UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

|X|            ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF 
                       THE SECURITIES EXCHANGE ACT OF 1934
                      For the year ended December 31, 1996

                                       OR

|_|          TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
               For the transition period from ________ to ________

                          Commission File Number 1-9043

                          Banyan Hotel Investment Fund
             (Exact name of Registrant as specified in its charter)

            Delaware                                           36-3361229
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                           Identification Number)

One Penn Plaza, Suite 1531, New York, New York                    10119
(Former Address: 150 S. Wacker Drive, Chicago,IL)                 60606
(Address of principal executive offices)                        (Zip Code)

      Registrant's telephone number, including area code (212) 736-7880

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

Title of each Class               Name of each exchange on which registered

Shares of Common Stock                               None 
        
      Securities registered pursuant to section 12 (g) of the Act:

                                      None
                                (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 Yes |X| No |_|.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB |X|.

The Registrant's Revenue for the preceding twelve months was $150,428. Shares of
common stock outstanding as of March 3, 1997: 12,338,051. Aggregate market value
of the Registrant's shares of common stock held by non-affiliates as of such
date was approximately $9,516,885.

                     DOCUMENTS INCORPORATED BY REFERENCE
Exhibit index located on Page 18 of sequentially numbered pages. Transitional
Small Business Disclosure Format  Yes |_|.  No  |X|.
<PAGE>

                              TABLE OF CONTENTS

                                    PART I

Item 1.    Description of Busines ........................................   1
Item 2.    Description of Property .......................................   5
Item 3.    Legal Proceedings .............................................   5
Item 4.    Submission of Matters to a
            Vote of Security Holders .....................................   5

                                   PART 11

Item  5.   Market for Common Equity and
            Related Shareholder Matters ..................................   6
Item  6.   Management's Discussion and
            Analysis or Plan of Operation ................................   6
Item  7.   Financial Statements ..........................................  10
Item  8.   Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure .......................  10

                                   PART 111

Item  9.   Directors, Executive Officers, Promotors
            and Control Persons of the Registrant ........................  11
Item  10.  Executive Compensation ........................................  14
Item  11.  Security Ownership of Certain Beneficial
            Owners and Management ........................................  15
Item  12.  Certain Relationships and Related Transactions ................  17
Item  13.  Exhibits, Financial Statement Schedules and
            Reports on Form 8-K ..........................................  18
SIGNATURES ...............................................................  19
<PAGE>

                                    PART 1

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

      The Registrant, Banyan Hotel Investment Fund (the "Fund"), was originally
organized as a Massachusetts business trust pursuant to a Declaration of Trust
filed March 19, 1985, under the name VMS Hotel Investment Trust and subsequently
reorganized as a Delaware corporation On March 13, 1987, at which time the
Fund's name was changed to VMS Hotel Investment Fund. The Fund began doing
business under its present name following shareholder authorization to amend its
Certificate of Incorporation to formally change its name to Banyan Hotel
Investment Fund during the second quarter of 1991.

      On September 13, 1985, the Fund commenced a public offering of up to
10,000,000 units pursuant to a Registration Statement filed on Form S-11 under
the Securities Act of 1933. Each unit consisted of two shares of common stock
("shares") at an offering price of $9.50 per share and one warrant entitling the
holder to purchase one additional share at an initial exercise price of $9.50
per share. The shares and warrants were separated January 14, 1986. The warrants
were exercisable for a five year period ending January 13, 1991, on which date
all outstanding warrants were converted by the Fund into one-tenth of a share.

      The public offering was terminated on December 16, 1985 and the final
closing occurred on January 13, 1986, with 4,931,333 units sold. The Fund
received gross proceeds of $98,482,751, net of volume discounts, from the sale
of units of which $201,000 represented the sale of 10,050 units purchased by VMS
Realty Partners.

PRESENT BUSINESS OPERATIONS

      The Fund was originally established to invest in mortgage loans,
principally to entities affiliated with VMS Realty Partners which were
collateralized by hotel and resort properties. Mortgage loans made by the Fund
were for initial terms of three, five or seven years, and were pre-payable in
whole at any time without prepayment penalty.

      On January 28, 1992, the Board of Directors of the fund authorized the
preparation of a formal plan of liquidation which was subsequently adopted on
April 7, 1992 (the "Plan"). The Plan contemplated the Fund liquidating its
assets and distributing the proceeds to its shareholders. The Fund estimated
that its liquidation value was between $.15 and $.20 per share. Since the
adoption of the plan, management of the Fund completed the workout or
liquidation of certain assets and considered alternatives to the announced plan
of liquidation which could provide greater shareholder value, including a number
of unsolicited proposals from various third parties. Based upon Management's
review of these various proposals, the Board of Directors resolved that one
proposal was in the best interest of the Fund and its shareholders because it
allowed every shareholder an opportunity to sell his shares at an amount in
excess of the projected liquidation value. The board of Directors, by unaminous
written consent


                                        1
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS (continued)

dated June 15, 1994, authorized the Fund to execute and deliver a nonbinding
letter of intent with a Mr. Harvey Polly.

      On August 3, 1994 the Fund entered into a Purchase Agreement (the
"Purchase Agreement") with Mr. Polly providing, among other things, for an all
cash tender offer, under which Mr. Polly agreed to offer to purchase 100% of the
shares of common stock of the Fund for $0.35 per share. The Purchase Agreement
was subsequently amended on November 4, 1994, December 19, 1994 and February 15,
1995. The Purchase Agreement provided, among other things, for the following
events to occur at or before closing: (i) the resignation of the then current
officers and directors, (ii) the purchase by the Fund of "run-off" directors and
officers liability insurance coverage for the current officers and directors;
(iii) the termination of the employment contract of Leonard G. Levine and
payment of the severence compensation associated therewith; (iv) the termination
of the Administrative Services Agreement with Banyan Management Corp. and
payment of the termination fee associated therewith; and (v) the assignment by
the Fund of its ownership interest in Banyan Management Corp.

