butler is not deemed a "consolidated subsidiary" of the Company, as that
term is used in this Report, including, but not limited to, the Certifications
pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 which are
annexed to this Report. Butler's income, expenses, assets and liabilities have
not been consolidated with those of the Company. Butler is an independent entity
owned by parties unrelated to the Company and, except for the transactions
between Butler and Warrantech as described in this Report, Warrantech does not
have knowledge of, or control over, Butler's affairs or financial reporting.
Warrantech also has no knowledge of, nor has it established or evaluated,
Butler's internal controls or disclosure controls or procedures. Any reference
to "consolidated subsidiary," internal controls or disclosure controls and
procedures in this Report, including, but not limited to, the Certifications
pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 which are
annexed to this Report, do not pertain to Butler.

Insurance Coverage
------------------

     Each Plan contains the name of a designated obligor that is legally
responsible for the cost of any valid claim submitted under the Plan. The
Company, however, arranges for an independent insurance company to issue a
policy on behalf of the named obligor that covers all of the obligor's
liabilities under the Plan. As a result, the insurance company is ultimately
responsible for paying the cost of any and all valid claims submitted under the
Plan.

     For each Plan sold or issued, the insurance company is entitled to receive
a contractually fixed amount that is included in the selling price of the Plan.
Generally, this amount is collected by the retailer/dealer at the time of sale
and forwarded to the Company at contractually agreed intervals. The Company then
holds this amount until required to remit it to the insurance company at
contractually agreed intervals. The Company's obligations with respect to such
amounts are purely administrative and it acquires no rights in or to such
amounts by the performance of its obligations. The calculation of these amounts
is based upon the insurance company's actuarial analysis of claims data
collected and maintained for each type of coverage and Plan term. Once the
retailer/dealer has remitted such contractually fixed amount to the Company, the
insurer is fully liable for all valid claims submitted under the applicable
Plan, even if such contractually fixed amount is insufficient to cover the cost
of such claims.

     Currently, GAIC is the primary insurer of Warrantech Automotive's VSC
Programs. On reinsurance Programs offered to automobile dealerships and other
specialty marketers, the Company also has an agreement with Heritage, a risk
retention group that is not rated by any nationally recognized rating agency;
Automotive Underwriters Insurance Company, Inc., another non rated risk
retention group, Capital Assurance Risk Retention Group, another non rated risk
retention group, Western Insurance and American Resources Insurance Company,
Inc., a B rated risk retention group. One or more reinsurance companies,
contracted by Heritage, participate in this Program as well. During the
immediately preceding five-year period, portions of the Warrantech VSC Programs

                                       9
<PAGE>

were insured by Reliance (see "Management's Discussion and Analysis - Insurer in
Liquidation" below), the New Hampshire Insurance Company and other member
companies of American International Group, Inc. ("AIG").

     GAIC also insured Plans issued under Programs marketed and administered by
Warrantech Consumer Products after February 12, 2000 until May 31, 2006. During
the immediately preceding five-year period, insurance for Plans issued under
such Programs was provided by Reliance (see "Management's Discussion and
Analysis - Insurer in Liquidation" below) and CIGNA Insurance Company. Effective
June 1, 2006 the Company entered into an agreement on consumer products with
Amtrust North America, Inc pursuant to which Amtrust will insure any new service
contracts.

     Except as otherwise noted herein, current insurance coverage is provided by
highly rated independent insurance companies. As noted above, in the United
States and Canada providers include GAIC Amtrust and ARIC which are rated A
(Excellent) and Heritage and AUIC which are unrated risk retention groups.
Certain Programs have been or are currently insured by (i) New Hampshire
Insurance Company and/or other AIG member companies and Tokio Marine & Fire
Insurance Company, each of which is rated A++ (Superior) and (ii) CIGNA
Insurance Company (acquired by ACE Insurance Company) which is rated A
(Excellent). Internationally, insurance coverage was provided by Universal
Insurance Company in Puerto Rico on non-automotive programs through August 2004,
rated A - (Excellent), ING beginning January 1, 2005 and Cruz del Sur prior to
January 1, 2005 in Chile, and La Positiva in Peru. All ratings for the United
States, Canada and Puerto Rico are made by A.M. Best Company. The Home warranty
program is self insured by the Company.

     Agreements between the Company and the insurers may contain profit-sharing
features that permit the Company to share in underwriting profits earned under
the Programs. The amounts to be received, if any, are determined in accordance
with certain specified formulas based upon the type of program and the policy
year. Certain of these agreements require interim calculations and distributions
for various Programs, with final calculations being made as Plan terms expire.
The Company recognized $0, $41,920 and $173,610 in profit sharing through its
International segment in the fiscal years-ended March 31, 2006, 2005 and 2004,
respectively.

Federal and State Regulation
----------------------------

     The Programs designed, developed and marketed by the Company's subsidiaries
and their related operations are regulated by federal law and the statutes of a
significant number of states. The Company continually reviews all existing and
proposed statutes and regulations to ascertain their applicability to its
existing operations, as well as to new Programs that the Company is developing.

     Generally, these statutes apply to the scope of service contract coverage
and the content of the service contract or limited warranty document. Statutes
typically require specific wording that expressly states the consumer's rights
in the event of a claim, how the service contract may be canceled, and
identification of the insurance company that insures the named obligors against
the cost of valid claims submitted under the service contract.

     Insurance departments in some states have sought to interpret the consumer
product service contract, or certain specific items covered under such contract,
as a form of insurance requiring that the issuer be a duly licensed and
chartered insurance company. The Company does not believe that it or any of its
subsidiaries is an insurer and has no intention of filing the documents or
meeting the capital and surplus requirements that are necessary to obtain a
license as an insurance company.

     There are instances where the applicability of statutes and regulations to
Programs and/or compliance therewith, involve issues of interpretation. The
Company uses its best efforts including, but not limited to, consultation with
legal and regulatory professionals to comply with applicable statutes and
regulations. It cannot, however, be certain that its interpretations, if

                                       10
<PAGE>

challenged, would be upheld by a court or regulatory body. In any situation in
which the Company has been specifically notified by a regulatory body that its
methods of doing business were not in compliance with applicable laws or
regulations, the Company has taken the steps necessary to comply.

     If the Company's right to operate in a state is challenged successfully,
the Company may be required to cease operations in such state and, in certain
circumstances, financial sanctions may be imposed against the Company. These
actions, should they occur, could have an adverse impact on the Company's
operations. Within the framework of currently known statutes and regulations,
however, the Company does not believe that this is a material concern at this
time.

     In order to reduce its operating costs, the Company has reorganized its
corporate structure that involves the transfer of some of the Company's
operations from corporate entities to limited partnerships. This reorganization
had no effect on the Company or its operations other than a reduction of its
franchise tax obligations and other operating costs.

Intellectual Property
---------------------

     The Company holds numerous registered United States trademarks, the most
important of which are the "Warrantech" and its stylized "W" logo service marks.
Additional service marks are registered covering subsidiary and Program names
and descriptions such as "Repairmaster(R)," "RepairGuard(R)," "Xchange Card(R),"
"WCPSOnline(R)", "OneWorld(R)" and "VSCOnline(R)." The Company has kept, and
intends to keep, the registration for all service marks current.

     The Company has developed proprietary computer software that consists of
custom designed relational databases with interactive capabilities. Essential to
the success of the Company is its ability to maintain all relevant data
regarding the Plans administered by the Company's business segments. Development
costs associated with this proprietary software have been capitalized and are
being amortized over the expected useful life of the software.

     The Company has deployed, and continues to refine, Speech Recognition IVR
telephone applications to speed the claims process. These telephone applications
allow a caller to speak their input, such as a VIN or contract number, rather
than key the entry on their phone. Additionally, the Fast-Track Automotive
claims telephone application has the capability to establish a claim, issue a
reference number, and read back payment information to the repair facility so
the caller does not need to hold for, or speak to, a call center representative.
Both of these advances help the Company continue to provide better service to
its customers and reduce time and costs involved with handling claims while
providing the better service.

Employees
---------

     As of March 31, 2006 the Company and its subsidiaries had approximately 349
employees, a decrease of approximately 17 employees from the preceding fiscal
year. None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.


Item 2.           Properties
                  ----------

     The Company's executive office is located at 2200 Highway 121 Airport
Centre II, Bedford, Texas. The premises, consisting of approximately 67,800
square feet, is leased pursuant to a lease agreement expiring February 28, 2013,
which provides for an annual base rent of $1.2 million. These premises also
accommodate the Company's Automotive, Consumer Products, Home, International and
Direct Marketing operations.

                                       11
<PAGE>

     Warrantech International's Puerto Rico operations are located in leased
premises at 1225 Ponce de Leon Avenue, Santurce, Puerto Rico pursuant to a month
to month lease. The lease provides for annual base rent payments of $75,526 for
3,433 square feet.

     Warrantech International's Chile operations are located in leased premises
at Avenida 11 de Septembre No. 1881 Officia No. 1619 Providencia, Santiago,
Chile. On May 31, 2006 the company gave its required 60 notice of termination
regarding this office and it will close July 31, 2006. The lease provides for
annual base rent payments of $23,983 for 145 square meters.

     Warrantech International's Peru operations are located in leased premises
at Avenida Paseo de la Republica #3691 Officina No 501 San Isidro Peru.
Effective May 1, 2006 the landlord released Warrantech from any further rent as
Edge Company owned by Rick Rodriguez a director signed a new lease for the
premises. The lease provides for annual base rent payments of $6,150 for 323
square feet.

Item 3.           Legal Proceedings
                  -----------------

     Information regarding legal proceedings is set forth in Note 11 in the
Notes to Consolidated Financial Statements set forth in "Item 8. - Consolidated
Financial Statements and Supplementary Data" under the subheading "Litigation,"
which is hereby incorporated by reference.

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

     No matters were submitted to a vote of the Company's Stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
Company's fiscal year ended March 31, 2006.

                                       12
<PAGE>

                                     PART II

Item 5.           Market for Warrantech's Common Equity and Related Stockholder
                  -------------------------------------------------------------
Matters
-------

     The Company's common stock, $.007 par value per share (the "Common Stock")
trades under the symbol "WTECE.OB." Trades are reported on the Over-The-Counter
("OTC") electronic quotation service of the National Association of Securities
Dealers Market Makers.

     As of March 31, 2006, there were 13,967,568 shares of outstanding Common
Stock and approximately 828 stockholders of record. On that date, the closing
bid price for the Common Stock, as reported on the OTC was $0.41.

     Following is a summary of the price range of the Company's Common Stock
during fiscal years 2006 and 2005:

                               Fiscal 2006                  Fiscal 2005
          Quarter             High & Low Bid              High & Low Bid
       First              $ 0.69        $   0.55      $ 1.05        $   0.76
       Second             $ 0.63        $   0.45      $ 0.87        $   0.63
       Third              $ 0.60        $   0.37      $ 0.82        $   0.61
       Fourth             $ 0.45        $   0.33      $ 0.78        $   0.57

     No cash dividends have been paid to holders of Common Stock since inception
of the Company. The Company anticipates that earnings, if any, will be retained
for use in the business or for other corporate purposes and it is not
anticipated that cash dividends will be paid in the foreseeable future.

        Purchase of Equity Securities for the Twelve Months Ended March 31, 2006

           ---------------------------------------------------------------------
                                        Total
                                      Number of                       Average
                                        Shares                       Price Paid
                 Period               purchased         Cost         per Share
           ---------------------------------------------------------------------
           1/1/06 - 1/31/06                   --              --             --
           2/1/06 - 2/28/06                   --              --             --
           3/1/06 - 3/31/06            1,519,425     $ 1,161,610       $ 0.7645

                                    ----------------------------
           Total                       1,519,425     $ 1,161,610       $ 0.7645
                                    ============================

     These shares were not purchased pursuant to a publicly announced plan or
program regarding stock repurchases in as much as the Company has no such plan
or program. The shares were tendered by stockholders in conjunction with debt
obligations due to the company that were settled, in whole or in part, in
Company common stock.

                                       13
<PAGE>

Item 6.           Selected Financial Data
                  -----------------------

     The Selected Financial Data should be read in conjunction with the
consolidated financial statements and related notes as of and for the years
ended March 31, 2006, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                    For The Years Ended March 31,
                                           ---------------------------------------------------------------------------------
                                                2006             2005             2004             2003             2002
                                           -------------    -------------    -------------    -------------    -------------
<S>                                        <C>              <C>              <C>              <C>              <C>
Gross Revenues                             $ 123,294,650    $ 113,904,402    $ 144,329,442    $ 143,843,963    $ 114,984,335
Net increase in deferred revenues             (1,566,054)      (2,076,499)     (29,270,703)     (48,517,264)     (23,379,415)
                                           -------------    -------------    -------------    -------------    -------------
Net revenues                               $ 121,728,596    $ 111,827,903    $ 115,058,739    $  95,326,699    $  91,604,920
                                           =============    =============    =============    =============    =============
Gross Profit                               $  25,337,564    $  27,280,530    $  29,818,392    $  34,237,400    $  26,302,317
                                           =============    =============    =============    =============    =============
Loss from operations                       ($  2,236,879)   ($  1,967,778)   ($    552,035)   $   1,265,202    ($ 16,691,659)
                                           =============    =============    =============    =============    =============

Discontinued operations, net of tax:
Income from discontinued
  operations (loss)                        ($    888,778)   ($  1,640,014)          35,664          201,690          177,955

  Net income per basic share               ($       0.20)   ($       0.23)   ($       0.03)   $        0.10    ($       1.08)
                                           =============    =============    =============    =============    =============

Basic income per share data:
  Income per share from
      continuing operations                ($       0.14)   ($       0.13)   ($       0.03)   $        0.08    ($       1.09)
  Income (loss) per share from
      discontinued operations              ($       0.06)   ($       0.10)   $         0.0    $        0.02    $        0.01
                                           -------------    -------------    -------------    -------------    -------------

Weighted average common
  shares outstanding, basic                       15,383           15,396           15,345           14,668           15,296
                                           =============    =============    =============    =============    =============

Diluted income per share data:
  Income per share from
     continuing operations                 ($       0.14)   ($       0.13)   ($       0.03)   $        0.08    ($       1.09)
  Income (loss) per share from
     discontinued operations               ($       0.06)   ($       0.10)   $         0.0    $        0.02    ($       0.01)
                                           -------------    -------------    -------------    -------------    -------------

  Net income per diluted share             ($       0.20)   ($       0.23)   ($       0.03)   $        0.10    ($       1.08)
                                           =============    =============    =============    =============    =============

Weighted average common
  shares, diluted                                 15,433           15,469           15,345           14,668           15,290
                                           =============    =============    =============    =============    =============

Cash dividend declared                              None             None             None             None             None
                                           -------------    -------------    -------------    -------------    -------------
Total assets                               $ 266,885,901    $ 258,558,766    $ 253,300,695    $ 257,270,451    $ 209,631,605
                                           =============    =============    =============    =============    =============
Long-term debt and capital lease           $     673,034    $     923,984    $     980,903    $   1,218,670    $     957,159
obligations
                                           =============    =============    =============    =============    =============

Common stockholders' (deficiency)          ($ 30,499,002)   ($ 29,609,684)   ($ 25,798,951)   ($ 25,471,901)   ($ 26,460,501)
                                           =============    =============    =============    =============    =============
</TABLE>

                                       14
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES

Item 7.           Management's Discussion and Analysis of Financial Condition
                  -----------------------------------------------------------
and Results of Operations
-------------------------

Cautionary Statement Regarding Risks and Uncertainties That May Affect Future
-----------------------------------------------------------------------------
Results
-------

         Except for the historical information contained herein, the matters
discussed below or elsewhere in this Quarterly Report on Form 10-K may contain
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those contemplated by the
forward-looking statements. The Company makes such forward-looking statements
under the provisions of the "safe harbor" section of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements reflect the Company's
views and assumptions, based on information currently available to management,
including, among other things, the Company's operating and financial performance
over recent years and its expectations about its business for the current and
future fiscal years. When used in this Quarterly Report on Form 10-K, the words
"believes," "estimates," "plans," "expects," and "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.

Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it can give no assurance that its
expectations will prove to be correct. These statements are subject to certain
risks, uncertainties and assumptions, including, but not limited to,

     o    changes in the terms or availability of insurance coverage for the
          Company's programs,
     o    regulatory or legal changes affecting the Company's business,
     o    loss of business from, or significant change in relationships with,
          any major customer,
     o    the inability of any of the insurance companies which insure the
          service contracts marketed and administered by the Company to pay
          claims under the service contracts,
     o    the termination of extended credit terms being provided by the
          Company's current insurance company,
     o    prevailing economic conditions which may significantly deteriorate,
          thereby reducing the demand for the Company's products and services,
     o    availability of technical support personnel or increases in the rate
          of turnover of such personnel, resulting from increased demand for
          such qualified personnel,
     o    the Company's ability to replace lost revenues in its Consumer
          Products or International segments,
     o    the ability to successfully identify and contract new business
          opportunities, both domestically and internationally,
     o    the ability to secure necessary capital for general operating or
          expansion purposes,
     o    the adverse outcomes of litigation,
     o    the outcome of the bankruptcy proceedings involving Ultimate
          Electronics, Inc. (discussed below),
     o    the non-payment of notes due from an officer and one former director
          of the Company in 2007, which would result in a charge against
          earnings in the period in which the event occurred,
     o    the consummation of the recently announced, proposed agreement for HIG
          to buyout the Company and the inherent risks associated if the
          purchase is not completed,
     o    the inability for recourse against the former audit firm, which ceased
          operations in 2005, and
     o    the illiquidity of the Company's stock.

Should one or more of these or any other risks or uncertainties materialize or
develop in a manner adverse to the Company, or should the Company's underlying
assumptions prove incorrect, actual results of operations, cash flows and/or the
Company's financial condition may vary materially from those anticipated,
estimated or expected.

                                       15
<PAGE>

SEC Review of the Company's Filings
-----------------------------------

         In March of 2005, the staff of the Division of Corporation Finance of
the Securities and Exchange Commission selected the Company's periodic reports
for review. The reports reviewed were the Annual Report on Form 10-K for the
fiscal year ended March 31, 2005 and the Quarterly Reports on Form 10-Q for the
periods ended June 30, 2005, September 30, 2005 and December 31, 2005. The SEC
Staff informed the Company that the purpose of the review was to assist the
Company in its compliance with applicable disclosure requirements and to enhance
the overall disclosure in the Company's reports. In the course of its review,
the SEC Staff notified the Company that the wording in the certification
documents did not conform with require wording. On April 7, 2006 the Company
subsequently revised the certification exhibits and filed an amended Form 10-K/A
with this one change.

         Additionally on May 30, 2006, the SEC Staff informed the Company that
the Annual Report on Form 10-K/A for the fiscal year ended March 31, 2005 must
be amended to reflect the risk resulting from the former audit firm's
discontinuation of business and therefore the inability of shareholders to have
recourse, if any, against the audit firm.

         In March of 2003, the staff of the Division of Corporation Finance of
the Securities and Exchange Commission selected the Company's periodic reports
for review. The reports reviewed were the Annual Report on Form 10-K for the
fiscal year ended March 31, 2002 and the Quarterly Reports on Form 10-Q for the
periods ended June 30, 2002, September 30, 2002 and December 31, 2002. The SEC
Staff informed the Company that the purpose of the review was to assist the
Company in its compliance with applicable disclosure requirements and to enhance
the overall disclosure in the Company's reports. In the course of its review,
the SEC Staff requested clarification of certain of the Company's disclosures
and items in its financial statements.

Butler Contracts
----------------

         As a result of discussions with the SEC's Division of Corporation
Finance, the Company requested guidance from the SEC's Office of the Chief
Accountant ("SEC Staff") concerning, the appropriate revenue recognition policy
which should be applied by the Company with respect to the Butler-obligor
contracts. After considering the guidance received from the SEC Staff, the
Company has restated its financial statements for the fiscal years ending on
March 31, 2001, 2002 and 2003 in order to change the method of recognizing
revenue from service contracts in which Butler is the named obligor and to give
effect to certain transactions which relate to Butler. These changes which are
reflected in Footnote 2 to the Financial Statements in this Annual Report
include the following:

         o        The Company has recognized revenues from contracts in which
                  Butler was the obligor on a straight-line basis over the life
                  of the service contracts.
         o        The Company has set up a loss reserve for the estimated cost
                  of all claims under service contracts previously insured by
                  Reliance.
         o        The Company has eliminated any contractual obligations
                  recorded with Butler.
         o        Additionally, the Company now presents line items for Gross
                  Revenue, Direct Costs and Gross Profit in its financial
                  statements. Previously, the Company had only recognized
                  revenue on a net basis.

         The Company, with the concurrence of its outside auditors, had
previously accounted for the Butler-related transactions based upon the legal
obligations of the parties and the regulatory requirements which applied to the
transactions. The changes which the Company has adopted are solely for financial
reporting purposes. Butler will remain responsible for the same obligations
under the service contracts which existed prior to the change in financial
presentation. The obligations of Butler under all service contracts sold after
July 25, 2000 were, and continue to be, assumed by an A-rated insurance carrier
which is a subsidiary of a New York Stock Exchange Company with over $19 billion
in assets. Butler also remains the licensed entity which is recognized as the
obligor under the service contracts regulated by the insurance departments in
all the states in which Butler does business.

                                       16
<PAGE>

Dealer-Obligor Contracts
------------------------

     Historically, the Company has recognized the major portion of the revenues
from the dealer-obligor contracts upon a sale to the consumer by the
dealer/retailer and has deferred a minor portion of those revenues.

     With the issuance of EITF 00-21, the Company and its accountants, with the
guidance of the SEC Staff in early 2004, have determined that, in order to
continue to recognize income under the dealer-obligor contracts in the same
manner as it has done historically, the Company must develop adequate evidence
of the fair value of the two elements of its services - the sale and structuring
of the contracts and the claims adjudication services. Without this evidence,
the Company would be required to recognize all of the income associated with the
dealer-obligor contracts over the life of the contracts. This would have the
effect of deferring to later periods the substantial portion of these revenues
which the Company has previously recognized up front. This would then have the
further effect of substantially deferring the current year's income to future
periods and may in fact cause the Company to recognize a current net loss.

     The SEC Staff offered its guidance that the Company's evidence to date has
not been sufficient to meet the standards of EITF Abstracts Issue No. 00-21
"Revenue Arrangements with Multiple Deliverables".

     Based on the SEC Staff's 2004 guidance, the Company recognizes all of the
income from the Dealer-Obligor Contracts over the life of the contracts.

     These accounting changes do not have an impact on Warrantech's cash flows
or its cash balances which the Company believes drives its business. The
deferral of revenues to future periods results in a significant negative net
worth and a corresponding increase in Deferred Income on the Balance Sheet.
However, the revenue recognition accounting change will also have a positive
effect on the results for future periods.

     Warrantech, through its wholly owned subsidiaries, designs, develops,
markets and acts as a third party administrator for programs ("Programs") for
service contracts, limited warranties and replacement plans (collectively,
"Plans"). The Company provides these services to a variety of clients in
selected industries. On a Program by Program basis in the Automotive and
Consumer Products segments, the Company contracts with highly rated independent
insurance companies or risk retention groups to provide coverage for the Plans
to be sold or issued under the Programs. This coverage obligates the insurer to
pay the cost of repairs or replacements of the products covered by the Plans. In
the Home segment, the Company is self insured.

     Plans issued under the Company's Programs provide consumers with expanded
and/or extended product breakdown coverage for a specified period of time
(and/or mileage in the case of automobiles and recreational vehicles), similar
to that provided by manufacturers under the terms of their product warranties.
Coverage generally provides for the repair or replacement of the product, or a
component thereof, in the event of its failure. The Company's Programs provide
clients with the opportunity for increased revenue and income without incurring
the costs and responsibilities of operating their own programs.

     The Plans for the Automotive and Consumer Products segments generally have
terms extending up to one hundred twenty (120) months or, in the case of mileage
based Plans, up to one hundred fifty thousand (150,000) miles. All repairs
and/or replacements required under these Plans are performed by independent
third party repair facilities or dealers. The cost of any repair or replacement
under these plans is generally paid by the insurance company. Notwithstanding
the forgoing, however, certain Plans were insured by Reliance which was placed
in liquidation in 2002. For a more detailed discussion of claims handling under

                                       17
<PAGE>

Plans insured by Reliance, see "Management's Discussion and Analysis-Insurer in
Liquidation" below. For a more detailed discussion of the responsibilities of
obligors and insurers under the Plans, see "Contract Obligors" and "Insurance"
in Item I of this Annual Report on Form 10 K. Plans for the Home segment are
generally for twelve months. The cost of any repair or replacement for plans in
the Home segment is paid for by the Company.

     The Company operates in four major business segments: Automotive, Consumer
Products, International and Direct. The Automotive segment designs, develops,
markets and acts as a third party administrator for vehicle service contract
("VSC") Programs and other related automotive after-sale products, all of which
enhance the dealer's profitability from the sale of automobiles, light trucks,
recreational vehicles, personal watercraft and automotive components. These
products are sold principally by franchised and independent automobile and
motorcycle dealers, leasing companies, repair facilities, retail stores,
financial institutions and other specialty marketers.

     The Consumer Products segment develops, markets and administers extended
warranties and product replacement plans on household appliances, consumer
electronics, televisions, computers and home office equipment, which are sold
principally through retailers, distributors, manufacturers, utility companies,
financial institutions and other specialty marketers.

     The International segment designs, develops, markets and acts as a third
party administrator for many of the same Programs and services outside the
United States that Warrantech Automotive and Warrantech Consumer Products market
and administer in the United States and Canada.

     The Direct segment markets these warranties and plans directly to the
ultimate consumer on behalf of the retailer/dealer and/or the manufacturer
through telemarketing and direct mail campaigns. It also offers call center and
technical computer services.

