<PAGE>

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

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    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 December 31, 1996

                                       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 NUMBER 000-21673

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

              TEXAS                                          75-2487218
  (State or other jurisdiction of                          (I.R.S. Employer
  incorporation or organization)                        Identification Number)

                               301 CONGRESS AVENUE
                               AUSTIN, TEXAS 78701
               (Address of principal executive offices, zip code)

       Registrant's telephone number, including area code: (512) 435-7000

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


                                                       NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                           ON WHICH REGISTERED
          -------------------                           -------------------
     COMMON STOCK, NO PAR VALUE PER SHARE              NASDAQ NATIONAL MARKET



        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]

        The aggregate market value of the voting stock held by non-affiliates of
the  registrant  on March 27, 1997  (based on the closing  price on such date as
reported on the Nasdaq National Market) was $5,240,625.(1)

        As of March 31, 1997, 6,512,500 shares of Common Stock, no par value per
share, were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE


--------
    1 Calculated  by excluding all shares that may be deemed to be  beneficially
owned by executive  officers,  directors and five percent,  shareholders  of the
Registrant,  without  conceding  that all such persons are  "affiliates"  of the
Registrant for purposes of the Federal securities laws.




<PAGE>



        Part      III -Portions of the  Registrant's  definitive Proxy Statement
                  with  respect  to the  Registrant's  1996  Annual  Meeting  of
                  Shareholders,  to be filed not later  than 120 days  after the
                  close of the Registrant's fiscal year.

                      EXHIBIT INDEX IS LOCATED AT PAGE 43
                                  PAGE 1 OF 45




                                       2

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






<PAGE>



                         AUTOBOND ACCEPTANCE CORPORATION

                          1996 FORM 10-K ANNUAL REPORT

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

                                TABLE OF CONTENTS

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

                                                                                                 PAGE
                                                                                                NUMBER
<S>            <C>                                                                               <C>
                                                PART I
Item 1.        BUSINESS........................................................................1

Item 2.        PROPERTIES......................................................................20

Item 3.        LEGAL PROCEEDINGS...............................................................20

Item 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................20

                                                PART II

Item 5.        MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS.............................................................21

Item 6.        SELECTED FINANCIAL DATA.........................................................22

Item 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS.............................................23

Item 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................40

Item 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE.............................................40

                                               PART III

Item 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................40

Item 11.       EXECUTIVE COMPENSATION..........................................................41

Item 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT......................................................................41

Item 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................41

                                                PART IV

Item 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
               ON FORM 8-K.....................................................................42
</TABLE>



<PAGE>


                                         PART I

ITEM 1. BUSINESS

GENERAL

        AutoBond Acceptance  Corporation (the "Company") is a specialty consumer
finance company engaged in underwriting,  acquiring,  servicing and securitizing
retail  installment  contracts  ("finance  contracts")  originated by franchised
automobile  dealers in connection with the sale of used and, to a lesser extent,
new vehicles to selected consumers with limited access to traditional sources of
credit  ("sub-prime  consumers").  Sub-prime  consumers  generally are borrowers
unable to qualify for traditional  financing due to one or more of the following
reasons: negative credit history (which may include late payments,  charge-offs,
bankruptcies,   repossessions  or  unpaid   judgments);   insufficient   credit;
employment or residence  histories;  or high debt-to-income or payment-to-income
ratios (which may indicate payment or economic risk).

        The  Company  acquires  finance  contracts   generally  from  franchised
automobile dealers, makes credit decisions using its own underwriting guidelines
and credit personnel and performs the collection  function for finance contracts
using  its  own  collections  department.  The  Company  also  acquires  finance
contracts  from  third  parties  other  than  dealers,  for  which  the  Company
reunderwrites  and  collects  such  finance  contracts  in  accordance  with the
Company's  standard  guidelines.  The Company  securitizes  portfolios  of these
retail automobile  installment  contracts to efficiently utilize limited capital
to allow continued growth and to achieve  sufficient  finance contract volume to
allow  profitability.  The Company markets a single finance contract acquisition
program  to  automobile   dealers  which  adheres  to  consistent   underwriting
guidelines  involving the purchase of primarily  late-model used vehicles.  This
has enabled the Company to securitize  those  contracts  into  investment  grade
securities with similar terms from one issue to another providing consistency to
investors.  For the period of inception  through  December 31, 1996, the Company
acquired 10,073 finance contracts with an aggregate initial principal balance of
$117,699,878,   and  which  had  an  initial  average  principal   balance,   at
acquisition,  of $11,685,  a weighted average annual  percentage rate ("APR") of
19.54%, a weighted average finance contract  acquisition  discount of 8.3% and a
weighted average maturity of 52 months. During the year ended December 31, 1996,
the Company completed four securitizations pursuant to which it privately placed
$81.7 million in finance contract backed securities.

RECENT DEVELOPMENTS

        On February 14, 1997 the Company,  through its  wholly-owned  subsidiary
AutoBond  Funding  Corporation II, entered into a $50,000,000  warehouse  credit
facility with Daiwa Finance Corporation (the "Diawa Facility"), which expires in
March 1998. The proceeds from the borrowings  under the Daiwa Facility are to be
used to acquire finance  contracts,  and to make deposits to a reserve  account.
Interest is payable  monthly at the 30-day LIBOR plus 1.15% per annum rate.  The
Daiwa  Facility  also  requires  the Company to pay a monthly fee on the average
unused balance at a per annum rate of 0.25%. Borrowings under the Daiwa Facility
are  rated  investment-grade  by  a  nationally  recognized  statistical  rating
organization. The Daiwa Facility contains certain conditions and imposes certain
requirements  similar  to  those in the  agreements  relating  to the  Company's
existing securitizations including, among



<PAGE>

other things, delinquency and repossession triggers.

        On March 31, 1997, the Company  completed its 1997-A  securitization  of
$28.0 million in finance contracts.  The senior securitization bonds received an
A/A2  rating  from  Fitch  Investors  Service  and  Moody's  Investors  Services
respectively.  Included in the $28.0  million  1997-A  securitization  were $8.3
million in  finance  contracts  which the  Company  acquired  as part of a $12.9
million pool from Credit Suisse First Boston.

        Beginning in the first quarter 1997,  the Company  elected not to obtain
credit deficiency insurance on every finance contract which it acquires.  Of the
$32 million in finance contracts which the Company acquired in the first quarter
of 1997,  roughly 40%, or $12.9  million,  were covered by an Interstate  Fire &
Casualty  credit  deficiency  policy.  However,  VSI  damage  policies  were and
continue to be purchased for all finance contracts. The completed securitization
structure for 1997-A  generated  less cash proceeds than prior  issuances due to
the  lack of  credit  deficiency  insurance  on many  of the  finance  contracts
collateralizing the transaction.  However,  offsetting much of this reduction in
cash  proceeds,  is the fact that the Company did not pay the up front  premiums
associated with the credit deficiency insurance,  which resulted in a lower cost
basis in the finance contracts than in the past.

GROWTH AND BUSINESS STRATEGY

        The  Company's  growth  strategy   anticipates  the  acquisition  of  an
increasing  number of  finance  contracts.  The key  elements  of this  strategy
include:  (i) increasing the number of finance contracts acquired per automobile
dealer;  (ii) expanding the Company's  presence within existing  markets;  (iii)
penetrating  new  markets  that meet the  Company's  economic,  demographic  and
business  criteria  and  (iv)   securitizing   portfolios  of  acquired  finance
contracts.

        To foster  its growth  and  increase  profitability,  the  Company  will
continue to pursue a business strategy based on the following principles:

        o  TARGETED MARKET AND PRODUCT  FOCUS--The Company targets the sub-prime
           auto  finance  market  because it  believes  that  sub-prime  finance
           presents greater  opportunities than does prime lending. This greater
           opportunity  stems from a number of factors,  including  the relative
           newness of sub-prime  auto  finance,  the range of finance  contracts
           that various sub-prime auto finance companies  provide,  the relative
           lack of competition compared to traditional  automotive financing and
           the potential  returns  sustainable from large interest rate spreads.
           The Company  focuses on late model used rather than new vehicles,  as
           management believes the risk of loss is lower on used vehicles due to
           lower  depreciation  rates, while interest rates are typically higher
           than on new vehicles.  For the period from inception through December
           31, 1996, new vehicles and used vehicles  represented 9.2% and 90.8%,
           respectively,  of the finance contract  portfolio  measured by dollar
           value of  amounts  financed  and 6.8% and 93.2%,  respectively,  as a
           percentage of units acquired.  In addition,  the Company concentrates
           on acquiring finance  contracts from dealerships  franchised by major
           automobile  manufacturers because they typically offer higher quality
           vehicles, are better capitalized, and have better service



                                       2


<PAGE>


           facilities than used car dealers.

        o  EFFICIENT FUNDING  STRATEGIES--Through an investment-grade  warehouse
           facility  and  a  quarterly   securitization   program,  the  Company
           increases  its  liquidity,  redeploys  its  capital  and  reduces its
           exposure  to  interest  rate  fluctuations.   The  Company  has  also
           developed  the  ability  to  borrow  funds on a  non-recourse  basis,
           collateralized  by excess  spread cash flows from its  securitization
           trusts.  The net effect of the Company's  funding and  securitization
           program is to provide more proceeds  than the  Company's  acquisition
           costs,  resulting in positive  revenue cash flow, lower overall costs
           of funding,  and  permitting  loan volume to  increase  with  limited
           additional equity capital.

        o  UNIFORM  UNDERWRITING  CRITERIA--To manage the risk of delinquency or
           defaults  associated  with  sub-prime  consumers,   the  Company  has
           utilized since inception a single set of underwriting  criteria which
           are  consistently  applied in evaluating  credit  applications.  This
           evaluation  process is conducted  on a  centralized  basis  utilizing
           experienced  personnel.  These uniform  underwriting  criteria create
           consistency in the securitized  portfolios of finance  contracts that
           make  them more  easily  analyzed  by the  rating  agencies  and more
           marketable  and permit  static  pool  analysis  of loan  defaults  to
           optimally structure securitizations. See "Management's Discussion and
           Analysis--Repossession Experience--Static Pool Analysis."

        o  CENTRALIZED  OPERATING  STRUCTURE--While  the Company establishes and
           maintains  relationships  with dealers through sales  representatives
           located in the geographic  markets served by the Company,  all of the
           Company's  day-to-day  operations  are  centralized  at the Company's
           offices in  Austin,  Texas.  This  centralized  structure  allows the
           Company to closely monitor its marketing,  funding,  underwriting and
           collections  operations and eliminates the expenses  associated  with
           full-service branch or regional offices.

        o  EXPERIENCED   MANAGEMENT  TEAM--The  Company  actively  recruits  and
           retains  experienced  personnel  at the  executive,  supervisory  and
           managerial  levels.  The senior  operating  management of the Company
           consists   of  seasoned   automobile   finance   professionals   with
           substantial  experience  in  underwriting,  collecting  and financing
           automobile finance contracts.

        o  INTENSIVE COLLECTION  MANAGEMENT--The Company believes that intensive
           collection  efforts  are  essential  to  ensure  the  performance  of
           sub-prime  finance  contracts and to mitigate  losses.  The Company's
           collections managers contact delinquent accounts frequently,  working
           cooperatively  with  customers to get full or partial  payments,  but
           will  initiate  repossession  of financed  vehicles no later than the
           90th  day of  delinquency.  As of  December  31,  1996,  a  total  of
           $1,826,800 or 1.74%, of the Company's finance contract portfolio were
           between  60 and 90 days  past due and  $1,328,300,  or  approximately
           1.27%, of the Company's  finance  contracts  outstanding were greater
           than 90 days past due. From inception  through December 31, 1996, the
           Company repossessed  approximately 6.2% of its financed vehicles. The
           Company had completed  the disposal of 344 vehicles,  resulting in an
           average loss per  repossession of  approximately  $1,270 per vehicle.
           See


                                       3


<PAGE>


           "Management's Discussion and Analysis - Net Loss per Repossession."


        o  LIMITED LOSS  EXPOSURE--To  reduce its potential  losses on defaulted
           finance contracts,  the Company historically has insured each finance
           contract it funds against  damage to the financed  vehicle  through a
           vender's  comprehensive  single interest  physical  damage  insurance
           policy (a "VSI Policy"). In addition in connection with the Company's
           warehouse  financing and  securitizations  through December 31, 1996,
           the Company  purchased credit default  insurance through a deficiency
           balance endorsement (the "Credit Endorsement") to the VSI Policy. The
           Credit Endorsement  reimburses the Company for the difference between
           the unpaid finance contract balance and the net proceeds  received in
           connection with the sale of the repossessed  vehicle.  Moreover,  the
           Company  limits  loan-to-value  ratios and  applies a purchase  price
           discount  to  the  finance  contracts  it  acquires.   The  Company's
           combination of underwriting  criteria,  intensive  collection efforts
           and the  VSI  Policy  and  Credit  Endorsement  has  resulted  in net
           charge-offs (after receipt of liquidation and insurance  proceeds) of
           8.57%  (excluding   repossession  costs)  of  the  principal  balance
           outstanding   on  disposed   repossessed   vehicles   for  which  the
           liquidation  process  has been  completed  as of December  31,  1996.
           Effective  April 1997,  the  insurance  company  providing the Credit
           Endorsement  will no longer provide such coverage to the auto finance
           industry,  including the Company,  for finance  contracts  originated
           after,  and  has  asserted  rights to increase premiums through, such
           date.  Although  the  Company  has  obtained new VSI Policies,  these
           policies  do  not have coverage similar  to  the  Credit Endorsement.
           However,   management   believes   that  the  increased   levels   of
           overcollateralization in its warehouse financing and  securitizations
           will   compensate   for  the  lack  of  the  Credit Endorsement.  See
           "-Insurance"  below  and  "Management's  Discussion and Analysis--Net
            Loss per Repossession."


BORROWER CHARACTERISTICS

        Borrowers  under  finance  contracts in the Company's  finance  contract
portfolio are generally sub-prime consumers.  Sub-prime consumers are purchasers
of financed  vehicles with limited access to  traditional  sources of credit and
are generally individuals with weak or no credit histories. Based on a sample of
1,533  finance  contracts in the finance  contract  portfolio  which the Company
believes  are  representative  of the  portfolio  as a whole,  the  Company  has
determined the following  characteristics  with respect to its finance  contract
borrowers.  The average  borrower's  monthly  income is $2,400,  with an average
payment-to-income  ratio of 15.7% and an average  debt-to-income ratio of 19.2%.
The  Company's   guidelines  permit  a  maximum   payment-to-income   ratio  and
debt-to-income  ratio of 20% and 50%,  respectively.  The  Company's  guidelines
require a cash down payment of 10% of the vehicle  selling  price.  Based upon a
sample of its borrowers  which the Company  believes to be  representative,  the
average  borrower's  time spent at current  residence is 65.6 months,  while the
average  time of service  at current  employer  is 46.6  months.  The age of the
average borrower is 34.3 years.



                                       4


<PAGE>

CONTRACT PROFILE

        From inception to December 31, 1996, the Company acquired 10,073 finance
contracts with an aggregate initial principal balance of $117.7 million.  Of the
finance contracts  acquired,  approximately 6.8% have related to the sale of new
automobiles  and   approximately   93.2%  have  related  to  the  sale  of  used
automobiles.  The average age of used financed  vehicles was  approximately  two
years at the time of sale.  The finance  contracts  had,  upon  acquisition,  an
average initial principal balance of $11,685;  a weighted average APR of 19.54%;
a weighted average finance contract acquisition discount of 8.3%; and a weighted
average contractual  maturity of 52 months. As of December 31, 1996, the finance
contracts in the finance  contract  portfolio had a weighted  average  remaining
maturity of 45.7 months. Since inception, the Company's cumulative repossessions
have totaled 625 or 6.2% of the total portfolio.

DEALER NETWORK

        General. The Company acquires finance contracts originated by automobile
dealers in connection  with the sale of late-model used and, to a lesser extent,
new cars to sub-prime borrowers. Accordingly, the Company's business development
strategy depends on enrolling and promoting  active  participation by automobile
dealers in the Company's financing program. Dealers are selected on the basis of
geographic location, financial strength, experience and integrity of management,
stability of ownership quality of used car inventory, participation in sub-prime
financing  programs,  and  the  anticipated  quality  and  quantity  of  finance
contracts  which  they  originate.   The  Company  principally  targets  dealers
operating under  franchises  from major  automobile  manufacturers,  rather than
independent used car dealers.  The Company believes that franchised  dealers are
generally  more  stable  and offer  higher  quality  vehicles  than  independent
dealers.  This is due,  in  part,  to  careful  initial  screening  and  ongoing
monitoring  by  the  automobile  manufacturers  and to the  level  of  financial
commitment  necessary  to secure and  maintain a  franchise.  As of December 31,
1996,  the Company was licensed or  qualified to do business in 34 states.  Over
the near term, the Company intends to focus its proposed geographic expansion on
states in the midwest and mid-Atlantic regions.

        Location of Dealers. Approximately 44.9% of the Company's dealer network
consists of dealers located in Texas, where the Company has operated since 1994.
During the fiscal year ended  December 31, 1996,  the Company  acquired  finance
contracts from dealers in 36 states.

        A  group  of six  dealerships  (including  Charlie  Thomas  Ford)  under
substantial common ownership  accounted for approximately  26.51% and 17.56% for
the fiscal year ended 1995 and 1996 respectively,  of finance contracts acquired
during the same period.  One  dealership,  Charlie Thomas Ford, Inc. of Houston,
Texas,  accounted for 8.79% of the finance contracts acquired by the Company for
the period from  inception  through  December  31, 1996 (8.77% and 8.94% for the
fiscal year ended 1995 and 1996 respectively).

DEALER SOLICITATION

        Marketing Representatives. As of December 31, 1996, the Company utilized
24




                                       5


<PAGE>

marketing  representatives,  twelve of which were  individuals  employed  by the
Company and twelve of which were marketing  organizations serving as independent
representatives.  These  representatives have an average of ten years experience
in the automobile financing industry. Each marketing  representative reports to,
and is  supervised  by, the  Company's  Senior  Vice  President--Marketing.  The
Company  is   currently   evaluating   candidates   for   additional   marketing
representative positions. The marketing representatives reside in the region for
which they are  responsible.  Marketing  representatives  are compensated on the
basis of a salary  plus  commissions  based on the number of  finance  contracts
purchased by the Company in their  respective  areas.  The Company  maintains an
exclusive  relationship  with  the  independent  marketing  representatives  and
compensates  such   representatives   on  a  commission   basis.  All  marketing
representatives  undergo  training  and  orientation  at  the  Company's  Austin
headquarters.

        The   Company's    marketing    representatives    establish   financing
relationships with new dealerships,  and maintain existing dealer relationships.
Each marketing representative endeavors to meet with the managers of the finance
and insurance  ("F&I")  departments  at each  targeted  dealership in his or her
territory to introduce and enroll  dealers in the Company's  financing  program,
educating the F&I managers  about the  Company's  underwriting  philosophy,  its
practice of using  experienced  underwriters  (rather than  computerized  credit
scoring)  to  review  applications,  and the  Company's  commitment  to a single
lending program that is easy for dealers to master and administer. The marketing
representatives  offer training to dealership  personnel regarding the Company's
program guidelines, procedures and philosophy.

        After   each   dealer   relationship   is   established,   a   marketing
representative continues to actively monitor the relationship with the objective
of maximizing the volume of applications  received from the dealer that meet the
Company's  underwriting  standards.  Due  to  the  non-exclusive  nature  of the
Company's relationships with dealers, the dealers retain discretion to determine
whether to seek financing  from the Company or another  financing  source.  Each
representative submits a weekly call report describing contacts with prospective
and existing  dealers during the preceding week and monthly  competitive  survey
relating to the competitive situation and possible  opportunities in the region.
The Company provides each representative a weekly report detailing  applications
received and finance  contracts  purchased  from all dealers in the region.  The
marketing  representatives  regularly telephone and visit F&I managers to remind
them of the  Company's  objectives  and to answer  questions.  To  increase  the
effectiveness  of these  contacts,  the  marketing  representatives  can  obtain
real-time information from the Company's newly installed management  information
systems,  listing  by  dealership  the  number of  applications  submitted,  the
Company's  response  to such  applications  and  the  reasons  why a  particular
application was rejected.  The Company believes that the personal  relationships
its marketing  representatives  establish with the F&I managers are an important
factor in creating and maintaining productive  relationships with its dealership
customer base.

        The  role of the  marketing  representatives  is  generally  limited  to
marketing the Company's financing program and maintaining relationships with the
Company's dealer network. The marketing representatives do not negotiate,  enter
into or modify dealer agreements on behalf of the Company, do not participate in
credit evaluation or loan funding




                                       6


<PAGE>

decisions and do not handle funds  belonging to the Company or its dealers.  The
Company  intends to develop  notable  finance  contract  volume in each state in
which it  initiates  coverage.  The Company has  elected not to  establish  full
service branch offices, believing that the expenses and administrative burden of
such  offices are  generally  unjustified.  The Company has  concluded  that the
ability to closely monitor the critical  functions finance contract approval and
contract  administration  and  collection are best performed and controlled on a
centralized basis from its Austin facility.

        Dealer  Agreements.  Each dealer with which the  Company  establishes  a
financing  relationship enters into a non-exclusive  written dealer agreement (a
"Dealer  Agreement")  with the Company,  governing the Company's  acquisition of
finance contracts from such dealer. A Dealer Agreement  generally  provides that
the dealer  shall  indemnify  the Company  against  any damages or  liabilities,
including  reasonable  attorney's  fees,  arising  out of (i)  any  breach  of a
representation  or warranty of the dealer set forth in the Dealer  Agreement  or
(ii) any claim or defense that a borrower may have against a dealer  relating to
financing  contract.  Representations  and  warranties  in  a  Dealer  Agreement
generally relate to matters such as whether (a) the financed  automobile is free
of all liens,  claims and  encumbrances  except the Company's lien, (b) the down
payment  specified in the finance contract has been paid in full and whether any
part of the down  payment  was loaned to the  borrower by the dealer and (c) the
dealer has complied with applicable law. If the dealer violates the terms of the
Dealer  Agreement  with  respect  to  any  finance  contract,  the  dealer  must
repurchase such contract on demand for an amount equal to the unpaid balance and
all other indebtedness due to the Company from the borrower.

FINANCING PROGRAM

        Unlike certain  competitors who offer numerous  marketing  programs that
the Company believes serve to confuse dealers and borrowers, the Company markets
a single  financing  contract  acquisition  program to its dealers.  The Company
believes  that by  focusing on a single  program,  it  realizes  consistency  in
achieving  its  contract  acquisition  criteria,  which  aids  the  funding  and
securitization process. The finance contracts purchased by the Company must meet
several  criteria,  including  that  each  contract:  (i)  meets  the  Company's
underwriting guidelines;  (ii) is secured by a new or late-model used vehicle of
a type on the Company's approved list; (iii) was originated in a jurisdiction in
the United States in which the Company was licensed or qualified to do business,
as  appropriate;  (iv) provides for level monthly  payments  (collectively,  the
"Scheduled  Payments")  that fully amortize the amount financed over the finance
contract's original  contractual term; (v) has an original contractual term from
24 to 60 months;  (vi)  provides for finance  charges at an APR of at least 14%;
(vii)  provides a  verifiable  down  payment of 10% or more of the cash  selling
price;  and  (viii) is not past due or does not  finance  a vehicle  which is in
repossession  at the time the  finance  contract  is  presented  to Company  for
acquisition.  Although the Company has in the past acquired a substantial number
of finance  contracts for which principal and interest are calculated  according
to the Rule of 78s the Company's  present policy is to acquire primarily finance
contracts calculated using the simple interest method.

