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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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, 1997

                                       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                  (I.R.S. Employer
      of incorporation or organization)               Identification No.)

     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 on
              Title of class                             which registered
              --------------                         ---------------------------
    COMMON STOCK, NO PAR VALUE PER SHARE             AMERICAN STOCK EXCHANGE
15% SERIES A CUMULATIVE PREFERRED STOCK NO PAR        AMERICAN STOCK EXCHANGE
               VALUE PER SHARE

         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 30, 1998, 1998 (based on the closing price on such
date as reported on the American Stock Exchange) was $7,275,777.(1)

         As of March 30, 1998, there were 6,531,311 shares of the registrant's
Common Stock, no par value, and 1,125,000 of the registrant's 15% Series A
Cumulative Preferred Stock, no par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III - Portions of the registrant's definitive Proxy Statement with respect
to the registrant's 1998 Annual Meeting of Shareholders, to be filed not later
that 120 days after the close of the registrant's fiscal year.

--------
(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.
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TABLE OF CONTENTS

<S>                                                                            <C>
PART I..........................................................................1

ITEM 1.    BUSINESS.............................................................1
ITEM 2.    PROPERTIES..........................................................16
ITEM 3.    LEGAL PROCEEDINGS...................................................16
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................17

PART II........................................................................17

ITEM 5.    MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS..............................................17
ITEM 6.    SELECTED FINANCIAL DATA.............................................18
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
             CONDITION AND RESULTS OF OPERATIONS...............................19

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................32
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE .............................32

PART III.......................................................................32

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............32
ITEM 11.      EXECUTIVE COMPENSATION...........................................32
ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...33
ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................33

PART IV........................................................................33

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K...33

SIGNATURES.....................................................................35
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                                     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, 1997, the Company
acquired 23,386 finance contracts with an aggregate outstanding principal
balance of $270 million. Since inception, the Company has completed eight
securitizations pursuant to which it privately placed $204 million in finance
contract-backed securities.

RECENT DEVELOPMENTS

        In November 1997, the Company was informed by Moody's, and then by
Fitch, that the rated notes issued in the 1997-B and 1997-C securitization
transactions had been placed under review for possible downgrade, due to certain
recent statements made by representatives of Progressive Northern Insurance
Company ("Progressive") about the coverage afforded under the VSI and Deficiency
Balance insurance policies issued in connection with such transactions.
Specifically Moody's and Fitch, after discussions with representatives of
Progressive, cited concerns with Progressive's interpretation of its right to
cancel the policies, as well as its aggregate limit of liability on claims paid
under the Deficiency Balance policy. In February 1998, the Company was informed
by Fitch that the two securitizations had been downgraded and Fitch's ratings
withdrawn. The Company disagrees with the actions taken by Moody's and Fitch and
reaffirms its understanding that (a) coverages under the Progressive policies
are not cancelable with respect to Auto Loans for which premiums have been paid
in full, and (b) Progressive's aggregate limitation of liability per month is
88% of premiums paid to date. On March 5, 1998, after the Company terminated its
engagement of Fitch, Fitch withdrew its ratings on all securitizations of the
Company. The Company has sued Progressive for declaratory relief. On March 23,
1998, Moody's announced that it had downgraded the senior securities in each of
the Company's eight outstanding securitizations to investment grade levels of
Baa2 (except for the 1997-B and 1997-C transactions, where due to uncertainties
about the supporting insurance policy, the ratings were downgraded to Baa3).
Moody's rested its actions upon its view that current net losses were projected
to be higher than originally expected, along with what Moody's termed as "the
unanticipated allocation of transaction cash flows" reducing available credit
enhancement to the senior securities, as well as "discrepancies in trigger
calculations, inaccuracies in reported delinquencies, concerns with the handling
of prepaid insurance claims, and errors in cash distributions." In December
1997, the Company assumed contractual responsibility for servicing the
securitizations from Loan Servicing Enterprise and is


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optimistic that the complex task of cash flow allocation and reporting can be
better handled going forward. Moody's has indicated that the securitizations
remain on review with direction uncertain due to the current " increased
uncertainty in projecting future deal performance."

        The Company entered into an employment agreement, dated as of January 1,
1998, with Manuel A. Gonzalez, a former outside director to serve as a
consultant to the Company until February 1, 1998, whereupon he agreed to become
President of the Company for a period of three years. On March 3, 1998, Robert
Shuey was appointed to fill the vacancy left by Mr. Gonzalez' departure from the
Board.

        During January 1998, the Company privately placed $7,500,000 in
aggregate principal amount of senior subordinated notes (the "subordinated
notes") to an affiliate of BankBoston, N.A. The subordinated notes bear interest
at 15% per annum, mature on February 1, 2001 and $1,215,925 in principal amount
are convertible into up to 368,462 shares of the Company's common stock at a
price of $3.30 per share (subject to adjustment). Although the subordinated
notes contain customary restrictive covenants, they do not prohibit the Company
from paying dividends on the preferred stock out of earnings legally available
therefor. In addition, the Company issued to the purchaser a warrant to purchase
such shares to the extent the notes have not been converted prior to maturity.
Net proceeds from the sale of the subordinated notes were used (i) to pay
short-term liabilities, (ii) to repay the Company's 18% convertible notes and
(iii) for working capital purposes.

        On February 20, 1998, the Company sold 1,000,000 of shares of it 15%
Series A Cumulative Preferred Stock (the "Preferred Stock") in a public offering
at a price of $10 per share. The net proceeds from the issuance and sale of
preferred stock amounted to approximately $9,000,000 after deducting underwriter
discounts and issuer expenses. Portions of the net proceeds were used (i) for
the acquisition and financing of finance contracts, including the funding of
reserves and other credit enhancements and (ii) for working capital and general
corporate purposes. The underwriters of the Company's public offering purchased
an additional 125,000 shares of the Preferred Stock at $10 per share by
exercising their over-allotment option on February 27, 1998. The net proceeds
from the issuance and sale of these over-allotment shares amounted to
approximately $1,125,000.

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:

                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,
        1997, new vehicles and used vehicles represented 6.8% and 93.2%,
        respectively, of the finance contract portfolio. 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 facilities than used car dealers.

                Efficient Funding Strategies--Through an investment-grade
        warehouse facility and a periodic securitization program, the Company
        increases its liquidity, redeploys its capital and reduces its exposure
        to interest rate fluctuations. The net effect of the Company's funding
        and securitization program is to provide more proceeds than the
        Company's acquisition costs,


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        resulting in positive revenue cash flow and lower overall costs of
        funding, and permitting loan volume to increase with limited
        additional equity capital.

                Uniform Underwriting Criteria--To manage the risk of delinquency
        or defaults associated with sub-prime consumers, the Company has
        utilized since inception underwriting criteria which are uniformly
        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 securitization
        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."

                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.

                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. In 1997 the difficulties experienced by several competitors
        provided an opportunity to attract experienced personnel to work for the
        Company. Hiring in 1998 is not expected to be as rapid but will continue
        selectively.

                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, 1997, a total of $32,426,203 or 15.32%,
        of the Company's finance contract portfolio were between 30 and 89 days
        past due and $8,368,493, or approximately 4.0%, of the Company's finance
        contracts outstanding were 90 days past due or greater. The
        aforementioned percentages and amounts include finance contracts in the
        Company's portfolio where the Company has discontinued collection
        efforts, such as where the underlying vehicle has been repossessed, the
        borrower is in bankruptcy, the dealer is to buy back the loan, or an
        insurance claim has been filed. From inception through December 31,
        1997, the Company repossessed 2,936 (approximately 13%) of its financed
        vehicles, and the Company had completed the disposal of 1,351 vehicles,
        resulting in an average loss per repossession of approximately $2,419
        per vehicle. See "Management's Discussion and Analysis of Financial
        Condition and Results of Operations--Net Loss Per Repossession."

                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 vendor's comprehensive single interest physical damage insurance
        policy (a "VSI Policy"). In addition, in connection with certain of the
        Company's warehouse financing and securitizations through December 31,
        1997, 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 contract finance 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 20.9%
        (excluding repossession costs) of the principal balance outstanding on
        disposed repossessed vehicles for which the liquidation process has been
        completed as of December 31, 1997. For its 1997-B and 1997-C
        securitizations, the Company purchased credit default insurance from
        Progressive 


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        Northern Insurance Company. See "Recent Developments," "Insurance" and
        "Management's Discussion and Analysis of Financial Condition and
        Results of Operations--Net Loss per Repossession."

        As discussed, the Company's business strategy depends on its ability to
increase the rate of revenue growth more rapidly than the rate of expenses,
which would involve a reversal of an adverse trend experienced through much of
1997. Thus, continued growth in revenues is important for the Company to succeed
in its business strategy.

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%. 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 average borrower's age is 34.3 years.

CONTRACT PROFILE

        From inception to December 31, 1997, the Company acquired 23,386 finance
contracts with an aggregate initial principal balance of $269,922,491. 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 finance vehicles was approximately two
years at the time of sale. The finance contracts had, upon acquisition, an
average initial principal balance of $12,228; a weighted average APR of 19.8%;
and a weighted average contractual maturity of 52.5 months. As of December 31,
1997, the finance contracts in the finance contract portfolio had a weighted
average remaining maturity of 43.6 months.

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,
1997, the Company was licensed or qualified to do business in 40 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 30% of the Company's dealer network
consists of dealers located in Texas, where the Company has operated since 1994.
A group of six dealerships (including Charlie Thomas Ford, Inc.) 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 


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(8.77% and 8.94% for the fiscal year ended 1995 and 1996 respectively). The
Company is no longer purchasing contracts from these dealerships due to a
dispute over repurchase obligations. See "Legal Proceedings."

DEALER SOLICITATION

        Marketing Representatives. As of December 31, 1997, the Company utilized
43 marketing representatives, 36 of whom were individuals employed by the
Company and seven of whom were marketing organizations serving as independent
representatives. The Company also maintained one loan production office. These
representatives have an average of ten years' experience in the automobile
financing industry. 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 that 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 a monthly
competitive survey relating to the competitive situation and possible
opportunities in the region. The Company provides each representative with 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 contracts, 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 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 expense
and administrative burden of such offices are generally unjustified. The Company
has concluded that the ability to closely monitor the critical functions of
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 contacts from such dealer. A Dealer Agreement generally 



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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 is obligated
to 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 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 Manufacturer's 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 of the (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.


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        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, 1997, 133,039 credit applications were
submitted to the Company. Of these 133,039 applications, approximately 23.4%
were approved and 7.9%, or 10,554 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. 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 uniformly 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 of experience 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


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<PAGE>




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.

        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 within a commercially reasonable time 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.

        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
$14.8 million in finance contracts in 1996 from Greenwich Capital Financial
Products which were originated by First Fidelity Acceptance Corp. During the
first quarter of 1997, the Company acquired approximately $12.8 million in
finance contracts from Credit Suisse First Boston Mortgage Capital LLC ("CSFB")
which were originated by Jefferson Capital Corporation. During the third quarter
of 1997, the Company acquired a total of $7.9 million in finance contracts from
three originators. During the fourth quarter of 1997, the Company acquired a
total of $7.4 million in finance contracts from third party originators and,
from CSFB, approximately $12.5 million in finance contracts, which were
originated by several third parties. CSFB also provided acquisition financing
for the purchase.

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 servicing and collection. Prior to December
1997, the Company engaged CSC Logic/MSA L.L.P. (a Texas limited liability
partnership doing business as "Loan Servicing Enterprise") ("LSE") to provide
contract administration for its warehouse arrangements and securitizations.

        Contract Administration. The Company, as servicer, performs certain
contract administration functions in connection with finance contracts
warehoused or sold to securitization trusts, including payment processing,
statement rendering, insurance tracking, data reporting and customer service for
finance contracts. The Company inputs newly originated finance contracts on the
contract system daily. The servicer 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. All borrower remittances are directed
to a lock box. Remittances received are then posted to the proper account on the
system. The Company also handles account inquiries from borrowers, performs
insurance tracking 



                                       8

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<PAGE>



services and 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.

        As of December 31, 1997, the Company employed 191 people full-time,
including 81 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, 1997, there
were 236 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.

        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 documentation.

        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, any deficiency balance policy 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 



                                       9

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<PAGE>



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 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. Certain finance contracts
acquired by the Company after December 31, 1996 are covered by either the
Interstate VSI Policy, including the Credit Endorsement, another VSI Policy
(which does not include a Credit Endorsement), or the VSI Policy and deficiency
balance endorsement (the "Progressive Policy") issued by Progressive Northern
Insurance Company ("Progressive").

        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
vehicle. The Company tracks the physical damage insurance of borrowers and
contacts borrowers in the event of a lapse in coverage or inadequate
documentation. Moreover, 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 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 applicable VSI Policy, by reason of the
inability of the Company to locate the borrower or 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 provide
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 $50,000 in the case of the Progressive
Policy; 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 ($250 for the
Progressive Policy). 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.

        Deficiency Balance Endorsements. 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 (as defined below)
less the sum of (I) the Actual Cash Value (as defined below) 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.

        "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




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<PAGE>



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 or remarketing expenses and
fees or taxes incurred.

        The Progressive Policy contains a Deficiency Balance Endorsement (the
"DBE"), pursuant to which Progressive will insure the Company's interest in the
Financed Vehicles against direct loss incurred due to the Company's inability to
recover one hundred percent (100%) of the balance due under an instrument
representing a finance contract. Under the DBE, Progressive will cover such
impairment of the Company's interest in the financed vehicle, measured as the
Net Payoff Amount, reduced by (a) claim settlements from other insurance
policies, (b) claim settlements due under other coverage provisions of the VSI
Policy or its other endorsements, and (c) monies recoverable under any other
recourse or repurchase agreement or through any dealer hold-back, or any other
source. The maximum liability under the DBE is Five Thousand Dollars ($5,000)
for any financed contract, and claims payments may not exceed, on a monthly
basis, 88% of the premiums paid. See "--Recent Developments."

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 enhance the Company's competitive position. Significant infrastructure
development was completed throughout 1997 to accommodate the servicing functions
which were assumed from LSE. Such development of both personnel and technology
increased expenses in 1997. The Company hopes to realize the benefits of such
investment in 1998 and thereafter.

        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, 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.

