<PAGE>
 
<PAGE>

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 1998

                                       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)

                                 (512) 435-7000

                  Registrant's telephone number, including area code

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

AS OF MAY 12, 1998, THERE WERE 6,531,311 SHARES OF THE REGISTRANT'S COMMON
STOCK, NO PAR VALUE, OUTSTANDING.





<PAGE>
 
<PAGE>



TABLE OF  CONTENTS

<TABLE>
<S>                                                                                  <C>
PART I - FINANCIAL INFORMATION........................................................3

ITEM 1.  FINANCIAL STATEMENTS.........................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...........................................................................11

PART II.  OTHER INFORMATION..........................................................28

ITEM 1. LEGAL PROCEEDINGS............................................................28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..............................................30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................30
ITEM 5. OTHER INFORMATION............................................................30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................30

EXHIBIT 27.1.........................................................................33

SIGNATURES...........................................................................34

</TABLE>





                                     Page 2




<PAGE>
 
<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                      DECEMBER 31,        MARCH 31,
                                                          1997              1998
                                                   -------------------------------------

<S>                                                      <C>             <C>           
                      ASSETS
                      ------
Cash and cash equivalents                                $    159,293    $       60,873
Restricted funds                                            6,904,264        12,539,071
Finance contracts held for sale, net                        1,366,114         3,084,818
Collateral acquired, net                                      150,908           244,406
Class B certificates                                        7,878,306         7,899,649
Retained interest in beneficial interest of trust           5,083,213         8,789,925
Interest-only strip receivables                             9,427,986        10,092,548
Debt issuance cost                                            605,847         2,522,025
Trust receivable                                            9,627,144         8,861,634
Other assets                                                1,830,410         2,978,144
                                                   -------------------------------------
        Total assets                                      $43,033,485       $57,073,093
                                                   =====================================

       LIABILITIES AND SHAREHOLDERS' EQUITY
       ------------------------------------
Liabilities:
  Revolving credit facilities                             $ 7,639,201      $  4,679,740
  Notes payable                                             9,841,043        15,237,728
  Accounts payable and accrued liabilities                  3,386,685         1,509,271
  Bank overdraft                                            2,936,883         3,168,151
  Payable to affiliates                                       554,233         2,452,175
  Deferred income taxes                                     3,504,249         3,435,284
                                                   -------------------------------------
     Total liabilities                                    $27,862,294       $30,482,349
                                                   -------------------------------------

Commitments and contingencies

Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
  authorized; no shares and 1,125,000 shares of           
  15% Series A cumulative preferred stock, $10
  liquidation preference, issued and outstanding,
  respectively                                            $         -       $11,250,000
Common stock, no par value; 25,000,000 shares 
  authorized, 6,531,311 shares issued and outstanding           1,000             1,000
Additional paid-in capital                                  8,781,669         9,133,241
Due from shareholders                                        (187,555)         (210,055)
Unrealized appreciation on interest-only strip
  receivables                                               1,049,256         1,010,875
Retained earnings                                           5,526,821         5,405,683
                                                   -------------------------------------
     Total shareholders' equity                            15,171,191        26,590,744
                                                   -------------------------------------

        Total liabilities and shareholders' equity        $43,033,485       $57,073,093
                                                   =====================================
</TABLE>

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



                                     Page 3




<PAGE>
 
<PAGE>

                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                      THREE MONTHS ENDED
                                                                            MARCH 31,
                                                                    1997               1998
                                                                 -----------------------------

<S>                                                              <C>                 <C>       
Revenues:
  Interest income                                                $   514,092         $1,138,498
  Gain on sale of finance contracts                                3,575,747          3,867,941
  Servicing fee income                                               191,819            506,593
  Other income (loss)                                                  6,913           (161,874)
                                                                 ------------------------------
   Total revenues                                                  4,288,571          5,351,158
                                                                 ------------------------------
Expenses:
  Provision for credit losses                                              -            100,000
  Interest expense                                                   872,625          1,290,405
  Salaries and benefits                                            1,539,654          2,397,765
  General and administrative                                       1,216,024          1,084,264
  Other operating expenses                                           389,014            649,054
                                                                 ------------------------------
   Total expenses                                                  4,017,317          5,521,488
                                                                 ------------------------------
Income before income taxes                                           271,254           (170,330)
Provision for income taxes                                            92,226            (49,192)
                                                                 ------------------------------
      Net income (loss)                                              179,028           (121,138)
Other comprehensive income (loss), net of tax:
  Unrealized appreciation (depreciation) on interest-only strip
    receivables                                                      203,409            (38,381)
                                                                 ------------------------------
   Other comprehensive income (loss)                                 203,409            (38,381)
                                                                 ------------------------------
      Comprehensive income (loss)                                 $  382,437          $(159,519)
                                                                 ==============================

Earnings per common share basic:
      Net income (loss)                                                $0.03             $(0.05)
                                                                 ==============================

Earnings per common share diluted:
      Net income (loss)                                                $0.03             $(0.05)
                                                                 ==============================
</TABLE>

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




                                     Page 4




<PAGE>
 
<PAGE>


--------------------------------------------------------------------------------
                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED MARCH 31,
                                                                1997          1998

<S>                                                             <C>           <C>      
Common stock shares:
  Beginning of period                                           6,512,500     6,531,000
  End of period                                                 6,512,500     6,531,000
                                                            ============================

Preferred stock
  Beginning balance                                           $         -   $         -
  Issuance of  preferred stock in public offering                       -    11,250,000
  Ending balance                                                        -    11,250,000

Common stock:
  Beginning balance                                                 1,000         1,000
  Ending balance                                                    1,000         1,000

Additional paid-in capital:
  Beginning balance                                             8,617,466     8,781,669
  Issuance of preferred stock in public offering                         -   (1,566,559)
  Issuance/exercise of common stock warrants                            -     1,981,131
  Ending balance                                                8,617,466     9,133,241

Deferred compensation:
  Beginning balance                                               (11,422)            -
  Amortization of deferred compensation                             3,427             -
  Ending balance                                                   (7,995)            -

Due from shareholders:
  Beginning balance                                              (378,618)     (187,555)
  Payments from (to) shareholders                                 232,738       (22,500)
  Ending balance                                                 (145,880)     (210,055)

