HARRELL INTERNATIONAL, INC.
  211 East Louisiana Street
  McKinney, Texas 75069
  
  Form 10-KSB
  
  For the fiscal year ended:
  September 30, 1998
  
  
  
  Submitted to
  
  
  
  
  
  SECURITIES AND EXCHANGE COMMISSION
  Washington, D. C.
  
  Commission File No. 0-2661
  
  SECURITIES AND EXCHANGE COMMISSION
  Washington, D. C. 20549
  
  FORM 10-KSB.
  
   ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
   THE SECURITIES EXCHANGE ACT OF 1934
  
  For the fiscal year ended:         Commission File No.: 
   September 30, 1998                        0-2661
  
  HARRELL INTERNATIONAL, INC.
  (Exact name of registrant as specified in its charter)
  
       Delaware                 13-1946181
  (State of Incorporation)      (I.R.S. Employer Id. No.)
                                  
          211 East Louisiana Street, McKinney, Texas 75069
        (Address of principal executive offices)  (Zip Code)
                                  
  Registrant's telephone number, including area code: (972)
  542-9525
    Securities registered pursuant to Section 12(b) of the
  Act:
                                  
                                None
                                  
    Securities registered pursuant to Section 12(g) of the
  Act:
  
                 Class A Common Stock, Par Value $.01
                           (Title of Class)
  
                      Indicate by check mark whether the
  registrant (1) has filed all reports required to
  be filed by Section 13 or 15(d) of the Securities Exchange
  Act of 1934 during the preceding 12
  months (or for such shorter period that the registrant was
  required to file such reports), and (2)
  has been subject to such filing requirements for the past 90
  days.
  
                 (1)  YES   X     NO      
                 (2)  YES   X     NO      
  
       Check if there is no disclosure of delinquent filers in
  response to Item 405 of Regulation
  S-B is not contained in this form, and no disclosure will be
  contained, to the best of registrant's knowledge, in
  definitive proxy or information statements incorporated by
  reference in Part III of this form 10-KSB or any amendment
  to this Form 10-KSB. [ X]
       
        Issuer's revenues for its most recent fiscal year
  $628,518  
       
       The aggregate market value of the registrant's Class A
  Common Stock held by non-affiliates of the registrant,
  computed by reference to the average bid and asked prices of
  such stock as of July 1, 1991, the last available quotation
  date:  Approximately $95,099.
  
       The number of shares of the registrant's Class A, $.01
  par value Common Stock outstanding as of September 30,1998
  was 976,580.  The number of shares of the registrant's $1
  par value preferred stock outstanding as of September 30,
  1998 was 243,331.
  
       In October 1997, the Company changed transfer agents
  from Chase Mellon to Registrar and Transfer Company. When
  transferring the records to Registrar and Transfer Company,
  Chase Mellon showed additional shares of common stock of the
  Company as being issued and outstanding. Chase Mellon gave
  no explanation for this discrepancy, and for the past
  several years has consistently reported the number of shares
  outstanding as approximately 976,580.  The Company has made
  three written inquiries to Chase Mellon but has received no
  response.  The Company will continue to follow up. It is not
  known at this time whether Chase Mellon's records are in
  error, and for purposes of this report and until a 
  satisfactory answer is received from Chase Mellon, the
  Company shall continue to use 976,580 as the number of
  outstanding shares.
  
         
  
                                PART I
  
  Item I. Description of Business
  
       Since September 30, 1990, the Company's intention has
  been to engage in the acquisition, development and
  management of real estate properties directly and through
  affiliates, including joint ventures and partnerships (in
  which its interests would be that of a general partner
  having substantial involvement or participation in
  management).  The Company focused  its initial real estate
  activities upon purchase, development and management of
  condominiums, apartments and other residential properties
  located in the Southwestern and Southeastern United States
  but did not rule out the possibility of pursuing similar
  opportunities with respect to office buildings, shopping
  centers and other commercial real estate projects throughout
  the United States and abroad.
  
       These proposed activities  of the Company  were
  intended to be structured in such a way as to preclude the
  Company from being deemed to be an investment company for
  purposes of the Investment Company Act of 1940.
       
       In August 1992, with the Company's acquisition of Hotel
  Management Group, Inc., the Company expanded its focus to
  include the acquisition, development, and management of
  hotels,directly and through affiliates.
  
  
                                HISTORY
  
       HARRELL INTERNATIONAL, INC. (the "Company") is a
  Delaware corporation which was originally incorporated in
  1959 in Massachusetts under the name of Formula 409, Inc. 
  In 1967, the Company's name was changed to The Harrell
  Corporation and in 1968 to Harrell International, Inc.  The
  Company changed its state of incorporation from 
  Massachusetts to Delaware in March, 1987.  The Company
  originally manufactured and sold a multi-purpose
  household spray cleaner under the registered trademark
  "Formula 409."  In 1970, the Company sold the rights to
  "Formula 409" to Clorox Corporation.  During the period 1970
  to 1983 the Company was primarily engaged in the business of
  acquiring and operating food and non-food brokers which
  represented the products of various unrelated manufacturers
  to either the U. S.Domestic Civilian Market or to the U. S.
  Military Resale System.  In 1983, the Company completed the
  divestiture of its consumer products brokerage businesses
  and entered a phase during which its revenues were derived
  primarily from the collection of receivables acquired in
  connection with such divestitures. 
  
       During fiscal 1988, the Company continued to attempt to
  develop a business as an international marketing agent for
  foreign-produced goods in the United States and for U.S.
  products abroad.  However, because of  disappointing results
  and the high costs of continuing to operate the Company, the
  Board of Directors decided to explore the liquidation or
  reorganization of the Company.
  
       During the fall of 1988, Wilson Harrell, then President
  of the Company,  began the search for a possible merger
  candidate, and to negotiate the sale of notes receivable
  from the divestiture of its consumer product brokerage
  business.  The Company and Sarvis,  Incorporated entered
  into a Note Purchase Agreement dated as of August 15, 1989. 
  The sale of the Sarvis Note was consummated on October 11,
  1989.
  
       Following the sale of the Sarvis Note, the Company
  continued searching for a possible merger candidate.  In
  early March, 1990, Wilson Harrell renewed discussions with
  Geoffrey G.Dart ("Dart"), of Clover, Inc.,  an Australian
  businessman with whom the Company had negotiated to the
  point of a verbal understanding in September, 1988.
  
       On June 12, 1990,  the Company and Clover, Inc.
  ("Clover") entered into a  Stock Purchase Agreement.
  
       Pursuant to the Stock Purchase Agreement, as amended in
  August 1990, in exchange for a purchase price of $500,000,
  Clover was issued certain shares of Class A Common Stock and
  warrants to purchase shares of a new Class B stock.  In
  addition, Dart was elected president and CEO and added as a
  new director.  Clover paid $65,000 at closing with the
  remainder due within approximately six months, in two
  installments of $185,000 and $250,000 respectively.
  
       Clover failed to make either additional payment and on
  December 23, 1991,  the Company and Clover entered into a
  Restructuring Agreement. 
  
       In light of Clover's failure to make the additional
  installments  and the Company's need for capital in order to
  pursue the business plan discussed above, the Company
  determined that it should seek a new capital partner.  On
  December 23, 1991, the Company's Board of Directors
  authorized Wilson Harrell and Geoffrey Dart to actively seek
  such a partner. 
  