Insurer in Liquidation
----------------------

     During the second fiscal quarter of 2002, the Pennsylvania Insurance
Commissioner informed the Company that Reliance would be liquidated and cease
making payments on claims. The Pennsylvania Insurance Commissioner determined
that Reliance was not likely to be able to satisfy all of the claims that would
be submitted to it due to the circumstances arising out of the September 11,
2001 terrorist attacks on the World Trade Center. Reliance underwrote
approximately 48% of the automotive service contracts that were sold by
Warrantech Automotive during approximately one and one-half years ending in
November 2001. Approximately 52% of the automotive service contracts sold by
Warrantech Automotive during that period are not affected by the Reliance
liquidation. Service contracts sold before and after that period are not
affected because they are underwritten by other insurance companies.

     Warrantech Automotive was the named obligor, as well as the administrator,
under some of the vehicle service contracts insured by Reliance. As the obligor,
Warrantech Automotive would ultimately be responsible for paying for the repairs
under such contracts. Additionally, for financial reporting purposes only,
Warrantech is treated as the obligor under the service contracts in which Butler
is the named obligor. While Warrantech is not obligated to pay claims under such
service contracts, it has treated the claims obligations under the
Butler-obligor contracts, including the service contracts which were insured by
Reliance, as obligations of the Company for accounting purposes.

     Prior to Reliance's liquidation, Reliance covered the cost of the repairs
under the insurance policies it provided. Because of Reliance's liquidation,
insurance coverage for the Company's obligations under those service contracts
ceased to exist. However, a non-insurance affiliate of Reliance, Reliance
Warranty Company ("RWC"), which was not placed in liquidation, held premiums
totaling approximately $15,892,635 relating to a portion of the service
contracts in which Butler, the retailer/dealers and Warrantech Automotive were

                                       18
<PAGE>

the named obligors. The Company received $15,892,635 from RWC during the fourth
quarter of fiscal 2004, as part of a settlement for claims paid by the Company
on behalf of RWC

     Funding to cover these uninsured claims is provided by a special surcharge,
which is payable on applicable VSC's sold under a Program after November 19,
2001. This surcharge will be paid by clients through which Reliance-insured
VSC's were sold. These funds will be used to pay valid claims submitted under
VSC's previously insured by Reliance.

     To mitigate its claims liability expense resulting from Reliance's
liquidation, the Company is attempting to ascertain if any recovery is available
on Federal subsidies as a result of the terrorist attacks to the insurance
industry in general or Reliance specifically, to pay vehicle service contract
claims. If such subsidies are available, it could take years before recovery, if
any, is obtained. In February 2005, the Company also began legal proceedings for
recovery of approximately $3 million against certain state guaranty funds. In
June 2005, the Company made its first state guaranty settlement with one of the
defendants in its action. In March 2006, the Company settled with all remaining
state guaranty agencies for $996,000.

Butler Financial Services, LLC
------------------------------

     Each Plan contains the name of a designated obligor that is legally
responsible for the cost of any valid claim submitted under the Plan. The
Company, however, arranges for an independent insurance company to issue a
policy on behalf of the named obligor that covers all of the obligor's
liabilities under the Plan for the Automotive and Consumer Products segments. As
a result, the insurance company is ultimately responsible for paying the cost of
any and all valid claims submitted under the Plans. In the event, however, that
the insurance company refuses or is unable to pay a covered claim, the
designated obligor will be responsible for the payment and it will have recourse
against the insurance company or its estate (in the event of an insolvency or
liquidation) to recover the payment.

     Prior to April 1, 2000, one of the Company's subsidiaries or a
retailer/dealer would routinely be named the obligor under the Plans. Since
April 1, 2000, however, Butler, a company unrelated to Warrantech but included
in the Company's financial results due to its close transactional ties with the
Company, has served as the obligor under all Plans sold or issued under a
Program in exchange for a fee payable by the seller or issuer of the Plan.
Notwithstanding the forgoing, however, a Company subsidiary continues to act as
the designated obligor for Plans sold in the States of California and Florida
due to regulatory considerations. Furthermore, Butler has contractually assumed
the liabilities of the obligor under all pre-existing Plans in which one of the
Company's subsidiaries was named as the designated obligor. The liabilities of
the designated obligor under these pre-existing Plans were insured by an
independent insurance company and, as a result of this assumption by Butler, the
coverage afforded by these insurance policies now benefits Butler as the named
obligor.

     Certain of the Plans under which Butler is the designated obligor were
insured by Reliance. The liquidation of Reliance (see "Management's Discussion
and Analysis - Insurer in Liquidation" above) has eliminated Butler's insurance
coverage under those Plans. As the obligor, Warrantech Automotive is ultimately
responsible for paying the valid claims submitted under those VSC's in which
Warrantech Automotive is the designated obligor. Prior to Reliance's
liquidation, Reliance paid the cost of such covered claims under the insurance
policies it provided. Subsequent to the liquidation of Reliance, however,
insurance coverage for Warrantech Automotive's obligations under those VSC's was
no longer available.

     While the Company had provided Butler notice of termination of the Obligor
Agreement between the two Companies effective Oct 22, 2004, it subsequently
amended the termination notice and Butler remains the obligor on certain service
contracts.

     For financial reporting purposes, for the reasons stated in Footnote 2 of
the Financial Statements annexed to this Report, the Company has adopted a
policy to treat the Butler-obligor contracts as if they were

                                       19
<PAGE>

administrator-obligor contracts and recognizes revenues under such contracts
pursuant to TB 90-1. The Company also includes, as its own liabilities,
liabilities of Butler relating to such contracts. Additionally, because the
Company is treating the Butler-obligor contracts as Warrantech-obligor contracts
for financial purposes only, the Company eliminated the transactions between
Warrantech and Butler from its financial statements.

     Reflecting these transactions for financial reporting purposes does not
alter the legal obligations under the applicable agreements in which the Company
is not responsible for, and has not assumed, the obligations of Butler. Butler
remains legally obligated under such agreements and the service contracts in
which it is the named obligor.

     Butler is not deemed a "consolidated subsidiary" of the Company, as that
term is used in this Report, including, but not limited to, the Certifications
pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 which are
annexed to this Report. Butler's income, expenses, assets and liabilities have
not been consolidated with those of the Company. Butler is an independent entity
owned by parties unrelated to the Company and, except for the transactions
between Butler and Warrantech as described in this Report, Warrantech does not
have knowledge of, or control over, Butler's affairs or financial reporting.
Warrantech also has no knowledge of, nor has it established or evaluated,
Butler's internal controls or disclosure controls or procedures. Any reference
to "consolidated subsidiary," internal controls or disclosure controls and
procedures in this Report, including, but not limited to, the Certifications
pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 which are
annexed to this Report, do not pertain to Butler.

Significant Customer In Bankruptcy
----------------------------------

     On January 11, 2005, Ultimate Electronics, Inc. and six of its subsidiaries
("Ultimate") filed individual voluntary petitions for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. Sales to Ultimate represented 10% and 32% of the Company's and its
Consumer Products segment's total gross revenues during fiscal 2005. Pursuant to
the provisions of Chapter 11, Warrantech was obligated to honor its existing
contract with Ultimate and Ultimate continued to sell service contracts during
this period of reorganization. Ultimate has made all its payments to Warrantech
with respect to sales subsequent to January 11, 2005 ("post-petition sales)." At
the time of filing, however, Warrantech believes that Ultimate owed it
approximately $3.27 million for sales up to January 11, 2005 ("pre-petition
sales") and Warrantech has filed a "proof of claim" in this amount with the
Court. At this time, although Warrantech's proof of claim has been reviewed and
approved, Warrantech does not know what it will recover on its claim. No
provision for bad debts has been recorded as of March 31, 2006, as there are
offsetting liabilities and reserves. The Plan of Reorganization has been
approved by the Bankruptcy Court and Ultimate's creditors. Ultimate and its
advisors have reviewed filed claims and have made initial determinations
regarding preference payments and other amounts that may be recoverable from
creditors. They are now contacting those creditors who appear to have the
largest potential obligations to the bankruptcy estate in an effort to negotiate
settlements. These discussions are expected to continue for a number of months.
The first distributions to creditors could occur as early as the 3rd quarter of
calendar 2006 although they are more likely to begin during the 4th quarter of
calendar year 2006.

     In separate orders dated April 19, 2005, the Court approved actions to
close thirty (30) of Ultimate's stores and retain a liquidator to dispose of
existing inventory. The liquidator was authorized by the Court to sell
Warrantech service contracts during the liquidation period in accordance with
the terms of the existing Ultimate contract. The liquidation period has been
completed. The remaining stores were purchased by Mark Wattles, the principal
shareholder of Ultimate, through an entity named Ultimate Acquisition Partners,
L.P. ("Acquisition"). As part of the Purchase Agreement, Acquisition was given
until August 31, 2005, to decide if it wanted to assume Ultimate's contract with
Warrantech. On November 1, 2005, Acquisition notified Warrantech that it had
elected not to continue selling warranties administered by Warrantech effective
November 15, 2005. Acquisition has made all of its payments to Warrantech with
respect to its sales.

                                       20
<PAGE>

     At March 31, 2006, the Company was owed $3.7 million by Ultimate, in which
the Company has filed a proof of claim for $3.27 million with the bankruptcy
court. The remaining balance has subsequently been paid. No provision for bad
debts has been recorded with respect to Ultimate as of the fiscal year ended
March 31, 2006.

Insurance Relationships
-----------------------

     As of November 1, 2005, Great American and Warrantech mutually agreed to
modify their current arrangement to provide for a final extension of the
administration agreement through November 27, 2005. Under this extension, Great
American agreed to continue writing new business for existing clients through
December 31, 2005. This mutual agreement was based on certain changes in Great
American's strategic direction and Warrantech's resulting belief that it would
be in the best interests of Warrantech and its customers to establish new
insurance relationships. Since entering into this agreement, both parties have
acknowledged that the required transitions have taken longer than originally
anticipated. Therefore, Great American and Warrantech have verbally agreed to
several extensions of the initial deadline to allow these transitions to occur
in an orderly manner. As of the date hereof, Great American has agreed to
continue writing business for existing clients through March 12, 2006. On June
7, 2006, in conjunction with the Merger Agreement, GAIC has agreed to continue
writing new automotive business for existing clients through December 31, 2006.
Effective June 1, 2006 the Company entered into an agreement on consumer
products with Amtrust North America, Inc pursuant to which Amtrust will insure
any new service contracts.


Results of Operations
---------------------

     The following information should be read in conjunction with the
information contained in the Consolidated Financial Statements and the Notes
thereto included in "Item 8 - Financial Statements and Supplementary Data" of
this Annual Report.

                                 Gross Revenues
                                 --------------

                                            For the Years Ended March 31,
                                     ------------------------------------------
                                         2006           2005           2004
                                     ------------   ------------   ------------
         Automotive segment          $ 78,154,529   $ 69,374,933   $103,494,113
         Consumer Products segment     33,193,512     35,781,604     31,594,250
         Direct segment                10,959,404      7,988,206      7,318,032
         International segment            987,205        759,659      1,923,047
                                     ------------   ------------   ------------
         Total gross revenues        $123,294,650   $113,904,402   $144,329,442
                                     ============   ============   ============

     Gross revenues for the year ended March 31, 2006 increased $9,390,248 or 8%
over fiscal 2005. The Automotive segment reported an increase in gross revenue
during the period resulting from several new clients. The Consumer Products
segment reported a slight decrease in gross revenue as most major clients had
increased their volumes and there was an increase from home warranty revenue but
it did not fully offset the revenue lost from Ultimate Acquisition which elected
not to continue effective November 15, 2005 and Microcenter whose contract
expired June 28, 2005. Direct segment revenues continue to increase as the
segment continues to expand operations into other regions. International segment
gross revenues decreased as a result of the loss of customers. The Peru and
Chile operations were closed April 1, 2006 and the financial impact shown under
gain (loss) for discontinued operations.

     Gross revenues for the year ended March 31, 2005 decreased $30,425,040 or
21% over fiscal 2004. The Consumer Products segment reported increased gross
revenues of 13% in the year ended March 31, 2005 over 2004, while the Automotive
segment reported a decrease in gross revenues of 33%, during the same period.
The decrease in gross revenues in the Automotive segment was due to the downturn
in sales of new cars and a reduction in volume arising from premium rate

                                       21
<PAGE>

increases. The increase in the Consumer Products segment was due to the opening
of additional stores by one of the Company's top dealers. The International
segment decrease in gross revenues during fiscal year 2005, resulted from lower
sales volumes in Puerto Rico due to the suspension of auto warranty sales.

                                  Direct Costs
                                  ------------

                                   For the Years Ended March 31,
                            ------------------------------------------
                                2006           2005           2004
                            ------------   ------------   ------------

          Direct costs      $ 96,391,032   $ 84,547,374   $ 85,240,347
                            ============   ============   ============

     Direct costs are those costs directly related to the production and
acquisition of service contracts. These costs consist primarily of insurance
premiums and commission expenses. Direct costs for the fiscal year ended March
31, 2006 of $96,391,032 increased $11,843,658 or 14% as compared with
$84,547,374 during the fiscal year ended March 31, 2005.

     Direct costs for the fiscal year ended March 31, 2005 of $84,547,374,
decreased $692,973 or 10% as compared with $85,240,347 during the fiscal year
ended March 31, 2004.
<TABLE>
<CAPTION>

                                      SG&A
                                      ----

                                                             For the Years Ended March 31,
                                                      ------------------------------------------
                                                          2006           2005           2004
                                                      ------------   ------------   ------------
<S>                                                   <C>            <C>            <C>
     Service, selling and general administrative      $ 25,633,085   $ 23,971,450   $ 27,284,384
                                                      ============   ============   ============
</TABLE>

     Service, selling and general and administrative expenses ("SG&A") for 2006
increased $1,661,635 or 7% compared to 2005. Legal expenses decreased $244,346
for the year ended March 31, 2006 compared to 2005, primarily due to legal costs
recovered from the state guaranty funds. Employee costs increased $245,617 from
$16,381,966 in fiscal 2005 to $16,627,583 for the year ended March 31, 2005,
primarily due to the addition of sales personnel in the Home segment. Travel and
Entertainment also increased $204,850 from $956,115 in 2005 to $1,160,965 in
2006 as a result of the addition of sales personnel in the Home segment. Lastly,
sales related costs increased $282,863 from $935,676 in 2005 to $1,218,539 in
2006 mainly as a result of the addition of sales personnel in the Home segment.

     Service, selling and general and administrative expenses ("SG&A") for 2005
decreased $3,312,934 or 12% compared to 2004. Legal expenses increased $369,750
for the year ended March 31, 2005 compared to 2004, primarily due to legal costs
associated with the SEC review in early 2005. Employee costs decreased
$1,461,171 from $17,843,137 in fiscal 2004 to $16,381,966 for the year ended
March 31, 2005, primarily due to the deferral of employee sales related
compensation to future years. Rent and related costs expense decreased $528,720
from $2,174,973 for the year ended March 31, 2004 to $1,646,253 for the year
ended March 31, 2005, reflecting lower deferred rent charges as a result of the
Company's move to its new corporate headquarters in Bedford, Texas.

                          Depreciation and amortization
                          -----------------------------

                                             For the Years Ended March 31,
                                      ------------------------------------------
                                          2006           2005           2004
                                      ------------   ------------   ------------

     Depreciation and amortization    $  1,619,941   $  2,537,117   $  3,268,593
                                      ============   ============   ============

     Depreciation and amortization expenses were reduced by $917,176 or 36%
during 2006 compared to 2005 and by $730,634 or 22% during 2005 compared to
2004. The decrease in depreciation and amortization is the result of the
Company's assets maturing and a reduced requirement for capital expenditures for
the past few years.

                                       22
<PAGE>

                             Provision for bad debts
                             -----------------------

                                         For the Years Ended March 31,
                                  ------------------------------------------
                                      2006           2005           2004
                                  ------------   ------------   ------------

     Provision for bad debts      $  1,098,222   $  4,045,271   $    590,000
                                  ============   ============   ============


     Provision for bad debts decreased $2,947,049 during the fiscal year 2006.
As a result of a negotiated settlement with the estate of Jeff White, former
Company director, for the repayment of his outstanding loan to the Company, the
Company forgave $1,098,222 of the debt. Provision for bad debts increased
$3,455,271 during the fiscal year 2005.

     During fiscal year ending March 31, 2005 and March 31, 2004, the Company
incurred $1,865,399 and $1,853,555, respectively, in legal expenses related to
the Lloyd's litigation. The Company, in anticipation of receiving reimbursement
for these expenses from its insurance company under a professional liability
insurance policy, deferred the legal fees. In January 2005, as a result of a
summary judgment, the court ruled that the insurance company was not responsible
for payment of the Company's legal costs. The Company has appealed the court's
decision. As a result of the lower court's ruling, the Company has provided for
this potential bad debt of $3,718,954 during the year ended March 31, 2005.

                                  Other Income
                                  ------------
<TABLE>
<CAPTION>
                                                   For the Years Ended March 31,
                                           --------------------------------------------
                                               2006            2005            2004
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
      Interest and dividend income         $    547,989    $    581,406    $    600,649
      Interest expense                       (1,136,069)       (586,914)       (690,019)
      Gain (loss) on sale of assets              (2,746)            635           1,195
      Credit card usage rebate                  899,934          74,590         541,345
      Miscellaneous income                      (38,043)   $    857,841         112,753
                                           ------------    ------------    ------------
            Total other income             $    309,108    $    783,270    $    453,170
                                           ============    ============    ============
</TABLE>

     Other income for 2006 decreased $576,776 compared to 2005, an increase in
interest expense due to the Company's extended payment terms for its insurance
premium payable to Great American.

     Other income for 2005 increased $281,918 or 50% compared to 2004, primarily
due to higher rebates from usage by the Company of its credit card transactions.

                     Gain (Loss) for Discontinued Operations
                     ---------------------------------------

     On April 1, 2006 the Company closed its operations in Peru and Chile as
several customers did not renew their agreements. These countries showed a loss
of $888,778 and $1,640,014 for March 31, 2006 and 2005, respectively, and a gain
of $35,664 for the fiscal year ended March 31, 2004.

                                       23
<PAGE>

     The net deferred tax asset as of March 31, 2006, 2005 and 2004 contained a
benefit of $1,121,051, $725,544, and $137,456, respectively, related to foreign
losses. Management does not believe the amount of this benefit is more likely
than not to be realized. Accordingly, management has reserved the amount of this
benefit.

                              Comprehensive Income
                              --------------------

<TABLE>
<CAPTION>
                                                             For the Years Ended March 31,
                                                     --------------------------------------------
                                                         2006            2005            2004
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>
     Net income (loss)                               ($ 3,125,657)   ($ 3,607,792)   ($   516,371)
     Other comprehensive income (loss), net of tax
        Unrealized gain (loss) on investments               4,489          (5,254)        (17,083)
        Foreign currency translation adjustments           64,212          86,909         364,858
                                                     ------------    ------------    ------------
     Comprehensive income (loss)                     ($ 3,056,956)   ($ 3,526,137)   ($   168,596)
                                                     ============    ============    ============

     Comprehensive income (loss) per share:          ($      0.20)   ($      0.23)   ($      0.01)
                                                     ============    ============    ============
</TABLE>

     Other comprehensive income for the year ended 2006 was materially flat
compared to the year ended March 31, 2005. Gains from foreign currency
translation adjustments decreased $277,949 for the year ended March 31, 2005
compared to 2004 and foreign currency translation adjustments gains were
$364,858 for the year-ended March 31, 2004 compared to losses of $158,659 for
2003, primarily due to Peru and Chile foreign currency translation fluctuations.

Agreements
----------

     The Company entered into agreements with Butler and GAIC to arrange for the
coverage of claims filed under the service contracts previously insured by
Reliance. Under these agreements, Butler agreed to assume all the obligations to
pay the claims under the service contracts which were covered by the premiums
being held by RWC. The Company executed an agreement with GAIC that provides the
Company with extended payment terms and a $3 million line of credit ("GAIC
Agreement"). All of the Company's obligations to GAIC pursuant to the GAIC
Agreement are secured by all of the Company Automotive and Consumer Products
segment's accounts receivable, which were $23,537,597 and $19,118,161 at March
31, 2006 and 2005, respectively. Further, GAIC received options to purchase up
to 1,650,000 shares of Warrantech's common stock at an exercise price of $1.00
per share subject to certain adjustments. In the event that GAIC exercises all
of these options, it would own approximately 11.8% of the Company's outstanding
shares, net of shares held in the treasury.

     Under an agreement between Butler and RWC that was finalized in the fourth
quarter of 2004, $15,892,635 of funds held by RWC were remitted to the Company
in repayment of the money which the Company had advanced to pay claims on
certain service contracts that had been insured by Reliance and its affiliates.
The Company agreed, as a condition of RWC remitting the $15,892,635, to
guarantee certain indemnification obligations of Butler under its agreement with
Reliance.

     Funding to cover the uninsured claims is provided by a special surcharge,
which is payable on applicable VSC's sold under a Program after November 19,
2001. This surcharge will be paid by clients through which Reliance-insured
VSC's were sold. These funds will be used to pay valid claims submitted under
VSC's previously insured by Reliance.

                                       24
<PAGE>

     During the years ended March 31, 2006, 2005, 2004, 2003 and 2002, the
Company paid $1,303,782, $4,727,643, $9,262,407, $10,959,364 and $5,770,999,
respectively, in claims related to Reliance obligations. Remaining amounts are
expected to be paid out as set forth in the following table.

<TABLE>
<CAPTION>
                                                              Expected Payment Date
                             ----------------------------------------------------------------------------------------
                                2007         2008         2009          2010         2011     Thereafter     Total
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                          <C>          <C>          <C>          <C>          <C>          <C>          <C>
     Claims loss liability   $1,563,951   $2,290,770   $   16,863   $       --   $       --   $       --   $3,871,584
</TABLE>

                                       25
<PAGE>

Liquidity and Capital Resources
-------------------------------

     As of March 31, 2006, total cash and short-term investments totaled
$5,064,089, a decrease of $966,003 or 16% from $6,030,092 at March 31, 2005.
During the fiscal year ended March 31, 2006, the Company used net cash from
operations totaling $866,210, compared to generating net cash from operations of
$280,170 for the fiscal year ended March 31, 2005. The change in net cash from
operations is due to an increase in insurance premiums payable, mainly because
of the increase in revenue. The negative change in its working capital from a
negative $15.4 million at March 31, 2005 to a negative $17.1 million at March
31, 2006 was due primarily due to an increase in premium payable. During fiscal
year 2006, the Company increased its accounts receivable by $4.7 million as a
result of higher sales from its automotive business. The Company offset the use
of those funds with a $6.0 million increase in its insurance premiums payable
and $1.7 million increase in its accounts and commissions payable.

     The Company believes that it will have sufficient funds to finance its
current operations for at least the next twelve months from internally generated
funds and from extended terms and the $3 million line of credit from Great
American Insurance Company ("GAIC"). Additional potential sources of liquidity
include the possibility of potential reduced litigation expenditures in the
event of either a successful appeal pending in the 5th circuit regarding the
LLoyds Underwriters litigation, described in the "Legal Proceedings" section of
this Report ("Lloyds Matter") or a successful appeal also pending in the 5th
circuit regarding Steadfast Insurance Company's defense in the Lloyds Matter.
Furthermore, the merger (see: Merger Agreement), if approved, will positively
impact the Company's active search for additional lines of credit to fund
working capital. The Company is aggressively pursuing new business domestically
to fund future working capital. The Company plans to continue to contain its
SG&A costs and utilize technologies for operational efficiencies to further
enhance both its operating income and cash flows from operating activities.

     With the loss of several major customers in the Consumer Products segment,
revenues in the Consumer Product and Direct segments are expected to continue to
remain flat compared to the previous year. The Consumer Products segment expects
to replace a portion of its business by the end of the fiscal year and continues
to expand operations in its Home warranty business. Losses in the Company's
International operations should be significantly reduced with the closing of
operations in South America and the commencement of operations in Mexico with
minimal SG&A costs. The Automotive segment plans to restart its auto warranty
operations in Puerto Rico during the 2nd fiscal quarter. Additionally,
Automotive segment revenues are expected to continue to increase due to the
acquisition of new clients. Stable insurance premium costs have allowed the
Company's automotive warranties to be more competitive than in the previous year
and the Company has expanded into other distribution channels.

     During the fiscal year ended March 31, 2006, the Company used $562,011 in
cash in investing activities compared to the use of $239,443 in investing
activities in the prior year. This increase in use of funds of $322,568 is
primarily due to an decrease in proceeds from the sale of marketable securities.
The Company used slightly more funds from the purchase of property and equipment
during the current fiscal year. The Company has ongoing relationships with
equipment financing companies and intends to continue financing certain future
equipment needs through leasing transactions. The total amount financed through
leasing transactions during the fiscal year ended March 31, 2006 amounted to
$205,345 compared to $538,609 during the fiscal year ended March 31, 2005. At
fiscal year end 2006, the Company had $1,093,328 in debt from capital lease
obligations compared to $1,465,610 at fiscal year-end 2005.

     During the fiscal year ended March 31, 2006, the Company provided $712,371
in cash from financing activities compared to uses of ($678,754) in fiscal year
2005. The variance was primarily due to the reduction of $3,549,000 in loans by
Company directors (see: Loans to Directors) and their tendering of shares back
into treasury of $1,161,111.

                                       26
<PAGE>

     During the fiscal year ended March 31, 2006 the Company obtained 1,519,425
shares of its common stock for an aggregate amount of $1,161,611 compared to the
32,500 shares of its common stock for an aggregate of $23,956 in the fiscal year
ended March 31, 2005.

     As a result of restricted cash requirements in the State of Florida for the
Home warranty business, the Company increased its restricted cash balance by
$100,000 during fiscal year 2005.