Unrealized appreciation on interest-only strip receivables:
  Beginning balance                                                     -     1,049,256
  Increase (decrease) in unrealized appreciation                  203,409       (38,381)
  Ending balance                                                  203,409     1,010,875

Retained earnings:
  Beginning balance                                             3,913,768     5,526,821
  Net income (loss)                                               179,028      (121,138)
  Ending balance                                                4,092,796     5,405,683

                                                            ============================
Total shareholders' equity                                    $12,760,796   $26,590,744
                                                            ============================
</TABLE>


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




                                     Page 5




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<PAGE>


                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED MARCH 31,
                                                               1997           1998
                                                           -----------------------------

<S>                                                         <C>            <C>         
Cash flows from operating activities:
  Net income (loss)                                         $    179,028    $  (121,138)
  Adjustments to reconcile net income to net cash used in
    operating activities:
   Amortization of finance contract acquisition discount         (11,472)             -
     and insurance
   Amortization of deferred compensation                           3,427              -
   Amortization of debt issuance costs                           211,120        347,651
   Provision for credit losses                                         -        100,000
   Depreciation and amortization                                  46,305        117,368
   Deferred income taxes                                          92,225        (49,192)
   Accretion of interest-only strip receivables                        -       (127,980)
   Impairment of interest-only strip receivables                       -        288,023
   Unrealized (gain) loss on Class B certificates                (6,913)       (116,076)
  Changes in operating assets and liabilities:
   Other assets                                               (2,900,541)    (1,265,102)
   Class B certificates                                          786,134         94,733
   Retained interest in beneficial interest of trust                   -      3,706,712
   Interest-only strip receivables                            (1,964,764)      (882,759)
   Accounts payable and accrued liabilities                     (425,183)    (1,877,414)
   Due to/due from affiliates                                    (54,998)     1,897,942
   Purchases of finance contracts                            (32,968,892)   (26,908,321)
  Sales of finance contracts                                  27,092,951     24,455,666
  Repayments of finance contracts                                204,481        526,936
                                                           -----------------------------
  Net cash used in operating activities                       (9,717,092)    (7,226,375)
                                                           -----------------------------
Cash flows from investing activities:
  Increase in restricted funds                                (2,712,832)    (5,634,807)
  Advances to AutoBond Receivables Trusts                       (659,338)       765,510
  Decrease (increase) in due from shareholders                   258,038        (22,500)
  Disposal proceeds from collateral acquired                      67,020         13,517
                                                           -----------------------------
  Net cash used in investing activities                       (3,047,112)    (4,878,280)
                                                           -----------------------------
Cash flows from financing activities:
  Net borrowings (payments) on revolving credit facilities     9,530,904     (2,959,461)
  Debt issuance costs                                           (362,974)    (2,263,829)
  Proceeds from notes payable                                     15,150      7,650,000
  Payments on notes payable                                     (765,160)    (2,253,315)
  Increase (decrease) in bank overdraft                          830,998        231,268
  Proceeds from public offering of preferred stock, net                -      9,683,441
  Issuance/exercise of common stock warrants                           -      1,918,131
                                                           -----------------------------
Net cash provided by financing activities                      9,248,918     12,006,235
                                                           -----------------------------
Net increase (decrease) in cash and cash equivalents           3,515,286        (98,420)
Cash and cash equivalents at beginning of period               4,121,342        159,293
                                                           -----------------------------
Cash and cash equivalents at end of period                  $    606,056   $     60,873
                                                           =============================
</TABLE>

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




                                     Page 6





<PAGE>
 
<PAGE>

                AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. BASIS OF PRESENTATION

        The consolidated financial statements of AutoBond Acceptance Corporation
("the Company") included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. Results for interim periods
are not necessarily indicative of the results for a full year. For further
information, refer to the audited financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended December 31, 1997 (SEC
File Number 000-21673). Certain data from the prior year has been reclassified
to conform to 1998 presentation.

2. ADJUSTMENT OF FINANCIAL STATEMENTS FOR PRIOR PERIOD

        The Company has accounted for and reported as a prior period adjustment
an item of profit and loss related to the correction of a mistake in the
consolidated financial statements during the fourth quarter for the year ended
December 31, 1997. The error involved the misidentification of funds collected
on finance contracts as allocable to an on-balance sheet warehouse facility
rather than a securitization trust, resulting in an overstatement of revenues
recorded by the Company. This mistake occurred in connection with the transfer
of servicing from a third party servicer to in-house personnel and technology.
This accounting mistake was identified by the Company's accounting personnel.
The effect of this prior period adjustment is as follows:

<TABLE>
<CAPTION>
                                        Year Ended December 31, 1997
                                        ----------------------------
                               Previously    Prior Period         Restated
                                Reported      Adjustment           Balance
                               ---------------------------------------------
                                           (Unaudited)

<S>                            <C>            <C>               <C>         
Income before income taxes     $2,874,574     $(373,351)          $2,501,223
Provision for income taxes      1,015,110      (126,940)             888,170
                               ---------------------------------------------
Net income (loss)              $1,859,464     $(246,411)          $1,613,053
                               =============================================

Earnings (loss) per common
 share:
  Basic                             $0.29        $(0.04)               $0.25
  Diluted                            0.28         (0.03)                0.25
                               =============================================

Retained earnings              $5,773,232     $(246,411)          $5,526,821
                               =============================================
</TABLE>



3. 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


                                     Page 7




<PAGE>
 
<PAGE>

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.

4. FINANCE CONTRACTS HELD FOR SALE

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

<TABLE>
<CAPTION>
                               December 31, 1997    March 31, 1998
                               -----------------------------------
                                        (Unaudited)

<S>                               <C>                <C>       
Unpaid principal balance          $1,946,135         $3,657,367
Contract acquisition discounts      (129,899)          (330,447)
Allowance for credit losses         (450,122)          (242,102)
                               -----------------------------------
                                  $1,366,114         $3,084,818
                               ===================================

</TABLE>


5. INTEREST-ONLY STRIP RECEIVABLE

        The changes in the interest-only strip receivable follow:


<TABLE>
<CAPTION>
                                         Three Months
                                             Ended
                                        March 31, 1998
                                      ------------------
                                          (Unaudited)

<S>                                         <C>        
Beginning balance                           $ 9,427,986
Unrealized appreciation                         (58,153)
Additions from securitization
  transactions                                  882,758
Accretion of discount                           127,980
Impairment charge                              (288,023)
                                            -----------
Ending balance                              $10,092,548
                                            ===========

</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 $1,531,629, net of related tax effect of $520,754, on the
valuation of the interest-only strip receivables as of March 31, 1998.
Additionally, the Company recorded a charge against earnings for permanent
impairment of interest-only strip receivables, determined on a disaggregated
basis, of $288,023 for the three months ended March 31, 1998.