        The amount  financed with respect to a finance  contract will  generally
equal the aggregate  amount  advanced  toward the purchase price of the financed
vehicle,  which equals the net selling  price of the vehicle (cash selling price
less down payment and trade-in), plus




                                       7


<PAGE>

the cost of permitted automotive  accessories (e.g., air conditioning,  standard
transmission,  etc.),  taxes, title and license fees, credit life,  accident and
health  insurance  policies,  service  and  warranty  contracts  and other items
customarily  included in retail  automobile  installment  contracts  and related
costs. Thus, the amount financed may be greater than the Manufacturers Suggested
Retail  Price  ("MSRP")  for new  vehicles or the market  value  quoted for used
vehicles.  Down  payments  must be in cash or real value of traded-in  vehicles.
Dealer-assisted or deferred down payments are not permitted.

        The  Company's  current  purchase  criteria  limit  acceptable   finance
contracts  to a  maximum  (a) net  selling  price of the  lesser  of (i) 112% of
wholesale  book value (or dealer invoice for new vehicles) or (ii) 95% of retail
book value (or MSRP for new vehicles) and (b) amount  financed of 120% of retail
book value in the case of a used  vehicle,  or 120% of MSRP in the case of a new
vehicle.  In assessing the value of a trade-in for purposes of  determining  the
vehicle's net selling price, the Company uses the published wholesale book value
without regard to the value assigned by the dealer.

        The credit characteristics of an application approved by the Company for
acquisition  generally  consist of the  following:  (i) stability of applicant's
employment,  (ii) stability of applicant's  residence history,  (iii) sufficient
borrower income, (iv) credit history, and (v) payment of down payment.

        The Company applies a loan-to-value ratio in selecting finance contracts
for  acquisitions  calculated  as equaling the quotient of: (a) The cash selling
price less the down payment on the vehicle,  divided by (b) the wholesale  value
of the vehicle  (net of  additions  or  subtractions  for mileage and  equipment
additions  listed in the  applicable  guide book).  For new vehicles,  wholesale
value is based on the invoice amount,  including  destination  charges. For used
vehicles, wholesale value is computed using the applicable guide book (Kelley or
NADA) in use within the market in which the vehicle is located.

        All of the  Company's  finance  contracts  are  prepayable  at any time.
Finance contracts  acquired by the Company must prohibit the sale or transfer of
the  financed  vehicle  without  the  Company's  prior  consent  and provide for
acceleration  of the  maturity  of the  finance  contract in the absence of such
consent.  For an approved  finance  contract,  the Company will agree to acquire
such finance contract from the originating  dealer at a non-refundable  contract
acquisition discount of approximately 8.5% to 12% of the amount financed.

CONTRACT ACQUISITION PROCESS

        General.  Having  selected an  automobile  for  purchase,  the sub-prime
consumer  typically meets with the  dealership's  F&I manager to discuss options
for financing the purchase of the vehicle.  If the sub-prime  consumer elects to
finance the vehicle's  purchase  through the dealer,  the dealer will  typically
submit the  borrower's  credit  application  to a number of potential  financing
sources  to find the most  favorable  terms.  In  general,  an F&I  department's
potential  sources of financing will include  banks,  thrifts,  captive  finance
companies and independent finance companies.

        For the year ended December 31, 1996,  71,132 credit  applications  were
submitted to




                                       8


<PAGE>

the Company. Of these 71,132 applications, approximately 32.8% were approved and
10.1%, or 7,215 contracts,  were acquired by the Company. The difference between
the number of applications approved and the number of finance contracts acquired
is  attributable  to a common  industry  practice in which  dealers often submit
credit  applications to more than one finance company and select on the basis of
the most favorable terms offered.  The prospective  customer may also decide not
to purchase the vehicle notwithstanding approval of the credit application.

        Contract  Processing.  Dealers send credit applications along with other
information to the Company's  Credit  Department in Austin via  facsimile.  Upon
receipt,  the credit application and other relevant  information is entered into
the  Company's  computerized  contract  administration  system by the  Company's
credit  verification  personnel  and  a  paper-based  file  where  the  original
documents  are  created.  Once logged into the system,  the  applicant's  credit
bureau  reports are  automatically  accessed  and  retrieved  directly  into the
system.  At this  stage,  the  computer  assigns the credit  application  to the
specific credit manager assigned to the submitting dealer for credit evaluation.

        Credit Evaluation.  The Company applies uniform underwriting  standards.
In evaluating the applicant's  creditworthiness  and the collateral value of the
vehicle,  the credit underwriter reviews each application in accordance with the
Company's  guidelines  and  procedures,  which take into  account,  among  other
things,  the individual's  stability of residence,  employment  history,  credit
history,  ability  to pay,  income,  discretionary  income  and debt  ratio.  In
addition,  the credit underwriter evaluates the applicant's credit bureau report
in order to determine if the  applicant's  (i) credit quality is  deteriorating,
(ii)  credit  history  suggests a high  probability  of default or (iii)  credit
experience  is too  limited  for  the  Company  to  assess  the  probability  of
performance.  The  Company  also  assesses  the  value  and  useful  life of the
automobile that will serve as collateral under the finance  contract.  Moreover,
the credit  underwriters  consider the  suitability of a proposed loan under its
financing  program in light of the (a) proposed contract term and (b) conformity
of the proposed collateral coverage to the Company's underwriting guidelines.

        Verification of certain applicant-provided information (e.g., employment
and residence history) is required before the Company makes its credit decision.
Such verification  typically  requires  submission of supporting  documentation,
such as a paycheck stub or other  substantiation  of income, or a telephone bill
evidencing a current address. In addition, the Company does not normally approve
any  applications  from  persons  who  have  been  the  subject  of two or  more
bankruptcy proceedings or two or more repossessions.

        The Company's  underwriting  standards are applied by experienced credit
underwriters with a personal analysis of each application, utilizing experienced
judgment.  These  standards  have been  developed  and refined by the  Company's
senior credit and collections  management who, on average,  possess more than 24
years in the automobile  finance industry.  The Company believes that having its
credit  underwriters   personally  review  and  communicate  to  the  submitting
dealership the decision with respect to each application,  including the reasons
why a particular  application  may have been  declined,  enhances the  Company's
relationship with such dealers.  This practice encourages F&I managers to submit
contracts meeting the Company's underwriting  standards,  thereby increasing the
Company's operating  efficiency by eliminating the need to process  applications
unlikely to be approved.


                                       9


<PAGE>

        The Company's  Credit  Department  personnel  undergo  ongoing  internal
training  programs that are scheduled on a weekly basis and are attended by such
personnel  depending  on  their  responsibilities.  All of these  personnel  are
located in the Company's  offices in Austin where they are under the supervision
of the Vice President--Credit and the credit manager. The credit manager and the
Vice President-- Credit have an aggregate of more than 30 years of experience in
the  automobile  finance  business.   In  addition,   the  Company  reviews  all
repossessions  to  identify  factors  that  might  require  refinements  in  the
Company's credit evaluation procedures.

        Approval  Process.  The time from receipt of application to final credit
approval is a significant  competitive factor, and the Company seeks to complete
its  funding  approval  decision in an average of two to three  hours.  When the
Company approves the purchase of a finance contract, the credit manager notifies
the dealer by  facsimile  or  telephone.  Such notice  specifies  all  pertinent
information relating to the terms of approval,  including the interest rate, the
term,  information  about the  automobile  to be sold and the amount of discount
that the Company will deduct from the amount  financed  prior to  remitting  the
funds to the dealer. The discount is not refundable to the dealer.

        Contract Purchase and Funding.  Upon final  confirmation of the terms by
the borrower,  the dealer  completes the sale of the automobile to the borrower.
After the dealer delivers all required  documentation  (including an application
for title or a dealer  guaranty of title,  naming the Company as  lienholder) to
the  Company,  the Company  remits  funds to the dealer via  overnight  delivery
service,  generally within 48 hours of having received the complete loan funding
package.  As a matter of policy,  the  Company  takes such  measures as it deems
necessary  to obtain a  perfected  security  interest  in the  related  financed
vehicles  under the laws of the states in which such  vehicles  are  originated.
This generally  involves  taking the necessary  steps to obtain a certificate of
title which names the Company as lienholder. Each finance contract requires that
the  automobile  be  adequately  insured  and that the  Company be named as loss
payee,  and  compliance  with  these  requirements  is  verified  prior  to  the
remittance  of funds to the dealer.  Upon  funding of the finance  contract  and
payment of the  required  premium,  the  financed  vehicle is insured  under the
Company's VSI Policy,  which includes  coverage of property damages in the event
that the borrower does not maintain insurance.

        From time to time, the Company also acquires bulk  portfolios from other
originators.  In this event, the Company  reunderwrites such contracts to ensure
appropriate credit standards are maintained.  The Company acquired approximately
$14  million in  finance  contracts  in 1996 from  Greenwich  Capital  Financial
Products which were originated by First Fidelity Acceptance Corp.

CONTRACT SERVICING AND COLLECTION

        Contract  servicing  includes  contract  administration  and collection.
Because the Company believes that an active  collection  program is essential to
success in the  sub-prime  automobile  financing  market,  the  Company  retains
responsibility for finance contract collection.  The Company currently contracts
with CSC Logic/MSA L.L.P. (a Texas limited liability  partnership doing business
as "Loan Servicing Enterprises") ("LSE") to provide contract administration. The
Company may in the future assume certain of the servicing functions




                                       10


<PAGE>

performed by LSE, but there can be no assurance that this will occur.

        Contract   Administration.   LSE  provides   certain  finance   contract
administration   functions  in  connection  with  warehouse  facilities  and  in
connection  with finance  contracts  sold to  securitization  trusts,  including
payment processing,  statement rendering, insurance tracking, data reporting and
customer  service for finance  contracts.  LSE inputs newly  originated  finance
contracts on the contract system daily.  Finance contract  documentation is sent
by the Company to LSE as soon as dealer funding occurs. LSE then mails a welcome
letter to the borrower and subsequently mails monthly billing statements to each
borrower  approximately  ten days prior to each  payment due date.  Any borrower
remittances are directed to a lock box.  Remittances received are then posted to
the proper account on the system.  All borrower  remittances  are reviewed under
LSE's quality  control  process to assure its proper  application to the correct
account in the proper amount.  LSE also handles account inquiries from borrowers
and  performs  insurance  tracking  services.  LSE also  sends  out  notices  to
borrowers for instances where proper collateral insurance is not documented.

        Contract Collection. As collection agent, the Company is responsible for
pursuing collections from delinquent  borrowers.  The Company utilizes proactive
collection  procedures,  which  include  making early and frequent  contact with
delinquent  borrowers,  educating  borrowers as to the importance of maintaining
good credit,  and  employing a  consultative  and customer  service  approach to
assist the borrower in meeting his or her obligations.  The Company's ability to
monitor performance and collect payments owed by contract obligors is a function
of its collection  approach and support systems.  The Company's  approach to the
collection of delinquent contracts is to minimize repossessions and charge-offs.
The Company maintains a computerized  collection system specifically designed to
service sub-prime  automobile  finance  contracts.  The Company believes that if
problems are  identified  early,  it is possible to correct  many  delinquencies
before they deteriorate further.

        The  Company  currently  employs  33  people  full-time,   including  23
collections   specialists  and  other  support  personnel,  in  the  Collections
Department.  Each employee is devoted exclusively to collection  functions.  The
Company  attempts to  maintain a ratio of between 500 and 600 finance  contracts
per  collections  specialist.  As of December 31,  1996,  there were 400 finance
contracts in the Company's  finance  contract  portfolio  for every  collections
specialist.    The    Collections    Department   is   managed   by   the   Vice
President--Collections,  who possesses 30 years experience in the automotive and
finance  industry.  The Company  hires  additional  collections  specialists  in
advance of need to ensure adequate staffing and training.

        The  Company's  collectors  have  real-time  computer  access  to  LSE's
database.  Accounts  reaching five days past due are assigned to collectors  who
have specific  responsibility  for those accounts.  These collectors contact the
customer frequently,  both by phone and in writing.  Accounts that reach 60 days
past due are assigned to two senior  collectors  who handle those accounts until
resolved.  To facilitate  collections from borrowers,  the Company has increased
its  utilization of Western Union's "Quick  Collect," which allows  borrowers to
pay  from  remote  locations,  with a check  printed  at the  Company's  office.
Consistent with the Company's  internal policies and  securitization  documents,
finance contract provisions,  such as term, interest rate, amount, maturity date
or payment schedule will not be amended,  modified or otherwise changed,  except
when  required by  applicable  law or court order or where  permitted  under the
applicable insurance Policy.


                                       11


<PAGE>


        Payment extensions may be granted if, in the opinion of management, such
extension  provides a  permanent  solution to resolve a  temporary  problem.  An
extension  fee must be paid by the customer  prior to the  extension.  Normally,
there  can be only one  extension  during  the  first  18  months  of a  finance
contract.  Additional  extensions may be granted if allowed under the applicable
VSI Policy, although the Company's  securitization  documents restrict permitted
extensions to no longer than one month and not more than once per year.  Payment
due dates can be  modified  once during the term of the  contract to  facilitate
current payment by the customer.

        Repossessions and Recoveries.  If a delinquency  exists and a default is
deemed  inevitable or the collateral is in jeopardy,  and in no event later than
the 90th day of  delinquency  (as required by the  applicable  VSI Policy),  the
Company's Collections  Department will initiate the repossession of the financed
vehicle.  Bonded,  insured  outside  repossession  agencies  are used to  secure
involuntary  repossessions.  In most  jurisdictions,  the Company is required to
give notice to the borrower of the Company's  intention to sell the  repossessed
vehicle,  whereupon the borrower may exercise  certain rights to cure his or her
default  or redeem the  automobile.  Following  the  expiration  of the  legally
required  notice  period,  the  repossessed  vehicle is sold at a wholesale auto
auction (or in limited circumstances,  through dealers),  usually within 60 days
of the repossession.  The Company closely monitors the condition of vehicles set
for auction,  and procures an appraisal under the applicable VSI Policy prior to
sale.  Liquidation proceeds are applied to the borrower's outstanding obligation
under the finance contract and loss deficiency  claims under the VSI Policy and,
if applicable, Credit Endorsement, are then filed. See "--Insurance."

INSURANCE

        Each finance contract requires the borrower to obtain  comprehensive and
collision  insurance  with  respect to the  related  financed  vehicle  with the
Company named as a loss payee.  The Company  relies on a written  representation
from the selling dealer and  independently  verifies that a borrower in fact has
such  insurance in effect when it  purchases  contracts.  Each finance  contract
acquired by the Company prior to December 31, 1996 is covered from the moment of
its purchase by the Interstate VSI Policy, including the Credit Endorsement. The
Interstate  VSI  Policy has been  issued to the  Company  by  Interstate  Fire &
Casualty  Company   ("Interstate").   Interstate  is  an  indirect  wholly-owned
subsidiary of Fireman's Fund Insurance  Company.  Each finance contract acquired
by the Company  after  December  31, 1996 will be covered from the moment of its
purchase by either the Interstate VSI Policy,  including the Credit  Endorsement
or another VSI Policy.

        Physical Damage and Loss Coverage.  The Company  initially relies on the
requirement, set forth in its underwriting criteria, that each borrower maintain
adequate  levels of physical  damage loss  coverage on the  respective  financed
vehicles.  LSE tracks the physical damage  insurance of borrowers,  and contacts
borrowers  in the  event of a lapse in  coverage  or  inadequate  documentation.
Moreover,  LSE is  obligated,  as servicer,  subject to certain  conditions  and
exclusions,  to assist the processing of claims under the VSI Policies.  The VSI
policies  insure  against:  (i) all risk of  physical  loss or  damage  from any
external cause to financed vehicles which the Company holds as collateral;  (ii)
any direct  loss which the Company  may  sustain by  unintentionally  failing to
record or file the instrument evidencing



                                       12


<PAGE>

each contract with the proper public officer or public office,  or by failing to
cause  the  proper  public  officer  or  public  office  to show  the  Company's
encumbrance  thereon,  if such  instrument is a certificate of title;  (iii) any
direct  loss  sustained  during  the term of the VSI  Policy,  by  reason of the
inability of the Company to locate the borrower,  the related financed  vehicle,
or by reason of  confiscation  of the  financed  vehicle by a public  officer or
public  office;  and (iv) all risk of physical  loss or damage from any external
cause to a  repossessed  financed  vehicle  for a period of 60 days  while  such
financed vehicle is (subject to certain exceptions) held by or being repossessed
by the Company.

        The  physical  damage  provisions  of a VSI  Policy  generally  provided
coverage for losses  sustained on the value of the financed  vehicle  securing a
contract,  but in no event is the coverage to exceed:  (i) the cost to repair or
replace the financed  vehicle with  material of like kind and quality;  (ii) the
actual cash value of the financed  vehicle at the date of loss, less its salvage
value;  (iii) the unpaid  balance of the  contract;  (iv)  $40,000 per  financed
vehicle (or, in the case of losses or damage  sustained on repossessed  financed
vehicles,  $25,000  per  occurrence);  or (v) the lesser of the  amounts due the
Company  under  clauses (i) through  (iv) above,  less any amounts due under all
other valid insurance on the damaged financed vehicle less its salvage value. No
assurance  can be given that the insurance  will cover the amount  financed with
respect to a financed vehicle.

        All claim  settlements  for physical  damage and loss coverage under the
Interstate  Policy  are  subject  to a $500  deductible  per  loss.  There is no
aggregate  limitation or other form of cap on the number of claims under the VSI
Policy.  Coverage on a financed  vehicle is for the term of the related contract
and is noncancellable. Each VSI Policy requires that, prior to filing a claim, a
reasonable attempt be made to repossess the financed vehicle and, in the case of
claims on skip losses,  every professional effort be made to locate the financed
vehicle and the related borrower.

        Credit Deficiency  Endorsement.  In addition to physical damage and loss
coverage, the Interstate VSI Policy contains a Credit Endorsement which provides
that Interstate shall indemnify the Company for certain losses incurred due to a
deficiency  balance  following the repossession and resale of financed  vehicles
securing defaulted finance contracts  eligible for coverage.  Coverage under the
Credit  Endorsement is strictly  conditioned upon the Company's  maintaining and
adhering  to  the  credit   underwriting   criteria  set  forth  in  the  Credit
Endorsement.  Losses on each eligible contract are covered in an amount equal to
the deficiency balance resulting from the Net Payoff Balance less the sum of (i)
the  Actual  Cash  Value of the  financed  vehicle  plus (ii) the  total  amount
recoverable  from  all  other  applicable  insurance,   including  refunds  from
cancelable add-on products. The maximum coverage under the Credit Endorsement is
$15,000 per contract.

        During the first  quarter of 1997,  the Company  elected not to obtain a
credit  deficiency  endorsement on  approximately  60% of the finance  contracts
which it acquired,  based upon the total principal  amount of finance  contracts
acquired.  However,  every contract  which the Company  acquires is covered by a
Vendors Single  Interest  policy to insure  against  damage to the vehicle.  The
Company  believes that its decision not to insure certain  contracts with credit
deficiency  coverage  will not  adversely  affect  its future  results.  This is
largely due to the fact that by not obtaining credit deficiency  insurance,  the
Company can reduce its cost basis in a finance contract by 5 to 6%.



                                       13


<PAGE>

        "Actual  Cash Value" for the  purposes of the Credit  Endorsement  only,
means the  greater of (i) the price for which the  subject  financed  vehicle is
sold or (ii) the wholesale market value at the time of the loss as determined by
an automobile guide approved by Interstate applicable to the region in which the
financed vehicle is sold.

        "Net Payoff Balance" for the purposes of the Credit  Endorsement,  means
the  outstanding  principal  balance as of the  default  date plus late fees and
corresponding  interest  no more than 90 days after the date of  default.  In no
event shall Net Payoff Balance include  non-approved  fees, taxes,  penalties or
assessments included in the original instrument,  or repossession,  disposition,
collection, remarketing expenses and fees or taxes incurred.

MANAGEMENT INFORMATION SYSTEMS

        Management believes that a high level of real-time  information flow and
analysis is essential to manage the Company's  informational and reporting needs
and to maintain the Company's competitive position. As stated above, the Company
has contracted with a third party servicer,  LSE, to provide data processing for
the Company's  portfolio of finance contracts.  LSE provides on-line information
processing  services with  terminals  located in the Company's  offices that are
connected to LSE's main computer center in Dallas.

        In addition,  management  uses  customized  reports,  with a download of
information to personal computers,  to issue investor reports and to analyze the
Company's   finance  contract   portfolio  on  a  monthly  basis.  The  system's
flexibility  allows  the  Company  to  achieve  productivity  improvements  with
enhanced  data access.  Management  believes that it has  sufficient  systems in
place to permit  significant  growth in the Company's finance contract portfolio
without the need for material  additional  investment in management  information
systems.

FUNDING/SECURITIZATION OF FINANCE CONTRACTS

        Warehouse Credit Facilities.  The Company obtains a substantial  portion
of its  working  capital  for  the  acquisition  of  finance  contracts  through
warehouse credit facilities.  Under a warehouse  facility,  generally the lender
advances  amounts  requested  by the  borrower  on a  periodic  basis,  up to an
aggregate  maximum  credit  limit  for the  facility,  for the  acquisition  and
servicing of finance  contracts or other similar  assets.  Until proceeds from a
securitization  transaction  are  used  to pay  down  outstanding  advances,  as
principal payments are received on the finance  contracts,  the principal amount
of the advances  may be paid down  incrementally  or  reinvested  in  additional
finance contracts on a revolving basis.

        At December 31, 1996, the Company had no balances  outstanding under the
$10.0 million Sentry Facility,  which expires on December 31, 2000. The proceeds
from borrowings under the Sentry Facility are used to acquire finance contracts,
to pay credit  default  insurance  premiums  and to make  deposits  to a reserve
account with Sentry. The Company pays a utilization fee of up to 0.21% per month
on the  average  outstanding  balance  under the  Sentry  Facility.  The  Sentry
Facility also requires the Company to pay up to 0.62% per quarter on the average
unused  balance.  Interest is payable monthly and accrues at a per annum rate of
prime plus 1.75% (which was approximately 10.0% at December 31, 1996).



                                       14


<PAGE>

        The Sentry  Facility  contains  certain  conditions and imposes  certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent  balances  in the reserve  account.  Under the Sentry  Facility,  the
Company paid interest of $220,674 for the year ended  December 31, 1996.  During
1996,  the  Company  also paid  $700,000  in  commitment  fees  pursuant  to its
agreement with Sentry.

        On May  22,  1996  the  Company,  through  its  wholly-owned  subsidiary
AutoBond  Funding  Corporation  II, entered into the Providian  Facility,  which
expired  December 15, 1996. The proceeds from the borrowings under the Providian
Facility were used to acquire finance contracts, to pay credit default insurance
premiums and to make deposits to a reserve account. Interest was payable monthly
with a delay of 15 days and  accrued  at a per annum  rate of LIBOR  plus  2.60%
(which was 8.0375% when  initially  determined on May 17,  1996).  The Providian
Facility  also  required the Company to pay a monthly fee on the average  unused
balance at a per annum rate of 0.25%.  Borrowings  under the Providian  Facility
were  rated  investment-grade  by a  nationally  recognized  statistical  rating
organization. As of December 31, 1996, no advances were outstanding with respect
to the Providian Facility.

        The Company's wholly-owned  subsidiary,  AutoBond Funding Corporation I,
entered into the Nomura  Facility,  pursuant to a credit  agreement  dated as of
June 16, 1995,  with a final  maturity date of June 16, 2005.  This facility was
terminated at the lender's option,  and no new advances were made after February
6, 1996. The Nomura Facility  provided for advances to AutoBond  Funding up to a
maximum  aggregate  principal  amount of $25  million,  for the  acquisition  of
finance  contracts.  As of December 31, 1996 no advances were  outstanding  with
respect to the Nomura Facility.