       In October 1991, the Company borrowed $50,000 from
  Xenex International, Inc., a Florida corporation.  In 1992
  the Company and Xenex entered into agreements whereby Xenex
  agreed to treat the $50,000 loan as an equity investment in
  the Company and invest an additional $100,000 into the
  Company in exchange for 291,228 shares of the Company's 
  common stock. In 1993 Xenex loaned the Company $150,000, and
  in 1994 the parties entered into an agreement (the "Debt
  Agreement") to convert the loan into stock of the Company.
  
       On December 15, 1994, Agreement was reached between
  Businesship International, Inc.("BI") and its wholly owned
  subsidiary Xenex, Inc. to merge Xenex, Inc. into Businesship
  International, Inc.  The effect was to transfer 291,228
  shares of the Company's Common Stock from Xenex, Inc. to BI.
  
       Effective as of September 1, 1996 the Company and BI
  entered into a Preferred Stock Purchase and Release of Debt
  Agreement (the "Modification Agreement") that modified and
  replaced the Debt Agreement.  Under the terms of the
  Modification Agreement, the parties agreed that the Company
  would issue 243,331 shares of $1.00 , a new class of par
  value preferred stock (the "Preferred Stock") in exchange
  for a release of the Company's obligation to BI on the Xenex
  Loan.  Under the Modification Agreement the Preferred Stock
  is  nonconvertible, nonvoting, noncumulative dividend, with
  dividends of 10% of par value.  The Company has the right,
  but not the obligation, to redeem the Preferred Shares at
  any time at par value. The Preferred Shares are not 
  registered under federal securities laws or the laws of any
  state.
  
       On December 31, 1996, the Articles of Incorporation of
  the Company were amended to authorize 1,000,000 shares of
  Preferred Stock and to eliminate the Class B Common Stock. 
  On December 31, 1996, the closing of the Modification
  Agreement occurred and the 243,331 shares of Preferred Stock
  were issued to BI.
  
  
  
                              OPERATIONS
  
       In furtherance of the Company's intention at September
  30, 1990, to acquire, develop and manage real estate
  projects, the Company has, since December, 1990, entered
  into the three separate transactions involving residential
  real estate, the Riviera Project, the Villa Martinique
  Project and the Athena Garden Project.   All such
  transactions included as a component the Company's entering
  into a joint venture agreement with another corporation and
  the acquisition by such joint venture of an interest in an
  existing apartment complex.  After any necessary
  renovations, the apartment complexes were, and in the case
  of Villa Martinique and Athena Gardens,  continue to be,
  operated by the joint ventures.
  
  Riviera Project
  
       The Riviera Project, a 37 unit apartment complex in
  Dallas, Texas, was managed by the Company for about five and
  one-half years, then sold in August 1996.  The net proceeds
  from the sale was approximately equal to the investment in
  the property.
  
  Villa Martinique Project
  
       The Company entered into a joint venture agreement
  dated July 15, 1991, with Villa Martinique Investors
  Corporation, a Texas corporation ("VMIC"), forming the
  "Villa Martinique Apartments  Joint Venture." VMIC
  contributed $275,000 to the venture's capital and the
  Company contributed 80.714% of its rights in an agreement
  dated June 17, 1991, to purchase a 146 unit apartment
  complex (the "VM Project") known as the Villa Martinique
  Apartments located in Irving, Texas, from Home Savings of
  America, F.A. ("Home Savings").  The Company's remaining
  19.286% interest in the contract was assigned to Wilson L.
  Harrell in consideration for his agreement to be a co-maker
  with VMIC of the purchase money promissory note.  On August
  13, 1991, the VM Project was acquired by the Villa
  Martinique Joint Venture and Wilson L. Harrell from Home
  Savings for a purchase price of $1,750,000.
  
       Pursuant to the joint venture agreement, 87.6% and
  12.4% of the joint venture's distributable cash, less
  reasonable reserves, was distributable to VMIC and the
  Company,respectively.  The Company's 12.4% interest in the
  venture equated to a 10% interest in the VM Project. 
  Although VMIC and the Company shared equally the right to
  manage the venture, the Company supervised the venture's
  day-to-day operations, through Hotel Management Group.
  
       On July 13, 1994, the Company, along with the other
  partners of Villa Martinique Apartments Joint Venture
  entered into a Compromise, Settlement and Release Agreement
  (the "Settlement") with Home Savings, settling claims by the
  venture against Home Savings as seller of the Villa
  Martinique Project for roof problems, which caused the
  complex to experience leaking and ceiling failures rendering
  15 units uninhabitable.   The Settlement called for a new
  roof being installed at the Villa Martinique Project, as
  well as an allowance for other minor repairs.
  
       Additionally, the partners negotiated a reduction in
  the interest rate on the Mortgage and an increase of
  $100,000 to the Mortgage, which amount has been used to make
  other improvements to the property.
  
       In order to enhance the Company's liquidity,  on
  November 30, 1996, the Company sold its 10% interest in the
  Villa Martinique Apartments Joint Venture to the Villa
  Martinique Investors Corporation, the Company's joint
  venture partner in the apartment project, for the sum of
  $38,889, payable as to $29,020 in cash at closing with a
  note in the amount of $9,869 bearing interest at the prime
  rate, with principal and interest  all due in 2 years.  The
  VM Project continues to be operated by Hotel Management
  Group.
  
  
  
  
  Athena Gardens Project
  
       The Company entered into a joint venture agreement
  dated November 26, 1991, with Athena Gardens Investors
  Corporation, a Texas corporation ("AGIC"), forming the
  "Athena Gardens Joint Venture."  AGIC contributed $235,500
  to the venture's capital and the Company contributed its
  rights in an agreement dated October 9, 1991, to purchase a
  72-unit apartment complex (the "AG Project") known as the
  Athena Gardens Apartments located in Athens, Texas, from
  Camarilla Development, Inc. for $600,000.  Financing in the
  amount of $420,000 was secured from First State Bank of
  Athens, Texas, in order to complete the acquisition.
  
       Pursuant to the joint venture agreement between the
  Company and AGIC, 80% and 20% of the venture's distributable
  cash is distributed to AGIC and the Company, respectively. 
  Although AGIC and the Company share equally the right to
  manage the venture, the Company supervises the venture's
  day-to-day operations, through Hotel Management Group.
  
       In order to enhance the Company's liquidity,  on August
  20, 1996,  the Company sold its 20% Interest in Athena
  Garden Apartments Joint Venture, to AGIC, the Company's
  joint venture partner in the apartment project, for the sum
  of $100,000.  The AG Project continues to be operated by
  Hotel Management Group, Inc.  
       
  
  Hotel Management Group Transaction
  
       On August 18,  1992, the Company entered into an
  Agreement with Hotel Management Group, Inc., a Texas
  corporation ("HMG"), wherein the Company acquired one
  hundred percent (100%) of HMG's issued and outstanding
  shares in exchange for 200,000 shares of the Company's
  Class A Common Stock. 
  
       On September 1, 1993, the Company completed the
  acquisition of Hotel Management Group, Inc. 
  
  Apartment Management
  
       Effective November 2, 1992,  Hotel Management Group
  assumed the management of the Athena Gardens, Riviera and
  Villa Martinique apartments at that time, and continues to
  operate Athena Gardens and Villa Martinique Apartments at
  September 30, 1998.
  