6. REVOLVING CREDIT FACILITIES

        At March 31, 1998, the Company had an outstanding balance of $2,452,202
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 March 31, 1998).



                                     Page 8




<PAGE>
 
<PAGE>


        The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve accounts. Under the Sentry Facility, the
Company incurred interest expense of $84,960 for the three months ended March
31, 1998. The Sentry Facility was amended in May 1998 to add additional
representations, covenants, a general release of Sentry, the guarantee of
William O. Winsauer, and the right of Sentry to refuse future advances at its
discretion.

        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 matured 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 were 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 was payable at the lesser of (x) 30 day
LIBOR plus 1.15% 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 was 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 March 31, 1998, advances under the Daiwa Facility totaled
$47,000,000, all of which but $2,227,538 had been securitized through AutoBond
Master Funding Corporation as described in the next paragraph. The Company
incurred interest expense under the Daiwa Facility of approximately $200,979
during the three months ended March 31, 1998. The Company had no credit
availability under the Daiwa Facility at March 31, 1998 (its expiration date).
Daiwa has extended the maturity of the current advances outstanding to May 31,
1998 and in consideration thereof, the Company agreed to pay interest at the
lesser of (x) 30 day LIBOR plus 4.00% (9.69% at March 31, 1998) or (y) 11% per
annum.

        During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into a qualified unconsolidated special
purpose subsidiary, AutoBond Master Funding Corporation. 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.

        On December 31, 1997, the Company entered into a similar
warehouse/securitization arrangement with Credit Suisse First Boston Mortgage
Capital L.L.C. ("CSFB"), whereby $12.5 million of finance contracts were sold to
a qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation II. These finance contracts secured variable funding notes in the
initial amount of $11.3 million ($9.8 million at March 31, 1998). Unless
converted into a term securitization, these notes were scheduled to mature on
April 30, 1998. The Company is currently negotiating with CSFB an extension of
such maturity to May 29, 1998. If such an extension is not granted, CSFB could
declare an event of default and foreclose on the underlying pool of finance
contracts, thereby impairing the Company's interest-only strip receivable, as
well as servicing fees, in respect of such pool. These variable funding notes
bear interest at LIBOR plus 3.00% per annum. Pursuant to its agreement with
CSFB, on January 30, 1998, the Company paid down the variable funding notes in
the amount of $730,000.

        On March 31, 1998, the Company entered into a similar
warehouse/securitization arrangement with Infinity Investors Limited
("Infinity"), whereby $7.156 million of finance contracts were sold to a
qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation IV. These finance contracts secured variable funding notes in the
initial amount of $6.455 million, increasing up to $10 million. Unless converted
into a term securitization, these notes are scheduled to mature on June 30,
1998. These variable funding notes bear interest at 10% per annum through May
31, 1998 and thereafter at 17% per annum. In connection with the transaction
with Infinity, the Company issued a warrant to purchase up to 100,000 shares of
Common Stock, at an exercise price of $8.73 per share.



                                     Page 9





<PAGE>
 
<PAGE>

7. NOTES PAYABLE

        The following amounts are included in notes payable as of:

<TABLE>
<CAPTION>
                                December 31, 1997    March 31, 1998
                                -----------------------------------
                                          (Unaudited)

<S>                                    <C>               <C>   
Notes payable,collateralized
   by Class B Certificates         $7,783,219       $ 7,688,486
Subordinated notes payable                  -         7,500,000
Convertible notes payable           2,000,000                 -
Other notes payable                    57,824            49,242
                               --------------------------------
                                   $9,841,043       $15,237,728
                               ================================

</TABLE>

        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 (x) an event of default on the
convertible notes and (y) 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.

        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 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 non-recourse 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





                                    Page 10





<PAGE>
 
<PAGE>

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. The Company capitalized debt issuance costs of
$2,026,483, including the value of all warrants issued, in conjunction with this
transaction. The debt issuance cost is being amortized as interest expense on a
straight line basis through February 2001.

8. COMMITMENTS AND CONTINGENCIES

        The Company is required to represent and warrant certain matters with
respect to the finance contracts sold to the securitization 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 securitization
trusts at a price equal to the remaining principal plus accrued interest. The
Company repurchased finance contracts totaling $619,520 from a securitization
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.

ITEM 2. 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 Company's
Consolidated Financial Statements and Notes thereto and the other financial data
included herein. The financial information set forth below has been rounded in
order to simplify its presentation. However, the ratios and percentages set
forth below are calculated using the detailed financial information contained in
the Financial Statements and the Notes thereto, and the financial data included
elsewhere in this Form 10-Q. Results for interim periods are not necessarily
indicative of the results for a full year. For further information, refer to the
audited financial statements and footnotes thereto included in the Company's
Form 10-K for the year ended December 31, 1997 (SEC File Number 000-21673).

        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
re-underwrites 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





                                    Page 11





<PAGE>
 
<PAGE>

experienced significant growth in its finance contract portfolio since it
commenced operations in August 1994.

        The continued acquisition and servicing of sub-prime 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 sub-prime 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.