        On February 14, 1997 the  Company,  though its  wholly-owned  subsidiary
AutoBond  Funding  Corporation II, entered into the $50,000,000  Daiwa Facility,
which expires March of 1998.  The proceeds from the  borrowings  under the Daiwa
Facility are to be used to acquire finance contracts,  and to make deposits to a
reserve account.  Interest is payable monthly at the 30-day LIBOR plus 1.15% per
annum rate. The Daiwa Facility also requires the Company to pay a monthly fee on
the average  unused balance at a per annum rate of 0.25%.  Borrowings  under the
Daiwa Facility are rated investment-grade by a nationally recognized statistical
rating organization.  The Daiwa Facility contains certain conditions and imposes
certain  requirements  similar  to  those  in  the  agreements  relating  to the
Company's existing securitizations  including,  among other things,  delinquency
and repossession triggers.

        Securitization Program. The periodic securitization of finance contracts
is an  integral  part of the  Company's  business.  Securitizations  enable  the
Company to monetize its assets and redeploy its capital  resources and warehouse
credit facilities for the purchase of additional finance contracts. To date, the
Company has completed five securitizations  involving approximately $108 million
in aggregate  principal amount of finance  contracts  (excluding $3.6 million in
finance contracts sold in securitizations during the revolving period).

        In its  securitization  transactions  through  December  31,  1996,  the
Company sold pools of finance contracts




                                       15


<PAGE>

to a special purpose subsidiary,  which then assigned the finance contracts to a
trust in exchange  for cash and certain  retained  beneficial  interests  in the
trust. The trust issued two classes of fixed income investor certificates: Class
A  Certificates  which  were sold to  investors,  generally  at par with a fixed
coupon,  and  subordinated  excess spread  certificates  (representing  a senior
interest  in excess  spread cash flows from the  finance  contracts)  which were
retained by the  Company's  securitization  subsidiary  and which  collateralize
borrowings on a non-recourse  basis.  The Company would also fund a cash reserve
account that provides credit support to the Class A Certificates.  The Company's
securitization  subsidiaries  also  retained  an  interest  in the trust that is
subordinate  to the  interest of the investor  certificateholders.  The retained
interests  entitle the Company to receive  the future  excess  spread cash flows
from the trust after  payment to investors,  absorption of losses,  if any, that
arise from  defaults on the  transferred  finance  contracts  and payment of the
other expenses and obligations of the trust. In its securitization  transactions
planned for 1997, the Company  intends to utilize the provisions of the recently
effective  SFAS 125. In these  securitizations  the  Company  will sell pools of
finance contracts to a special purpose  subsidiary,  which will then issue notes
under a trust indenture secured by such finance  contracts.  The special purpose
corporations may issue multiple classes of secured notes, including subordinated
excess  spread  notes.  The Company will also fund a cash  reserve  account that
provides  credit  support  to the senior  notes.  The  Company's  securitization
subsidiaries  also will  retain an interest  in the  finance  contracts  that is
subordinate to the interest of the noteholders.  The retained  interests entitle
the Company to receive the future excess spread cash flows from the trust estate
after  payment  to  investors,  absorption  of losses,  if any,  that arise from
defaults on the transferred  finance contracts and payment of the other expenses
and obligations of the trust estate.

        Securitization  transactions impact the Company's liquidity primarily in
two ways.  First,  the application of proceeds toward payment of the outstanding
advances on warehouse credit facilities makes additional borrowing available, to
the extent of such  proceeds,  under those  facilities  for the  acquisition  of
additional  finance  contracts.  Second,  additional working capital is obtained
through  the  Company's   practice  of   borrowing,   through  the  issuance  of
non-recourse  debt,  against the value of the senior  interest  in the  retained
excess spread.  If the structure of the  securitizations  was changed,  it could
impact the Company's ability to generate liquidity. See "Recent Events".

        Upon each  securitization,  the Company  recognizes  the sale of finance
contracts  and records a gain or loss in an amount  which takes into account the
amounts  expected  to be  received as a result of its  retained  interests.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations --Revenues--Gain on Sale of Finance Contracts." At December 31, 1996,
the Company held excess servicing receivables and Class B Certificates totalling
$14.7  million,  a portion of which had been pledged to secure notes  payable of
$10.2 million.

        If the  Company  were  unable to  securitize  contracts  in a  financial
reporting  period,  the  Company  would  incur a  significant  decline  in total
revenues  and net income or report a loss for such  period.  If the Company were
unable to securitize its contracts and did not have sufficient credit available,
either under its warehouse credit facilities or from other sources,  the Company
would have to sell  portions of its  portfolio  directly to investors or curtail
its finance contract acquisition  activities.  See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."



                                       16


<PAGE>

        When the Company securitizes  finance contracts,  it repays a portion of
its outstanding warehouse indebtedness, making such portion available for future
borrowing.  As  finance  contract  volume  increases,  the  Company  expects  to
securitize  its assets at least  quarterly,  although  there can be no assurance
that the Company will be able to do so.

        The securitization  trust agreements and the servicing agreement contain
certain events of administrator termination, the occurrence of which entitle the
trustee  to  terminate  the  Company's  right  to act as  collection  agent  and
administrator.  Events  of  administrator  termination  typically  include:  (i)
defaults in payment  obligations  under the trust  agreements;  (ii)  unremedied
defaults  in the  performance  of  certain  terms or  covenants  under the trust
agreements, the servicing agreements or related documents; (iii) the institution
of certain  bankruptcy  or  liquidation  proceedings  against the Company;  (iv)
material  breaches by the Company of  representations  and warranties made by it
under the servicing  agreements and the sale agreements pursuant to which it has
sold the securitized  finance  contracts;  (v) the occurrence of a trigger event
whereby the ratio of delinquent  finance contracts to total securitized  finance
contracts for each transaction exceeds the percentage set forth in the servicing
agreements;  (vi)  a  material  adverse  change  in the  consolidated  financial
condition or  operations  of the Company,  or the  occurrence of any event which
materially  adversely  affects the  collectibility  of a material  amount of the
securitized finance contracts or which materially  adversely affects the ability
of the  Company to  collect a material  amount of the  finance  contracts  or to
perform in all material respects its obligations under the servicing agreements,
trust  agreements  and related  documents;  or (vii) any of the rating  agencies
rating the securitization  transactions determines that the Company's serving as
collection  agent under the servicing  agreement  would prevent such agency from
maintaining the required ratings on such  transactions,  or would result in such
transactions' being placed on negative review suspension or downgrade.

        The trust agreements contain  amortization events, the occurrence of any
of which may affect the Company's  rights to receive  payments in respect of the
future  excess  spread cash flows  otherwise  payable to it until  principal and
interest payments due the holders of all investor certificates are paid in full.
Such amortization events include: (i) defaults in certain payments or repurchase
obligations  under  the  trust  agreements;  (ii)  unremedied  defaults  in  the
performance   of  any   covenants  or  terms  of  the  trust   agreements  by  a
securitization  subsidiary;  (iii)  the  occurrence  of  certain  bankruptcy  or
insolvency  events of a  securitization  subsidiary;  (iv)  unremedied  material
breaches of  representations or warranties of a securitization  subsidiary;  (v)
occurrence  of  an  event  of  administrator  termination;  (vi)  failure  of  a
securitization  subsidiary  to  transfer  certain  required  amounts  of  unpaid
principal balance of finance contracts to each securitization trust or to retain
the  resulting  shortfall  in the  collection  accounts;  (vii)  failure  of any
transfer  under the trust  agreements  to create,  or  failure  of any  investor
certificates  to  evidence,  a valid  and  perfected  first  priority  undivided
ownership or security interest in the pool of securitized  finance contracts and
related  collateral;   (viii)  failure  of  the  Company  to  own,  directly  or
indirectly, 100% of the outstanding shares of common stock of any securitization
subsidiary; (ix) entry of unpaid and unstayed judgments aggregating in excess of
$25,000 are entered against any securitization  subsidiary; or (x) occurrence of
a "change in control" with respect to the Company.



                                       17


<PAGE>

COMPETITION

        The  sub-prime  credit market is highly  fragmented,  consisting of many
national, regional and local competitors,  and is characterized by relative ease
of entry and the recent  arrival of a number of well  capitalized  publicly-held
competitors.   Existing  and  potential  competitors  include   well-established
financial institutions,  such as banks, savings and loans, small loan companies,
industrial  thrifts,  leasing  companies and captive finance  companies owned by
automobile  manufacturers and others.  Many of these financial  organizations do
not consistently  solicit  business in the sub-prime credit market.  The Company
believes that captive finance companies  generally focus their marketing efforts
on  this  market  only  when  inventory  control  and/or  production  scheduling
requirements  of their  parent  organizations  dictate a need to  enhance  sales
volumes and exit the market once such sales volumes are  satisfied.  The Company
also  believes that  increased  regulatory  oversight  and capital  requirements
imposed  by  market  conditions  and  governmental  agencies  have  limited  the
activities of many banks and savings and loans in the sub-prime  credit  market.
In many cases, those organizations  electing to remain in the automobile finance
business  have  migrated  toward  higher  credit  quality   customers  to  allow
reductions in their overhead cost structures.

        As a result,  the  sub-prime  credit  market is  primarily  serviced  by
smaller finance organizations that solicit business when and to the extent their
capital  resources  permit.  The Company  believes no one of its  competitors or
group of  competitors  has a dominant  presence  in the  market.  The  Company's
strategy  is designed  to  capitalize  on the  market's  relative  lack of major
national  financing  sources.  Nonetheless,  several of these  competitors  have
greater financial  resources than the Company and may have a significantly lower
cost of funds. Many of these competitors also have  long-standing  relationships
with automobile  dealerships and may offer  dealerships or their customers other
forms of financing or services not provided by the Company. Furthermore,  during
the past two years,  a number of automobile  finance  companies  have  completed
public offerings of common stock, the proceeds of which are being used, at least
in part, to fund expansion and finance increased purchases of finance contracts.
The  Company's  ability  to  compete   successfully  depends  largely  upon  its
relationships  with  dealerships  and the  willingness  of  dealerships to offer
finance contracts to the Company that meet the Company's  underwriting criteria.
There can be no assurance that the Company will be able to continue successfully
in the markets it serves.

        Additionally,  during the first quarter of 1997 several of the Company's
competitors have experienced serious problems ranging from allegedly  fraudulent
misstatements of earnings to increasing losses and inadequate reserves. Although
the Company believes it has made adequate reserves to cover losses,  the ability
of the  Company  to obtain  funding  in the  future  and the rates at which such
financings may be obtained could be impaired as the result of the turmoil in the
subprime  auto  finance  industry.  Although  the  Company  was  able to  obtain
financing  under the Daiwa  Facility and continues to have  financing  available
under the Sentry  Facility  there can be no  assurance  that the  turmoil in the
subprime auto finance industry will not have an affect on the Company's  ability
to raise funds and may result in an increased cost of funding to the Company.



                                       18


<PAGE>

REGULATION

        The  Company's  business is subject to regulation  and  licensing  under
various federal,  state and local statutes and  regulations.  As of December 31,
1996, the Company's  business  operations were conducted with dealers located in
26 states, and, accordingly,  the laws and regulations of such states govern the
Company's  operations.  Most  states  where the Company  operates  (i) limit the
interest  rates,  fees and other  charges  that may be imposed by, or  prescribe
certain  other terms of, the finance  contracts  that the Company  purchases and
(ii) define the Company's rights to repossess and sell collateral.  In addition,
the Company is required  to be  licensed  or  registered  to conduct its finance
operations in certain states in which the Company purchases  finance  contracts.
As the Company expands its operations into other states,  it will be required to
comply with the laws of such states.

        Numerous  federal  and  state  consumer   protection  laws  and  related
regulations  impose  substantive   disclosure   requirements  upon  lenders  and
servicers  involved  in  automobile  financing.  Some of the  federal  laws  and
regulations include the Truth-in-Lending  Act, the Equal Credit Opportunity Act,
the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Credit
Billing Act, the Fair Debt Collection Practices Act, the Magnuson-Moss  Warranty
Act, the Federal  Reserve  Board's  Regulations  B and Z and the  Soldiers'  and
Sailors' Civil Relief Act.

        In  addition,  the  Federal  Trade  Commission  ("FTC")  has  adopted  a
holder-in-due-course  rule  which has the  effect  of  subjecting  persons  that
finance  consumer  credit  transactions  (and certain  related lenders and their
assignees) to all claims and defenses  which the purchaser  could assert against
the  seller  of the  goods  and  services.  With  respect  to  used  automobiles
specifically,  the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty  coverage for such  automobiles.  The Credit Practices Rules of the
FTC impose  additional  restrictions  on sales  contract  provisions  and credit
practices.

        The  Company  believes  that it is in  substantial  compliance  with all
applicable  material  laws  and  regulations.  Adverse  changes  in the  laws or
regulations to which the Company's business is subject, or in the interpretation
thereof,  could have a material  adverse  effect on the Company's  business.  In
addition,  due to the  consumer-oriented  nature  of the  industry  in which the
Company operates and the unclear  application of various  truth-in-lending  laws
and  regulations  to certain  products  offered by  companies  in the  industry,
industry  participants are sometimes named as defendants in litigation involving
alleged  violations of federal and state consumer  lending or other similar laws
and  regulation.  A  significant  judgment  against  the  Company  or within the
industry in connection with any litigation  could have a material adverse effect
on the Company's financial condition and results of operations.

        In the event of  default  by a borrower  under a finance  contract,  the
Company is  entitled  to  exercise  the  remedies  of a secured  party under the
Uniform Commercial Code ("UCC"). The UCC remedies of a secured party include the
right to repossession by self-help  means,  unless such means would constitute a
breach of the  peace.  Unless the  borrower  voluntarily  surrenders  a vehicle,
self-help  repossession  by an  independent  repossession  agent  engaged by the
Company is usually employed by the Company when a borrower  defaults.  Self-help


                                       19


<PAGE>

repossession is accomplished by retaking  possession of the vehicle. If a breach
of the peace is likely to occur,  or if  applicable  state law so requires,  the
Company must obtain a court order from the appropriate state court and repossess
the  vehicle  in  accordance  with that  order.  None of the states in which the
Company  presently does business has any law that would require the Company,  in
the absence of a probable breach of the peace, to obtain a court order before it
attempts to repossess a vehicle.

        In most  jurisdictions,  the UCC and other state laws  require a secured
party to provide an obligor with  reasonable  notice of the date, time and place
of any public sale or the date after which any private sale of collateral may be
held.  Unless the obligor waives his rights after  default,  the obligor in most
circumstances  has a right to redeem the collateral  prior to actual sale (i) by
paying  the  secured  party all  unpaid  installments  on the  obligation,  plus
reasonable  expenses for repossessing,  holding and preparing the collateral for
disposition and arranging for its sale, plus in some  jurisdictions,  reasonable
attorneys'  fees or (ii) in some states,  by paying the secured  party  past-due
installments.  Repossessed  vehicles are generally resold by the Company through
wholesale auctions which are attended principally by dealers.

EMPLOYEES

        As of December 31, 1996, the Company employed 116 persons, none of which
was covered by a collective bargaining agreement.  The Company believes that its
relationship with its employees is satisfactory.

ITEM 2. PROPERTIES

PROPERTIES AND FACILITIES

        The Company's  headquarters are located in  approximately  18,900 square
feet of leased space at 301 Congress Avenue,  Austin,  Texas, for a monthly rent
of $18,338.  The lease for such  facility  expires in June 1998.  The  Company's
headquarters contain the Company's executive offices as well as those related to
automobile  finance  contract  acquisition.  In  addition,  the  Company  leased
approximately 520 square feet of office space at 1010 Woodman Drive,  Suite 240,
Dayton,  Ohio, for its midwest  regional  marketing office at a rent of $550 per
month. The lease for the Ohio facility expired on February 28, 1997. The Company
no longer maintains any regional office facilities

ITEM 3. LEGAL PROCEEDINGS

        The  Company  is  currently  not a  party  to any  material  litigation,
although it is involved from time to time in routine litigation  incident to its
business.

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

               Not Applicable.



                                       20


<PAGE>


                                     PART II

ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
        RELATED SHAREHOLDER MATTERS

        On November 8, 1996, the Company's Common Stock was listed for quotation
and began trading on Nasdaq  National  Market under the symbol  "ABND." Prior to
such date,  the Company's  stock was closely held and not traded on any regional
or national  exchange.  The high and low sale prices for the Common Stock during
the period  beginning  November 8, 1996,  when the Common  Stock  began  trading
publicly,  through the end of 1996, as reported by Nasdaq,  were $11 and $9 1/4,
respectively.

        The transfer  agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. As of December 31, 1996, the Company had approximately
41 stockholders of record, exclusive of holders who own their shares in "street"
or nominee names.

        The  Company  has not paid and does  not  presently  intend  to pay cash
dividends on its Common Stock. The Company anticipates that its earnings for the
foreseeable  future will be  retained  for use in  operation  and  expansion  of
business.  Payment of cash dividends,  if any, in the future will be at the sole
discretion  of the  Company's  Board  of  Directors  and  will  depend  upon the
Company's  financial  condition,   earnings,  current  and  anticipated  capital
requirements,  terms of  indebtedness  and other factors deemed  relevant by the
Company's Board of Directors.



                                       21


<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

        The following selected financial data as of and for each of the years in
the  three-year  period ended  December 31, 1996 are derived from the  financial
statements  of the  Company.  The  selected  financial  data  should  be read in
conjunction  with the Financial  Statements,  including the Notes  thereto,  and
other financial data included  elsewhere herein and the following  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                                 -----------------------
                                                          1994(1)         1995           1996
                                                          -------         ----           ----
                                                         (DOLLARS IN THOUSANDS EXCEPT FOR PER
                                                                    SHARE AMOUNTS)
<S>                                                    <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
    Net interest income ..........................        $   19         $   781        $   137
    Servicing fee income .........................             0               0            658
    Gain on sale of finance contracts ............             0           4,086         12,821
    Unrealized gain on Class B Certificates ......             0               0            388
                                                          ------         -------        -------
     Total revenues ..............................            19           4,867         14,004
                                                          ------         -------        -------
    Provision for credit losses ..................            45              49            412
    Salaries and benefits ........................           226           1,320          4,529
    General and administrative ...................           245           1,463          2,331
    Other operating expenses .....................            48             963          1,120
                                                          ------         -------        -------
     Total expenses ..............................           564           3,795          8,392
                                                          ------         -------        -------
    Net income (loss) before taxes and ...........          (545)          1,072          5,611
     extraordinary item
    Provision for income taxes ...................             0             199          1,927
    Extraordinary loss net of tax effect .........          --              --             (100)
                                                          ------         -------        -------
    Net income (loss) ............................          (545)            873          3,585
                                                          ======         =======        =======
   Net income (loss) before extraordinary item ...       $(0.11)          $0.17          $0.64
   Net income (loss) per share ...................        $(0.11)          $0.17          $0.62
   Weighted average shares outstanding ...........     5,118,753       5,190,159      5,811,377

PORTFOLIO DATA:
  Number of finance contracts acquired ...........           202           2,656          7,215
  Principal balance of finance contacts ..........        $2,465         $31,863        $83,372
  acquired
  Principal balance of finance contracts .........             0          26,261         85,036
  securitized
  Average initial finance contract principal .....       $  12.2         $  12.0         $ 11.6
  balance
  Weighted average initial contractual term ......          54.3            53.3           51.5
     (months)
  Weighted average APR of finance contracts(2) ...          19.1%           19.3%          19.6%
  Weighted average finance contract ..............           8.6%            8.8%           8.2%
     acquisition discount(2)
  Number of finance contacts outstanding (end ....           197           2,774          9,030
     of period)(2)
Principal balance of finance contracts (end ......        $2,450         $31,311        $94,352
  of period)(2)
OPERATING DATA:
  Number of enrolled dealers (end of period) .....            50             280            715
  Number of active states (end of period) ........             2               7             26
  Total expenses as a percentage of total ........          23.0%           12.0%         10.07%
  principal balance of finance contracts
  acquired in period
ASSET QUALITY DATA:
Delinquencies 60+ days past due as a .............          0.30%           2.30%         3.34%
  percentage of principal balance of finance
  contract portfolio (end of period)(2)
</TABLE>

                                       22


<PAGE>


<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              -------------
                                                      1994        1995        1996
                                                      ----        ----        ----
                                                         (DOLLARS IN THOUSANDS)

<S>                                                     <C>        <C>           <C>
BALANCE SHEET DATA:
  Cash and cash equivalents......................       $    0     $    93       4,121
  Cash held in escrow............................            0       1,323       2,663
  Finance contracts held for sale, net...........        2,361       3,355         228
  Excess servicing receivable....................            0         847       4,247
     Total assets................................        2,500      11,065      27,277
  Notes payable..................................            0       2,675      10,175
  Repurchase agreement...........................            0       1,061           0
  Revolving credit agreement.....................        2,055       1,150           0
  Subordinated debt..............................            0           0           0
                                                        ------     -------      ------
     Total debt..................................        2,055       4,886      10,175
  Shareholders' equity...........................         (109)      3,026      12,286
</TABLE>

---------------
(1)  The Company was  incorporated on June 15, 1993 and commenced  operations in
     August 1994.

(2)  Includes  the  Company's  entire finance  contract  portfolio  of contracts
     held and contracts securitized.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

     The following analysis of the financial condition and results of operations
of the  Company  should  be read in  conjunction  with the  preceding  "Selected
Financial Data" and the Company's  Consolidated  Financial  Statements and Notes
thereto and the other financial data included herein. The financial  information
set forth below has been rounded in order to simplify its presentation. However,
the ratios and  percentages  set forth below are  calculated  using the detailed
financial  information  contained  in the  Financial  Statements  and the  Notes
thereto, and the financial data included elsewhere in this Form 10-K.

     The Company is a specialty  consumer  finance company engaged in acquiring,
securitizing and servicing finance contracts originated by automobile dealers in
connection  with the sale of used and new  vehicles to subprime  consumers.  The
Company has experienced  significant  growth in its finance  contract  portfolio
since it commenced operations in August 1994.

REVENUES

     The Company's primary sources of revenues consist of three components:  net
interest income,  gain on sale of finance contracts and servicing and collection
fees.

     Net  Interest  Income.  Net  interest  income  consists  of the  sum of two
components: (i)




                                       23


<PAGE>

the difference between interest income earned on finance contracts held for sale
and interest  expense  incurred by the Company  pursuant to borrowings under its
warehouse  and  other  credit  facilities;  and (ii) the  accretion  of  finance
contract  acquisition  discounts.  Other factors influencing net interest income
during a given  fiscal  period  include  (a) the annual  percentage  rate of the
finance  contracts  acquired,  (b) the  aggregate  principal  balance of finance
contracts  acquired and funded through the Company's  warehouse and other credit
facilities  prior to  securitization,  (c) the length of time such contracts are
funded  by  the  warehouse  and  other  credit   facilities.   Finance  contract
acquisition  growth has had a  significant  impact on the amount of net interest
income earned by the Company.