Loans to Directors
------------------

     On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of Warrantech's
Board of Directors, exercised an aggregate of 3,000,000 of their vested options
to purchase Warrantech common stock. Promissory notes totaling $8,062,500 were
signed with interest payable over three years at an annual rate of 6%. The
promissory notes, which were with recourse and secured by the stock certificates
issued, matured July 5, 2001. The value of the collateral for the Notes, which
consists of a total of 3,040,000 shares of the Company's common stock, is
currently $1,824,000, as of May 31, 2005, based upon the market price of the
stock on that date. Under the loan documents, the Company does not have a right
to require the payors to increase the loan collateral. On March 22, 1999, Joel
San Antonio delivered an additional promissory note for $595,634, payable to the
Company, representing the amounts funded by the Company for the payroll taxes
payable by him upon the exercise of these options. The exercise of these stock
options and the anticipated tax benefit from this transaction represented
approximately $10 million.

     In February 2000, the Company agreed to restructure the loans to Mr. Tweed
and Mr. White by capitalizing the interest due and extending the loan maturity
from July 5, 2001 until January 31, 2005. Interest on the restructured loans
accrued annually at the applicable federal rate of 6.2%. Under the
restructuring, interest first became payable on the third anniversary of the
restructuring and was payable annually thereafter. In July 2002, the Company
extended the loan maturity dates until February 1, 2007 (the "loan extension").
The interest, which accrued on the notes up to the time of the loan extension,
was added to the principal of the notes. The new principal amount of Mr. Tweed's
note is $3,189,675 and of Mr. White's note is $2,912,430. The applicable federal
interest rate on the notes following the loan extension is 4.6%. Under the loan
extension, interest on the notes will accrue until February 1, 2005 and, at that
time, the accrued interest will be added to the principal of the notes.
Commencing on February 1, 2005, interest on the new principal amount of the
loans to Mssr. Tweed and White is payable annually in arrears, with the first
interest payment becoming due on February 1, 2006. On January 31, 2006, in lieu
of a cash payment for the $148,033 in interest due by Mr. Tweed, the Company
agreed to accept 211,476 shares of its Common Stock.

     In February 2000, the Company also agreed to restructure the two existing
loans to Mr. San Antonio (as restructured, the "Combined Loan"). The Combined
Loan, finalized in March 2001, was due on January 31, 2005 and accrued interest
annually at 5.2%. In July 2002, the Company extended the loan maturity date
until February 1, 2007 and the interest rate was changed to the then applicable
federal rate of 4.6%. The principal amount of Mr. San Antonio's note is
$4,165,062. Interest will be forgiven as long as Mr. San Antonio continues to be
employed by the Company. The $194,254, $194,254, 194,786 and $133,050 of
interest which accrued on the note during fiscal years 2006, 2005, 2004 and
2003, respectively has been forgiven. The interest was charged to operations as
additional compensation in the respective fiscal years the interest income was
accrued.

     Mr. White passed away on November 30, 2005. Pursuant to a promissory note
given by Mr. White to the Company in connection with his exercise of stock
options, Mr. White's estate owed the Company $3,401,799 as of February 28, 2006.
His death triggered an acceleration provision of the promissory note, which
provides that if the note is not paid within 90 days after his death (March 1,
2006), the Company is entitled to declare all amounts owed under the note due
and payable. An interest payment per the terms of the note was due on February
1, 2006. The Company's Board of Directors agreed to extend the due date of the
interest payment until Feb 28, 2006. In consideration for the note, the Estate

                                       27
<PAGE>

of Mr. White ("Estate") and the Company agreed that the Estate would transfer
$1,290,000 in cash and 1,322,048 shares of the Company's Common Stock valued at
$1,013,577 and in exchange the Company would forgive $1,098,222 of the remaining
amount of Mr. White's loan with the Company.

     The total amount of the restructured loans to Mr. Tweed and Mr. San Antonio
at March 31, 2006, including the capitalized interest of $400,556, is
$7,755,292. For a discussion and the impact on these loans based on the Merger
see : Merger Agreement.

     The total amount of the restructured loans to Mr. Tweed, Mr. White and Mr.
San Antonio at March 31, 2005, including the capitalized interest of $764,899,
is $11,032,065.

Commitments
-----------

     Set forth below is information about the Company's commitments outstanding
at March 31, 2006.

<TABLE>
<CAPTION>
                                                       Payments due by period
                            ------------------------------------------------------------------------
                                             Less than        1 - 3          3 - 5        More than
       Commitment Type          Total         1 year          Years          Years         5 years
----------------------------------------------------------------------------------------------------
<S>                         <C>            <C>            <C>            <C>            <C>
Capital lease obligations   $  1,265,021   $    513,724   $    748,101   $      3,196   $         --
Operating leases               8,952,871      1,307,236      2,599,366      2,576,818      2,469,451
Employment agreements          4,321,458      2,088,333      1,707,500        525,625             --
Claims loss liability       $  3,871,584      1,563,951      2,290,770         16,863             --
                            ------------------------------------------------------------------------
   Total commitments        $ 18,410,934   $  5,473,244   $  7,345,737   $  3,122,502   $  2,469,451
                            ========================================================================
</TABLE>

     The effect of inflation has not been significant to the Company.

Subsequent Event - Merger
-------------------------

     On June 7, 2006, the Company, entered into an Agreement and Plan of Merger
(the "Merger Agreement") with WT Acquisition Holdings, LLC, a Delaware limited
liability company ("Parent") and WT Acquisition Corp., a Nevada corporation and
direct wholly-owned subsidiary of Parent ("Merger Sub"). The Merger Agreement
contemplates that, subject to the terms and conditions of the Merger Agreement,
Merger Sub will be merged with and into the Company, with the Company continuing
after the Merger as the surviving corporation (the "Merger").

     Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), each issued and outstanding share of common stock of the
Company will be converted into the right to receive $0.75 in cash, without
interest (the "Cash Consideration"). As of the Effective Time, all shares of the
Company's common stock issued and outstanding prior to such Effective Time shall
no longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any such
shares of common stock shall cease to have any rights with respect thereto,
except the right to receive the Cash Consideration or the fair value of the
shares pursuant to the appraisal rights available under Nevada law. Each
outstanding Company stock option at the time of closing will be cancelled in the
Merger and the holder thereof shall be entitled to an amount of cash, without
interest, equal to the excess, if any, of $0.75 over the exercise price of such
stock option with respect to each share of stock issuable upon exercise of such
stock option.

     Following the recommendations of the Special Committee of disinterested
directors, the Boards of Directors of the Company and Merger Sub have, and the
Board of Managers of Parent has, approved the Merger Agreement. Completion of
the Merger is subject to customary closing conditions, including, among other
things, (i) adoption of the Merger Agreement by the Company's stockholders, (ii)
absence of any injunction prohibiting the consummation of the Merger, (iii) the
accuracy of the representations and warranties of each party, and (v) compliance
of the Company with its covenants.

                                       28
<PAGE>

     The Merger Agreement contains certain termination rights for both the
Company and Parent, and further provides that, upon termination of the Merger
Agreement under specified circumstances, the Company may be required to pay
Parent a termination fee of $1,250,000.


THE COMPANY STOCKHOLDER AGREEMENTS

         In connection with the execution of the Merger Agreement, certain of
the Company's principal stockholders holding in the aggregate 35.5% of the
Company's issued and outstanding common stock entered into stockholder voting
agreements with Parent and/or Parent and the Company (the "Company Stockholder
Agreements"), pursuant to which, among other things, such stockholders agreed to
vote their shares of common stock in favor of the Merger and against any other
acquisition proposal for a period of twelve months following termination of the
Merger Agreement. In addition, Joel San Antonio, the Company's Chairman of the
Board and Chief Executive Officer entered into an agreement with Parent and the
Company which contains the terms of the Company Stockholder Agreements, grants
an option to Parent to purchase Mr. San Antonio's shares for $0.75 per share
exercisable for a period of twelve months following termination of the Merger
Agreement, and also provides for the application of amounts paid to Mr. San
Antonio for his shares and stock options to reduce his outstanding indebtedness
to the Company, the termination of the outstanding obligations under Mr. San
Antonio's employment agreement with the Company in exchange for a cash payment
of $1,700,000 and the grant to Mr. San Antonio of a common equity award equal to
22.5% of the common equity interests in Parent. In addition, the Company is
aware of a letter agreement between Parent and Mr. San Antonio relating to (i)
the forgiveness of accrued and unpaid interest owed on Mr. San Antonio's
indebtedness to the Company through the Effective Time, (ii) the forgiveness of
approximately $600,000 of outstanding principal on such indebtedness, and the
extension of the maturity date of the promissory note, evidencing the remaining
indebtedness of approximately $1,050,000, until the second anniversary of the
closing of the Merger. William Tweed, a former director of the Company also
entered into an agreement with Parent and the Company which contains the terms
of the Company Stockholder Agreements, grants an option to Parent to purchase
Mr. Tweed's shares for $0.75 per share exercisable for a period of twelve months
following termination of the Merger Agreement, and also provides for the
application of amounts paid to Mr. Tweed for his shares to reduce his
outstanding indebtedness to the Company and the extension of the maturity date
of the promissory note evidencing the remaining indebtedness of approximately
$2,394,796, until December 31, 2013.

                                       29
<PAGE>

CONSOLIDATION AND SALE OF CERTAIN COMPANY DEBT

         In connection with the Merger, the outstanding indebtedness of the
Company and its subsidiaries to Great American Insurance Company, GAI Warranty
Company, GAI Warranty Company of Florida and GAI Warranty Company of Canada
(collectively, "GAI") through March 1, 2006 is being consolidated under a single
term promissory note between GAI, the Company and such subsidiaries (the "Term
Note"), which is secured by a first priority, continuing security interest in
and to all of the tangible and intangible assets of the Company and its
subsidiaries granted to GAI under the terms of a security agreement by and
between GAI, the Company and its subsidiaries (the "Security Agreement"). All
principal and interest under the Term Note is due and payable in 120 days. The
Term Note is in full novation of any and all other debt instruments and
obligations to repay indebtedness between GAI and the Company and its
subsidiaries through March 1, 2006. The Term Note and Security Agreement contain
customary representations and warranties, affirmative and negative covenants and
events of default.

         Contemporaneously with the execution of the Merger Agreement, GAI sold
to Wtech Holdings, LLC ("Wtech"), an affiliate of Parent, all of its rights and
obligations under the Term Note and Security Agreement, whereupon Wtech became
the primary secured lender to, and creditor of, the Company and its
subsidiaries. The Company is not a party to the agreement providing for the sale
and transfer of GAI's rights under the Term Note and the Security Agreement,
although the Company granted its consent with respect thereto.

Critical Accounting Policies
----------------------------

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Note 1 to the Company's Consolidated
Financial Statements set forth in the "Item 8. - Financial Statements and
Supplementary Data," in the Company's Annual Report on Form 10-K for the year
ended March 31, 2005, describes the significant accounting policies and methods
used in the preparation of the Consolidated Financial Statements. The following
lists some of the Company's critical accounting policies affected by judgments,
assumptions and estimates.

Revenue Recognition Policy

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Note 1 to the Company's Consolidated
Financial Statements set forth in the "Item 8. - Financial Statements and
Supplementary Data," describes the significant accounting policies and methods
used in the preparation of the Consolidated Financial Statements. The following
lists some of the Company's critical accounting policies affected by judgments,
assumptions and estimates.

     Revenue from administrator-obligor contracts is recognized in accordance
with Financial Accounting Standards Board Technical Bulletin 90-1, Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts, ("TB
90-1"). The Company recognizes such revenue over the life of the contract on a
straight-line basis. In addition the Company charges the costs of contracts to
operations over the life of the contracts on a straight-line basis.

     Historically, through June 30, 2003, the Company recognized revenues from
dealer-obligor service contracts, in which the retailer/dealer or a third party
is designated as the obligor, in direct proportion to the costs incurred in
providing the service contract programs to the Company's clients. Revenues in

                                       30
<PAGE>

amounts sufficient to meet future administrative costs and a reasonable gross
profit were deferred. With the issuance of EITF Abstracts Issue No. 00-21 (EITF
No. 00-21), "Revenue Arrangements with Multiple Deliverables", as of July 1,
2003, the Company recognizes revenue from these dealer-obligor contracts on a
straight-line basis over the life of the service contract, pursuant to Staff
Accounting Bulletin 101.

     Since Butler has been determined to be a nominally capitalized entity, all
transactions concerning Butler obligor-contracts are treated in a manner similar
to the accounting principles discussed in Financial Accounting Standards Board
Emerging Issues Task Force Topic No. D-14, "Transactions Involving
Special-Purpose Entities." The Company treats the Butler-obligor contracts as if
they were administrator-obligor contracts and recognizes revenues under such
contracts pursuant to TB 90-1. Additionally, because the Company is treating the
Butler-obligor contracts as Warrantech-obligor contracts for financial reporting
purposes only, the Company eliminated the transactions between Warrantech and
Butler from its financial statements.

     Reflecting these transactions for financial reporting purposes does not
alter the legal obligations under the applicable agreements in which the Company
is not responsible for, and has not assumed the obligations of Butler. Butler
remains legally obligated under such agreements and the service contracts in
which it is the named obligor. Butler is not deemed a "consolidated subsidiary"
of the Company, as that term is used in this Report, including, but not limited
to, the Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002 which are annexed to this Report. Butler's income, expenses, assets
and liabilities have not been consolidated with those of the Company. Butler is
an independent entity owned by parties unrelated to the Company and, except for
the transactions between Butler and Warrantech as described in this Report,
Warrantech does not have knowledge of, or control over, Butler's affairs or
financial reporting. Warrantech also has no knowledge of, nor has it established
or evaluated, Butler's internal controls or disclosure controls or procedures.
Any reference to "consolidated subsidiary," internal controls or disclosure
controls and procedures in this Report, including, but not limited to, the
Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 which are annexed to this Report, do not pertain to Butler.

     Now that the Company is required to recognize revenues from all service
contracts over the life of the service contracts, the Company believes that it
is unlikely that the Company will be able to report operating profits until at
least 2008 when the Company expects that the revenues recognized from prior
periods will begin to equal the revenue being deferred to future periods.
However, there can be no assurance that the Company will be profitable at that
time. In the meantime, the revenue recognition policies adopted by the Company
do not have an impact on the Company's cash flows which are an important measure
of the Company's financial condition and are reflected in the Statements of Cash
Flows which are part of these financial statements.

Direct Costs

     Direct costs, consisting primarily of insurance premiums and commissions,
are costs directly related to the production and acquisition of service
contracts. Effective with the application of the revenue recognition policy(s)
described above on all service contracts, the Company recognizes direct costs
according to Statement of Financial Accounting Standards No. 113 ("SFAS 113"),
"Accounting and Reporting for Reinsurance of Short-Duration and Long Duration
Contracts" which requires that insurance premium costs be ratably expensed over
the life of the service contract.


Impairment of Long-Lived Assets

     The Company assesses potential impairment of its long-lived assets, which
include its property and equipment and its identifiable intangibles such as
software development costs, goodwill and deferred charges under the guidance of
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Once
annually, or as events or circumstances indicate that an asset may be impaired,
the Company assesses potential impairment of its long-lived assets. The Company

                                       31
<PAGE>

determines impairment by measuring the undiscounted future cash flows generated
by the assets, comparing the result to the assets' carrying value and adjusting
the assets to the lower of their carrying value or fair value and charging
current operations for any measured impairment. At 2005, the Company found no
impairment to its property and equipment or its other identifiable intangibles.
At March 31, 2006 the Company provided for the impairment of its assets in Chile
and Peru for $23,464.

Income Taxes

     Deferred tax assets and liabilities are determined using enacted tax rates
for the effects of net operating losses and temporary differences between the
book and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets when appropriate to reflect the expected future
tax benefits to be realized. In determining the appropriate valuation allowance,
certain judgments are made relating to recoverability of deferred tax assets,
use of tax loss carryforwards, level of expected future taxable income and
available tax planning strategies. These judgments are routinely reviewed by
management. At March 31, 2006, the Company had deferred tax assets of
$24,376,209, net of a valuation allowance of $1,385,529.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk
             ----------------------------------------------------------

     As of March 31, 2006, the Company did not have any derivatives, debt or
hedges outstanding. Therefore, the Company was not subject to interest rate
risk. In addition, the risk of foreign currency fluctuation was and is not
material to the Company's financial position or results of operations.

     Short-term marketable securities and long-term investments are comprised of
municipal bonds which bear interest at fixed rates. Interest income from these
securities is generally affected by changes in the U.S. interest rates. The
following tables provide information about the Company's financial instruments
that are sensitive to changes in interest rates. The tables present principal
cash flows and weighted-average interest rates by expected maturity dates. All
of the investments are considered "available for sale." The resultant
differences between amortized cost and fair value, net of taxes, have been
reflected as a separate component of accumulated other comprehensive income.

     Principal amounts by expected maturity as of March 31, 2006 of marketable
securities are as follows:

<TABLE>
<CAPTION>
                                                 Expected Maturity Date
                         ---------------------------------------------------------------------------
                            2007         2008         2009         2010         2011      Thereafter  Total Costs   Fair Value
                         ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Available for sale
securities               $1,164,000   $  570,000   $       --   $       --   $       --   $       --   $1,734,000   $1,732,064

Interest rate                  1.98%         2.1%

     Principal amounts by expected maturity as of March 31, 2005 of marketable
securities are as follows:

<CAPTION>
                                                 Expected Maturity Date
                         ---------------------------------------------------------------------------
                            2006         2007         2008         2009         2010      Thereafter  Total Costs   Fair Value
                         ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Available for sale
securities               $1,425,000   $  595,000   $       --   $       --   $       --   $       --   $2,020,000   $2,043,758

Interest rate                  3.51%        4.09%
</TABLE>

                                       32
<PAGE>

The following table sets forth the carrying amounts and fair values of the
Company's other receivables at March 31, 2006.

<TABLE>
<CAPTION>
                                                 Expected Maturity Date
                         ---------------------------------------------------------------------------
                            2007         2008         2009         2010         2011      Thereafter     Total      Fair Value
                         ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Other Receivables        $1,969,008   $       --   $       --   $       --   $       --   $       --   $1,969,008   $1,969,008
    - 0% interest



The following table sets forth the carrying amounts and fair values of the
company's other receivables at March 31, 2005.

<CAPTION>
                                                 Expected Maturity Date
                         ---------------------------------------------------------------------------
                            2006         2007         2008         2009         2010      Thereafter     Total      Fair Value
                         ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Other Receivables -      $1,106,720   $       --   $       --   $       --   $       --   $       --   $1,106,720   $1,106,720
    0% interest
</TABLE>

                                       33
<PAGE>

Item 8.       Financial Statements and Supplementary Data
              -------------------------------------------


                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULES


                                                                        Page No.
                                                                        --------

Report of Independent Registered Public Accounting Firm................    35-37

Consolidated Financial Statements:
    Statements of Operations and Comprehensive Income
    For the Fiscal Years Ended March 31, 2006, 2005 and 2004...........    38

    Balance Sheets as of March 31, 2006 and 2005.......................    39-40

    Statements of Common Stockholders' Equity (Capital Deficiency)
    For the Fiscal Years Ended March 31, 2006, 2005 and 2004...........    41

    Statements of Cash Flows
    For the Fiscal Years Ended March 31, 2006, 2005 and 2004...........    42

Notes to Consolidated Financial Statements.............................    43

Consolidated Financial Statement Schedules:
Schedule VIII - Valuation and Qualifying Accounts......................    67



All other schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted or the
information is presented in the consolidated financial statements or
accompanying notes.

                                       34
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and Stockholders of
Warrantech Corporation


We have audited the accompanying consolidated balance sheet of Warrantech
Corporation and Subsidiaries as of March 31, 2006 and its related consolidated
statements of operations and comprehensive income, common stockholders equity
(capital deficiency) and cash flows for the fiscal year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.

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

The financial statements of Warrantech Corporation and Subsidiaries as of March
31 J 2005 and 2004 and for the fiscal years then end d were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated June 15, 2005.

In our opinion, the 2006 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Warrantech Corporation and Subsidiaries at March 31, 2006 and the consolidated
results of their operations and comprehensive income and their cash flows for
the fiscal year then ended, in conformity with accounting principles generally
accepted in the United States of America.

Our 2006 audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The 2006 consolidated financial statement
schedule of valuation and qualifying accounts is presented for purpose of
additional analysis and is not a required part of the basic financial
statements. Such 2006 information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic 2006 financial
statements taken as a whole.

                                          /s/ RAICH ENDE MALTER & CO. LLP

New York, New York
June 23, 2006

                                       35
<PAGE>

Information Regarding Consent of Weinick Sanders Leventhal & Co., LLP
---------------------------------------------------------------------

In its Annual Report on Form 10-K for the year ended March 31, 2005 filed with
the Securities and Exchange Commission (the "SEC") on June 15, 2005 (the
"Original Filing"), Warrantech Corporation ("the Company"), pursuant to
disclosure requirements of Item 8 included the previously issued audit report
from Weinick Sanders Leventhal & Co., LLP ("WSL") on the consolidated financial
statements of the Company for the fiscal years ended March 31, 2005, 2004 and
2003, which are covered under the WSL audit report dated June 15, 2005. The
Company is no longer able to obtain the reissued audit report covering the 2005,
2004 and 2003 consolidated financial statements of the Company because WSL is no
longer practicing public accounting. Consistent with the SEC's guidance in
paragraph 65 of AU 9508.15, in filing its Annual Report on Form 10-K for the
year ended March 31, 2006, the Company is including a previously issued audit
report of WSL and is disclosing that (a) the report is a copy of the previously
issued WSL report dated June 15, 2005 and (b) the report has not been reissued
by WSL. WSL is thus unable to consent to the incorporation by reference to its
audit report with respect to the consolidated financial statements as of and for
the fiscal years ended March 31 2005, 2004 and 2003. Under these circumstances,
Rule 437(a) under the Securities act permits the Company to file its Annual
Report on Form 10K, which is incorporated by reference into the Form 10-K,
without a written consent from WSL.

                                       36
<PAGE>

[GRAPHIC OMITTED]   WEINICK
                      SANDERS                                      1375 BROADWAY
                        LEVENTHAL & CO. LLP            NEW YORK, N.Y. 10018-7010
                    ------------------------------------------------------------
                           CERTIFIED PUBLIC ACCOUNTANTS             212-869-3333
                                                              FAX:  212-764-3060
                                                                   WWW.WSLCO.COM

                         REPORT OF INDEPENDENT AUDITORS

         To the Board of Directors and Stockholders of Warrantech Corporation

         We have audited the accompanying consolidated balance sheets of
         Warrantech Corporation and Subsidiaries as of March 31, 2005 and 2004
         and its related consolidated statements of operations and comprehensive
         income, common stockholders equity (capital deficiency) and cash flows
         for the fiscal years ended March 31, 2005, 2004 and 2003. Our audits
         also included the financial statement schedules listed in the index.
         These consolidated financial statements and schedules are the
         responsibility of the Company's management. Our responsibility is to
         express an opinion on these financial statements and schedules based on
         our audits.

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

         In our opinion, the consolidated financial statements referred to above
         present fairly, in all material respects, the consolidated financial
         position of Warrantech Corporation and Subsidiaries at March 31, 2005
         and 2004 and the consolidated results of their operations and
         comprehensive income and their cash flows for the years ended March 31,
         2005, 2004 and 2003, in conformity with accounting principles generally
         accepted in the United States of America. Also, in our opinion,' the
         related consolidated financial statement schedules, when considered in
         relation to the basic financial statements taken as a whole, present
         fairly, in all material respects, the information set forth therein.


                                  /s/ Weinick Sanders Leventhal & Co., LLP
                                  ----------------------------------------

         New York, NY
         June 15, 2005


         THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY WEINICK SANDERS
         LEVENTHAL & CO., LLP IN CONNECTION WITH WARRANTECH CORPORATION'S FILING
         ON FORM10-K FOR THE YEAR ENDED MARCH 31, 2005. THIS AUDIT REPORT HAS
         NOT BEEN REISSUED BY WEINICK SANDERS LEVENTHAL & CO., LLP IN CONNECTION
         WITH THIS FILING ON FORM 10-K.

