<PAGE>   1
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                          HARRELL INTERNATIONAL, INC.

                         17218 Preston Road, Suite 3200
                                Dallas, TX 75252





                                  Form 10-KSB



                           For the fiscal year ended:
                               September 30, 1996





                                  Submitted to





                       SECURITIES AND EXCHANGE COMMISSION
                               Washington, D. C.

                           Commission File No. 0-2661


--------------------------------------------------------------------------------
<PAGE>   2
                       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, 1996                                 0-2661

                          HARRELL INTERNATIONAL, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                               Delaware13-1946181
               (State of Incorporation)(I.R.S. Employer Id. No.)

               17218 Preston Road, Suite 3200, Dallas, TX  75252
              (Address of principal executive offices)  (Zip Code)

       Registrant's telephone number, including area code: (972) 250-6370
          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 $402,595  
                                                            --------

         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 30,1996 was 976,580.






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<PAGE>   3

                                     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.  Such receivables included a note from
Sarvis, Incorporated, in the amount of $4.2 million dollars, and to whom the
Company sold its operations and assets.

         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. 





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<PAGE>   4


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 on the
following terms:

         1.      Clover returned to the Company for cancellation all of the
                 Clover Class B Stock, all of the warrants, and all but 50,000
                 shares of the Company.

         2.      Clover retained 50,000 shares of the Clover Class A Stock in
                 settlement of all issues relating to the default by Clover
                 under the Stock Purchase Agreement, as amended, and the
                 agreements executed pursuant thereto, and in full satisfaction
                 of all services performed on behalf of the Company by Dart
                 through December 23, 1991.

         3.      Dart was to remain president and chief executive officer of
                 the Company but no new management or employment agreement was
                 entered into at that time.

         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.


Xenex Transaction

         On October 24, 1991, the Company borrowed $50,000 from Xenex
International, Inc., a Florida corporation, with interest at the rate of 10%
per annum with interest and principal due on January 31, 1992.

         The maturity date of the loan was extended at January 31, 1992, in
connection with the agreement of the Company and Xenex to enter into Stock
Purchase Agreement giving Xenex an option to acquire up to 80% of the Company's
Class A Common Stock for $1,000,000.  Pursuant to the Agreement the parties
agreed that the forgiveness of the $50,000 loan from Xenex would be treated as
a deposit toward Xenex's initial $150,000 investment in the Company which was
due upon closing the transactions contemplated in the Stock Purchase Agreement.

         The Stock Purchase Agreement was executed  May 28, 1992  (the "Xenex
Agreement").   Its terms provided as follows:

         1.      Xenex's initial investment of $150,000 entitled Xenex to (i)
                 291,228 shares, or approximately 37.5% of the Company's then
                 outstanding stock, and (ii) an option to acquire up to an
                 additional 1,650,292 shares of the Company's Class A Common
                 Stock for an aggregate purchase price of $850,000 (the
                 "Warrant'); and

         2.      The Warrant  (i) was exercisable in whole or in part at any
                 time prior to the first anniversary of the closing date, and
                 (ii) was subject to adjustment to prevent dilution of Xenex's
                 right to acquire 80% control of the Company as a result of the
                 exercise of certain other options to acquire the Company's
                 Common Stock.





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<PAGE>   5
         As part of the transaction with Xenex, Wilson L. Harrell, one of the
Company's directors,  agreed to deposit his shares in a one-year voting trust
for the benefit of Xenex.  Upon consummation of the transaction with Xenex, the
number of directors of the Company was increased by two and Nasir Ashemimry and
Joseph Vincent, both of whom were officers, directors and shareholders of
Xenex, were elected to the Board.



         On February 16, 1993, the Company  entered into a modification of the
Xenex Agreement:

         (i)     The term of the Warrant was extended to June 30, 1995.

         (ii)    Xenex agreed to loan $150,000 to the Company such loan to bear
                 interest at the rate of 2% above Prime, with the principal and
                 all interest due on June 30, 1995.  The Note was secured by
                 the Company's interest in the real property owned by
                 partnerships in which the Company was a partner and by the
                 Company and by some of Class A Common Stock of the Company.
                 The loan together with accrued interest was to be converted to
                 stock at December 15, 1994.  The Warrant expired on June 30,
                 1995, without Xenex purchasing additional shares in the
                 Company.

         On December 15, 1994, an agreement was reached between the Company and
Xenex, Inc. (the "Debt Agreement"),  to convert the Xenex $216,932.80  loan to
the Company, plus accumulated interest, into 472,396 shares of the Company's
Common Stock, based on the option price of $.5151 per share as outlined in the
Stock Purchase Agreement of May 28, 1992, as modified on February 16, 1993. The
parties agreed that the transaction would close only after all regulatory
delinquencies or deficiencies had been cured.

         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





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<PAGE>   6
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 Company entered into a joint venture agreement dated December 7,
1990, with Riviera Investors Corporation, a Texas Corporation ("RIC"), forming
the "Riviera Joint Venture."  RIC contributed $232,000 to the venture's
capital, and the Company  assigned to the venture its rights under that certain
Contract of Sale dated October 20, 1990, by and between Clover, Inc. and the
Estate of James Devereaux Stahlman.

         The venture exercised its rights under the Contract of Sale on
December 7, 1990, and purchased a 37 unit apartment complex known as Riviera
Apartments (the "Riviera Project") located in Dallas, Texas, for a purchase
price of $222,000.

         Pursuant to the Riviera Joint Venture Agreement, the venture's
distributable cash is to be distributed as follows:

         (1)  The first $32,480 to RIC;
         (2)  The second $32,480 to the Company;
         (3)  The balance, 50% to RIC and 50% to the Company.