ADJUSTMENT OF FINANCIAL STATEMENTS FOR PRIOR PERIOD

        The Company has accounted for and reported as a prior period adjustment
an item of profit and loss related to the correction of an error in the
consolidated financial statements during the fourth quarter for the year ended
December 31, 1997. The error involved commingling of funds collected on finance
contracts belonging to the Company and to a securitization trust resulting in
(1) an overstatement of revenues recorded by the Company and (2) a failure to
remit trust collections in a timely manner. The effect of this restatement
follows:

<TABLE>
<CAPTION>
                                    Year Ended December 31, 1997
                                    ----------------------------
                               Previously    Prior Period     Restated
                                Reported      Adjustment      Balance
                               ---------------------------------------
                                           (Unaudited)

<S>                            <C>            <C>           <C>       
Income before income taxes     $2,874,574     $(373,351)    $2,501,223
Provision for income taxes      1,015,110      (126,940)       888,170
                               ---------------------------------------
Net income                     $1,859,464     $(246,411)    $1,613,053
                               =======================================

Earnings per common share:
  Basic                             $0.29        $(0.04)         $0.25
  Diluted                            0.28         (0.03)          0.25
                               ---------------------------------------

Retained earnings              $5,773,232     $(246,411)    $5,526,821
                               =======================================

</TABLE>


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 two 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





                                    Page 12





<PAGE>
 
<PAGE>

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 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 ($288,023) during the
three months ended March 31, 1998 as a result of the impairment review.
Impairment would also occur if an event of default occurred under a
securitization and the underlying finance contracts were liquidated, resulting
in insufficient proceeds to pay off the interest-only strip receivable.

        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





                                    Page 13





<PAGE>
 
<PAGE>

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. following table illustrates the gross interest:








                                    Page 14





<PAGE>
 
<PAGE>


spread for each of the Company's securitizations (dollars in thousands):

<TABLE>
<CAPTION>
                                       Remaining   Weighted
                                       Balance at  Average
                           Original    March 31,   Contract  Certificate                  Gross
     Securitization       Balance(1)       1998       Rate       Rate     Ratings(2)    Spread(3)
-------------------------------------------------------------------------------------------------
<S>                       <C>          <C>          <C>       <C>         <C>          <C>
AutoBond Receivables
  Trust 1995-A            $26,261,009  $ 8,989,592    18.9%     7.23%        Baa2         11.7%
AutoBond Receivables
  Trust 1996-A             16,563,366    7,397,239    19.7%     7.15%        Baa2         12.5%
AutoBond Receivables
  Trust 1996-B             17,832,885    8,976,471    19.7%     7.73%        Baa2         12.0%
AutoBond Receivables
  Trust 1996-C             22,296,719   14,005,713    19.7%     7.45%        Baa2         12.3%
AutoBond Receivables
  Trust 1996-D             25,000,000   16,522,353    19.5%     7.37%        Baa2         12.1%
AutoBond Receivables
  Trust 1997-A(4)          27,196,052   18,814,317    20.8%     7.82%        Baa2         13.0%
AutoBond Receivables
  Trust 1997-B             34,725,196   28,513,561    19.9%     7.66%        Baa3         12.3%
AutoBond Receivables
  Trust 1997-C             34,430,079   34,430,079    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    9,759,958    18.6%     8.73%         -            9.9%
AutoBond Master Funding
  Corporation(5)           18,411,664   18,411,664    20.3%     9.69%         -           10.6%
AutoBond Master Funding
  Corporation IV(5)         6,455,894    6,455,894    20.5%    10.00%         -           10.5%
                         --------------------------
   Total                 $267,059,301 $198,877,847
                         ==========================

</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.

        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.



                                    Page 15





<PAGE>
 
<PAGE>



FINANCE CONTRACT ACQUISITION ACTIVITY

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

<TABLE>
<CAPTION>
                                                               Three Months Ended March 31,
                                                               ----------------------------
                                                                    1997           1998
                                                               ----------------------------

<S>                                                                   <C>          <C>  
Number of finance contracts acquired                                  3,175        2,637
 Principal balance of finance contracts acquired                $34,875,869  $29,775,406
 Number of active dealerships(1)                                        336          578
 Number of enrolled dealerships                                         890        1,789

</TABLE>


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

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

RESULTS OF OPERATIONS

        Period-to-period comparisons of operating results may not be meaningful,
and results of operations from prior periods may not be indicative of future
results. The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

NET INCOME

        In the three months ended March 31, 1998, net income (loss) decreased
$300,166 to $(121,138) from $179,028 for the three months ended March 31, 1997.
The decrease in net income was primarily attributable to an increase in
infrastructure costs to support higher non-bulk finance contract acquisition and
servicing volumes and impairment charges on interest-only strip receivables. The
principal balance of finance contracts acquired decreased $5.1 million to $29.8
million for the three months ended March 31, 1998 from $34.9 million for the
three months ended March 31, 1997. The Company acquired a bulk portfolio of
$12.8 million from Credit Suisse First Boston Mortgage Capital LLC during the
three months ended March 31, 1997. Due to weakened competitors, the Company more
aggressively added qualified personnel as they became available during the past
year, and this added to the growth in salary and benefit expenses for the three
months ended March 31, 1998.

TOTAL REVENUES

        Total revenues increased $1,062,587 to $5,351,158 for the three months
ended March 31, 1998 from $4,288,571 for the three months ended March 31, 1997
due to expansion of the Company's finance contract acquisition and
securitization activities.

        Interest Income. Interest income increased $624,406 to $1,138,498 for
the three months ended March 31, 1998 from $514,092 for the three months ended
March 31, 1997 due the growth and timing of finance contract acquisitions. The
Company acquired finance contracts totaling $29.8 million during the three
months ended March 31, 1998 compared to $34.9 million in the comparable 1997
period. The Company acquired a bulk portfolio of $12.8 million from Credit
Suisse First Boston Mortgage Capital Corporation during the three months ended
March 31, 1997. Accretion on interest-only strip receivables increased $127,980
from the respective 1997 period to $127,980 during the three months ended March
31, 1997.

        Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $3,867,941 on finance contracts carried at $24.5 million (15.8%) during
the three months ended March 31, 1998. Gain on sale amounted to $3,575,747 on
finance contracts carried at $27.1 million (13.2%) in the comparable 1997



                                    Page 16






<PAGE>
 
<PAGE>


period. Accordingly, gain on sale of finance contracts rose $292,194 during
three months ended March 31, 1998 over the comparable 1997 period.

        Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the three months ended
March 31, 1998, servicing fee income was $506,593, primarily contractual
administrative fees. Servicing fee income increased by $314,774 from the three
months ended March 31, 1997 as a result of the Company's assumption of servicing
responsibilities in December 1997. Contractual servicing fees contributed
$270,239 to the increase over the past period. The ratio of servicing fee income
to the average principal balance of finance contracts outstanding increased from
 .6% for the three months ended March 31, 1997 to 1.1% during the three months
ended March 31, 1998. The Company also waived $224,640 in servicing fees during
the three months ended March 31, 1998. The Company waived these servicing fees
to enhance the liquidity of specific outstanding securitization trusts during
1998, 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 the three months ended March 31, 1998, other
income (loss) amounted to ($161,074), compared with $6,913 for the comparable
1997 period. The Company recorded a charge against earnings for permanent
impairment of the interest-only strip receivable, determined on a disaggregated
basis, of $288,023 during the three months ended March 31, 1998. Additionally,
unrealized gain on the Company's Class B certificates totaled $116,075 during
the three months ended March 31, 1998.

TOTAL EXPENSES

        Total expenses of the Company increased $1,504,171 to $5,521,488 for the
three months ended March 31, 1998 from $4,017,317 for the three months ended
March 31, 1997. The ratio of total expenses to the average principal balance of
finance contracts outstanding declined from 16.9% for the three months ended
March 31, 1997 to 10.8% for the three months ended March 31, 1998 on an
annualized basis.

        Provision for Credit Losses. Provision for credit losses on finance
contracts rose to $100,000 for the three months ended March 31, 1998 compared to
none for the three months ended March 31, 1997. The Company charged off loans,
net, totaling $398,020 to the allowance for credit losses during three months
ended March 31, 1998.

        Interest Expense. Interest expense rose to $1,290,405 for three months
ended March 31, 1998 from $872,625 for three months ended March 31, 1997.
Interest expense increased by $417,780 due to higher borrowing volumes
outstanding under the revolving credit facilities, along with increased debt
issuance costs amortization of $136,531.

        Salaries and Benefits. Salaries and benefits increased $858,111 to
$2,397,765 for the three months ended March 31, 1998 from $1,539,654 for the
three months ended March 31, 1997. 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 number of employees of the Company increased by 64 to 193
employees at March 31, 1998, compared to 129 employees at March 31, 1997.

        General and Administrative Expenses. General and administrative expenses
decreased $131,760 to $1,084,264 for the three months ended March 31, 1998 from
$1,216,024 for the three months ended March 31, 1997. This decrease was due
primarily to a reduction in professional fees. 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.






                                    Page 17





<PAGE>
 
<PAGE>

        Other Operating Expenses. Other operating expenses (consisting
principally of servicer fees, credit bureau reports and insurance) increased
$260,040 to $649,054 for the three months ended March 31, 1998 from $389,014 for
the three months ended March 31, 1997. This increase was due to increased
finance contract acquisition volume.

FINANCIAL CONDITION

        Restricted Cash. Restricted cash increased $5.6 million to $12.5 million
at March 31, 1998 from $6.9 million at December 31, 1997. 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
trustees held $7.3 million of funds advanced for the purchase of finance
contracts at March 31, 1998. The Company is also required to maintain a cash
reserve with its lenders up to 10% 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 $1.7 million to $3.1 million at
March 31, 1998, from $1.4 million at December 31, 1997. 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 Receivable. The following table provides historical
data regarding the interest-only strip receivable:

<TABLE>
<CAPTION>
                                    Three Months Ended
                                      March 31, 1998
                                    ------------------
                                        (Unaudited)

<S>                                       <C>        
Beginning balance                         $ 9,427,986
Unrealized appreciation                       (58,153)
Additions from securitization                 882,758
transactions
Accretion of discount                         127,980
Impairment charge                            (288,023)
                                    -----------------
Ending balance                            $10,092,548
                                    =================

</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



                                    Page 18





<PAGE>
 
<PAGE>


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)       Deposit     Percent
-------------------------------------------------------------------------------------
<S>                                            <C>              <C>          <C>
AutoBond Receivables Trust 1995-A(4)                $26,261,009  $  525,220    2.0%
AutoBond Receivables Trust 1996-A(4)                 16,563,366     331,267    2.0%
AutoBond Receivables Trust 1996-B(4)                 17,832,885     356,658    2.0%
AutoBond Receivables Trust 1996-C(4)                 22,296,719     445,934    2.0%
AutoBond Receivables Trust 1996-D(4)                 25,000,000     500,000    2.0%
AutoBond Receivables Trust 1997-A(2,4)               27,196,052     560,744    2.0%
AutoBond Receivables Trust 1997-B(4)                 34,725,196     868,130    2.5%
AutoBond Receivables Trust 1997-C(4)                 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           -    0.0%
AutoBond Master Funding Corporation(3)               18,411,664           -    0.0%
AutoBond Master Funding Corporation IV(3)             6,455,894           -    0.0%


</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).
(4) A portion of excess spread cash flows will increase such reserves until
they reach 6%.

        Retained Interest in Beneficial Interest of Trusts. The Company's
retained interest in beneficial interests of trusts increased $3.7 million to
$8.8 million at March 31, 1998, from $5.1 million at December 31, 1997. These
amounts relate to retained interest in amounts sold to special purpose
subsidiaries which issue variable funding notes of short-term maturities of
three to six months. If such variable funding notes are not converted into term
notes or paid-off in full at maturity, then the holder could foreclose on the
underlying finance contracts, which could impair the Company's retained
interest.

DELINQUENCY EXPERIENCE

        The following table reflects the delinquency experience of the Company's
finance contract portfolio:

<TABLE>
<CAPTION>
                                                         December 31, 1997          March 31, 1998
                                                  --------------------------------------------------

<S>                                                        <C>                      <C>         
Principal balance of finance contracts outstanding         $187,098,957             $195,458,519
Delinquent finance contracts(1):
30-59 days past due                                    21,484,450   11.48%      21,547,374     11.02%
60-89 days past due                                    10,941,753    5.85%       6,587,571      3.37%
90 days past due and over                               8,368,493    4.47%      10,057,559      5.15%
                                                  --------------------------------------------------
Total                                                 $40,794,696   21.80%     $38,192,804     19.54%
                                                  ==================================================


</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






                                    Page 19





<PAGE>
 
<PAGE>

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 1998 versus 1997 delinquency percentages since
the portfolio is tangibly more seasoned as of March 31, 1998. 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. 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 March
31, 1998. 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



                                    Page 20





<PAGE>
 
<PAGE>


than the collateral depreciates, and therefore losses and/or repossessions will
decline over time.