      On February 15, 1995, a change in control of the Fund occurred pursuant to
the closing of the sale of shares of common stock in the Fund to Mr. Polly
pursuant to the Purchase Agreement. Mr. Polly's tender offer, which commenced on
December 28, 1994, concluded on January 26, 1995, and resulted in the tender to
Mr. Polly of 1,288,217 shares of common stock, or 12.5% of the Fund's then
outstanding shares of common stock, for a cash price of $0.35 per share.
Subsequent to the closing of the tender offer, the terms of the Purchase
Agreement also required Mr. Polly to purchase from the Fund a number of shares
sufficient to allow Mr. Polly to own, by virtue of the combination of the tender
offer and the share purchase, not less than 3,335,000 and not more than 40% of
the shares of common stock after giving effect to the shares issued in
connection with the purchase on February 15, 1995, per the Purchase Agreement.
Mr. Polly purchased 2,047,766 newly issued shares of common stock of the Fund
for a cash price of $0.22 per share. Upon the acquisition of the aforesaid
shares from the Fund, when combined with the shares of common stock previously
owned and acquired pursuant to the tender offer, Mr. Polly is the beneficial
owner of 3,335,983 shares, or approximately 27% of the Fund's outstanding voting
shares of common stock.

      Upon the closing of the sale of shares of common stock of the Fund on
February 15, 1995, the Purchase Agreement provided for the resignation of the
Fund's then current Directors and Officers. Accordingly, all of the then current
Directors and Officers resigned and were replaced with Mr. Polly's designees.
Subsequent to the resignation of the Directors and Officers of the Fund, no
further arrangements or understanding among the Fund or its new Officers and
Directors existed. On February 15, 1995, Messrs, Leo Yarfitz, Morton I. Kalb,
Willis G. Ryckman and Harvey Polly were appointed as new Directors of the Fund.
In addition, the new Directors appointed Mr. Harvey Polly as President and Chief
executive Officer, Mr. Morton I. Kalb as Vice President and Chief Financial
Officer, Ms. Celia Zisfein as Secretary and Mr. William L. Weiss as Assistant
Secretary. Effective February 15, 1995, Mr. Polly's and the Fund's address of
their principal executive office is One Penn Plaza, Suite 1531, New York New
York 10119.


                                        2
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS (continued)

      On October 14, 1996, the Fund was notified by the American Stock Exchange
that its shares would be removed from listing on the Exchange, and that the last
day of trading on the Exchange, would be October 25, 1996. The reason for this
action was that the Fund no longer meets the requirements for continued listing,
and Banyan had discontinued previously announced negotiations to acquire a
portfolio of retail shopping center properties.

      Also, on October 14, 1996, the Fund issued a press release stating the
above facts, as well as that it had resumed negotiations to acquire, for cash
and stock valued at approximately $80,000,000 a privately held domestic and
international manufacturer and distributor of toys, hobby and leisure products
with annual sales of approximately $80,000,000. Banyan noted that the
acquisition of the toy, hobby and leisure products company was subject to
negotiation and execution of definitive agreements and subject to obtaining
commitments for financing required to consummate the acquisition. Banyan also
noted that certain aspects of the acquisition program would require stockholder
approval and that the matter would be submitted to stockholders at a meeting on
a date to be announced.

      During the week of October 28, 1996, the Fund's shares began trading on
the NASD market with a ticker symbol of "VHTI".

      The Fund has attempted to reduce the ongoing operating expenses of the
Fund in order to maximize the net cash return to shareholders. The Fund's
ultimate return to shareholders is dependent upon management's ability to make
profitable acquisitions and utilize its net operating loss.

      Below is a summary and current status for each of the Fund's remaining
assets at December 31, 1996.

SANTA BARBARA BILTMORE

      The Fund currently owns a 50% limited partnership interest in the Santa
Barbara Biltmore Partnership which was originally recorded by the Fund at its
fair market value and is accounted for on the equity method. This asset is
illiquid due to the poor operating performance of the hotel. While the Fund
believes that the operation of the hotel may improve over time to the point that
sale of this asset could result in a recovery of a portion of the Fund's
investment, the timing and amount of such a recovery is difficult to predict.
The Fund did not record losses related to its interest in the Santa Barbara
Biltmore during 1996, 1995, 1994 and 1993 since the carrying value of the
partnership interest was reduced to zero as of December, 1992 and the Fund has
no obligation to make additional capital contributions to, or to pay the
liabilities of, the partnership.


                                        3
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS (continued)

OMNI PARK CENTRE

      On June 17, 1987, the Fund issued a $5,154,600 third mortgage loan to Park
Centre Associates (the "Borrower") which was collateralized by the Omni Park
Hotel (the "Property") located in New York, New York. On July 19, 1991 the Fund
was served with a summons in a mortgage foreclosure action filed by Sheraton
Holding Inc. ("Sheraton") in the Superior Court of New York, New York. Sheraton
sought to foreclose on its $54,000,000 first mortgage collateralized by the
property. The Sheraton foreclosure action was based on monetary defaults by the
Borrower. On September 30, 1991 the Fund filed a counterclaim to the Sheraton
foreclosure action. In addition, the second mortgage on the property in the
amount of approximately $5,600,000 is also in default and the holder of the
mortgage has filed a counterclaim to the foreclosure with the court. On June
12,1992, the Borrower filed for protection under the U.S. Bankruptcy Code. On
June 30, 1992, an order was entered in the Bankruptcy Court between the Fund,
Sheraton, the second mortgage holder and the Borrower, authorizing and
restricting the use of cash collateral by the Borrower. During 1992, the Fund
recorded a provision for losses for the remaining carrying balance of the loan.

      During the third quarter of 1995, the Fund assigned its interest in this
loan for $75,000. Inasmuch as the entire loan had previously been written off,
this receipt is reflected as income on the accompanying Financial Statements.

OTHER MORTGAGE LOANS RECEIVABLE

      On October 10, 1995, the Fund made a first mortgage loan in the amount of
$375,000 which is secured by a commercial property in New York City, as well as
by a personal guaranty of one of the principals of the borrower. The loan calls
for interest at 12% per annum with monthly payments based on a ten (10) year
amortization schedule and a balloon payment of the total balance in five (5)
years.

      On February 13, 1996, the Fund made a first mortgage loan in the amount of
$150,000 which is secured by a commercial property in New York City. The loan
represents less than 17% of the appraised value of the property, bears interest
at the rate of 10% per annum and calls for monthly payments on a five year
self-liquidating basis.

      On February 29, 1996, the Fund made a first mortgage loan in the
approximate amount of $106,000, which is secured by an industrial property in
Lake Worth, Florida. The property securing the mortgage is controlled by Harvey
Polly, who has personally guaranteed the mortgage. The loan calls for 10%
interest per annum, payable monthly, with a balloon payment of principal after
five years.