         In February, 1991, RIC and the Company agreed to restructure the
voting and profits interests of the Riviera Joint Venture whereby the Company's
voting interest and its net profits interest in excess of $64,960 were both
decreased from 50% to 40% in exchange for $11,600 from RIC.

         While RIC and the Company share equally the venture's management, the
Company supervised its day-to-day operations.  The Riviera Project was operated
by Hotel Management Group, a wholly owned subsidiary, until the property was
sold on August 5, 1996.

         On August 5, 1996, the property was sold to a Mr. Dallas Smith, an
unrelated party, for the sum of $260,000.  The net proceeds due to the original
investors in RIC was approximately the same as their original investment, and
therefore the sale resulted in no proceeds to the Company.  The partners
elected to sell the property due to its lack of past performance or potential
future performance as an investment.

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





                                       5
<PAGE>   7
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.
Additionally, as a condition of closing the transaction:

                 (i)      the number of directors of the Company was increased
                          by one, and Paul Barham was elected to fill the
                          vacancy;

                 (ii)     HMG's Board of Directors was increased from two to
                          five members and Nasir M. Ashemimry, Wilson L.
                          Harrell and B. Joseph Vincent were elected thereto;

                 (iii)    as an inducement to become officers and employees of
                          the Company, the Company paid





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<PAGE>   8
                          each of Messrs. Marks and Barham a $12,500 signing
                          bonus on account of $25,000 each, the balance to be
                          paid within 180 days, and entered into three-year
                          employment agreements with them providing for annual
                          salaries of $75,000, automobile allowances, a health
                          care package and plans for both incentive
                          compensation and stock options; and

                 (iv)     HMG was granted a right to rescind the transaction in
                          the event the Company did not receive at least
                          $1,000,000 in working capital within the twelve (12)
                          month period following the closing.

         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, 1996.





Director Resignation

         On August 9, 1996, Mr. Nasir Ashemimry resigned as Chairman and
Director of the Company, to pursue other interests.

Hotel Management

         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.  Additionally, as part of a restructuring undertaken
by the Owners of that hotel, the food and beverage operations at the property
were leased to HMG California Partners, L.P. a California Limited Partnership,
of which Hotel Management Group - California, Inc. was the General Partner, and
the limited partners were members of the Owner's family.  Hotel Management
Group - California, Inc ceased to be the General Partner of HMG California
Partners L.P. on June 22, 1995 as part of further restructuring by the hotel's
owner.

         HMG - California entered into a management contract of the Rancho
Santa Barbara Marriott in May 1995.

         The management contract on the Days Inn Pass Christian Mississippi was
terminated in July 1995, as the property was to be purchased and demolished by
the State of Mississippi for the expansion of the highway system. As
compensation for the early termination of the management agreement, HMG
Mississippi  received a fee of $15,000.   Additionally, for the period July
1995 through July 1996,  HMG Mississippi  performed marketing consulting
services for the property.

Number of Employees

         At September 30, 1996, the Company had 2 full time employees and no
part time employees.





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                               Subsequent Events

Memphis Airport Sheraton

         On October 17, 1996 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 contracted with the new ownership to manage the hotel.

         In June of 1996 an unaffiliated company, LTS Group, Inc. entered into
a contract to purchase the hotel for a purchase price of $9 million.  Hotel
Management Group, Inc.  entered into an agreement with LTS Group, Inc. to study
feasibility and prepare recommendations and budgets.  Hotel Management Group,
Inc. was paid at the closing $25,000 for these efforts.  Costs to renovate the
hotel are budgeted to be approximately $2.5 million, which together with
closing costs and working capital for the hotel estimated at $1.2 million
comprise the $12.65 million transaction.  Of the $12.65 million, Lehman
Brothers Holdings, Inc. loaned approximately  $11.65 million and contributed
equity of $700,000.  LTS Group and others contributed equity of $200,000 and
the Company contributed $100,000.  The hotel is owned through limited
partnerships with the Company owning a limited partnership interest equating to
a 7% interest in the hotel, LTS Group, Inc., its affiliates and others 23%, and
Lehman Brothers and its affiliates 70%.  LTS Group, Inc., the Company and
others comprise Texas Memphis Investors Limited, a Texas limited partnership.
The Lender required as a condition of the 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 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 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 $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 and LTS Group, Inc. have
agreed to share certain fees in connection with the management agreement.  HMG-
Tennessee will receive a net monthly management fee of $5,000 per month for the
first 8 months, with fees thereafter changing to be a net 8% of the net
operating income of the hotel before debt service.  In recent years, the hotel
has had net operating income of approximately $1 million, although the Company
believes that if the proposed renovations and management of the hotel are
successful, net income may be able to be increased substantially.

McKinney Texas Development

         On November 19, 1996, Hotel Management Group, Inc., 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 Hotel Management Group will manage the hotels and conference
centers if the project is completed.

Item 2. Description of  Property

         The Company maintains its administrative and executive offices in a
commercial office building located at 17218 Preston Road, Suite 3200, Dallas,
TX  75252.  The lease for Suite 3200 was entered into by Hotel Management
Group, Inc.  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.





                                       8
<PAGE>   10
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, 1996.


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

         The Company obtained the written consent of the majority of the
Company's shareholders for the fiscal year ended September 30, 1996, in the
following matters:

         (i)    Sale of the Company's 20% Interest in Athena Gardens Apartments;

         (ii)   Preferred Stock Purchase and Release of Debt Agreement.





                                       9
<PAGE>   11
                                    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 1995             Fiscal 1996
                         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, 1996, 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 1995, 1996 or any subsequent year.   On
December 31, 1996, 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.