  HOTEL MANAGEMENT
  
       Hotel Management Group - California, Inc.("HMG
  California")
  
            Effective January 1, 1994, Hotel Management Group,
  Inc. formed a wholly owned subsidiary, Hotel Management
  Group - California, Inc., to hold the management contract
  for the operations of the Biltmore Hotel and Suites in Santa
  Clara,California.  The Biltmore Hotel is a 262 room full
  service hotel with 8,000 square feet of meeting space. HMG
  California's management contract is a two-year renewable
  contract that began in January 1992 and has a current
  expiration of December 31, 1999. HMG California receives a
  management fee equal to ten percent (10%) of the hotel's net
  income pre debt, after a 3% reserve for furniture,fixtures
  and equipment.
  
            HMG California entered into a management contract
  of the Rancho Santa Barbara Marriott in May 1995.The
  Marriott is a 149 room full service hotel with 8,000 square
  feet of meeting space and health and spa facilities.  HMG
  California's management contract is a two-year renewable
  contract that began in June 1995 and has a current
  expiration of December 31, 1999.  HMG California receives a
  management fee equal to ten percent (10%) of the hotel's net
  income pre-debt,after a 3% reserve for furniture, fixtures
  and equipment.
  
       Hotel Management- Tennessee, Inc. ("HMG Tennessee")
  
            On October 17, 1996, for the sum of $100,000,  the
  Company purchased a minority limited partnership interest in
  the Sheraton Four Points Hotel, located near the Memphis
  Airport in Memphis, Tennessee.  At the same closing a
  subsidiary of the Company, HMG Tennessee,  contracted with
  the new ownership to manage the hotel.  
  
            After undergoing substantial renovation in 1996
  and 1997, the hotel failed to reach budgeted profitability
  figures.  The majority owner, an affiliate of Lehman
  Brothers, agreed to purchase the limited partnership
  interest of the Company for its original investment of
  $100,000.  The transaction closed in April 1998, and HMG
  Tennessee resigned as manager of the hotel. Pursuant to the
  resignation agreement, HMG Tennessee was to be paid certain
  outstanding management fees by  the limited partnership. 
  However, to date, the partnership, citing lack of funds, has
  not paid the remaining amount of $33,247.66.
                           
       Hotel Management- Oklahoma, Inc. ("HMG Oklahoma")
  
            On June 4, 1997, the Company acquired a limited
  partnership interest in the Ramada Inn, located on I-44 in
  Tulsa, Oklahoma. At the same closing a subsidiary of the
  Company, HMG Oklahoma, contracted with the new ownership to
  manage the hotel.
  
            Hotel Management Group, Inc. ("HMG") was not paid
  a fee for work in acquiring the hotel but instead received
  an equity ownership of 2.5%.  Entities affiliated with
  Paul Barham and Norman Marks each received an equity
  ownership of 1% as consideration for the personal guaranties
  of certain obligations in connection with the hotel and its
  renovation. 
  
            After undergoing substantial renovation in 1997
  and 1998, the hotel was positioned to operate as a Holiday
  Inn Select.  The majority owner, an affiliate of Lehman
  Brothers, however, desired to have the hotel be under common
  management with the Memphis hotel and agreed to purchase the
  limited partnership interest of Barham, Marks, and the
  Company, for a total of $25,000.  Of this amount, the
  Company's portion was $13,888.90 and Barham and Marks each
  received $5,555.55.  The transaction closed in June 1998,
  and all of the proceeds to the Company were booked as a
  gain.  At closing, HMG Oklahoma resigned as manager of the
  hotel; HMG Oklahoma is not owed any management fees.
  
       Ennis, Texas hotel
  
            In August 1997, HMG entered into a management
  agreement to manage the Holiday Inn Express in Ennis, Texas. 
  Under the agreement HMG receives a management fee of $2,500
  per month through the initial term ending December 31, 1998,
  By its terms, since no notice of termination was given by
  October 31, 1998, the agreement was automatically extended
  for a two year period.  However, discussions are underway
  between the parties regarding the extension of the contract.
       
       Hotel ManagementGroup - Virginia, Inc. ("HMG Virginia")
  
            On February 17, 1998 Hotel Management Group -
  Virginia, Inc. assumed the management of the Chamberlin
  Hotel in Hampton Virginia, an historic 225 room hotel
  overlooking the Chesapeake Bay.  Plans called for a $2M
  renovation of the property.  On November 6, 1998 the owner
  took over the management of the hotel and incorporated it
  into a portfolio of hotels that it had acquired and which it
  was then going to operate without the use of a third party
  management company.
  
       Subsequent Events: H.M.Group - Alabama, Inc.
  
            On December 1, 1998, H.M.Group - Alabama, Inc.
  assumed the management of the Governors House Hotel in
  Montgomery Alabama, a 200 room full service hotel
  
       The loss of management fees derived from the management
  of the Memphis Four Points Hotel, the Select Hotel in Tulsa
  and the Chamberlin Hotel is not expected to have a material
  impact on future financial results or the future financial
  conditions of the Company.
  
  
  
  Number of Employees
  
       At September 30, 1998, the Company and its subsidiaries
  had 404 full time employees and 99 part time employees.
  
  
  Item 2. Description of  Property
   
       The Company maintains its administrative and executive
  offices in a commercial office building located at 211 East
  Louisiana Street, McKinney, Texas.  In the opinion of
  management, the premises are suitable and adequate for the
  present requirements of the Company and ample comparable
  space is available on comparable terms in the market.
  
  Item 3.  Legal Proceedings
  
       There were no material legal proceedings, either
  on-going, instituted by or against, or otherwise involving
  the Registrant during the period ended September 30, 1998.  
  
  Item 4.  Submission of Matters to a Vote of Security Holders
  
       There were no matters submitted to a vote of security
  holders during the year ended September 30, 1998.
  
                              PART II
  
  Item 5.  Market for Common Equity and Related Security
  Holder Matters
  
       (a)  The following table shows the range of closing bid
  prices for the Company's Common Stock in the over-the-
  counter market for the fiscal quarters indicated, as
  reported by the National Quotation Bureau.  The quotations
  represent limited or sporadic trading and, therefore,
  do not constitute an "established public trading market". 
  The quotations represent prices in the over-the-counter
  market between dealers in securities, do not include retail
  markup, markdown or commission and do not represent actual
  transactions.
  
  <TABLE>
  <CAPTION>
                              Fiscal 1997         Fiscal 1998
                              Bid Prices          Bid Prices
  Fiscal Period               High      Low       High      Low
  
  <S>                         <C>                 <C>
  
  First Quarter               NOT QUOTED          NOT QUOTED      
                         
  Second Quarter              NOT QUOTED          NOT QUOTED      
                         
  Third Quarter               NOT QUOTED          NOT QUOTED      
                         
  Fourth Quarter              NOT QUOTED          NOT QUOTED      
                         
            
            
  </TABLE>
  
       (b)  As of September 30, 1998, there were 694 record
  holders of the Company's $.01 par value Class A Common
  Stock.
            
        (c)      There have been no cash dividends paid on the
  Company's Common Stocks in fiscal years 1996, 1997 or any
  subsequent year.   On September 30, 1998, the Company paid
  the 10% dividend on the 243,331 shares of Preferred Stock. 
  The Company has no present plans to pay further dividends on
  the Company's Common Stock.
  
  
  Item 6.  Management's Discussion and Analysis or Plan of 
  Operation
  
                        RESULTS OF OPERATIONS
  
  A.   Revenues
  
       Revenues for the periods ended September 30, 1997 and
  1998 were primarily produced from the Company's interest in
  Hotel Management Group.  The increase in revenues in 1998
  over 1997 was a result of improved performance in the hotels
  with incentive based management fees, as well as additional
  fees gained from new contracts secured during the course of
  the year.
       