        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 (the "Sentry Facility")
provides for a $10.0 million 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 Sentry Facility 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 Sentry Facility 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% at December 31, 1997). The Sentry Facility contains certain
restrictive covenants, including requirements to maintain a certain minimum net
worth, and cash and cash equivalent balances. The Company pays a utilization fee
of up to 0.21% per month on the average outstanding balance of the Sentry
Facility. The Sentry Facility also requires the Company to pay up to 0.62% per
quarter on the average unused balance. At December 31, 1997, $10,000,000 was
available for borrowing under the credit line as there were no amounts
outstanding at that date.

        The Company and its wholly owned subsidiary, AutoBond Funding
Corporation II, entered into a $50 million revolving warehouse facility (the
"Daiwa Facility") with Daiwa Finance Corporation



                                       11

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<PAGE>




("Daiwa") effective as of February 1, 1997. Advances under the Daiwa Facility
mature on the earlier of 120 days following the date of the advance or March 31,
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. The
Daiwa Facility is collateralized by the finance contracts acquired with the
outstanding advances. The Daiwa Facility does not require that the finance
contracts funded be covered by default deficiency insurance. Interest is payable
upon maturity of the advances and accrues at the lesser of (x) 30 day LIBOR plus
1.15% (6.87% at December 31, 1997) or (y) 11% per annum. The Company also pays a
non-utilization fee of .25% per annum on the unused amount of the line of
credit. Pursuant to the Daiwa Facility, the Company paid a $243,750 commitment
fee. The Daiwa Facility contains certain covenants and representations similar
to those in the agreements governing the Company's existing securitizations
including, among other things, delinquency and repossession triggers. While no
new advances will be made under the Daiwa Facility after March 31, 1998, the
maturity date for existing advances has been extended to April 30, 1998, with
interest therein accruing at LIBOR plus 4.00% per annum. At December 31, 1997,
advances under the Daiwa Facility totaled $7,639,201 and remaining availability
was $15,759,792. The Company incurred interest expense under the Daiwa Facility
of approximately $1,118,883 during the year ended December 31, 1997.

        During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable funding warehouse notes (beneficial interests) which
are convertible into term notes at the option of the holder of such notes.
Transfers of finance contracts to the special purpose entities have been
recognized as sales under Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 125").

        On December 31, 1997, the Company purchased approximately $12.5 million
of finance contracts from Credit Suisse First Boston Mortgage Capital LLC
("CSFB"), at a purchase price of 93.5% of the outstanding principal balance of
the finance contracts. The Company financed its purchase through a warehouse
securitization facility with CSFB pursuant to which the finance contracts were
transferred to a bankruptcy remote, special purpose corporation, AutoBond Master
Funding Corporation II and variable beneficial interests were issued to CSFB.
Pursuant to the structure, the Company agreed to maintain sufficient
over-collateralization such that CSFB's investment in the special purpose
corporation is collateralized by assets having a value equal to or greater than
117% of such investment. Recourse to the Company is limited to 10% of the
original unpaid balance of the finance contracts, and the variable beneficial
interests accrue interest at LIBOR plus 3% per annum. The variable beneficial
interests matures at 120 days and are convertible at CSFB's option into a term
securitization. The transfer of finance contracts to the special purpose entity
has been recognized as a sale under SFAS No. 125. As of March 31, 1998, the
Company is currently in active discussions with several potential warehouse
providers. To the extent that the Company is unable to maintain the revolving
credit facilities or is unable to arrange new warehouse lines of credit, the
Company would have to curtail its finance contract acquisition activities, which
would have a material adverse effect on operations and cash position. The
Company ability to obtain a successor facility or similar financing will depend
on, among other things, the willingness of financial organizations to
participate in funding subprime finance contracts and the Company's financial
condition and results of operations. The Company's growth is dependent upon its
ability to obtain sufficient financing under warehouse credit facilities, at
rates and upon terms acceptable to the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

        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 nine securitizations involving approximately $246 million
in aggregate principal amount of finance contracts.

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



                                       12

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<PAGE>



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 also funded 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 certificate holders. 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 accounting for its securitization transactions in 1997, the
Company followed the provisions of SFAS 125. In these securitizations the
Company sold pools of finance contracts to a special purpose subsidiary, which
then issued 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 also funded a cash
reserve account that provides credit support to the senior notes. The Company's
securitization subsidiaries also have retained an interest in the finance
contracts that is subordinate to the interest of the note holders. 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 in two
primary 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
Developments."

        Upon each securitization, the Company recognizes the sale of finance
contracts and records a non-cash 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, 1997, the Company held interest-only strip receivables and Class B
Certificates totaling $17.2 million, a portion of which had been pledged to
secure notes payable of $9.9 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. The Company is currently
negotiating a $200 million revolving purchase securitization facility and hopes
to secure such a facility in the short term.

        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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

        The securitization trust agreements and the servicing agreement contain
certain events of administrator termination, the occurrence of which entitles
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 



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<PAGE>



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
related 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.

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 loan associations, 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 loan associations in the
sub-prime credit market. In many cases, those organizations electing to remain
in the automobile finance business have migrated toward higher 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.




                                       14

<PAGE>
<PAGE>


        Additionally, during the first half 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 a result of the turmoil in the
sub-prime 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 recent negative
developments in the sub-prime auto finance industry will not have an effect on
the Company's ability to raise funds and may result in an increased cost of
funding to the Company. See "Recent Developments."

REGULATION

        The Company's business is subject to regulation and licensing under
various federal, state and local statues and regulations. As of December 31,
1997, the Company was licensed to conduct business operations with dealers
located in 41 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 regulations. 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
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.



                                       15

<PAGE>
<PAGE>



        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, 1997, the Company employed 191 persons, none of whom
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 $18,390. The lease for such facility expires in June 1998. Thereafter, it
plans to relocate to 100 Congress Avenue, Austin, Texas. Accordingly, the
Company has leased approximately 40,530 square feet of office space at a monthly
rent of $46,863 for a term of seven years following the initial commencement
date (projected on June 1, 1998). The Company's headquarters contain the
Company's executive offices as well as those related to automobile finance
contract acquisition. The Company does not maintain any regional office
facilities, although its securitization subsidiaries are incorporated and
maintain an office in Nevada.

ITEM 3.         LEGAL PROCEEDINGS

        In the normal course of its business, the Company is from time to time
made a party to litigation involving consumer-law claims. These claims typically
allege improprieties on the part of the originating dealer and name the Company
and/or its assignees as subsequent holders of the finance contracts. To date,
none of these actions have resulted in the payment of damages, or any judgments
therefor, by the Company or its assignees, nor have any actions been certified
as eligible for class-action status.

        In March 1998, after Progressive Northern Insurance purported to cancel
the VSI and deficiency balance insurance policies issued in favor of the
Company, the Company sued Progressive, its affiliate United Financial Casualty
Co. and their agent in Texas, Technical Risks, Inc. in the district court of
Harris County, Texas. The action seeks declaratory relief confirming the
Company's interpretation of the policies, as discussed under "Business -- Recent
Developments", as well as claims for damages based upon breach of contract, bad
faith and fraud. The Company has not yet received the defendants' answers. Also
in March 1998, the Company commenced an action in Travis County, Texas, against
Loan Servicing Enterprise, alleging LSE's contractual breach of its servicing
obligations on a continuing basis. LSE has commenced an action against AutoBond
in Texas state court seeking recovery from the Company of putative
termination fees in connection with LSE's termination as servicer. The Company
expects the two actions to be consolidated.

        The Company's carrier for the credit deficiency insurance obtained
through 1996, Interstate Fire & Casualty Co. ("Interstate") determined in late
1996 to no longer offer such coverage to the auto finance industry, including
the Company. In connection with Interstate's attempt to no longer offer credit
deficiency coverage for contracts originated after December 1996, the Company
commenced an action in the United States District Court for the Western District
of Texas, Austin Division, seeking a declaratory judgment that (a) the Company
was entitled to 180 days' prior notice of cancellation and (b) Interstate was
not entitled to raise premiums on finance contracts for which coverage was
obtained prior to the effectiveness of such cancellation, as well as seeking
damages for Interstate's alleged deficiencies in paying claims. Prior to
receiving the Company's complaint in the Texas action, Interstate commenced a



                                       16

<PAGE>
<PAGE>



similar action for declaratory relief in the United States Court for the
Northern District of Illinois. While settlement discussions are ongoing,
Interstate and the Company have to date acted on the basis of a cancellation
date of May 12, 1997 (i.e., no finance contracts presented after that date will
be eligible for credit deficiency coverage by Interstate, although all existing
contracts for which coverage was obtained will continue to have the benefits of
such coverage), no additional premiums having been demanded or paid, and the
claims-paying process having been streamlined. In particular, in order to speed
the claims-paying process, Interstate has paid lump sums to the Company as an
estimate of claims payable prior to completion of processing. Pending the
Company's determination of the appropriate destination for such claims payments,
the Company has deposited and will continue to deposit such funds into a
segregated account.

        As set forth in the discussion of finance contracts held for sale in
Note 3 to the Notes to the Company's audited financial statements, in February
1997 the Company discovered certain breaches of representations and warranties
by certain dealers with respect to finance contracts sold into a securitization.
The Company honored its obligations to the securitization trust and repurchased
finance contracts totaling $619,520 from that trust during the three months
ended March 31, 1997. Of the total amount of these finance contracts, $190,320
were purchased from one dealer. Although the Company has requested that this
dealer repurchase such contracts, the dealer has refused. After such dealer's
refusal to repurchase, the Company commenced an action in the 157th Judicial
District Court for Harris County, Texas against Charlie Thomas Ford, Inc. to
compel such repurchase. Discovery is proceeding but no trial date has been set.

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

Not Applicable.

                                     PART II

ITEM 5.         MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
                STOCKHOHLDER MATTERS

        On November 8, 1996, the Company's Common Stock was listed for quotation
and began trading on Nasdaq National Market ("Nasdaq") under the symbol "ABND".
Prior to such date, the Company's stock was closely held and not traded on any
regional or national exchange.

<TABLE>
<CAPTION>
          HIGH AND LOW SALE PRICES BY PERIOD
QUARTER ENDED                       HIGH       LOW
-----------------------------------------------------
<S>                                <C>        <C>
December 31, 1996                 $11         $9 1/4
March 31, 1997                    $10 3/8     $4
June 30, 1997                     $ 4 3/4     $2 1/4
September 30, 1997                $5 1/8      $3 13/16
December 31, 1997                 $ 4 1/2     $2 5/8 
</TABLE>

        On February 27, 1998, the Company's common stock listing was transferred
to the American Stock Exchange and began trading under the symbol "ABD". The
transfer agent and registrar for the Common Stock is American Stock Transfer &
Trust Company. As of March 26, 1998, the Company had approximately 16
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.



                                       17

<PAGE>
<PAGE>




ITEM 6.         SELECTED FINANCIAL DATA

        The following table sets forth selected consolidated financial data for
the Company and its subsidiaries for the periods and at the date indicated. The
selected financial data were derived from the financial statements and
accounting records of the Company. The data presented below should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.

<TABLE>
<CAPTION>
                                                   Period from                
                                                 August 1, 1994                    
                                                 (inception) to                      Year Ended
                                                  December 31,                     December 31,
                                                     1994(2)                1995       1996        1997
                                                     (Dollars in thousands, except for pershare amounts)
<S>                                                         <C>             <C>        <C>         <C> 
Statement of operations data:
  Interest income                                           $  38           $2,881     $2,520       $4,341
  Gain on sale of finance contracts                             -                -        658       18,944
  Servicing fee income                                          -            4,086     12,820        1,131
  Other income (loss)                                           -                -        388       (1,485)
                                                     ------------------------------ -----------------------
     Total revenues                                            38            6,967     16,386       22,931
                                                     ------------------------------ -----------------------
  Provision for credit losses                                  45               49        412          613
  Interest expense                                             19            2,100      2,383        3,880
  Salaries and benefits                                       226            1,320      4,529        7,357
  General and administrative                                  245            1,463      2,331        6,202
  Other operating expenses                                     48              963      1,120        2,005
                                                     ------------------------------ -----------------------
     Total expenses                                           543            5,895     10,775       20,057
                                                    ------------------------------ -----------------------
  Income before income taxes and                 
    extraordinary loss                                       (545)           1,072      5,611        2,874
  Provision for income taxes                                    -              199      1,926        1,015
  Extraordinary loss, net of tax benefit                        -                -       (100)           -
                                                     ------------------------------ -----------------------
  Net income                                               $ (545)            $873     $3,585      $ 1,859
                                                     ------------------------------ -----------------------
  Earnings per share before extraordinary item             $(0.11)           $0.17      $0.64        $0.29
  Earnings per share-basic                                 $(0.11)           $0.17      $0.62        $0.29
  Earnings per share-diluted                               $(0.11)           $0.17      $0.62        $0.28
Weighted average shares outstanding                   5,118,753        5,190,159  5,791,189    6,516,056
Cash flow data:
  Cash used in operating activities                        (2,514)          (3,913)    (2,726)      (3,135)
  Cash used in investing activities                           (16)          (1,987)    (2,582)     (10,807)
  Cash provided by financing activities                     2,530            5,992      9,337        9,980
Asset quality data:
  Delinquencies as a percentage of principal
    balance of finance contract portfolio
    serviced (end of period)(1)
  30-59 days past due                                                        4.69%      7.55%       10.15%
  60+ days past due                                                          2.32%      4.63%        9.12%
</TABLE>

<TABLE>
<CAPTION>
                                                                          December 31,
                                                         1994                 1995       1996        1997
                                                        ------------------------------ -----------------------
Balance sheet data:
<S>                                                         <C>             <C>        <C>         <C>  
  Cash and cash equivalents                                $    -         $     93   $  4,121     $    159
  Restricted funds                                              -            1,683      2,982        6,904
  Finance contracts held for sale, net                      2,361            3,355        228        1,366
  Interest-only strip receivable                                -              847      4,247        9,353
      Total assets                                          2,500           11,065     26,133       42,853
  Revolving credit agreement                                2,055            1,150          -        7,639
  Notes payable                                                 -            2,675     10,175        9,841
  Repurchase agreement                                          -            1,061          -            -
      Total debt                                            2,055            4,886     10,175       17,480
  Shareholders' equity                                      (109)            3,026     12,142       15,418
</TABLE>

-----------------------------------------------------
(1) Includes the Company's entire finance contract portfolio of contracts held
and contracts securitized. Includes finance contracts where underlying vehicle
is repossessed (but subject to redemption), the borrower is in bankruptcy, the
dealer is to buy back the loan, or insurance claims have been filed and are
pending.