<TABLE>
<CAPTION>
                                   Repossession Frequency
                      ----------------------------------------------------
                     Principal Balance of                                    Principal Balance
 Year and Quarter of   Repossessions by                                         of Contracts
     Acquisition       Quarter Acquired   Cumulative(1)     Annualized(2)        Acquired
--------------------------------------------------------------------------------------------
<S>                   <C>                 <C>               <C>              <C>
1994
  Q3                     $    22,046          21.79%            5.81%         $    101,161
  Q4                         595,429          24.43%            6.98%            2,437,674
1995    
  Q1                       1,715,862          27.19%            8.37%            6,310,421
  Q2                       1,661,098          26.83%            8.94%            6,190,596
  Q3                       1,904,431          26.30%            9.57%            7,239,813
  Q4                       3,467,265          28.45%           11.38%           12,188,863
1996
  Q1                       3,992,695          25.82%           11.48%           15,460,823
  Q2                       4,975,988          26.87%           13.43%           18,520,410
  Q3                       5,107,393          18.18%           10.39%           28,098,899
  Q4                       5,150,395          21.07%           14.05%           24,442,500
1997
  Q1                       6,256,486          17.94%           14.35%           34,875,869
  Q2                       5,018,535          14.21%           14.21%           35,305,817
  Q3                       2,757,864           7.96%           10.62%           34,629,616
  Q4                         644,753           1.46%            2.92%           44,120,029
1998
  Q1                         126,683           0.43%            1.70%           29,775,406
 
</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 $595,429 in
repossessions divided by principal balance of $2,437,674 in contracts acquired,
divided by 14 quarters outstanding times four equals an annual repossession
frequency of 6.98%).

NET LOSS PER REPOSSESSION

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



                                    Page 21




<PAGE>
 
<PAGE>


table demonstrates the net charge-off per repossessed automobile since
inception.

<TABLE>
<CAPTION>
                                                                        From August 1,
                                                                       1994 (Inception)
                                                                       to March 31, 1998
                                                                       ------------------

<S>                                                                               <C>   
Number of finance contracts acquired                                               26,023
Number of vehicles repossessed                                                      4,125
Repossessed units disposed of                                                       1,762
Repossessed units awaiting disposition(1)                                           2,363
Cumulative gross charge-offs(2)                                               $18,906,287
Costs of repossession(2)                                                          881,075
Proceeds from auction, physical damage insurance and refunds(2)               (10,332,360)
                                                                       ------------------
Net loss                                                                        9,455,002
Deficiency insurance settlements received(2)                                   (5,488,289)
                                                                       ------------------
Net charge-offs(2)                                                             $3,966,713
                                                                       ==================
Net charge-offs per unit disposed                                                  $2,251
Net loss as a percentage of cumulative gross charge-offs                            50.01%
Recoveries as a percentage of cumulative gross charge-offs(3,4)                     83.68%


</TABLE>

----------------------------------------------------------------------
(1) The vehicles may have been sold at auction; however the Company might not
have received all insurance proceeds as of March 31, 1998.

(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 March 31, 1998.

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

(4) Includes the effect of certain loans included in term securitization
1997-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 $7.2 million during the three months
ended March 31, 1998. The Company used $26.9 million to purchase finance
contracts and $24.5 million was received from sales of finance contracts,
primarily through securitizations during the three months ended March 31, 1998.

        Significant activities comprising cash flows from investing activities
include net increases in restricted cash of $5.6 million for the three months
ended March 31, 1998. Cash flows from financing activities include proceeds from
notes payable of $7.7 million for the three months ended March 31, 1998.

        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.



                                    Page 22






<PAGE>
 
<PAGE>

        At March 31, 1998, the Company had an outstanding balance of $2,452,202
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 (i) cable 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 March 31, 1998).

        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 $84,960 for the three months ended March
31, 1998. The Sentry Facility was amended in May 1998 to add additional
representations, covenants, a general release of Sentry, the guarantee of
William O. Winsauer, and the right of Sentry to refuse future advances at its
discretion.

        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 matured 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 were 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 was payable at the lesser
of (x) 30 day LIBOR plus 1.15% 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 was 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 March 31, 1998, advances under the Daiwa Facility totaled
$47,000,000, of which all but $2,227,538 had been securitized through AutoBond
Master Funding Corporation as described in the next paragraph. The Company
incurred interest expense under the Daiwa Facility of approximately $200,979
during the three months ended March 31, 1998. The Company had no credit
availability under the Daiwa Facility at March 31, 1998 (its expiration date).
Daiwa has extended the maturity of the current advances outstanding to May 31,
1998 and in consideration thereof, the Company agreed to pay interest at the
lesser of (x) 30 day LIBOR plus 4.00% (9.69% at March 31, 1998) or (y) 11% per
annum.

        During 1997, the Daiwa Facility was amended to allow the Company, at its
election, to transfer finance contracts into a qualified unconsolidated special
purpose subsidiary. 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.

        On December 31, 1997, the Company entered into a similar
warehouse/securitization arrangement with Credit Suisse First Boston Mortgage
Capital L.L.C. ("CSFB"), whereby $12.5 million of finance contracts were sold to
a qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation II. These finance contracts secured variable funding notes in the
initial amount of $11.3 million ($9.8 million at March 31, 1998). Unless
converted into a term securitization, these notes were scheduled to mature on
April 30, 1998. The Company is currently negotiating with CSFB an extension of
such maturity to May 29, 1998. If such an extension is not granted, CSFB could
declare an event of default and foreclose on the underlying pool of finance
contracts, thereby impairing the Company's interest-only strip receivable, as
well as servicing fees, in respect of such pool. These variable funding notes
bear





                                    Page 23





<PAGE>
 
<PAGE>

interest at LIBOR plus 3.00% per annum. Pursuant to its agreement with CSFB, on
January 30, 1998, the Company paid down the variable funding notes in the amount
of $730,000.

        On March 31, 1998, the Company entered into a similar
warehouse/securitization arrangement with Infinity Investors Limited
("Infinity"), whereby $7.156 million of finance contracts were sold to a
qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation IV. These finance contracts secured variable funding notes in the
initial amount of $6.455 million, increasing up to $10 million. Unless converted
into a term securitization, these notes are scheduled to mature on June 30,
1998. These variable funding notes bear interest at 10% per annum through May
31, 1998 and thereafter at 17% per annum. In connection with the transaction
with Infinity, the Company issued a warrant to purchase up to 100,000 shares of
Common Stock, at an exercise price of $8.73 per share.