                                       37
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                     For the Year Ended
                                                                          March 31,
                                                      --------------------------------------------------
                                                           2006              2005              2004
                                                      --------------    --------------    --------------
<S>                                                   <C>               <C>               <C>
Gross revenues                                        $  123,294,650    $  113,904,402    $  144,329,442
Net (increase) decrease in deferred revenues              -1,566,054        -2,076,499       -29,270,703
                                                      --------------    --------------    --------------
Net revenues                                             121,728,596       111,827,903       115,058,739

Direct costs                                              96,391,032        84,547,374        85,240,347
                                                      --------------    --------------    --------------
Gross Profit                                          $   25,337,564    $   27,280,529    $   29,818,392
                                                      --------------    --------------    --------------
Operating expenses
   Service, selling, and general and administrative       25,633,085        23,971,450        27,284,384
   Provision for bad debt expense                          1,098,222         4,045,271           590,000
   Depreciation and amortization                           1,619,941         2,537,117         3,268,593
                                                      --------------    --------------    --------------
Total costs and expenses                                  28,351,248        30,553,838        31,142,977
                                                      --------------    --------------    --------------

Income (loss) from operations                             -3,013,684        -3,273,307        -1,324,585
Other income                                                 271,065           847,841           565,923
                                                      --------------    --------------    --------------
Income (loss) from continuing operations before
   provision for income taxes                             -2,742,619        -2,425,466          -758,662
Provision for income taxes                                  -410,152          -457,688          -206,627
                                                      --------------    --------------    --------------
Income (loss) from continuing operations                  -2,332,467        -1,967,778          -552,035
Income (loss) from discontinued operations, net
   of income taxes                                          -793,190        -1,640,014            35,664
                                                      --------------    --------------    --------------

Net loss                                              ($   3,125,657)   ($   3,607,792)   ($     516,371)
                                                      ==============    ==============    ==============

Basic earnings (loss) per share:
  Income (loss) form continuing operations            ($        0.14)   ($        0.13)   ($        0.03)
  Income (loss) from discontinued operations          ($        0.06)   ($        0.10)   $         0.00
                                                      --------------    --------------    --------------
  Net income (loss)                                   ($        0.20)   ($        0.23)   ($        0.20)
                                                      ==============    ==============    ==============

Diluted earnings (loss) per share:
  Income (loss) form continuing operations            ($        0.14)   ($        0.13)   ($        0.03)
  Income (loss) from discontinued operations          ($        0.06)   ($        0.10)   $         0.00
                                                      --------------    --------------    --------------
  Net income (loss)                                   ($        0.20)   ($        0.23)   ($        0.20)
                                                      ==============    ==============    ==============

Weighted average number of shares outstanding:
     Basic                                                15,383,507        15,396,342        15,344,563
                                                      ==============    ==============    ==============
     Diluted                                              15,433,507        15,469,074        15,569,608
                                                      ==============    ==============    ==============



Comprehensive Income
--------------------
                                                              For the Years Ended March 31,
                                                      --------------------------------------------------
                                                           2006              2005              2004
                                                      --------------    --------------    --------------
Net (loss)                                            ($   3,125,657)   ($   3,607,792)   ($     516,371)
Other comprehensive income (loss), net of tax
   Unrealized gain (loss) on investments                       4,489            (5,254)          (17,083)
   Foreign currency translation adjustments                   64,212            86,909           364,858
                                                      --------------    --------------    --------------
Comprehensive income (loss)                           ($   3,056,941)   ($   3,526,138)   ($     168,596)
                                                      ==============    ==============    ==============

Comprehensive (loss) per share:                       ($        0.20)   ($        0.23)   ($        0.01)
                                                      ==============    ==============    ==============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       38
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          March 31,     March 31,
                                                                            2006         2005 (*)
                                                                        ------------   ------------
                                  A S S E T S
                                  -----------
<S>                                                                     <C>            <C>
Current assets:
  Cash and cash equivalents                                             $  3,899,361   $  4,591,746
  Investments in marketable securities                                       808,399      1,190,283
  Accounts receivable, (net of allowances of $559,123 and $576,832,       25,020,997     20,297,743
respectively)

  Other receivables, (net of allowances of $3,718,954 and $3,718,954,      1,969,008      1,106,720
respectively)
  Employee receivables                                                        47,962         42,912
  Deferred income taxes                                                    6,982,019      5,786,881
  Prepaid taxes                                                                   --         41,530
  Prepaid expenses and other current assets                                  804,550        945,786
                                                                        ------------   ------------
     Total current assets                                                 39,532,296     34,003,601
                                                                        ------------   ------------

Property and equipment, net                                                3,393,438      4,356,537

Other assets:
  Excess of cost over fair value of assets acquired
        (net of accumulated amortization of $5,825,405)                    1,637,290      1,637,290
  Deferred income taxes                                                   17,394,190     17,639,485
  Deferred direct costs                                                  202,285,711    198,333,403
  Investments in marketable securities                                       923,665        853,475
  Restricted cash                                                            800,000        800,000
  Split dollar life insurance policies                                       900,145        900,145
  Other assets                                                                19,166         34,830
                                                                        ------------   ------------
          Total other assets                                             223,960,167    220,198,628
                                                                        ------------   ------------
                    Total Assets                                        $266,885,901   $258,558,766
                                                                        ============   ============
</TABLE>

(*) Reclassified for comparability

          See accompanying notes to consolidated financial statements.

                                       39
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             March 31,         March 31,
                                                                               2006            2005 (*)
                                                                          --------------    --------------
<S>                                                                       <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
---------------------------------------------------------
Current liabilities:
     Current maturities of long-term debt and capital lease obligations   $      420,294    $      541,626
     Insurance premiums payable                                               39,597,509        33,616,252
     Income taxes payable                                                         28,082                --
     Accounts and commissions payable                                          9,675,496         7,952,621
     Claims loss liability                                                     1,563,951         2,930,559
     Accrued expenses and other current liabilities                            5,314,439         4,341,754
                                                                          --------------    --------------
          Total current liabilities                                           56,599,771        49,382,812
                                                                          --------------    --------------

Deferred revenues                                                            237,345,559       235,588,801
Claims loss liability                                                          2,307,633         1,833,385
Long-term debt and capital lease obligations                                     673,034           923,984
Deferred rent payable                                                            458,906           439,468
                                                                          --------------    --------------
   Total liabilities                                                         297,384,903       288,168,450
                                                                          --------------    --------------

Commitments and contingencies                                                         --                --

Stockholders' equity (capital deficiency):
   Preferred stock - $.0007 par value authorized - 15,000,000 Shares
       issued  - none at March 31, 2006 and March 31, 2005                            --                --
   Common stock - $.007 par value authorized - 30,000,000 Shares
       issued  - 16,674,617 shares at March 31, 2006 and 16,586,283
       shares at March 31, 2005
                                                                                 116,724           116,106
   Additional paid-in capital                                                 23,852,085        23,800,228
   Loans to directors and officers                                            (7,755,292)      (11,032,065)
   Accumulated other comprehensive income, net of taxes                          301,157           232,456
   Retained earnings (deficit)                                               (41,664,508)      (38,538,852)
                                                                          --------------    --------------
                                                                             (25,149,834)      (25,422,127)
Treasury stock - at cost, 2,707,031 shares at March 31, 2006 and
1,187,606 shares at March 31, 2005                                            (5,349,168)       (4,187,557)
                                                                          --------------    --------------
        Total Stockholders' Equity (Capital Deficiency)                      (30,499,002)      (29,609,684)
                                                                          --------------    --------------
        Total Liabilities and Stockholders' Equity (Capital Deficiency)   $  266,885,901    $  258,558,766
                                                                          ==============    ==============
</TABLE>

(*) Reclassified for comparability

          See accompanying notes to consolidated financial statements.

                                       40
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                     ---------------------------------------
   CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)

<TABLE>
<CAPTION>
                                                          For the Years Ended March 31,
                                                  --------------------------------------------
                                                      2006            2005            2004
                                                  ------------    ------------    ------------
<S>                                               <C>             <C>             <C>
Common Stock Outstanding (shares)
---------------------------------
Balance, beginning of year                          16,586,283      16,586,283      16,530,324
Exercise of common stock options                            --              --          48,667
Issuance of common stock                                88,334              --           7,292
                                                  ------------    ------------    ------------
Balance, end of year                                16,674,617      16,586,283      16,586,283
                                                  ============    ============    ============
Common Stock (amount)
---------------------
Balance, beginning of year                        $    116,106    $    116,106    $    115,714
Exercise of common stock options                            --              --             341
Issuance of common stock                                   618              --              51
                                                  ------------    ------------    ------------
Balance, end of year                              $    116,724    $    116,106    $    116,106
                                                  ============    ============    ============
Additional Paid-In Capital
--------------------------
Balance, beginning of year                        $ 23,800,228    $ 23,800,228    $ 23,760,809
Exercise of unrestricted common stock options               --              --              --
Exercise of restricted common stock options                 --              --              --
Issuance of common stock                                51,857              --          39,419
                                                  ------------    ------------    ------------
Balance, end of year                              $ 23,852,085    $ 23,800,228    $ 23,800,228
                                                  ============    ============    ============
Loans to Directors and Officers
-------------------------------
Balance, beginning of year                        ($11,032,065)   ($10,747,470)   ($10,462,094)
Repayment of loans                                   2,451,610              --              --
Forgiveness of loan                                  1,098,222              --              --
Current year interest on loans                        (273,059)       (284,595)       (285,376)
                                                  ------------    ------------    ------------
Balance, end of year                              ($ 7,755,292)   ($11,032,065)   ($10,747,470)
                                                  ============    ============    ============
Accumulated Other Comprehensive Income
--------------------------------------
Balance, beginning of year                        $    232,456    $    150,801    ($   196,974)
Foreign currency translation adjustments                64,212          86,909         364,858
Unrealized gain (loss) on investments                    4,489          (5,254)        (17,083)
                                                  ------------    ------------    ------------
Balance, end of year                              $    301,157    $    232,456    $    150,801
                                                  ============    ============    ============
Retained Earnings (Accumulated Deficit)
---------------------------------------
Balance, beginning of year                        ($38,538,852)   ($34,931,059)   ($34,414,688)
Net income (loss)                                   (3,125,656)     (3,607,793)       (516,371)
                                                  ------------    ------------    ------------
Balance, end of year                              ($41,664,508)   ($38,538,852)   ($34,931,059)
                                                  ============    ============    ============
Common stock in treasury (shares)
---------------------------------
Balance, beginning of year                          (1,187,606)     (1,187,606)     (1,249,690)
Purchase of treasury shares                         (1,519,425)        (32,500)             --
Issuance of treasury shares                                 --          32,500          62,084
                                                  ------------    ------------    ------------
Balance, end of year                                (2,707,031)     (1,187,606)     (1,187,606)
                                                  ============    ============    ============
Common stock in treasury (amount)
---------------------------------
Balance, beginning of year                        ($ 4,187,557)   ($ 4,187,557)   ($ 4,274,670)
Purchase of treasury shares                         (1,161,611)        (23,956)             --
Issuance of treasury shares                                 --          23,956          87,113
                                                  ------------    ------------    ------------
Balance, end of year                              ($ 5,349,168)   ($ 4,187,557)   ($ 4,187,557)
                                                  ============    ============    ============

                                                  ------------    ------------    ------------
Total Stockholders' Equity (Capital Deficiency)   ($30,499,002)   ($29,609,684)   ($25,798,951)
-----------------------------------------------   ============    ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       41
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                     For the Years Ended March 31,
                                                             --------------------------------------------
                                                                 2006            2005*           2004*
                                                             ------------    ------------    ------------
<S>                                                          <C>             <C>             <C>
Cash flows from operating activities:
  Net (loss)                                                 $ (3,125,656)   $ (3,657,793)   $   (518,371)
                                                             ------------    ------------    ------------
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Loss (income) from discontinued operations                    888,778       1,690,014         (35,664)
    Depreciation and amortization                               1,619,941       2,537,117       3,268,330
    Provision for bad debt expense                                (17,709)      4,045,271         590,000
    Deferred revenues                                           1,566,065       2,076,449      12,139,058
    Deferred direct costs                                      (3,699,916)     (9,010,002)    (12,956,068)
    Deferred income taxes                                        (861,148)       (983,106)       (491,190)
    Deferred rent payable                                          19,438          69,629         (47,881)
    Other                                                       1,325,613      (4,234,212)       (243,330)
    Increase (decrease) in cash flows as a result of
      changes in asset and liability balances:
      Accounts receivable                                      (4,709,446)      3,748,285        (885,940)
      Other receivables                                          (101,873)      1,868,603      (2,018,663)
      Receivable from Reliance Warranty, Inc.                          --              --      15,892,635
      Income taxes                                                148,274         113,513        (325,685)
      Prepaid expenses and other current assets                   (28,418)        (69,506)        505,255
      Split dollar life insurance policies                             --              --         (23,019)
      Other assets                                                 15,304          (5,347)         17,766
      Insurance premiums payable                                4,907,619       4,437,758      (5,063,999)
      Accounts and commissions payable                          1,697,181         895,147        (957,004)
      Clams loss liability - Reliance                            (862,360)     (4,727,634)     (9,262,407)
      Accrued expenses and other current liabilities              725,600         537,241         156,488
                                                             ------------    ------------    ------------

  Total Adjustments to reconcile net income to net cash
  provided by operating activities:                             2,632,943       2,989,220         258,682
                                                             ------------    ------------    ------------
Net cash flows used in continuing operating activities           (492,713)       (668,573)       (259,689)
Net cash provided by discontinued operating activities           (350,033)        948,765         583,941
                                                             ------------    ------------    ------------
Net cash used in operating activities                            (842,746)        280,192         324,252
                                                             ------------    ------------    ------------
Cash flows from investing activities:
  Property and equipment purchased                               (464,922)       (612,320)       (399,389)
  Purchase of marketable securities                            (1,384,000)     (1,245,000)     (1,455,000)
  Proceeds from sales of marketable securities                  1,289,000       1,625,000       1,190,000
                                                             ------------    ------------    ------------
Net cas used in continuing investing activities                  (559,922)       (232,320)       (664,389)
Net cash used in discontinued investing activities                 (2,089)         (7,123)        (19,433)
                                                             ------------    ------------    ------------
Net cash usded in investing activities                           (562,011)       (239,443)       (683,822)
                                                             ------------    ------------    ------------
Cash flows from financing activities:
  Exercise of common stock options and stock grants                    --              --          18,868
  Repayment of director loans                                   1,290,000              --              --
  Purchase treasury stock                                                         (23,956)
  Repayments, notes and capital leases                           (577,628)       (650,896)       (855,975)
                                                             ------------    ------------    ------------
Net cash used in continuing financing activities                  712,372        (674,852)       (837,107)
Net cash provided by discontinued financing activities                 --          (3,920)          3,920
                                                             ------------    ------------    ------------
Net cash used in financing activities                             712,372        (678,772)       (833,187)
                                                             ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents             (692,385)       (638,023)     (1,192,757)

Cash and cash equivalents at beginning of year                  4,591,746       5,229,773       6,422,530
                                                             ------------    ------------    ------------
Cash and cash equivalents at end of year                     $  3,899,361    $  4,591,746    $  5,229,773
                                                             ============    ============    ============

Supplemental Cash Flow Information:
Cash payments (receipts) for:
Continuing Operations:
  Interest                                                   $    163,197    $    149,200    $    148,358
                                                             ------------    ------------    ------------
  Income taxes                                               $    474,912    $    546,098    $     48,650
                                                             ------------    ------------    ------------
Discontinued Operations:
  Income taxes                                               $     82,956    $     20,546    $         --
Non-cash investing and financing activities:
    Property and equipment financed through capital leases   $    205,345    $    536,609    $    487,060
    Increase (decrease) in loans to officers and directors   $    825,163    $   (284,595)   $   (285,376)
    Issuance of treasury stock for services rendered         $  1,161,611    $     23,956    $     87,113
</TABLE>

          See accompanying notes to consolidated financial statements.


*  Reclassified for comparability

                                       42
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Nature of Business - Warrantech, through its wholly owned subsidiaries,
         designs, develops, markets and acts as a third party administrator for
         programs ("Programs") for service contracts, limited warranties and
         replacement plans (collectively, "Plans"). The Company provides these
         services to a variety of clients in selected industries. On a Program
         by Program basis in the Automotive and Consumer Products segments, the
         Company contracts with highly rated independent insurance companies or
         risk retention groups to provide coverage for the Plans to be sold or
         issued under the Programs. This coverage obligates the insurer to pay
         the cost of repairs or replacements of the products covered by the
         Plans. In the Home segment, the Company is self insured.

         Plans issued under the Company's Programs provide consumers with
         expanded and/or extended product breakdown coverage for a specified
         period of time (and/or mileage in the case of automobiles and
         recreational vehicles), similar to that provided by manufacturers under
         the terms of their product warranties. Coverage generally provides for
         the repair or replacement of the product, or a component thereof, in
         the event of its failure. The Company's Programs provide clients with
         the opportunity for increased revenue and income without incurring the
         costs and responsibilities of operating their own programs.

         The Plans for the Automotive and Consumer Products segments generally
         have terms extending up to one hundred twenty (120) months or, in the
         case of mileage based Plans, up to one hundred fifty thousand (150,000)
         miles. All repairs and/or replacements required under these Plans are
         performed by independent third party repair facilities or dealers. The
         cost of any repair or replacement under these plans is generally paid
         by the insurance company or retention group with which the Company has
         contracted to provide coverage for the Plan. Plans for the Home segment
         are generally for twelve months. The cost of any repair or replacement
         for plans in the Home segment is paid for by the Company.

         Contract Obligors - Each Plan contains the name of a designated obligor
         that is legally responsible for the cost of any valid claim submitted
         under the Plan. The Company, however, arranges for an independent
         insurance company to issue a policy on behalf of the named obligor that
         covers all of the obligor's liabilities under the Plan for the
         Automotive and Consumer Products segments. As a result, the insurance
         company is then ultimately responsible for paying the cost of any and
         all valid claims submitted under these Plans. In the event, however,
         that the insurance company refuses or is unable to pay a covered claim,
         the designated obligor will be responsible for the payment and it will
         have recourse against the insurance company or its estate (in the event
         of an insolvency or liquidation) to recover the payment.

         Prior to April 1, 2000, one of the Company's subsidiaries or a
         retailer/dealer would routinely be named the obligor under the Plans.
         Since April 1, 2000, however, Butler Financial Services, LLC
         ("Butler"), a company unrelated to Warrantech but included in the
         Company's financial results due to its close transactional ties with
         the Company, has served as the obligor under all Plans sold or issued
         under a Program in exchange for a fee payable by the seller or issuer
         of the Plan. Notwithstanding the forgoing, however, a Company
         subsidiary continues to act as the designated obligor for Plans sold in
         the States of California and Florida due to regulatory considerations.
         Furthermore, Butler had contractually assumed the liabilities of the
         obligor under all pre-existing Plans in which one of the Company's
         subsidiaries was named as the designated obligor. The liabilities of

                                       43
<PAGE>

         the designated obligor under these pre-existing Plans were insured by
         an independent insurance company and, as a result of this assumption by
         Butler, the coverage afforded by these insurance policies now benefits
         Butler as the named obligor.

         Certain of the Plans under which Butler is the designated obligor were
         insured by Reliance. The liquidation of Reliance has eliminated
         Butler's insurance coverage under those Plans. Warrantech Automotive is
         the obligor, as well as the administrator, under some of the VSC's that
         were insured by Reliance. As the obligor, Warrantech Automotive is
         ultimately responsible for paying the valid claims submitted under
         those VSC's in which Warrantech Automotive is the designated obligor.
         Prior to Reliance's liquidation, Reliance paid the cost of such covered
         claims under the insurance policies it provided. Subsequent to the
         liquidation of Reliance, however, insurance coverage for Warrantech
         Automotive's obligations under those VSC's was no longer available.

         While the Company had provided Butler notice of termination of the
         Obligor Agreement between the two Companies effective Oct 22, 2004, it
         subsequently amended the termination notice and Butler remains the
         obligor on certain service contracts.

         Basis of Presentation and Principles of Consolidation - The
         accompanying consolidated financial statements have been prepared in
         accordance with accounting principles generally accepted in the United
         States of America ("GAAP"). These consolidated financial statements
         include the accounts of Warrantech Corporation, its subsidiaries, all
         of which are wholly owned, and certain transactions involving Butler
         due to its related interest to the Company. All intercompany accounts
         and transactions have been eliminated in consolidation.

         Use of Estimates - The preparation of financial statements in
         conformity with accounting principles generally accepted in the United
         States of America requires management to make estimates and assumptions
         which affect the reporting of assets and liabilities as of the dates of
         the financial statements and revenues and expenses during the reporting
         period. Actual results could differ from these estimates.

         Revenue Recognition Policy - Revenue from administrator-obligor
         contracts is recognized in accordance with Financial Accounting
         Standards Board Technical Bulletin 90-1, "Accounting for Separately
         Priced Extended Warranty and Product Maintenance Contracts," ("TB
         90-1"). The Company recognizes such revenue over the life of the
         contract on a straight-line basis. In addition the Company charges the
         costs of contracts to operations over the life of the contracts on a
         straight-line basis.

         Historically, through June 30, 2003, the Company recognized revenues
         from dealer-obligor service contracts, in which the retailer/dealer or
         a third party is designated as the obligor, in direct proportion to the
         costs incurred in providing the service contract programs to the
         Company's clients. Revenues in amounts sufficient to meet future
         administrative costs and a reasonable gross profit were deferred. With
         the issuance of EITF Abstracts Issue No. 00-21 (EITF No. 00-21),
         "Revenue Arrangements with Multiple Deliverables", as of July 1, 2003,
         the Company recognizes revenue from these dealer-obligor contracts on a
         straight-line basis over the life of the service contract, pursuant to
         Staff Accounting Bulletin 101.

         Since Butler has been determined to be a nominally capitalized entity,
         all transactions concerning Butler obligor-contracts are treated in a
         manner similar to the accounting principles discussed in Financial
         Accounting Standards Board Emerging Issues Task Force Topic No. D-14,
         "Transactions Involving Special-Purpose Entities." The Company treats
         the Butler-obligor contracts as if they were administrator-obligor
         contracts and recognizes revenues under such contracts pursuant to TB
         90-1. Additionally, because the Company is treating the Butler-obligor

                                       44
<PAGE>

         contracts as Warrantech-obligor contracts for financial reporting
         purposes only, the Company eliminated the transactions between
         Warrantech and Butler from its financial statements.

         Reflecting these transactions for financial reporting purposes does not
         alter the legal obligations under the applicable agreements in which
         the Company is not responsible, and has not assumed the obligations of
         Butler. Butler remains legally obligated under such agreements and the
         service contracts in which it is the named obligor. Butler is not
         deemed a "consolidated subsidiary" of the Company, as that term is used
         in this Report, including, but not limited to, the Certifications
         pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002
         which are annexed to this Report. Butler's income, expenses, assets and
         liabilities have not been consolidated with those of the Company.
         Butler is an independent entity owned by parties unrelated to the
         Company and, except for the transactions between Butler and Warrantech
         as described in this Report, Warrantech does not have knowledge of, or
         control over, Butler's affairs or financial reporting. Warrantech also
         has no knowledge of, nor has it established or evaluated, Butler's
         internal controls or disclosure controls or procedures. Any reference
         to "consolidated subsidiary," internal controls or disclosure controls
         and procedures in this Report, including, but not limited to, the
         Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley
         Act of 2002 which are annexed to this Report, do not pertain to Butler.

         Now that the Company is required to recognize revenues from all service
         contracts over the life of the service contracts, the Company believes
         that it is unlikely that the Company will be able to report operating
         profits until at least 2008 when the Company expects that the revenues
         recognized from prior periods will begin to equal the revenue being
         deferred to future periods. However, there can be no assurance that the
         Company will be profitable at that time. In the meantime, the revenue
         recognition policies adopted by the Company do not have an impact on
         the Company's cash flows which are an important measure of the
         Company's financial condition and are reflected in the Statements of
         Cash Flows which are part of these financial statements.

         Direct Costs - Direct costs, which consist primarily of insurance
         premiums and commissions, are those costs directly related to the
         production and acquisition of service contracts. Effective with the
         application of the revenue recognition policy described above on all
         service contracts, the Company recognizes direct costs according to
         Statement of Financial Accounting Standards No. 113 ("SFAS 113"),
         "Accounting and Reporting for Reinsurance of Short-Duration and Long
         Duration Contracts". This requires that insurance premium costs be
         ratably expensed over the life of the service contract.

         Profit Sharing Arrangement - Pursuant to certain agreements with its
         insurers, the Company may be eligible to share a portion of the
         insurers' profits on the Company's service contract programs. The
         amounts to be received, if any, are determined based upon the residual
         value of the premiums set aside by the insurer to pay losses (the "Loss
         Fund"). The residual value is comprised of underwriting profits and
         investment income earned on the monies in the Loss Fund. Subsequent
         adjustments to original estimates are solely changes in estimates based
         upon current information, affording the Company better determination of
         ultimate profit sharing revenues and are reflected in income when
         known. The Company recognized $0, $41,920 and $173,610 in profit
         sharing on its International business in the fiscal years ended March
         31, 2006, 2005 and 2004, respectively.

         Provision for Bad Debt Expense - The Company's policy is to record an
         allowance for doubtful accounts when it is established that receivables
         are uncollectible or are otherwise impaired.

                                       45
<PAGE>

         Earnings Per Share - The Company has adopted Statement of Financial
         Accounting Standards No. 128, "Earnings per Share", which modified the
         calculation of earnings per share ("EPS".) This Statement replaced the
         previous presentation of primary and fully diluted EPS to basic and
         diluted EPS. Basic EPS is computed by dividing income available to
         common stockholders by the weighted average number of common shares
         outstanding for the period. Diluted EPS includes the dilution of common
         stock equivalents, and is computed similarly to fully diluted EPS
         pursuant to Accounting Principle Board ("APB") Opinion 15. All prior
         periods presented have been restated to reflect this adoption.

         Cash and Cash Equivalents - Cash and cash equivalents for the purpose
         of reporting cash flows for all periods presented include cash on
         deposit and certificates of deposit. There were no other cash
         equivalents at March 31, 2006 and 2005.

         At March 31, 2006 and 2005, respectively, the Company had cash on
         deposit in excess of federally insured limits of $0 and $376,818.
         Additionally, at March 31, 2006 and 2005, the Company had cash on
         deposit in foreign bank accounts not covered by United States insurance
         limits of $252,152 and $1,893,013, respectively.

         Included in the cash and cash equivalent balances as reported at March
         31, 2006 and 2005, respectively, is $1,388,671 and $1,354,497 of cash
         related to Butler. Since Butler is a private company, the Company has
         no means to determine the disposition of this cash, if any, and,
         accordingly management disclaims any knowledge of the existence of this
         cash or related assets, liabilities or expenses. As part of its
         agreement to receive monies received from RIC, Butler agreed to
         restrict its cash received from RWC related to such settlement to be
         used to pay future Reliance claims. At March 31, 2006 and March 31,
         2005, of the $1,982,012 received from RWC, Butler had $0 in such
         restricted cash on deposit.

         Investments in Marketable Securities - All investments in marketable
         securities have been classified as available-for-sale and are carried
         at fair value with changes in unrealized gains and losses being
         reflected as a separate component of accumulated other comprehensive
         income, net of tax. At March 31, 2006 and March 31, 2005, $923,655 and
         $853,475 of the marketable securities are pledged as collateral for
         long-term letters of credit and accordingly are classified as long-term
         assets in the financial statements.

         Property and Equipment - Property and equipment are stated at cost.
         Depreciation is provided using the straight-line method over the
         estimated useful lives of the related assets ranging between 3 and 7
         years.

         Capitalization Policy - In accordance with Statement of Position 98-1,
         the Company capitalizes purchased software or software development and
         implementation costs incurred internally or through independent
         consultants related to the Company's state of the art proprietary
         relational database and interactive operating software for warranty
         tracking and sales. These systems are only available for internal uses
         and are not available for purchase by outside parties. All direct
         implementation costs and purchased software costs are capitalized and
         amortized using the straight-line method over their estimated useful
         lives not to exceed a five-year period. Of the $1,266,923 and
         $1,793,937 of net unamortized software development costs at March 31,
         2006 and March 31, 2005, respectively, the Company capitalized $300,861
         and $540,388 during these periods, respectively.