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




                                       18

<PAGE>
<PAGE>



ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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. Certain of 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
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. The
Company has experienced significant growth in its finance contract portfolio
since it commenced operations in August 1994.

        The continued acquisition and servicing of subprime finance contracts
by an independent finance company under current market conditions is a capital
and labor intensive enterprise. Capital is needed to fund the acquisition of
finance contracts and to effectively securitize them so that additional
capital is made available for acquisition activity. While a portion of the
Company's capital has been obtained with investment grade ratings at relatively
low interest rates, the remainder is difficult to obtain and requires the
Company to pay high coupons, fees and other issuance expenses, with a negative
impact on earnings. The underwriting and servicing of a growing subprime
finance contract portfolio requires a higher level of experienced personnel
than that required for a portfolio of higher credit-quality consumer loans.
Accordingly, the Company's growth in finance contract volume since inception
has corresponded with a significant increase in expenses related to building
the infrastructure necessary for effective underwriting and servicing,
resulting in a decrease in net income for 1997 fiscal year as compared with
1996. Although the Company's assumption of all servicing functions in late
1997 is expected to increase servicing income, it is uncertain when the
Company will begin to realize overall improvements in net income as the
growth in acquisition volume continues, especially in view of the high cost
of capital. See "--Results of Operations" and "--Liquidity and Capital
Resources;" and Note 1 to the Notes to the Consolidated Financial Statements.

REVENUES

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

        Interest Income. Interest income consists of the sum of three primary
components: (i) interest income earned on finance contracts held for sale by the
Company and (ii) interest income earned on Class B certificates. Other factors
influencing 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, and (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
interest income earned by the Company.

        Gain on Sale of Finance Contracts. Upon completion of a securitization
prior to 1997, the Company recognized 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 insurance premiums, if any) to the
Company of the finance contracts sold. Excess spread cash flows represent the
difference between the weighted average contract rate earned and the rate paid
on multiple class certificates issued to investors in the securitization, taking
into account certain assumptions regarding prepayments, defaults, proceeds from
disposal of repossessed assets, and servicing and other costs, over the life of
the securitization.

        The Company implemented Statement of Financial Accounting Standards No.
125 "Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS No. 125") as of January 1, 1997. SFAS No. 125 provides new
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings and



                                       19

<PAGE>
<PAGE>



requires that liabilities and derivatives incurred or obtained by transferors as
part of a transfer of financial assets be initially measured at fair value. For
transfers that result in the recognition of a sale, SFAS No. 125 requires that
the newly created assets obtained and liabilities incurred by the transferors as
a part of a transfer of financial assets be initially measured at fair value.
Interests in the assets that are retained are measured by allocating the
previous carrying amount of the assets (e.g. finance contracts) between the
interests sold (e.g. investor certificates) and interests retained (e.g.
interest-only strip receivable) based on their relative fair values at the date
of the transfer. The amounts initially assigned to these financial components is
a determinant of the gain or loss from a securitization transaction under SFAS
No. 125.

        The discounted excess spread cash flows are reported on the consolidated
balance sheet as "interest-only strip receivables." The fair value of the
interest-only strip receivable is 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 subordinated certificates are then formed by
carving out a portion of the discounted excess spread cash flows. The remainder
of the discounted excess spread cash flows represent the interest-only strip
receivable. All of the excess spread cash flows are paid by the securitization
trustee to the investor security holders until such time as all accrued interest
together with principal have been paid in full. Subsequently, all remaining
excess spread cash flows are paid to the Company.

        An impairment review of the interest-only strip receivable is performed
quarterly by calculating the net present value of the expected future excess
spread cash flows after giving effect to changes in assumptions due to market
and economic changes and the performance of the loan pool to date. The discount
rate used is an estimated market rate, currently 15%. 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. To the
extent that the Company deems the asset to be permanently impaired, the Company
would record a charge against earnings and write down the asset accordingly. The
Company recorded an adjustment to other income (loss) of $1,312,234 during the
year ended December 31, 1997 as a result of the impairment review .

        The Company's cost basis in finance contracts sold has varied from
approximately 97.5% to 103% of the value of the principal balance of such
finance contracts. This portion of recognized gain on sale varies based on the
Company's cost of insurance covering the finance contracts and the discount
obtained upon acquisition of the finance contracts. Generally, the Company has
acquired finance contracts from dealers at a greater discount than with finance
contracts acquired from third parties. 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 are expected to shrink
as a percentage of the size of the securitization.

        Further, the excess spread component of recognized gain is affected by
various factors, including most significantly, the coupon on the senior investor
securities and the age of the finance contracts in the pool, as the excess
spread cash flow 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 (dollars in thousands):



                                       20

<PAGE>
<PAGE>




<TABLE>
<CAPTION>

                                           Remaining    Weighted
                                           Balance at    Average
                                          December 31,  Contract  Certificate             Gross
      Securitization         Balance(1)        1997        Rate      Rate      Ratings(2) Spread(3)
-----------------------------------------------------------------------------------------------
<S>                          <C>           <C>              <C>       <C>       <C>      <C>  
AutoBond Receivables
  Trust 1995-A               $26,261,009   $ 11,429,768     18.9%     7.23%     Baa2      11.7%
AutoBond Receivables
  Trust 1996-A                16,563,366      9,119,507     19.7%     7.15%     Baa2      12.5%
AutoBond Receivables
  Trust 1996-B                17,832,885     10,529,943     19.7%     7.73%     Baa2      12.0%
AutoBond Receivables
  Trust 1996-C                22,296,719     16,759,706     19.7%     7.45%     Baa2      12.3%
AutoBond Receivables
  Trust 1996-D                25,000,000     19,346,258     19.5%     7.37%     Baa2      12.1%
AutoBond Receivables
  Trust 1997-A(4)             27,196,052     22,130,875     20.8%     7.82%     Baa2      13.0%
AutoBond Receivables
  Trust 1997-B                34,725,196     32,523,526     19.9%     7.66%     Baa3      12.3%
AutoBond Receivables
  Trust 1997-C                34,430,079     33,289,098     20.0%     7.56%     Baa3      12.5%
AutoBond Master Funding
  Corporation(5)              26,601,006     26,601,006     19.7%     7.09%       -       12.5%
AutoBond Master Funding
  Corporation II(5)           11,285,431     11,285,431     18.6%       8.73%      -      9.9%

                           =============================
    Total                   $242,191,743   $193,015,118
                           =============================
</TABLE>

---------------------------
(1) Refers only to balances on senior investor certificates.

(2)Indicates ratings by Moody's Investors Service, Inc.

(3) Difference between weighted average contract rate and senior certificate
rate.

(4) Includes Class A and Class B Notes.

(5) Includes Variable Rate Funding Notes.

See "Business -- Recent Developments" for a discussion of recent actions taken
by Fitch and Moody's

        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 administrative 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) contractual servicing fees received through securitizations, equal to $8.00
per month per contract included in each trust; 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.

FINANCE CONTRACT ACQUISITION ACTIVITY

        The following table sets forth information about the Company's finance
contract acquisition activity (dollars in thousands):
<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                           1996           1997
                                                      ------------------------------
<S>                                                             <C>          <C>   
Number of finance contracts acquired                            7,331        13,189
 Principal balance of finance contracts acquired          $86,522,631  $148,931,331
 Number of active dealerships(1)                                  654         1,060
 Number of enrolled dealerships                                   715         1,621
</TABLE>

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



                                       21

<PAGE>
<PAGE>



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. The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

NET INCOME

        In the year ended December 31, 1997, net income decreased $1,725,422 to
from $3,584,886 for the year ended December 31, 1996. The decrease in net income
was primarily attributable to an increase in infrastructure costs to support
higher finance contract acquisition and servicing volumes and impairment charges
on interest-only strip receivables. The principal balance of finance contracts
acquired increased $62.4 million to $148.9 million for the year ended December
31, 1997 from $86.5 million for the year ended December 31, 1996. Due to
weakened competitors, the Company more aggressively added qualified personnel as
they became available in the year ended December 31, 1997, and this added to the
growth in salary and benefit expenses.

TOTAL REVENUES

        Total revenues increased $6,544,761 to $22,931,301 for the year ended
December 31, 1997 from $16,386,540 for the year ended December 31, 1996 due to
expansion of the Company's finance contract acquisition and securitization
activities.

        Interest Income. Interest income increased $1,821,685 to $4,341,297 for
the year ended December 31, 1997 from $2,519,612 for the year ended December 31,
1996 due the growth and timing of finance contract acquisitions. The Company
acquired finance contracts totaling $148.9 million during the year ended
December 31, 1997 compared to $86.5 million in the comparable 1996 period.
Accretion on interest-only strip receivables increased $392,478 from the
respective 1996 period to $546,507 during the year ended December 31, 1997.

        Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling on finance contracts carried at $136.4 million (13.9%) during the year
ended December 31, 1997. Gain on sale amounted to $12,820,700 on finance
contracts carried at $85.0 million (15.1%) in the comparable 1996 period.
Accordingly, gain on sale of finance contracts rose $6,123,541 during the year
ended December 31, 1997 over the comparable 1996 period.

        Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the year ended December
31, 1997, servicing fee income was $1,131,142, primarily collection agent fees.
Servicing fee income increased by $473,192 from the year ended December 31, 1996
as a result of increased securitization activity by the Company. The ratio of
servicing fee income to the average principal balance of finance contracts
outstanding declined from 1.0% for the year ended December 31, 1996 to .7%
during the year ended December 31, 1997, as the Company waived $149,415 in
servicing fees during the later period. The Company waived these servicing fees
to enhance the liquidity of specific outstanding securitization trusts during
1997, increasing the rate of repayment of non-recourse notes. The result of such
waiver is the deferral and subordination of the Company's ultimate receipt of
such waived fees.

        Other Income (Loss). For year ended December 31, 1997, other income
(loss) amounted to ($1,485,379), compared with $388,278 for the comparable 1996
period. The Company recorded a charge against earnings for permanent impairment
of the interest-only strip receivable, determined on a disaggregated basis, of
$1,312,234 during the year ended December 31, 1997. Additionally, unrealized
loss on the Company's Class B certificates totaled $293,188 during the year
ended December 31, 1997.



                                       22

<PAGE>
<PAGE>


TOTAL EXPENSES

        Total expenses of the Company increased $9,281,626 to $20,056,727 for
year ended December 31, 1997 from $10,775,101 for the year ended December 31,
1996. The ratio of total expenses to the average principal balance of finance
contracts outstanding declined from 16.9% for the year ended December 31, 1996
to 13.1% for year ended December 31, 1997 on an annualized basis. As of December
1, 1997 the Company completed the transfer of certain servicing functions from
LSE to in-house personnel and equipment. The Company incurred significant
expenses in the hiring and training of personnel as well as the acquisition and
leasing of equipment primarily to facilitate the servicing transfer during the
year ended December 31, 1997. For example, the incremental equipment expense for
the period was approximately $441,366.

        Provision for Credit Losses. Provision for credit losses on finance
contracts increased $200,328to $612,715 for the year ended December 31, 1997
from $412,387 for the year ended December 31, 1996.

        Interest Expense. Interest expense rose to $3,879,543 for the year ended
December 31, 1997 from $2,382,818 for the year ended December 31, 1996. Interest
expense increased by $1,496,725 due to higher borrowing volumes outstanding
under the revolving credit facilities, along with increased debt issuance costs
amortization of $320,985.

        Salaries and Benefits. Salaries and benefits increased $2,828,278 to
$7,357,284 for the year ended December 31, 1997 from $4,529,006 the year ended
December 31, 1996. 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
finance contracts. As of December 1, 1997 the Company completed the transfer of
certain servicing functions from LSE to in-house personnel and equipment. The
Company incurred significant expenses in the hiring and training of personnel as
well as the acquisition and leasing of equipment to facilitate the servicing
transfer during the year ended December 31, 1997. The number of employees of the
Company increased by 75 to 191 employees at December 31, 1997, compared to 116
employees at December 31, 1996.

        General and Administrative Expenses. General and administrative expenses
increased $3,870,702 to $6,201,948 for the year ended December 31, 1997 from
$2,331,246 the year ended December 31, 1996. 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,
non-employee marketing commissions, communications and office 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 servicer fees, credit bureau reports and insurance) increased
$885,593 to $2,005,237 for the year ended December 31, 1997 from $1,119,644 for
the year ended December 31, 1996. This increase was due to increased finance
contract acquisition volume.

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

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
1995-A 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.

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.



                                       23

<PAGE>
<PAGE>



        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
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 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 percentage 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
loansfinance contracts, and due to compensation of the Company's Chief Executive
Officer, which the Company began paying in May 1996. See Note 11 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 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.

FINANCIAL CONDITION

        Restricted Cash. Restricted cash increased $3.9 million to $6.9 million
at December 31, 1997 from $3.0 million at December 31, 1996. In accordance with
the Company's revolving credit facilities,



                                       24

<PAGE>
<PAGE>



proceeds advanced by the lender for purchase of finance contracts are held by a
trustee until the Company delivers qualifying collateral to release the funds,
normally in a matter of days. The trustee held $6.6 million of funds advanced
for the purchase of finance contracts at December 31, 1997. The Company is also
required to maintain a cash reserve with its lenders up to 11% 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.

        Finance Contracts Held for Sale, Net. Finance contracts held for sale,
net of allowance for credit losses, increased $1.2 million to $1.4 million at
December 31, 1997, from $228,429 at December 31, 1996. 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 basis.