                                       10
<PAGE>   12
Item 6.  Management's Discussion and Analysis or Plan of  Operation

                             RESULTS OF OPERATIONS

A.       Revenues

                 Revenues for the periods ended September 30, 1995 and 1996
were primarily produced from the Company's interest in Hotel Management Group,
and the sale of the Company's interest in Athena Gardens Apartments.

         The Company anticipates income from Hotel Management Group to increase
as the subsidiary secures more management and consulting assignments.

B.       Employee Compensation

         Employee compensation expense includes salaries for Messrs Barham and
Marks as well as accounting staff of HMG.

C.       General and Administrative Expenses

         In 1995 and 1996 the Company incurred increased legal and professional
fees associated with the Company's goal to be compliant with SEC and other
reporting obligations.

Item 7.  Financial Statements

         (1)     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.
        
         (2)     The following financial statement schedules are filed as part
                 of this report:

                 Not applicable.


Item 8.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

         The Company engaged Arthur Andersen, LLP, as its independent
accountant on November 1, 1994, to succeed Price Waterhouse, which had audited
the Company's financial statements for the fiscal years ended September 30,
1991 and 1992.  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.

         The Company engaged Jackson & Rhodes, P.C. as its independent
accountant on May 31, 1996 to succeed  Arthur Andersen which had audited the
Company's financial statements for the fiscal years ended September 30, 1993
and 1994.

         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.





                                       11
<PAGE>   13
                                    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, 1996.

<TABLE>
<CAPTION>
                                                                        Consecutive
                           Principal Occupation                           Service
          Name              for the Past 5 Years                           Since           Age
 ----------------------    -----------------------                      -----------        ---
<S>                        <C>                                             <C>           <C>
 Paul L. Barham            CFO, Hotel Management Group since               1992            43
                           December, 1989; V. P. Finance, Savoy       
                           Resorts, March, 1986 to December, 1989.    
                                                                      
                           Current Position:  Chief Financial         
                           ----------------                           
                           Officer of Harrell International.          
                                                                      
                                                                      
                                                                      
Norman L. Marks            President, Hotel Management Group               1995            55
                           since December , 1989                      
                                                                      
                           Current Position: Chief Operating Officer, 
                           -----------------                          
                           of Harrell International, Inc.             
</TABLE>

The following table provides certain information concerning each of the
executive officers of the Company as of September 30, 1996.

<TABLE>
<CAPTION>
                                        All Positions and Terms of
                                        Office with the Company and 
         Name                Age        Five Year Employment History
----------------------       ---        ----------------------------
<S>                          <C>        <C>                                             
Norman L. Marks              55         Executive Vice President and Chief Operating
                                        Officer from August 19, 1992, Member of
                                        Board of Directors from Sept. 20, 1995.
                                        President of Hotel Management Group, Inc.
                                        since December 1989.
                                        
Paul L. Barham               43         Vice President and Chief Financial Officer of
                                        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.





                                       12
<PAGE>   14

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, 1996, 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
   or Number of
Persons in Group         Capacity in which served        Compensation (1)
----------------         ------------------------       -------------    
<S>                              <C>                    <C>
Norman L. Marks                  COO                    Received less than $100,000
                                                       
Paul L. Barham                   CFO                    Received less than $100,000
</TABLE>




(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 $12,000 during fiscal year
         1996.

         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.
        
         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, 1996, (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:





                                       13
<PAGE>   15
<TABLE>
<CAPTION>
                                               Number of shares
                                               of Class A Common
                                               Stock Beneficially
         Name and Address                      owned as of                 Approximate
         of Beneficial Owner                   September 30, 1996 (1)      Percent of Class
         -------------------                   ----------------------      ----------------
<S>                                            <C>                         <C>
DIRECTORS:                                                               
                                                                         
         Paul L. Barham (2)                    0                           0
         17218 Preston Road                                              
         Suite 3200                                                      
         Dallas, TX 75252                                                
                                                                         
         Norman L. Marks   (3)                 0                           0
         17218 Preston Road                                              
         Suite 3200                                                      
         Dallas, TX 75252                                                
                                                                         
5% BENEFICIAL OWNERS:                                                    
                                                                         
         Businesship International, Inc.       291,288                     29.82%
         One Alhambra Plaza                                              
         Suite 1400                                                      
         Coral Gables, FL 33134                                          
                                                                         
         Barham Family Interest, Inc.          100,000                     10.24%
         17218 Preston Road                    63,639 options (4)        
         Suite 3200                                                      
         Dallas, TX 75252                                                
                                                                         
         Marks & Associates, Inc.              100,000                     10.24%
         17218 Preston Road                    63,639 options (4)        
         Suite 3200                                                      
         Dallas, TX 75252                                                
                                                                         
         Wilson Harrell                        164,570 (5)                 16.85%
         7380 Pine Valley Road                                           
         Cumming, GA 30131                                               
                                                                         
         Clover, Inc.                          50,000                      5.12%
         2661 Midway Road                                                
         Suite 224
         Carrollton, TX 75006
</TABLE>





                                       14
<PAGE>   16
         (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 Interest, 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 Interest, 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 wife, are included in Mr. 
                  Harrell's beneficial ownership in the above table.
        
         As of September 30, 1996,  the Company had 976,580 shares of Class A
Common Stock, issued and outstanding.





                                       15
<PAGE>   17

                                    PART IV

Item 12.  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-
                                   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 is
                                   attached to this filing.


         (b)      Reports on Form 8-K -- One report on Form 8-K was filed
                  during the quarter ended September 30, 1996, a copy of which
                  is attached with this filing.





                                       16
<PAGE>   18
                                   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:     /s/ PAUL L. BARHAM
                                                -------------------------------
                                                Paul L. Barham
                                                Vice President,
                                                Chief Financial Officer
                                                And Director
                                        
DATE: February 28, 1997
      ---------------------


         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.