     Gain on Sale of Finance Contracts. Upon completion of a securitization, the
Company  recognizes  a gain on sale of finance  contracts  equal to the  present
value of future excess spread cash flows from the securitization  trust, and the
difference between the net proceeds from the securitization and the net carrying
cost  (including the cost of VSI Policy  premiums) to the Company of the finance
contracts sold. The Class B Certificates and the excess servicing receivable are
determined based on the estimated present value of excess spread cash flows from
a  securitization  trust.  Excess  spread cash flows  represent  the  difference
between the weighted  average  contract rate earned and the rate paid on Class A
Certificates  issued  to  third  party  investors  in the  securitization,  less
servicing  fees and other  costs,  over the life of the  securitization.  Excess
spread  cash flows are  computed  by taking  into  account  certain  assumptions
regarding prepayments,  defaults,  proceeds from disposal of repossessed assets,
and servicing and other costs.  The Class B  Certificates  and excess  servicing
receivable are determined by discounting  the excess spread cash flows at a rate
based on assumptions that market  participants  would use for similar  financial
instruments subject to prepayment,  default,  collateral value and interest rate
risks. The Class B Certificates are then formed by carving out 65% to 80% of the
discounted  excess spread cash flows. The remaining 20% to 35% of the discounted
excess  spread cash flows  represent  excess  servicing  receivable.  All of the
excess spread cash flows are paid by the  securitization  Trustee to the Class B
Certificateholders  until such time as all accrued interest at 15% together with
principal have been paid in full. Subsequently, all remaining excess spread cash
flows  are  paid  to the  Company  and  are  referred  to as  the  "Transferor's
Interest."  The  discounted  Transferor's  Interest  is  reported in the balance
sheets as "Excess  Servicing  Receivable".  In each  securitization,  all of the
Class B Certificate and Transferor's  Interest are retained by the Company.  The
Class B Certificates  are used by the Company as collateral on its  non-recourse
term loans  entered  into with  investors.  The Company  performs an  impairment
review of the excess  servicing  receivable by calculating the net present value
of the  expected  future  excess  spread  cash  flows  to the  Company  from the
securitization trust utilizing the same discount rate used to record the initial
excess  servicing  receivable.  To the extent that market and  economic  changes
occur which adversely impact the assumptions  utilized in determining the excess
servicing  receivable,  the Company would record a charge against  servicing fee
income and write  down the asset  accordingly.  Impairment  is  determined  on a
disaggregated  basis consistent with the risk  characteristics of the underlying
finance  contracts,  consisting  principally of origination date and originating
dealership,  as well as the  performance  of the  pool to  date.  There  were no
adjustments required as a result of impairment reviews during any of the periods
presented in the



                                       24


<PAGE>

financial  statements.  Should  the  Company  be  unable to  securitize  finance
contracts  in the form of a sale in a financial  reporting  period,  the Company
would likely  incur a  significant  decline in total  revenues and net income or
report a loss for such period To date, the Company's  securitizations  have been
characterized  as debt for tax purposes.  Since the Company  records a provision
for income taxes on securitization, alternatively characterizing securitizations
as sales for tax  purposes  would  have no effect on net  income,  although  the
timing of tax payments by the Company would be accelerated.

     Gain on sale of finance contracts was $3,951,706,  $2,749,612,  $2,972,804,
$3,554,745, and $3,543,539 for each of the securitizations occurring in December
1995,  March 1996, June 1996,  September  1996, and December 1996  respectively.
This represents  approximately 15.05%,  16.60%, 16.67%, 15.94% and 14.17% of the
outstanding  balances  of the  finance  contracts  at  each  of  the  respective
securitization  dates.  Gain on sale can be broken into three major  components:
the amount by which the proceeds from the sale of Class A  Certificates  exceeds
the Company's cost basis in the contracts;  costs of sale (primarily  placement,
rating agent, and legal and accounting  fees); and discounted excess spread cash
flows (the Class B Certificates and Transferor's Interests).

     The  Company's  cost  basis  in  finance  contracts  sold has  varied  from
approximately  97.5% to 103% of the  value  of the  Class A  Certificates.  This
portion  of  recognized  gain on sale will vary based on the  Company's  cost on
insurance  covering the finance contracts and discount obtained upon acquisition
of the finance contracts.

     Additionally,  costs of sale  reduce  the  total  gain  recognized.  As the
Company's  securitization  program  matures,  placement  fees  and  other  costs
associated  with the  sale  should  shrink  as a  percentage  of the size of the
securitization.  For example,  costs of sale for the March 1996 transaction were
$280,000 (or 1.7%),  while costs for the December  1996  transaction  were about
$240,000 (or 1.0%).

     Further,  the excess  spread  component of  recognized  gain is affected by
various  factors,  including  most  significantly,  the  coupon  on the  Class A
Certificates  and the age of the finance  contracts  in the pool,  as the excess
spread  cashflow  from a pool of aged, as opposed to new,  finance  contracts is
less. The aging (capture of excess spread prior to  securitization)  necessarily
results in less available excess spread cash flow from the  securitization.  The
Company  believes that margins in the range of those  previously  recognized are
sustainable  subject to adverse  interest rate  movements,  availability  of VSI
insurance  at current  rates and the  Company's  ability to continue  purchasing
finance contracts from dealers at approximately an 8.5% discount.

     The  gain  on  sale of  finance  contracts  is  affected  by the  aggregate
principal  balance of contracts  securitized  and the gross  interest  spread on
those contracts.  The following table  illustrates the gross interest spread for
each of the Company's securitizations:



                                       25


<PAGE>



<TABLE>
<CAPTION>
                                        REMAINING     WEIGHTED
                                        BALANCE AT    AVERAGE
                             ORIGINAL   DECEMBER 31,  CONTRACT  CERTIFICATE                  GROSS
      SECURITIZATION        BALANCE(1)     1996         RATE      RATE        RATINGS(2)    SPREAD(3)
      --------------        ----------     ----         ----      ----        ----------    ---------
                                        (DOLLARS IN THOUSANDS)
<S>                       <C>         <C>            <C>        <C>             <C>     <C>
AutoBond Receivables
  Trust 1995-A.............  $26,261     $21,826        18.9%      7.23%        A/A3         11.7%
AutoBond Receivables
  Trust 1996-A.............   16,563      14,289        19.7       7.15         A/A3         12.5
AutoBond Receivables
  Trust 1996-B.............   17,833      17,833(4)     19.7       7.73         A/A3         12.0
    AutoBond Receivables
  Trust 1996-C.............   22,297      22,297(4)     19.7       7.45         A/A3         12.3
    AutoBond Receivables
  Trust 1996-D.............   25,000      25,000(4)     19.5       7.37         A/A3         12.1
                            --------   --------
      Total................ $107,954    $101,245
                            ========   ========
</TABLE>

------------------
(1)   Refers only to balances on Class A investor certificates.
(2)   Indicates ratings by Fitch Investors  Service,  L.P. and Moody's Investors
      Service, Inc., respectively.
(3)   Difference between weighted  average  contract  rate  and  senior  Class A
      Certificate rate.
(4)   Before expiration of the revolving period for each trust.

     Servicing Fee Income. The Company earns  substantially all of its servicing
fee income on the  contracts  it  services on behalf of  securitization  trusts.
Servicing  fee income  consists  of: (i)  contractual  servicing  fees  received
through securitizations,  equal to $7.00 per month per contract included in each
trust  (excluding  amounts paid to  third-party  servicers  by the trust);  (ii)
Transferor's  Interest,  reduced by the  amortization  of the  excess  servicing
receivable;  and (iii) fee  income  earned as  servicer  for such  items as late
charges and documentation fees, which are earned whether or not a securitization
has occurred.

     Servicing fee income,  excess spread cash flows and the value of the excess
servicing  receivable  may be affected by changes in the levels of  prepayments,
defaults, delinquencies, recoveries and interest rates from those assumed by the
Company  at the time of  securitization.  To the  extent  the  assumptions  used
materially  differ  from  actual  results,  the amount of cash  received  by the
Company over the remaining  life of the  securitization  could be  significantly
affected,  and the Company would be required to take a charge against  earnings,
which could have a material adverse effect on the Company's  financial condition
and operating results. To date, no such charge has been required.

EXPENSE ALLOCATIONS

     The Company has shared  certain  general and  administrative  expenses with
ABI.  Historically,  each  entity's  expenses have been  allocated  based on the
estimated utilization of resources, including employees, office space, equipment
rentals and other miscellaneous  expenses.  The office,  equipment and furniture
leases  at the  Company's  headquarters  are in  ABI's  name,  and  accordingly,
approximately  75% of ABI's lease  expense for the year ended  December 31, 1995
was allocated to the Company.  As of July 1996, such leases were assigned to the
Company. As of January 1, 1996, the Company has been and will be




                                       26


<PAGE>

compensated for services rendered and reimbursed for expenses incurred on behalf
of ABI, pursuant to a management agreement.  See "Certain Transactions" and Note
[12] to Notes to Consolidated Financial Statements.  ABI has no material current
operations  other  than to  manage  its  investment  in,  and its  shareholder's
investments in, securitizations unrelated to the Company. It is anticipated that
ABI will wind down as the outstanding principal of such investments is retired.

FINANCE CONTRACT ACQUISITION ACTIVITY

     The following  table sets forth  information  about the  Company's  finance
contract acquisition activity.

<TABLE>
<CAPTION>
                                         PERIOD FROM
                                       INCEPTION THROUGH         YEAR ENDED          YEAR ENDED
                                        DECEMBER 31, 1994    DECEMBER 31, 1995   DECEMBER 31, 1996
                                        -----------------    -----------------   -----------------
                                                       (DOLLARS IN THOUSANDS)
<S>                                         <C>               <C>                <C>
Number of finance contracts acquired              202             2,656               7,215
Principal balance of finance contracts          2,464           $31,863             $83,372
Number of active dealerships(1).....               50               222                 654
Number of enrolled dealerships......               50               280                 715
</TABLE>


---------
(1) Dealers  who have sold at least one finance  contract to the Company  during
    the period.

RESULTS OF OPERATIONS

        Period-to-period comparisons of operating results may not be meaningful,
and results of  operations  from prior  periods may not be  indicative of future
results. Because results of operations for 1994 are based on a five-month period
from the  inception of the  Company's  operations  through  December 31, 1994, a
comparison of those results to results of operations  for fiscal 1995 may not be
meaningful.  The following discussion and analysis should be read in conjunction
with  "Selected  Consolidated  Financial and  Operating  Data" and the Company's
Consolidated Financial Statements and the Notes thereto.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Total Revenues

        Total  revenues  increased  $9.1  million to $14.0  million for the year
ended  December 31, 1996 from $4.9 million for the year ended  December 31, 1995
due to growth in finance contract acquisition and securitization activity.

        Net Interest Income.  Net interest income decreased $644,300 to $136,794
for the year ended  December 31, 1996 from $781,094 for the year ended  December
31, 1995.  The decrease in net interest  income was primarily due to a reduction
in the average daily balance of finance contracts held for sale. This was due to
the fact that the Company securitized its production  quarterly in 1996 versus a
single  securitization in 1995. Interest income also declined due to an increase
in overall net borrowing costs and fees associated with  non-recourse term loans
and  Revolving  Credit  Facilities.  Finally,  there is no  spread  between  the
interest  rate earned on the Class B  certificates  and the related non recourse


                                       27


<PAGE>

loans  collateralized  by such  certificates.  The  increase in the  outstanding
balance of the Class B  certificates  and the related  debt causes net  interest
income to narrow. The average APR of outstanding finance contracts was 19.45% at
December 31, 1996, compared with 19.3% at December 31, 1995.

        Gain on Sale of Finance Contracts. For the year ended December 31, 1996,
gain on sale of finance contracts amounted to $12.8 million.  For the year ended
December  31,  1996,  the Company  completed  four  securitizations  aggregating
approximately  $81.7  million in principal  amount of finance  contracts and the
gain on sale of finance contracts accounted for 91.6% of total revenues. For the
year ended December 31, 1995,  there was one  securitization  transaction in the
principal  amount of $26.3  million.  The gain on sale of finance  contracts for
this sale transaction accounted for 84.0% of total revenues in 1995.

        Servicing Fee Income. The Company reports servicing fee income only with
respect to finance  contracts that are securitized.  For the year ended December
31, 1996,  servicing fee income was $657,950,  of which  $402,016 was collection
agent fees,  $154,029  resulted from discount  accretion on the excess servicing
receivable,  $50,000 was management fees from an affiliated company, and $51,904
arose from other sources.  The Company had completed only one  securitization in
1995,  which was completed at December 31, 1995, and had no servicing fee income
for such period.

Total Expenses

        Total expenses of the Company increased $4.6 million to $8.4 million for
the year ended  December 31, 1996 from $3.8 million for the year ended  December
31, 1995.  Although  operating expenses increased during the year ended December
31, 1996, the Company's  finance  contract  portfolio grew at a faster rate than
the rate of increase in operating  expenses.  Total  expenses as a percentage of
total principal  balance of finance  contracts  acquired in the period decreased
slightly  to 10.1%  during the year ended  December  31, 1996 from 12.0% for the
year ended December 31, 1995,  reflecting  improved  efficiency in the Company's
operations.

        Salaries and Benefits.  Salaries and benefits  increased $3.2 million to
$4.5 million for the year ended December 31, 1996 from $1.3 million for the year
ended  December 31, 1995.  This increase was due primarily to an increase in the
number of the Company's  employees  necessary to handle the  increased  contract
acquisition  volume and the  collection  activities  on a growing  portfolio  of
loans, and due to compensation of the Company's Chief Executive  Officer,  which
the  Company  began  paying  in May 1996.  See Note 13 to Notes to  Consolidated
Financial Statements.

        General and Administrative Expenses. General and administrative expenses
increased  $868,506 to $2.3  million for the year ended  December  31, 1996 from
$1.5  million  for the year ended  December  31,  1995.  This  increase  was due
primarily  to growth in the  Company's  operations.  General and  administrative
expenses  consist  principally  of  office,   furniture  and  equipment  leases,
professional fees, communications and office


                                       28


<PAGE>

supplies, and are expected to increase as the Company continues to grow and also
due to the costs of operating as a public company.

        Other  Operating   Expenses.   Other  operating   expenses   (consisting
principally of servicing  fees,  credit bureau reports and insurance)  increased
$156,628 to $1.1 million for the year ended  December 31, 1996 from $963,017 for
the year ended  December 31, 1995.  This  increase was due to increased  finance
contract acquisition volume.

Net Income

        In the year  ended  December  31,  1996,  net income  increased  to $3.6
million from $873,487 for the year ended  December 31, 1995.  Net income for the
year ended December 31, 1996 includes an extraordinary  charge of $100,000,  net
of income tax  benefits of $50,000,  which  represents  the  prepayment  penalty
associated with the early  redemption of the Class B Certificate  Notes from the
1995A securitization.  The increase in net income was primarily  attributable to
an increase in the number of finance  contracts  securitized  during 1996: $81.7
million, compared to $26.3 million in 1995.

FISCAL  YEAR ENDED  DECEMBER  31,  1995  COMPARED  TO PERIOD FROM AUGUST 1, 1994
(INCEPTION) THROUGH DECEMBER 31, 1994

Total Revenues

        Total  revenues  increased  to $4.9  million  for the fiscal  year ended
December 31, 1995 from $19,001 for the period from  inception  through  December
31,  1994.  Although  the  Company  was  incorporated  in June 1993,  it did not
commence  operations  until August 1994; thus the period from inception  through
December 31, 1994 reflects only five months of start-up operations.

        Net Interest Income.  Net interest income increased $762,093 to $781,094
for the fiscal year ended  December  31,  1995 from  $19,001 for the period from
inception  through  December 31, 1994.  The increase in net interest  income was
primarily due to an increase in average  balance of finance  contracts  held for
sale. The average daily balance of outstanding finance contracts increased $13.8
million to $14.7  million  for the  fiscal  year ended  December  31,  1995 from
$855,640 for the period from  inception  through  December 31, 1994. The average
APR of finance contracts  outstanding was 19.3% at December 31, 1995 as compared
to 19.1% at December 31, 1994.

        Gain on Sale of Finance Contracts. In the fiscal year ended December 31,
1995, the gain on sale of finance contracts was $4.1 million,  or 83.9% of total
revenues,  from the  securitization  of  approximately  $26.3 million in finance
contracts  and the sale of finance  contracts to a third  party.  For the period
from inception through December 31, 1994, there were no securitizations.

        Servicing Fee Income.  The  Company  completed  its first securitization
transaction

                                       29


<PAGE>


on December 29, 1995; therefore prior to 1996 there was no servicing fee  income
collected by the Company.

Total Expenses

        Total expenses of the Company increased $3.2 million to $3.8 million for
the fiscal year ended December 31, 1995 from $563,606 for the five-month  period
ended December 31, 1994.  Although  operating expenses increased during the year
ended  December 31, 1995,  the Company's  finance  contract  portfolio grew at a
faster rate than the rate of increase in operating expenses.  As a result, total
expenses  as a  percentage  of total  principal  balance  of  finance  contracts
acquired in period  decreased to 12.0% in the year ended  December 31, 1995 from
23.0% in the five months ended December 31, 1994.

        Provision  for Credit  Losses.  Provision  for credit  losses  increased
$3,702 to $48,702 for the fiscal year ended December 31, 1995,  from $45,000 for
the period from  inception  through  December  31, 1994.  This  increase was due
primarily  to  increased  acquisition  volume and does not reflect any change in
expected defaults as a percentage of finance contracts purchased.

        Salaries and Benefits.  Salaries and benefits  increased $1.1 million to
$1.3 million for the fiscal year ended  December 31, 1995 from  $225,351 for the
five-month period ended December 31, 1994. This increase was due primarily to an
increase in the number of the Company's employees.

        General and Administrative Expenses. General and administrative expenses
increased  $1.2 million to $1.5  million for the fiscal year ended  December 31,
1995 from  $244,974  for the  five-month  period ended  December 31, 1994.  This
increase was due primarily to growth in the Company's operations.

        Other Operating Expenses. Other operating expenses increased $914,736 to
$963,017  for the fiscal year ended  December  31,  1995,  from  $48,281 for the
five-month  period  ended  December  31,  1994,  due to the  increase in finance
contracts acquired.

Net Income

        Net income  increased to $873,487 for the fiscal year ended December 31,
1995 from a net loss of $544,605 for the period from inception  through December
31, 1994.  This increase was  primarily  attributable  to the Company's  initial
securitization  transaction  having been  completed in December 1995, as well as
growth in finance contract acquisitions.

FINANCIAL CONDITION

        Finance  Contracts Held for Sale, Net. Finance  contracts held for sale,
net of  allowance  for credit  losses,  decreased  $3.1  million to  $228,429 at
December  31,  1996,  from $3.4  million at December  31,  1995.  The number and
principal  balance of  contracts  held for sale are largely  dependent  upon the
timing  and  size  of  the  Company's  securitizations.  The  Company  plans  to
securitize finance contracts on a regular quarterly




                                       30


<PAGE>

basis.  See  Note 1 to the  Notes to  Consolidated  Financial  Statements  for a
discussion of finance contracts held for sale and allowance for credit losses.

        Trust  Receivable.  At the time a securitization  closes,  the Company's
securitization  subsidiary is required to fund a cash reserve account within the
trust to provide  additional  credit support for the senior trust  certificates.
Additionally, depending on the structure of the securitization, a portion of the
future  excess  spread cash flows from the trust is required to be  deposited in
the cash reserve account to increase the initial  deposit to a specified  level.
Amounts on deposit in cash reserve  accounts  are also  reflected as advances to
the relevant trust under the item "Cash flows from investing  activities" in the
Company's  consolidated  statements  of cash  flows.  The initial  cash  reserve
deposits  for the  December  1995,  March 1996,  June 1996,  September  1996 and
December 1996 securitizations were $525,220,  $331,267,  $356,658, $445,934, and
$500,000  respectively,  equivalent to 2% of the initial principal amount of the
senior trust  certificates.  A portion of excess spread cash flows will increase
such reserves until they reach 6%.

        Excess  Servicing Receivable.  The following  table provides  historical
data regarding the excess servicing receivable:

<TABLE>
<CAPTION>
                                        PERIOD FROM
                                       INCEPTION THROUGH        YEAR ENDED          YEAR ENDED
                                       DECEMBER 31, 1994    DECEMBER 31, 1995    DECEMBER 31, 1996
                                       -----------------    -----------------    -----------------
                                                         (DOLLARS IN THOUSANDS)
<S>                                           <C>                    <C>              <C>
     Beginning balance..............          $0                     $0               $847
     Additions......................           0                    847              3,246
     Accretion......................           0                      0                154
                                             ---                   ----             ------
     Ending balance.................          $0                   $847             $4,247
                                              ==                   ====             ======
</TABLE>

Delinquency Experience

        The following table reflects the delinquency experience of the Company's
finance contract portfolio at December 31, 1995 and at December 31, 1996:


<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                        -------------------------------
                                           1995                1996
                                           ----                -----
                                           (DOLLARS IN THOUSANDS)
<S>                                     <C>                   <C>
Principal balance of finance
  contracts outstanding .........       $31,311               $ 104,889
Delinquent finance contracts(1):
60-89 days past due .............       474   1.51          1,827   1.74%
90 days past due and over .......       246   0.79          1,328   1.27
                                        ---   ----        -------   ----
     Total ......................       720   2.30%       $ 3,155   3.01%
</TABLE>

----------
(1) Percentage based on outstanding  balance.  Excludes finance  contracts where
the underlying vehicle is repossessed,  the, borrower is in bankruptcy, Or there
are insurance claims filed.



                                       31


<PAGE>

CREDIT LOSS EXPERIENCE

        An allowance for credit losses is maintained  for all contracts held for
sale.  See  Notes 1 and 3 to Notes to  Consolidated  Financial  Statements.  The
Company  reports a provision  for credit  losses on finance  contracts  held for
sale.  Management  evaluates the  reasonableness of the assumptions  employed by
reviewing credit loss experience,  delinquencies,  repossession trends, the size
of the finance contract portfolio and general economic conditions and trends. If
necessary,  assumptions  will be changed  in the  future to  reflect  historical
experience  to the extent it deviates  materially  from that which was  assumed.
Since inception, the Company's assumptions have been consistent and are adequate
based upon actual experience.  Accordingly, no additional charges to earnings to
date  have  been  necessary  to  accommodate   more  adverse   experience   than
anticipated.

        If a  delinquency  exists  and a  default  is deemed  inevitable  or the
collateral  is in  jeopardy,  and  in no  event  later  than  the  90th  day  of
delinquency  (as  required  by  the  VSI  Policy),  the  Company's   Collections
Department  will  initiate the  repossession  of the financed  vehicle.  Bonded,
insured   outside   repossession   agencies  are  used  to  secure   involuntary
repossessions.  In most  jurisdictions,  notice to the borrower of the Company's
intention to sell the  repossessed  vehicle is required,  whereupon the borrower
may exercise certain rights to cure his or her default or redeem the automobile.
Following the expiration of the legally required notice period,  the repossessed
vehicle  is sold at a  wholesale  auto  auction  (or in  limited  circumstances.
through  dealers),  usually  within  60 days of the  repossession.  The  Company
closely  monitors the  condition  of vehicles  set for auction,  and procures an
appraisal under the VSI Policy prior to sale.  Liquidation  proceeds are applied
to the borrower's  outstanding  obligation  under the finance  contract and loss
deficiency  claims under the VSI Policy and Credit  Endorsement  are then filed.
The physical  damage and loss provisions of the VSI Policy insures each financed
vehicle against losses relating to (i) physical damage to repossessed  vehicles,
(ii) failure to file or record  necessary  instruments  or documents,  and (iii)
loss or confiscation  of the vehicle.  Generally the amount of coverage will not
exceed (i) the  vehicle's  replacement  value,  (ii) its cash value less salvage
value,  (iii) the unpaid  Finance  Contract  balance,  (iv)  $40,000 per vehicle
($25,000 per  occurrence  for  repossessed  vehicles),  or (v) the lesser of the
amounts  under  clauses  (i)-(iv)  above less other  insurance  coverage  on the
vehicle.  The Company  also has  obtained  credit  deficiency  balance  coverage
through the Credit Endorsement of the VSI Policy. See "Business-Insurance."

        Because of the Company's limited operating history, its finance contract
portfolio is somewhat unseasoned.  This effect on the delinquency statistics can
be  observed  in  the  comparison  of  year end 1995  versus  1996   delinquency
percentages.  The  portfolio is tangibly  more  seasoned as of December 31, 1996
versus December 31, 1995.  Accordingly,  delinquency and charge-off rates in the
portfolio  may not fully  reflect  the rates  that may  apply  when the  average
holding  period for finance  contracts in the Portfolio is


                                       32


<PAGE>


longer.  Increases in the delinquency  and/or  charge-off rates in the portfolio
would adversely affect the Company's  ability to obtain credit or securitize its
receivables.