        Interest-Only Strip Receivables. The following table provides historical
data regarding the interest-only strip receivable:

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                           1996         1997
                                        -------------------------
<S>                                    <C>            <C>
Beginning balance                       $846,526       $4,247,274
Unrealized appreciation                        -        1,589,782 
Additions from securitization          3,246,719        4,281,313
  transactions
Accretion of discount                    154,029          546,507
Impairment charge                              -       (1,312,233)
                                      ===========================
Ending balance                        $4,247,274       $9,352,641          
                                      ===========================
</TABLE>

        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 investor securities.
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 Company's securitizations follow:
<TABLE>
<CAPTION>
                                                    Senior Investor         Initial
                                                      Certificate           Reserve
                  Securitization                        Amount(1)           Deosit    Percent
--------------------------------------------------------------------------------------------
<S>                                                      <C>               <C>          <C> 
AutoBond Receivables Trust 1995-A                        $26,261,009        $25,220    2.0%
AutoBond Receivables Trust 1996-A                         16,563,366        331,267    2.0%
AutoBond Receivables Trust 1996-B                         17,833,885        356,658    2.0%
AutoBond Receivables Trust 1996-C                         22,297,719        445,934    2.0%
AutoBond Receivables Trust 1996-D                         25,000,000        500,000    2.0%
AutoBond Receivables Trust 1997-A(2)                      28,037,167        560,744    2.0%
AutoBond Receivables Trust 1997-B                         34,725,196        868,130    2.5%
AutoBond Receivables Trust 1997-C                         34,430,079        860,752    2.5%
AutoBond Master Funding Corporation(3)                    26,601,006      4,285,855   16.1%
AutoBond Master Funding Corporation II(3)                 11,285,431        790,342    7.0%
</TABLE>

----------
(1) Refers only to balances on senior Investor certificates upon issuance.
(2) Includes Class A, Class B and Class C-1 Notes.
(3) Includes Variable Rate Funding Notes (beneficial interests).

        A portion of excess spread cash flows will increase such reserves until
they reach a target reserve level (initially 6%) of the outstanding balance of
the senior investor certificates.



                                       25

<PAGE>
<PAGE>

        Other Assets. The Company carried $1.4 million in assets as of December
31, 1997 primarily related to the Company's retained interest in amounts sold to
a special purpose subsidiary which issued variable rate funding notes.

DELINQUENCY EXPERIENCE

        The following table reflects the delinquency experience of the Company's
finance contract portfolio:
<TABLE>
<CAPTION>
                                                 December 31, 1996     December 31, 1997
                                               --------------------------------------------
<S>                                                <C>          <C>     <C>            <C>
Principal balance of finance contracts         $104,889,892             $211,727,750
outstanding
Delinquent finance contracts(1):
30-59 days past due                               7,916,425      7.55%    21,484,450    10.15%
60-89 days past due                               2,102,014      2.00%    10,941,753     5.17%
90 days past due and over                         2,763,300      2.63%     8,368,493     3.95%
                                               ==============================================
Total                                           $12,781,739     12.18%   $40,794,696    19.27%
                                               ==============================================
</TABLE>

------------
(1) Percentage based upon outstanding balance. Includes finance contracts where
the underlying vehicle is repossessed (but subject to redemption), the borrower
is in bankruptcy, a dealer buy back is expected or where insurance claims are
filed and pending.

CREDIT LOSS EXPERIENCE

        An allowance for credit losses is maintained for contracts held for
sale. 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 .

        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, 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
and 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 relevant VSI policy prior to sale.
Liquidation proceeds are applied to the borrower's outstanding obligation under
the finance contract and insurance claims under the VSI policy and, if
applicable, the deficiency balance policy are then filed.

        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 1997 versus 1996 delinquency percentages since
the portfolio is tangibly more seasoned as of December 31, 1997. 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 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.


                                       26

<PAGE>
<PAGE>



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, 1997. 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 few repossessions because properly underwritten finance
contracts to sub-prime 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 the finance contracts generally amortize more quickly than
the collateral depreciates, and therefore losses and/or repossessions will
decline over time.

<TABLE>
<CAPTION>
                                     Repossession Frequency
                        ------------------------------------------------------------------
                                                                             Principal
                        Principal Balance of                                  Balance
  Year and Quarter of     Repossessions by                                 of Contracts
      Acquisition         Quarter Acquired   Cumulative(1)  Annualized(2)     Acquired
-------------------------------------------------------------------------------------------
        <S>                   <C>                <C>           <C>         <C>        
        1994
          Q3                 $    21,148        20.91%        5.97%       $   101,161
          Q4                     558,044        22.89%        7.04%         2,437,674
        1995
          Q1                   1,570,799        24.89%        8.30%         6,310,421
          Q2                   1,556,086        25.14%        9.14%         6,190,596
          Q3                   1,753,861        24.23%        9.69%         7,239,813
          Q4                   2,050,507        16.82%        7.48%        12,188,863
        1996
          Q1                   4,721,783        30.54%       15.27%        15,460,823
          Q2                   4,288,468        23.16%       13.23%        18,520,410
          Q3                   4,036,155        14.36%        9.58%        28,098,899
          Q4                   3,833,759        15.68%       12.55%        24,442,500
        1997
          Q1                   3,948,029        11.32%       11.32%        34,875,869
          Q2                   2,610,105         7.39%        9.86%        35,305,817
          Q3                     409,489         1.18%        2.36%        34,629,616
          Q4                      19,474         0.04%        0.18%        44,120,029
</TABLE>

----------------
(1) For each quarter, cumulative repossession frequency equals the number of
repossessions divided by the number of contracts acquired 2 Annualized
repossession frequency converts cumulative repossession frequency into an annual
equivalent (e.g., for Q4 1994, principal balance of $558,044 in repossessions
divided by principal balance of $2,437,674 in contracts acquired, divided by 13
quarters outstanding times four equals an annual repossession frequency of
7.04%).

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)



                                       27

<PAGE>
<PAGE>



and less proceeds from insurance claims. As less of the Company's finance
contracts are acquired with credit deficiency insurance, the Company expects its
net loss per repossession to increase. The following table demonstrates the net
charge-off per repossessed automobile since inception.

<TABLE>
<CAPTION>
                                                                    From August 1,
                                                                   1994 (Inception)
                                                                 to December 31, 1997
                                                                  --------------------
<S>                                                                            <C>   
Number of finance contracts acquired                                           23,386
Number of vehicles repossessed                                                  2,936
Repossessed units disposed of                                                   1,351
Repossessed units awaiting disposition(1)                                       1,585
Cumulative gross charge-offs(2)                                           $14,520,631
Costs of repossession(2)                                                      225,003
Proceeds from auction, physical damage insurance and refunds(2)            (8,035,075)
                                                                  --------------------
Net loss                                                                    6,710,560
Deficiency insurance settlement received(2)                                (3,438,798)
                                                                  ====================
Net charge-offs(2)                                                         $3,271,762
                                                                  ====================
Net charge-offs per unit disposed                                              $2,422
Net loss as a percentage of cumulative gross charge-offs                       53.79%
Recoveries as a percentage of cumulative gross charge-offs(3)(4)               79.02%
</TABLE>

------------
(1) The vehicles may have been sold at auction; however AutoBond might not have
received all insurance proceeds as of December 31, 1997.

(2) 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, 1997.

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

(4) Includes the effect of certain loans included in term securitization
97-A which did not have credit default insurance coverage.

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; (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. Net
cash used in operating activities totaled $3.1 million during the year ended
December 31, 1997. The Company used $140.4 million to purchase finance contracts
and $136.4 million was received from sales of finance contracts, primarily
through securitizations during the year ended December 31, 1997.

        Significant activities comprising cash flows from investing activities
include net advances to AutoBond Receivables Trusts of $7.4 million for the year
ended December 31, 1997. Cash flows from financing activities include net
borrowings under revolving credit facilities of $7.6 million for the year ended
December 31, 1997.

        Revolving Credit Facilities. The Company obtains a substantial portion
of its working capital for the acquisition of finance contracts through
revolving 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.



                                       28

<PAGE>
<PAGE>



        At December 31, 1997, the Company had no outstanding balance 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 applicable 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% (10.25% at December 31, 1997).

        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. In April 1996, the Company paid a
one-time commitment fee of $700,000 to Sentry. Under the Sentry Facility, the
Company incurred interest expense of $420,674 for the year ended December 31,
1997.

        The Company and its wholly owned subsidiary, AutoBond Funding
Corporation II, entered into a $50 million revolving warehouse facility (the
"Daiwa Facility") with Daiwa Finance Corporation ("Daiwa") effective as of
February 1, 1997. Advances under the Daiwa Facility mature on the earlier of 120
days following the date of the advance or March 31, 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. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the finance contracts funded be covered by
default deficiency insurance. Interest is payable upon maturity of the advances
and accrues at the lesser of (x) 30 day LIBOR plus 1.15% (6.87% at December 31,
1997), or (y) 11% per annum. The Company also pays a non-utilization fee of .25%
per annum on the unused amount of the line of credit. Pursuant to the Daiwa
Facility, the Company paid a $243,750 commitment fee. The debt issuance cost is
being amortized as interest expense on a straight line basis through March 1998.
The Daiwa Facility contains certain covenants and representations similar to
those in the agreements governing the Company's existing securitizations
including, among other things, delinquency and repossession triggers. At
December 31, 1997, advances under the Daiwa Facility totaled $7,639,201 and
remaining availability was $15,759,792. The Company incurred interest expense
under the Daiwa Facility of approximately $1,118,883 during the year ended
December 31, 1997.

        During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable funding warehouse notes which are convertible into
term notes at the option of the holder of such notes. Transfers of finance
contracts to the special purpose entities have been recognized as sales under
SFAS No. 125.

        Notes Payable. Pursuant to the Agreement (the "Securities Purchase
Agreement") entered into on June 30, 1997, the Company issued by private
placement $2,000,000 in aggregate principal amount of senior secured convertible
notes ("Convertible Notes"). Interest on the Convertible Notes was payable
quarterly at a rate of 18% per annum. The Convertible Notes were redeemed by the
Company in February 1998.

        Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase up to 200,000 shares
of common stock at $4.225 per share. The warrants are exercisable to the extent
the holders thereof purchase up to $10,000,000 of the Company's subordinated
asset-backed securities before June 30, 1998. To date, the holders have
purchased $5.8 million of subordinated asset-backed securities.

        In January 1998, the Company privately placed with BancBoston
Investments, Inc. ("BancBoston") $7,500,000 in aggregate principal amount of its
15% senior subordinated convertible notes (the "Subordinated Notes"). Interest
on the Subordinated Notes is payable quarterly until maturity on February 1,
2001. The Subordinated Notes are convertible at the option of the holder for up
to 368,462 shares of Common Stock, at a conversion price of $3.30 per share,
subject to adjustment under standard anti-dilution provisions. In the event of a
change of control transaction, the holder of the Subordinated Notes may require
the Company to repurchase the Subordinated Notes at 100% of the principal amount
plus accrued interest. The Subordinated Notes are redeemable at the option of
the Company on or after July 1, 1999 at redemption prices starting at 105% of
the principal amount, with such premium reducing to par on and after November 1,
2000, plus accrued interest. The Subordinated Notes were issued



                                       29

<PAGE>
<PAGE>



pursuant to an Indenture, dated as of January 30, 1998 (the "Indenture") between
the Company and BankBoston, N.A., as agent. The Indenture contains certain
restrictive covenants including (i) a consolidated leveraged ratio not to exceed
2 to 1 (excluding nonrecourse warehouse debt and securitization debt), (ii)
limitations on restricted payments such as dividends (but excluding, so long as
no event of default has occurred under the Indenture, dividends or distributions
on the Preferred Stock), (iii) limitations on sales of assets other than in the
ordinary course of business and (iv) certain financial covenants, including a
minimum consolidated net worth test of $12 million (plus proceeds from equity
offerings), a minimum ratio of earnings to interest of 1.5 to 1, and a maximum
cumulative repossession ratio of 27%.

        Events of default under the Indenture include failure to pay, breach of
covenants, cross-defaults in excess of $1 million, or material breach of
representations or covenants under the purchase agreement with BankBoston.

        Net proceeds from the sale of the subordinated notes were used to pay
short-term liabilities, with the remainder available to provide for the
repayment of the Company's 18% Convertible Secured Notes and for working
capital.

        Securitization Program. In its securitization transactions through the
end of 1996, the Company sold pools of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to a trust in exchange for
cash and certain retained beneficial interests in future excess spread cash
flows. 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 ("Class B
Certificates"), representing a senior interest in excess spread cash flows from
the finance contracts, which were typically retained by the Company's
securitization subsidiary and which collateralize borrowings on a non-recourse
basis. The Company also funded a cash reserve account that provides credit
support to the Class A Certificates. The Company's securitization subsidiaries
also retained a "Transferor's Interest" in the contracts that is subordinate to
the interest of the investor certificate holders.

        In the Company's March 1997, August 1997 and October 1997 securitization
transactions, the Company sold a pool of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to an indenture trustee.
Under the trust indenture, the special purpose subsidiary issued three classes
of fixed income investor notes, which were sold to investors, generally at par,
with fixed coupons. The subordinated notes represent a senior interest in
certain excess spread cash flows from the finance contracts. In addition, the
securitization subsidiary retained rights to the remaining excess spread cash
flows. The Company also funded cash reserve accounts that provide credit support
to the senior class or classes.

        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. 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. During the year ended December 31, 1997, the
Company securitized approximately $270 million 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 non-recourse basis, collateralized by its
interest in future excess spread cash flows from its securitization trusts. At
December 31, 1997, the Company held interest-only strip receivables and Class B
Certificates totaling $17.2 million, substantially all of which had been pledged
to collateralize notes payable of $9.8 million.

        The Company relies significantly on a strategy of periodically selling
finance contracts through asset-backed securitizations. The Company's ability to
access the asset-backed securities market is affected by a number of factors,
some of which are beyond the Company's control and any of which could cause
substantial delays in securitization including, among other things, the recent
withdrawal of ratings by Fitch and downgrade by Moody's, the requirements
for large cash contributions by the Company into securitizations, conditions
in the securities markets in general, conditions in the asset-backed securities
market and investor demand for subprime auto paper. Additionally, gain on sale
of finance contracts represents a significant portion of the



                                       30

<PAGE>
<PAGE>



Company's total revenues and, accordingly, net income. If the Company were
unable to securitize finance contracts or account for any securitization as a
sale transaction 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. Moreover, the Company's ability to monetize excess spread cash flows has
been an important factor in providing the Company with substantial liquidity,
but such ability appears to be diminishing due to the difficulty in obtaining
acceptable insurance and ratings. If the Company were unable to securitize its
finance contracts and did not have sufficient credit available, either under
warehouse credit facilities or from other sources, the Company would have to
sell portions of its portfolio directly to whole loan buyers or curtail its
finance contract acquisition activities. See "Business--Funding/Securitization
of Finance Contracts."