       The Company anticipates income from Hotel Management
  Group to increase as the subsidiary secures more management
  and consulting assignments, and that the Company will be
  able to meet its cash requirements from operations.
  
  B.   Employee Compensation
       
       Employee compensation expense includes salaries for
  Messrs Barham and Marks as well as accounting staff of HMG.
  The accounting staff was increased to handle the increased
  activity of additional management contracts.
  
       In January 1998, the Company purchased $500,000
  increasing life insurance policies on the lives of each Paul
  L. Barham and Norman L. Marks.  The purposes of the policies
  are both (i) to protect the Company's financial interest in
  the event of the premature death of either of these key
  employees, and (ii) to provide an employee benefit to these
  key employees.  The Company is the owner and beneficiary of
  the policies, although the cash value accumulation will
  accrue to the benefit of the key employees and is payable to
  the employees upon their retirement or termination of
  employment.
  
  C.   General and Administrative Expenses 
       
       General and Administrative Expenses increased because
  of the relocation of the corporate office to a larger
  facility in McKinney, Texas, and because of additional
  support staff.
  
  
                   LIQUIDITY AND CAPITAL RESOURCES
  
  Funds generated from company operations are the major source
  of liquidity.  The Company generated $42,548 in cash from
  operating activities in the 1998 fiscal year and provided
  and additional $101,998 in cash from investing activities. 
  At September 30, 1998, the Company had $194,792 in cash and
  $274,458 in working capital.  Management of the Company
  believes that it will have sufficient working capital to
  fund its operating and investing needs during fiscal 1999.
  
                              YEAR 2000
  
  The Company currently believes that it does not have any
  significant exposure to uncertainties nor material
  anticipated costs related to Year 2000 issues including
  Company, vendor, and customer issues.  The Company's current
  systems and any anticipated upgrades are Year 2000
  compliant.
  
  Item 7.  Financial Statements
  
       The following financial statements are filed as a part
  of this report:
  
  See the Index to Financial Statements on page F-1
  immediately following page 23 of this report. All such
  financial statements, schedules and supplementary data are
  incorporated herein by this reference.
  
       
  Item 8.  Changes in and Disagreements with Accountants on
  Accounting and Financial Disclosure
  
       
       There were no disagreements regarding matters of
  accounting principles or practices, financial statement
  disclosure, or auditing scope or procedure.  Thus, pursuant
  to Item 304 of Regulation 8-KSB, and Rule 12b-2 under the
  Exchange Act, no further disclosure regarding the Company's
    change in accountants is necessary or provided herein. 

                             PART III
  
  Item 9.  Directors,  Executive Officers, Promoters and
  Control Persons:   Compliance with Section 16 (a) of the
  Exchange Act
  
       The following table provides certain information
  concerning each of the directors of Harrell International,
  Inc. (the "Company") as of September 30, 1998.
  
  <TABLE>
  <CAPTION>
  
  Name                   Principal Occupation     Consecu-  Age
                         For the past 5 years     tive      
                                                  Service 
                                                  Since     
                                             
  <S>                    <C>                      <C>       <C>
  
  Paul L. Barham         CFO, Hotel Management    1992      45
                         Group, since December 
                         1989
  
                         Current Position: Chief
                         Financial Officer, 
                         Harrell International
  
  Norman L. Marks        President, Hotel         1995      57
                         Management Group, 
                         since December 1989
  
                         Current Position: Chief
                         Operating Officer, 
                         Harrell International
  
  </TABLE>
  
  
  
  The following table provides certain information concerning
  each of the executive officers of the Company as of
  September 30, 1997.
  
  
  
  
  
  
  
  <TABLE>
  <CAPTION>
  
  
  Name                   Age  All Positions and Terms of Office
                              with the Company and Five Year
                              Employment History
  
  <S>                    <C>  <C>
  
  Norman L. Marks        57   Executive Vice President and Chief
                              Operating Officer from August 19, 
                              1992, Member of Board of Directors 
                              from September 20, 1995. President
                              of Hotel Management Group, Inc.
                              since December 1989
  
  Paul L. Barham         45   Vice President  and Chief Financial 
                              Officer of the Company from August 19, 1992, 
                              Member of Board of Directors of Company 
                              from August 19,1992; Secretary to Board of 
                              Directors of Company from August 19, 1992; 
                              CFO, Hotel Management Group since December 1989.
  
  </TABLE>
  
  The Company has not made inquiry of its Directors, Officers
  and 10 % or more security holders,and otherwise does not
  have information to determine the level of compliance with
  the reporting obligation under Section 16 (a) of the
  Exchange Act. 
    
  
  Item 10.  Executive Compensation
  
       The following table shows the aggregate cash
  compensation for services in all capacities paid or accrued
  by the Company and its subsidiaries during the fiscal year
  ended September 30, 1998, to (i) each executive officer
  whose aggregate cash compensation exceeded $100,000 during
  such year and (ii) all executive officers of the Company as
  a group.
  
  <TABLE>
  <CAPTION>
  
  Name of Individual     Capacity in which   Compensation (1)
  Number of Persons      served    
  in Group
  
  <S>                    <C>                 <C>
  
  Norman L. Marks        COO                 $105,787
  
  
  Paul L. Barham         CFO                 $105,787
  
  
  <FN>                     
  
  (1)  This does not include medical expense reimbursement,
  club dues, or the value of automobiles (and their
  maintenance, repair and insurance) furnished to all of the
  executive officers of the Company, which in the aggregate
  for all officers amounted to $15,600 during fiscal year
  1998.
  
  </TABLE>
  
       At the present time the Company has, and at all times
  during the past three fiscal years, the Company had no
  pension, retirement, annuity, deferred compensation,
  incentive or stock purchase, thrift or profit-sharing plan,
  except the accumulated cash value of the life insurance
  policies detailed under item 6B above. 
  
       Directors receive no fees for serving in such capacity.
  
  
  Item 11.  Security Ownership of Certain Beneficial Owners
  and Management
  
       The following table sets forth as of September 30,
  1998, (i) the name of each current director of the Company
  and each person or entity known to the Company to be the
  beneficial owner of more than 5% of the Company's Class A
  Common Stock, (ii) the number of shares of the Company's
  Class A Common Stock beneficially owned by each such current
  director and 5% beneficial owner and all officers and
  directors of the Company as a group, and (iii) the percent
  of outstanding Class A Common Stock so owned by each such
  director, 5% beneficial owner and management group:          
                     <PAGE>
<TABLE>
  <CAPTION>
  
  Name and Address       Number of Shares    Approximate
  of Beneficial               of Class A Common   Percent of
  Owner                  Stock               Class     
                                   
  Beneficially  owned as of 
  September 30, 1998 (1)
  
  DIRECTORS:
  
  <S>                         <C>                 <C>
  
  Paul L. Barham (2)          0                   0
  211 East Louisiana St
  McKinney, Texas 75069
  
  Norman L. Marks (3)         0                   0
  211 East Louisiana St
  McKinney, Texas 75069
  
  
  5% BENEFICIAL OWNERS:
  
  Businesship 
  International, Inc.         291,288             29.82%
  One Alhambra Plaza
  Suite 1400
  Coral Gables, FL 33134
  
  Barham Family 
  Interests, Inc.             100,000             10.24%
  211 East Louisiana St       63,639 options (4)
  McKinney, Texas 75069
  
  Marks & Associates, Inc.    100,000             10.24%
  211 East Louisiana St       63,639 options (4)
  McKinney, Texas 75069
  
  The Estate of Wilson 
  Harrell                     164,570 (5)         16.85%
  7380 Pine Valley Road
  Cumming, GA 30131
  
  Clover, Inc                 50,000              5.12%
  2661 Midway Rd Ste 224
  Carrollton, Texas 75006
  
  
  
  <FN>     (1)     Except as noted below, the individual listed
  has sole voting and investment power.
  