OTHER

      Prior to the February 15, 1995 acquisition of the Fund by Mr. Polly (as
discussed above) the Fund had four employees who served as executive officers.
Administrative and accounting services performed on behalf of the Fund were
primarily provided by Banyan Management Corp. Please see Item 12, "Certain
Relationships and Related Transactions" and Note 5 of Notes to consolidated
Financial Statements.


                                      4
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS (continued)

TAX STATUS

      Prior to January 1, 1995, the Fund elected to be treated as a real estate
investment trust (REIT) under sections 856-860 of the Internal Revenue Code of
1986. However, management of the Fund discontinued its REIT status, effective
January 1, 1995. Accordingly, the Fund has subsequently been treated as a
C-Corporation in accordance with the Internal Revenue Code.

      The business of the Fund is not seasonal and the Fund does no foreign or
export business. The Fund does not segregate revenue or assets by geographical
region, and such presentation is not applicable and would not be material to an
understanding of the Fund's business taken as a whole.

ITEM 2. DESCRIPTION OF PROPERTY

      As of December 31, 1996, the Fund owned a 50% partnership interest in the
Santa Barbara Biltmore Hotel. In addition, see Note 3 of the Notes to Financial
Statements for certain information pertaining to the property which
collateralized the Fund's mortgage loan.

ITEM 3. LEGAL PROCEEDINGS

      The Registrant is not aware of any material pending legal proceedings as
of March 3, 1997 nor were any proceedings terminated during the year ended
December 31, 1996.

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

      The Fund did not submit any matter to a vote of its security holders
during the year ended December 31, 1996.


                                      5
<PAGE>

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

      The Fund's shares of common stock were traded on the American Stock
Exchange ("AMEX") (Symbol - VHT) , through October 25, 1996. Thereafter, the
Fund's shares have been traded on the NASD Market (Symbol-VHTI). The range of
high and low sales prices per share for each of the quarters in the years ended
December 31, 1996 and 1995 are as follows:

                                   Share Price

Quarter                         1996          1995
                                ----          ----
   1.             High         $1.187        $1.375
                  Low          $0.687        $0.312

   2.             High         $1.500        $1.125
                  Low          $0.500        $0.437

   3.             High         $l.625        $1.625
                  Low          $0.625        $0.500

   4.             High         $1.187        $1.500
                  Low          $0.500        $1.000

      Prior to the acquisition of the Fund by Mr. Polly (see Item 1. Description
of Business), the Fund had suspended distribution due to interruption in the
Fund's cash flow resulting from defaults by borrowers on the Fund's mortgage
loans, the modest size of the Fund's cash position and the uncertainty regarding
the cash requirements for operating activities. No distributions were declared
by the Fund in 1996 and 1995.

      On October 14, 1996, the Fund was notified by the American Stock Exchange
that its shares would be removed from listing on the Exchange, and that the last
day of trading, on the Exchange, would be October 25, 1996. The reason for this
action was that the Fund no longer meets the requirements for continued listing,
and Banyan had discontinued previously announced negotiations to acquire a
portfolio of retail shopping center properties.

      Also, on October 14, 1996, the Fund issued a press release stating the
above facts, as well as that it had resumed negotiations to acquire for cash and
stock valued at approximately $80,000,000 a privately held domestic and
interational manufacturer and distributor of toys, hobby and leisure products
with annual sales of approximately $80,000,000. Banyan noted that the
acquisition of the toy, hobby and leisure products company was subject to
negotiation and execution of definitive agreements and subject to obtaining
commitments for financing required to consummate the acquisition. Banyan also
noted that certain aspects of the acquisition program would require stockholder
approval and that the matter would be submitted to stockholders at a meeting on
a date to be announced.

      During the week of October 28, 1996, the Fund's shares began trading on
the NASD market with a ticker symbol of "VHTI".

      At December 31, 1996, there were 2,409 record holders of common stock


                                        6
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

      Banyan Hotel Investment Fund (the "Fund"), was originally formed to make
mortgage loans to affiliates of VMS Realty Partners, ("VMS") secured by hotel
and resort properties. The Fund has been adversely affected as a result of the
non-payment of amounts due from these borrowers on mortgage loans and notes
receivable.

      In early 1990, the Fund implemented a business plan focused on
preservation of its assets and managing its properties acquired through
foreclosure until they could be disposed of in an orderly manner (the "Principal
Recovery Plan").

      On January 28, 1992, the Board of Directors of the fund authorized the
preparation of a formal plan of liquidation which was subsequently adopted on
April 7, 1992 (the "Plan"). The Plan contemplated the Fund liquidating its
assets and distributing the proceeds to its shareholders. The Fund estimated
that its liquidation value was between $.15 and $.20 per share. Since the
adoption of the Plan, Management of the Fund completed the workout or
liquidation of certain assets and considered alternatives to the announced plan
of liquidation which could provide greater shareholder value, including a number
of unsolicited proposals from various third parties. Based upon management's
review of these various proposals, the Board of Directors resolved that one
proposal was in the best interest of the Fund and its shareholders because it
allowed every shareholder an opportunity to sell his shares at an amount in
excess of the projected liquidation value. The Board of Directors, by unanimous
written consent dated June 15, 1994, authorized the Fund to execute and deliver
a non-binding letter of intent with a Mr. Harvey Polly.

      On August 3, 1994 the Fund entered into a Purchase Agreement (the
"Purchase Agreement") with Mr. Polly providing, among other things, for an all
cash tender offer, under which Mr. Polly agreed to offer to purchase 100% of the
shares of common stock of the Fund for $0.35 per share. The Purchase Agreement
was subsequently amended on November 4, 1994, December 19, 1994 and February 15,
1995. The Purchase Agreement provided, among other things, for the following
events to occur at or before closing: (i) the resignation of the then current
officers and directors; (ii) the purchase by the Fund of "run-off" directors'
and officers' liability insurance coverage for the then current officers and
directors; (iii) the termination of the employment contract of Leonard G. Levine
and payment of the severence compensation associated therewith; (iv) the
termination of the Administrative Services Agreement with Banyan Management
Corp. and payment of the termination fee associated therewith; and (iv) the
assignment by the Fund of its ownership interest in Banyan Management Corp.