         /s/ PAUL L. BARHAM                                   February 28, 1997
         -----------------------------------------          --------------------
         Paul L. Barham, Vice President,                             Date
         Chief Financial Officer and Director

         /s/ NORMAN L. MARKS                                  February 28, 1997
         -----------------------------------------          --------------------
         Norman L. Marks, Vice President                             Date
         Chief Operating Officer and Director





                                       17
<PAGE>   19
                          HARRELL INTERNATIONAL, INC.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                            Page
<S>                                                                          <C>
Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . . . .  F-2

Consolidated Balance Sheets at September 30, 1996 and 1995  . . . . . . . .  F-3

Consolidated Statements of Operations For the Years Ended
    September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . .  F-4

Consolidated Statements of Changes in Shareholders' Equity (Deficit)
    For the Years Ended September 30, 1996 and 1995 . . . . . . . . . . . .  F-5

Consolidated Statements of Cash Flows For the Years Ended
    September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . .  F-6

Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . .  F-7
</TABLE>





                                     F-1
<PAGE>   20
                     [JACKSON & RHODES P.C. LETTERHEAD]



                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Shareholders
Harrell International, Inc.


We have audited the accompanying consolidated balance sheets of Harrell
International, Inc. and subsidiary as of September 30, 1996 and 1995, and the
related consolidated statements of operations, changes in shareholders' equity
(deficit) 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 financial position of Harrell
International, Inc. and subsidiary as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.



                                                       /s/ JACKSON & RHODES P.C.
                                                           Jackson & Rhodes P.C.





Dallas, Texas
December 13, 1996





                                      F-2
<PAGE>   21
                          HARRELL INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1996 AND 1995

                                     ASSETS

<TABLE>
<CAPTION>
                                                             1996           1995
                                                          -----------    -----------
Current assets:
<S>                                                       <C>            <C>        
      Cash                                                $   140,288    $    36,843
      Accounts receivable                                      49,712         41,201
      Accounts receivable - affiliate                           5,125
      Other assets                                              2,888          5,961
                                                          -----------    -----------
             Total current assets                             198,013         84,005
                                                          -----------    -----------

Property and equipment:
      Furniture and fixtures                                   25,343         21,897
         Less accumulated depreciation                        (20,211)       (17,826)
                                                          -----------    -----------
             Total property and equipment                       5,132          4,071
                                                          -----------    -----------

Other assets:
      Investment in limited partnership                         2,798           --
                                                          -----------    -----------

                                                          $   205,943    $    88,076
                                                          ===========    ===========

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
      Accounts payable and accrued liabilities            $    65,972    $    50,819
      Accrued salaries                                            551         16,516
                                                          -----------    -----------
             Total current liabilities                         66,523         67,335

Long-term debt:
      Amounts payable to related parties                        8,000         15,077
      Investments in joint ventures (Note 5)                   12,961          9,009
                                                          -----------    -----------
             Total liabilities                                 87,484         91,421
                                                          -----------    -----------

Commitments and contingencies (Note 10)                          --             --

Shareholders' equity (deficit):
      Preferred stock to be issued (Note 3)                      --          243,331
      Preferred stock, $1 par, 1,000,000 shares authorized,
         243,331 shares issued and outstanding                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                     --             --
      Additional paid-in capital                            2,077,287      2,077,287
      Accumulated deficit                                  (2,211,925)    (2,333,729)
                                                          -----------    -----------
             Total shareholders' equity (deficit)             118,459         (3,345)
                                                          -----------    -----------

                                                          $   205,943    $    88,076
                                                          ===========    ===========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   22
                          HARRELL INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>
                                                  1996         1995
                                               ----------   ----------
<S>                                            <C>          <C>       
Revenues:
      Management fees                          $  373,094   $  300,757
      Consulting fees                              15,900       82,400
      Equity in income of joint ventures            3,623        2,437
      Other                                         9,978       16,374
                                               ----------   ----------
                Total revenues                    402,595      401,968
                                               ----------   ----------

Expenses:
      Employee compensation                       253,157      221,292
      General and administrative                   99,373      102,917
                                               ----------   ----------
                Total expenses                    352,530      324,209
                                               ----------   ----------

                Operating income                   50,065       77,759

Gain on sale of joint ventures                     96,070         --
                                               ----------   ----------

Net income                                        146,135       77,759

Preferred dividends accrued                        24,331         --
                                               ----------   ----------

Net income available for common shareholders   $  121,804   $   77,759
                                               ==========   ----------

Earnings per common share                      $     0.12   $     0.08
                                               ==========   ==========

Weighted average shares outstanding               976,580      976,580
                                               ==========   ==========
</TABLE>






          See accompanying notes to consolidated financial statements.





                                      F-4
<PAGE>   23
                          HARRELL INTERNATIONAL, INC.
      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                    Years Ended September 30, 1996 and 1995


<TABLE>
<CAPTION>
                                                                                                                        
                                          Preferred                                                                     
                                            Stock              Preferred Stock                Common Stock - Class A    
                                                          -----------------------------   ----------------------------- 
                                         to be Issued        Shares          Amount          Shares          Amount     
                                         -------------    -------------   -------------   -------------   ------------- 
<S>                                      <C>              <C>             <C>             <C>             <C>           
Balance, September 30, 1994              $        --               --     $        --           976,580   $       9,766 
                                                                                                                        
Preferred shares to be issued                                                                                           
    for conversion of debt (Note 3)            243,331             --              --              --              --   
                                                                                                                        
Net income                                        --               --              --              --              --   
                                         -------------    -------------   -------------   -------------   ------------- 
                                                                                                                        
Balance, September 30, 1995                    243,331             --              --           976,580           9,766 
                                                                                                                        