       (2)     Barham and his other family members own 100,000
  shares through Barham Family Interests, Inc.
  
       (3)     Marks and his other family members own 100,000
  shares through Marks and Associates, Inc.
            
       (4)     On September 27, 1996, Businesship
  International granted Barham Family Interests, Inc., and
  Marks and Associates, Inc., each an option to acquire 63,639
  shares from BI.  The options shall automatically expire on
  September 30, 2001, if not exercised.
  
       (5)     The 5,850 shares of Class A Common Stock owned
  by Charlene Echols Harrell, Wilson L. Harrell's widow, are
  included in the estate's beneficial ownership in the above
  table.
  
  </TABLE>
  
       As of September 30, 1998,  the Company had 976,580
  shares of Class A Common Stock, issued and outstanding. In
  October 1997, the Company changed transfer agents from Chase
  Mellon to Registrar and Transfer Company. When transferring
  the records to Registrar and Transfer Company, Chase Mellon
  showed additional shares of common stock of the Company
  as being issued and outstanding. Chase Mellon gave no
  explanation for this discrepancy, and for the past several
  years has consistently reported the number of shares
  outstanding as approximately 976,580.  The Company has made
  three written inquiries to Chase Mellon but has received no
  response.  The Company will continue to follow up. It is not
  known at this time whether Chase Mellon's records are in
  error, and for purposes of this report and until a
  satisfactory answer is received from Chase Mellon, the
  Company shall continue to use 976,580 as the number of
  outstanding shares.
  
  
                 
  Item 12.  Certain Relationships and Related Transactions
  
  Transactions involving related parties in the last two years
  are outlined in Item 1 of this report.
  
  
  
  
  
  
  
  
  
  
  
  
  
                           PART IV
  
  Item 13.  Exhibits and Reports on Form 8-K
  
       (a)     Exhibits --
  
            (1)  The following exhibits, as required by Item
  601 of Regulation SB, are attached hereto or incorporated
  herein by this reference: 
  
            (2)  Certificate of Incorporation as last amended,
  effective as of January 21, 1989, a copy of which was filed
  with the Company's Form 10-K report for the fiscal year
  ended September 30, 1990.
     
            (3)  Material Contracts:
  
                 (A)  Stock Purchase Agreement between the
  Company and Clover, Inc., dated June 12, 1990, and the
  amendment thereto dated August 27, 1990, copies of which
  were filed with the Company's Form 10-K report for the
  fiscal year ended September 30, 1990.  
                 
                 (B)  Restructuring Agreement between the
  Company and Clover, Inc., dated December 23, 1991, a copy of
  which was attached to the Company's Form 10-K report for the
  fiscal year ended September 30, 1990.  
   
                 (C)  Stock Option Agreements between the
  Company and each Douglas C. Echols, Irvin Atkins and David
  A. Woodcock, Jr., all of which are dated December 7, 1991,
  copies of which were attached to the Company's Form 10-K
  report for the fiscal year ended September 30, 1990.   
  
                 (D)  Stock Purchase Agreement between the
  Company and Xenex International, Inc., dated May 28, 1992, a
  copy of which was attached to the Company's Form 10K report
  for the fiscal year ended September 30, 1992.
  
                 (E)  Acquisition agreement between the
  Company and the Hotel Management Group, Inc., dated August
  18, 1992, a copy of which was attached to the Company's Form
  10K report for the fiscal year ended September 30, 1992.    
  
                 (F)  Employment agreements between the
  Company and Messrs. Marks and Barham, copies of which were
  attached to the Company's Form 10 K report for the fiscal
  year ended September 30, 1992.
                 (G)  Settlement Compromise and Release
  Agreement between Villa Martinique Apartments Joint Venture,
  Wilson L. Harrell, the Company and Home Savings of America
  F. S. B., a copy of which was attached to the Company's Form
  10-KSB report for the fiscal year ended September 30, 1994.
  
                 (H)  Preferred Stock Purchase and Release of
  Debt Agreement between the Company and Businesship
  International, Inc. dated September 1, 1996, a copy of which
  was attached to the Company's Form 10-KSB for the fiscal
  year ended September 30, 1996.
  
  
                           
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
                             SIGNATURES
  
       Pursuant to the requirements of Section 13 or 15(d) of
  the Securities Exchange Act of
  1934, the registrant has duly caused this report to be
  signed on its behalf by the undersigned,
  thereunto duly authorized.
  
                                HARRELL INTERNATIONAL, INC.
  
  
  
                                By:                            
                                  
                                     Paul L. Barham 
                                     Vice President,
                                     Chief Financial Officer
                                     And Director
  
  DATE: ________________________
  
       Pursuant to the requirements of the Securities Exchange
  Act of 1934, this report has been signed below by the
  following persons comprising the majority of the current
  Directors on behalf of the registrant and in the capacities
  and on the dates indicated.
  
  
  
       
  
  __________________________________     _____________________
  Paul L. Barham, Vice President,                    Date
  Chief Financial Officer and Director               
  
  
  __________________________________     _____________________
  Norman L. Marks, Vice President                    Date
  Chief Operating Officer and Director
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  HARRELL INTERNATIONAL, INC.
  
  
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  
  <TABLE>
  <CAPTION>    
                                                                                                         Page
  
  <S>                                                  <C>  
  
  Independent Auditors' Report                                                                                F-2
  
  Consolidated Balance Sheets at September 30, 
          1998 and 1997                                F-3
  
  Consolidated Statements of Income For the 
          Years Ended September 30, 1998 and 1997      F-4
  
  Consolidated Statements of Changes in 
       Shareholders' Equity For the Years Ended 
       September 30, 1998 and 1997                     F-5
  
  Consolidated Statements of Cash Flows 
       For the Years Ended 
       September 30, 1998 and 1997                     F-6
  
  Notes to Consolidated Financial Statements           F-7
   
  
  
    </TABLE>
  
  
  
  
     INDEPENDENT AUDITORS' REPORT
  
  
  
  Board of Directors and Shareholders
  Harrell International, Inc. 
  
  
  We have audited the accompanying consolidated balance sheets
  of Harrell International, Inc. and subsidiaries as of
  September 30, 1998 and 1997, and the related consolidated
  statements of income, changes in shareholders' equity and
  cash flows for the years then ended. These financial
  statements are the responsibility of the Company's
  management.  Our responsibility is to express an opinion on
  these consolidated financial statements based on our audits.
  
  We conducted our audits in accordance with generally
  accepted auditing standards.  Those standards require that
  we plan and perform the audits to obtain reasonable
  assurance about whether the financial statements are free of
  material misstatement.  An audit includes examining, on a
  test basis, evidence supporting the amounts and disclosures
  in the financial statements.  An audit also includes
  assessing the accounting principles used and significant
  estimates made by management, as well as evaluating the
  overall financial statement presentation.  We believe that
  our audits provide a reasonable basis for our opinion.
  
  In our opinion, the consolidated financial statements
  referred to above present fairly, in all material respects,
  the consolidated financial position of Harrell
  International, Inc. and subsidiaries as of September 30,
  1998 and 1997, and the results of their operations and their
  cash flows for the years then ended in conformity with
  generally accepted accounting principles.
  
                    
                    
  
                    Jackson & Rhodes P.C.
  