        Equity Offerings. In February 1998, the Company completed the
underwritten public offering of 1,125,000 shares of its 15% Series A Cumulative
Preferred Stock (the "Preferred Stock"), with a liquidation preference of $10
per share. The price to public was $10 per share, with net proceeds to the
Company of approximately $10,150,000. Such net proceeds have been utilized for
working capital purposes, including the funding of finance contracts. Dividends
on the Preferred Stock are cumulative and payable quarterly on the last day of
March, June, September and December of each year, commencing on June 30, 1998,
at the rate of 15% per annum. After three years from the date of issuance, the
Company may, at its option, redeem one-sixth of the Preferred Stock each year,
in cash at the liquidation price per share (plus accrued and unpaid dividends),
or, if in Common Stock, that number of shares equal to $10 per share of
Preferred Stock to be redeemed, divided by 85% of the average closing sale price
per share for the Common Stock for the 5 trading days prior to the redemption
date. The Preferred Stock is not redeemable at the option of the holder and has
no stated maturity.

        If dividends on the Preferred Stock are in arrears for two quarterly
dividend periods, holders of the Preferred Stock will have the right to elect
three additional directors to serve on the Board until such dividend arrearage
is eliminated. In addition, certain changes that could materially affect the
holders of Preferred Stock, such as a merger of the Company, cannot be made
without the affirmative vote of the holders of two-thirds of the shares of
Preferred Stock, voting as a separate class. The Preferred Stock ranks senior to
the Common Stock with respect to the payment of dividends and amounts upon
liquidation, dissolution or winding up.

        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 the public of $10 per share and an underwriting discount at $.70 per
share, the Company received gross proceeds of $7,492,500 from the offering, from
which it paid offering expenses of approximately $1.8 million. The net proceeds
were utilized for working capital, repayment of subordinated debt of $300,000
and investment in finance contracts.

        Management recognizes that the ability to monetize residual cash flows
from securitizations in 1998 is uncertain and that both warehousing and
securitization of the Company's finance contracts will require greater levels of
cash outlays by the Company. Accordingly the Company intends to tap the equity
markets, initially in the context of the Preferred Stock Offering, as well as
the debt markets (initially in connection with the Company's placement of Senior
Subordinated Notes), in order to meet its cash needs during 1998 and to take
better advantage of growth opportunities. There can be no assurance, however,
that the Company will be able to obtain such additional funding.

        The statements contained in this document that are not historical facts
are forward looking statements. Actual results may differ from those projected
in the forward looking statements. These forward looking statements involve
risks and uncertainties, including but not limited to the following risks and
uncertainties: changes in the performance of the financial markets, in the
demand for and market acceptance of the Company's loan products, and in general
economic conditions, including interest rates, presence of competitors with
greater financial resources and the impact of competitive products and pricing;
the effect of the Company's policies; and the continued availability to the
Company of adequate funding sources. Investors are also directed to other risks
discussed in documents filed by the Company with the Securities and Exchange
Commission.



                                       31

<PAGE>
<PAGE>



        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.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

        In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Restated Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.

        The Company does not believe the implementation of the recent
accounting pronouncements will have a material effect on its consolidated
financial statements, since the Company operates in one business segment. 

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 hereby incorporated above reference
thereto.

        No person who, at any time during the fiscal year ended December 31,
1997, 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, 1997 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.




                                       32

<PAGE>
<PAGE>


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.

                                     PART IV

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

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

       1.   Financial Statements

                Report of Independent Accountants - Coopers & Lybrand L.L.P.

                Financial Statements

                        Consolidated Balance Sheets

                        Consolidated Statements of Income and Comprehensive
                        Income

                        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

       3.   Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO.                                  DESCRIPTION OF EXHIBIT
-----------                                  ------------------------
<S>         <C>                                                         
3.1(1)     Restated Articles of Incorporation of the Company

3.2(1)     Amended and restated Bylaws of the Company

3.3        Certificate of Designation for the Company's 15% Series A 
           Cumulative Preferred Stock

4.1(1)     Specimen Common Stock Certificate

4.2(5)     Specimen Preferred Stock Certificate

10.1(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(1)    Security Agreement dated as of May 21, 1996 among AutoBond Funding
           Corporation II, the Company and Norwest Bank Minnesota, National
           Association

10.3(1)    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(1)    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(1)    Loan Acquisition Sale and Contribution Agreement dated as of May 21,
           1996 by and between the Company and AutoBond Funding Corporation II

10.6(1)    Second Amended and Restated Secured Revolving Credit Agreement dated
           as of July 31, 1995 between Sentry Financial Corporation and the
           Company

10.7(1)    Management Administration and Services Agreement dated as of January
           1, 1996 between the Company and AutoBond, Inc.
</TABLE>


                                       33

<PAGE>
<PAGE>



<TABLE>
<CAPTION>
EXHIBIT NO.                                  DESCRIPTION OF EXHIBIT
------------                                 ------------------------
<S>         <C>                                                         
10.8(1)    Employment Agreement dated November 15, 1995 between Adrian Katz and
           the Company
10.9(1)    Employment Agreement effective as of May 1, 1996 between William O.
           Winsauer and the Company
10.10(1)   Vender's Comprehensive Single Interest Insurance Policy and
           Endorsements, issued by Interstate Fire & Casualty Company
10.11(1)   Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12(1)   Employee Stock Option Plan
10.13(1)   Dealer Agreement dated November 9, 1994, between the Company and
           Charlie Thomas Ford, Inc.
10.14(1)   Automobile Loan Sale Agreement, dated as of September 30, 1996, among
           the Company, First Fidelity Acceptance Corp., and Greenwich Capital
           Financial Products, Inc.
10.15(2)   Servicing Agreement, dated as of January 29, 1997, between CSC
           LOGIC/MSA L.P.P., doing business as "Loan Servicing Enterprise" and
           the Company
10.16(2)   Credit Agreement, dated as of February 1, 1997, among AutoBond
           Funding Corporation II, the Company and Daiwa Finance Corporation
           10.17(2) Security Agreement, dated as of February 1, 1997, by and
           among AutoBond Funding Corporation II, the Company and Norwest Bank
           Minnesota, National Association
10.18(2)   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
10.19(3)   Automobile Loan Sale Agreement, dated as of March 26, 1997, by and
           between Credit Suisse First Boston Mortgage Capital L.L.C., a
           Delaware limited liability company, and the Company
10.20(4)   Credit Agreement, dated as of June 30, 1997, by and among AutoBond
           Master Funding Corporation, the Company and Daiwa Finance Corporation
10.21(4)   Amended and Restated Trust Indenture, dated as of June 30, 1997,
           among AutoBond Master Funding Corporation, AutoBond Acceptance
           Corporation and Norwest Bank Minnesota, National Association.
10.22(4)   Securities Purchase Agreement, dated as of June 30, 1997, by and
           among the Company, Lion Capital Partners, L.P. and Infinity Emerging
           Opportunities Limited.
10.23(5)   Credit Agreement, dated as of December 31, 1997, by and among
           AutoBond Master Funding Corporation II, the Company and Credit Suisse
           First Boston Mortgage Capital L.L.C
10.24(5)   Trust Indenture, dated as of December 31, 1997, among AutoBond Master
           Funding Corporation II, the Company and Manufacturers & Traders Trust
           Company
10.25(5)   Receivables Purchase Agreement, dated as of December 31, 1997,
           between Credit Suisse First Boston Mortgage Capital L.L.C and the
           Company
10.26(5)   Servicing Agreement, dated as of December 31, 1997, among the
           Company, AutoBond Master Funding Corporation II and Manufacturers &
           Traders Trust Company
10.27(5)   Indenture and Note, dated January 30, 1998, between the company and
           Bank Boston, N.A.
10.28(5)   Warrant, dated January 30, 1998, issued to BancBoston Investments,
           Inc.
10.29(5)   Purchase Agreement, dated January 30, 1998, between the Company and
           BancBoston Investments, Inc.
10.30      Warrant, dated February 2, 1998, issued to Dresner Investments
           Services, Inc.
10.31      Warrant Agreement and Warrant, dated February 20, 1998, issued to Tejas
           Securities Group, Inc.
10.32(5)   Consulting and Employment Agreement, dated as of January 1, 1998
           between Manuel A. Gonzalez and the Company
10.33(5)   Severance Agreement, dated as of February 1, 1998 between Manuel A.
           Gonzalez and the Company
21.1       Subsidiaries of the Company
21.2(5)    Additional Subsidiaries of the Company
27.1       Financial Data Schedule
</TABLE>

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

(2)  Incorporated  by  reference  to the  Company's  1996 annual  report
     on Form 10-K for the year ended December 31, 1996.



                                       34

<PAGE>
<PAGE>



(3)  Incorporated by reference to the Company's quarterly report on Form
     10-Q for the quarter ended March 31, 1997.

(4)  Incorporated by reference to the Company's quarterly report on Form
     10-Q for the quarter ended June 30, 1997.

(5)  Incorporated by reference from the Company's Registration Statement
     on Form S-1 (Registration No. 333-41257).

(b)  Reports of Form 8-K

        The Company filed no reports on Form 8-K during the quarter ended
December 31, 1997.

                                   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, 1998

        Pursuant to the requirements of the Securities 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.

<TABLE>
<S>                                <C>                           <C> 
/s/ William O. Winsauer           Chairman of the Board and       March   31, 1998
-----------------------           Chief Executive Officer                                          
William O. Winsauer               

/s/ Adrian Katz                   Vice Chairman of the Board      March   31, 1998
---------------                   and Chief Operating Officer                                          
Adrian Katz                       

/s/ R. T. Pigott, Jr.             Vice President and Chief        March   31, 1998
---------------------             Financial Officer                                          
R. T. Pigott, Jr.                 

/s/ John S. Winsauer              Secretary and Director          March   31, 1998
--------------------                                                        
John S. Winsauer

/s/ Thomas Blinten                Director                        March   31, 1998
--------------------                                                        
Thomas Blinten
</TABLE>




                                       35

<PAGE>
<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 as of December 31, 1996 and 1997                          F-3
Consolidated Statements of Income and Comprehensive Income for the Years Ended        F-4

    December 31, 1995, 1996 and 1997

Consolidated Statements of Shareholders' Equity for the Years Ended December 31,      F-5
    1995, 1996 and 1997

Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996     F-6
    and 1997
Notes to Consolidated Financial Statements                                            F-7
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>
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders
Autobond Acceptance Corporation and Subsidiaries

        We have audited the accompanying consolidated balance sheets of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for the years ended December 31, 1995, 1996
and 1997. 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.

        As discussed in Note 1, the Company's most significant warehouse and
securitization facility, which expires March 31, 1998, has been extended to
April 30, 1998. The Company is currently in negotiations with other parties for
additional warehouse and securitzation facilities.

        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, 1996 and
1997, and the consolidated results of their operations and their cash flows for
each of the years ended December 31, 1995, 1996 and 1997, in conformity with
generally accepted accounting principles.

        As described in Note 1, the Company implemented Statement of Financial
Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" as of January 1, 1997 and 
SFAS No. 130, "Reporting Comprehensive Income," for the period ended
December 31, 1997.

COOPERS & LYBRAND L.L.P.

Austin, Texas
March 30, 1998

                                      F-2


<PAGE>
<PAGE>




                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          1996         1997
                                                                      --------------------------
<S>                                                                      <C>          <C>      
                               ASSETS
Cash and cash equivalents                                              $ 4,121,342        $159,293
Restricted funds                                                         2,981,449       6,904,264
Finance contracts held for sale, net                                       228,429       1,366,114         
Collateral acquired, net                                                   152,580         150,908
Class B certificates                                                    10,465,294       7,878,306
Retained interest in beneficial interest of trust                                -       5,083,213
Interest-only strip receivables                                          4,247,274       9,352,641          
Debt issuance cost                                                         997,338         605,847
Trust receivable                                                         2,230,003       9,627,144
Due from affiliates                                                         25,300          21,285       
Other assets                                                               683,955       1,703,587
                                                                      -----------------------------
        Total assets                                                   $26,132,964     $42,852,602
                                                                      =============================

                 LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
  Revolving credit facilities                                          $        -      $ 7,639,201
  Notes payable                                                         10,174,633       9,841,043         
  Accounts payable and accrued liabilities                               1,474,586       3,386,685
  Bank overdraft                                                                 -       2,936,883
  Payable to affiliates                                                    265,998            -
  Deferred income taxes                                                  2,075,553       3,631,188         
                                                                      -----------------------------
    Total liabilities                                                   13,990,770      27,435,000
                                                                      -----------------------------

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,                  1,000           1,000
    6,512,500 and 6,531,311 shares issued and outstanding
  Additional paid-in capital                                             8,617,466        8,781,669
  Deferred compensation                                                    (11,422)               -
  Due from shareholders                                                   (378,618)        (187,555)
  Unrealized appreciation on interest-only strip receivables                     -        1,049,256
  Retained earnings                                                      3,913,768        5,773,232
                                                                      ------------------------------
    Total shareholders' equity                                          12,142,194       15,417,602
                                                                      ------------------------------
        Total liabilities and shareholders' equity                     $26,132,964      $42,852,602
                                                                      ==============================
</TABLE>

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


                                      F-3

<PAGE>
<PAGE>




                        AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                            1995           1996               1997
                                         --------------------------------------------------------
<S>                                                        <C>           <C>          <C> 
Revenues:
  Interest income                                          $ 2,880,961  $ 2,519,612  $ 4,341,297
  Gain on sale of finance contracts                          4,085,952   12,820,700   18,944,241
  Servicing fee income                                               -      657,950    1,131,142
  Other income (loss)                                                -      388,278   (1,485,379)
                                                         ---------------------------------------
    Total revenues                                           6,966,913   16,386,540   22,931,301
                                                         ---------------------------------------
Expenses:
  Provision for credit losses                                   48,702      412,387      612,715
  Interest expense                                           2,099,867    2,382,818    3,879,543
  Salaries and benefits                                      1,320,100    4,529,006    7,357,284
  General and administrative                                 1,462,740    2,331,246    6,201,948
  Other operating expenses                                     963,017    1,119,644    2,005,237
                                                         ---------------------------------------
    Total expenses                                           5,894,426   10,775,101   20,056,727
                                                         ---------------------------------------
Income before income taxes and extraordinary loss            1,072,487    5,611,439    2,874,574
Provision for income taxes                                     199,000    1,926,553    1,015,110
                                                         ---------------------------------------
Income before extraordinary loss                               873,487    3,684,886    1,859,464
Extraordinary loss, net of tax                                       -     (100,000)            -
                                                         ---------------------------------------
     Net income                                                873,487    3,584,886    1,859,464
Other comprehensive income, net of tax:
  Unrealized appreciation on interest-only strip                    
  receivables                                                        -            -    1,049,256