         Once annually or as events or circumstances indicate that an asset may
         be impaired, the Company assesses potential impairment of its
         long-lived assets, which include its property and equipment and its
         identifiable intangibles such as software development costs, goodwill
         and deferred charges. The Company determines such impairment by

                                       46
<PAGE>

         measuring the undiscounted future cash flow generated by the assets,
         comparing the result to the assets carrying value and adjusting the
         asset to the lower of its carrying value or fair value and charging
         current operations for the measured impairment. At years ended March
         31, 2006 and 2005, the Company found no impairment to its property and
         equipment or its other identifiable intangibles.

         Excess of Cost Over Fair Value of Assets Acquired - The excess of cost
         over fair value of the assets acquired ("Goodwill") is a result of the
         purchases of Dealer Based Services, Inc. in 1989, and certain assets of
         Distributors & Dealers Service Co., Inc. in October 1997. Prior to the
         early adoption of Statement of Financial Accounting Standard No. 142
         "Goodwill and Intangible Assets" on April 1, 2001, the excess of cost
         over fair value of assets acquired was being amortized on a
         straight-line basis over 15, 10 and 4.5 years, respectively.

         Reclassification - Certain reclassifications were made to prior year
         amounts to conform to the current presentation. The Company has
         separately disclosed the operating, investing and financing portions of
         the cash flows attributable to its discontinued operations which in
         prior periods were reported on a combined basis as a single amount.

         Impairment of Long-lived Assets - The Company assesses potential
         impairment of its long-lived assets, which include its property and
         equipment and its identifiable intangibles such as software development
         costs, goodwill and deferred charges under the guidance of SFAS 144
         "Accounting for the Impairment or Disposal of Long-Lived Assets." Once
         annually, or as events or circumstances indicate that an asset may be
         impaired, the Company assesses potential impairment of its long-lived
         assets. The Company determines impairment by measuring the undiscounted
         future cash flows generated by the assets, comparing the result to the
         assets' carrying value and adjusting the assets to the lower of their
         carrying value or fair value and charging current operations for any
         measured impairment. At March 31, 2006 the Company provided for the
         impairment of its assets in Chile and Peru for $23,464.

         Advertising Costs - The Company expenses advertising costs as incurred.
         Advertising expenses for the years ended March 31, 2006, 2005 and 2004
         were $301,849, $216,737 and $197,833, respectively.

         Stock Based Compensation - The Company applies FASB Statement No. 123
         R, "Share Based Payment" in accounting for its stock-based compensation
         plans. Under this method, compensation of any unvested awards at
         January 1, 2006, is recognized over the remaining service period and
         any new and modified awards are expensed prospectively. In addition,
         Statement 123 R requires all share payments to employees, including
         grants of employee stock options, to be recognized as an expense based
         on fair values measured on award grant dates. No restatement of prior
         periods is required.

         Income Taxes - Deferred tax assets and liabilities are determined using
         enacted tax rates for the effects of net operating losses and temporary
         differences between the book and tax bases of assets and liabilities.
         The Company records a valuation allowance on deferred tax assets when
         appropriate to reflect the expected future tax benefits to be realized.
         In determining the appropriate valuation allowance, certain judgments
         are made relating to recoverability of deferred tax assets, use of tax
         loss carryforwards, level of expected future taxable income and
         available tax planning strategies. These judgments are routinely
         reviewed by management.

         Foreign Currency Translation - Financial statement accounts expressed
         in foreign currencies are translated into United States dollars in
         accordance with Statement of Financial Accounting Standards ("SFAS")
         No. 52 "Foreign Currency Translation". The functional currency for the
         Company's Chilean and Peruvian operations are their respective local
         currencies. Transaction gains and losses are reflected in operations,
         while translation gains and losses are reflected as a separate
         component of accumulated other comprehensive income, net of tax.

                                       47
<PAGE>

         Comprehensive Income - The Company has adopted SFAS No. 130 "Reporting
         Comprehensive Income". SFAS No. 130 establishes rules for the reporting
         and display of comprehensive income and its components; however, the
         adoption of this Statement had minimal impact on the Company's net
         income or stockholders' equity. SFAS No. 130 requires unrealized gains
         or losses to be recorded on the Company's available for sale securities
         and foreign currency translation adjustments, which prior to the
         adoption were reported separately in stockholders' equity, to be
         included in other comprehensive income.

         Contingent Liability Policy - In accordance with SFAS No. 5 and
         Financial Accounting Standards Interpretation ("FIN") 14, the Company
         may have certain contingent liabilities with respect to material
         existing or potential claims, lawsuits and other proceedings. The
         Company accrues liabilities when it is probable that future costs will
         be incurred and such costs can be reasonably estimated and measured.

2.       CLAIMS LOSS LIABILITY

         During the second fiscal quarter of 2002, the Pennsylvania Insurance
         Commissioner informed the Company that Reliance would be liquidated and
         cease making payments on claims. The Pennsylvania Insurance
         Commissioner determined that Reliance was not likely to be able to
         satisfy all of the claims that would be submitted to it due to the
         circumstances arising out of the September 11, 2001 terrorist attacks
         on the World Trade Center. Reliance underwrote approximately 48% of the
         automotive service contracts that were sold by Warrantech Automotive
         during approximately one and one-half years ending in November 2001.
         Approximately 52% of the automotive service contracts sold by
         Warrantech Automotive during that period are not affected by the
         Reliance liquidation. Service contracts sold before and after that
         period are not affected because they are underwritten by other
         insurance companies.

         Warrantech Automotive was the named obligor, as well as the
         administrator, under some of the vehicle service contracts insured by
         Reliance. As the obligor, Warrantech Automotive would ultimately be
         responsible for paying for the repairs under such contracts.
         Additionally, for financial reporting purposes only, Warrantech is
         treated as the obligor under the service contracts in which Butler is
         the named obligor. While Warrantech is not obligated to pay claims
         under such service contracts, it has treated the claims obligations
         under the Butler-obligor contracts, including the service contracts
         which were insured by Reliance, as obligations of the Company for
         accounting purposes. Prior to Reliance's liquidation, Reliance covered
         the cost of the repairs under the insurance policies it provided.
         Because of Reliance's liquidation, insurance coverage for the Company's
         obligations under those service contracts ceased to exist. However, a
         non-insurance affiliate of Reliance, Reliance Warranty Company ("RWC"),
         which was not placed in liquidation, held premiums totaling
         approximately $15,892,635 relating to a portion of the service
         contracts in which Butler, the retailer/dealers and Warrantech
         Automotive were the named obligors. The Company received $15,892,635
         from RWC during the fourth quarter of fiscal 2004, as part of a
         settlement for claims paid by the Company on behalf of RWC. As a result
         of the Reliance liquidation, the Company recorded a claims liability
         expense for $19,591,713 during fiscal 2002, which was net of the
         $15,892,632 receivable from RWC.

         To mitigate its claims liability expense resulting from Reliance's
         liquidation, the Company is attempting to ascertain if any recovery is
         available on Federal subsidies to the insurance industry in general or
         Reliance specifically, as a result of the terrorist attacks to pay
         vehicle service contract claims. If such subsidies are available, it
         could take years before recovery, if any, is obtained. In February
         2005, the Company also began legal proceedings for recovery of
         approximately $3 million against certain state guaranty funds. In June

                                       48
<PAGE>

         2005 the Company made its first state guaranty settlement with one of
         the defendants in its action. In March 2006, the Company settled with
         all remaining state guarantee agencies for $996,000.

         During the years ended March 31, 2006, 2005, 2004, 2003 and 2002, the
         Company paid $1,303,782, $4,727,643, $9,262,407, $10,959,364 and
         $5,770,999, respectively, in claims related to Reliance obligations.
         Remaining amounts are expected to be paid out as set forth in the
         following table.

<TABLE>
<CAPTION>
                                                 Expected Payment Date
                         ---------------------------------------------------------------------------
                            2007         2008         2009         2009         2010      Thereafter     Total
                         ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>
Claims loss liability    $1,563,951   $2,290,770   $   16,863   $       --   $       --   $       --   $3,871,584
</TABLE>

3.       RESTRICTED CASH

         At March 31, 2006 and 2005, respectively, cash in the amount of
         $800,000, was on deposit with Florida and Ohio regulatory agencies to
         comply with their state insurance laws. Butler had $0, at March 31,
         2006 and 2005, which was restricted, and held in trust by the Company,
         for use to pay Reliance claims.

4.       INVESTMENTS IN MARKETABLE SECURITIES

         Short-term marketable securities and long-term investments are
         comprised of municipal bonds which bear interest at fixed rates.
         Interest income from these securities is generally affected by changes
         in the U.S. interest rates. The following tables provide information
         about the Company's financial instruments that are sensitive to changes
         in interest rates. The tables present principal cash flows and
         weighted-average interest rates by expected maturity dates. All of the
         investments are considered "available for sale." The resultant
         differences between amortized cost and fair value, net of taxes, have
         been reflected as a separate component of accumulated other
         comprehensive income.

         Principal amounts by expected maturity as of March 31, 2006 of
         marketable securities are as follows:

<TABLE>
<CAPTION>
                                                 Expected Maturity Date
                         ---------------------------------------------------------------------------
                            2007         2008         2009         2010         2011      Thereafter  Total Costs   Fair Value
                         ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Available for sale
securities               $1,164,000   $  570,000   $       --   $       --   $       --   $       --   $1,734,000   $1,732,064

Interest rate                  1.98%         2.1%
</TABLE>

                                       49
<PAGE>

         Principal amounts by expected maturity as of March 31, 2005 of
         marketable securities are as follows:

<TABLE>
<CAPTION>
                                                 Expected Maturity Date
                         ---------------------------------------------------------------------------
                            2006         2007         2008         2009         2010      Thereafter  Total Costs   Fair Value
                         ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Available for sale
securities               $1,425,000   $  595,000   $       --   $       --   $       --   $       --   $2,020,000   $2,043,758

Interest rate                  3.51%        4.09%          --           --           --           --
</TABLE>

         JP Morgan has issued two letters of credit in the amounts of $750,000
         and $200,000 as security respectively for the Bedford lease and for the
         credit card processor. As security against these letters of credit the
         Company has pledges its securities held by JP Morgan in the amount of
         $923,665 at March 31, 2006 and $853,475 at March 31, 2005.

5.       ACCOUNTS RECEIVABLE

         On January 11, 2005, Ultimate Electronics, Inc. and six of its
         subsidiaries ("Ultimate") filed individual voluntary petitions for
         relief under Chapter 11 of the Bankruptcy Code in the United States
         Bankruptcy Court for the District of Delaware. Sales to Ultimate
         represented 10% and 32% of the Company's and its Consumer Products
         segment's total gross revenues during fiscal 2005. Pursuant to the
         provisions of Chapter 11, Warrantech was obligated to honor its
         existing contract with Ultimate and Ultimate continued to sell service
         contracts during this period of reorganization. Ultimate has made all
         its payments to Warrantech with respect to sales subsequent to January
         11, 2005 ("post-petition sales)." At the time of filing, however,
         Warrantech believes that Ultimate owed it approximately $3.27 million
         for sales up to January 11, 2005 ("pre-petition sales") and Warrantech
         has filed a "proof of claim" in this amount with the Court. At this
         time, although Warrantech's proof of claim has been reviewed and
         approved, Warrantech does not know what it will recover on its claim.
         No provision for bad debts has been recorded as of March 31, 2006, as
         there are offsetting liabilities and reserves. The Plan of
         Reorganization has been approved by the Bankruptcy Court and Ultimate's
         creditors. Ultimate and its advisors have reviewed filed claims and
         have made initial determinations regarding preference payments and
         other amounts that may be recoverable from creditors. They are now
         contacting those creditors who appear to have the largest potential
         obligations to the bankruptcy estate in an effort to negotiate
         settlements. These discussions are expected to continue for a number of
         months. The first distributions to creditors could occur as early as
         the 3rd quarter of calendar 2006 although they are more likely to begin
         during the 4th quarter of calendar year 2006.

           In separate orders dated April 19, 2005, the Court approved actions
         to close thirty (30) of Ultimate's stores and retain a liquidator to
         dispose of existing inventory. The liquidator was authorized by the
         Court to sell Warrantech service contracts during the liquidation
         period in accordance with the terms of the existing Ultimate contract.
         The liquidation period has been completed. The remaining stores were
         purchased by Mark Wattles, the principal shareholder of Ultimate,
         through an entity named Ultimate Acquisition Partners, L.P.
         ("Acquisition"). As part of the Purchase Agreement, Acquisition was
         given until August 31, 2005, to decide if it wanted to assume
         Ultimate's contract with Warrantech. On November 1, 2005, Acquisition
         notified Warrantech that it had elected not to continue selling
         warranties administered by Warrantech effective November 15, 2005.
         Acquisition has made all of its payments to Warrantech with respect to
         its sales subsequent to January 11, 2005.

           At March 31, 2006, the Company was owed $3.7 million by Ultimate, in
         which the Company has filed a proof of claim for $3.27 million with the
         bankruptcy court. The remaining balance has subsequently been paid. No
         provision for bad debts has been recorded as of the fiscal year ended
         March 31, 2006.

         Accounts Receivable Security - The Company has executed an agreement
         with Great American Insurance Company ("GAIC") that provides the
         Company with extended premium payment terms and a $3 million line of
         credit ("GAIC Agreement"). All of the Company's obligations to GAIC
         pursuant to the GAIC Agreement are secured by all of the Company's

                                       50
<PAGE>

         Automotive and Consumer Products segment's accounts receivable, which
         were $23,537,597 and $19,118,161 at March 31, 2006 and 2005,
         respectively.

6.       OTHER RECEIVABLES

         During fiscal year ending March 31, 2006, 2005 and 2004, the Company
         incurred $948,822, $1,865,399 and $1,853,555, respectively, in legal
         expenses related to the Lloyd's litigation. The Company, in
         anticipation of receiving reimbursement for these expenses from its
         insurance company under a professional liability insurance policy,
         deferred the legal fees. In January 2005, as a result of a summary
         judgment, the court ruled that the insurance company was not
         responsible for payment of the Company's legal costs. The Company has
         appealed the court's decision. As a result of the lower court's ruling,
         the Company has provided for this potential bad debt of $3,718,954
         during the year ended March 31, 2005. Some future legal expenses are
         expected to be covered under the Company's Director's and Officer's
         liability insurance policy.

         The nature and amounts of Other Receivables as of March 31, 2006 and
         2005 are as follows. :

<TABLE>
<CAPTION>
                                                                                    March 31,
                                                                         ----------------------------
                                                                             2006            2005 *
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
         Other receivables, net
            Due from insurance companies                                 $    353,833    $    229,548
            Due from insurance companies - reimbursement of legal fees      3,718,954       3,718,954
            Due from insurance companies - profit sharing                      41,920          41,920
            Due from dealers                                                  302,569         384,304
                                                                         ------------    ------------
            Due from insurance companies/dealers                            4,417,276       4,374,726
            Agent advances                                                    108,565          61,787
             Due from financial institutions - rebate                         790,000         319,565
            Other                                                             372,121          69,596
                                                                         ------------    ------------
                                                                            5,687,962       4,825,674
         Allowance for doubtful accounts                                   (3,718,954)     (3,718,954)
                                                                         ------------    ------------
         Total Other receivables, net                                    $  1,969,008    $  1,106,720
                                                                         ============    ============
</TABLE>

         The following table sets forth the carrying amounts and fair values of
         the Company's other receivables at March 31, 2006.

<TABLE>
<CAPTION>
                                                      Expected Maturity Date
                              ---------------------------------------------------------------------------
                                 2006         2007         2008         2009         2010      Thereafter     Total      Fair Value
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                           <C>                  <C>          <C>          <C>          <C>          <C>  <C>          <C>
     Other receivables, net   $1,969,008           --           --           --           --           --   $1,969,008   $1,969,008

         The following table sets forth the carrying amounts and fair values of
         the Company's loan and other receivables at March 31, 2005.
<CAPTION>

                                                      Expected Maturity Date
                              ---------------------------------------------------------------------------
                                 2005         2006         2007         2008         2009      Thereafter     Total      Fair Value
                              ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                           <C>                  <C>          <C>          <C>          <C>          <C>  <C>          <C>
      Other receivables, net  $1,106,720           --           --           --           --           --   $1,106,720   $1,106,720
</TABLE>

                                       51
<PAGE>

7.       PROPERTY AND EQUIPMENT

Property and equipment consists of the following at March 31

<TABLE>
<CAPTION>
                                                                        March 31
                                                               ---------------------------
                                                                   2006           2005
                                                               ------------   ------------
<S>                                                            <C>            <C>
            Automobiles                                        $     61,280   $     61,280
            Equipment, furniture and fixtures                     7,428,270      9,945,239
            Leasehold improvements                                2,042,139      2,031,248
            Software development costs                            3,178,299     16,211,130
                                                               ------------   ------------
                                                                 12,709,988     28,248,897
            Less:  Accumulated depreciation and amortization     10,710,379     25,607,392
                                                               ------------   ------------
                                                                  1,999,609      2,641,505
                                                               ------------   ------------
            Assets under capital leases:
              Cost                                                9,891,015     10,154,148
              Less:  Accumulated amortization                     8,497,186      8,439,116
                                                               ------------   ------------
                                                                  1,393,829      1,715,032
                                                               ------------   ------------
            Total Property and Equipment, net                  $  3,393,438   $  4,356,537
                                                               ============   ============

         Amortization expense on assets under capital leases for the years ended
         March 31, 2006, 2005 and 2004 was $363,535, $434,300 and $520,340,
         respectively. Depreciation expense on property and equipment other than
         under capital leases for the years ended March 31, 2006, 2005 and 2004
         was $1,269,341, $2,115,670, and $2,760,264, respectively. At March 31,
         2006 the Company provided for the impairment of its assets in Chile and
         Peru for $23,464.

8.       LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consisted of the following:

<CAPTION>
                                                                               March 31,
                                                                     ---------------------------
                                                                         2006           2005
                                                                     ------------   ------------
<S>                                                                  <C>            <C>
            Capital lease obligations - for property and
               equipment payable monthly with interest
               rates ranging from 7.046% to 12.8% due through 2010   $  1,093,328   $  1,465,610
            Less: Current maturities                                      420,294        541,626
                                                                     ------------   ------------
            Long-term portion                                        $    673,034   $    923,984
                                                                     ============   ============
</TABLE>

The aggregate amounts of maturities at March 31, 2006 were as follows:

                                                               Minimum Future
                  Fiscal Year                                  Lease Payments
                                                               --------------
                  2007                                         $      513,724
                  2008                                                451,347
                  2009                                                202,877
                  2010                                                 93,877
                  2011                                                  3,196
                  2012 and thereafter                                      --
                                                               --------------
                                                                    1,265,021
                  Less: amount representing interest                  167,873
                                                               --------------
                  Net                                          $    1,093,328
                                                               ==============

                                       52
<PAGE>

The capital lease obligations are collateralized by the capitalized property and
equipment related to the underlying leases.

9.       SPLIT DOLLAR LIFE INSURANCE POLICIES

Through April 2003, the Company made payments on split dollar life insurance
policies on the lives of six officers of the Company, respectively. The Company
suspended payment of premiums under these policies until the permissibility of
making such payments under the Sarbanes-Oxley Act of 2002 is clarified. In lieu
of these premium payments, beginning in September of 2004 and going forward, the
Company provides cash bonuses for the premium amount to these officers. The cash
surrender value of these policies was $900,145 as of March 31, 2006 and 2005,
respectively. The Company is the beneficiary of any proceeds from the policies
up to the amount of premiums paid.

10.      INCOME TAXES

A reconciliation of the income tax provision to the amount computed using the
federal statutory rate is as follows:

<TABLE>
<CAPTION>
                                                                  For the years ended March 31,
                                            --------------------------------------------------------------------------
                                                     2006                      2005                      2004
                                            ----------------------    ----------------------    ----------------------
<S>                                         <C>               <C>     <C>               <C>     <C>               <C>
Loss before income taxes                    ($ 2,742,619)             ($ 2,425,466)             ($   758,662)
                                            ------------              ------------              ------------

Federal statutory rate                      ($   932,491)     34.0%   ($   824,658)     34.0%   ($   257,946)     34.0%
State tax effect                                 (29,095)      1.1%        (17,221)      0.7%        (96,037)     12.7%
Non deductible items                              45,295      -1.7%         28,660      -1.2%         55,073      -7.3%
Foreign income taxed at rates other
than Federal                                      87,836      -3.2%         87,274       3.6%       (257,399)     33.9%
Foreign income tax withheld at the source        469,984     -17.1%        354,207     -14.6%        211,787     -27.9%
Other                                            (51,681)      1.9%         88,598      -3.7%        137,895     -18.2%
                                            ----------------------    ----------------------    ----------------------
Benefit for income taxes                    ($   410,152)     15.0%   ($   457,688)     18.8%   ($   206,627)     27.2%
                                            ======================    ======================    ======================

<CAPTION>

The components of tax expense are as follows:                                            Provision
For the Year Ended March 31, 2006                          Current        Deferred       (Benefit)
---------------------------------                       ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>
Federal                                                 $         --    ($   719,496)   ($   719,496)
State                                                        -19,153         -24,931         -44,084
Foreign                                                      547,040        -241,406         305,634
                                                        ------------    ------------    ------------
   Total provision benefit                              $    527,887    ($   985,833)   ($   457,946)
                                                        ============    ============    ============
   Tax provision on discontinued operations             $     76,891    ($   124,685)   $     47,794
   Tax provision on income from continuing operations   $    450,996    ($   861,148)   ($   505,740)
                                                        ------------    ------------    ------------
   Total provision benefit                              $    527,887    ($   985,833)   ($   457,946)
                                                        ============    ============    ============

For the Year Ended March 31, 2005:
----------------------------------
Federal                                                 $      2,466    ($   954,379)   ($   951,913)
State                                                          5,951         -32,044         -26,093
Foreign                                                      468,735        -131,689         337,046
                                                        ------------    ------------    ------------
   Total provision benefit                              $    477,152    ($ 1,118,112)   ($   640,960)
                                                        ============    ============    ============
   Tax provision on discontinued operations             ($    48,266)   ($   135,006)   ($   183,272)
   Tax provision on income from continuing operations   $    525,418    ($   983,106)   ($   457,688)
                                                        ------------    ------------    ------------
   Total provision benefit                              $    477,152    ($ 1,118,112)   ($   640,960)
                                                        ============    ============    ============

For the Year Ended March 31, 2004:
----------------------------------
Federal                                                 $      8,703    ($   392,733)   ($   384,030)
State                                                        -57,187         -88,324        -145,511
Foreign                                                      388,455         -36,206         352,249
                                                        ------------    ------------    ------------
   Total provision benefit                              $    339,971    ($   517,263)   ($   177,292)
                                                        ============    ============    ============
   Tax provision on discontinued operations             $     55,408    ($    26,073)   $     29,335
   Tax provision on income from continuing operations   $    284,563    ($   491,190)   ($   206,627)
                                                        ============    ============    ============
   Total provision benefit                              $    339,971    ($   517,263)   ($   177,292)
                                                        ============    ============    ============


The components of the net change in deferred tax assets are as follows:
<CAPTION>

                                                                    For the years ended March 31,
                                                            --------------------------------------------
                                                                2006            2005            2004
                                                            ------------    ------------    ------------
<S>                                                             <C>           <C>               <C>
         Deferred provision (benefit) from:
           Continuing operations                                (861,148)       (983,105)       (491,190)
           Discontinued operations                              (124,685)       (135,006)        (26,073)

         Deferred taxes on non-recognized gains (losses):
           Continuing operations                                   2,312         (20,023)            327
           Discontinued operations                                    --              --              --

         Deferred taxes on transaction gains (losses):
           Continuing operations                                   3,249          30,611          35,413
           Discontinued operations                                30,429          38,579          14,650
                                                            ------------    ------------    ------------

         Net change in deferred tax assets                      (949,843)     (1,068,944)       (466,873)
                                                            ============    ============    ============
</TABLE>

Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income taxes. The components of the
net deferred tax asset are as follows:

                                       53
<PAGE>

<TABLE>
<CAPTION>
                                                      ----------------------------
                                                      For the Years Ended March 31,
                                                      ----------------------------
                                                          2006            2005
                                                      ------------    ------------
<S>                                                   <C>             <C>
            Deferred tax assets
                 Deferred revenue                     $ 80,516,061    $ 76,961,754
                 Deferred rent                             156,028         149,419
                 Provision for doubtful accounts         1,385,529       1,387,867
                 Accrued bonus                              98,116         123,961
                 Foreign loss benefit                    1,121,051         725,544
                 Net operating loss                      5,253,430       4,166,598
                 Net state benefit                         796,530         771,599
                Tax vs. book depreciation                  239,717         147,605
                 Other                                      48,532          17,581
                                                      ------------    ------------
                      Total assets                      89,614,994      87,451,928
            Deferred tax liabilities
                 Deferred direct costs                 (68,605,155)    (67,314,387)
                 Section 174 expense                      (388,290)       (528,481)
                                                      ------------    ------------
                      Total liabilities                (68,993,445)    (67,842,868)
                                                        20,621,549      19,609,060
              Less:  Valuation allowance                (1,493,437)     (1,255,462)
                                                      ------------    ------------
                                                        19,128,112      18,353,598
            Plus:  Tax effect of Butler transaction      5,248,097       5,072,768
                                                      ------------    ------------
                 Net deferred tax asset               $ 24,376,209    $ 23,426,366
                                                      ============    ============
</TABLE>

As of March 31, 2006, the Company had a United States net operating loss
carryforward of approximately $15.45 million, which is available to reduce
future regular federal taxable income. If not used, the entire carryover will
expire in the years 2020 to 2025. As of March 31, 2006, the Company also had a
foreign net operating loss carryforward of approximately $2.1 million. Due to
the uncertainty of the realization of these foreign tax carryforwards, the
Company established a valuation allowance against these carryforward benefits of
$1,493,437 and $1,255,462 at March 31, 2006 and 2005, respectively.