      On February 15, 1995, a change in control of the Fund occurred pursuant to
the closing of the sale of shares of common stock in the Fund to Mr.
Polly, pursuant to the Purchase Agreement. Mr. Polly's tender offer, which
commenced on December 28, 1994, concluded on January 26, 1995, and resulted in
the tender to Mr. Polly of 1,288,217 shares of common stock, or 12.5% of the
Fund's then outstanding shares of common stock, for a cash price of $0.35 per
share. Subsequent to the closing of the tender offer, the terms of the Purchase
Agreement also required Mr. Polly to purchase from the Fund a number of shares
sufficient to allow Mr. Polly to own, by virtue of the combination of the tender
offer


                                        7
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
        (continued)

and the share purchase, not less than 3,335,000 and not more than 40% of the
shares of common stock after giving effect to the shares issued in connection
with the purchase. On February 15, 1995, per the Purchase Agreement, Mr. Polly
purchased 2,047,766 newly issued shares of common stock of the Fund for a cash
price of $0.22 per share. Upon the acquisition of the aforesaid shares from the
Fund, when combined with the shares of common stock previously owned and
acquired pursuant to the tender offer, Mr. Polly is the beneficial owner of
3,335,983 shares or approximately 27% of the Fund's outstanding voting shares of
common stock.

      Upon the closing of the sale of shares of common stock of the Fund on
February 15, 1995, the Purchase Agreement provided for the resignation of the
Fund's then current Directors and Officers. Accordingly, all of the then current
Directors and Officers resigned and were replaced with Mr. Polly's designees.
Subsequent to the resignation of the Directors and Officers of the Fund, no
further arrangements or understanding among the Fund or its new officers and
directors existed. On February 15, 1995, Messrs. Leo Yarfitz, Morton I. Kalb,
Willis G. Ryckman and Harvey Polly were appointed as new Directors of the Fund.
In addition, the new Directors appointed Mr. Harvey Polly as President and Chief
Executive Officer, Mr. Morton I. Kalb as Vice President and Chief Financial
Officer, Ms. Celia Zisfein as Secretary and Mr. William L. Weiss as Assistant
Secretary. Effective February 15, 1995, Mr. Polly's and the Fund's address of
their principal executive office is One Penn Plaza, Suite 1531, New York, New
York 10119.

LIQUIDITY AND CAPITAL RESOURCES

      Cash and cash equivalents consist of cash and short-term investments. The
Fund's cash and cash equivalents balance at December 31, 1996 and 1995 was
$414,935 and $736,897 respectively. This decrease in cash and cash equivalents
is due primarily to the mortgage investments made by the Fund and by the payment
of the Fund's operating expenses. On February 15,1995, the purchase by Mr. Polly
of 2,047,766 shares of common stock from the Fund resulted in cash proceeds of
approximately $450,000 to the Fund. During 1996, the Fund received approximately
$150,000 in investment income on its cash and cash equivalents and investments.

      At this time, there are no material commitments for capital expenditures.
The Fund's cash and cash equivalents are sufficient to meet its needs for
anticipated operating expenses. The Fund deems its liquidity to be adequate.

      During the fourth quarter of 1995 and the first quarter of 1996 the Fund
invested approximately $631,000 in three first mortgages. These mortgages yield
an average return of approximately 11% and are all for five year terms.


                                        8
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
        (continued)

      As of December 31, 1994, the Fund's mortgage loan portfolio consisted of
one loan classified as loans in substantive foreclosure. The Fund has recorded a
provision for losses on the loan representing its full carrying balance. During
the third quarter of 1995, the Fund assigned its interest in this mortgage in
return for a payment of $75,000. This payment is included in income for the year
ended December 31, 1995.

      On November 18, 1993, in final settlement of guarantees of VMS Realty
Partners of loans made by the Fund in prior years, the Fund received a cash
distribution of $27,831 and an interest in a liquidating trust established for
the benefit of the unsecured creditors of VMS. As of December 31, 1993, the Fund
valued its interest at $4,939 representing its pro rata portion of the cash
assets of the trust. During 1996 and 1995 the Fund recorded $3,146 and $105,154
respectively on its Statement of Income and Expenses as a recovery of the
provision for Losses on Mortgage Loans, Notes and Interest Receivable related to
the distributions received from the liquidating trust. The $3,146 net recovery
recorded in 1996 includes a $5,033 distribution received net of an estimated
$1,887 due to the Class Action Settlement Fund representing the Fund's share of
amounts due per the terms of the previously settled VMS Securities litigation.

      The Fund's ultimate return of cash to its shareholders is dependent upon,
among other things: (i) the activities undertaken by the Fund under its present
management; (ii) interest earned from the investment of cash and cash
equivalents, mortgages and investment securities; (iii) the Fund's ability to
control its operating expenses; and (iv) possible recoveries from the Santa
Barbara Biltmore Hotel and the liquidating trust.

RESULTS OF OPERATIONS

      Total income for the years ended December 31, 1996, 1995 and 1994 was
$150,428, $128,675, and $138,603, respectively. The $22,000 increase in total
income between 1996 and 1995 is the result of an increase in interest earned on
the Fund's mortgage investments, partially offset by a decrease in interest
earned on investment securities due to a lesser amount of securities held.

      Total expenses for the years ended December 31, 1996 and 1995 decreased by
$574,368. This decrease in expenses was due to the elimination of directors'
fees and expenses, as well as substantial reductions in all other expense areas.
The figures for 1995 included a credit for approximately $102,000 more in
recoveries on previously written off items. It should be noted that the 1995
expenses included costs associated with the tender offer which resulted in a
change in control of the Fund as discussed above, including stock listing fees,
required termination payments to the Fund's former President and Banyan
Management Corp. and the purchase of Director's and Officer's liability
insurance.


                                        9
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
        (continued)

      During 1996 and 1995, the Fund recorded net recoveries of losses on loans,
notes and interest receivable, as well as the 1994 Class Action Settlement of
$3,146 and $107,481 respectively. During 1996 and 1995, the Fund did not record
losses related to its interest in the Santa Barbara Biltmore since the carrying
value of the partnership interest was reduced to zero as of December 31, 1992,
and the Fund has no obligation to make additional capital contributions to, or
pay the liabilities of, the partnership. During 1995, the Fund realized a loss
of $38,984 on the sale and early retirement of investment securities. This loss
is due primarily to declining interest rates in 1995.