                                                         ---------------------------------------
    Other comprehensive income                                       -            -    1,049,256
                                                         =======================================
     Comprehensive income                                   $  873,487  $ 3,584,886   $2,908,720
                                                         =======================================

Earnings per common share basic:
  Income before extraordinary loss                               $0.17        $0.64        $0.29
  Extraordinary loss, net of tax                                     -        (0.02)           -
                                                         =======================================
      Net income                                                 $0.17        $0.62        $0.29
                                                         =======================================

Earnings per common share diluted 
  Income before extraordinary loss                               $0.17        $0.63        $0.28
  Extraordinary loss, net of tax                                     -         0.01            -
                                                         =======================================
      Net income                                                 $0.17        $0.62        $0.28
                                                         =======================================


</TABLE>

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


                                      F-4

<PAGE>
<PAGE>




                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                 1995       1996          1997
                                                            ------------------------------------
<S>                                                            <C>         <C>        <C>      
Common stock shares:
  Beginning of year                                            5,118,753   5,118,753  6,512,500
  Stock issued pursuant to employee contract                           -     568,747          -
  Issuance of common stock in public offering                          -     825,000          -
  Exercise of common stock warrants                                    -           -     18,811
                                                            ====================================
  End of year                                                  5,118,753   6,512,500  6,531,311
                                                            ====================================
Common stock:
  Beginning balance                                          $     1,000      $1,000     $1,000
                                                            ------------------------------------
  Ending balance                                                   1,000       1,000      1,000
                                                            ------------------------------------
Additional paid-in capital:
  Beginning balance                                              451,000   2,912,603  8,617,466
  Capital contributions                                        2,323,103           -          -
  Deferred compensation pursuant to employee contract            138,500           -          -
  Issuance of common stock in public offering                          -   5,704,863          -
  Issuance/exercise of common stock warrants                           -           -    164,203
                                                            ------------------------------------
  Ending balance                                               2,912,603   8,617,466  8,781,669
                                                            ------------------------------------
Deferred compensation:
  Beginning balance                                                    -    (62,758)   (11,422)
  Deferred compensation pursuant to employee contract          (138,500)           -          -
  Amortization of deferred compensation                           75,742      51,336     11,422
                                                            ------------------------------------
  Ending balance                                                (62,758)    (11,422)          -
                                                            ------------------------------------
Due from shareholders:
  Beginning balance                                             (16,000)   (153,359)    (378,618)
  Payments from (to) shareholders                              (137,359)   (225,259)     191,063
                                                            ------------------------------------
  Ending balance                                               (153,359)   (378,618)    (187,555)
                                                            ------------------------------------
Unrealized appreciation on interest-only strip receivables:
  Beginning balance                                                    -           -          -
  Increase in unrealized appreciation on interest-only                 -           -   1,049,256 
  strip receivables
                                                            ------------------------------------
  Ending balance                                                       -           -   1,049,256         
                                                            ------------------------------------
Retained earnings:
  Beginning balance                                            (544,605)     328,882   3,913,768
  Net income                                                    873,487    3,584,886   1,859,464         
                                                            ------------------------------------
  Ending balance                                                328,882    3,913,768   5,773,232         
                                                            ====================================
Total shareholders' equity                                  $ 3,026,368  $12,142,194 $15,417,602         
                                                            ====================================
</TABLE>

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



                                      F-5

<PAGE>
<PAGE>










                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                           1995           1996          1997
                                                       -----------------------------------------
<S>                                                      <C>          <C>            <C>        
Cash flows from operating activities:
  Net income                                             $ 873,487    $ 3,584,886    $ 1,859,464
  Adjustments to reconcile net income to net
       cash used in operating activities:
    Amortization of finance contract acquisition          (795,579)      (358,949)     (11,472)
    discount and insurance
    Amortization of deferred compensation                    75,742         51,336       11,422
    Amortization of debt issuance costs                                    497,496      818,481
    Provision for credit losses                              48,702        412,387      612,715       
    Depreciation and amortization                                 -              -      288,878
    Deferred income taxes                                   199,000      1,876,553    1,015,110
    Accretion of interest-only strip receivables                  -      (154,029)    (546,507)
    Impairment of interest-only strip receivables                 -              -    1,312,234
    Unrealized (gain) loss on Class B certificates                -      (388,278)      293,188
  Changes in operating assets and liabilities:
    Other assets                                          (354,208)      (329,747)  (1,308,511)
    Class B certificates                                (2,834,502)    (7,242,514)    2,293,800
    Retained interest in beneficial interest of trust             -              -  (5,083,213)
    Interest-only strip receivables                       (846,526)    (3,246,719)  (4,281,311)
    Accounts payable and accrued liabilities              1,110,446      (361,496)    1,912,099
    Due to/due from affiliates                            (248,937)       (14,899)    (261,983)
  Purchases of finance contracts                       (31,200,131)   (83,672,335) (140,364,193)
  Sales of finance contracts                             27,399,543     85,014,394  136,389,461
  Repayments of finance contracts                         2,660,018      1,605,461    1,915,606
                                                       -----------------------------------------
     Net cash used in operating activities              (3,912,945)     (2,726,453)  (3,134,732)
                                                       -----------------------------------------
Cash flows from investing activities:
  Increase in restricted funds                          (1,544,661)    (1,298,612)  (3,922,815)
  Advances to AutoBond Receivables Trusts                 (525,220)    (1,704,783)  (7,397,141)
  Decrease (increase) in due from                         (137,359)      (225,259)     191,063
  shareholders
  Disposal proceeds from collateral acquired                220,359        646,600      321,870
                                                       -----------------------------------------
     Net cash used in investing activities             (1,986,881)    (2,582,054)  (10,807,023)
                                                       -----------------------------------------
Cash flows from financing activities:
  Net borrowings (payments) on revolving                
    credit facilities                                     (904,355)    (1,150,421)    7,639,201
  Debt issuance costs                                             -      (794,834)    (426,991)
  Proceeds (payments) from borrowings on                  1,061,392    (1,061,392)            -
  repurchase agreement
  Proceeds from notes payable                             2,674,597     12,575,248    2,015,150
  Payments on notes payable                                       -    (5,075,212)  (2,348,740)
  Shareholder contributions                               2,323,103              -            -
  Increase (decrease) in bank overdraft                     837,749      (861,063)    2,936,883
  Proceeds from public offering of common stock, net              -      5,704,863            -
  Issuance/exercise of common stock warrants                      -              -      164,203
                                                       -----------------------------------------
     Net cash provided by financing activities            5,992,486      9,337,189   9,979,706
                                                       -----------------------------------------
Net increase (decrease) in cash and cash equivalents         92,660      4,028,682 (3,962,049)
Cash and cash equivalents at beginning of period                  -         92,660   4,121,342
                                                       =========================================
Cash and cash equivalents at end of period              $    92,660   $  4,121,342    $159,293
                                                       =========================================
</TABLE>

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




                                      F-6

<PAGE>
<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 ("finance contracts") originated by franchised
automobile dealers. 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.

Principals 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.

Risks and Uncertainties

        The Company records the present value of estimated future cash flows in
connection with its determination of the carrying value of its interest-only
strip receivables. Such estimation considers significant assumptions about the
future performance of finance contracts, including prepayments, default rates,
collections on repossessions of automobiles, delinquencies and timing of cash
receipts. Since such assumptions may not predict actual performance, it is at
least reasonably possible that the carrying value of the interest-only strip
receivables will be adjusted in the near term and the change could be material
to the results of operations.

        The Company and its credit loss deficiency insurance provider on two of
its securtizations disagree over the cancellability of coverages and the
aggregate limitation of liability under such policies. The Company has filed
suit to seek a declaratory judgment to affirm their interpretation of the
insurance policies. Should the Company's interpretation be incorrect, the
Company would need to reassess its carrying value of its interest-only strip
receivables under new assumptions and the result of this reevaluation could be
material. The Company's estimated future cash flow at December 31, 1997 exceed
the aggregate limitations asserted by the insurance provider by approximately 
 .5 million.

        Included in the Company's finance contracts held for sale are certain
finance contracts which were otherwise ineligible to be part of a securitzation
transaction. Such finance contracts have inherently higher risk than performing
finance contracts acquired in the normal course of business. The Company's
reserve on such finance contracts is determined based upon an estimate of the
historical default rates, the liquidation value of the underlying collateral and
recoveries of insurance proceeds. Actual results from the ultimate liquidation
of the loan will differ from the net recorded amount and the differences could
be material.



                                      F-7

<PAGE>
<PAGE>


Liquidity Risk

        The Company's warehousing and securitization facility agreement with
Daiwa expires on March 31, 1998. Daiwa has extended the current maturities of
the facilities to April 30, 1998. The Company's availability under the Daiwa and
Sentry warehouse facilities totals $2.7 million and $7.6 million at March 30,
1998, respectively. The Company is currently in the process of securing new
warehouse and securitization facilities. Signed term sheets for a $50 million
warehouse facility and a $200 million revolving asset purchase funding facility
have been received in March of 1998. Such term sheets do not obligate the
Company or the lender to extend credit. Extension of credit under the term
sheets are contingent upon processes such as due diligence procedures of the
lenders, approvals of lending committees or board of directors, and drafting and
signing of final agreements. In addition, the Company has an agreement for an
additional warehouse facility of $10 million, which is expected to close March
31, 1998. Failure to obtain a suitable warehousing and securitization facility
could have a material adverse effect on the Company's financial operations and
would result in the Company significantly curtailing its operations. Rating
agencies have taken certain recent actions on the Company's prior term
securitizations. Fitch has withdrawn its ratings on all securitzations of the
Company. Moody's has downgraded the senior securities in each of the Company's
term securitizations to Baa2 and Baa3 (97B and 97C securitizations). These
actions may limit the Company's ability to do similar securitization structures
in the near term. Future downgrades are possible as such securitizations
continue to be on review by Moody's. Management plans to obtain bond insurance
and has a term sheet from FSA, in order to complete future term securitizations.
The Company believes that it will be successful in obtaining the appropriate
warehousing and securitization facilities.

        The Company's cash position at March 26, 1998 is approximately $1
million. The Company has funded loans out of its own account for approximately
$4.3 million since March 1, 1998 and believes net cash outflows will be $2 to $3
million per quarter. Given the cash position, the Company may need to secure
additional equity or debt to fund operations by the end of the year. Management
believes additional cash may be generated if a term securitization structure
with subordinated traunches is successfully implemented.. The Company continues
to pursue equity or debt infusions and currently a term sheet which covers the
issuance of convertible debt of up to $5 million has been received. Similar to
the warehouse agreement, the term sheet does not represent a binding commitment
to extend credit. The Company believes it will be successful in obtaining
necessary equity or debt and believes it has a history of raising sufficient
debt or equity for the Company. Without additional debt or equity, including
obtaining additional warehousing and securitization financing, the Company
may not be able to generate the necessary cash inflows to cover its operating
costs through the end of the year.

Cash and Cash Equivalents

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

Restricted Cash

        In accordance with the Company's revolving credit facilities, proceeds
advanced by the lender for purchase of finance contracts are held by a trustee
until the Company delivers qualifying collateral to release the funds, normally
in a matter of days. The Company is also required to maintain a cash reserve
with its lenders up to 11% 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.

Trust Receivable

        At the close of a securitization, 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 initial cash reserve deposits for the Company's securitizations totaled
$525,220, $1.6 million and $7.4 million for the years ended December 31, 1995,
1996 and 1997, respectively. These amounts represented 2.0%, 2.0% and 3.9% of
the senior investor certificates issued by the trusts during the 



                                      F-8

<PAGE>
<PAGE>



respective periods. 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 as 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 finance contracts. 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
collateral acquired.

Impairment of Long-Lived Assets

        In the event that facts and circumstances indicate that the cost of
long-lived assets other than financial instruments, interest-only strip
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 during the years ended December 31, 1995, 1996 and 1997.

Collateral Acquired

        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.

        Subsequent impairment reviews are performed quarterly on a disaggregated
basis. A valuation allowance is established if the carrying amount is greater
than the underlying fair value of the assets. Subsequent increases and decreases
in fair value result in an 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.

Class B Certificates

        Pursuant to certain 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 interest-only strip receivables 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 No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). 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 



                                      F-9

<PAGE>
<PAGE>




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. The Company recorded unrealized gain
(loss) on the Class B certificates of $388,278 and ($293,188) during the years
ended December 31, 1996 and 1997, respectively. The Class B certificates accrue
interest at 15%.

Interest-Only Strip Receivables and Adoption of New Accounting Standard

        The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 125"), as amended by Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125--An Amendment of FASB Statement No. 125"
("SFAS No. 127"), on January 1, 1997. SFAS No. 125 applies a control-oriented,
financial-components approach to financial-asset-transfer transactions whereby
the Company (1) recognizes the financial and servicing assets it controls and
the liabilities it has incurred, (2) derecognizes financial assets when control
has been surrendered, and (3) derecognizes liabilities once they are
extinquished. Under SFAS No. 125, control is considered to have been surrendered
only if: (i) the transferee assets have been isolated from the transferor and
its creditors, even in bankruptcy or other receivership (ii) the transferee has
the right to pledge or exchange the transferred assets, or, is a qualifying
special-purpose entity (as defined) and the holders of beneficial interests in
that entity have the right to pledge or exchange those interests; and (iii) the
transferor does not maintain effective control over the transferred assets
through an agreement which both entitles and obligates it to repurchase or
redeem those assets prior to maturity, or through an agreement which both
entitles and obligates it to repurchase or redeem those assets if they were not
readily obtainable elsewhere. If any of these conditions are not met, the
Company accounts for the transfer as a secured borrowing.

        As a result of adopting SFAS No. 125, the excess servicing receivables
previously shown on the consolidated balance sheet as of December 31, 1996 have
been reclassified as interest-only strip receivables, and accounted for as an
investment security classified similar to those classified as "available for
sale" under SFAS No. 115. Accordingly, any unrealized gain or loss in the fair
value is included as a component of equity, net of the income tax effect. Any
impairment deemed permanent is recorded as a charge against earnings.