Section 174 expense represents research and experimental expenses related to the
development of a proprietary relational database and interactive software.

11.      COMMITMENTS AND CONTINGENCIES

         Operating Lease Commitments - The Company leases office and warehouse
         space under noncancellable operating leases expiring through 2013.
         These leases include scheduled rent increases over their respective
         terms. The accompanying consolidated statements of operations reflect
         rent expense on a straight-line basis over the lease terms, which
         differ from the cash payments required. Rent expense, net of sub-lease
         income, charged to operations for the years ended March 31, 2006, 2005
         and 2004 was $1,490,273, $1,646,252 and $2,101,971, respectively.

         Future minimum commitments under these leases that have initial or
         remaining lease terms in excess of one year at March 31, 2006, are as
         follows:

                                          Fiscal Year        Amount
                                          -----------      -----------
                                                 2007      $ 1,307,236
                                                 2008        1,291,125
                                                 2009        1,308,241
                                                 2010        1,288,409
                                                 2011        1,288,409
                              Thereafter through 2013        2,469,451
                                                           -----------
                  Total future minimum lease payments      $ 8,952,871
                                                           ===========

                                       54
<PAGE>

         Employment Contracts - The Company has employment contracts with its
         officers and certain key employees. These employment contracts,
         expiring on various dates through 2008, provide for aggregate minimum
         annual base compensation of $2,088,333. Certain agreements also call
         for (i) annual increases, (ii) cost of living increases, (iii)
         automobile allowances, (iv) medical insurance, and (v) additional
         compensation if certain defined performance levels are attained. This
         additional compensation is to be paid in the form of cash and/or
         Company common stock. The Company also agreed to forgive interest which
         has accrued annually on a note between the Company and its CEO, for as
         long as the CEO remains in the Company's employ.

         Line of Credit and Extended Payment Terms - The Company executed an
         agreement with GAIC on October 9, 2002, whereby GAIC agreed to provide
         funding by extending a favorable change of its credit terms to the
         Company. GAIC agreed to allow a 30 day extension to its normal payment
         terms as set forth in the service agreement. Interest is charged on
         amounts within the extended payment term at 3% per annum, calculated on
         a daily basis. GAIC also agreed to a separate line of credit for an
         amount up to $3 million through further extensions of terms, subject to
         certain adjustments. Funds provided by the line of credit are made
         available by GAIC by further extending its premium payment terms.
         Interest is charged on funds advanced from the line of credit at an
         annual rate equal to the prime interest rate plus 2%. As of March 31,
         2006, the $3 million available line of credit from GAIC has been drawn
         down by the Company and is reflected in premium payable.

         Letters of Credit - The Company maintains a $750,000 letter of credit
         for the benefit of the landlord of its headquarters office building.
         This letter of credit is automatically renewed annually through January
         31, 2013.

         The Company also maintains a $200,000 letter of credit for the benefit
         of its credit card processor. This letter of credit is automatically
         renewed annually, as long as the agreement with the credit card company
         is in place.

         As security against these letters of credit the Company has pledges its
         securities held by JP Morgan in the amount of $923,665 at March 31,
         2006 and $853,475 at March 31, 2005.

         Equipment Financing - The Company has ongoing relationships with
         equipment financing companies and intends to continue financing certain
         future equipment needs through leasing transactions. The total amount
         financed through leasing transactions during the fiscal year ended
         March 31, 2006 amounted to $205,345 compared to $538,609 during the
         fiscal year ended March 31, 2005. At fiscal year end 2006, the Company
         had $1,093,328 in debt outstanding from capital lease obligations
         compared to $1,465,609 at fiscal year end 2005.

         Litigation - The Company is from time to time involved in litigation
         incidental to the conduct of its business.

         Lloyd's Underwriters
         Certain Underwriters at Lloyd's, London and Other Reinsurers
         Subscribing to Reinsurance Agreements F96/2992/00 and No. F97/2992/00
         v. Warrantech Corporation, Warrantech Consumer Product Services, Inc.,
         Warrantech Help Desk, Inc., and Joel San Antonio, in United States
         District Court, Northern District of Texas, Fort Worth Division.

         During the period that Houston General was the underwriter of certain
         of Warrantech's programs, it reinsured certain of the underwritten
         risks with one or more Lloyd's insurance syndicates. At some point
         thereafter, Houston General commenced an arbitration against the
         Lloyd's syndicates seeking to recover approximately $46,000,000 under
         the reinsurance treaties with respect to claims previously paid by
         Houston General on warranty claims submitted by customers under
         Warrantech programs. The Warrantech entities were not parties in the

                                       55
<PAGE>

         arbitration but were the subject of extensive discovery by each of
         Houston General and the Lloyd's syndicates. The arbitration concluded
         in August 2002 with an award of approximately $39,000,000 in favor of
         Houston General.

         The award supports the assertions of Houston General with respect to
         the validity of the claims that it paid. Warrantech was not involved in
         the selection of these re-insurers, has no contractual relationship
         with them, and has had no reporting or other obligation to them.
         Despite these facts, the Lloyd's syndicates now seek to recover some
         portion of the arbitration award from the Warrantech entities on two
         theories of liability. The first is that, at the time certain claims
         were presented to Houston General for payment, the Warrantech entities
         either fraudulently or negligently represented to Houston General that
         such claims were valid. The second is that the Warrantech entities
         intentionally failed to comply with their legal obligations to
         cooperate with the parties during the discovery process for the
         arbitration. The complaint seeks ordinary, punitive and exemplary
         damages although no specific amount is requested. On January 6, 2004,
         the plaintiff filed an amended complaint that added Joel San Antonio,
         Chairman and Chief Executive Officer of Warrantech Corporation, as a
         party defendant in his individual capacity.

         Warrantech has filed a counterclaim against Lloyd's arising out of the
         same set of facts that underlie the original litigation. Warrantech
         alleges fraud, unfair claim settlement practices and bad faith and is
         seeking damages of approximately $46 million. Warrantech is also asking
         that treble damages for $138 million be awarded as permitted under
         applicable Texas law.

         This case was originally brought in the District Court of Tarrant
         County, Texas, 17th Judicial District. On March 19, 2004, Defendant San
         Antonio filed a notice of removal to the United States District Court
         which motion was joined by all other defendants. Following removal,
         Lloyd's filed a motion to remand the case to state court. Although the
         motion was originally denied, the matter was subsequently returned to
         state court by Judge McBryde. Warrantech appealed this and several
         other rulings to the 5th Circuit Court of Appeals. Oral argument was
         heard on August 29, 2005 and, although a decision was expected before
         the end of 2005, the Court has yet to announce its decision. If the
         Court determines that jurisdiction properly lies with the federal
         courts, it will also rule on defendant's motions with respect to
         collateral estoppel and res judicata. A ruling favorable to the
         defendants on either of these issues could ultimately lead to a
         successful pre-trial resolution of the entire litigation. The Court is
         also considering the reinstatement of Warrantech's counterclaim against
         Lloyds for damages and attorneys' fees. As the parties await the ruling
         of the 5th Circuit they are continuing with preparation for trial in
         state court, currently scheduled for October 9, 2006. The defendants
         have filed several motions for summary judgment based on lack of
         jurisdiction and the running of the statute of limitations. Both
         motions are currently being briefed and will be argued in late June. As
         with the pending federal appeal, a favorable ruling on either motion
         could result in a successful pre-trial resolution of the entire
         litigation.

         Management continues to believe that the Lloyd's case is without merit.
         At this time, however, it is not able to predict the outcome of the
         litigation. For this reason, the Company is unable to determine its
         potential liability, if any, and as such, the accompanying financial
         statements do not reflect any estimate for losses.

                                       56
<PAGE>

         Universal Insurance Company
         ---------------------------
         In the Matter of Arbitration between Universal Insurance Company and
         Warrantech Consumer Product Services, Inc.; Jane Doe; and ABC
         Corporation

         Universal Insurance Company ("Universal") provided insurance for the
         vehicle service contracts marketed and administered by Warrantech
         International in Puerto Rico pursuant to an Administrative Agreement
         that was effective as of April 1, 1998. On October 16, 2003, Universal,
         claiming a material breach of the agreement by Warrantech, terminated
         the agreement and assumed responsibility for administering the
         applicable service contracts.

         Universal served Warrantech with a Demand for Arbitration, dated
         October 15, 2004, seeking to recover a portion of the fees Warrantech
         received to provide administrative services under the contracts,
         approximating $2,155,000, together with interest thereon from the
         effective date of termination. Subsequent to receipt of Universal's
         Demand for Arbitration, Warrantech commenced an action against
         Universal in the State of Connecticut to recover fees owed to
         Warrantech pursuant to the terms of a certain Fee Agreement. Although
         it is difficult at this time to determine the exact amount owed to
         Warrantech, it is believed that the amount will be in excess of
         $1,000,000. Universal has moved in local court to have the Connecticut
         action combined with the arbitration in Puerto Rico. In response to
         that motion, Warrantech has moved to have the Connecticut action
         remanded to federal court in Connecticut. The parties are currently
         contesting a number of procedural issues. Minimal discovery has taken
         place as of the date hereof.

         Management believes Universal's case is without merit. At this time,
         however, it is not able to predict the outcome of either the
         arbitration or the Connecticut action. For this reason, the Company is
         unable to determine its potential liability, if any, and as such, the
         accompanying financial statements do not reflect any estimate for
         losses.

12.      SHARE BASED COMPENSATION AND OTHER BENEFIT PLANS

         Stock Incentive Plans - Under the Company's 1998 Employee Incentive
         Stock Option Plan, as amended (the "1998 amended Plan"), 1,041,987
         shares of the Company's common stock are reserved for issuance to
         employees (including officers) upon exercise of options granted under
         the 1998 amended plan. Options are to be granted at an exercise price
         not less than 100% of the fair market value of the Company's common
         stock at date of grant. The number of shares granted, terms of
         exercise, and expiration dates are to be decided at the date of grant
         of each option by the Company's Board of Directors. The 1998 Amended
         Plan will terminate in August 2008 unless sooner terminated by the
         Board of Directors.

         Stock Awards - Restricted common stock of the Company may be awarded to
         officers, key employees, non-employee directors and certain other
         non-employees. Shares granted are subject to certain restrictions on
         ownership and transferability. Such restrictions on current restricted
         stock awards typically lapse one to three years after the award. The
         deferred compensation expense related to restricted stock grants is
         amortized to expense on a straight-line basis over the period of time
         the restrictions are in place. Restricted common stock awards to
         employees reduce stock options otherwise available for future grants.
         The common stock awards are valued based on the opening price of the
         Company's stock on the date the award is approved by the Board of
         Directors. During the year end March 31, 2006 and 2005, 88,334 and
         32,500 restricted shares were awarded to directors and employees,
         respectively.

                                       57
<PAGE>

         The Company recognized costs of $61,875, $73,850 and $100,000 for the
         years ended March 31, 2006, 2005 and 2004, respectively, for
         stock-based compensation to employees and directors. The Company had no
         costs for the years ended March 31, 2006, 2005 and 2004, respectively,
         for stock-based compensation to non-employees.

         Stock Option Plans - At March 31, 2005, the Company had one stock
         option plan, which is described above. SFAS No. 123, "Accounting for
         Stock-based Compensation," defines a fair value method of accounting
         for an employee stock option. SFAS No. 123 allows a company to continue
         to measure compensation costs for these plans using APB No. 25 and
         related interpretations. The Company has elected to continue using APB
         No. 25 for accounting for its employee stock compensation plan.
         Accordingly, no compensation cost has been recognized for its fixed
         stock option plan. If Warrantech had determined compensation cost for
         its stock option plan based on the fair value at the grant dates for
         awards under the plan, consistent with the method prescribed by SFAS
         123, the Company's net income and earnings per share would have been
         reduced to the pro forma amounts as follows:

<TABLE>
<CAPTION>
                                                                             For the Years Ended March 31,
                                                                     --------------------------------------------
                                                                         2006            2005            2004
                                                                     ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>
Net loss as reported                                                 ($ 3,125,656)   ($ 3,607,793)   ($   516,371)
Stock based employee compensation expense included in
  reported net loss, net of related tax effects                            25,810              --              --
Total stock based employee compensation expense determined
  under fair value based method for all awards, net of related tax
  effects                                                                 (84,042)        (97,559)       (107,998)
                                                                     ------------    ------------    ------------

Net loss proforma                                                    $ (3,183,888)   $ (3,705,352)   $   (624,369)
                                                                     ============    ============    ============

Shares - basic                                                         15,383,507      15,396,342      15,344,563

Basic loss per share as reported                                     ($      0.20)   ($      0.23)   ($      0.03)
Basic loss per share pro forma                                       ($      0.21)   ($      0.24)   ($      0.04)
</TABLE>

         In December 2004, the FASB issued Statement 123(R), "Share-Based
         Payment," to be effective, in the case of Warrantech, for interim
         periods beginning after December 15, 2005; thereby, becoming effective
         for Warrantech in the fourth quarter of fiscal 2006. Statement 123(R)
         requires all share-based payments to employees, including grants of
         employee stock options, to be recognized as an operating expense in the
         income statement. The cost is recognized over the requisite service
         period based on fair values measured on grant dates. The new standard
         may be adopted using either the modified prospective transition method
         or the modified retrospective method. The Company is currently
         evaluating its share-based employee compensation programs, the
         potential impact of this statement on the consolidated financial
         position and results of operations. The Company has adopted the
         modified prospective method for its options issued and recognizes
         compensation expense under their requisite vesting periods.

         Presented below is a summary of the status of the stock options in the
         plan and the related transactions for the years ended March 31, 2006,
         2005 and 2004.

<TABLE>
<CAPTION>
                                                        2006                          2005                          2004
                                             ------------------------------------------------------------------------------------
                                                            Weighted                      Weighted                      Weighted
                                                            Average                       Average                       Average
                                                            Exercise                      Exercise                      Exercise
                                               Shares        Price           Shares        Price           Shares        Price
                                             ------------------------------------------------------------------------------------
<S>                                           <C>          <C>              <C>          <C>              <C>          <C>
Options outstanding at beginning of year      1,514,803    $     1.16       1,332,789    $     1.23       1,306,380    $     1.33
Granted                                         300,000         0.605         353,532          0.67         278,040          1.38
Canceled/Surrendered                           (341,770)        (0.80)       (171,518)        (0.52)       (121,518)        (1.44)
Exercised                                            --            --              --            --         (20,000)        (0.60)
Forfeited                                            --            --              --            --        (110,113)        (0.94)
                                             ------------------------------------------------------------------------------------
Options outstanding at end of year            1,473,033    $     1.06       1,514,803    $     1.16       1,332,789    $     1.23
                                             ====================================================================================

                                             ------------------------------------------------------------------------------------
Options exercisable at end of year              903,031    $     1.25         936,467    $     1.30         764,604    $     1.35
                                             ====================================================================================
</TABLE>

                                       58
<PAGE>

         The weighted average fair value of stock options at date of grant,
         calculated using the Black-Scholes option-pricing model, granted during
         the years ended March 31, 2006, 2005 and 2004 was $0.38, $0.38 and
         $0.56, respectively.

         The following table summarizes the status of all Warrantech's stock
         options outstanding and exercisable at March 31, 2006.

<TABLE>
<CAPTION>
                                                 Stock Options                     Stock Options
                                                  Outstanding                       Exercisable
                                       ------------------------------------   -----------------------
                                                    Weighted      Weighted                  Weighted
                                                     Average      Average                   Average
                                                    Remaining     Exercise                  Exercise
         Range Of Exercise Prices        Shares     Life (Yrs)     Price        Shares       Price
         ------------------------      ----------   ----------   ----------   ----------   ----------
<S>                                     <C>               <C>    <C>             <C>       <C>
         $0.42 to $0.94                   963,605         7.22   $     0.72      512,427   $     0.79
         $1.00 to $1.02                    78,432         5.52   $     1.02       19,608   $     1.02
         $1.26 to $1.595                  337,207         2.78   $     1.45      277,207   $     1.42
         $3.25 to $3.375                   93,790         0.64   $     3.25       93,790   $     3.25
                                       ----------   ----------   ----------   ----------   ----------
         Total at March 31, 2006        1,473,034         4.75   $     1.06      903,032   $     1.25
                                       ==========   ==========   ==========   ==========   ==========
         Total at March 31, 2005        3,239,803         2.87   $     1.08    2,661,467   $     1.11
                                       ==========   ==========   ==========   ==========   ==========
         Total at March 31, 2004        3,062,365         3.93   $     1.68    2,489,605   $     1.81
                                       ==========   ==========   ==========   ==========   ==========
</TABLE>

         Other Stock Options - The Company may issue options to purchase its
         common stock to officers, non-employees, non-employee directors or
         others as part of settlements in disputes and/or incentives to perform
         services for the Company. The Company accounts for stock options issued
         to vendors and non-employees of the Company under SFAS No. 123
         "Accounting for Stock-based Compensation." The fair value of each
         option grant is estimated on the date of grant using the Black-Scholes
         option-pricing model with weighted average assumptions identical to
         those used for options granted to employees.

                  No stock options have been issued to vendors or non-employees
         during fiscal 2006, 2005 or 2004.

                  The fair value of Warrantech stock options used to compute pro
         forma net income and earnings per share disclosures is the estimated
         value at grant date using the Black-Scholes option-pricing model with
         the following weighted average assumptions for the years ended March
         31, 2006, 2005 and 2004, respectively: expected dividend yield of 0%;
         expected volatility of 30% - 50%; a risk free interest rate of 4.5% -
         5.0%; and expected option life of 3 to 5 years.

                  On October 1, 2002, as part of an agreement between the
         Company and GAIC to provide extended credit terms, GAIC received
         options to purchase up to 1,650,000 shares of common stock. The GAIC
         options are exercisable no earlier than January 1, 2006 nor later than
         December 31, 2006. Per the terms of the agreement, since Warrantech's
         stock did not trade above $2 per share for ten consecutive trading days
         prior to January 1, 2004, the exercise price of the option was
         automatically reduced to $1 per share from $2 per share. The GAIC
         options are each exercisable for a period of five years. Warrantech has
         the right to redeem these options at any time if its shares trade at a
         price of $3.00 per share or more on any five consecutive trading days.
         The redemption price is $.001 per share. However, if Warrantech elects

                                       59
<PAGE>

         to redeem the options, GAIC will have the right to exercise their
         respective options immediately prior to the redemption. If GAIC
         exercises all of these options, it would own approximately 9.7% of the
         Company's outstanding shares. As the options had no value under the
         Black-Scholes option pricing model, no compensation expense was
         recorded in the Company's results of operations for the fiscal year
         ended March 31, 2006.

                  On July 6, 1998, Joel San Antonio, Warrantech's Chairman and
         Chief Executive Officer, and William Tweed and Jeff J. White, members
         of Warrantech's Board of Directors, exercised an aggregate of 3,000,000
         of their vested options to purchase Warrantech common stock. Promissory
         notes totaling $8,062,500 were signed with interest payable over three
         years at an annual rate of 6%. The promissory notes, which were with
         recourse and secured by the stock certificates issued, matured July 5,
         2001. On March 14, 2006, there was a settlement of Mr. White's note
         with his estate (see below). The value of the remaining collateral for
         Mr. Tweed and Mr. San Antonio's Notes, which consists of a total of
         2,183,000 shares of the Company's common stock, is currently
         $1,026,000, as of May 31, 2006, based upon the market price of the
         stock on that date. Under the loan documents, the Company does not have
         a right to require the payors to increase the loan collateral. On March
         22, 1999, Joel San Antonio delivered an additional promissory note for
         $595,634, payable to the Company, representing the amounts funded by
         the Company for the payroll taxes payable by him upon the exercise of
         these options. The exercise of these stock options and the anticipated
         tax benefit from this transaction represented approximately $10
         million. .

                  In February 2000, the Company agreed to restructure the loans
         to Mr. Tweed and Mr. White by capitalizing the interest due and
         extending the loan maturity from July 5, 2001 until January 31, 2005.
         Interest on the restructured loans accrued annually at the applicable
         federal rate of 6.2%. Under the restructuring, interest first became
         payable on the third anniversary of the restructuring and was payable
         annually thereafter. In July 2002, the Company extended the loan
         maturity dates until February 1, 2007 (the "loan extension"). The
         interest, which accrued on the notes up to the time of the loan
         extension, was added to the principal of the notes. The new principal
         amount of Mr. Tweed's note is $3,189,675 and of Mr. White's note is
         $2,912,430. The applicable federal interest rate on the notes following
         the loan extension is 4.6%. Under the loan extension, interest on the
         notes will accrue until February 1, 2005 and, at that time, the accrued
         interest will be added to the principal of the notes. Commencing on
         February 1, 2005, interest on the new principal amount of the loans to
         Mr. Tweed and Mr. White is payable annually in arrears, with the first
         interest payment becoming due on February 1, 2006. On January 31, 2006,
         in lieu of a cash payment for the $148,033 in interest due by Mr.
         Tweed, the Company agreed to accept 211,476 shares of its Common Stock.

                  In February 2000, the Company also agreed to restructure the
         two existing loans to Mr. San Antonio (as restructured, the "Combined
         Loan"). The Combined Loan, finalized in March 2001, was due on January
         31, 2005 and accrued interest annually at 5.2%. In July 2002, the
         Company extended the loan maturity date until February 1, 2007 and the
         interest rate was changed to the then applicable federal rate of 4.6%.
         The principal amount of Mr. San Antonio's note is $4,165,062. Interest
         will be forgiven as long as Mr. San Antonio continues to be employed by
         the Company. The $194,254, $194,254, 194,786 and $133,050 of interest
         which accrued on the note during fiscal years 2006, 2005, 2004 and
         2003, respectively has been forgiven. The interest was charged to
         operations as additional compensation in the respective fiscal years
         the interest income was accrued.

                                       60
<PAGE>

                  Mr. White passed away on November 30, 2005. Pursuant to a
         promissory note given by Mr. White to the Company in connection with
         his exercise of stock options, Mr. White's estate owed the Company
         $3,401,799 as of February 28, 2006. His death triggered an acceleration
         provision of the promissory note, which provides that if the note is
         not paid within 90 days after his death (March 1, 2006), the Company is
         entitled to declare all amounts owed under the note due and payable. An
         interest payment per the terms of the note, was due on February 1,
         2006. The Company's Board of Directors agreed to extend the due date of
         the interest payment until Feb 28, 2006. In settlement of the note, the
         Estate of Mr. White ("Estate") and the Company agreed that the Estate
         would transfer $1,290,000 in cash and 1,322,048 shares of the Company's
         Common Stock valued at $1,013,577, and in exchange the Company forgave
         and charged $1,098,222 of the remaining amount of Mr. White's loan with
         the Company to operations. The transaction took place on March 14,
         2006.

                  The total amount of the restructured loans to Mr. Tweed and
         Mr. San Antonio at March 31, 2006, including the capitalized interest
         of $400,556, is $7,755,292. The total amount of the restructured loans
         to Mr. Tweed, Mr. White and Mr. San Antonio at March 31, 2005,
         including the capitalized interest of $764,899, is $11,032,065.

         Savings and Retirement Plan

         The Company and its qualified employees also participate in a Savings
         and Retirement Plan also known as the 401(k) Plan (the "Plan"). All of
         the Company's domestic employees are eligible to participate in the
         Plan at the first quarterly enrollment period following their date of
         employment. All Plan participants who have completed one year of
         service with the Company are eligible for the Company contribution. The
         Company contributes 66% of an eligible employee's contribution to the
         Plan, with a maximum up to 4% of the employee's compensation. The
         Company's contribution, for the benefit of the employee, vests after an
         employee has been employed by the Company for three years. The Company
         contributed $203,973, $197,265 and $217,159 to the Plan during the
         fiscal years ended March 31, 2006 2005 and 2004, respectively.

13.      OTHER INCOME (EXPENSE)

         Other income (expense) consists of the following:

<TABLE>
<CAPTION>
                                                         For the Years Ended March 31,
                                                 --------------------------------------------
                                                     2006            2005            2004
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
            Interest and dividend income         $    547,989    $    581,406    $    600,649
            Interest expense                       (1,136,069)       (586,914)       (690,019)
            Gain (loss) on sale of assets              (2,746)            635           1,195
            Credit card usage rebate                  899,934          74,590         541,345
            Miscellaneous income                      (38,043)   $    857,841         112,753
                                                 ------------    ------------    ------------
                  Total other income             $    309,108    $    783,270    $    453,170
                                                 ============    ============    ============
</TABLE>

14.      GAIN (LOSS) FOR DISCONTINUED OPERATIONS

     On April 1, 2006 the Company closed its operations in Peru and Chile as
several customers did not renew their agreements. These countries showed a loss
for 2006 of $888,778, a loss of $1,640,014 for 2005 and a gain for 2004 of
$35,664.

                                       61
<PAGE>

15.      SIGNIFICANT CUSTOMERS

     During the fiscal year ended March 31, 2006, the Company had one customer
which accounted for more than 10% of the Company's consolidated gross revenues.
In 2006, 2005 and 2004 gross revenues from this significant customer were $16.9
million, $13.8 million and $11.2 million, respectively, which accounted for 13%,
12% and 8% of the Company's total gross revenues, respectively.