Preferred stock issued                        (243,331)                         243,331            --              --   
                                                                                                                        
Net income available for                                                                                                
    common shareholders                           --               --              --              --              --   
                                         -------------    -------------   -------------   -------------   ------------- 
                                                                                                                        
Balance, September 30, 1996              $        --                      $     243,331         976,580   $       9,766 
                                         =============    =============   =============   =============   ============= 


<CAPTION>
                                                                               Total
                                            Additional                      Shareholders'
                                             Paid-In        Accumulated        Equity
                                             Capital         Deficit         (Deficit)
                                          -------------    -------------    -------------
<S>                                       <C>              <C>              <C>          
Balance, September 30, 1994               $   2,077,287    $  (2,411,488)   $    (324,435)
                                        
Preferred shares to be issued           
    for conversion of debt (Note 3)                --               --            243,331
                                        
Net income                                         --             77,759           77,759
                                          -------------    -------------    -------------
                                        
Balance, September 30, 1995                   2,077,287       (2,333,729)          (3,345)
                                        
Preferred stock issued                             --              --               --
                                        
Net income available for                
    common shareholders                            --            121,804          121,804
                                          -------------    -------------    -------------
                                        
Balance, September 30, 1996               $   2,077,287    $  (2,211,925)   $     118,459
                                          =============    =============    =============
</TABLE>



          See accompanying notes to consolidated financial statements.




                                      F-5
<PAGE>   24
                          HARRELL INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    Years Ended September 30, 1996 and 1995

<TABLE>
<CAPTION>
                                                              1996         1995
                                                           ----------   ----------
<S>                                                        <C>          <C>       
Cash flows from operating activities:
     Net income available for common shareholders          $  121,804   $   77,759
       Adjustments to reconcile net income to
          net cash provided by operating activities:
         Depreciation                                           2,385        3,603
         Gain on sale of joint venture                        (96,070)        --
         Equity in (income) losses of joint venture            (3,624)      (2,437)
         Accretion of equity interest in assets of
            joint venture over initial investments             (3,121)      (3,240)
         Changes in assets and liabilities:
            Accounts receivable                                (8,511)     (10,290)
            Other assets                                        3,073       (1,692)
            Accounts payable and accrued liabilities           14,169       22,728
            Amounts payable to related parties                 (7,078)      (4,328)
            Accrued salaries                                  (15,965)     (55,395)
                                                           ----------   ----------
               Net cash provided by operating activities        6,062       26,708
                                                           ----------   ----------

Cash flows from investing activities:
     Purchase of furniture and equipment                       (3,446)      (3,612)
     Return of capital in joint ventures                        7,752        5,750
     Proceeds from sale of joint venture                      100,000         --
     Receivable from affiliate                                 (5,125)        --
     Investment in limited partnership                         (2,798)        --
                                                           ----------   ----------
               Net cash provided by investing activities       96,383        2,138
                                                           ----------   ----------

Net increase in cash                                          102,445       28,846

Cash at beginning of year                                      36,843        7,997
                                                           ----------   ----------

Cash at end of year                                        $  140,288   $   36,843
                                                           ==========   ==========


Supplemental cash flow information:
     Interest paid during year                             $     --     $       80
                                                           ==========   ==========
</TABLE>

Non-cash transactions:

     In December 1995, the Company agreed to issue certain preferred shares 
     as payment for certain debt (Note 3).


          See accompanying notes to consolidated financial statements.





                                      F-6
<PAGE>   25
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         SEPTEMBER 30, 1996 AND 1995



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.  A significant portion of the revenues in 1996 and 1995
       were produced from the Company's wholly-owned subsidiary, HMG.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Principles of Consolidation

       The consolidated financial statements include the accounts of the
       Company and its subsidiary.  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 from five to fifteen years.





                                      F-7
<PAGE>   26
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       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 5).

       Income Taxes

       The Company accounts for income taxes pursuant to Statement of Financial
       Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109)
       which requires a change from the deferred method to 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

       Earnings per common share is computed on the weighted average number of
       shares outstanding during the period.

3.     CAPITAL TRANSACTION WITH XENEX INTERNATIONAL, INC.

       On May 28, 1992, the Company entered into a stock purchase agreement
       (the "Agreement") with Xenex International, Inc. ("Xenex"), a Florida
       corporation, whereby upon successful completion of the terms of the
       Agreement, Xenex would purchase, or be granted an option to purchase, up
       to 1,941,520 shares of Class A common stock of the Company.

       On the closing date, Xenex acquired 291,228 shares and a one-year
       warrant to purchase up to 1,650,292 shares at a purchase price of $.5151
       per share or $850,000 in the aggregate, the term of which was to expire
       on June 30, 1993.  In consideration for purchase of the 291,228 shares
       and the warrant, Xenex paid a total of $150,000 comprised of $100,000
       cash and the forgiveness of a $50,000 loan to the Company.

       Further, on the closing date, the Company's chairman and Xenex
       established a voting trust which provided that Xenex, or its designees,
       as trustee, had the right to vote the chairman's shares for a time
       period not to exceed one year from the closing date.  This voting trust,
       together with the shares owned by Xenex, gave Xenex control of
       approximately 59% of the total outstanding shares of the Company for the
       year ended September 30, 1994.





                                      F-8
<PAGE>   27
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.     CAPITAL TRANSACTION WITH XENEX INTERNATIONAL, INC. (CONTINUED)

       Upon and as a condition of closing, the board of directors of the
       Company was increased from three to five members.  Two executives of
       Xenex were elected to the board.  In addition, the chief executive
       officer of Xenex was elected chairman of the board of the Company.