      The net loss for 1996, 1995 and 1994 was $104,803 ($0.01 per share),
$739,908 ($0.06 per share) and $385,838 ($0.04 per share), respectively.

ITEM 7. FINANCIAL STATEMENTS

      See Index to Consolidated Financial Statements on Page F-l of this Report
for financial statements.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

      There have been no disagreements with the accountants on any matter of
accounting principals, practices or financial statement disclosure.


                                      10
<PAGE>

                                   PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
        THE REGISTRANT

      Prior to the February 15, 1995 acquisition of the Fund by Mr. Polly (see
Item 1. Description of Business), the following individuals were serving as
directors and the executive officers of the Fund:

       Norman M. Gold                  Director
       Gerald L. Nudo                  Director
       Marvin A. Sotoloff              Director
       Leonard G. Levine               President
       Neil D. Hansen                  First Vice president
       Robert G. Higgins               Vice president/General Counsel
       Joel L. Teglia                  Acting Chief Financial Officer

      NORMAN M. GOLD, age 66, is a senior partner in the law firm of
Altheimer & Gray and has actively practiced law for over 40 years,
specializing in taxation, corporate and real estate law.  Mr. Gold is a
trustee of Banyan Short Term Income Trust, Banyan Strategic Realty Trust, and
director of Banyan Management Corp.  Mr. Gold is also a trustee of New Plan
Realty Trust.  Mr. Gold is a certified public accountant and a member of the
Chicago and American Bar Association.

      GERALD L. NUDO, age 47, is senior vice president of Mesirow Realty
Finance, Inc., a subsidiary of Mesirow Financial Corp., a regional investment
banking firm. From 1982 to 1990 Mr. Nudo was a principal and Vice President of
Capital Realty services, Inc., a commercial real estate investment banking
company. Mr. Nudo received his Bachelor of Science Degree from Northwestern
University and his Masters Degree in Business Administration from the University
of Chicago Graduate School of Business. Mr. Nudo is also a certified public
accountant and a licensed real estate broker in Illinois. He is a trustee of
Banyan Short Term Income Trust and a director of Banyan Strategic Land Fund II
and Banyan Management Corp.

      MARVIN A. SOTOLOFF, age 53, is regional vice president of Premisys
Marketing Services, Inc., effective July 1993. Premisys Marketing Services, a
division of Premisys Real Estate Services, Inc., is a national real estate firm
involved in the leasing and management of office, retail and industrial
properties. From 1979-1993, Mr. Sotoloff was executive vice president of the
Palmer Group Ltd., a company involved in real estate brokerage, development and
property management, concentrating on commercial real estate. He is a past
president of the Chicago Office Leasing brokers Association, a licensed real
estate broker and a member of the Illinois and Pennsylvania Bar Associations.
Mr. Sotoloff is a trustee of Banyan Strategic Realty Trust, Banyan Short Term
Income Trust and director of Banyan Management Corp.

      LEONARD G. LEVINE, age 50, is president of Banyan Management corp.,
Banyan Short Term Income Trust, Banyan Strategic realty Trust, Banyan
Strategic Land Fund II, Banyan Mortgage Investment Fund.  Mr. Levine was
employed by VMS Realty Partners from 1981 to 1989 before becoming president
of the other Banyan entities mentioned above.  He received a B.S./B.A. Degree
in Accounting from Roosevelt University in 1968 and a Masters Degree in
Taxation from Depaul University in 1972.  His areas of specialization include
real estate syndications, estate planning and taxation of closely-held
corporations.  Mr. Levine is also a certified public accountant and a
licensed real estate broker.


                                      11
<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
        OF THE REGISTRANT (continued)

      NEIL D. HANSEN, age 50, is first vice president of Banyan Management
Corp., Banyan Short Term Income Trust, Banyan Strategic Realty Trust, Banyan
Strategic Land Fund II, and Banyan Mortgage Investment Fund. From 1988 through
1990 Mr. Hansen was senior vice president of Ruff Callaghan & Hemmeter Company,
a real estate development firm, and executive vice president, secretary and
treasurer of Resort Income Investors, Inc., an American Stock Exchange listed
real estate investment trust. He received a B.S. degree in finance from the
University of Illinois and a Master of management degree from Northwestern
University. He is a certified public accountant.

      ROBERT G. HIGGINS, age 45, is vice president/general counsel of Banyan
Management corp., Banyan Short Term Income Trust, Banyan Strategic Realty Trust,
Banyan Strategic Land Fund II, and Banyan Mortgage Investment Fund. From 1990 to
1992, Mr. Higgins was a contract partner at the law firm of Chapman and Cutler.
From 1984 to 1990, Mr. Higgins was a partner at the law firm of Schwartz &
Freeman. During these years, Mr. Higgins concentrated in the areas of real
estate development, finance, acquisitions, land use, sales, lending and
syndications, and general corporate and business practice. Mr. Higgins is
admitted to the bar in the States of Illinois, Minnesota and Texas. He received
a B.A. Degree in Government from the University of Notre Dame and a J.D. Degree
from Loyola University of Chicago.

      JOEL L. TEGLIA, age 35, is acting chief financial officer of Banyan
Management Corp., Banyan Strategic Realty Trust, Banyan Mortgage Investment
Fund, Banyan Short Term Income Trust and Banyan Strategic Land Fund II. Prior to
assuming the responsibilities of his current position, Mr. Teglia was the
controller for Banyan Management Corp. From 1986 to 1990 Mr. Teglia held
positions as project controller and director of Finance and budgeting at the
Prime Group., Inc., an international real estate investment and development
firm. He received a B.B.A. Degree in Accounting from the University of Notre
Dame. Mr. Teglia is a certified public accountant.

      On February 15, 1995, Norman M. Gold, Gerald L. Nudo and Marvin A.
Sotoloff (the "Directors") submitted their respective resignations as
Independent Directors of the Fund. Also on February 15, 1995, Leonard G. Levine,
Neil D. Hansen, Robert G. Higgins and Joel L. Teglia (the "Officers") submitted
their respective resignations as officers of the Fund. The resignations of the
Directors and Officers, which were effective immediately, were submitted as a
result of a change in control of the Fund pursuant to the closing of the
February 15, 1995 sale of shares of stock in the Fund to Mr. Harvey Polly. See
discussion in Item 1. Description of business and Item 6. Management's
Discussion and Analysis or Plan of Operation for details of this change in
control.