        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 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 non-recourse 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%. The Company capitalized debt issuance
costs of $2,292,793, including the value of all warrants issued, in conjunction
with this transaction. The debt issuance cost is being amortized as interest
expense on a straight line basis through February 2001. 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




                                    Page 24





<PAGE>
 
<PAGE>

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
March 31, 1998, the Company held interest-only strip receivables and Class B
Certificates totaling $18.0 million, substantially all of which had been pledged
to collateralize notes payable of $15.2 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 sub-prime auto paper. Additionally, gain on sale of
finance contracts represents a significant portion of the 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.

        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





                                    Page 25





<PAGE>
 
<PAGE>

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.

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.





                                    Page 26






<PAGE>
 
<PAGE>

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.





                                    Page 27





<PAGE>
 
<PAGE>


                           PART II. OTHER INFORMATION

ITEM 1. 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 well as claims for damages based
upon breach of contract, bad faith and fraud. The Company has received the
defendants' answers, denying the Company's claims. 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
similar action for declaratory relief in the United States Court for the
Northern District of Illinois. Both suits have been voluntarily dismissed, and
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.

        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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        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




                                    Page 28




<PAGE>
 
<PAGE>

per share. While any shares of the Preferred Stock are outstanding, neither the
Company nor any affiliate nor any person acting on behalf of the Company or any
of its affiliates will (i) declare, pay or set apart funds for the payment of
any dividend or other distribution of cash or other property declared or made
directly or indirectly by the Company or any such affiliate or person with
respect to any Common Stock or (ii) redeem, purchase or otherwise acquire for
consideration any Common Stock through a sinking fund or otherwise (other than a
redemption or purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan of the Company or any
subsidiary) or (iii) pay or distribute any cash or other property for the
benefit of any holder of Common Stock in respect thereof, directly or
indirectly, unless (A) all cumulative dividends with respect to the Preferred
Stock at the time such dividends are payable have been paid or such dividends
have been declared and funds have been set apart for payment of such dividends
and (B) sufficient funds have been paid or set apart for the payment of the
dividend for the current dividend period with respect to the Preferred Stock.

        In the event of any liquidation, dissolution or winding up or the
Company, holders of shares of Preferred Stock are entitled to receive, out of
legally available assets, a liquidation preference of $10.00 per share, plus an
amount equal to any accrued and unpaid dividends to the payment date, and no
more, before any payment or distribution is made to the holders of Common Stock
or any series or class of the Company's stock hereafter issued that ranks junior
as to the liquidation rights to the Preferred Stock, but the holders of the
shares of the Preferred Stock will not be entitled to receive the liquidation
preference on such shares until the liquidation preference of any other series
or class of the Company's stock previously or hereafter issued that ranks senior
as to liquidation rights to the Preferred Stock has been paid in full.

        If two quarterly dividends payable on the Preferred Stock are in
arrears, whether or not earned or declared, the number of directors then
constituting the Board will be increased by three and the holders of Preferred
Stock will have the right to elect three additional directors to serve on the
Board at an annual meeting of stockholders or special meeting held in place
thereof, or at a properly called special meeting of the holders of the Preferred
Stock and at each subsequent annual meeting of stockholders or special meeting
held in place thereof, until all such dividends in arrears and dividends for the
current quarterly period on the Preferred Stock have been paid or declared and
set aside for payment. Notwithstanding the foregoing, the total number of
directors elected by the holders of the Preferred Stock and the preferred
stockholders' representative will not exceed three.

        The approval of the holders of two-thirds of the outstanding shares of
Preferred Stock will be required in order to amend the Articles of Incorporation
or Bylaws to affect materially and adversely the rights, preferences or voting
power of the holders of the Preferred Stock or to authorize, create, or increase
the authorized amount of, any class of stock having rights prior or senior to
the Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up or change any provision of the Articles
or Incorporation or Bylaws that relate to the Board of Directors or the election
of directors or approve any merger or consolidation involving the Company or a
sale of all or substantially all of the assets of the Company. However, the
Company may create additional classes, shares or series of preferred stock which
rank on a parity with the Preferred Stock with respect, in each case, to the
payment of dividends and amounts upon liquidation, dissolution or winding up of
the Company, with the consent of the holders of a majority of the outstanding
shares of Preferred Stock, and may create classes of Common Stock, increase the
authorized number of shares of Common Stock and issue additional series of
Common Stock without the consent of any holder of Preferred Stock.

        Notes Payable. 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"). The Subordinated Notes were issued 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
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). Under the Indenture, the Company is prohibited from
paying dividends or redeeming its Common Stock if a default has occurred or if,
after giving effect to such restricted payment, the Company's debt/equity ratio
would exceed 2:1.



                                    Page 29




<PAGE>
 
<PAGE>

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None.

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

        None.

ITEM 5. OTHER INFORMATION

        After the Company's Annual Meeting of Shareholders on May 12, 1998, the
Company was notified by its independent auditors, Coopers & Lybrand LLP
("Coopers"), that Coopers would no longer serve as the Company's
independent auditors. Thereafter, the Company's audit committee approved
Coopers' decision. Coopers' report on the Company's financial statements
included in the Company's 1997 Annual Report on Form 10-K contained statements
emphasizing that the Company's most significant warehouse facility, which
expired on March 31, 1998 had been extended to April 30, 1998 and that
the Company was in negotiations with other parties for additional
warehouse and securitizations facilities.

        There were no disagreements between the Company and Coopers as to
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure with respect to the 1997 audit or any interim period
hereafter. With respect to the 1996 audit the Company and Coopers did disagree
over the treatment of premiums paid by the Company to procure physical damage
and deficiency balance insurance for certain finance contracts included in
securitization trusts. The additional credit enhancement provided by such
insurance allowed the Company's subsidiary to issue rated debt secured by excess
spread cash flows from the trusts, and the Company believed that the appropriate
accounting treatment was to capitalize at least part of the premiums paid over
the expected life of the debt. Coopers disagreed and required the current
expensing of all such premiums. The disagreement was discussed by the Company's
board of directors with Coopers and was resolved to Coopers' satisfaction, and
such premiums have been expensed in the period incurred. The Company has
authorized Coopers to respond fully to the inquiries of the Company's successor
auditors as to the nature of the disagreement. During 1996 and prior
to the Company's initial public offering in November 1996, Coopers did advise
the Company as to the Company's need to improve the internal accounting controls
necessary to develop reliable financial statements. In its 1996 and 1997 Reports
to Management, Coopers also advised the Company of certain matters involving the
internal control structure and its operation that Coopers considered to be
"reportable conditions" that could adversely affect the ability to report
financial data consistent with the assertions of management in the financial
statements, none of which conditions were deemed material to the point of
requiring financial statement disclosure.