        The fair value of interest-only strip receivables is calculated based
upon the present value of the estimated future interest income after considering
the effects or estimated prepayments, defaults and delinquencies. The discount
rate utilized is based upon assumptions that market participants would use for
similar financial instruments subject to prepayments, defaults, collateral value
and interest rate risks.

        The Company accretes income for its interest-only strip receivable on
the interest method based upon the expected rate of return of such assets.

Bank Overdraft

        Bank overdrafts result from checks prepared but not sent to the related
creditor.

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.

Furniture, Fixtures and Equipment, Net

        Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. Expenditures for additions and improvements are capitalized while
minor replacements, maintenance and repairs which do not improve or extend the
life of such assets are charged to expense. Gains of losses on disposal of fixed
assets are reflected in operations. Depreciation is computed using the
straight-line method over the 



                                      F-10

<PAGE>
<PAGE>



estimated useful lives of the depreciable assets, ranging from 3 to 5 years.
Leasehold improvements are depreciated over the term of the lease.

Advertising

        Advertising costs are expensed as incurred.

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

        During the year ended December 31, 1996, the Company recorded an
extraordinary loss related to a $150,000 prepayment fee on a $2,684,000 term
loan that was repaid during 1996.

Earnings per Share

        The Company adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which specifies the computation, presentation, and disclosure requirements for
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities of other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company.

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 finance contracts past due for more than 90 days. The Company
accrues interest income on the Class B certificates monthly at 15% using the
interest method

Comprehensive Income

        Effective for periods ended December 31, 1997, the Company implemented
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes disclosure standards for
reporting comprehensive income, which is the change in equity during a period
from transactions and other events from non-owner sources. Comprehensive income
reconciles net income to retained earnings on the face of the statement of
income.

Concentration of Credit Risk

        The Company generally acquires finance contracts from a network of
automobile dealers located in forty states. Finance contracts acquired with
borrowers in Texas totaled 64% and 38% of the portfolio at December 31, 1996 and
1997, respectively. Finance contracts acquired with borrowers in Florida totaled
25% at December 31, 1997. The Company had no dealer concentrations which
accounted for more than 10% of the portfolio at December 31, 1996 and 1997.



                                      F-11

<PAGE>
<PAGE>


2. FINANCE CONTRACTS HELD FOR SALE

        The following amounts are included in finance contracts held for sale as
of:

<TABLE>
<CAPTION>
                                    December 31,
                                  1996         1997
                              --------------------------
<S>                               <C>        <C>       
Unpaid principal balance          $266,450   $1,946,135
Prepaid insurance                   18,733            -
Contract acquisition              (31,554)    (129,899)
discounts
Allowance for credit losses       (25,200)    (450,122)
                              ==========================
                                  $228,429   $1,366,114
                              ==========================
</TABLE>




3. INTEREST-ONLY STRIP RECEIVABLES AND GAIN ON SALE

        The changes in interest-only strip receivables follow:

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                           1996         1997
                                        -------------------------
<S>                                        <C>        <C>       
Beginning balance                          $846,526   $4,247,274
Unrealized appreciation                           -    1,589,782
Additions from securitization             3,246,719    4,281,313
transactions
Accretion of discount                       154,029      546,507
Impairment charge                                 -  (1,312,233)
                                        =========================
Ending balance                           $4,247,274   $9,352,641
                                        =========================
</TABLE>

        The Company periodically reviews the fair value of the interest-only
strip receivables. The difference in the fair value of securities available for
sale and the historical carrying value on a disaggregated basis, where any
reduction in value does not result in a permanent impairment, is recognized as
an adjustment to stockholders' equity. The cumulative adjustment amounted to a
net unrealized gain of $1,589,782, net of related tax effect of $540,526, on the
valuation of the interest-only strip receivables for the year ended December 31,
1997. Additionally, the Company recorded a charge against earnings for permanent
impairment of interest-only strip receivables, determined on a disaggregated
basis, of $1,312,233 for the year ended December 31, 1997.

        During the fourth quarter of 1997, the Company revised its estimate of
future cash flows related to its interest-only strip receivables. Significant
assumptions utilized in the estimation of future cash flows include:



                                      F-12

<PAGE>
<PAGE>




<TABLE>
<CAPTION>
Variable                                          Assumptions
---------                                         -------------
<S>                                                <C>
Discount rate                                     15%
Default rates                                     Variable curve based upon historical
                                                      experience, varies from 5% to 17%

Lag in sale of collateral and insurance receipts  5 months and 7 months
Collections on defaulted loans                    76% of base wholesale collateral value
                                                      reduced over time to give effect to
                                                      estimated changes in such wholesale
                                                      automobile values plus insurance proceeds
Prepayment rates                                  1% in first month, reducing to .4% per month
                                                      over the loan term
</TABLE>

        As a result, the Company adjusted its carrying value of the
interest-only strip receivables by $1,312,233, which was recognized as a
permanent impairment in accordance with EITF 89-4 on a disaggregated basis. In
addition, the Company utilized these same assumptions to estimate its gain on
sale of the fourth quarter transfers to AutoBond Master Funding Corporation and
AutoBond Master Funding Corporation II. Under the transfer, the variable
beneficiary holder has an option to redeem such certificates for term
certificates. The gain on sale calculation assumes that the variable rate
holders do not exercise such option and the facility pays out under a turbo
arrangement.


4. REVOLVING CREDIT FACILITIES

        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 (the "Sentry Facility")
provides for a $10.0 million 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 Sentry Facility 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 Sentry Facility 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% at December 31, 1997). The Sentry Facility contains certain
restrictive covenants, including requirements to maintain a certain minimum net
worth, and cash and cash equivalent balances. Under the Sentry Facility, the
Company paid interest of $411,915, $220,674 and $420,674 for the years ended
December 31, 1995, 1996 and 1997, respectively. Pursuant to the Sentry Facility,
the Company was 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 Sentry Facility. The Company pays a utilization fee of
up to 0.21% per month on the average outstanding balance of the Sentry Facility.
The Sentry Facility also requires the Company to pay up to 0.62% per quarter on
the average unused balance. At December 31, 1997, $10,000,000 was available for
borrowing under the credit line as there were no amounts outstanding at that
date.

        Effective May 21, 1996 the Company, through its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into a $20 million revolving warehouse
facility (the "Providian 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 Providian Facility were
used to acquire



                                      F-13

<PAGE>
<PAGE>



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 Providian Facility also required the Company to pay a monthly
fee on the average unused balance of 0.25% per annum. The Providian Facility was
collateralized by the finance contracts acquired with the outstanding
borrowings.

        The Company and its wholly owned subsidiary, AutoBond Funding
Corporation II, entered into a $50 million revolving warehouse facility (the
"Daiwa Facility") with Daiwa Finance Corporation ("Daiwa") effective as of
February 1, 1997. Advances under the Daiwa Facility mature on the earlier of 120
days following the date of the advance or March 31, 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. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the finance contracts funded be covered by
default deficiency insurance. Interest is payable upon maturity of the advances
and accrues at the lesser of (x) 30 day LIBOR plus 1.15% (6.87% at December 31,
1997) or (y) 11% per annum. The Company also pays a non-utilization fee of .25%
per annum on the unused amount of the line of credit. Pursuant to the Daiwa
Facility, the Company paid a $243,750 commitment fee. The debt issuance cost is
being amortized as interest expense on a straight line basis through March 1998.
The Daiwa Facility contains certain covenants and representations similar to
those in the agreements governing the Company's existing securitizations
including, among other things, delinquency and repossession triggers. The 
Company had credit availability under the Diawa Facility of $15,759,792 at
December 31, 1997.

The Company incurred interest expense
under the Daiwa Facility of approximately $1,118,883 during the year ended
December 31, 1997.

        The interest rate on borrowings under revolving credit agreements ranged
from 6% to 11% for the year ended December 31, 1997. The weighted average
interest rate on revolving credit agreements was 7.10% at December 31, 1997.

        During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into qualified unconsolidated special
purpose subsidiaries. In conjunction with these transfers, these special purpose
subsidiaries issue variable beneficial interests which are convertible into term
beneficial interests at the option of the holder of such notes. Transfers of
finance contracts to the special purpose entities have been recognized as sales
under SFAS No. 125 .

6. NOTES PAYABLE

        The following amounts are included in notes payable as of:

<TABLE>
<CAPTION>
                                                       December 31,
                                                     1996         1997
                                                 --------------------------
<S>                                               <C>          <C>        
Notes payable, collateralized by Class B          $10,050,781  $ 7,783,219
    certificates
Convertible notes payable                                   -    2,000,000
Other notes payable                                   123,852       57,824
                                                 ==========================
                                                  $10,174,633   $9,841,043
                                                 ==========================
</TABLE>

        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 interest-only strip
receivables from the cash flows of the related trust. 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



                                      F-14

<PAGE>
<PAGE>




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. The term loan bears interest at 15% per annum payably monthly.

        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. The term loan bears interest at 15% per annum payable monthly.

        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. The term loan bear
interest at 15% per annum payable monthly.

        Pursuant to the an agreement (the "Securities Purchase Agreement")
entered into on June 30, 1997, the Company issued by private placement
$2,000,000 in aggregate principal amount of senior secured convertible notes
("convertible notes"). Interest is payable quarterly at a rate of 18% per annum
until maturity on June 30, 2000. If the Company pays down the convertible notes
in full prior to June 30, 1998, the holders will have no conversion rights. The
convertible notes, collateralized by the interest-only strip receivables from
the Company's first four securitizations, are convertible into shares of common
stock of the Company upon the earlier to occur of (i) an event of default on the
convertible notes and (ii) June 30, 1998, through the close of business on June
30, 2000, subject to prior redemption. The conversion price is equal to the
outstanding principal amount of the convertible note being converted divided by
the lesser of (x) $5.00 (as adjusted by the terms of the Securities Purchase
Agreement) and (y) 85% of the average of the five lowest closing bid prices of
the Company's common stock on the Nasdaq Stock Market, or such other exchange or
market where the common stock is then traded during the 60 trading days
immediately preceding the date the convertible note is converted or the
applicable date of repayment (subject to adjustment under certain circumstances
specified in the Securities Purchase Agreement). The Company also paid certain
debt issuance costs to the purchaser totaling $25,000, which are being amortized
as interest expense on a straight line basis through June 30, 2000. The Company
paid off this debt in February 1998.

        Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase up to 200,000 shares
of common stock at $4.225 per share. The warrants are exercisable to the extent
the holders thereof purchase up to $10,000,000 of the Company's subordinated
asset-backed securities before June 30, 1998. To date, the holders have
purchased $5,800,000 of subordinated asset-backed securities. The total value
assigned to these warrants was approximately $154,000.



                                      F-15

<PAGE>
<PAGE>




6. 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.

        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.

7. INCOME TAXES

        The provision for income taxes for the years ended December 31, 1995,
1996 and 1997 consisted of a provision for deferred taxes and the Company had no
current liability. 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>
                                              Year Ended December 31,
                                           1995        1996        1997
                                        ------------------------------------
<S>                                     <C>            <C>          <C>       
Federal tax at statutory rate of 34%    $  364,646     $ 1,907,889  $  977,355
Other                                       17,354          18,664      37,755
Change in valuation allowance             (183,000)            -              -
                                        ----------------------------------------
Provision for income taxes              $  199,000     $ 1,926,553  $1,015,110
                                        ========================================
</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,
                                           1996         1997
                                        -------------------------
<S>                                     <C>           <C>       
Deferred tax assets:
  Allowance for credit losses           $    16,728   $  244,489
  Cost related to securitizations           491,935      727,443
  Other                                       3,883       61,769
  Net operating loss carryforwards        2,792,067    8,023,325
                                        -------------------------
     Gross deferred tax assets            3,304,613    9,057,025
                                        -------------------------
Deferred tax liabilities:
  Gain on securitizations                 5,242,372   11,849,562
  Other                                     137,794      298,126
                                        -------------------------
     Gross deferred tax liabilities       5,380,166   12,147,688
                                        -------------------------
                                          2,075,553    3,090,663
Unrealized appreciation on                        -      540,525
interest-only strip receivables
                                        -------------------------
Net deferred tax liabilities             $2,075,553   $3,631,188
                                        =========================
</TABLE>


        At December 31, 1997, the Company had tax net operating loss
carryforwards of approximately $23,598,000 expiring in fiscal years 2009 through
2012.


                                      F-16

<PAGE>
<PAGE>




8. 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 "Option Plan"). The Company applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for the Option 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 Option 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 are required by
SFAS 123 and are presented below.

        Under the Option 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 and 1997 under the
Option Plan in the form of non-qualified stock options.

Stock Options

        The Company has granted stock options to employees and directors. The
stock options granted in 1996 and 1997 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 vest 
33.33% per year, beginning on the first anniversary of the date of grant. In
accordance with APB 25, the Company has not recognized any compensation cost for
the stock options granted.

        A summary of the status of the Company's stock options for the years
ended December 31, 1996 and 1997 is presented below:
<TABLE>
<CAPTION>
                                       # Shares of              Average
                                     Underlying Options      Exercise Price
                                   --------------------------------------
<S>                                         <C>                  <C>  
Outstanding at December 31, 1995                   -                  -
  Granted                                     297,500             $10.11
                                   --------------------------------------
Outstanding at December 31, 1996              297,500              10.12
  Granted                                      93,000               5.67
  Exercised                                        -             -
  Forfeited                                  -119,500               9.50
                                   --------------------------------------
Outstanding at December 31, 1997              271,000             $ 8.85
                                   ======================================
Options exercisable at end of
   period                                      64,329             $10.17
                                   ======================================
</TABLE>

<TABLE>
<CAPTION>
                                                             Weighted           Weighted
                                       # Shares of            Average            Average
Range of Exercise Prices           Underlying Options       Remaining Life    Exercise Price
-------------------------------------------------------------------------------------------
<S>                                            <C>                   <C>            <C>   
$2.00 to $2.99                                 11,000                9.4            $ 2.48
$3.00 to $3.99                                 14,000                9.6              3.59
$4.00 to $4.99                                 29,000                9.4              4.38
$8.00 to $8.99                                  3,000                9.1              8.88
$9.00 to $9.99                                112,000                9.0              9.82
$10.00 to $10.99                              102,000                8.9             10.48
                                   --------------------------------------------------------
  Total                                       271,000                9.0             $8.85
                                   ========================================================
</TABLE>



                                      F-17

<PAGE>
<PAGE>



        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 1997: dividend yield of
0.00%; risk-free interest rates of 6.36%, the expected lives of options of 5
years; and a volatility of 63.51% for all grants.