       On February 16, 1993, the Company entered into a modification of the
       common stock warrant with Xenex which extended the term of the warrant
       to June 30, 1995.  The warrant expired on June 30, 1995, without Xenex
       purchasing additional shares in the Company.  In addition, Xenex agreed
       to loan the Company $150,000.  The loan bore interest at 2% above prime
       with principal and interest due on June 30, 1995.  The note was secured
       by the Company's joint venture interests (see Note 5).  The note was
       increased and an additional $66,933 was funded during 1994.

       By agreement with Businesship (see below) dated September 27, 1996, the
       outstanding balance of the note of $243,331, including accrued interest
       of $26,398, was converted into preferred stock to be issued by the
       Company.  The preferred shares were from a new class of stock authorized
       by the Company and are nonvoting, nonconvertible and will pay a 10%
       dividend ($24,331 annually), beginning with the year ended September 30,
       1996.  The Company shall have the right, but not the obligation, to
       redeem the shares at any time at par value.

       In March 1993, an agreement was reached between Xenex and Businesship
       International ("Businesship") for the sale of Xenex to Businesship.
       Xenex and Businesship are majority owned by Mr. Nasir Ashemimry, a
       director of the Company.  Under the terms of the agreement, Businesship
       purchased Xenex's rights, duties and obligations under the Xenex
       Agreement with the Company.

       On December 15, 1994, an agreement was reached between Businesship and
       its wholly-owned subsidiary, Xenex, to merge Xenex into Businesship.
       The effect was to transfer 291,228 shares of the Company's Class A
       common stock from Xenex to Businesship.

       On December 15, 1994, the board of directors of Businesship resolved to
       declare a dividend of all the stock that it owned in the Company to its
       shareholders of record as of January 15, 1995.  The effect of this
       action was that a total of up to 291,228 shares of Class A common stock
       of the Company was to be issued to sixty-eight people and/or entities.
       As a result of these events, Nasir Ashemimry was to own or beneficially
       own 14.9% or more of the Company's Class A common stock.  Delivery of
       the stock certificates had been delayed pending the resolution of all
       deficiencies in the Company's reporting obligations under the Securities
       Exchange Act of 1934.  On January 31, 1996, the shareholders of
       Businesship resolved not to issue stock in the Company to Businesship
       shareholders, but that Businesship International would remain holder of
       the 291,228 shares in the Company.





                                      F-9
<PAGE>   28
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.     ACQUISITION OF HOTEL MANAGEMENT GROUP

       In August 1992, the Company purchased 100% of the issued and outstanding
       common stock of HMG.  The common stock was purchased from Barham Family
       Interests, Inc. ("Barham") and Marks and Associates, Inc. ("Marks") for
       stock and consideration of $15,149, which represented the net book value
       of HMG at the time of acquisition.  In addition, the Company issued
       200,000 shares of its Class A common stock to Barham and Marks (100,000
       shares each).  HMG is engaged in the business of managing the general
       operations of hotels and providing them with accounting services.

       In conjunction with the purchase, the Company signed a three year
       employment agreement with the former officers of HMG, Paul Barham and
       Norman Marks.  As an inducement to sign, the officers were granted
       signing bonuses of $25,000 each, to be paid $12,500 each upon execution
       of the agreement and $12,500 each by June 30, 1995.  The Company paid
       the remaining $12,500 each in October 1993.  Additionally, they are to
       receive an annual salary of $75,000 each, monthly car allowances of $500
       each, a health care package and plans for both incentive compensation
       and stock options.  In addition, the officers were granted the right to
       rescind the transaction in the event the Company did not receive an
       additional $850,000 in equity capital any time prior to June 30, 1995.
       The officers elected not to rescind the transaction.

       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.  Additionally, as part of a restructuring
       undertaken by the owners of that hotel, the food and beverage operations
       at the property were leased to HMG California Partners LP, a California
       Limited Partnership, of which HMG - California is the General Partner,
       and the limited partners are members of the owner's family.  HMG -
       California, Inc. ceased to be the General Partner of HMG California
       Partners, LP on June  22, 1995, as part of further restructuring by the
       hotel's owner.

       Effective July 22, 1994, HMG formed a wholly-owned subsidiary, Hotel
       Management Group - Mississippi, Inc. ("HMG - Mississippi") to hold the
       management contract for the operation of the Days Inn, a 60-room
       oceanfront limited service hotel in Pass Christian, Mississippi.  HMG
       opened this property on August 25, 1994.  The management contract on the
       Days Inn in Pass Christian, Mississippi (Note 4), was terminated in July
       1995.  The property was to be purchased by the State of Mississippi and
       demolished for the expansion of the highway system.  As compensation for
       the early termination of the management agreement, HMG - Mississippi has
       received a fee of $15,000.





                                      F-10
<PAGE>   29
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.     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 two of the properties, Athena
       Gardens and Riviera, resulting in a gain of $96,070.  The Company has
       also entered into an agreement to sell the third joint venture, Villa
       Martinique.

       Riviera

       On December 7, 1990, the Company entered into a joint venture agreement
       with Riviera Investors Corporation ("Riviera").  This joint venture is
       referred to as the "Riviera Joint Venture".

       Under the terms of the joint venture agreement as amended, Riviera
       contributed $232,000 to the venture and the Company contributed all of
       its rights under a purchase agreement it had entered into for the
       acquisition of an apartment complex known as Riviera Apartments located
       in Dallas, Texas.  The agreement provided that Riviera was to receive
       the first $32,480 of the venture's annual net profits (as defined), and
       the Company would receive any net profits exceeding $32,480, but less
       than $64,960.  Any net profits in excess of $64,960 would be allocated
       40% to the Company and 60% to Riviera.  Net losses were to be allocated
       equally to Riviera and the Company.  Riviera and the Company had a 60%
       and 40% voting interest, respectively, in the joint venture.  The
       Company supervised the joint venture's day-to-day operations through
       HMG.  No compensation, other than the profit sharing arrangement
       discussed above, was received for such supervision by the Company.