        The Company and Coopers are currently in discussions as to certain
limited engagements by Coopers on behalf of the Company, including the rendering
of Coopers' report on the financial statements to be included in the Company's
upcoming amendment to its 1997 Annual Report on Form 10-K. The Company has
commenced discussions with another accounting firm with respect to such firm's
engagement as auditors for the Company.

        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 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."

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

<TABLE>
<CAPTION>

EXHIBIT NO.                             DESCRIPTION OF EXHIBIT
-----------                             -----------------------
<C>           <S>
3.1 *         Restated Articles of Incorporation of the Company
3.2 *         Amended and restated Bylaws of the Company
3.3 ++        Certificate of Designation  for the Company's 15% Series A Cumulative
              Preferred Stock
4.1 *         Specimen Common Stock Certificate
4.2 xx        Specimen Preferred Stock Certificate
10.1*         Amended and Restated Loan Origination, Sale and Contribution
              Agreement dated as of December 15, 1995 by and between the Company
              and AutoBond Funding Corporation I
10.2*         Security Agreement dated as of May 21, 1996 among AutoBond
              Funding Corporation II, the Company and Norwest Bank Minnesota,
              National Association
10.3*         Credit Agreement and Side Agreement, dated as of May 21, 1996
              among AutoBond

</TABLE>


                                    Page 30




<PAGE>
 
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.                             DESCRIPTION OF EXHIBIT
-----------                             -----------------------
<C>           <S>

              Funding Corporation II, the Company and Peoples Life Insurance
              Company
10.4 *        Servicing Agreement dated as of May 21, 1996 among AutoBond
              Funding Corporation II, CSC Logic/MSA L.L.P., doing business as
              "Loan Servicing Enterprise", the Company and Norwest Bank
              Minnesota, National Association
10.5 *        Loan Acquisition Sale and Contribution Agreement dated as of May
              21, 1996 by and between the Company and AutoBond Funding
              Corporation II
10.6 *        Second Amended and Restated  Secured  Revolving  Credit Agreement dated as
              of July 31, 1995 between Sentry Financial Corporation and the Company
10.7 *        Management Administration and Services Agreement dated as of
              January 1, 1996 between the Company and AutoBond, Inc.
10.8 *        Employment  Agreement  dated November 15, 1995 between Adrian Katz and the
              Company
10.9 *        Employment  Agreement  effective  as of May 1,  1996  between  William  O.
              Winsauer and the Company
10.10 *       Vender's  Comprehensive Single Interest Insurance Policy and Endorsements,
              issued by Interstate Fire & Casualty Company
10.11 *       Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.12 *       Employee Stock Option Plan
10.13 *       Dealer Agreement dated November 9, 1994, between the Company and
              Charlie Thomas Ford, Inc.
10.14 *       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 +       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 +       Credit Agreement, dated as of February 1, 1997, among AutoBond
              Funding Corporation II, the Company and Daiwa Finance Corporation
10.17 +       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 +       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 x       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 **      Credit Agreement, dated as of June 30, 1997, by and among
              AutoBond Master Funding Corporation, the Company and Daiwa Finance
              Corporation
10.21 **      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 **      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 xx      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 xx      Trust Indenture, dated as of December 31, 1997, among AutoBond
              Master Funding Corporation II, the Company and Manufacturers and
              Traders Trust Company
10.25 xx      Receivables Purchase Agreement, dated as of December 31, 1997,
              between Credit Suisse First Boston Mortgage Capital L.L.C. and
              the Company
10.26 xx      Servicing Agreement, dated as of December 31, 1997, among the
              Company, AutoBond Master Funding Corporation II and Manufacturers
              and Traders Trust Company
10.27 xx      Indenture and Note, dated January 30, 1998, between the Company
              and Bank Boston, N.A.
10.28 xx      Warrant, dated January 30, 1998, issued to BancBoston
              Investments, Inc.
10.29 xx      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.



</TABLE>






                                    Page 31




<PAGE>
 
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.                             DESCRIPTION OF EXHIBIT
-----------                             -----------------------
<C>           <S>
10.31 ++      Warrant Agreement and Warrant, dated February 20, 1998, issued to
              Tejas Securities Group, Inc.
10.32 xx      Consulting and Employment Agreement, dated as of January 1, 1998
              between Manuel A. Gonzalez and the Company
10.33 xx      Severance Agreement, dated as of February 1, 1998 between Manuel
              A. Gonzalez and the Company
10.34         1998 Stock Option Plan
10.35         Third Amendment to the Secured Revolving Credit Agreement dated
              May 5, 1998 between Sentry Financial Corporation and the Company
10.36         Warrant, dated March 31, 1998, issued to Infinity Investors Limited
21.1 **       Subsidiaries of the Company
21.2 xx       Additional Subsidiaries of the Company
27.1          Financial Data Schedule

</TABLE>

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

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

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

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

++ Incorporated by reference to the Company's 1997 annual report on Form 10-K
for the year ended December 31, 1997.

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

(B) EXHIBITS

        No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.



                                    Page 32





<PAGE>
 
<PAGE>


                                   SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 15, 1998.

                                      AUTOBOND ACCEPTANCE CORPORATION


                                      BY:  /S/ WILLIAM O. WINSAUER
                                         _______________________________________
                                      WILLIAM O. WINSAUER, CHAIRMAN OF THE BOARD
                                                     AND CHIEF EXECUTIVE OFFICER


                                      BY:  /S/ ADRIAN KATZ
                                         _______________________________________
                                         ADRIAN KATZ, VICE CHAIRMAN OF THE
                                              BOARD, CHIEF OPERATING OFFICER AND
                                                         CHIEF FINANCIAL OFFICER





                                    Page 34



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