REPOSSESSION EXPERIENCE-STATIC POOL ANALYSIS

        Because the Company's  finance contract  portfolio is continuing to grow
rapidly,  management  does not manage losses on the basis of a percentage of the
Company's  finance  contract  portfolio,  because  percentages  can be favorably
affected by large balances of recently  acquired finance  contracts.  Management
monitors actual dollar levels of delinquencies  and charge-offs and analyzes the
data on a "static pool" basis.

        The following table provides static pool repossession frequency analysis
in  dollars  of the  Company's  portfolio  performance  from  inception  through
December 31, 1996. In this table, all finance  contracts have been segregated by
quarter of acquisition. All repossessions have been segregated by the quarter in
which  the  repossessed   contract  was  originally  acquired  by  the  Company.
Cumulative  repossessions  equals the ratio of  repossessions as a percentage of
finance contracts acquired for each segregated quarter. Annualized repossessions
equals  an  annual  equivalent  of the  cumulative  repossession  ratio for each
segregated  quarter.  This table  provides  information  regarding the Company's
repossession  experience  over time.  For  example,  recently  acquired  finance
contracts  demonstrate  very few  repossessions  because  properly  underwritten
finance  contracts to subprime  consumers  generally  do not default  during the
initial term of the contract.  Between  approximately  one year and 18 months of
seasoning,  frequency of  repossessions on an annualized basis appear to reach a
plateau.  Based on industry  statistics  and the  performance  experience of the
Company's  finance  contract  portfolio,   the  Company  believes  that  finance
contracts   seasoned  in  excess  of  approximately  18  months  will  start  to
demonstrate declining repossession  frequency.  The Company believes this may be
due to the fact that the  borrower  perceives  that he or she has  equity in the
vehicle.  The Company also believes that since the loans generally amortize more
quickly  than the  collateral  depreciates,  losses  and/or  repossessions  will
decline over time.


                                       33


<PAGE>


<TABLE>
<CAPTION>

                                                         REPOSSESSION FREQUENCY
                                                        -------------------------
                                    PRINCIPAL BALANCE OF                          PRINCIPAL BALANCE
    YEAR AND QUARTER OF               REPOSSESSIONS BY                              OF CONTRACTS
         ACQUISITION                 QUARTER ACQUIRED  CUMULATIVE(1)   ANNUALIZED(2)  ACQUIRED
         -----------                 ----------------  ------------    -------------  --------
                                         (DOLLARS IN THOUSANDS)
<S>                               <C>                <C>               <C>              <C>
1994
     Q3.............................  $    15.74         16.89%           6.76%$           93.17
     Q4.............................      514.39         21.69            9.64          2,371.60
1995
     Q1.............................   $1,200.89         19.03%           9.52%       $ 6,310.42
     Q2.............................    1,015.89         16.50            9.43          6,157.44
     Q3.............................      984.66         13.66            9.11          7,205.90
     Q4.............................    1,589.46         13.04           10.43         12,188.86
1996
     Q1.............................   $1,462.62          9.46%           9.46%       $15,459.93
     Q2.............................    1,183.59          6.41            8.55         18,458.82
     Q3.............................      508.57          2.14            4.29         23,735.10
     Q4.............................       10.98          0.04            0.17         25,802.89
</TABLE>

                                                       (footnotes on next page)


(footnotes from previous page)

(1) For each quarter,  cumulative  repossession  frequency  equals the principal
    balance of  repossessions  divided by the  principal  amount.  of  contracts
    acquired.

(2) Annualized repossession frequency converts cumulative repossession frequency
    into an annual equivalent  (e.g., for Q4 1994,  principal balance of $514.39
    thousand in repossessions  divided by principal balance of $2.371 million in
    contracts acquired,  divided by 9 quarters  outstanding times four equals an
    annualized repossession frequency of 9.64%).



                                       34


<PAGE>


NET LOSS PER REPOSSESSION

        Upon initiation of the repossession  process, it is the Company's intent
to complete  the  liquidation  process as quickly as  possible.  The majority of
repossessed  vehicles are sold at wholesale auction.  The Company is responsible
for the costs of  repossession,  transportation  and storage.  The Company's net
charge-off per repossession  equals the unpaid balance less the auction proceeds
(net of associated costs) and less proceeds from insurance claims. The following
table   demonstrates  the  net  charge-off  per  repossessed   automobile  since
inception.

<TABLE>
<CAPTION>
                                                                       FROM
                                                                   AUGUST 1, 1994
                                                                   (INCEPTION) TO
                                                                  DECEMBER 31, 1996
                                                                  -----------------
<S>                                                                      <C>
Number of finance contracts acquired.............................        10,073
Number of finance vehicles repossessed...........................           625
Repossessed units disposed of....................................           344
Repossessed units awaiting disposition (2).......................           281
Cumulative gross charge-offs(l)..................................    $3,898,719
Costs of repossession(l).........................................       102,728
Proceeds from auction, physical damage insurance and refunds(l)..    (2,672,875)
                                                                    -----------
Net loss.........................................................     1,328,572
Deficiency insurance settlement received(l) .....................       891,684
                                                                   ------------
Net charge-offs(l)...............................................   $   436,888
                                                                    ============
Net charge-off per unit disposed.................................     $   1,270
Recoveries as a percentage of cumulative gross charge-offs(3)....        91.43%
</TABLE>

-------------
(1) Amounts are based on actual liquidation and repossession proceeds (including
    insurance proceeds) received on units for which the repossession process had
    been completed as of December 31, 1996.

(2) The vehicles may have been sold at auction;  however AutoBond might not have
    received all insurance proceeds as of December 31, 1996.

(3) Not  including  the  costs  of  repossession  which  are  reimbursed  by the
    securitization trusts.

LIQUIDITY AND CAPITAL RESOURCES

        Since inception, the Company has primarily funded its operations and the
growth of its finance  contract  portfolio  through seven  principal  sources of
capital:  (i) cash flows from  operating  activities;  (ii) funds  provided from
borrowers'  payments  received  under  finance  contracts  held for sale;  (iii)
borrowings under various warehouse and working capital facilities; (iv) proceeds
from securitization  transactions;  (v) cash flows from servicing fees; and (vi)
proceeds from the issuances of subordinated  debt and capital  contributions  of
principal shareholders, and (vii) an initial public offering of common stock.

        Cash Flows.  Significant  cash flows related to the Company's  operating
activities include the use of cash for purchases of finance contracts, and, cash
provided by payments on finance  contracts and sales of finance  contracts.  For
the year ended  December 31, 1995 and the year ended  December  31, 1996,  $31.2
million and $83.7 million, respectively, was




                                       35


<PAGE>

used by the  Company to  purchase  finance  contracts,  $2.7  million  and $1.6,
respectively,  was received as payments on finance contracts,  and $27.4 million
and $85.0 million,  respectively,  was received from sales of finance contracts,
primarily through  securitizations.  The Company used $525,220 and $1,633,859 to
fund cash reserve accounts for the  securitizations  completed in the year ended
December 31, 1995 and the year ended December 31, 1996, respectively.

        Significant  activities  comprising cash flows from financing activities
include net repayments under revolving warehouse credit facilities ($904,355 for
the year ended  December 31, 1995 and $1,150,421 for the year ended December 31,
1996) and net proceeds from  borrowings  against  excess spread cash flows ($2.7
million for the year ended December 31, 1995 and $2.7 million for the year ended
December 31, 1996).

        Warehouse Credit Facilities.  The Company obtains a substantial  portion
of its  working  capital  for  the  acquisition  of  finance  contracts  through
warehouse credit facilities.  Under a warehouse  facility,  the lender generally
advances  amounts  requested  by the  borrower  on a  periodic  basis,  up to an
aggregate  maximum  credit  limit  for the  facility,  for the  acquisition  and
servicing of finance  contracts or other similar  assets.  Until proceeds from a
securitization  transaction  are  used  to pay  down  outstanding  advances,  as
principal payments are received on the finance  contracts,  the principal amount
of the advances  may be paid down  incrementally  or  reinvested  in  additional
finance contracts on a revolving basis.

        At December 31, 1996, the Company had no balance  outstanding on a $10.0
million revolving credit facility (the "Sentry  Facility") with Sentry Financial
Corporation  ("Sentry"),  which expires on December 31, 2000.  The proceeds from
borrowings under the Sentry Facility are used to acquire finance  contracts,  to
pay credit default insurance  premiums and to make deposits to a reserve account
with Sentry.  The Company pays a utilization fee of up to 0.21% per month on the
average outstanding balance under the Sentry Facility.  The Sentry Facility also
requires  the  Company  to pay up to 0.62% per  quarter  on the  average  unused
balance.  Interest  is payable  monthly and accrues at a per annum rate of prime
plus 1.75% (which was approximately 10.0% at December 31, 1996).

        The Sentry  Facility  contains  certain  conditions and imposes  certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent  balances in the reserve  accounts.  Under the Sentry  Facility,  the
Company paid interest of $412,000 for the year ended December 31, 1996. In April
1996, the Company agreed to pay a one-time commitment fee of $700,000 to Sentry.

        On May 22,  1996,  the  Company,  through  its  wholly-owned  subsidiary
AutoBond Funding Corporation II, entered into a $20.0 million warehouse facility
(the  "Providian  Facility")  with Peoples  Security Life Insurance  Company (an
affiliate of Providian Capital Management), which expires December 15, 1996. The
proceeds  from the  borrowings  under the  Providian  Facility are to be used to
acquire finance contracts,  to pay credit default insurance premiums and to make
deposits to a reserve account. Interest is payable monthly




                                       36


<PAGE>

at a per annum  rate of LIBOR  plus  2.60%  with a  maximum  rate of 11.0% and a
minimum rate of 7.60%. The Providian Facility also requires the Company to pay a
monthly  fee on the  average  unused  balance  at a per  annum  rate  of  0.25%.
Borrowings  under  the  Providian  Facility  are  rated  investment-grade  by  a
nationally  recognized  statistical rating organization.  The Providian Facility
contains  certain  covenants  and  representations   similar  to  those  in  the
agreements governing the Company's existing securitizations.

        The Company's  wholly-owned  subsidiary,  AutoBond Funding Corporation I
("AutoBond  Funding"),  entered into a warehouse  credit  facility  (the "Nomura
Facility") with Nomura Asset Capital Corporation, pursuant to a credit agreement
dated as of June 16, 1995,  with a final  maturity  date of June 16, 2005.  This
facility was  terminated at the lender's  option,  and no new advances were made
after  February  6, 1996.  The Nomura  Facility  provided  advances  to AutoBond
Funding up to a maximum  aggregate  principal  amount of $25.0  million  for the
acquisition  of  finance  contracts.  On March 29,  1996,  the  remaining  total
outstanding  balance of advances of $9 million,  and  interest of $89,000,  were
paid by AutoBond  Funding.  As of December 31, 1996 no advances were outstanding
with respect to the Nomura Facility.

        On February 14, 1997 the Company,  through its  wholly-owned  subsidiary
AutoBond  Funding  Corporation II, entered into the $50,000,000  Daiwa Facility,
which expires March of 1998.  The proceeds from the  borrowings  under the Daiwa
Facility are to be used to acquire finance contracts,  and to make deposits to a
reserve account.  Interest is payable monthly at the 30-day LIBOR plus 1.15% per
annum rate. The Daiwa Facility also requires the Company to pay a monthly fee on
the average  unused balance at a per annum rate of 0.25%.  Borrowings  under the
Daiwa Facility are rated investment-grade by a nationally recognized statistical
rating organization.  The Daiwa Facility contains certain conditions and imposes
certain  requirements  similar  to  those  in  the  agreements  relating  to the
Company's existing securitizations  including,  among other things,  delinquency
and repossession triggers.

        Securitization Program. In its securitization transactions,  the Company
sells pools of finance  contracts to a special  purpose  subsidiary,  which then
sells or assigns  the  finance  contracts  to a trust in  exchange  for cash and
certain  retained  beneficial  interests in future excess spread cash flows. The
trust  issues  two  classes  of fixed  income  investor  certificates:  "Class A
Certificates" which are sold to investors, generally at par with a fixed coupon,
and  subordinated   excess  spread   certificates   ("Class  B   Certificates"),
representing  a senior  interest  in excess  spread  cash flows from the finance
contracts,   which  are  typically  retained  by  the  Company's  securitization
subsidiary  and which  collateralize  borrowings  on a  nonrecourse  basis.  The
Company also funds a cash reserve  account that provides  credit  support to the
Class A Certificates.  The company's  securitization  subsidiaries also retain a
"Transferor's  Interest" in the contracts that is subordinate to the interest of
the investor  certificateholders.  The retained interests entitle the Company to
receive  the  future  cash  flows from the trust  after  payment  to  investors,
absorption  of  losses,  if any,  that arise from  defaults  on the  transferred
finance  contracts  and payment of the other  expenses  and  obligations  of the
trust.

        Securitization  transactions impact the Company's liquidity primarily in
two ways.




                                       37


<PAGE>

First,  the application of proceeds  toward payment of the outstanding  advances
under warehouse credit facilities makes additional borrowing  available,  to the
extent  of  such  proceeds,  under  those  facilities  for  the  acquisition  of
additional finance contracts. In December 1995, March 1996, June 1996, September
1996 and December  1996 the Company  securitized  approximately  $26.2  million,
$16.6 million, $17.8 million,  $22.3 million and $25.0 million respectively,  in
nominal  principal amount of finance  contracts and used the net proceeds to pay
down borrowings under its warehouse credit facilities.

        Second,  additional  working  capital is obtained  through the Company's
practice of borrowing  funds,  on a  nonrecourse  basis,  collateralized  by its
interest in future excess spread cash flows from its  securitization  trusts. At
December 31, 1996,  the Company held excess  servicing  receivables  and Class B
Certificates totaling $14.3 million, substantially all of which had been pledged
to secure notes payable of $10.1 million.

        Subordinated Debt. The Company issued subordinated debt in the principal
amount of $300,000 to an individual  investor  pursuant to a  subordinated  note
dated as of March 12, 1996. The  subordinated  note has a final maturity date of
March 12, 1997 and provides for payment of interest at a per annum rate of 10.0%
and includes a warrant to purchase  18,811  shares of Common Stock at a price of
$0.53 per share. This Subordinated Note was repaid in full in November 1996 with
proceeds from the Company's initial public offering.

        Initial Public Offering. On November 14, 1996, the Company completed the
initial  public  offering of its Common  Stock.  The closing  comprised  825,000
shares sold by the  Company  (including  75,000  shares  issued  pursuant to the
exercise of the  underwriters  overallotment  option) and 250,000 shares sold by
the  Selling  Shareholders.  With a price  to  public  of $10 per  share  and an
underwriting  discount at $.70 per share, the Company received gross proceeds of
$7,725,000  from  the  offering,   from  which  it  paid  offering  expenses  of
approximately  $1.7 million.  The net proceeds  were being  utilized for working
capital,  repayment of  subordinated  debt of $300,000 and investment in finance
contracts.

        Loans  to  shareholders.  Loans  to  shareholders  totaled  $235,071  at
December 31, 1996. All shareholder loans were paid in full as of March 20, 1997.

         Continued  availability  of funding from the  Company's  securitization
program  cannot be guaranteed.  However,  borrowings  under the Company's  Daiwa
warehouse  facility  are  rated  investment  grade  by a  nationally  recognized
statistical  rating  organization.  Although the Company  currently has only two
long-term  warehouse  facilities,  management believes that the investment grade
rating  should allow the Company  successfully  to obtain  additional  warehouse
financing if necessary.

        The  warehouse   facilities   provide  the  short-term  cash  needed  to
accumulate  loan pools for  securitizations.  Under the  Company's  practice  of
borrowing  funds,  on a non-recourse  basis,  collateralized  by its interest in
future  excess-spread  cash flows,  working capital is thereby  provided for the
cashflow needs of the Company. The structure of the




                                       38


<PAGE>

excess spread cashflow and related note payable  provides for  self-amortization
of such debt. The Company's excess spread cashflow projections indicate that the
excess  spread  cashflows  will be  sufficient to retire the related debt within
approximately 30 months of its incurrence.  Cash from the excess spread retained
by the Company is received  monthly,  commencing  immediately upon completion of
the securitization  transaction.  interest and principal payments are made first
to the Class A  Certificateholders,  then  Trust  operating  expenses  are paid.
Excess  cashflow,  comprised  of  interest  and fees from the loans  reduced  by
interest  on  Class  A  Certificates  and  trust  operating  expenses,  is  then
distributed  in two  manners.  If the  cash  reserve  account  is less  than the
required  amount,  35% of the excess cash flow is retained in the trust to build
the cash  reserves  until  required  levels are met. The remaining 65% of excess
spread  cashflow  is utilized to first pay down any  non-recourse  borrowing  in
full, and then distributed to the Company for operating purposes. The final cash
flows for each  transaction  should be released at the  expected  maturity of 72
months.

        The Company  has entered  into a  commitment  with a private  investment
management  company for  financing  collateralized  by the senior  excess spread
interests  to be  created in the  Company's  next five  proposed  securitization
transactions.  Timing and amount of payments of interest  and  principal  on the
loans will correspond to  distributions  from the  securitization  trusts on the
Class B  Certificates.  The  interest  rate on such loans will be 15% per annum.
payable  monthly.  The  commitment  also provides that the Class B  Certificates
evidencing  the  interests in such senior excess spread cash flows be rated "BB"
by Fitch.

        The  proceeds of the initial  public  Offering of the  Company's  common
stock, proceeds from finance contracts,  securitization  proceeds and borrowings
under its  warehouse  facilities  will be  sufficient  to fund  expansion of the
Company's business through the end of 1997. The Company has no specific plans or
arrangements for additional equity financings,  due to the liquidity provided by
securitizations and financings of excess spread cash flows. The Company believes
it will be able to obtain additional  funding through an increase in the maximum
amount  available  for  borrowings  under its warehouse  facilities  and through
securitizations.  There can be no assurance,  however,  that the Company will be
able to obtain such additional funding. See "Risk Factors--Liquidity and Capital
Resources."

IMPACT OF INFLATION AND CHANGING PRICES

        Although  the Company  does not believe  that  inflation  directly has a
material  adverse  effect on its financial  condition or results of  operations,
increases in the inflation rate generally are associated with increased interest
rates.  Because the Company  borrows  funds on a floating  rate basis during the
period  leading  up to a  securitization,  and in many cases  purchases  finance
contracts  bearing a fixed rate nearly equal but less than the maximum  interest
rate permitted by law,  increased  costs of borrowed funds could have a material
adverse  impact on the  Company's  profitability.  Inflation  also can adversely
affect the Company's operating expenses.



                                       39


<PAGE>


IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In October 1995, the Financial  Accounting  Standards Board issued SFAS No. 123,
"Accounting  for  Stock-Based  Compensation."  SFAS No.  123  establishes  fair,
value-based financial accounting and reporting standards for all transactions in
which a company acquires goods or services by issuing its equity  instruments or
by incurring a liability  to suppliers in the amounts  based on the price of its
common stock or other equity instruments.

During 1996, the Company adopted the disclosure-only  alternative under SFAS No.
123, and will continue to account for stock-based  compensation as prescribed by
Accounting  Principals  Board  Opinion No. 25,  `Accounting  for Stock Issued to
Employees.'

In June 1996,  the  Financial  Accounting  Standards  Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment
of  Liabilities."  SFAS 125 provides  consistent  standards  for  distinguishing
transfers of  financial  assets that are sales from  transfers  that are secured
borrowings. The statement is effective for the transfers of financial assets and
extinguishments  of liabilities  occurring  after December 31, 1996 and is to be
applied prospectively.  SFAS 125 is not expected to have a significant impact on
the  Company's  securitization  activity,  although  it  should  allow a simpler
structure.

In February 1997, the Financial  Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 specifies the computation,  presentation, and
disclosure  requirements  for  earnings  per share.  The  Company  believes  the
implementation  of SFAS No.  128 will not have an effect on  earnings  per share
calculation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  [Financial statements are set forth in this report beginning at page F-1.]

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.


                                        PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     This  information  will be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's  Annual meeting of  Shareholders,  to be
filed with the Securities and Exchange  Commission within 120 days following the
end of the Company's  fiscal year, and is




                                       40


<PAGE>

hereby incorporated above reference thereto.

     No person who, at any time during the fiscal year ended  December 31, 1996,
was a director,  officer, beneficial owner of more than ten percent of any class
of equity  securities  of the Company  registered  pursuant to Section 12 of the
Exchange Act, or any other person subject to Section 16 of the Exchange Act with
respect  to  the  Company  because  of the  requirements  of  Section  30 of the
Investment Company Act ("reporting  person") has failed to file or is delinquent
in filing the forms and reports  required by Section  16(a) of the  Exchange Act
during the fiscal year ended December 31, 1996 or prior fiscal years.

ITEM 11.       EXECUTIVE COMPENSATION

     This  information  will be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's  Annual Meeting of  Shareholders,  to be
filed with the Securities and Exchange  Commission within 120 days following the
end of the  Company's  fiscal  year,  and is hereby  incorporated  by  reference
thereto.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
             AND  MANAGEMENT

     This  information  will be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's  Annual Meeting of  Shareholders,  to be
filed with the Securities and Exchange  Commission within 120 days following the
end of the  Company's  fiscal  year,  and is hereby  incorporated  by  reference
thereto.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     This  information  will be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's  Annual Meeting of  Shareholders,  to be
filed with the Securities and Exchange  Commission within 120 days following the
end of the  Company's  fiscal  year,  and is hereby  incorporated  by  reference
thereto.