  
  
  
  
  
  
  
  
  HARRELL INTERNATIONAL, INC.
  CONSOLIDATED BALANCE SHEETS
  September 30, 1998 and 1997
  
  Assets
  
  <TABLE>
  <CAPTION>
                                             1998          1997
  <S>                                        <C>           <C>
  
  Current assets:
     Cash                                       194,792        98,908
     Accounts receivable, net 
     allowance for doubtful
       accounts of $33,248 in 1998                                                           116,543         9,464
     Note receivable                              9,869         9,869
     Other assets                                   150         3,939
         Total current assets                   321,354       202,180
  
  Property and equipment:
     Furniture and fixtures                      42,008        30,767
       Less accumulated depreciation            (25,964)       22,604)
         Total property 
          and equipment                          16,044         8,163
  
  Other assets:
     Investment in limited 
     partnerships (Note 5)                        1,850       101,200
                                                                                                  339,248       311,543
  
  Liabilities and Shareholders' 
     Equity
  
  Current liabilities:
     Accounts payable and 
     accrued liabilities                         30,400        31,977
     Dividends payable                                0        24,331
     Accrued salaries                            16,496         8,215
         Total current liabilities               46,896        64,523
  
  Long-term debt:
     Amounts payable to 
     related parties                              8,000         8,000
         Total liabilities                       54,896        72,523
  
  Commitments and contingencies 
          (Note 8)                                    0             0 
     
  Shareholders' equity:
     Preferred stock, $1 par, 
     1,000,000 shares 
     authorized,  243,331 
     shares issued
     and Outstanding (Note 3)                   243,331       243,331
     Common stock: 
       Class A, $.01 par; 
     9,000,000 shares 
     authorized,  976,580 
     shares issued
     and outstanding                              9,766         9,766
       Class B, $.01 par; 
     1,000,000 shares authorized,
       no shares issued or 
     outstanding                                      0             0
     Additional paid-in capital               2,077,287     2,077,287
     Accumulated deficit                     (2,046,032)   (2,091,364)
         Total shareholders' equity             284,352       239,020
                                                                                                  339,248       311,543
  
  </TABLE>
  
  
  See accompanying notes to consolidated financial statements.
  F-3
  
  HARRELL INTERNATIONAL, INC.
  CONSOLIDATED STATEMENTS OF INCOME
  Years Ended September 30, 1998 and 1997
  
  
  <TABLE>
  <CAPTION>
  
                                                                                          1998           1997
  <S>                              <C>            <C>
  
  Revenues:
     Management fees               623,719        486,226
     Consulting fees                 3,500         42,800
     Other                           1,299         10,816
        Total revenues             628,518        539,842
           
  Expenses:
     Employee compensation         393,318        343,653
     General and administrative    179,426        100,349
           Total expenses          572,744        444,002
  
           Operating income         55,774         95,840
  
  Gain on sale of 
     joint ventures                 13,889         49,052
  
  Net income (see Note 7)           69,663        144,892
  
  Preferred dividends accrued       24,331         24,331
  
  Net income available for 
     common Shareholders            45,332        120,561
  
  Basic earnings per 
     common share                    $0.05          $0.12
  
  Weighted average shares 
     outstanding                   976,580        976,580
  
  
  </TABLE>
  
  
  
  
  
  
  
  
  
  
  
  See accompanying notes to consolidated financial statements.
  F-4
  
  
  
  
  
  
  
  
  
  
  
  
  HARRELL INTERNATIONAL, INC.
  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
  Years Ended September 30, 1997 and 1996
  <TABLE>
  <CAPTION>         
                    Preferred Stock          Common Stock
                    Shares         Amount         Shares
  
  <S>                    <C>            <C>            <C>        <C> 
  
  Balance, Sep 30, 
  1996                   243,331        243,331        976,580    9,766
  
  Net income                   0              0              0        0
  
  Preferred dividends
  payable ($.10 per 
  share)                       0              0              0        0
  
  Balance, Sep 30, 
  1997                   243,331        243,331        976,580    9,766
  
  Net income                   0              0              0        0
  
  Preferred dividends 
  payable
  ($.10 per share)             0              0              0        0
  
  Balance, Sep 30, 
  1998                   243,331        243,331        976,580    9,766
  
  <C>         <C>            <C>
  
   2,077,287   (2,211,925)    118,459
  
           0      144,892     144,892
  
           0      (24,331)    (24,331)
  
   2,077,287   (2,091,364)    239,020
  
           0       69,663      69,663
  
           0      (24,331)    (24,331)
  
   2,077,287   (2,046,032)    284,352
  
  </TABLE>
  See accompanying notes to consolidated financial statements.
  F-5
  
  
  HARRELL INTERNATIONAL, INC.
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Years Ended September 30, 1998 and 1997
  
  <TABLE>
                                                                                               1998           1997
  
  <S>                                   <C>            <C>
  
  Cash flows from operating 
     activities:
    Net income available for 
     common shareholders                 45,332         120,561
     Adjustments to reconcile 
     net income to net cash 
     provided by operating 
     activities:
      Depreciation                        3,360           2,393
      Gain on sale of joint venture     (13,889)        (49,052) 
      Changes in assets and 
     liabilities:
       Accounts receivable              (27,079)        (39,752)
       Other assets                       3,789          (1,051)
       Accounts payable and 
     accrued liabilities                 (1,577)         (9,664)
       Preferred dividends accrued       24,331          24,331
       Accrued salaries                   8,281           7,664
         Net cash provided by 
          operating activities           42,548          55,430
  
  Cash flows from investing 
     activities:
    Purchase of furniture and 
     equipment                          (11,241)         (5,424)
    Proceeds from sale of joint 
     venture/limited part               113,239          29,020
    Receivable from affiliate                 0           5,125
    Investment in limited 
     partnership                              0        (101,200)
         Net cash provided by 
          (used in) investing 
          activities                    101,998         (72,479)
  
  Cash flows from financing 
     activities:
    Dividends paid                      (48,662)        (24,331)
  
  Net increase (decrease) in 
     cash                                95,884         (41,380)
  
  Cash at beginning of year              98,908         140,288
  
  Cash at end of year                   194,792          98,908
  
  </TABLE>
  
  See accompanying notes to consolidated financial statements.
  F-6
    1.   Description of Business
  
     Organization
  
     Harrell International, Inc., a Delaware corporation
  (the "Company"), began operations in 1959.  The Company
  entered into the acquisition, development and management of
  real estate properties including joint ventures and
  partnerships (in which its interests would be that of a
  general partner having substantial involvement in
  management) in December 1990.  The Company plans to focus
  its real estate activities upon purchase, development and
  management of hotels, and other income-producing properties
  located in the southwestern and southeastern United States. 
  The Company acquired Hotel Management Group, Inc. ("HMG") in
  August 1992.  The Company has created four other
  wholly-owned subsidiaries  (see Note 4.)
  
  2. Summary of Significant Accounting Policies 
  
     Principles of Consolidation
  
     The consolidated financial statements include the
  accounts of the Company and its subsidiaries.  All
  significant intercompany balances and transactions are
  eliminated in consolidation.
  
     Use of Estimates and Assumptions
  
     Preparation of the Company's financial statements in
  conformity with generally accepted accounting principles
  requires management to make estimates and assumptions that
  affect certain reported amounts and disclosures.
  Accordingly, actual results could differ from those
  estimates.
  
     Cash Equivalents
  
     For statement of cash flow purposes, the Company
  considers short-term investments with original maturities of
  three months or less to be cash equivalents.
  