Pro Forma Net Income and Net Income Per Common Share

        Had the compensation cost for the Company's Option Plan been determined
consistent with SFAS 123, the Company's net income and net income per common
share for 1996 and 1997 would approximate the pro forma amounts below:

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                           1996         1997
                                        -------------------------
<S>                                      <C>           <C>       
SFAS 123 charge, pre-tax:
  As reported                            $        -    $       - 
  Pro Forma                                  33,343      375,086
APB 25 charge:
  As reported                                     -            -
  Pro Forma                                       -            -
Net income:
  As reported                             3,584,886    1,859,464
  Pro Forma                               3,562,991    1,616,833
Net income per common share (basic):
  As reported                                $ 0.62        $0.29
  Pro Forma                                    0.62         0.25
Net income per common share (diluted):
  As reported                                   .62          .28
  Pro Forma                                     .61          .23

</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.
Management has determined that the fair value of the warrant at its issuance
date was de minimus. This warrant was excercised during 1997.

        In addition to senior secured convertible notes issued June 30, 1997,
the Company issued warrants, which upon exercise allow the holders to purchase
up to 200,000 shares of common stock at $4.225 per share. The warrants are
exercisable to the extent the holders thereof purchase up to $10,000,000 of the
Company's subordinated asset-backed securities before June 30, 1998. To date,
the holders have purchased $5.8 million of subordinated asset-backed securities.

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.


                                      F-18

<PAGE>
<PAGE>



There were no shares of preferred stock issued or outstanding during the years
ended December 31, 1996 and 1997.

Earnings Per Share

        Effective for periods ended December 31, 1997, the Company implemented
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share", and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS, which excludes dilution. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. Basic earnings per share were
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share differs
from basic earnings per share due to the assumed conversions of dilutive
options, warrants and convertible debt that were outstanding during the period.
EPS for periods ended prior to December 31, 1997 has been restated to conform
with the requirements of SFAS No. 128.

        Earnings per share is calculated as follows:

<TABLE>
<CAPTION>
                                                          Income          Shares       Per-Share
                                                        (Numerator)   (Denominator)     Amount
                                                       -------------- --------------- ------------
<S>                                                         <C>            <C>             <C>
Year Ended December 31, 1995:
  Net income                                                $873,487
                                                       --------------
  Basic EPS:
    Income available to common shareholders                  873,487       5,190,159        $0.17
                                                                                      ============
  Effect of dilutive securities
    Warrants
    Incentive stock options
  Diluted EPS:
    Income available to common shareholders +
                                                       ------------- ---------------  ------------
    assumed conversions                                     $873,487       5,190,159        $0.17
                                                       ============== =============== ============
Year Ended December 31,1996:
  Net income                                              $3,584,886
                                                       --------------
  Basic EPS:
    Income available to common shareholders                3,584,886       5,791,189        $0.62
                                                                                      ============
  Effect of dilutive securities
    Warrants                                                                  16,470
    Incentive stock options                                                    1,498
  Diluted EPS:
    Income available to common shareholders +
                                                       -------------- ---------------
    assumed conversions                                   $3,684,886       5,809,157        $0.62
                                                       ============== =============== ============
Year Ended December 31,1997:
  Net income                                              $1,859,464
                                                       --------------
  Basic EPS:
    Income available to common shareholders                1,859,464       6,516,056        $0.29
                                                                                      ============
  Effect of dilutive securities
    Warrants                                                                  16,590      
    Incentive stock options                                                    4,994     
   18% convertible notes payable                            119,460         428,238
  Diluted EPS:
    Income available to common shareholders +
                                                       -------------- ---------------
    assumed conversions                                   $1,978,924       6,965,877        $0.28
                                                       ============== =============== ============
</TABLE>


                                      F-19

<PAGE>
<PAGE>


        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.

9. 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
55.9% 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 $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 1995; however, management of the Company commenced compensation
payments to the CEO during the latter half of 1996 (see Note 11). The Company
estimated that a reasonable amount of compensation to pay the CEO on a
stand-alone entity basis would approximate $100,000 for the year ended December
31, 1995.

        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.

        Since July 1994, ABI has also provided certain administrative services
to Intercontinental Brokerage Inc. ("Intercontinental"), an independent
insurance broker, in connection with Intercontinental's obligations as
administrator of pools of finance contracts subject to the Interstate Policy,.
ABI received fees from Intercontinental totaling approximately $752,000 for the
period from July 1994 to March 1997, including with respect to finance contracts
as to which the Company has paid administrative fees to Intercontinental. Since
March 1997, the Company has elected not to insure finance contracts under the
Interstate Policy and ABI will not receive any future fees from Intercontinental
with respect to such finance contracts.

        Certain executive officers received (repaid) advances from the Company
totaling $137,359, $81,712 and ($224,479) during the years ended December 31,
1995, 1996, and 1997. The outstanding advances, provided on a
non-interest-bearing basis without repayment terms, are shown as a reduction of
shareholders' equity.

10. EMPLOYMENT AGREEMENTS

        The Company and its chief operating officer ("COO") entered into an
employment agreement dated November 15, 1995 and 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



                                      F-20

<PAGE>
<PAGE>




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 COO. Half of such issued shares were not subject to forfeiture whereas
the remaining 50% were subject to forfeiture until November 15, 1997. 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, $51,336 and $11,422 for the years ended December 31, 1995,
1996 and 1997, respectively.

        The Company and its chief executive officer ("CEO") also entered into an
employment agreement dated May 31, 1996, and 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 CEO 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 CEO with certain additional benefits. The agreement automatically
terminates upon (i) the death of the CEO, (ii) disability of the CEO for six
continuous months together with the likelihood that the CEO will be unable to
perform his duties for the following continuous six months, as determined by the
Board of Directors, (iii) termination of the CEO "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 CEO may terminate his employment for "good reason" as defined in the
agreement. In the event of the CEO's termination for cause, the agreement
provides that the Company shall pay the CEO his base salary through the date of
termination and the vested portion of any incentive compensation plan to which
the CEO may be entitled. Other than following a change in control, if the
Company terminates the CEO in breach of the agreement, or if the CEO terminates
his employment for good reason, the Company must pay the CEO: (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 CEO may be entitled as a result of such breach, including lost
benefits under retirement and incentive plans. In the event of the CEO's
termination following a change in control, the Company is required to pay the
CEO 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 CEO for any
costs or liabilities incurred by the CEO in connection with his employment.

11. LEASES

        The Company leases property under capital leases as follows:

<TABLE>
<CAPTION>
                                     December 31,
                                 1996          1997
                               --------------------------
<S>                             <C>             <C>    
Furniture                       $        -      $49,606
                                         -
Equipment                                -      515,891
Less: Accumulated                      
  depreciation                           -      (92,941)
                               --------------------------
                                $        -     $472,556
                               ==========================
</TABLE>

        Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1997 follow:

<TABLE>
<CAPTION>
Year ending December 31,
-------------------------
<S>                                            <C>      
  1998                                         $ 226,385
</TABLE>




                                      F-21

<PAGE>
<PAGE>



<TABLE>

<S>                                            <C>      
  1999                                           217,329
  2000                                           129,173
                                              -----------
Total minimum lease payments                     572,887
Less: amounts representing interest              (71,872)
                                              -----------
Present value of net minimum lease            
payments                                       $ 501,015
                                              ===========
</TABLE>


        Future minimum lease payments under operating leases (which reflect
leases having noncancelable lease terms in excess of one year) as of December
31, 1997 follow:

<TABLE>
<CAPTION>
Year ending December 31,
--------------------------
<S>                                          <C>     
  1998                                       $610,926
  1999                                        743,838
  2000                                        716,583
  2001                                        623,488
  2002                                        562,356
  Later years                               1,312,163
                                           -------------
Total                                      $4,569,354
                                           =============
</TABLE>


        Rental expense under operating leases for the years ended December 31,
1995, 1996 and 1997 were approximately $351,000, $524,000 and $371,555,
respectively.

12. COMMITMENTS AND CONTINGENCIES

        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 repurchased finance
contracts totaling $619,520 from a Trust during 1997. Of the total amount of
these finance contracts, $190,320 was purchased from one dealer. Although the
Company has requested that this dealer repurchase such contracts, the dealer has
refused. The Company has commenced litigation against such dealer.

        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.

        The Company is taking actions to provide that their computer systems are
capable of processing for the periods in the year 2000 and beyond. The costs
associated with this are not expected to significantly affect operating cash
flow; however, the nature of their business requires that they rely on external
vendors and services who may not be year 2000 compliant. Therefore, there is no
assurance that the Company's actions in this regard will be successful.

13. 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



                                      F-22

<PAGE>
<PAGE>



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.

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.

Interest-Only Strip Receivables

        The fair value of interest-only strip receivables is 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.

Revolving Credit Borrowings, Notes Payable and Repurchase Agreement

        The fair value of the Company's debt is 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, 1997.

        The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
                                       December 31, 1996           December 31, 1997
                                     Carrying        Fair        Carrying        Fair
                                      Amount        Value         Amount        Value
                                   ------------- ------------- ------------- -------------
<S>                                  <C>          <C>           <C>          <C>        
Cash and cash equivalents            $4,121,342   $ 4,121,342   $  159,293   $   159,293
Finance contracts held for sale         228,429       228,429    1,366,114     1,366,114    
Class B certificates                 10,465,294    10,465,294    7,878,306     7,878,306
Interest-Only Strip Receivables       4,247,274     4,247,274    9,352,641     9,352,641   
Revolving credit facilities                   -             -    7,639,201     7,639,201
Notes payable                        10,174,633    10,174,633    9,841,043     9,841,043  
</TABLE>

14. Supplemental Cash Flow Disclosures

        Supplemental cash flow information with respect to payments of interest
is as follows:
<TABLE>
<CAPTION>
                   Year Ended December 31,
                 1995        1996        1997
              -----------------------------------
<S>            <C>         <C>        <C>       
Interest paid  $2,099,867  $1,885,322  $3,771,566
</TABLE>

        No income taxes were paid during fiscal 1995, 1995 or 1997. The Company
entered into capital leases totaling $565,497 during the year ended December 31,
1997.

15. SUBSEQUENT EVENTS

        The Company entered into an employment agreement, dated as of January 1,
1998, with a former outside director to serve as a consultant to the Company
until February 1, 1998, whereupon he agreed to become President of the Company
for a period of three years. The agreement provides for compensation at a base
salary of $200,000 per annum, with a one time signing bonus of $100,000 and
additional 



                                      F-23

<PAGE>
<PAGE>




performance bonuses of up to $25,000 per quarter, as approved by the CEO and the
Compensation Committee. In addition, the President received options under the
Option Plan to purchase 100,000 shares of the Company's common stock, along with
an agreement to grant additional options to purchase 50,000 of the Company's
common stock on December 1, 1998. The agreement automatically terminates upon
(i) the death of the President, (ii) the disability of the President, which
continues for a period of six months, (iii) "for cause," (iv) at the President's
option, or (v) at the Company's option. Upon such termination, the Company is
obligated to pay the President his accrued base pay through the date of such
termination, unless terminated by the Company without cause, whereupon he would
be entitled to his base pay for the remainder of the year in which such
termination occurred. Pursuant to a separate Severance Agreement, dated as of
February 1, 1998, upon the occurrence of a "change in control" the Company must
pay the President a lump sum payment equal to the sum of the base pay plus any
incentive pay for that year, plus the Company will arrange to provide, for a
period of twelve months following the termination date, such employee benefits
as are substantially similar to those that he was receiving or entitled to
receive immediately prior to such termination date.

        During January 1998, the Company privately placed $7,500,000 in
aggregate principal amount of senior subordinated notes (the "subordinated
notes") to an affiliate of BankBoston, N.A. The subordinated notes bear interest
at 15% per annum, mature on February 1, 2001 and are convertible into up to
368,462 shares of the Company's common stock at a price of $3.30 per share
(subject to adjustment). Although the subordinated notes contain customary
restrictive covenants, they do not prohibit the Company from paying dividends on
the preferred stock out of earnings legally available therefor. In addition, the
Company issued to the purchaser a warrant to purchase such shares to the extent
the notes have not been converted prior to maturity. Net proceeds from the sale
of the subordinated notes were used (i) to pay short-term liabilities, (ii) to
repay the Company's 18% convertible notes and (iii) for working capital
purposes.

        On February 20, 1998, the Company issued 1,000,000 shares of preferred
stock in a public offering at a price of $10 per share. The net proceeds from
the issuance and sale of preferred stock amounted to approximately $9,000,000
after deducting underwriter discounts and issuer expenses. Portions of the net
proceeds will be used (i) for the acquisition and financing of finance
contracts, including the funding of reserves and other credit enhancements and
(ii) for working capital and general corporate purposes. The underwriters of the
Company's public offering purchased an additional 125,000 shares of the
Company's preferred stock at $10 per share by exercising their entire
over-allotment option on February 27, 1998. The net proceeds from the issuance
and sale of the over-allotment of shares amounted to approximately $1,125,000.



16. Selected Quarterly Data (unaudited)

        The following financial data summarizes quarterly results for the
Company for the year ended December 31, 1997:


<TABLE>
<CAPTION>
                                                   Three Months Ended
                              -----------------------------------------------------------------------
                                March 31          June 30          September 30        December 30

<S>                           <C>                <C>                <C>                 <C>
Fiscal 1997

   Total revenues              $4,228,664         $6,110,826       $6,370,219          $6,161,592
   Net income                     179,028            966,869          511,814             201,753
   Earnings per common share         
     basic and diluted                .03                .15              .08                  .03

</TABLE>



                                      F-24

<PAGE>
<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(1)   of Period
-----------                                   --------------------------------------------------------
<S>                                                 <C>          <C>           <C>            <C>     
Allowance for credit losses:
  Year ended December 31, 1995                   $ 45,000     $  48,702     $         -    $ 93,702
  Year ended December 31, 1996                     93,702       412,387       (480,889)      25,200
  Year ended December 31, 1997                     25,200       612,715       (187,793)     450,122
</TABLE>

-----------
(1) Deductions were write-offs of uncollectible finance contracts


                                      F-25



<PAGE>