                                       41


<PAGE>

                                         PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM
             8-K

     (a)The following documents are filed as part of this Form 10-K:

        1.     Financial Statements.

               Independent Auditors' Report - Coopers & Lybrand  L.L.P.
               Financial Statements

                      Consolidated Balance Sheets
                      Consolidated Statements of Earnings
                      Consolidated Statements of Shareholders' Equity
                      Consolidated Statements of Cash Flows
                      Notes to the Consolidated Financial Statements

        2.     Financial Statement Schedule.

               Schedule II; Valuation and Qualifying Accounts



                                       42


<PAGE>




        3.     Exhibits.

<TABLE>
<CAPTION>
Exhibit No.                                 Description of Exhibit
----------                                  ----------------------
<S>           <C>
3.1*            --    Restated Articles of Incorporation of the Company
3.2*            --    Amended and Restated Bylaws of the Company
4.1*            --    Specimen Common Stock Certificate
10.1*           --    Amended and  Restated  Loan  Origination,  Sale and  Contribution
                      Agreement  dated  as of  December  15,  1995 by and  between  the
                      Company and AutoBond Funding Corporation I
10.2*           --    Security  Agreement  dated  as of May  21,  1996  among  AutoBond
                      Funding  Corporation  II, the Company and Norwest Bank Minnesota,
                      National Association
10.3*           --    Credit  Agreement  and Side  Agreement,  dated as of May 21, 1996
                      among AutoBond  Funding  Corporation  II, the Company and Peoples
                      Life Insurance Company
10.4*           --    Servicing  Agreement  dated  as of May 21,  1996  among  AutoBond
                      Funding  Corporation II, CSC Logic/MSA L.L.P.,  doing business as
                      "Loan  Servicing  Enterprise",   the  Company  and  Norwest  Bank
                      Minnesota, National Association
10.5*           --    Loan Acquisition Sale and Contribution  Agreement dated as of May
                      21,  1996  by  and  between  the  Company  and  AutoBond  Funding
                      Corporation II
10.6*           --    Second Amended and Restated  Secured  Revolving  Credit Agreement
                      dated as of July 31, 1995 between  Sentry  Financial  Corporation
                      and the Company
10.7*           --    Management  Administration  and  Services  Agreement  dated as of
                      January 1, 1996 between the Company and AutoBond, Inc.
10.8*           --    Employment  Agreement dated November 15, 1995 between Adrian Katz
                      and the Company
10.9*           --    Employment  Agreement  dated February 15, 1996 between Charles A.
                      Pond and the Company
10.10*          --    Employment  Agreement effective as of May 1, 1996 between William
                      O. Winsauer and the Company
10.11*          --    Vender's  Comprehensive  Single  Interest  Insurance  Policy  and
                      Endorsements, issued by Interstate Fire & Casualty Company


                                       43


<PAGE>


<CAPTION>
Exhibit No.                                 Description of Exhibit
----------                                  ----------------------
<S>           <C>
10.12*          --    Warrant to Purchase  Common Stock of the Company  dated March 12,
                      1996
10.13*           --    Employee Stock Option Plan

10.14*          --    Dealer Agreement dated November 9, 1994,  between the Company and
                      Charlie Thomas Ford, Inc.
10.15*          --    Automobile Loan Sale  Agreement,  dated as of September 30, 1996,
                      among  the  Company,   First  Fidelity   Acceptance   Corp.,  and
                      Greenwich Capital Financial Products, Inc.
10.16'D'        --    Servicing  Agreement,  dated as of January 29, 1997,  between CSC
                      LOGIC/MSA L.P.P.,  doing business as "Loan Servicing  Enterprise"
                      and the Company
10.17'D'        --    Credit  Agreement,  dated as of February 1, 1997, among
                      AutoBond  Funding  Corporation  II, the  Company and Daiwa
                      Finance Corporation

10.18'D'        --    Security Agreement, dated as of February 1, 1997, by and among
                      AutoBond  Funding  Corporation  II, the Company and Norwest  Bank
                      Minnesota, National Association
10.19'D'        --    Automobile  Loan Sale  Agreement,  dated as of March 19, 1997, by
                      and between Credit Suisse First Boston  Mortgage  Capital L.L.C.,
                      a Delaware limited liability company, and the Company
21'D'           --    Subsidiaries of the Company
27.1'D'         --    Financial Data Schedule

</TABLE>

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

*   Incorporated  by reference  from  the  Company's  Registration  Statement
    on Form S-1 (Registration No. 333-05359).
'D' Filed herewith.

  (b) Reports on Form 8-K

  No reports  on Form 8-K were filed by the  Company  during the  quarter  ended
December 31, 1996.


                                       44


<PAGE>




                                   SIGNATURES

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

                                      AUTOBOND ACCEPTANCE CORPORATION

                                       By:   /s/ William O. Winsauer
                                             ----------------------------------
                                             William O. Winsauer, Chairman
                                             of the Board  and Chief  Executive
                                             Officer

Date: March 31, 1997

        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 in the capacities and on the dates indicated.

/s/ William O. Winsauer     Chairman of the Board and         March 31, 1997
--------------------------  Chief Executive
William O. Winsauer         Officer


/s/ Adrian Katz             Vice Chairman of the Board        March 31, 1997
--------------------------  and Chief Operating Officer
Adrian Katz

/s/ William J. Stahl        Vice President and                March 31, 1997
--------------------------  Chief Financial Officer
William J. Stahl

/s/ John S. Winsauer        Secretary and                     March 31, 1997
--------------------------  and Director
John S. Winsauer


/s/ Robert S. Kapito        Director                          March 31, 1997
--------------------------
Robert S. Kapito


                                       45



<PAGE>
                        AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                       Page
                                                                                       ----
<S>                                                                                    <C>
Report of Independent Accountants                                                      F-2

Consolidated Balance Sheets, December 31, 1995 and 1996                                F-3


Consolidated  Statements  of  Operations  for the  Period  From  August  1, 1994
 (Inception) through December 31, 1994,

 and the Years Ended December 31, 1995 and 1996                                        F-4


Consolidated Statements of Shareholders' Equity for the
 Period From August 1, 1994 (Inception) to December 31, 1994,

 and the Years Ended December 31, 1995 and 1996                                        F-5


Consolidated Statements of Cash Flows for the Period From
 August 1, 1994 (Inception) to December 31, 1994, and the

 Years Ended December 31, 1995 and 1996                                                F-6


Notes to Consolidated Financial Statements                                             F-7

Financial Statement Schedule:

  Schedule II - Valuation and Qualifying Accounts                                      S-1
</TABLE>


All other schedules are omitted as the required information is not applicable or
the information is presented in the consolidated  financial statements,  related
notes, or other schedules.

                                             F-1




<PAGE>







                                REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders
AutoBond Acceptance Corporation

We  have  audited  the  consolidated  financial  statements  and  the  financial
statement schedule of AutoBond Acceptance Corporation and Subsidiaries listed in
the index on page F-1 of this Form  10-K.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  consolidated   financial  position  of  AutoBond
Acceptance  Corporation  and  Subsidiaries as of December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for the period
from  August 1, 1994  (inception)  through  December  31, 1994 and for the years
ended  December  31,  1995  and  1996  in  conformity  with  generally  accepted
accounting  principles.  In addition,  in our opinion,  the financial  statement
schedule  referred to above,  when considered in relation to the basic financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information required to be included therein.

COOPERS & LYBRAND L.L.P.

Austin, Texas
March 26, 1997

                                             F-2




<PAGE>



                        AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                                   CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                        December 31,
                      ASSETS                                       1995             1996
                      ------                                    -----------       -------
<S>                                                             <C>              <C>
Cash and cash equivalents                                       $    92,660      $ 4,121,342
Restricted cash                                                     360,266          318,515
Cash held in escrow                                               1,322,571        2,662,934
Finance contracts held for sale, net                              3,354,821          228,429
Repossessed assets held for sale, net                               673,746          152,580
Class B Certificates                                              2,834,502       10,465,294
Excess servicing receivable                                         846,526        4,247,274
Debt issuance cost                                                  700,000          997,338
Trust receivable                                                    525,220        2,230,003
Due from affiliate                                                                   168,847
Prepaid expenses and other assets                                   354,208          383,573
Software development costs                                                           300,382
                                                                -----------      -----------
          Total assets                                          $11,064,520      $26,276,511
                                                                ===========      ===========

      LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
  Revolving credit agreements                                   $ 1,150,421
  Notes payable                                                   2,674,597      $10,174,633
  Repurchase agreement                                            1,061,392
  Accounts payable and accrued liabilities                        1,836,082        1,474,586
  Bank overdraft                                                    861,063
  Payable to affiliate                                              255,597          265,998
  Deferred income taxes                                             199,000        2,075,553
                                                                -----------      -----------
         Total liabilities                                        8,038,152       13,990,770
                                                                -----------      -----------

Commitments and contingencies

Shareholders' equity:

  Preferred stock, no par value; 5,000,000
   shares authorized; no shares issued
  Common stock, no par value; 25,000,000
   shares authorized; 5,118,753 and
   6,512,500 shares issued and outstanding                            1,000            1,000
  Additional paid-in capital                                      2,912,603        8,617,466
  Deferred compensation                                             (62,758)         (11,422)
  Loans to shareholders                                            (153,359)        (235,071)
  Retained earnings                                                 328,882        3,913,768
                                                                -----------      -----------
          Total shareholders' equity                              3,026,368       12,285,741
                                                                -----------      -----------

          Total liabilities and shareholders'
           equity                                               $11,064,520      $26,276,511
                                                                ===========      ===========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                             F-3




<PAGE>




                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                               Period From
                                              August 1, 1994
                                               (Inception)
                                                 Through                  Year Ended
                                               December 31,              December 31,
                                                   1994              1995              1996
                                              --------------     ------------         -------
<S>                                             <C>              <C>                   <C>
Revenues:
  Interest income                               $   38,197       $ 2,880,961           $ 2,519,612
  Interest expense                                 (19,196)       (2,099,867)           (2,382,818)
                                                ----------       -----------           -----------
          Net interest income                       19,001           781,094               136,794
  Gain on sale of finance contracts                                4,085,952            12,820,700
  Servicing fee income                                                                     657,950
  Unrealized gain on Class B
   Certificates                                                                            388,278
                                                 ---------       -----------           -----------
          Total revenues                            19,001         4,867,046            14,003,722
                                                 ---------       -----------           -----------

Expenses:
  Provision for credit losses                       45,000            48,702               412,387
  Salaries and benefits                            225,351         1,320,100             4,529,006
  General and administrative                       244,974         1,462,740             2,331,246
  Other operating expenses                          48,281           963,017             1,119,644
                                                 ---------       -----------           -----------
          Total expenses                           563,606         3,794,559             8,392,283
                                                 ---------       -----------           -----------

Income (loss) before income taxes
 and extraordinary item                           (544,605)        1,072,487             5,611,439
Provision for income taxes                                           199,000             1,926,553
                                                 ---------       -----------           -----------

Income (loss) before extraordinary
 item                                             (544,605)          873,487             3,684,886
Extraordinary loss, net of tax
 benefit of $50,000                                                                       (100,000)
                                                 ---------       -----------           -----------
          Net income (loss)                      $(544,605)      $   873,487           $ 3,584,886
                                                 =========       ===========           ===========
Income (loss) per common share:
  Income (loss) before extraordinary
   item                                        $     (0.11)      $      0.17           $      0.64
  Extraordinary loss                                                                         (0.02)
                                               -----------       -----------           -----------
          Net income (loss)                    $     (0.11)      $      0.17           $      0.62
                                               ===========       ===========           ===========
Weighted average shares outstanding              5,118,753         5,190,159             5,811,377
                                               ===========       ===========           ===========

</TABLE>




               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       F-4




<PAGE>






                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                Additional
                                        Common Stock              Paid-In      Deferred       Loans To      Retained
                                    Shares          Amount        Capital    Compensation   Shareholders    Earnings      Total
                                  ----------        -------    -----------   ------------   ------------   -----------   --------
<S>                                <C>          <C>            <C>           <C>            <C>            <C>          <C>
Capital contributions at
 inception                         5,118,753    $     1,000    $   451,000                                              $   452,000

Loans to shareholders                                                                       $   (16,000)                    (16,000)

Net loss                                                                                                   $  (544,605)    (544,605)
                                 -----------    -----------    -----------   -----------    -----------    -----------   -----------

Balance, December 31, 1994         5,118,753          1,000        451,000                      (16,000)      (544,605)    (108,605)

Capital contributions                                            2,323,103                                                2,323,103

Loans to shareholders                                                                          (137,359)                   (137,359)

Deferred compensation pursuant
 to employee contract                                             138,500     $ (138,500)

Amortization of deferred
 compensation                                                                     75,742                                     75,742

Net income                                                                                                     873,487      873,487
                                 -----------    -----------   -----------   -----------     -----------    -----------    ----------
Balance, December 31, 1995         5,118,753          1,000     2,912,603       (62,758)       (153,359)       328,882    3,026,368

Stock issued pursuant to
 employee contract                   568,747

Loans to shareholders                                                                           (81,712)                    (81,712)

Amortization of deferred
 compensation                                                                    51,336                                      51,336

Issuance of common stock in
 public offering                     825,000                    5,704,863                                                 5,704,863

Net income                                                                                                   3,584,886    3,584,886
                                 -----------    -----------    -----------   -----------    -----------    -----------   -----------
Balance, December 31, 1996         6,512,500    $     1,000   $ 8,617,466   $   (11,422)    $  (235,071)   $ 3,913,768  $12,285,741
                                 ===========    ===========    ===========   ===========    ===========    ===========   ===========
</TABLE>


                             The accompanying  notes are an integral part of the
                         consolidated financial statements.

                                             F-5




<PAGE>



                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                          Period From
                                                                         August 1, 1994
                                                                          (Inception)
                                                                             Through                         Year Ended
                                                                            December 31,                     December 31,
                                                                                1994                  1995                  1996
                                                                           ---------------           ------                ------
<S>                                                                          <C>                  <C>                  <C>
Cash flows from operating activities:
  Net income (loss)                                                          $   (544,605)        $    873,487         $  3,584,886
  Adjustments to reconcile net income to net cash
   used in operating activities:
    Amortization of finance contract acquisition
     discount and insurance                                                        (4,513)            (795,579)            (358,949)
    Amortization of deferred compensation                                                               75,742               51,336
    Amortization of debt issuance costs                                                                                     497,496
    Provision for credit losses                                                    45,000               48,702              412,387
    Deferred income taxes                                                                              199,000            1,876,553
    Accretion of excess servicing receivable                                                                               (154,029)
    Unrealized gain on Class B Certificates                                                                                (388,278)
    Changes in operating assets and liabilities:
      Restricted cash                                                            (138,176)            (222,090)              41,751
      Cash held in escrow                                                                           (1,322,571)          (1,340,363)
      Prepaid expenses and other assets                                                               (354,208)            (329,747)
      Class B Certificates                                                                          (2,834,502)          (7,242,514)
      Excess servicing receivable                                                                     (846,526)          (3,246,719)
      Accounts payable and accrued liabilities                                     25,636            1,110,446             (361,496)
      Due to/due from affiliate                                                   504,534             (248,937)            (158,446)
  Purchases of finance contracts                                               (2,453,604)         (31,200,131)         (83,672,335)
  Sales of finance contracts                                                                        27,399,543           85,014,394
  Repayments of finance contracts                                                  51,638            2,660,018            1,605,461
                                                                             ------------         ------------         ------------
           Net cash used in operating activities                               (2,514,090)          (5,457,606)          (4,168,612)
                                                                             ------------         ------------         ------------
Cash flows from investing activities:
  Advances to AutoBond Receivables Trusts                                                             (525,220)          (1,704,783)
  Loans to shareholders                                                           (16,000)            (137,359)             (81,712)
  Disposal proceeds from repossessions                                                                 220,359              646,600
                                                                             ------------         ------------         ------------
          Net cash used in investing activities                                   (16,000)            (442,220)          (1,139,895)
                                                                             ------------         ------------         ------------

Cash flows from financing activities:
  Net borrowings (repayments) under revolving credit
   agreements                                                                   2,054,776             (904,355)          (1,150,421)
  Debt issuance costs                                                                                                      (794,834)
  Proceeds (repayments) from borrowings under repurchase
   agreement                                                                                         1,061,392           (1,061,392)
  Proceeds from notes payable                                                                        2,674,597           12,575,248
  Payments on notes payable                                                                                              (5,075,212)
  Shareholder contributions                                                       452,000            2,323,103
  Increase (decrease) in bank overdraft                                            23,314              837,749             (861,063)
  Proceeds from public offering of common stock, net                                                                      5,704,863
                                                                             ------------         ------------         ------------
          Net cash provided by financing activities                             2,530,090            5,992,486            9,337,189
                                                                             ------------         ------------         ------------

Net increase in cash and cash equivalents                                             -0-               92,660            4,028,682
Cash and cash equivalents at beginning of period                                      -0-                  -0-               92,660
                                                                             ------------         ------------         ------------

Cash and cash equivalents at end of period                                       $    -0-         $     92,660         $  4,121,342
                                                                             ============         ============         ============
Non-cash investing and financing activities:
  Accrual of debt issuance cost                                                  $                $    700,000         $
                                                                             ===========          ============         ============
  Repossession of automobiles                                                    $                $    849,756         $    291,086
                                                                             ===========          ============         ============
  Deferred compensation                                                          $                $    138,500         $
                                                                             ===========          ============         ============
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                             F-6




<PAGE>



                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        NATURE OF BUSINESS

        AutoBond Acceptance  Corporation (AAC) was incorporated in June 1993 and
        commenced   operations   August  1,  1994.  AAC  and  its   wholly-owned
        subsidiaries,  AutoBond Funding Corp I (ABF I), AutoBond Funding Corp II
        (ABF II), and AutoBond  Funding  Corp III (ABF III)  (collectively,  the
        Company),  engage  primarily in the business of acquiring,  securitizing
        and  servicing  automobile  installment  sale  contracts  originated  by
        franchised  automobile dealers (the Contracts).  The Company specializes
        in  Contracts  to  consumers  who  generally   have  limited  access  to
        traditional  financing,  such as that  provided by  commercial  banks or
        captive  finance  companies  of  automobile  manufacturers.  The Company
        purchases  Contracts  directly  from  automobile  dealers  or from other
        originators,  with the intent to resell them to institution investors in
        securitization structures.

        PRINCIPLES OF CONSOLIDATION

        The consolidated  financial  statements  include the accounts of AAC and
        its wholly-owned subsidiaries. All significant intercompany balances and
        transactions   have   been   eliminated   in   consolidation.    Certain
        reclassifications have been made to prior years' financial statements to
        conform with the current year's presentation.

        PERVASIVENESS OF ESTIMATES

        The preparation of consolidated  financial statements in conformity with
        generally accepted  accounting  principles  requires  management to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities  and disclosure of contingent  assets and liabilities at the
        date of the financial  statements  and the reported  amounts of revenues
        and expenses  during the reporting  period.  Actual results could differ
        from those estimates.

        CASH AND CASH EQUIVALENTS

        The Company considers highly liquid investments with original maturities
        of three months or less to be cash equivalents.

        RESTRICTED CASH

        In  accordance  with the  Company's  revolving  credit  facilities,  the
        Company is required to maintain a cash reserve with its lenders of 1% to
        6% of the proceeds  received from the lender for the  origination of the
        Finance  Contracts.  Access to these funds is  restricted by the lender;
        however,  such  funds may be  released  in part upon the  occurrence  of
        certain events including payoffs of Finance Contracts.

        CASH HELD IN ESCROW

        Upon closing of a securitization  transaction,  certain funds due to the
        various  parties,  including  the  Company  and its  warehouse  lenders,
        frequently  remain in escrow pending  disbursement by the Trustee one to
        eleven days subsequent to closing.

                                              F-7




<PAGE>


                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
         Continued:

        TRUST RECEIVABLE

        At the  time  a  securitization  closes,  the  Company  is  required  to
        establish  a cash  reserve  within the trust for future  credit  losses.
        Additionally,  depending on each securitization  structure, a portion of
        the Company's  future servicing cash flow is required to be deposited as
        additional  reserves for credit losses.  The December 1995,  March 1996,
        June 1996, September 1996 and December 1996 securitization  transactions
        resulted in initial cash reserves of approximately  $525,000,  $331,000,
        $357,000, $446,000, and $500,000, respectively, which approximates 2% of
        the Finance Contracts sold to the respective  trusts. The trust reserves
        are  increased  monthly  from  excess cash flows until such time as they
        attain a level of 6% of the outstanding principal balance.

        FINANCE CONTRACTS HELD FOR SALE

        Finance  Contracts  held for sale are stated at the lower of  aggregated
        amortized cost, or market value. Market value is determined based on the
        estimated value of the Finance Contracts if securitized and sold.

        The Company generally acquires Finance Contracts at a discount,  and has
        purchased  loss  default  and vender  single  interest  physical  damage
        insurance on the Finance Contracts.  The purchase discount and insurance
        are amortized as an adjustment to the related Finance  Contract's  yield
        and operating  expense,  respectively,  utilizing the same basis as that
        used to record  income on the Finance  Contracts,  over the  contractual
        life  of  the  related  loans.  At  the  time  of  sale,  any  remaining
        unamortized amounts are netted against the Finance Contract's  principal
        amounts outstanding to determine the resultant gain or loss on sale.

        Allowance  for credit  losses on the Finance  Contracts  is based on the
        Company's   historical  default  rate,  the  liquidation  value  of  the
        underlying   collateral   in  the  existing   portfolio,   estimates  of
        repossession costs and probable recoveries from insurance proceeds.  The
        allowance is increased by provisions for estimated  future credit losses
        which are charged against income.  The allowance  account is reduced for
        direct  charge-offs using the specific  identification  method,  and for
        estimated  losses  upon  repossession  of  automobiles  which is  netted
        against the related  Finance  Contracts and  transferred  to Repossessed
        assets held for sale.

        IMPAIRMENT OF LONG-LIVED ASSETS

        In the event  that  facts and  circumstances  indicate  that the cost of
        long-lived  assets other than financial  instruments,  excess  servicing
        receivables  and deferred tax assets may be impaired,  an  evaluation of
        recoverability  would be  performed.  If an  evaluation of impairment is
        required,  the estimated future  undiscounted cash flows associated with
        the asset would be compared to the asset's  carrying amount to determine
        if a  write-down  to  market  value or  discounted  cash  flow  value is
        required. No such write-downs were recorded in 1995 or 1996.

        REPOSSESSED ASSETS HELD FOR SALE

        Automobiles  repossessed and held for sale are initially recorded at the
        recorded investment in the Finance Contracts on the date of repossession
        less an allowance.  This value  approximates  the expected cash proceeds
        from the sale of the assets and applicable  insurance  payments,  net of
        all disposition  costs.  Due to the relatively short time period between
        acquisition and disposal of the assets,  discounting of the expected net
        cash proceeds to determine fair value is not utilized.

                                              F-8




<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
         Continued:

        REPOSSESSED ASSETS HELD FOR SALE, Continued

        Subsequent impairment reviews are performed quarterly on a disaggregated
        basis. A valuation  allowance is  established if the carrying  amount is
        greater  than the fair value of the  assets.  Subsequent  increases  and
        decreases in fair value result in adjustment of the valuation  allowance
        which  is  recorded  in  earnings   during  the  period  of  adjustment.
        Adjustments  for  subsequent  increases in fair value are limited to the
        existing valuation  allowance amount, if any. During each of the periods
        presented,  no valuation  allowance  was  established.  An adjustment of
        approximately  $300,000 was made in the fourth quarter of 1996 to adjust
        for the  differences  between actual  proceeds from sale to the carrying
        amounts  recorded  for  repossessed  assets,  some  portion of which may
        relate to prior quarters.

        CLASS B CERTIFICATES

        Pursuant to the  securitization  transactions,  the related  Trusts have
        issued Class B Certificates  to the Company which are subordinate to the
        Class A Certificates and senior to the excess servicing  receivable with
        respect to cash  distributions  from the Trust. The Company accounts for
        the Class B  Certificates  as  trading  securities  in  accordance  with
        Statement  of   Financial   Accounting   Standards   ("SFAS")  No.  115,
        "Accounting for Certain Investments in Debt and Equity Securities." SFAS
        No. 115 requires fair value accounting for these  certificates  with the
        resultant  unrealized  gain  or  loss  recorded  in  the  statements  of
        operations  in the  period of the  change  in fair  value.  The  company
        determines  fair value on a disaggregated  basis  utilizing  quotes from
        outside  dealers who utilize  discounted  cash flow analyses  similar to
        that  described  below  for  determining  market  value  of  the  excess
        servicing  receivable,  as well as other unique  characteristics such as
        the  remaining  principal  balance in relation to estimated  future cash
        flows and the expected  remaining terms of the  certificates.  Estimated
        transaction costs associated with a sale of the Class B Certificates are
        not  deducted  from  the  fair  value  determination.  During  1996,  an
        unrealized  gain of $388,278 was recognized on the Class B Certificates.
        During  1996,  the  Company's  Class  B  Certificate   from  their  1995
        securitization  was upgraded by Fitch Investors  Service from BB to BB+.
        The Class B Certificates accrue interest at 15%.

        EXCESS SERVICING RECEIVABLE

        Excess  servicing  receivable  includes the  estimated  present value of
        future net cash flows from securitized  receivables over the amounts due
        to the Class A and Class B Certificate holders in the securitization and
        certain  expenses paid by the entity  established in connection with the
        securitization  transaction.  The Finance  Contracts sold in conjunction
        with the securitization transactions are treated as sale transactions in
        accordance with SFAS No. 77,  'Reporting by Transferors for Transfers of
        Receivables  with  Recourse.' Gain or loss is recognized on the date the
        Company  surrenders its control of the future economic benefits relating
        to  the  receivables  and  the  investor  has  placed  its  cash  in the
        securitization trust.  Accordingly,  all outstanding debt related to the
        Finance  Contracts  sold to the  securitization  trust is  deemed  to be
        simultaneously  extinguished.  The  Company  sells  100% of the  Finance
        Contracts and retains a participation  in the future cash flows released
        by the  securitization  Trustee.  The Company also retains the servicing
        rights,  and contracts with third parties to perform  certain aspects of
        the servicing function.