     Property and Equipment
  
     Property and equipment is recorded at cost.
  Depreciation is computed on the straight-line method over
  the estimated lives of the assets, principally over three
  years.
  
     Investments in Joint Ventures
  
     The Company uses the equity method of accounting for
  its investments in joint ventures.  Accordingly, the Company
  recorded its investment in joint ventures at cost and
  records subsequent contributions, returns of capital and
  equity in earnings as an adjustment to the initial
  investment (Note 6).
  
     Income Taxes
  
     The Company accounts for income taxes pursuant to
  Statement of Financial Accounting Standards No. 109,
  "Accounting for Income Taxes" (SFAS 109) which utilizes the
  asset and liability method of computing deferred income
  taxes.  The objective of the asset and liability method is
  to establish deferred tax assets and liabilities for the
  temporary differences between the financial reporting basis
  and the tax basis of the Company's assets and liabilities at
  enacted tax rates expected to be in effect when such amounts
  are realized or settled.
  
     Earnings Per Common Share
     
     In March 1997, the Financial Accounting Standards Board
  issued Statement of Financial Accounting Standards No. 128,
  Earnings Per Share ("SFAS 128"). SFAS 128  provides a
  different method of calculating earnings per share than was
  formerly used in APB Opinion 15.  SFAS 128 provides for the
  calculation of basic and diluted earnings per share.  Basic
  earnings per share includes no dilution and is computed by 
  dividing income available to common stockholders by the
  weighted average number of common shares outstanding for the
  period.  Dilutive earnings per share reflects the potential
  dilution of securities that could share in the earnings of
  the Company.  The Company was required to adopt this
  standard in the fourth quarter of calendar 1997.  Because
  the Company has no potential dilutive securities
  outstanding, the accompanying presentation is only of basic
  earnings per share.
  
  3. Preferred Stock Transaction
  
     By agreement with Businesship International
  ("Businesship") dated September 27, 1996, the outstanding
  balance of a certain note of $243,331, including accrued
  interest of $26,398, was converted into preferred stock
  issued by the Company.  The preferred shares were from a new
  class of stock authorized by the Company and are nonvoting,
  non-convertible and pay a 10% dividend ($24,331 annually),
  beginning with the year ended    September 30, 1996.  The
  Company has the right, but not the obligation, to redeem the
  shares at any time at par value.  By agreement, the Company
  paid a full year's dividend on the preferred shares for
  1996.
  
     4.   Acquisition of Hotel Management Group
  
     In August 1992, the Company purchased 100% of the
  issued and outstanding common stock of HMG.  HMG is engaged
  in the business of managing the general operations of hotels
  and providing them with accounting services.
  
  Hotel Management Group - California, Inc.
                    
     Effective January 1, 1994, HMG formed a wholly-owned
  subsidiary, Hotel Management Group - California, Inc. ("HMG
  - California"), to hold the management contract for the
  operations of the Biltmore Hotel and Suites in Santa Clara,
  California.
     
  Hotel Management Group - Tennessee, Inc.
     
     Effective September 23, 1996, HMG formed a wholly-owned
  subsidiary, Hotel Management Group - Tennessee, Inc. ("HMG -
  Tennessee"), to hold the management contract for the
  Sheraton Four Points Hotel in Memphis, Tennessee.  The
  Company also had a limited partnership interest in the
  hotel.  (See Note 5.)
     
  Hotel Management Group - Oklahoma, Inc.
     
     Effective May 20, 1997, HMG formed a wholly-owned
  subsidiary, Hotel Management Group - Oklahoma, Inc. ("HMG -
  Oklahoma"), to hold the management contract for the  Ramada
  Inn in Tulsa, Oklahoma.  The Company also had a limited
  partnership interest in the hotel.  (See Note 5.)
     
  Hotel Management Group - Virginia, Inc.
     
     On February 17, 1998, Hotel Management Group -
  Virginia, Inc. assumed the management of the Chamberlin
  Hotel in Hampton Virginia, an historic 225 room hotel
  overlooking the Chesapeake Bay.  Plans called for a
  $2,000,000 renovation of the property.  On November 6, 1998,
  the owner took over the management of the hotel and
  incorporated it into a portfolio of hotels that it had
  acquired and which it was then going to operate without the
  use of a third party management company.
  
  Subsequent Events: H.M. Group - Alabama, Inc.
     
     On December 1, 1998, H.M.Group - Alabama, Inc. assumed
  the management of the Governors House Hotel in Montgomery,
  Alabama, a 200 room full service hotel.
     
  5. Hotel Investments
  
     Tennessee Hotel Project
     
     On October 17, 1996 the Company purchased, for
  $100,000, a minority limited partnership interest in the
  Sheraton Four Points Hotel, located near the Memphis Airport
  in Memphis, Tennessee and a subsidiary of the Company was
  contracted to manage the hotel. The hotel is owned through
  limited partnerships, with the Company owning a limited
  partnership interest equating to 7%.  The Company accounted
  for its interest in the hotel utilizing the cost method. 
  The Lender required as a condition of a loan to the
  partnership that Paul L. Barham ("Barham") an Officer and
  Director of the Company, and Norman L. Marks ("Marks"), also
  an Officer and Director of the Company, individually
  guarantee certain non-recourse provisions of the loan,
  guarantee certain environmental warranties regarding the
  hotel and guarantee completion of the renovations
  (collectively "Guaranties").  Texas Memphis Investors
  Limited offered Barham and Marks, or their assigns, in
  exchange for their Guaranties, each a limited partnership
  interest in Texas Memphis Investors Limited, which
  constitutes an interest in the Hotel of one percent (1%). 
     
     The $11.65 million loan in connection with the purchase
  is for a three-year term secured by a first lien mortgage on
  the hotel, and contains provisions for required payment on
  the loan of all net operating income of the hotel (after
  expenses, certain reserves and management fees), with a
  final additional payment of approximately $2 million.
     
     Also in connection with the transaction, a newly formed
  subsidiary of the Company, HMG - Tennessee, entered into a
  management agreement to manage the hotel and supervise the
  renovations.  HMG - Tennessee received a net monthly
  management fee of $5,000 per month for the first eight
  months, with fees thereafter to be 8% of the net operating
  income of the hotel before debt service.
  
     The Company completed negotiations for the sale of its
  limited partnership interest in the hotel. The Company
  received the return of its investment on April 3, 1998.  At
  the point of consummation of the transaction, the Company
  resigned as manager of the Memphis Four Points Hotel, and
  was to be paid all remaining fees through the point of
  termination "promptly after closing."  To date the
  partnership, citing lack of funds, has not paid the
  remaining amounts ($33,248) and the Company has therefore
  fully provided for the amount.
  