                                      12
<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
        THE REGISTRANT (continued)

      Subsequent to the February 15, 1995 acquisition of the Fund by Mr. Polly,
the following individuals were appointed to serve as directors and the executive
officers of the Fund:

       Harvey Polly                          Director, President and
                                             Chief Executive Officer

       Morton I. Kalb                        Director, Vice President
                                             and Chief Financial Officer

       Willis G. Ryckman                     Director

       Leo Yarfitz                           Director

      HARVEY Polly, age 68, is a director, president and chief executive officer
of the Fund. Mr. Polly also serves as the Chief Executive officer and a
stockholder of H/R Industries, Inc., H/R Industries, Inc. is essentially a
personal holding company which was formed in 1984 under the name Helena
Rubinstein, Inc., and was engaged from 1984 until 1988 in various aspects of the
cosmetics business. In 1988, the name of the corporation was changed to Elite
Industries, Ltd., and in 1990 the name was changed to H/R Industries, Inc., Mr.
Polly has been involved in the railroad business for approximately twenty years.
In 1973 he founded and became a major stockholder in Emons Industries, Inc.,
which was formed on the basis of the acquisition of the Maryland and
Pennsylvania Railroad Company. Since the founding of Emons Industries, Inc., Mr.
Polly has been involved in the railroad freight car business. Mr. Polly has
been, since 1975, chief executive officer and a stockholder of Railway Freight
Car Service, Inc., which is involved in the railroad boxcar leasing business. In
1994 and 1995, Mr. Polly was chairman of CAGY Industries, Inc., the publicly
held holding company for the Columbus and Greenville Railway, the Chattooga &
Chicamauga Railway and the Redmont Railway and was the largest stockholder with
approximately 40% of the outstanding shares of common stock. Mr. Polly sold his
shares and resigned from the Board effective February 16, 1995. Since 1988 he
has served on the Board of Directors of The Delaware Otsego Corp., which is a
publicly held corporation that operates the New York Susquehanna and Western
Railroad. In prior years, Mr. Polly was also a stockholder and heavily involved
in the operations of the Louisiana Midland Railroad. He is also presently a
stockholder and officer of SLF of Martin County, Inc., a real estate development
company. From 1987 to 1990 he was a principal shareholder, chief executive
officer and director of Hanover Bank of Florida, a publicly held corporation.

      MORTON I. KALB, age 63, is a director, vice president and chief
financial officer of the Fund.  Mr. Kalb has served as vice president of H/R
Industries, Inc., since July 1984.  Mr. Kalb is also a certified public
account.

      WILLIS G. RYCKMAN, age 51, is a director of the Fund. Mr. Ryckman has
served as chairman of the Board of Directors of Tri-Tech Labs since August
1990.  From December 1966 through August 1990, Mr. Ryckman was senior vice
president of Manufacturers Hanover Trust Company.


                                      13
<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
        THE REGISTRANT   (continued)

      LEO YARFITZ, age 80, is a director of the Fund, Mr. Yarfitz has been a
financial consultant with Sterling Management of Florida since June 1990. From
October 1987 until October 1989, Mr. Yarfitz served as chief financial officer
of Hanover Bank of Florida. From October 1989 until December 1989, Mr. Yarfitz
served as president of Hanover Bank of Florida.

ITEM 10. EXECUTIVE COMPENSATION

A.    DIRECTOR COMPENSATION

      Prior to February 15, 1995, the Independent Directors were paid an annual
fee of $15,000, payable quarterly, plus $875 for each Board Meeting, including
meetings of the audit committee, attended in person and $250 an hour for each
Board meeting, including meetings of the audit committee, attended via telephone
conference call. In addition, each Director was reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board. On February 15, 1995 a
change in control the Fund occurred pursuant to the closing of the sale of
shares of common stock in the Fund to Mr. Harvey Polly. (See discussion in Item.
1. Description of Business and Item 6. Management's Discussion and Analysis or
Plan of Operation.) To date, no arrangements or decisions have been made with
respect to payments to the new directors for their service on the Fund's Board
of Directors, and no fees have been paid.

B.    EXECUTIVE COMPENSATION

      Compensation paid to executive officers for the years ended December 31,
1996, 1995 and 1994 is as follows:

                                       Annual Compensation               
                                   --------------------------         Other
                                   Year    Salary     Bonus(3)     Compensation
                                   ----    ------     --------     ------------
Morton I. Kalb
Vice President and Chief           1996    $55,600       N/A            N/A
Financial Officer                  1995    $60,600       N/A            N/A
Celia Zisfein                      1996    $21,600       N/A            N/A
                                   1995    $23,400       N/A            N/A
Leonard G. Levine
President & Chief                  1996      -0-         N/A            N/A
Executive Officer (1)              1995    $ 4,743       N/A         $61,160 (2)
                                   1994    $41,554    $  376            N/A

There were no long term compensation awards or payouts during the years 1996,
1995 or 1994.

         (1)  Resigned 2/15/95
         (2)  Termination Fee
         (3)  See Incentive Compensation Program Disclosure Below 
         (4)  No Executive Officer earned more than $100,000 in salary and
              bonus.


                                      14
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION (continued)

      Until February 15, 1995, Mr. Levine served as President of the Fund
pursuant to an employment agreement entered into January 1, 1990. This agreement
provided that Mr. Levine was to be employed through December 31, 1994 with
automatic one year renewals unless either the Fund or Mr. Levine gave the other
notice of termination before March 31 preceding the end of the current
employment period.

      In consideration of his employment, Mr. Levine received annual
compensation from the Fund equal to $41,554 per year. In addition to his base
salary. Mr. Levine could have been granted a bonus at the discretion of the
Board of Directors of the Fund. Further, Mr. Levine was eligible to receive
compensation under an incentive compensation program included in his contract.
Mr. Levine's incentive compensation earnings were calculated based on the
following four components: (i) 0.56% of the amount of the Fund's collateralized
claims which were converted into cash; (ii) 1.35% of the amount of the Fund's
unsecured claims which were converted into cash; (iii) the percentage increase
in the Fund's market capitalization between January 1, 1990 and the end of each
calendar year (0.25% of the first 10% increase, .50% of the next 10% increase
and 1.00% of any increase in excess of 20%) and (iv) 0.1% of the amount of cash
distributions to stockholders of the Fund. The total incentive compensation that
Mr. Levine was permitted to receive in any year (on a cumulative basis) from the
Fund was subject to certain limitations. Any amounts in excess of these limits
would have been deferred.