                                              F-9


<PAGE>

                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
         Continued

        EXCESS SERVICING RECEIVABLE, Continued

        The discount rate utilized to determine the excess servicing  receivable
        is based on assumptions that market  participants  would use for similar
        financial instruments subject to prepayment,  default,  collateral value
        and interest rate risks.  The future net cash flows are estimated  based
        on many  factors  including  contractual  principal  and  interest to be
        received,  as adjusted for expected  prepayments,  defaults,  collateral
        sales  proceeds,  insurance  proceeds,  payments  to  investors  on  the
        pass-through securities,  servicing fees and other costs associated with
        the  securitization   transaction  and  related  loans.  The  gain  from
        securitization  transactions include the excess servicing receivable and
        Class B Certificates  plus the difference  between net proceeds received
        on the transaction date and the net carrying value of Finance  Contracts
        held for sale.

        The carrying  value of the excess  servicing  receivable is amortized in
        proportion  to and  over the  period  of  estimated  net  future  excess
        servicing fee income, for which the amortization is recorded as a charge
        against  servicing  fee  income.  The  excess  servicing  receivable  is
        reviewed to determine if the present  value of the  estimated  remaining
        future  excess  servicing  fee income is less than the  carrying  amount
        using the discount factor applied in the original  determination  of the
        excess servicing receivable.  The Company does not increase the carrying
        value of the excess  servicing  receivable for favorable  variances from
        original  estimates,  but to the extent that actual  results  exceed the
        Company's prepayment or loss estimates, any required decrease adjustment
        is  reflected  as a write down of the  receivable  and a related  charge
        against  current  period  earnings.  Write  downs  of  excess  servicing
        receivables due to  modification of future  estimates as a result of the
        impairment  review are determined on a  disaggregated  basis  consistent
        with  the  risk  characteristics  of  the  underlying  loans  consisting
        principally of origination date and originating  dealership.  There were
        no  adjustments  for  impairment  to the  carrying  value of the  excess
        servicing receivable during 1995 or 1996.

        The receipt of the servicing fee income related to the excess  servicing
        asset is  subordinate  to the  Class A and  Class B  Certificates.  As a
        result,  the Company recognizes income for the accretion of the discount
        associated  with the present  value effect on the carrying  value of the
        excess  servicing  asset.   Such  accretion  amounted  to  approximately
        $154,000 in 1996.

        The value of the excess servicing reflects  management's estimate of the
        net  future  servicing  income  on the  finance  contracts  held in each
        securitization  trust.  Such estimate is affected by assumptions such as
        repossession rates,  uninsured loss amounts,  delinquencies,  prepayment
        rates and timing of cash receipts.  If actual results are  significantly
        different than those assumptions presumed by management in such a manner
        as to reduce  the amount of excess  spread  cash  flows  available  than
        originally estimated, the excess servicing asset will be impaired. Given
        the valuation of the excess servicing asset is affected by a significant
        number of assumptions  and that changes in such  assumptions  affect the
        amount of cash flows available to the Company, it is at least reasonably
        possible that decreases to the value of the excess servicing  receivable
        will  occur in the near  term and that the  decreases  could  materially
        affect the amounts reported in the income statement.

                                              F-10




<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
         Continued

        SOFTWARE DEVELOPMENT COSTS

        Software  development  costs recorded include external costs incurred to
        modify the related software from a state of technical feasibility to its
        operational  form  and  will be  amortized  over 5  years,  which is its
        estimated  useful life.  No  amortization  was recorded in 1996,  as the
        software was not available for use during 1996.

        DEBT ISSUANCE COSTS

        The costs related to the issuance of debt are  capitalized and amortized
        in interest expense over the lives of the related debt.

        Debt   issuance   costs   related  to  the  issuance  of  notes  payable
        collateralized   by   Class  B   Certificates,   are   amortized   on  a
        dissaggregated  basis  over  the  term of the  related  note  using  the
        interest  method.  Debt  issuance  costs  related  to  warehouse  credit
        facilities are amortized using the straight-line method.

        INCOME TAXES

        The Company uses the liability  method in  accounting  for income taxes.
        Under this method,  deferred tax assets and  liabilities  are recognized
        for the future tax consequences  attributable to differences between the
        financial  statement carrying amounts of existing assets and liabilities
        and their respective tax bases.  Deferred tax assets and liabilities are
        measured  using enacted tax rates expected to apply to taxable income in
        the  years in which  those  temporary  differences  are  expected  to be
        recovered  or  settled.  Valuation  allowances  are  established,   when
        necessary,  to reduce  deferred tax assets to the amount  expected to be
        realized.  The provision for income taxes represents the tax payable for
        the  period and the change  during the year in  deferred  tax assets and
        liabilities. The Company files a consolidated federal income tax return.

        EXTRAORDINARY ITEM

        The extraordinary loss recorded in 1996 relates to a $150,000 prepayment
        fee on a $2,684,000 term loan that was repaid during 1996. The term loan
        carried a stated interest rate of 20% (see Note 6).

        EARNINGS PER SHARE

        Earnings per share is calculated  using the weighted  average  number of
        common shares and common share equivalents  outstanding during the year.
        Common  share  equivalents  of  71,406  and  19,489  were  used  in  the
        calculation of earnings per share in 1995 and 1996, respectively.  Fully
        diluted earnings per share are not presented  because the relevant stock
        options and  warrants  are not  significant.  There were no common share
        equivalents  in 1994.  Effective May 30, 1996, the Board of Directors of
        the Company  voted to effect a  767.8125-for-1  stock  split.  All share
        information  and  earnings  per  share   calculations  for  the  periods
        presented in the financial statements herein, and the notes hereto, have
        been retroactively restated for such stock split.

                                              F-11




<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
         Continued

        INTEREST INCOME

        Generally,  interest  income  on  Finance  Contracts  acquired  prior to
        December 31, 1995 is determined on a monthly basis using the Rule of 78s
        method which  approximates  the simple  interest  method.  Subsequent to
        December 31, 1995, the Company generally uses the simple interest method
        to determine interest income on Finance Contracts acquired.  The Company
        discontinues  accrual  of  interest  on loans  past due for more than 90
        days. The Company  accrues  interest  income on the Class B Certificates
        monthly at 15% using the interest method.

        CONCENTRATION OF CREDIT RISK

        The  Company  generally  acquires  Finance  Contracts  from a network of
        automobile dealers located in thirty-six states,  including among others
        Texas, Arizona, Oklahoma, New Mexico, Connecticut, Georgia and Utah. For
        the  years  ended  December  31,  1995  and  1996,  the  Company  had  a
        significant  concentration of Finance Contracts with borrowers in Texas,
        which   approximated   91%  and  63.7%  of  total   Finance   Contracts,
        respectively. For the years ended December 31, 1995 and 1996, one dealer
        accounted  for 8.8% and 8.9%,  respectively,  of the  Finance  Contracts
        purchased by the Company. No other dealer accounted for more than 10% of
        the Finance Contracts purchased.

2.      RECENT ACCOUNTING PRONOUNCEMENTS:

        In June 1996, the Financial  Accounting  Standards Board issued SFAS No.
        125,  "Accounting  for Transfers  and Servicing of Financial  Assets and
        Extinguishment  of  Liabilities."  SFAS  No.  125  provides   consistent
        standards  for  distinguishing  transfers of  financial  assets that are
        sales from  transfers  that are secured  borrowings.  The  statement  is
        effective  for  transfers of  financial  assets and  extinguishments  of
        liabilities  occurring  after  December  31,  1996 and is to be  applied
        prospectively.

        In February  1997,  the  Financial  Accounting  Standards  Board  issued
        Statement of  Financial  Accounting  Standards  No. 128,  "Earnings  Per
        Share."  SFAS No.  128  specifies  the  computation,  presentation,  and
        disclosure requirements for earnings per share. The Company believes the
        implementation  of SFAS No. 128 will not have an effect on earnings  per
        share calculation.

3.      FINANCE CONTRACTS HELD FOR SALE:

        The following amounts are included in Finance Contracts held for sale as
        of:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                       1995             1996
                                                                       ----             ----
<S>                                                                 <C>             <C>
        Principal balance of Finance Contracts
         held for sale                                              $3,539,195      $  266,450
        Prepaid insurance                                              260,155          18,733
        Contract acquisition discounts                                (350,827)        (31,554)
        Allowance for credit losses                                    (93,702)        (25,200)
                                                                    ----------      ----------
                                                                    $3,354,821      $  228,429
                                                                    ==========      ==========
</TABLE>


                                              F-12




<PAGE>



                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

4.      EXCESS SERVICING RECEIVABLE AND SECURITIZATIONS:

        The Company has  completed  the  following  securitization  transactions
        (rounded to thousands):
<TABLE>
<CAPTION>
                                                             December        March           June        September       December
                                                               1995           1996           1996           1996           1996
                                                           -----------    -----------    -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>            <C>            <C>
        Principal of loans sold                            $26,200,000    $16,500,000    $17,800,000    $22,300,000    $25,000,000

        A Certificate                                       26,200,000     16,500,000     17,800,000     22,300,000     25,000,000

        A Certificate rate                                        7.23%          7.15%          7.73%          7.45%          7.37%

        B Certificate                                      $ 2,800,000    $ 2,000,000    $ 2,000,000    $ 2,400,000    $ 2,800,000

        B Certificate rate                                          15%            15%            15%            15%            15%

        Excess servicing asset                             $   846,000    $   597,000    $   650,000    $ 1,000,000    $ 1,000,000

        Gain on sale                                         4,100,000      2,800,000      2,900,000      3,320,000      3,800,000

        The changes in the excess servicing asset are as follows:

        Balance, January 1, 1996                                    $   846,526
        Additions from securitization transactions                    3,246,719
        Accretion of discount                                           154,029
                                                                    -----------
        Balance, December 31, 1996                                  $ 4,247,274
                                                                    ===========
</TABLE>

        The Company is required to represent  and warrant  certain  matters with
        respect to the Finance  Contracts  sold to the Trusts,  which  generally
        duplicate the substance of the  representations  and warranties  made by
        the dealers in  connection  with the  Company's  purchase of the Finance
        Contracts. In the event of a breach by the Company of any representation
        or  warranty,  the  Company  is  obligated  to  repurchase  the  Finance
        Contracts  from the Trust at a price  equal to the  remaining  principal
        plus accrued  interest.  The Company has not recorded any  liability and
        has not been obligated to purchase Finance  Contracts under the recourse
        provisions  during any of the reporting  periods,  however,  the Company
        repurchased  loans with  principal  balances of $420,000 in total from a
        Trust in February 1997. The Company expects that it will recover,  under
        dealer  representations and warranty provisions,  the amounts due on the
        repurchased loans from the dealership who sold the Company the loans.

                                              F-13






<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.      REVOLVING CREDIT AGREEMENTS:

        Effective  August 1, 1994, the Company entered into a Secured  Revolving
        Credit Agreement with Sentry Financial Corporation  ('Sentry') which was
        amended and restated on July 31, 1995. The amended agreement ('Revolving
        Credit Agreement')  provides for a $10,000,000  warehouse line of credit
        which terminates  December 31, 2000,  unless  terminated  earlier by the
        Company or Sentry upon meeting certain defined conditions.  The proceeds
        of the  Revolving  Credit  Agreement  are to be  used to  originate  and
        acquire Finance Contracts,  to pay for loss default insurance  premiums,
        to make deposits to a reserve  account with Sentry,  and to pay for fees
        associated  with the  origination  of Finance  Contracts.  The Revolving
        Credit Agreement is  collateralized  by the Finance  Contracts  acquired
        with the outstanding borrowings. Interest is payable monthly and accrues
        at a rate of prime plus 1.75%  (10.25% and 10% at December  31, 1995 and
        1996,  respectively).  The Revolving Credit  Agreement  contains certain
        restrictive  covenants,  including  requirements  to  maintain a certain
        minimum  net worth,  and cash and cash  equivalent  balances.  Under the
        Revolving  Credit  Agreement,  the Company paid interest of $411,915 and
        $220,674 for the years ended  December 31, 1995 and 1996,  respectively.
        Pursuant to the Revolving Credit  Agreement,  the Company is required to
        pay a  $700,000  warehouse  facility  fee  payable  upon the  successful
        securitization of Finance Contracts. The $700,000 was payable in varying
        amounts  after  each of the first  three  securitizations.  The  Company
        accrued the $700,000 debt issuance cost upon the first securitization in
        December  1995,  the date the Company  determined  the  liability  to be
        probable in accordance  with SFAS No. 5. The $700,000 debt issuance cost
        is being amortized as interest  expense on a straight line basis through
        December  31,  2000,  the  termination  date  of  the  Revolving  Credit
        Agreement.  The Company pays a utilization  fee of up to 0.21% per month
        on the average  outstanding  balance of the Revolving Credit  Agreement.
        The Revolving  Credit  Agreement  also requires the Company to pay up to
        0.62% per quarter on the average unused  balance.  At December 31, 1996,
        $10,000,000 was available for borrowings  under the credit line as there
        were no amounts outstanding at that date.

        Effective June 16, 1995, the Company  entered into a $25,000,000  Credit
        Agreement with Nomura Asset Capital Corporation ('Nomura') which allowed
        for  advances  to the  Company  through  June 2000 with all  outstanding
        amounts to mature June 2005.  Advances  outstanding  under the  facility
        accrued  interest  at the  three  month  LIBOR  rate  plus  6.75%  which
        approximated 12.59% at December 31, 1995. The warehouse facility allowed
        Nomura to terminate  the agreement  upon 120 days notice.  On October 6,
        1995, the Company  received notice of Nomura's intent to terminate,  and
        all outstanding advance amounts together with accrued interest were paid
        by the Company  prior to March 31,  1996.  No advances  under the Nomura
        credit facility were outstanding at December 31, 1996.

                                              F-14





<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.      REVOLVING CREDIT AGREEMENTS, Continued:

        Effective May 21, 1996 the Company,  through its wholly-owned subsidiary
        AutoBond  Funding  Corporation II, entered into a $20 million  revolving
        warehouse facility (the 'Revolving  Warehouse  Facility'),  with Peoples
        Security  Life  Insurance  Company (an  affiliate of  Providian  Capital
        Management),  which  expired  December 15, 1996.  The proceeds  from the
        borrowings under the Revolving  Warehouse  Facility were used to acquire
        Finance Contracts,  to pay credit default insurance premiums and to make
        deposits to a reserve  account.  Interest  was payable  monthly at a per
        annum rate of LIBOR plus 2.60%.  The Revolving  Warehouse  Facility also
        required the Company to pay a monthly fee on the average  unused balance
        of 0.25% per annum. The Revolving  Warehouse Facility was collateralized
        by the Finance Contracts acquired with the outstanding  borrowings.  The
        Revolving    Warehouse   Facility   contains   certain   covenants   and
        representations  similar  to  those  in  the  agreements  governing  the
        Company's  existing  securitizations.  No advances  under the  Revolving
        Warehouse Facility were outstanding at December 31, 1996.

        The interest rate on borrowings under revolving credit agreements ranged
        from 8% to 10% for the year ended December 31, 1996.

6.      NOTES PAYABLE:

        Pursuant to the  securitization  completed in December 1995, the Company
        entered  into a term loan  agreement  with a finance  company  to borrow
        approximately  $2,684,000.  The loan was collateralized by the Company's
        Class B Certificates from its 1995  securitization as well as the excess
        servicing  receivable from the cash flows of the related Trust (see Note
        4). The loan  accrued  interest  at 20% per annum  payable  monthly  and
        principal payments were made based on principal payments received on the
        Class B Certificates.

        Effective  April 8, 1996,  the  outstanding  balance of  $2,585,757  was
        refinanced  through a  non-recourse  term loan  entered  into with a new
        finance company.  The term loan is collateralized by the Company's Class
        B Certificates,  and matures April 8, 2002. The term loan bears interest
        at 15% per annum payable monthly. Principal and interest payments on the
        term loan are paid  directly by the  Trustee to the finance  company and
        are based on  payments  required  to be made to the Class B  Certificate
        holders  pursuant to the Trust.  The Company can prepay the term loan in
        whole or part at any time if the holder seeks to transfer such loan to a
        third party.

        Effective March 28, 1996, the Company obtained another non-recourse term
        loan in the amount of $2,059,214  from an  institutional  investor under
        similar  terms as  described  in the  preceding  paragraph.  The loan is
        collateralized  by the  Class  B  Certificates  issued  to  the  Company
        pursuant to the March 29, 1996 securitization  transaction.  The Company
        may prepay the loan in whole or in part at any time  subsequent to March
        28,  1997,  or any time after  receiving  notice by the  investor of its
        intent to transfer the loan to a third party.  The maturity  date of the
        loan is the earlier of March 28,  2002 or the date that all  outstanding
        principal  and  accrued  interest  has been paid by the  Trustee  or the
        Company.

                                              F-15




<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

6.      NOTES PAYABLE, Continued:

        Effective June 27, 1996, the Company obtained a third  non-recourse term
        loan in the amount of $2,066,410  from an  institutional  investor under
        similar terms as described in the preceding two paragraphs.  The loan is
        collateralized  by the  Class  B  Certificates  issued  to  the  Company
        pursuant to the June 27, 1996  securitization  transaction.  The Company
        may prepay the loan in whole or in part at any time  subsequent  to June
        27,  1997,  or any time after  receiving  notice by the  investor of its
        intent to transfer the loan to a third party.  The maturity  date of the
        loan is the  earlier of June 26,  2002 or the date that all  outstanding
        principal  and  accrued  interest  has been paid by the  Trustee  or the
        Company.

        Effective September 30, 1996 and December 27, 1996, the Company obtained
        non-recourse  term loans for  $2,403,027 and  $2,802,891,  respectively,
        from institutional investors under similar terms as described above. The
        loans  are  collateralized  by the  Class B  Certificates  issued to the
        Company  pursuant  to the  September  30,  1996 and  December  27,  1996
        securitization  transactions.  The Company may prepay the loans in whole
        or in part at any time  subsequent  to September  30, 1997,  or any time
        after  receiving  notice by the  investor of its intent to transfer  the
        loan to a third party.  The maturity date for the loans is September 30,
        2002 and December 31, 2002, respectively.

        During July 1996, a private investment management company entered into a
        commitment agreement to provide the Company financing  collateralized by
        the senior excess spread  interests to be created in the Company's  next
        five proposed securitization transactions. Timing and amount of payments
        of interest and principal on the loans will correspond to  distributions
        from the securitization trusts on the Class B Certificates. The interest
        rate  on such  loans  will be 15% per  annum,  payable  monthly  and the
        borrowings will include a 3% origination  fee. The commitment is subject
        to  the  Company's  ability  to  continue  meeting  several  provisions,
        including: (1) similarly structured securitization transactions; (2) the
        absence of rating downgrades and defaults from previous  securitization;
        and (3) satisfactory performance reports.

7.      REPURCHASE AGREEMENT:

        On December  20,  1995,  the Company  entered  into an agreement to sell
        certain Finance Contracts totaling $1,061,392 to a finance company,  and
        repurchase such Finance Contracts in January 1996 for an amount equal to
        the remaining  unpaid  principal  balance plus  interest  accruing at an
        annual rate of 19%.

        The Company  repurchased  such Finance  Contracts during January 1996 in
        accordance with the terms of the agreement.

8.      INITIAL PUBLIC OFFERING:

        On November 14, 1996, the Company and Selling  Shareholders sold 750,000
        and  250,000,  respectively,  of shares of  common  stock in an  initial
        public  offering at a price of $10 per share.  The net proceeds from the
        issuance and sale of common stock amounted to  approximately  $5,000,000
        after deducting underwriter  discounts and issuer expenses.  Portions of
        the net proceeds were used (i) to prepay  outstanding  subordinated debt
        of approximately $300,000 plus accrued interest,  (ii) to repay advances
        under Revolving Credit  Facilities,  and (iii) for general corporate and
        working capital purposes.


                                              F-16




<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8.      INITIAL PUBLIC OFFERING, Continued:

        The underwriters of the Company's  initial public offering  purchased an
        additional  75,000 shares of the Company's common stock at $10 per share
        by exercising half of their over-allotment option. The net proceeds from
        the issuance and sale of these shares amounted to approximately $700,000
        after  deducting  underwriter's  discounts.

9.      INCOME TAXES:

        The  provision  for income  taxes for 1996  consists  of a deferred  tax
        provision of  $1,926,553  and no current  liability.  The  provision for
        income taxes for 1995  consists of a deferred tax  provision of $199,000
        and no current  liability.  Due to net losses  incurred  from  inception
        through  December  31, 1994,  the Company has no provision in 1994.  The
        reconciliation  between the  provision  for income taxes and the amounts
        that  would  result  from  applying  the  Federal  statutory  rate is as
        follows:

<TABLE>
<CAPTION>
                                               Period From
                                              August 1, 1994
                                               (Inception)              Year Ended
                                               December 31,            December 31,
                                                   1994           1995             1996
                                              --------------  ------------       --------
<S>                                            <C>            <C>            <C>
Federal tax at statutory rate
 of 34%                                        $  (185,166)   $   364,646    $ 1,907,889
Nondeductible expenses                               2,166         17,354         18,664
Change in valuation allowance                      183,000       (183,000)          --
                                               -----------    -----------    -----------
     Provision for income taxes                $      --      $   199,000    $ 1,926,553
                                               ===========    ===========    ===========
</TABLE>


Deferred  income tax assets and  liabilities  reflect  the tax effect of
temporary  differences  between  the  carrying  amounts  of  assets  and
liabilities  for financial  reporting  purposes and income tax purposes
Significant  components  of the Company's net deferred tax liability are
as follows:

<TABLE>
<CAPTION>

                                                         December 31,
                                                     1995             1996
                                                  -----------    -----------
<S>                                               <C>            <C>
Deferred Tax Assets:
  Allowance for credit losses                     $    31,859    $    16,728
  Costs related to securitizations                     19,664        491,935
  Other                                               106,424          3,883
  Net operating loss carryforwards                  1,032,396      2,792,067
                                                  -----------    -----------
          Gross deferred tax assets                 1,190,343      3,304,613
                                                  -----------    -----------
Deferred Tax Liabilities:
  Gain on securitization                            1,389,343      5,242,372
  Other                                                  --          137,794
                                                  -----------    -----------
          Gross deferred tax liabilities            1,389,343      5,380,166
                                                  -----------    -----------

  Net deferred tax liabilities                    $   199,000    $ 2,075,553
                                                  ===========    ===========
</TABLE>


        At  December  31,  1996,   the  Company  had  tax  net  operating   loss
        carryforwards  of  approximately  $8,212,000 which will expire in fiscal
        years 2009 through 2011.

                                              F-17






<PAGE>


                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

10.     STOCKHOLDERS' EQUITY:

        Effective May 30, 1996, the Board of Directors adopted Restated Articles
        of  Incorporation  which  authorized  25,000,000  shares of no par value
        common stock and 5,000,000 shares of no par value preferred stock.

        STOCK BASED COMPENSATION PLAN

        The  Company   grants  stock  options  under  a  stock-based   incentive
        compensation   plan  (the  "Plan").   The  Company  applies   Accounting
        Principles  Board Opinion 25 and related  Interpretations  in accounting
        for the  Plan.  In  1995,  SFAS  No.  123  "Accounting  for  Stock-Based
        Compensation"  ("SFAS 123") was issued,  which,  if fully adopted by the
        Company, would change the methods the Company applies in recognizing the
        cost of the Plan.  Adoption of the cost  recognition  provisions of SFAS
        123  is  optional  and  the  Company  has  decided  not to  elect  these
        provisions of SFAS 123. However, pro forma disclosures as if the Company
        adopted  the  expense  recognition  provisions  of SFAS 123 for 1996 are
        required by SFAS 123 and are presented below.