       During 1996 and 1995, the Riviera Joint Venture did not earn in excess
       of $32,480.  Accordingly, the Company did not recognize any equity in
       the earnings of the Riviera Joint Venture for the fiscal years ended
       September 30, 1996 and 1995.

       On August 3, 1996, the Riviera Apartments were sold to a Mr. Dallas
       Smith, an unrelated party, for the sum of $260,000.  The net proceeds
       due to the original investors in Riviera were slightly more than their
       original investment, and therefore the sale resulted in no proceeds to
       the Company.  The partners elected to sell the property due to its lack
       of past performance or potential future performance as an investment.





                                      F-11
<PAGE>   30
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.     INVESTMENTS IN JOINT VENTURES (CONTINUED)

       Villa Martinique

       On July 15, 1991, the Company entered into a joint venture known as the
       "Villa Martinique Joint Venture" with Villa Martinique Investors
       Corporation ("Villa Martinique").  The joint venture was formed to
       purchase and operate an apartment complex in Irving, Texas known as the
       Villa Martinique Apartments.  Under the terms of the joint venture
       agreement, Villa Martinique contributed $275,000, and the Company
       contributed 80.714% of its rights under a purchase agreement with Home
       Savings of America, F.S.B. ("Home Savings") to acquire the property.
       The remaining 19.286% interest in the property was conveyed by the
       Company to the Company's chairman in consideration for his agreement to
       be a co-maker of the promissory note discussed below.  Villa Martinique
       Joint Venture consists of the Company, with a 12.4% ownership and profit
       or loss interest and Villa Martinique, with the remaining 87.6%.  The
       Company's 12.4% interest in the joint venture translates into a 10%
       interest in the underlying property.

       Although both Villa Martinique and the Company share equally the right
       to manage the joint venture, the Company, through HMG, supervises the
       joint venture's day-to-day operations.

       Villa Martinique and the Company's chairman are both makers of an August
       13, 1991, promissory note to Home Savings in the amount of $1,495,000,
       which bears interest at 7.5% through August 31, 1992.  The rate
       increases 8.5%, 10% and 10.5% for the periods ending August 31, 1993,
       August 31, 1994 and September 1, 2001, respectively.  This note is
       collateralized by property, an assignment of the property's leases and
       rents, and personal guarantees.

       On July 13, 1994, the Company, along with the other partners of Villa
       Martinique Joint Venture entered into a Compromise, Settlement and
       Release Agreement ("the Compromise") with the property's mortgage
       holder, Home Savings.  The Compromise was reached after responsibility
       for roof problems, which caused the complex to experience leaking and
       ceiling failures rendering 15 units uninhabitable, was acknowledged by
       the lender.  The Compromise called for a new roof to be installed at the
       property, was well as an allowance for other minor repairs.
       Additionally, the partners negotiated an increase of $100,000 to the
       related mortgage, which was allocated to be used to make other
       improvements to the property, as well as a reduction in the interest
       rate on the mortgage.

       During the fiscal years ended September 30, 1996 and 1995, the Company
       recognized $6,309 and $3,366, respectively, in equity in the earnings of
       Villa Martinique.





                                      F-12
<PAGE>   31
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.     INVESTMENTS IN JOINT VENTURES (CONTINUED)

       Sale of the Company's Interest in Villa Martinique Apartments

       The Company has negotiated with Messrs. Arthur Linkletter and Wilson
       Harrell to sell the Company's 10% interest in the Villa Martinique
       Apartments Joint Venture for the sum of $38,889, payable $29,020 in cash
       at closing with a note in the amount of $9,869 bearing interest at the
       prime rate, due in two years.  This transaction closed in November 1996.

       Athena Gardens

       On November 26, 1991, the Company entered into a joint venture agreement
       with related parties to purchase and operate a 72-unit complex known as
       Athena Gardens Apartments in Athens, Texas.  This transaction provided
       for the joint venture's December 4, 1991 acquisition of the property
       from Camarilla Development, Inc. ("Camarilla") for $600,000 in cash,
       $420,000 of which was financed by First State Bank ("First State").  The
       First State loan is collateralized by a first lien deed of trust,
       assignment of rents and leases and other liens in favor of First State
       and personal guarantees.  The $420,000 loan is to be repaid over 120
       months and bears a fluctuating interest rate which is based on the prime
       lending rate plus two percent.  The maximum and minimum rates are 15%
       and 9% per annum, respectively.

       Like the Riviera and Villa Martinique projects, this transaction
       provided for the assignment by the Company of its real property purchase
       contract to the joint venture comprised of the Company and Athena
       Gardens Investors Corporation, a Texas corporation ("Athena Gardens
       Corporation").  The joint venture is referred to as the "Athena Gardens
       Joint Venture".

       Athena Gardens Corporation made a $235,500 capital contribution to the
       Athena Gardens Joint Venture and the Company contributed its rights
       under its purchase contract with Camarilla.  Under the terms of the
       joint venture agreement, the net profits or losses (as defined) were to
       be distributed 80% to the Athena Gardens Corporation and 20% to the
       Company, after reasonable reserves are withheld for the joint venture's
       indebtedness.  Although both the Company and Athena Gardens Corporation
       had an equal voice in the management of the Athena Gardens Joint
       Venture's business, the Company, through HMG, supervised its day-to-day
       affairs.

       During the fiscal years ended September 30, 1996 and 1995, the Company
       recognized $9,650 and $802, respectively, in equity in the earnings of
       Athena Gardens.