      Pursuant to the terms of the August 3, 1994 agreement, as amended, between
the Fund and Mr. Polly (see Item 1. Description of Business) on February 15,
1995, Mr. Levine resigned as President of the Fund. In accordance with the terms
of his employment agreement, Mr. Levine was paid a total of $61,160 representing
a severence payment equal to one year's salary, all incentive compensation
earned through the date of his termination, and an amount equal to the full cost
of continuing Mr. Levine's health benefits for one year.

      To date, no contract agreements have been made with respect to
compensation to be paid to the Fund's new executive officers. The new Board of
Directors will create a compensation committee which will recommend to the Board
the compensation to be paid to the Fund's executive officers.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      As of March 3, 1997, the following persons or entities were known by the
Fund to be the beneficial owner of more than five percent (5%) of the
outstanding shares of common stock of the Fund:

                            Name of          Amount and Nature of        Percent
 Title of class         Beneficial Owner     Beneficial Ownership       of Class

Share of Common         Mr. Harvey Polly      3,380,983  shares            27%
Stock $.01 Par
Value


                                      15
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         (continued)

      The following table sets forth the ownership of shares owned directly or
indirectly by the directors and principal officers of the Fund as of March 3,
1997:
                      Name of                 Amount and Nature of    Percent
   Title of Class     Beneficial Owner        Beneficial Ownership    of Class 
   --------------     ----------------        --------------------    -------- 

Shares of Common      Mr. Harvey Polly          3,380,983 shares         27%
Stock, $.01           Director,
Par Value             President and Chief
                      Executive Officer

Shares of Common      Mr. Morton I. Kalb           75,000 shares          1%
Stock, $.01           Director
Par Value             Vice President and
                      Chief Financial
                      Officer

Shares of Common      Mr. Leo Yarfitz             100,000 shares          1%
Stock, $.0l           Director
Par Value

Shares of Common      All Directors and         3,555,983 shares         29%
Stock, $.0l           Officers of the Fund
Par Value             as a group (6 persons)


                                       16
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      As a result of the acquisition of the Fund by Mr. Polly (see Item 1.
Description of Business). The Administrative Services Agreement with Banyan
Management Corp. was terminated on February 15, 1995. Banyan Management Corp.
had performed certain administrative and accounting services on behalf of the
Fund for which it was reimbursed at cost. Banyan Management corp. is owned by
the Banyan Funds for which it provides services. Prior to February 15, 1995, the
Fund had been a stockholder of Banyan Management Corp. Mr. Levine is the
President of Banyan Management Corp. for which he receives no compensation.
Messrs. Hansen, Higgins and Teglia were employees of the Fund but are
compensated by Banyan Management Corp., and their compensation was included in
the administrative costs charged by Banyan Management Corp. to and reimbursed by
the Fund. The directors/trustees of all the Banyan Funds serve as directors of
Banyan Management Corp. but receive no additional compensation. Prior to
February 15, 1995, the Fund's directors had also served as directors of Banyan
Management Corp. Administrative cost reimbursed by the Fund to Banyan Management
Corp. for the years ended December 31,1995 and l994 totalled $83,855 and $96,917
respectively. Banyan Management Corp. charges its operating expenses among the
Banyan Funds for which it performs services and acts as a common paymaster for
the Fund. The 1995 total includes a $46,354 termination fee. Subsequent to
February 15, 1995 some administrative services were performed by Oak Realty
Group, Inc., for which they were paid $20,741. Oak Realty Group, Inc., is an
Illinois corporation, owned 100% by the Fund's former president.

      Reference is made to Note 5 of the Notes to the Consolidated Financial
Statements for the amount of administrative costs paid to, and a description of
various transactions with Banyan Management corp.

      On February 29, 1996, the Fund made a first mortgage loan in the
approximate amount of $106,000 which is secured by an industrial property in
Lake Worth, Florida. The property securing the mortgage is controlled by Harvey
Polly, who has personally guaranteed the mortgage. The loan calls for 10%
interest per annum, payable monthly, with a balloon payment of principal after
five years.

      Effective February 15, 1995 the Fund began renting space from an
affiliated company. Rent paid to the affiliate amounted to $15,050 during 1996
and $21,500 during 1995, which is equal to the rent paid by the affiliate to the
landlord. The lease expired July 31, 1996 and the Fund executed a new lease with
the landlord for a period of two years. The Fund's future rental payments will
be $42,155.

      During 1996 and 1995, the Fund reimbursed an affiliated company $20,082
and $19,330 respectively for health insurance premiums paid on behalf of the
Fund. Included in this reimbursement is $6,290 and $4,166 which is prepaid as of
December 1996 and 1995 respectively.


                                      17
<PAGE>

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   The following documents are filed as part of this report:

      (1)   (2)   The financial statements indicated in Part II
                  Item 7, Financial Statements.

            (3)   Exhibit (2) Plan of organization, reorganization,
                  management, liquidation or succession; Exhibit (21)
                  Subsidiaries of the Fund

      The following exhibits are incorporated by reference from the Registrant's
Registration Statement on Form S-11 (file number 2-96565). referencing the
exhibit number used in such Registration Statement.

           Exhibit Number                       Description

                 (3)  (a)                       Certificate of incorporation
                 (3)  (b)                       By-Laws

(b)   No reports on Form 8-K were filed during the quarter ending December 31,
      1996.

(c)   See Item 13 (a)    (3) above.

(d)   None


                                      18
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1914, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there-unto duly authorized.