        Under the Plan,  the  Company is  authorized  to issue  shares of Common
        Stock pursuant to "Awards" granted in various forms, including incentive
        stock  options  (intended to qualify  under  Section 422 of the Internal
        Revenue Code of 1986,  as amended),  non-qualified  stock  options,  and
        other similar stock- based Awards.  The Company granted stock options in
        1996 under the Plan in the form of non-qualified stock options.

        STOCK OPTIONS

        The Company  granted stock  options in 1996 to employees and  directors.
        The stock options  granted in 1996 have  contractual  terms of 10 years.
        All options  granted to the  employees  and  directors  have an exercise
        price no less than the fair market value of the stock at grant date. The
        options  granted in 1996 vest,  33.33% per year,  beginning on the first
        anniversary of the date of grant. The Company granted 274,500 options in
        1996 and 1 warrant for  100,000  shares of stock  (collectively,  "stock
        options"). The warrant is fully exercisable after 1 year.

        In  accordance   with  APB  25,  the  Company  has  not  recognized  any
        compensation cost for these stock options granted in 1996.

        A summary of the status of the  Company's  stock  options as of December
        31, 1996 and the changes during the year ended is presented below:

                                           STOCK OPTIONS
<TABLE>
<CAPTION>

                                                                              1996
                                                                     -------------------------
                                                                                     Weighted
                                                                     # Shares of      Average
                                                                     Underlying       Exercise
                                                                       Options         Prices
                                                                     -----------     ---------
<S>                                                                  <C>             <C>
        Outstanding at beginning of the year                                 0          n/a
          Granted at-the-money                                         274,500        $10.06
          Granted at a premium                                         100,000        $12.00
                                                                       -------
        Total granted                                                  374,500        $10.58
                                                                       =======        ======
        Outstanding at end of year                                     374,500        $10.58
                                                                       =======        ======
        Exercisable at end of year                                           0          n/a
        Weighted-average FV of options granted at-the-money                           $ 4.88
        Weighted-average FV of warrants granted at a premium                          $ 4.65
        Weighted-average FV of options granted during the year                        $ 4.82
</TABLE>

                                              F-18




<PAGE>



                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

10.     STOCKHOLDERS' EQUITY, Continued:

        STOCK OPTIONS, Continued

        The fair value of each stock option and warrant  granted is estimated on
        the date of grant using the Black-Scholes  option-pricing model with the
        following  weighted-average  assumptions  for  grants in 1996:  dividend
        yield of 0.00% for both years;  risk-free  interest  rates are different
        for each  grant and range  from 5.89% to 6.06%;  the  expected  lives of
        options are estimated to be 5 years;  and a volatility of 46.46% for all
        grants.

        As of December  31,  1996,  374,500  options are  outstanding  with none
        bearing exercisable and a weighted-average contractual life of all stock
        options being 9.93 years.

        PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE

        Had the  compensation  cost for the Company's  stock-based  compensation
        plan been determined  consistent with SFAS 123, the Company's net income
        and net income per common share for 1996 would approximate the pro forma
        amounts below:

<TABLE>
<CAPTION>
                                                                 As Reported       Pro Forma
                                                                 December 31,      December 31,
                                                                     1996              1996
                                                                 ------------      --------
<S>                                                              <C>               <C>
        SFAS 123 Charge, pre-tax                                       -            $1,804,560

        APB 25 Charge                                                  -                  -

        Net income                                               $3,584,886         $2,393,876

        Net income per common share                                 $ .62              $ .41
</TABLE>

        The effects of applying  SFAS 123 in this pro forma  disclosure  are not
        indicative of future amounts. SFAS 123 does not apply to awards prior to
        1995.

        WARRANTS

        The Company issued to its  underwriters of their initial public offering
        a warrant to  purchase  up to  100,000  common  shares of the  Company's
        common  stock at a price per  share  equal to  $12.00.  The  warrant  is
        exercisable  after one year from  November 14,  1996,  or earlier if the
        Company effects certain registrations of its common stock.

        In addition to  subordinated  debt issued March 12, 1996,  which was not
        outstanding at December 31, 1996, a detachable  warrant was issued to an
        individual  for the  purchase  of 18,811  shares  of common  stock at an
        exercise  price equal to the fair market value as of March 12, 1996, the
        date of grant.  The warrant is exercisable in full or in part during the
        period  commencing  six months after the effective date of the Company's
        initial public offering and ending 1.5 years thereafter.  Management has
        determined  that the fair value of the warrant at its issuance  date was
        de minimus.

                                              F-19




<PAGE>



                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

10.     STOCKHOLDERS' EQUITY, Continued:

        PREFERRED STOCK

        Pursuant to the Company's Amended Articles of Incorporation, the Company
        is  authorized  to issue  from  time to time up to  5,000,000  shares of
        Preferred  Stock,  in one or more  series.  The  Board of  Directors  is
        authorized to fix the dividend  rights,  dividend rates,  any conversion
        rights or right of exchange,  any voting right,  any rights and terms of
        redemption (including sinking fund provisions), the redemption rights or
        prices, the liquidation  preferences and any other rights,  preferences,
        privileges  and  restrictions  of any series of Preferred  Stock and the
        number of shares  constituting such series and the designation  thereof.
        There were no shares of  Preferred  Stock issued or  outstanding  during
        1995 or 1996.

11.     RELATED PARTY TRANSACTIONS:

        Prior to  January  1,  1996  the  Company  shared  certain  general  and
        administrative  expenses with AutoBond,  Inc. ('ABI'), which was founded
        and is 100% owned by the Chief Executive Officer ('CEO') of the Company.
        The CEO owns 56.59% of the Company.  Each entity was allocated  expenses
        based  on  a  proportional  cost  method,  whereby  payroll  costs  were
        allocated   based   on   management's   review   of  each   individual's
        responsibilities,  and  costs  related  to office  space  and  equipment
        rentals  were based on  management's  best  estimate of usage during the
        year.  Miscellaneous  expenses  were  allocated  based  on the  specific
        purposes for which each expense related. Management believes the methods
        used to allocate the general and administrative expenses shared with ABI
        were  reasonable,  and  that  the  expenses  reported  in the  financial
        statements after the ABI allocations approximate the expenses that would
        have  been  incurred  on a  stand-alone  entity  basis.  Total  expenses
        allocated to the Company from ABI amounted to approximately $441,000 for
        the period from  August 1, 1994  (inception)  to  December  31, 1994 and
        $2,163,000 for the year ended December 31, 1995.  Additionally,  neither
        the Company nor any of its affiliates had paid any  compensation  to its
        CEO during 1994 or 1995;  however,  management of the Company  commenced
        compensation  payments  to the CEO during  the latter  half of 1996 (see
        Note 12). The Company estimated that a reasonable amount of compensation
        to pay the CEO on a stand-alone  entity basis would approximate  $40,000
        and $100,000  for the five months  ended  December 31, 1994 and the year
        ended December 31, 1995.

        The Company advanced  approximately $132,000 and $201,000 as of December
        31, 1995 and December 31, 1996,  respectively,  to William Winsauer, CEO
        and majority shareholder of the Company,  and approximately  $21,000 and
        $34,000 as of December 31, 1995 and December 31, 1996, respectively,  to
        John Winsauer,  a significant  shareholder of the Company.  The advances
        are  non-interest  bearing  amounts that have no repayment terms and are
        shown as a reduction  of  shareholders'  equity.  As of March 20,  1997,
        these loans were repaid in full.

                                              F-20




<PAGE>



                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

11.     RELATED PARTY TRANSACTIONS, Continued:

        The Company  and ABI entered  into a  management  agreement  dated as of
        January 1, 1996 (the 'ABI Management  Agreement')  which requires ABI to
        pay an annual fee of $50,000 to the Company for services  rendered by it
        or the Company's  employees on behalf of ABI as follows:  (i) monitoring
        the  performance of certain  partnership  interests owned by ABI and its
        sole shareholder,  (ii) certain cash management services,  including the
        advancing  of funds to pay ABI's  ordinary  business  expenses and (iii)
        providing  advice  as  to  regulatory  compliance.  The  ABI  Management
        Agreement also provides that the Company will perform certain accounting
        functions on behalf of ABI including (i)  maintenance of financial books
        and  records,  (ii)  monitoring  of  cash  management  functions,  (iii)
        preparation  of financial  statements and tax returns and (iv) providing
        advice in connection with retention of independent accountants.  The ABI
        Management  Agreement further provides for the reimbursement of advances
        made by the Company for  out-of-pocket  costs and  expenses  incurred on
        behalf of ABI.  Amounts  due to the  Company  under  the ABI  Management
        Agreement amounted to $143,547 at December 31, 1996.

12.     EMPLOYMENT AGREEMENTS:

        During 1995 and 1996,  the Company  entered into  three-year  employment
        agreements with two officers of the Company. One employment agreement is
        dated November 15, 1995 and is effective from such date through November
        15, 1998.  This agreement is  automatically  extended unless the Company
        gives six  months  notice of its  intent  not to extend the terms of the
        agreement.  This  agreement  provides  for a minimum  monthly  salary of
        $12,500,  together  with shares of the Company's  common  stock,  issued
        January 1, 1996,  equal to 10% of the  outstanding  shares  after giving
        effect to the shares issued to the employee.  Half of such issued shares
        are not subject to  forfeiture  whereas the remaining 50% are subject to
        forfeiture.  Equal  amounts of the  forfeitable  shares  bear no risk of
        forfeiture upon the officer  remaining  employed as of November 15, 1996
        and November 15, 1997, respectively.

        The  Company  valued  the  shares  issued  January  1, 1996  based on an
        independent  appraisal  of the  Company as of  November  15,  1995,  the
        measurement date, and recorded an increase to additional paid-in capital
        and  deferred   compensation  of  $138,500.   Deferred  compensation  is
        amortized  on a  straight-line  basis  over the two  forfeiture  periods
        ending  November 15, 1997 resulting in  compensation  expense of $75,742
        and  $51,336  for  the  years   ended   December   31,  1995  and  1996,
        respectively.

        The second employment  agreement is dated May 31, 1996, and is effective
        from such date for five years.  The agreement  provides for compensation
        at a base salary of $240,000 per annum,  which may be increased  and may
        be decreased to an amount of not less than  $240,000,  at the discretion
        of the Board of Directors.  The agreement  entitles the chief  executive
        officer to receive the benefits of any cash  incentive  compensation  as
        may be  granted by the Board to  employees,  and to  participate  in any
        executive bonus or incentive plan established by the Board of Directors.
        The  agreement  also  provides  the  officer  with  certain   additional
        benefits.

                                              F-21




<PAGE>




                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

12.     EMPLOYMENT AGREEMENTS, Continued:

        The  agreement  automatically  terminates  upon  (i)  the  death  of the
        officer,  (ii)  disability  of the  officer  for six  continuous  months
        together with the likelihood  that the officer will be unable to perform
        his duties for the following continuous six months, as determined by the
        Board of Directors,  (iii) termination of the officer 'for cause' (which
        termination  requires  the vote of a majority  of the Board) or (iv) the
        occurrence of the  five-year  expiration  date  provided,  however,  the
        agreement  may be extended  for  successive  one-year  intervals  unless
        either  party  elects to  terminate  the  agreement  in a prior  written
        notice.  The officer may terminate his  employment  for 'good reason' as
        defined in the agreement.  In the event of the officer's termination for
        cause, the agreement provides that the Company shall pay the officer his
        base salary  through the date of  termination  and the vested portion of
        any incentive compensation plan to which the officer may be entitled.

        Other than following a change in control,  if the Company terminates the
        officer in breach of the  agreement,  or if the officer  terminates  his
        employment  for good reason,  the Company must pay the officer:  (i) his
        base salary through the date of  termination;  (ii) a severance  payment
        equal to the base  salary  multiplied  by the number of years  remaining
        under the  agreement;  and (iii) in the case of breach by the Company of
        the agreement, all other damages to which the officer may be entitled as
        a result of such breach,  including lost benefits  under  retirement and
        incentive plans.

        In the event of the officer's termination following a change in control,
        the  Company is  required  to pay the  officer an amount  equal to three
        times  the  sum of (i) his  base  salary,  (ii)  his  annual  management
        incentive   compensation   and  (iii)  his   planned   level  of  annual
        perquisites.  The  agreement  also provides for  indemnification  of the
        officer  for  any  costs  or  liabilities  incurred  by the  officer  in
        connection with his employment.

13.     COMMITMENTS AND CONTINGENCIES:

        An affiliate of the Company leases office space, furniture, fixtures and
        equipment under operating leases and during 1995 allocated a significant
        portion of such costs to the Company based on estimated  usage (see Note
        11).

        Future minimum lease payments (which reflect leases having noncancelable
        lease  terms in excess of one year) are as  follows  for the year  ended
        December 31:

<TABLE>
<CAPTION>
                                                               Operating
                                                                 Leases
                                                               --------
<S>                                                            <C>
             1997                                              $542,580
             1998                                               305,697
             1999                                                91,847
             2000                                                16,567
             2001                                                    --
             Thereafter                                              --
                                                               --------
                                                                956,691
                                                               ========
</TABLE>



        Rental expense under  operating  leases for the years ended December 31,
        1996, 1995 and 1994 were approximately $524,000,  $351,000, and $61,000,
        respectively.

                                              F-22




<PAGE>




                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

13.     COMMITMENTS AND CONTINGENCIES, Continued:

        The  Company  guaranteed  a working  capital  line  entered  into by the
        Company's  majority  shareholder.  Total  borrowings of $2,250,000 under
        such  line of credit  were  contributed  to the  Company  as  additional
        paid-in   capital   during  the  year  ended   December  31,  1995.  The
        indebtedness   of  the   majority   shareholder   is  repaid   from  and
        collateralized  by a  portion  of  cash  flows  from  Finance  Contracts
        underlying certain securitization transactions completed by the majority
        shareholder  and  affiliates  owned  by the  majority  shareholder.  The
        outstanding  balance  guaranteed by the Company at December 31, 1995 was
        approximately  $2,000,000.  All  amounts  outstanding  under the working
        capital  line,  if any,  are  expected  to be repaid  from the sale of a
        portion of the  majority  shareholder's  common  stock  upon  successful
        completion by the Company of an initial public offering.  In April 1996,
        the Company  made a payment of $89,000 as a principal  reduction  in the
        working  capital  line to bring the  outstanding  balance to the maximum
        permitted  outstanding amount as of March 31, 1996.  Effective September
        26,  1996  the  Company  was   released   from  its   guarantee  of  the
        shareholder's debt for a release fee of $125,000.

        The  Company  is  the  plaintiff  or  the  defendant  in  several  legal
        proceedings  that its  management  considers  to be the normal  kinds of
        actions to which an  enterprise of its size and nature might be subject,
        and not to be material to the  Company's  overall  business or financial
        condition, results of operations or cash flows.

14.     FAIR VALUE OF FINANCIAL INSTRUMENTS:

        The estimated  fair value  amounts have been  determined by the Company,
        using   available   market   information   and   appropriate   valuation
        methodologies. However, considerable judgment is necessarily required in
        interpreting market data to develop the estimates of fair value.

        Accordingly,   the  estimates   presented  herein  are  not  necessarily
        indicative  of the amounts that the Company  would  realize in a current
        market  exchange.   The  use  of  different  market  assumptions  and/or
        estimation  methodologies  may have a material  effect on the  estimated
        fair value amounts.  The following  methods and assumptions were used to
        estimate the fair value of each class of financial instruments for which
        it is practicable to estimate that value.

        CASH AND CASH EQUIVALENTS

        The  carrying  amount  approximates  fair  value  because  of the  short
        maturity of those investments.

        NOTE PAYABLE, REVOLVING CREDIT BORROWINGS AND REPURCHASE AGREEMENT

        The fair value of the Company's debt is estimated  based upon the quoted
        market  prices for the same or similar  issues or on the  current  rates
        offered to the Company  for debt of the same  remaining  maturities  and
        characteristics.  The  revolving  credit lines are variable  rate loans,
        resulting in a fair value that  approximates  carrying  cost at December
        31, 1996.  Additionally,  due to the December  borrowing  date, the note
        payable  and  repurchase  agreement  fair  values  approximated  cost at
        December 31, 1995.

        FINANCE CONTRACTS HELD FOR SALE

        The  fair  value  of  Finance  Contracts  held  for sale is based on the
        estimated  proceeds  expected on securitization of the Finance Contracts
        held for sale.

                                              F-23




<PAGE>



                         AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

14.     FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued:

        EXCESS SERVICING RECEIVABLE

        The fair value is determined  based on discounted  future net cash flows
        utilizing  a  discount  rate  that  market  participants  would  use for
        financial  instruments  with  similar  risks.  Due to the nature of this
        financial  instrument  and the  relative  recency of the  securitization
        transaction date, the carrying amount approximates fair value.

        The estimated  fair values of the  Company's  financial  instruments  at
        December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
                                                 1995                         1996
                                       -------------------------   -------------------------
                                          Carrying      Fair         Carrying       Fair
                                           Amount       Value         Amount       Value
                                       -----------   -----------   -----------   -----------
<S>                                    <C>           <C>           <C>           <C>
Cash and cash equivalents              $    92,660   $    92,660   $ 4,121,342   $ 4,121,342
Finance Contracts held for sale, net     3,354,821     3,854,821       228,428       228,428
Class B Certificates                     2,834,502     2,834,502    10,465,294    10,465,294
Excess servicing receivable                846,526       846,526     4,247,274     4,247,274
Note payable                             2,674,597     2,674,597    10,174,633    10,174,633
Revolving credit borrowings              1,150,421     1,150,421          --            --
Repurchase agreement                     1,061,392     1,061,392          --            --
</TABLE>


15.     SUPPLEMENTAL CASH FLOW DISCLOSURES:

        Supplemental  cash flow information with respect to payments of interest
        is as follows:

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                          --------------------------------------
                                                            1994           1995          1996
                                                            ----           ----          ----
<S>                                                       <C>           <C>           <C>
        Interest paid                                     $ 19,196      $2,099,867    $1,885,322
</TABLE>

        No income taxes were paid during fiscal 1994, 1995 or 1996.

16.     SUBSEQUENT EVENTS:

        Effective  February  5, 1997,  the  Company  through  its  wholly  owned
        subsidiary  AutoBond  Funding II, obtained a warehouse line of credit of
        $50,000,000 with Daiwa Finance  Corporation for a fourteen month period.
        This line of credit does not require that the loans funded be covered by
        default deficiency insurance.  The interest rate applied to this line of
        credit  is the  lesser  of (x) 30 day  LIBOR  plus  1.15% or (y) 11% per
        annum. The agreement  requires the Company pay a non-utilization  fee of
        .25% per annum on the amount of the line  unused.  Pursuant to this line
        of credit, the Company paid a $243,750 commitment fee. The Debt issuance
        costs  will  be  amortized  as  interest  expense  through  April  1998,
        utilizing the effective interest method.

        In January  1997,  the Company  granted  40,000  options to officers and
        employees.

                                              F-24




<PAGE>




                                                                     SCHEDULE II

                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                                               Additions
                                                 Balance        Charged                           Balance
                                              at Beginning     Cost and                           at End
               Description                      of Period      Expenses       Deductions (A)     of Period
               -----------                    ------------    ---------       --------------     ----------
<S>                                           <C>             <C>             <C>                <C>
        Allowance for Credit Losses:
          Period from August 1, 1994
           (Inception) to December 31, 1994   $       --       $ 45,000       $      --          $  45,000
          Year ended December 31, 1995        $     45,000     $ 48,702       $      --          $  93,702
          Year ended December 31, 1996        $     93,702     $412,387       $(480,889)         $  25,200
</TABLE>



(A) Deductions in 1996 were write-offs of uncollectible finance contracts.

                                              S-1



<PAGE>

<TABLE>
<CAPTION>
                                  EXHIBIT INDEX

   Exhibit No.                       Description of Exhibit                      Page No.
   ----------                        ----------------------                      --------
        <S>          <C>                                                         <C>
          3.1*   --   Restated Articles of Incorporation of the Company

          3.2*   --   Amended and Restated Bylaws of the Company

          4.1*   --   Specimen Common Stock Certificate

         10.1*   --   Amended and Restated Loan Origination, Sale and
                      Contribution Agreement dated as of December 15, 1995
                      by and between the Company and AutoBond Funding
                      Corporation I

         10.2*   --   Security  Agreement  dated  as of  May  21,  1996  among
                      AutoBond  Funding  Corporation  II, the  Company and Norwest
                      Bank Minnesota, National Association

         10.3*   --   Credit  Agreement  and Side  Agreement,  dated as of May 21,
                      1996 among AutoBond Funding  Corporation II, the Company and
                      Peoples Life Insurance Company

         10.4*   --   Servicing  Agreement  dated  as of May  21,  1996  among
                      AutoBond Funding Corporation II, CSC Logic/MSA L.L.P., doing
                      business  as "Loan  Servicing  Enterprise",  the Company and
                      Norwest Bank Minnesota, National Association

         10.5*   --   Loan Acquisition Sale and Contribution Agreement dated as
                      of May 21, 1996 by and  between  the  Company  and  AutoBond
                      Funding Corporation II

         10.6*   --   Second Amended and Restated Secured Revolving Credit
                      Agreement dated as of July 31, 1995 between Sentry
                      Financial Corporation and the Company

         10.7*   --   Management Administration and Services Agreement dated as
                      of January 1, 1996 between the Company and AutoBond, Inc.

         10.8*   --   Employment Agreement dated November 15, 1995 between
                      Adrian Katz and the Company

         10.9*   --   Employment Agreement dated February 15, 1996 between
                      Charles A. Pond and the Company

        10.10*   --   Employment  Agreement  effective  as of May 1, 1996  between
                      William O. Winsauer and the Company

        10.11*   --   Vender's  Comprehensive Single Interest Insurance Policy and
                      Endorsements, issued by Interstate Fire & Casualty Company
</TABLE>


                                          i



<PAGE>


<TABLE>
       <S>         <C>                                                             <C>
        10.12*   --   Warrant to Purchase Common Stock of the Company dated
                      March 12, 1996

        10.13*   --   Employee Stock Option Plan

        10.14*   --   Dealer  Agreement  dated  November  9, 1994,  between the
                      Company and Charlie Thomas Ford, Inc.

        10.15*   --   Automobile Loan Sale Agreement, dated as of September 30,
                      1996, among the Company,  First Fidelity  Acceptance  Corp.,
                      and Greenwich Capital Financial Products, Inc.

         10.16   --   Servicing  Agreement,  dated  as of  January  29,  1997,
                      between  CSC  LOGIC/MSA  L.P.P.,  doing  business  as  "Loan
                      Servicing Enterprise" and the Company

         10.17   --   Credit  Agreement,  dated as of February  1, 1997,  among
                      AutoBond  Funding  Corporation  II,  the  Company  and Daiwa
                      Finance Corporation

         10.18   --   Security Agreement,  dated as of February 1, 1997, by and
                      among  AutoBond  Funding  Corporation  II, the  Company  and
                      Norwest Bank Minnesota, National Association

         10.19   --   Automobile Loan Sale Agreement, dated as of March 19,
                      1997, by and between Credit Suisse First Boston
                      Mortgage Capital L.L.C., a Delaware limited liability
                      company, and the Company

         16.1*   --   Change in certifying accountant's letter

         21'D'   --   Subsidiaries of the Company

         27.1'D' --   Financial Data Schedule

</TABLE>


                                          ii





<PAGE>


*  Incorporated  by  reference from  the  Company's  Registration  Statement  on
   Form S-1
(Registration No. 333-05359).

'D' Filed herewith.

                                          iii




                                     STATEMENT OF DIFFERENCES

            The dagger symbol shall be expressed as .................'D'