16.      EARNINGS PER SHARE

         The computations of loss per share for the years ended March 31, 2006,
2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                                                For the Years Ended March 31,
                                                       --------------------------------------------
                                                           2006            2005            2004
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
     Numerator:
        Net (loss) applicable to common stock          ($ 3,125,656)   ($ 3,607,792)   ($   516,371)
                                                       ------------    ------------    ------------
     Denominator:
         Average outstanding shares used in the
         computation of per share earnings:
           Common Stock issued-Basic shares              15,383,507      15,398,677      15,344,563
           Stock Options (treasury method)                   50,000         161,448         225,045
                                                       ------------    ------------    ------------
           Diluted shares                                15,433,507      15,560,125      15,569,608
                                                       ============    ============    ============
     Loss per common share:
        Basic                                          ($      0.20)   ($      0.23)   ($      0.03)
                                                       ============    ============    ============
        Diluted                                        ($      0.20)   ($      0.23)   ($      0.03)
                                                       ============    ============    ============
</TABLE>

17.      ACCUMULATED OTHER COMPREHENSIVE INCOME

         The components of accumulated other comprehensive income, net of
related tax, for the years ended March 31, 2006, 2005 and 2004 are as follows:

                                                      March 31,     March 31,
                                                        2006          2005
                                                     -----------   -----------
            Unrealized gain/ (loss) on investments   $       198   $    (4,291)
            Accumulated translation adjustments          300,969       236,747
                                                     -----------   -----------
            Accumulated other comprehensive income   $   301,157   $   232,456
                                                     ===========   ===========

18.      SEGMENT INFORMATION

         Until April 2006, the Company operated in four major business segments:
Automotive, Consumer Products, Direct and International, each of which is
discussed below. Effective with April 2006, the Company ceased operations in
Chile and Peru in its International segment. The Automotive segment markets and
administers extended warranties on automobiles, light trucks, motorcycles,
recreational vehicles and automotive components, which are sold principally by
franchised and independent automobile and motorcycle dealers, leasing companies,
repair facilities, retail stores, financial institutions and other specialty
marketers. The Consumer Products segment develops, markets and administers
extended warranties and product replacement plans on household appliances,
consumer electronics, televisions, computers, home office equipment and homes
which are sold principally through retailers, distributors, manufacturers,
utility companies, financial institutions and other specialty marketers. The
International segment is currently operating in Central America, Puerto Rico and
the Caribbean and operated in Chile and Peru until April 2006. The International
segment markets and administers outside the United States and Canada
predominately the same products and services of the other business segments. The
Direct segment markets these warranties and plans directly to the ultimate
consumer on behalf of the retailer/dealer and/or the manufacturer through
telemarketing and direct mail campaigns. Other includes intersegment
eliminations of revenues and receivables and net unallocated Corporate expenses
and Butler.

                                       62
<PAGE>

<TABLE>
<CAPTION>
                                                Consumer                                Reportable
Year Ended                       Automotive     Products       Direct     International   Segments       Other         Total
-----------------------------   ------------  ------------  ------------  ------------- ------------  ------------  ------------
<S>                             <C>            <C>           <C>           <C>          <C>            <C>          <C>
March 31, 2006
--------------
Gross Revenues                  $ 78,154,529   $33,193,512   $10,914,045   $   905,563  $123,167,649   $   127,001  $123,294,650
Intercompany revenues              2,845,689     1,660,739        45,360       259,125     4,810,913    (4,810,913)           --
Profit (loss) from operations        587,654     3,734,233     1,320,778      (465,456)    5,177,209    (2,163,525)   (3,013,684)
Pretax income (loss)              (3,218,870)    1,118,475       (22,802)   (1,354,543)   (3,477,740)     (153,657)   (3,631,397)
Net interest income (expense)       (676,199)     (247,732)           --         2,293      (886,577)      333,558      (588,080)
Depreciation/amortization            306,599       343,901        82,003        57,904       790,407       829,534     1,619,941
Total assets                     192,088,003    65,856,424     3,177,252     9,436,977   270,558,656    (3,672,755)  266,885,901

March 31, 2005
--------------
Gross Revenues                    69,374,933     3,768,936     7,922,943       759,659   113,904,402            --   113,904,402
Intercompany revenues                828,951     1,497,880        65,264     1,082,877     3,499,160    (3,499,160)           --
Profit (loss) from operations      1,003,585      (188,724)    3,169,574       525,649     4,510,085    (7,783,392)   (3,273,307)
Pretax income (loss)              (2,996,156)   (2,827,262)    1,528,585    (1,116,272)   (5,411,105)    1,345,625    (4,065,480)
Net interest income (expense)       (229,852)     (119,292)           --         9,498      (339,646)      345,543         5,897
Depreciation/amortization            287,572       761,378        61,736        65,339     1,114,289     1,422,828     2,537,117
Total assets                     182,566,590    66,091,687     3,550,460     9,383,193   261,591,930     2,071,909   258,558,776

March 31, 2004
--------------
Gross Revenues                   103,494,113    31,855,760     7,118,419     1,861,150   149,329,442            --   144,329,442
Intercompany revenues                     --            --        61,847       804,069       865,965      (865,966)           --
Profit (loss) from operations      2,074,521       412,458       933,972       830,998     5,721,223    (7,045,808)   (1,324,585)
Pretax income (loss)              (3,952,873)      132,346       513,277       866,842    (2,160,296)    1,437,298      (722,998)
Net interest income (expense)       (381,282)      (58,666)           --        14,599      (425,348)      350,577       (74,771)
Depreciation/amortization            386,794     1,236,190        55,083        70,473     1,748,540     1,520,053     3,268,593
Total assets                     180,793,348    60,538,744     4,811,950     8,618,712   254,762,754     2,109,732   257,184,550
</TABLE>

19.      SUBSEQUENT EVENT - MERGER

THE MERGER AGREEMENT
--------------------

         On June 7, 2006, the Company, entered into an Agreement and Plan of
Merger (the "Merger Agreement") with WT Acquisition Holdings, LLC, a Delaware
limited liability company ("Parent") and WT Acquisition Corp., a Nevada
corporation and direct wholly-owned subsidiary of Parent ("Merger Sub"). The
Merger Agreement contemplates that, subject to the terms and conditions of the
Merger Agreement, Merger Sub will be merged with and into the Company, with the
Company continuing after the Merger as the surviving corporation (the "Merger").

         Pursuant to the Merger Agreement, at the effective time of the Merger
(the "Effective Time"), each issued and outstanding share of common stock of the
Company will be converted into the right to receive $0.75 in cash, without
interest (the "Cash Consideration"). As of the Effective Time, all shares of the
Company's common stock issued and outstanding prior to such Effective Time shall
no longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any such
shares of common stock shall cease to have any rights with respect thereto,
except the right to receive the Cash Consideration or the fair value of the
shares pursuant to the appraisal rights available under Nevada law. Each
outstanding Company stock option at the time of closing will be cancelled in the
Merger and the holder thereof shall be entitled to an amount of cash, without
interest, equal to the excess, if any, of $0.75 over the exercise price of such
stock option with respect to each share of stock issuable upon exercise of such
stock option.

                                       63
<PAGE>

         Following the recommendations of the Special Committee of disinterested
directors, the Boards of Directors of the Company and Merger Sub have, and the
Board of Managers of Parent has, approved the Merger Agreement. Completion of
the Merger is subject to customary closing conditions, including, among other
things, (i) adoption of the Merger Agreement by the Company's stockholders, (ii)
absence of any injunction prohibiting the consummation of the Merger, (iii) the
accuracy of the representations and warranties of each party, and (iv)
compliance of the Company with its covenants.

         The Merger Agreement contains certain termination rights for both the
Company and Parent, and further provides that, upon termination of the Merger
Agreement under specified circumstances, the Company may be required to pay
Parent a termination fee of $1,250,000.

THE COMPANY STOCKHOLDER AGREEMENTS
----------------------------------

         In connection with the execution of the Merger Agreement, certain of
the Company's principal stockholders holding in the aggregate 35.5% of the
Company's issued and outstanding common stock entered into stockholder voting
agreements with Parent and/or Parent and the Company (the "Company Stockholder
Agreements"), pursuant to which, among other things, such stockholders agreed to
vote their shares of common stock in favor of the Merger and against any other
acquisition proposal for a period of twelve months following termination of the
Merger Agreement. In addition, Joel San Antonio, the Company's Chairman of the
Board and Chief Executive Officer entered into an agreement with Parent and the
Company which contains the terms of the Company Stockholder Agreements, grants
an option to Parent to purchase Mr. San Antonio's shares for $0.75 per share
exercisable for a period of twelve months following termination of the Merger
Agreement, and also provides for the application of amounts paid to Mr. San
Antonio for his shares and stock options to reduce his outstanding indebtedness
to the Company, the termination of the outstanding obligations under Mr. San
Antonio's employment agreement with the Company in exchange for a cash payment
of $1,700,000 and the grant to Mr. San Antonio of a common equity award equal to
22.5% of the common equity interests in Parent. In addition, the Company is
aware of a letter agreement between Parent and Mr. San Antonio relating to (i)
the forgiveness of accrued and unpaid interest owed on Mr. San Antonio's
indebtedness to the Company through the Effective Time, (ii) the forgiveness of
approximately $600,000 of outstanding principal on such indebtedness, and (iii)
the extension of the maturity date of the promissory note, evidencing the
remaining indebtedness of approximately $1,050,000, until the second anniversary
of the closing of the Merger. William Tweed, a former director of the Company
also entered into an agreement with Parent and the Company which contains the
terms of the Company Stockholder Agreements, grants an option to Parent to
purchase Mr. Tweed's shares for $0.75 per share exercisable for a period of
twelve months following termination of the Merger Agreement, provides for the
application of amounts paid to Mr. Tweed for his shares to reduce his
outstanding indebtedness to the Company and the extension of the maturity date
of the promissory note evidencing the remaining indebtedness of approximately
$2,394,796, until December 31, 2013.

                                       64
<PAGE>

CONSOLIDATION AND SALE OF CERTAIN COMPANY DEBT
----------------------------------------------

         In connection with the Merger, the outstanding indebtedness of the
Company and its subsidiaries to Great American Insurance Company, GAI Warranty
Company, GAI Warranty Company of Florida and GAI Warranty Company of Canada
(collectively, "GAI") through March 1, 2006 is being consolidated under a single
term promissory note between GAI, the Company and such subsidiaries (the "Term
Note"), which is secured by a first priority, continuing security interest in
and to all of the tangible and intangible assets of the Company and its
subsidiaries granted to GAI under the terms of a security agreement by and
between GAI, the Company and its subsidiaries (the "Security Agreement"). All
principal and interest under the Term Note is due and payable 120 days from June
7, 2006. The Term Note is in full novation of any and all other debt instruments
and obligations to repay indebtedness between GAI and the Company and its
subsidiaries through March 1, 2006. The Term Note and Security Agreement contain
customary representations and warranties, affirmative and negative covenants and
events of default.

         Contemporaneously with the execution of the Merger Agreement, GAI sold
to Wtech Holdings, LLC ("Wtech"), an affiliate of Parent, all of its rights and
obligations under the Term Note and Security Agreement, whereupon Wtech became
the primary secured lender to, and creditor of, the Company and its
subsidiaries. The Company is not a party to the agreement providing for the sale
and transfer of GAI's rights under the Term Note and the Security Agreement,
although the Company granted its consent with respect thereto.

                                       65
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                      SUPPLEMENTAL QUARTERLY FINANCIAL DATA
                                   (Unaudited)

The following fiscal 2006 and 2005 quarterly financial information for each of
the three month periods ended June 30, September 30, December 31, 2005 and 2004
and March 31, 2006 and 2005 is unaudited. However, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the results of operations for such periods have been made for a
fair presentation of the results shown.

<TABLE>
<CAPTION>
                           Quarter Ended                Quarter Ended               Quarter Ended              Quarter Ended
                              June 30,                  September 30,                December 31,                 March 31,
                     --------------------------  --------------------------  --------------------------  --------------------------
                         2005          2004          2005          2004          2005          2004          2006          2005
                     ------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------
<S>                  <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
Net revenues         $ 26,135,186  $ 23,439,833  $ 30,281,159  $ 24,817,090  $ 32,109,608  $ 28,206,527  $ 34,768,697  $ 34,788,027
Gross profit            5,862,190     6,092,317     6,111,402     5,678,243     6,674,315     6,465,701     6,708,742     8,968,927
Profit (loss)
  from continuing
  operations             (775,597)     (481,669)      228,449      (647,983)       87,088       244,680    (2,226,646)   (1,425,625)
Discontinued
  operations, net
  of tax                  239,539      (277,870)     (943,055)     (946,055)      (22,056)     (220,576)      286,621      (195,513)
Income (loss) from
   discontinued
   operations

Net income (loss)        (536,058)     (759,539)     (714,606)   (1,594,038)       65,032       (24,104)   (1,940,025)   (1,230,112)

Basic income per
  share data
Income per share
  from continuing
  operations         ($      0.04) ($      0.07) ($      0.00) ($      0.05) $       0.02  $       0.02  ($      0.14) ($      0.13)
Income (loss) per
  share from
  discontinued
  operations         $       0.01  $       0.02  ($      0.04) ($      0.05) $      (0.02) $      (0.02) $       0.02  $       0.05

Net income per
  basic share        ($      0.03) ($      0.05) ($      0.05) ($      0.10) $       0.01  $      (0.00) ($      0.13) ($      0.08)

Weighted average
  common shares
  outstanding basic    15,398,677    15,398,677    15,406,992    15,389,412    15,479,810    15,398,677    15,383,507    15,396,342

Diluted income per
  share data
Income per share
  from continuing
  operations         ($      0.04) ($      0.07) ($      0.00) ($      0.05) $       0.02  $       0.02  ($      0.14) ($      0.13)
Income (loss) per
  share from
  discontinued
  operations         $       0.01  $       0.02  ($      0.04) ($      0.05) $      (0.02) $      (0.02) $       0.02  $       0.05

Net Income per
  diluted share      ($      0.03) ($      0.05) ($      0.05) ($      0.10) $       0.01  $      (0.00) ($      0.13) ($      0.08)

Weighted average
  common shares
  outstanding
  diluted              15,398,677    15,398,677    15,427,992    15,732,312    15,500,810    15,398,677    15,433,507    15,469,074
</TABLE>

                                       66
<PAGE>

                     WARRANTECH CORPORATION AND SUBSIDIARIES
                          FINANCIAL STATEMENT SCHEDULE
                 SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
-------------------------------------  ------------   -------------------------------------   ----------------   ------------
        Column                           Column                     Column                       Column            Column
          A                                B                          C                            D                 E
-------------------------------------  ------------   -------------------------------------   ----------------   ------------
                                                                   Additions                    Deductions-
                                         Balance at   -------------------------------------                       Balance at
                                         Beginning    Charged to Costs    Charged to Other                          End of
Description                              of Year       and Expense (a)    Accounts-Describe     Describe (b)         Year
-------------------------------------  ------------   ----------------    -----------------   ----------------   ------------
<S>                                    <C>                   <C>           <C>                    <C>            <C>
Year Ended March 31, 2006
   Allowance for doubtful accounts:
              Trade A/R                $    576,832                  0                              17,709       $    559,123
              Other A/R                   3,718,954                  0                                   0          3,718,954

Year Ended March 31, 2005
   Allowance for doubtful accounts:
              Trade A/R                $    233,667            326,317                            (16,848)       $    576,832
              Other A/R                           0          3,718,954                                   0          3,718,954

Year Ended March 31, 2004
   Allowance for doubtful accounts:
              Trade A/R                $    230,064            590,000                             586,397       $    233,667
              Other A/R                           0                  0                                   0                  0
</TABLE>

(a)      Amount of receivables charged to the allowance during the year.
(b)      Recovery of prior year bad debts resulted in credit amount for the year
         ended March 31, 2006.


Item 9.  Changes in and Disagreements with Accountants on Accounting and
         ---------------------------------------------------------------
Financial Disclosures
---------------------

         None.

Item 9A. Controls and Procedures
         -----------------------

Disclosure Controls and Procedures
The Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
are primarily responsible for the accuracy of the financial information that is
presented in this Annual Report on Form 10-K. Each of them has, within 90 days
of the filing date of this report, evaluated the Company's disclosure controls
and procedures, as defined in the rules of the SEC and have determined that such
controls and procedures were effective in ensuring that material information
relating to the Company and its consolidated subsidiaries was made known to them
during the period covered by this Annual Report.

Internal Controls
To meet their responsibility for financial reporting, the CEO and CFO have
established internal controls and procedures, which they believe, are adequate
to provide reasonable assurance that the Company's assets are protected from
loss. These internal controls are reviewed by the independent accountants to
support their audit work

THERE WERE NO SIGNIFICANT CHANGES IN COMPANY'S INTERNAL CONTROLS OR IN OTHER
FACTORS THAT COULD SIGNIFICANTLY AFFECT INTERNAL CONTROLS SUBSEQUENT TO THE DATE
OF THE CEO'S AND CFO'S MOST RECENT EVALUATION.

Item 9B. Other Information
         -----------------

         None.

                                       67
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant
         --------------------------------------------------

         Set forth below is certain information concerning the nominees for the
Board of Directors of the Company.

<TABLE>
<CAPTION>
          Name                Age                Positions with Company              Director Since
          ----                ---                ----------------------              --------------
<S>                           <C>      <C>                                                <C>
Joel San Antonio              53       Chairman of the Board of Directors ,Chief          1983
                                            Executive Officer and President

Robert M. Cohen               45                        Director                          2005

Richard Rodriguez             52                        Director                          2002

Donald Senderowitz            54                        Director                          2005

Charles G. Stiene, Esq        46                        Director                          2005
</TABLE>

         While the Company has not formally adopted a policy regarding Board
members' attendance at annual meetings of stockholders, it has been the
consistent past practice of all directors who are standing for re-election to
attend the meetings. The Company anticipates that this practice will continue in
the future.

         No family relationships exist among any of the Company's directors or
executive officers, except that Randall San Antonio, President of Warrantech
Direct, Inc., a wholly-owned subsidiary of the Company, is Joel San Antonio's
brother.

         The business experience of each of the Company's directors and other
executive officers and key employees follows.

         Joel San Antonio has served as the Company's Chairman and Chief
Executive Officer since February 1988, and President of the Company since June
15, 2005. He began his business career as co-founder of a women's sportswear
manufacturer. Exiting the fashion industry, Mr. San Antonio and his partner
established the Company in 1983. He is presently Chairman of the Board of
Directors of Marc Pharmaceuticals, Inc., a company engaged in the development
and commercialization of innovative products for the treatment of cancer and
other life threatening diseases. He is also Chairman of the Board of Directors
of MedStrong International Corporation and a member of the Board of Directors of
SearchHelp, Inc. Mr. San Antonio is engaged in a variety of philanthropic and
charitable activities.

         Robert M. Cohen has been a director since October 2005. Mr. Cohen is
president, chief executive officer, chief financial officer and a director of
Marc Pharmaceuticals, Inc. He has been president of Marc Pharmaceuticals, Inc.
since its inception in 2001. Mr. Cohen is Chairman of the Board of Directors of
Home Run USA, Inc., a chain of indoor batting cages he founded in 2001. In 1987,
Mr. Cohen founded Robert M. Cohen & Co. Inc., a full-service stock brokerage
firm that emphasized trading and investment banking and served its president
from 1987 to December 2003.

         Richard Rodriguez has been a director since 2002. Mr. Rodriguez joined
the Company in 1987 and was the Executive Vice President of the Company and
President of Warrantech International, Inc. since May 1999. From April 1998
until May 1999, Mr. Rodriguez was President of Warrantech Consumer Product
Services, Inc. and, from December 1996 until March 1998, he was Vice President
and Managing Director of Warrantech International.

         Donald Senderowitz has been a director since January 2005. Mr.
Senderowitz is a real estate developer and is licensed as a real estate broker
and a broker appraiser in the state of Pennsylvania. He has been a real estate
Associate Broker with Re/Max Real Estate in Allentown, Pennsylvania since 1994.
He has been a member of the Board of the Allentown Housing Authority for the
past twelve years and its Chairman for the past two years. He has served as the
treasurer of the Jewish Federation of the Lehigh Valley since 2000 and, since in
or about 1990, as a member of the Board of Directors of the Jewish Day School of
Allentown.

                                       68
<PAGE>

         Charles G. Stiene, Esq. has been a director since October 2005. Mr.
Stiene is an attorney and member of the law firm of Stiene & Edwards, LLP
located in Huntington, New York. Mr. Stiene has been engaged in the practice of
law since 1985. His practice is based primarily in representing financial
institutions in connection with loan transactions and in real estate.

                   Other Executive Officers and Key Employees
                   ------------------------------------------

         Jeanine M. Folz, 41, has been the Senior Vice President of Insurance
Services since April 1998 and has been Assistant Secretary of the Company since
January 1995. Ms. Folz has held various positions since joining the Company in
1987, serving as the Vice President of Insurance Services from October 1995
until March 1998. She is a member of the Risk and Insurance Management Society
and the National Association for Female Executives. Ms. Folz also renders
consulting services for a fee, to Butler Financial Solutions, Inc. which serves,
in some instances, as the obligor under service contracts administered by the
Company.

         Christopher Ford, 58, has been President of Warrantech Automotive, Inc.
since joining the Company in May 1999. From December 1996 until April 1999, he
was Regional Vice President for the Warranty Products Division of AIU, based in
Australia which is an international subsidiary of American International Group,
Inc. From 1979 until 1996, Mr. Ford held several key marketing and management
positions within the vehicle service contract industry.

         Richard F. Gavino, 59, has been Executive Vice President, and the
Company's Chief Financial Officer, Chief Accounting Officer and Treasurer since
April 1998. From 1995 until March 1998, Mr. Gavino was Chief Financial Officer
of Maxon Auto Group, one of the largest automobile retailers in New Jersey. From
1978 until 1993 Mr. Gavino held several Chief Financial Officer positions within
the consumer electronics industry.

         James F. Morganteen, 56, has been General Counsel since joining the
Company in April 1997 and Senior Vice President since February 1998. Prior to
joining the Company, Mr. Morganteen served as Senior Counsel of Xerox
Corporation, responsible for provision of legal services to Xerox Credit
Corporation, and as a Vice President of Bankers Trust Corporation.

         Evan Rothman, 39, has been President of Warrantech Home Service Company
since joining the Company in March 2004. From March 2003 until February 2004, he
was National Director for the 2-10 Resale Home Warranty Company. From November
2000 until February 2003, Mr. Rothman was a division director for RHI Management
Resources and MSI Consulting, both management consulting firms. From August 1999
until November 2000, Mr. Rothman was President of Global Internet Group, an
internet consulting group and prior to August 1999, Mr. Rothman was Vice
President of Cross Country Home Services, parent company of HMS, Inc., a home
national warranty company.

         Randall San Antonio, 52, has been President of Warrantech Direct, Inc.,
since June 1996, having joined the Company in May 1994.

         Laurence Tutt, 41, has been Senior Vice President and Chief Operating
Officer of Warrantech Corporation since April 2005, From September 2000 until
March 2005, he served as Vice President of MIS/Telecommunication and Operations.
He held various managerial positions within the MIS Department since joining the
Company in 1994, having become Vice President-MIS in 1999.

         Stephen R. Williams, 58, joined the Company in June 1990. Mr. Williams
has been Senior Vice President Retail Sales of Warrantech Consumer Products
since 1994.

                                       69
<PAGE>

Item 11.   Executive Compensation
           ----------------------

         The following table provides information for the years ended March 31,
2006, 2005 and 2004 concerning the annual and long-term compensation of the
Company's Chief Executive Officer and the Company's next four highest paid
executive officers.

<TABLE>
<CAPTION>
                                                                                        Long Term Compensation
                                                    Annual Compensation                        Awards (1)
                                      ----------------------------------------------- ---------------------------
                                                                                        Restricted   Stock Option
                                                                       Other Annual   Stock (Shares)   (Shares)       All Other
Name of Principal Positions       Year       Salary         Bonus     Compensation(2)     Awards        Awards      Compensation
---------------------------       ----   ------------   ------------   -------------- -------------- ------------   ------------
<S>                               <C>    <C>            <C>            <C>                      <C>  <C>            <C>
Joel San Antonio                  2006   $    597,743   $     58,200   $    386,669             --             --   $      6,430
  Chairman of the Board           2005        595,026         64,047        259,516             --             --          6,430
  And Chief Executive Officer     2004        591,851   $     59,226        410,174             --   $    150,000          5,685

Richard F. Gavino                 2006   $    287,624   $     16,267   $     12,000             --             --   $      6,306
  Executive Vice President,       2005        284,423         19,067         11,815             --   $    100,000          6,306
  Chief Financial Officer and     2004        268,524         20,692         17,863             --             --          5,803
  Treasurer

Christopher Ford                  2006   $    230,000   $        300   $     13,266             --             --   $      4,953
  President of Warrantech         2005        230,000          2,549         11,001             --             --          4,953
  Automotive, Inc.                2004        218,717         91,156         24,045             --   $     98,040          7,605

Richard Rodriguez                 2006   $    193.680   $     11,800   $     22,097             --             --   $      6,440
  President and Executive         2005        192,655         38,628         11,430             --             --          6,440
  Vice President of               2004        185,317         16,600         22,645             --             --          4,204
  Warrantech International, Inc

  Stephen R. Williams             2006   $    167,369   $     16,500   $     15,961             --             --   $      5,060
   Sr. VP of Warrantech           2005        164,212         28,149          9,132             --   $     60,000          5,060
   Consumer Products Services     2004        120,889          8,800          6,000             --              0          3,620
</TABLE>

---------------

(1)  For purposes of this Summary Compensation Table and this purpose only, the
     1998 Employee Incentive Stock Option Plan is being treated as a long-term
     incentive plan.

(2)  Included in Other Annual Compensation are auto allowances, the Company's
     401K Plan matching contributions and other perquisites given to each
     officer in fiscal 2006, 2005 and 2004; forgiveness of $194,254, $178,288
     and $194,254 in interest, in 2006, 2005 and 2004, respectively, on a loan
     to Mr. San Antonio and $128,674, $19,862 and $100,134, amounts which
     covered the personal income taxes which Mr. San Antonio incurred in the
     2003 and 2002 calendar years, respectively, in connection with the
     forgiveness of interest on his loan.

Stock-Based Compensation Grants in Last Fiscal Year

         The following table sets forth information with respect to individual
grants of stock options during the fiscal year ended March 31, 2006 to the
Company's Chief Executive Officer and the other four most highly compensated
executive officers.