       On August 20, 1996, the Company sold its 20% interest in Athena Garden
       Apartments Joint Venture to Messrs. Irvin Atkins, Arthur Linkletter, and
       Wilson Harrell, who collectively represent 83.33% of Athena Gardens
       Investors Corporation, the Company's joint venture partner in Athena
       Gardens Joint Venture, for the sum of $100,000.





                                      F-13
<PAGE>   32
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.     INVESTMENTS IN JOINT VENTURES (CONTINUED)

       The sale was approved by the Board and the holders of a majority of the
       shares of the Company under authority of Section 6 of the Company's
       bylaws.  The Company agreed to the sale to raise funds so that it can
       secure medium term hotel management contracts for Hotel Management Group
       and its subsidiaries, as part of the Company's future goals.

       Following is a reconciliation of investments in joint ventures at
       September 30:

<TABLE>
<CAPTION>
                                                                 1996         1995
                                                               ---------    --------- 
       <S>                                               <C>           <C>
       Balance at beginning of year                            $  (9,009)   $  (8,936)
       Equity in income of joint ventures                          3,623        2,437
       Accretion of equity interest in net assets
       of joint ventures over initial investments                  3,121        3,240
       Distributions (7,752)                                      (5,750)
       Sale of Riviera                                             4,551         --
       Sale of Athena Gardens                                     (7,495)        --
                                                               ---------    --------- 
              Balance at end of year                           $ (12,961)   $  (9,009)
                                                               =========    ========= 
</TABLE>

       As discussed in Note 1, the Company recorded its initial investments in
       the joint ventures at the cost of the contributed rights or assets.
       However, the Company has an equity interest in the net assets of each
       joint venture which exceeds its initial investment.  The Company
       accretes the excess of its interest in net assets of the joint ventures
       over its initial investments over the depreciable lives of the apartment
       complexes.

       Set forth below is the summarized unaudited combined financial
       information of the remaining joint ventures for the years ended
       September 30:

<TABLE>
<CAPTION>
                                   1996         1995
                                   ----         ----
<S>                             <C>          <C>       
       Current assets           $   51,264   $   89,155
       Noncurrent assets         2,016,702    2,934,647
       Current liabilities         123,345      191,832
       Noncurrent liabilities    1,557,548    1,858,511
       Venturers' equity           387,073      973,459

       Total revenues              729,458    1,076,932
       Total expenses              683,676    1,004,313
       Net income                   45,782       72,619
</TABLE>

6.     FEDERAL AND STATE INCOME TAXES

       As of September 30, 1996, the Company had net operating loss
       carryforwards of approximately $2,887,000 for book and tax purposes.
       Unused operating loss carryforwards may provide future tax benefits,
       although there can be no assurance that these net operating





                                      F-14
<PAGE>   33
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.     FEDERAL AND STATE INCOME TAXES (CONTINUED)

       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,
       no deferred tax assets have been recorded in the accompanying financial
       statements.

       The loss carryforwards expire as follows:

<TABLE>
<CAPTION>
            Year of                                   Operating Loss 
          Expiration                              Carryforward Expirations
          ----------                              ------------------------
             <C>                                        <C>        
             1997                                       $   114,000
             1998                                           314,000
             1999                                           485,000
             2002                                            20,000
             2003                                            27,000
             2004                                         1,116,000
             2005                                           295,000
             2006                                            87,000
             2007                                           158,000
             2008                                           157,000
             2009                                           114,000
                                                        -----------
                                                        $ 2,887,000
                                                        ===========
</TABLE>

7.     COMMITMENTS AND CONTINGENCIES

       Leases

       The Company leases its office facility from an unrelated party.  The
       lease expired on October 31, 1996, and as of December 13, 1996, the
       lease is on a month-to-month basis.  The Company also leases an off-site
       storage facility on a month-to-month basis.  Rental expense for the
       years ended September 30, 1996 and 1995 amounted to $17,663 and $12,997,
       respectively.

       The lease commitment for 1997 is $1,152.

       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.





                                      F-15
<PAGE>   34
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.     COMMITMENTS AND CONTINGENCIES (CONTINUED)

       Fair Value of Financial Instruments

       The following disclosure of the estimated fair value of financial
       instruments is made in accordance with the requirements of SFAS No. 107,
       Disclosures about Fair Value of Financial Instruments. The estimated
       fair value amounts have been determined by the Company, using available
       market information and appropriate valuation methodologies.

       The fair value of financial instruments classified as current assets or
       liabilities including cash and cash equivalents, receivables and
       accounts payable approximate carrying value due to the short-term
       maturity of the instruments.

8.     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 5).  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, 1996 and 1995.  In addition, $7,077 was advanced to the Company as
       of September 30, 1995 by Riviera Joint Venture to cover a portion of the
       Company's operating expenses.  The Company has reimbursed Riviera Joint
       Venture.

9.     MAJOR CUSTOMERS

       The Company received approximately 71% and 62% of gross management
       revenues from the Biltmore Hotel in California for the years ended
       September 30, 1996 and 1995, respectively.

10.    SUBSEQUENT EVENTS

       Director Resignation

       Effective August 9, 1996, Mr. Nasir Ashemimry resigned as Chairman,
       Director and CEO of the Company to pursue other interests.





                                      F-16
<PAGE>   35
                         HARRELL INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.    SUBSEQUENT EVENTS (CONTINUED)

       Memphis Airport Sheraton Acquisition

       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 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 nonrecourse
       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 will
       receive a net monthly management fee of $5,000 per month for the first
       eight months, with fees thereafter changing to be a net 8% of the net
       operating income of the hotel before debt service.





                                      F-17
       

<PAGE>   36

                              INDEX TO EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION
-------                  -----------
<S>           <C>
  27          -  Financial Data Schedule

  99.1        -  Preferred Stock Purchase and Release of Debt Agreement
</TABLE>