     Tulsa Hotel Project
     
     On June 4, 1997, the Company acquired a limited
  partnership interest in the Ramada Inn, located on I-44 in
  Tulsa, Oklahoma.  At the same closing a subsidiary of the
  Company contracted with the new ownership to manage the
  hotel.  In March of 1997, an unaffiliated Company, LTS
  Group, Inc. ("LTS") entered into a contract to purchase the
  hotel for a purchase price of $4,575,000.  HMG entered into
  an agreement with LTS to study feasibility and prepare
  recommendations and budgets. HMG was not paid a fee for its
  work but instead was provided a 2 1/2% Limited Partnership
  interest in the project.  Costs to renovate the hotel were
  budgeted to be approximately $4.5 million which together
  with closing costs and working capital for the hotel 
  estimated at $1 million comprise the $10 million
  transaction.  Of the $10 million, Lehman Brothers Holdings,
  Inc. ("Lehman Brothers") loaned approximately $9 million and
  contributed equity of $700,000.  LTS and others contributed
  equity of $300,000.  The hotel was owned through limited
  partnerships with the Company owning a limited partnership
  interest equating to 2 1/2% interest in the hotel, LTS and
  others 27 1/2%, and Lehman Brothers and its affiliates 70%. 
  LTS, the Company and others comprise Texas Tulsa Investors
  Limited ("Texas Tulsa"), a Texas limited partnership. The
  Lender required as a condition of the loan to the
  partnership that Barham and Marks individually guarantee
  certain recourse provisions of the loan, guarantee certain
  environmental warranties regarding the hotel and guarantee
  completion of the renovations (collectively "Guarantees"). 
  Texas Tulsa offered Barham and Marks, or their assigns, in
  exchange for their Guarantees, each a limited partnership
  interest in Texas Tulsa, which constitutes an interest in
  the hotel of one percent (1%).  The $9 million loan in
  connection with the purchase was for a three year term
  secured by a first lien mortgage on the hotel and contains
  provisions for required payment to the loan of all net
  operating income of the hotel (after expenses, certain
  reserves and management fees), with a final additional
  payment of approximately $1.6 million.
     
     Also in connection with the transaction, a newly formed
  subsidiary of the Company, HMG - Oklahoma entered into a
  management agreement to manage the hotel and supervise the
  renovations.  HMG - Oklahoma and LTS agreed to share certain
  fees in connection with the management agreement. HMG -
  Oklahoma received a net monthly management fee of $5,000 per
  month for the first eight months, with fees thereafter
  changing to 8% of the net operating income of the hotel
  before debt service.
     
     On June 3, 1998, the transaction closed wherein the
  guarantors of certain aspects of the acquisition, renovation
  and on-going operation of the hotel sold their interests. 
  As part of the transaction, the Company has resigned as
  manager of the hotel.
      
     McKinney Texas Development
     
     On November 19, 1996, HMG, as Agent for McKinney Hotel
  Development Group, Ltd., a Texas Limited Partnership in
  organization, entered into an agreement to purchase
  approximately five acres of land in McKinney, Texas, on
  which the Partnership intends to build two small hotels and
  a conference center.  The Company will be a limited partner
  in the venture and HMG will manage the hotels and conference
  centers if the project is completed, which looks doubtful at
  this time.
     
  6. Investments in Joint Ventures
  
     In furtherance of management's stated intention to
  acquire, develop and manage real estate projects, the
  Company entered into three separate related party
  transactions with directors of the Company (among others). 
  The initial transactions involved contributions by the
  Company of rights or assets other than cash.  All three
  transactions required the Company to enter into a joint
  venture agreement with another corporation whereunder the
  joint venture acquired an interest in an apartment complex. 
  During 1996, the Company sold its interest in two of the
  properties, Athena Gardens and Riviera, resulting in a gain
  of $96,070.  Also, in November of 1996, the Company sold its
  interest in the third joint venture, Villa Martinique,
  resulting in a gain of $49,052.  The Company still operates
  the Athens Gardens and Villa Martinique projects, receiving
  management fees aggregating $42,000 each year in 1998 and
  1997.
  
  7. Income Taxes
  
     As of September 30, 1998, the Company had net operating
  loss carryforwards of approximately $2,333,000 for book and
  tax purposes.  Unused operating loss carryforwards may
  provide future tax benefits, although there can be no
  assurance that these net operating losses can be recognized
  in the future.  Also, if substantial changes in the
  Company's ownership should occur, there may be an annual
  limitation on the amount of the carryforwards which can be
  utilized.  Accordingly, deferred tax assets have been offset
  in the accompanying financial statements by a valuation
  allowance.
     
  
  
  
  
  
  The loss carryforwards expire as follows:
  
  <TABLE>
  <CAPTION>         
  
  Year of      Operating Loss         
  Expiration   Carryforward Expirations
  <S>               <C>                           
     
  1999                485,000
  2002                 74,000
  2003                 26,000
  2004              1,116,000
  2005                278,000
  2006                 26,000
  2007                134,000
  2008                105,000
  2009                 89,000
                    2,333,000
  </TABLE>     
               
  8. Commitments and Contingencies
  
     Leases
  
     The Company leases its office facilities from an
  unrelated party.  The lease expires on December 31, 1998 and
  the lease commitment for the remaining three month period is
  $6,600.  The Company also leases an off-site storage
  facility on a month-to-month basis.  Rental expense for the
  years ended September 30, 1998 and 1997 amounted to $28,002
  and $17,555, respectively.  
  
      Concentration of Credit Risk
  
     The Company invests its cash and certificates of
  deposit primarily in deposits with major banks.  Certain
  deposits, at times, are in excess of federally insured
  limits.  The Company has not incurred losses related to its
  cash.
  
  9. Related Party Transactions
  
     During the year ended September 30, 1991, the Company
  entered into two joint venture agreements with entities
  controlled by certain directors of the Company (Note 6). 
  Also, on December 4, 1991, the Company entered into a third
  joint venture agreement with certain entities controlled by
  certain directors of the Company.  Under the terms of the
  joint venture agreements, all joint venturers can exert
  significant influence over the operations of the joint
  ventures.
  
     Amounts payable to related parties includes $8,000 to
  Villa Martinique Joint Venture for capital contributions and
  cash calls as of September 30, 1998 and 1997.
  
  10.     Management Fee Revenues
  
     The Company received approximately 64% and 76% of gross
  management revenues from the Biltmore Hotel in California
  for the years ended September 30, 1998 and 1997,
  respectively.
  
  11.     Accounting Developments
  
     SFAS 129
     
     Statement of Financial Accounting Standards No. 129,
  Disclosure of Information about Capital Structure ("SFAS
  129"), effective for periods ending after December 15, 1997,
  establishes standards for disclosing information about an
  entity's capital structure.  SFAS 129 requires disclosure of
  the pertinent rights and privileges of various securities
  outstanding (stock, options, warrants, preferred stock, debt
  and participating rights) including dividend and liquidation
  preferences, participant rights, call prices and dates,
  conversion or exercise prices and redemption requirements. 
  Adoption of SFAS 129 has had no effect on the Company as it
  currently discloses the information specified.
  
     SFAS 130
  
     Statement of Financial Accounting Standards (SFAS) 130,
  "Reporting Comprehensive Income", establishes standards for
  reporting and display of comprehensive income, its
  components and accumulated  balances.  Comprehensive income
  is defined to include all changes in equity except those
  resulting from investments by owners and distributions to
  owners.  Among other disclosures, SFAS 130 requires that all
  items that are required to be recognized under current
  accounting standards as components of comprehensive income
  be reported in a financial statement that is displayed with
  the same prominence as other financial statements. Results
  of operations and financial position are unaffected by
  implementation of this new standard.
     
     SFAS 131
     
     SFAS  131,  "Disclosure  about Segments of a Business 
  Enterprise", establishes  standards for the way that public
  enterprises report information about operating  segments in
  annual financial statements and requires reporting of
  selected information about operating segments in interim
  financial statements issued to the public.  It also
  establishes standards for disclosures regarding products and
  services, geographic areas and major  customers.  SFAS 131
  defines operating segments as components of an enterprise
  about which separate financial information is available that
  is evaluated regularly by the chief operating decision maker
  in deciding how to allocate resources and in assessing
  performance.  This accounting pronouncement will not have an
  effect on the Company's financial statements, since the
  Company only operates in one segment of business, the
  management of real estate properties.