<TABLE>
<CAPTION>
                        Number of     Percent of                                    Potential Realized Value at
                       Securities    Total Options                               Assumed Annual Rates of Stock Price
                       Underlying     Granted to                                    Appreciation for Option Term
                         Options     Employees in     Exercise                      ----------------------------
        Name             Granted     Fiscal Year       Price    Expiration Date     0%            5%          10%
        ----             -------     -----------       -----    ---------------     --            --          ---
<S>                       <C>               <C>        <C>       <C>             <C>           <C>          <C>
Joel San Antonio          300,000           100%       $0.605    August 2004 -   $181,500      $190,575     $199,650
                                                                  August 2010
Richard F. Gavino              --            --            --               --         --            --           --
Christopher Ford               --            --            --               --         --            --           --
Richard Rodriguez              --            --            --               --         --            --           --
Stephen R. Williams            --            --            --               --         --            --           --
</TABLE>
-------------
(1)  The exercise price equals the fair market value of a share of Common Stock
     on the date of grant.

                                       70
<PAGE>

Options Exercised and Holdings

         The following table sets forth information with respect to the
individuals listed in the Summary Compensation Table above concerning
unexercised options held as of the end of the 2006 fiscal year.

<TABLE>
<CAPTION>
                                                           Number of Unexercised         Value of Unexercised
                                                                Options at             In-the-Money Options at
                           Shares                           Fiscal Year-End (#)         Fiscal Year-End ($)(1)
                          Acquired      Value         ------------------------------  ---------------------------
      Name              On Exercise    Realized       Exercisable      Unexercisable  Exercisable   Unexercisable
      ----              -----------    --------       -----------      -------------  -----------   -------------
<S>                           <C>         <C>            <C>               <C>         <C>            <C>
Joel San Antonio              --          --             460,000           290,000     $     --       $     --
Richard F. Gavino             --          --             151,720            88,236           --             --
Christopher Ford              --          --              94,192            58,824           --             --
Richard Rodriguez             --          --              29,500                --           --             --
Stephen R. Williams           --          --              17,706            58,824           --             --
</TABLE>
    ----------------

(1)  Based upon the Company's price per share of $0.40, as reported on the
     NASDAQ National Market System on March 31, 2006.

Employment Agreements

Joel San Antonio - Chief Executive Officer

         Mr. San Antonio's employment agreement was renewed as of July 1, 2003
for a five year term. His annual compensation consists of a base salary of
$595,026 and an incentive bonus equal to 2% of the Company's net after-tax
profits. The Company provides Mr. San Antonio with an annual automobile
allowance of $12,000 and comprehensive medical, dental and disability coverage
and reimbursement for all ordinary, reasonable and necessary expenses incurred
by him in the performance of his duties. Through April 2002, the Company made
payments on a split dollar life insurance death benefit policy of $4,000,000
covering Mr. San Antonio, in which the Company is the beneficiary of any
proceeds from the policies up to the amount of premiums paid. The Company
suspended payment of premiums for the policy until the permissibility of making
such payments under the Sarbanes-Oxley Act of 2002 is clarified. In lieu of
these premium payments, beginning in September 2004 and going forward the
Company provides $56,000 cash bonus for the premium amount. Upon execution of
his agreement, Mr. San Antonio was granted options, which vest over three years,
to purchase an aggregate of 150,000 shares of Common Stock at an exercise price
of $1.595 (110% of the fair market value on the date of grant) per share.

Richard F. Gavino - Executive Vice President, Chief Financial Officer and
Treasurer

         Mr. Gavino's employment agreement was renewed as of April 1, 2004 for a
five year term. His annual compensation consists of a base salary of $285,000
and a cash bonus equal to 0.5% percent of the Company's net after tax income.
While Mr. Gavino's base salary was increased from $265,254 in fiscal 2003, he
does not automatically receive annual cost of living increases. The Company
provides Mr. Gavino with medical and dental insurance and an annual automobile
allowance of $12,000. Through April 2002, the Company made payments on a split
dollar life insurance death benefit policy of $376,304 covering Mr. Gavino, in
which the Company is the beneficiary of any proceeds from the policies up to the
amount of premiums paid. The Company suspended payment of premiums for the
policy until the permissibility of making such payments under the Sarbanes-Oxley
Act of 2002 is clarified. In lieu of such split dollar life insurance payment,
the Company awarded Mr. Gavino a $15,918 bonus. In accordance with the terms of
his agreement, Mr. Gavino was granted options, which vest over five years, to
purchase an aggregate of 147,060 shares of Common Stock at an exercise price of
$0.68 per share.

Christopher Ford - President Warrantech Automotive, Inc.

         Mr. Ford's employment agreement has a five year term which commenced as
of July 1, 2003. His annual compensation consists of a base salary, currently
$230,000 with 5% increases if certain operating goals for Warrantech Automotive
are attained, and a cash bonus equal to 30% of his then base salary. The Company
provides Mr. Ford with medical and dental insurance, an annual automobile
allowance of $6,000 and club memberships. The Company plans to make payments of
premiums for a split-dollar life insurance policy of $150,000, however, until
the permissibility of making such payments under the Sarbanes-Oxley Act of 2002
is clarified, the Company will not make the payments. The Company will be the

                                       71
<PAGE>

beneficiary of any proceeds from the policies up to the amount of premiums paid.
In accordance with the terms of the agreement, Mr. Ford was granted options,
which vest over three years, to purchase an aggregate of 98,040 shares of Common
Stock at an exercise price of $1.02 per share.

Richard Rodriguez - Executive Vice President of the Company and President of
Warrantech International, Inc.

         Mr. Rodriguez's employment agreement was renewed as of April 1, 2004
for a three year term. His base salary, which is subject to annual 5% increases,
is currently $192,398 in fiscal 2005. Mr. Rodriguez is also entitled to receive
an annual bonus of $50,000, half of which is contingent upon the Company
achieving certain financial objectives and the balance of which is contingent on
Warrantech International achieving its financial objectives. The Company
provides Mr. Rodriguez with medical and dental insurance, an annual automobile
allowance of $6,000 and life insurance benefits similar to that provided by the
Company to certain of its other executives. Through April 2002, the Company made
payments on a split dollar life insurance life insurance death benefit policy of
$721,369 covering Mr. Rodriguez, in which the Company is the beneficiary of any
proceeds from the policies up to the amount of premiums paid. The Company
suspended payment of premiums for the policy until the permissibility of making
such payments under the Sarbanes-Oxley Act of 2002 is clarified. In lieu of such
split dollar life insurance payment, the Company awarded Mr. Rodriguez a $10,000
bonus.

     Stephen R. Williams - Senior Vice President Warrantech Consumer Product
Services, Inc.

         Effective June 1, 2004, Stephen R. Williams entered into a three-year
employment agreement to serve as Senior Vice President of Warrantech Consumer
Product Services, Inc. Mr. Williams' base salary was $175,000 in fiscal 2005. He
is entitled to receive an annual cash bonus up to $50,000 if certain operating
goals for Warrantech Consumer Products Services are attained. The Company
provides Mr. Williams with life, medical and dental insurance, an automobile
allowance of $6,000 per annum and club memberships. During 2005, in accordance
with the terms of his employment agreement, Mr. Williams was granted options to
purchase an aggregate of 88,236 shares of common stock at an exercise price of
$0.68 per share, which vest over three years.

Other Incentives and Compensation

Employee Incentive Stock Option Plan

         The Company has provided executives equity-based long-term incentives
through its 1998 Employee Incentive Stock Option Plan, which was designed to
award key management personnel and other employees of the Company with bonuses
and stock options based on the Company's and the employee's performance.

         During the fiscal year ended March 31, 2006, all decisions regarding
the Company's 1998 Employee Incentive Stock Option Plan (the "Plan"), including
the granting of options thereunder, were made by the full Board of Directors.

         As of March 31, 2006, options to purchase an aggregate of
1,473,033shares of Common Stock were issued under the Plan, of which options to
purchase 300,000 shares were granted under the Plan during the fiscal year ended
March 31, 2006.

Incentive Bonuses

         The Company's Bonus Incentive Plan is designed to reward key executive
officers if the Company attains its operating goals. Under the Bonus Incentive
Plan, if the Company's net operating revenues and/or operating income goals are
met, each eligible participant is entitled to a bonus, payable in cash and/or
stock options, equal to an agreed upon percentage of his then current salary
base, adjusted proportionately.

         The Company provides an incentive bonus to all employees for referring
job candidates who are hired by the Company. The amount of the bonus is
predicated on the skill and professional level of the new employee.

         Additionally, the Company provides incentive bonuses to employees who
are claims adjusters for obtaining and maintaining certification as
professionals in their field.

                                       72
<PAGE>

Item 12.   Security Ownership of Certain Beneficial Owners and Management
           --------------------------------------------------------------

         The following table sets forth certain information, as of June 7, 2006,
with respect to the number of shares of Warrantech common stock beneficially
owned by individual directors and officers, by all directors and officers of
Warrantech as a group, and by persons known to Warrantech to own more than 5% of
Warrantech common stock. Unless otherwise indicated below, to Warrantech's
knowledge, all persons below have sole voting and investment power with respect
to their shares, except to the extent authority is shared by spouses under
applicable law. This information is based upon Warrantech's records and the
persons' filings with the SEC.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                 Number of
                                                 Shares           Options           Total
                                                 Beneficially     Exercisable       Beneficial        Percent
           Name and Address                      Owned            within 60 days    Ownership         of Class
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>               <C>
Joel San Antonio                                3,243,095         510,000           3,753,095(3)      25.92%
2200 Highway 121, Suite 100
Bedford, Texas 76021
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
William Tweed                                   1,730,660         --                1,730,660(4)      12.39%
Lance Aux Epines
Georges, Grenada
West Indies
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Robert Cohen                                    5,000             --                5,000(5)          (6)
2200 Highway 121, Suite 100
Bedford, Texas 76021
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Donald Senderowitz                              52,200            --                52,200            (6)
2750 Chew Street
Allentown, Pennsylvania 18104
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Charles G. Steine                               7,500             --                7,500             (6)
2200 Highway 121, Suite 100
Bedford, Texas 76021
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Richard Rodriguez                               1,100             29,500            30,600            (6)
2200 Highway 121, Suite 100
Bedford, Texas 76021
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
All directors and executive officers as a       5,196,037         917,885           6,113,922         41.07%
group
(10 persons)
----------------------------------------------------------------------------------------------------------------
</TABLE>

(1)      Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to shares. Unless
otherwise indicated, the persons named in the table have sole voting and sole
investment control with respect to all shares beneficially owned by them.

(2)      The number and percentage of shares beneficially owned are based on
13,967,586 shares of common stock issued and outstanding as of June 7, 2006,
after deducting shares held in treasury. Certain of the above listed persons
have the right to acquire beneficial ownership of shares of Warrantech common
stock within 60 days after the date of this proxy statement. Each of their

                                       73
<PAGE>

percentages of ownership is determined by assuming that all of their respective
options have been exercised and that the shares acquired upon exercise are
outstanding.

(3)      The 3,753,095 shares held by Mr. San Antonio do not include (i) 46,908
shares owned by his brother, sister-in-law and mother, (ii) 5,000 held by two of
Mr. San Antonio's adult children, (iii) an aggregate of 200,000 shares held in
trusts for his children for which Mr. San Antonio's ex-wife is trustee and (iv)
100,800 shares owned by his ex-wife. Mr. San Antonio disclaims the beneficial
ownership of shares listed in (i) through (iv) above. Such 3,753,095 shares
include 48,215 shares held in his 401(k) account and 570,000 shares subject to
stock options exercisable within 60 days.

(4)      Includes (i) 23,000 shares held by Mr. Tweed as custodian for his
daughter, (ii) 1,500 shares held by Mr. Tweed's wife, and (iii) 55,000 shares
held in trust, as to which he disclaims any beneficial interest. Does not
include an aggregate of 7,500 shares held by Mr. Tweed's sister and 60,000
shares held by Mr. Tweed's daughter as to which Mr. Tweed also disclaims
beneficial ownership.

(5)      Includes 200 shares owned by Mr. Cohen's wife as custodian for Mr.
Cohen's son, as to which he disclaims any beneficial interest.

(6)      Less than 1% of the outstanding shares of Common Stock.


Security Ownership of Certain Beneficial Owners


The following table describes, as of June 7, 2006, each person who is known by
the Company to beneficially own more than 5% of the Company's outstanding voting
securities.

Beneficial ownership, and the calculation of the number of shares owned, is
determined in accordance with the rules of the SEC. The person named in the
table has the right to acquire beneficial ownership of the reported shares
within 60 days after the date of this Proxy Statement. The percentage of
ownership reported is determined by assuming that all of the reported options
have been exercised and that the shares acquired upon exercise are outstanding.
The percentage reported, as adjusted, is based on 13,967,586 shares of Common
Stock issued and outstanding as of June 7, 2006.

<TABLE>
<CAPTION>
                                              Amount and Nature of Beneficial Ownership
                                          -------------------------------------------------
                                                                  Options         Total
                                           Number of Shares     Exercisable     Beneficial        Percent
Name and Address of Beneficial Owner      Beneficially Owned   within 60 days   Ownership        of Class
---------------------------------------------------------------------------------------------------------
<S>                                           <C>                 <C>            <C>               <C>
Prescott Group Capital Management,            1,035,273           --             1,035,273         7.41%
L.L.C.
and Mr. Phil Frohlich
1924 South Utica, Suite 1120
Tulsa, Oklahoma 74104
---------------------------------------------------------------------------------------------------------
</TABLE>

Item 13.   Certain Relationships and Related Transactions
           ----------------------------------------------

Receipt of Rent Payments from Companies Affiliated with Directors

         During the last fiscal year, MedStrong International Corp.
("MedStrong") and Marc Pharmaceuticals, Inc. ("Marc") each paid rent in the
amount of $350.00 per month to the Company for the use of a portion of office
space maintained by the Company at 350 Bedford Street, Stamford, Connecticut
06901. Joel San Antonio, who is the Company's Chief Executive Officer and
Chairman of the board of directors, is Chairman of the board of directors of
MedStrong and Marc. Robert M. Cohen, who is a director of the Company, is Chief
Executive Officer, President, Chief Financial Officer and a director of Marc.

                                       74
<PAGE>

Item 14.   Principal Accountants Fees and Services
           ---------------------------------------

         On July 21, 2005, the Company engaged Raich Ende Malter & Co. LLP
("Raich") as its new independent accountants, effective on August 1, 2005,
replacing Weinick Sanders Leventhal & Co., LLP ("Weinick"), due to the fact that
Weinick resigned, effective July 31, 2005, because it ceased doing business.
Since the Company does not have an Audit Committee, the full Board of Directors
approved the engagement of Raich on July 21, 2005.

         The reports of Weinick on the financial statements of the Company for
the past two fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with its audits for the two most recent fiscal years
and through June 30, 2005, there have been no disagreements with Weinick on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Weinick would have caused them to make reference thereto in
their report on the financial statements for such years.

         It is expected that representatives of Raich will be present at the
annual meeting and will have the opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.

         Scope of Services. During fiscal 2006, the Company engaged Raich to
provide audit services only. It did not engage Raich for any other services.
Specifically, it did not engage Raich to provide: (a) bookkeeping or other
services related to the accounting records or financial statements; (b)
financial information systems design and implementation; (c) appraisal or
valuation services, fairness opinions, or contribution-in-kind reports; (d)
actuarial services; (e) internal audit outsourcing services; (f) management
functions or human resources; (g) broker or dealer, investment adviser, or
investment banking services; (h) legal services and expert services unrelated to
the audit; or (i) tax preparation and compliance services.

         Audit Fees. Raich's audit services during fiscal 2006 included the
examination of the Company's annual consolidated financial statements for fiscal
2006, the reviews of the consolidated financial statements included in the
Company's Forms 10-Q for fiscal 2006 and assistance with correspondence related
to the SEC's review of the Company's consolidated financial statements. The
aggregate fees for professional audit services rendered by Raich during fiscal
year 2006 were $278,468.

                                       75
<PAGE>

Item 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
           ---------------------------------------------------------------

             (a)  1. and 2. Financial Statements and Financial Statement
                  Schedule: see accompanying Index to Financial Statements and
                  Financial Statement Schedule, page F-1.

             (b)  Reports on Form 8-K during the last quarter:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Date                      Item Reported                                Financial Statements Filed
----                      -------------                                --------------------------
----------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------
<S>                       <C>                                          <C>
January 10, 2006          Item 8.01 - Other Events, Financial          None
                          Statements and Exhibits
----------------------------------------------------------------------------------------------------------
March 17, 2006            Item 1.01 - Entry into a Material            None
                          Definitive Agreement, Financial
                          Statements and Exhibits
----------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------
</TABLE>


             (c)  Exhibits

Exhibits not incorporated herein by reference to a prior filing are designated
by an asterisk (*) and are filed herewith; all exhibits not so designated are
incorporated herein by reference as indicated. Management contracts or
compensatory plans, contracts or arrangements with directors and executive
officers of the Company appear in Exhibits 10(p) through 10(bb).

                                       76
<PAGE>

                                    EXHIBITS

Exhibit                            Description
-------                            -----------

3(a)        Certificate of Nevada Incorporation filed February 28, 2005.

*3(b)       Amended and Restated By-laws of Warrantech Corporation in the State
            of Nevada.

3(c)        Amendment to the Bylaws and Article of Incorporation, Incorporated
            by reference to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 2005.

10(a)       Form of Sales Distributor Agreement. Incorporated by reference to
            the Company's Annual Report on Form 10-K for the fiscal year ended
            March 31, 1985, file no. 0-13084.

10(b)       Form of Service Center Agreement. Incorporated by reference to the
            Company's Annual Report on Form 10-K for the fiscal year ended March
            31, 1985, file no. 0-13084.

10(c)       Form of Dealer Agreement. Incorporated by reference to the Company's
            Annual Report on Form 10-K for the fiscal year ended March 31, 1985,
            file no. 0-13084.

10(d)       Form of Sales Agent Agreement. Incorporated by reference to the
            Company's Registration Statement on Form S-1, filed on September 5,
            1986, Registration No. 3-8517.

10(e)       Amendment and supplement number one, dated January 16, 2004 to
            certain Warrantech and Butler agreements. Incorporated by reference
            to Exhibit 10(2) to the Company's Quarterly Report on Form 10-Q for
            the quarter ended December 31, 2004, file no. 0-13084.

10(f)       Warrantech Corp. Guaranty of Payment and Performance by RWC Corp.
            Incorporated by reference to Exhibit 10(3) to the Company's
            Quarterly Report on Form 10-Q for the quarter ended December 31,
            2004, file no. 0-13084.

10(g)       Security Agreement dated as of January 16, 2004, by Reliance
            Warranty Company, in favor of Warrantech Corporation. Incorporated
            by reference to Exhibit 10(4) to the Company's Quarterly Report on
            Form 10-Q for the quarter ended December 31, 2004, file no. 0-13084.

10(h)       Indemnity Agreement by and between Warrantech Corporation (the
            "Indemnitor") and Butler Financial Solutions, LLC, Reliance Warranty
            Company, SPG Financial Corp., the current members and officers of
            Butler, RWC and SPG, Harris Miller, Karen Parker and Paula Graff,
            (collectively and individually, the "Indemnitee(s)"). Incorporated
            by reference to Exhibit 10(5) to the Company's Quarterly Report on
            Form 10-Q for the quarter ended December 31, 2004, file no. 0-13084.

10(i)       General Agency Agreement between American International Group, Inc.
            and Warrantech Automotive, Inc. Incorporated by reference to Exhibit
            10(o) to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 1996, file no. 0-13084.

                                       77
<PAGE>

10(j)       Master Agreement between American International Group, Inc. and
            Warrantech Corporation. Incorporated by reference to Exhibit 10(q)
            to the Company's Annual Report on Form 10-K for the fiscal year
            ended March 31, 1996, file no. 0-13084.

10(k)       Stock Option Agreement dated June 4, 2002, by and between Warrantech
            Corporation and Staples, Inc. Incorporated by reference to Exhibit
            10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
            ended June 30, 2002, file no. 0-13084.

10(l)       Warrantech Corporation 1998 Employee Incentive Stock Option Plan, as
            amended and restated, effective September 25, 2001. Incorporated by
            reference to Exhibit 10(a) to the Company's Quarterly Report on Form
            10-Q for the quarter ended September 30, 2001, file no. 0-13084.

10(m)       Amendment No. 2 dated October 8, 2002, to the Warrantech Corporation
            1998 Employee Incentive Stock Option Plan, as amended and restated,
            effective September 25, 2001. Incorporated by reference to Exhibit
            4(a) to the Company's Quarterly Report on Form 10-Q for the quarter
            ended September 30, 2002, file no. 0-13084.

10(n)       Amendment No. 3, dated September 8, 2003, to the Warrantech
            Corporation 1998 Employee Incentive Stock Option Plan, as amended
            and restated, effective June 12, 2003. Incorporated by reference to
            Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 2003, file no. 0-13084.

10(o)       Amendment No. 3, dated October 7, 2003, to the Warrantech 401K plan.
            Incorporated by reference to Exhibit 4(b) to the Company's Quarterly
            Report on Form 10-Q for the quarter ended September 30, 2003, file
            no. 0-13084.

10(p)       Employment Agreement dated April 1, 2003 between Warrantech
            Corporation and Joel San Antonio. Incorporated by reference to
            Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 2003, file no. 0-13084.

10(q)       Employment Agreement dated April 1, 2004, between Warrantech
            Corporation and Richard F. Gavino. Incorporated by reference to
            Exhibit 10(x) to the Company's Annual Report on Form 10-K for the
            year ended March 31, 2004, file no. 0-13084.

10(r)       Schedule 10(u) identifying contracts that are substantially similar
            to Exhibit 10(t), the Employment Agreement between Warrantech
            Corporation and James F. Morganteen, in all material respects except
            as to the parties thereto, the dates of execution, or other details,
            incorporated by reference to Exhibit 10(h) to the Company's
            Quarterly Report on Form 10-Q for the quarter ended September 30,
            2002, file no. 0-13084.

                                       78
<PAGE>

10(s)       Employment Agreement dated March 15, 2004, between Warrantech
            Corporation and Evan Rothman. Incorporated by reference to Exhibit
            10(aa) to the Company's Annual Report on Form 10-K for the year
            ended March 31, 2004, file no. 0-13084.

10(t)       Employment Agreement dated June 1, 2004, between Warrantech
            Corporation and Stephen R. Williams. Incorporated by reference to
            Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the
            year ended March 31, 2004, file no. 0-13084.

10(u)       Amendment #1, dated April 1, 2004 to the Employment Agreement dated
            April 1, 2000 between Warrantech Corporation and Richard Rodriguez.

10(v)       Employment Agreement dated July 9, 2003, between Warrantech
            Corporation and Christopher L. Ford. Incorporated by reference to
            Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 2003, file no. 0-13084.

10(w)       Employment Agreement dated April 1, 2003 between Warrantech
            Corporation and Randall San Antonio. Incorporated by reference to
            Exhibit 10(w) to the Company's Annual Report on Form 10-K for the
            year ended March 31, 2003, file no. 0-13084.

10(x)       Employment Agreement dated December 1, 2004, between Warrantech
            Corporation and Laurence Tutt. Incorporated by reference to Exhibit
            10(1) to the Company's Quarterly Report on Form 10-Q for the quarter
            ended December 31, 2004, file no. 0-13084.

10(y)       Amendment #1, dated October 1, 2004 to the Employment Agreement
            dated April 1, 2002 between Warrantech Corporation and Jeanine Folz.

10(z)       Promissory Note, as amended July 24, 2002,between Warrantech
            Corporation and William Tweed, incorporated by reference to Exhibit
            10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
            ended September 30, 2002, file no. 0-13084.

10(aa)      Promissory Note, as amended, July 24, 2002, between Warrantech
            Corporation and Joel San Antonio, incorporated by reference to
            Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 2002, file no. 0-13084.

10(bb)      Promissory Note, as amended July 24, 2002, between Warrantech
            Corporation and Jeff J. White. Incorporated by reference to Exhibit
            10(c) to the Company's Quarterly Report on Form 10-Q for the quarter
            ended September 30, 2002, file no. 0-13084.

10(cc)      Code of Business Conduct and Ethics. Incorporated by reference to
            Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the
            year ended March 31, 2004, file no. 0-13084.

                                       79
<PAGE>

*10(dd)     Agreement dated May 2006, between Warrantech Corporation and William
            Tweed to exchange shares of Company Common Stock for the interest
            due on the Note from Mr. Tweed.

10(ee)      Filed as exhibit to 8-K filed March 14, 2006.

*21         Subsidiaries of the Company.

*31.1       Certification by the Chief Executive Officer pursuant to
            Rule13a-14(a) of the Securities Exchange Act of 1934, as amended.

*31.2       Certification by the Chief Financial Officer pursuant to
            Rule13a-14(a) of the Securities Exchange Act of 1934, as amended.

*32.1       Statement by the Chief Executive Officer and the Chief Financial
            Officer furnished pursuant to Rule 13a-14(b) of the Securities
            Exchange Act of 1934, as amended.

                                       80
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized.

                                       WARRANTECH CORPORATION


Dated:   June 29, 2006                 By: /s/ JOEL SAN ANTONIO
                                           -------------------------------------
                                           Joel San Antonio,
                                           Chairman of the Board and
                                           Chief Executive Officer


Dated:   June 29, 2006                 By: /s/ RICHARD F. GAVINO
                                           -------------------------------------
                                           Richard F. Gavino,
                                           Executive Vice President and
                                           Chief Financial Officer

                                       81
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on June 29, 2006.


/s/ JOEL SAN ANTONIO        Chairman, Chief Executive Officer and Director
------------------------    (Principal Executive Officer)
Joel San Antonio

/s/ RICHARD F. GAVINO       Executive Vice President and Chief Financial Officer
------------------------    (Principal Accounting and Financial Officer)
Richard F. Gavino

/s/ ROBERT M. COHEN                 Director
------------------------
Robert M. Cohen

/s/ CHARLES G. STIENE, ESQ.         Director
------------------------
Charles G. Stiene, Esq

/s/ DONALD SENDEROWITZ              Director
------------------------
Donald Senderowitz

/s/ RICHARD RODRIGUEZ               Director
------------------------
Richard Rodriguez

                                       82