BANYAN HOTEL INVESTMENT

By:      /s/ Harvey Polly                                    Date: March 3, 1997
         Harvey Polly, Director, President
         and Chief Executive Officer


      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

By:     /s/ Harvey Polly                                     Date: March 3, 1997
        Harvey Polly, Director, President
        and Chief Executive Officer

        /s/ Morton I. Kalb                                   Date: March 3, 1997
        Morton I. Kalb
        Vice president and
        Chief Financial Officer

        /s/ Willis Ryckman                                   Date: March 3, 1997
        Willis Ryckman, Director

        /s/ Leo Yarfitz                                      Date: March 3, 1997
        Leo Yarfitz, Director


                                       19
<PAGE>




                                   EXHIBIT 21




                                       20
<PAGE>

                  SUBSIDIARY OF BANYAN HOTEL INVESTMENT FUND

Name of Subsidiary                          State of Organization

BHF Merger Corp.                              Illinois

BNC Santa Barbara Corp.                       Illinois


                                       21
<PAGE>

                         BANYAN HOTEL INVESTMENT FUND

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM 13 (a) (1) and (2)
                                                                           Pages

Report of Independent Auditors                                              F-2

Consolidated Balnace Sheets as of
 December 31, 1996 and 1995                                                 F-3

Consolidated Statements of Income and Expenses 
 For the Years Ended December 31, 1996, 1995 and 1994                       F-4

Consolidated Statements of Stockholders' Equity 
 For the Years Ended December 31, 1996, 1995 and 1994                   F-5 & 6

Consolidated Statements of Cash Flow for the
 Years Ended December 1996, 1995 and 1994                               F-7 & 8

Notes to Consolidated Financial Statements                          F-9 to F-14


                                       F-1
<PAGE>

                         Report of Independent Auditors

The Stockholders
Banyan Hotel Investment Fund

We have audited the accompanying consolidated balance sheets of Banyan Hotel
Investment Fund as of December 31, 1996 and 1995, and related consolidated
statements of income and expenses. stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Fund's management Our responsibility
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Banyan Hotel
Investment Fund at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

                                                      /s/ Ernst & Young LLP


New York, New York 
January 21, 1997


                                       F-2
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
                          Consolidated Balance Sheets
                          December 31, 1996 and 1995

ASSETS                                               1996              1995
                                                 ------------      ------------
    Cash and Cash Equivalents                    $    414,935      $    736,897
    Investment Securities                             864,000           891,096
    Interest Receivable on Mortgage
      Receivable and Investment Sec                     8,318             7,916
    Mortgage Loans Receivable:
      Related Party                                   106,189              --
      Other                                           480,517           371,723
    Prepaid Insurance                                   6,290              --
    Other Assets                                        4,437            10,343
                                                 ------------      ------------
       Total Assets                              $  1,884,686      $  2,017,975
                                                 ============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
    Accounts Payable, Accrued
       Expenses and Deferred Income              $     81,854      $     82,910
                                                 ------------      ------------
Commitments and Contingencies                            --                --

Stockholders' Equity
Shares of Common Stock $0.01 Far Value
  20,000,000 Shares Authorized,
  12,338,051 Shares Issued                       $ 87,477,847      $ 87,477,847
Accumulated Deficit                               (85,639,396)      (85,534,593)
Unrealized Loss on Investment
  Securities                                          (27,430)             --
Treasury Stock, At Cost, for
  32,757 Shares of Common Stock                        (8,189)           (8,189)
                                                 ------------      ------------
Total Stockholders' Equity                          1,802,832         1,935,065
                                                 ------------      ------------
Total Liabilities and Stockholders'
   Equity                                        $  1,884,686      $  2,017,975
                                                 ============      ============

      See accompanying notes


                                       F-3
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
                 Consolidated Statements of Income and Expenses
              For the Years Ended December 31, 1996, 1995 and 1994

INCOME                                        1996         1995         1994
                                            ---------    ---------    ---------
Interest Income on Cash
  and Cash Equivalents                      $  20,321    $  20,097    $  18,305
Interest Income on
  Investment Securities                        65,585       98,616      120,298
Interest Income on
  Mortgage Receivable                          64,522        9,962         --
                                            ---------    ---------    ---------
  Total Income                                150,428      128,675      138,603
                                            ---------    ---------    ---------
EXPENSES
  Recovery of Losses on
  Mortgage Loans, Notes and
  Interest Receivable                           3,146      105,154       16,788
                                            ---------    ---------    ---------
OTHER EXPENSES
  Stockholder Expenses                         18,714       58,671       76,620
  Directors' Fees, Expenses
   and Insurance                                 --        388,588      260,670
  Other Professional Fees                      65,143      138,940      122,444
  General and Administrative                  174,520      348,554      172,188
                                            ---------    ---------    ---------
    Total Other Expenses                      258,377      934,753      631,922
                                            ---------    ---------    ---------
Recovery of Class Action
   Settlement Costs and
   Expenses                                      --           --        (90,693)
                                            ---------    ---------    ---------
TOTAL EXPENSES                                255,231      829,599      524,441
                                            ---------    ---------    ---------
Operating  Loss                              (104,803)    (700,924)    (385,838)
Net  Loss  on Investment
 Securities                                      --        (38,984)        --
                                            ---------    ---------    ---------
Net (Loss)                                  $(104,803)   $(739,908)   $(385,838)
                                            =========    =========    =========
Net Loss Per Share of Common Stock (Based
 on weighted Average Number of Shares
 Outstanding of 12,338,051
 in 1996,12,082,080 in 1995;
 and 10,920,285 in 1994)                    $   (0.01)   $   (0.06)   $   (0.04)
                                            ---------    ---------    ---------

      See accompanying notes


                                       F-4
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995

                                                                  Unrealized
                                                                  Losses on
                                 Shares of Common Stock           Investment
                                Shares            Amount          Securities

Stockholders'
Equity (Deficit)
December 31, 1994             10,290,285       $87,027,338        $ (65,138)

Proceeds From
Issuance of
Common Stock                   2,047,766           450,509

Market Adjustment
December 31, 1995                   --                --             65,138
                              ----------       -----------        --------- 

Stockholders' Equity
(Deficit)Dec.31,1995          12,338,051       $87,477,847        $     -0-

Net Loss for the
Year Ended
December 31,1996                    --                --                --

Market Adjustment
December 31, 1996                   --                --            (27,430)

Stockholders' Equity
(Deficit)
 December 31, 1996            12,338,051       $87,477,847        $ (27,430)
                              ==========       ===========        ========= 


                                       F-5
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 1996 and 1995

                                  Accumulated       Treasury
                                    Deficit           Stock            Total
                                 ------------      -----------      -----------
Stockholders'
Equity (Deficit)
December 31, 1994                $(84,794,685)     $    (8,189)     $ 2,159,326

Net Loss for the
Year Ended
December 31, 1995                    (739,908)            --           (739,908)

Market Adjustment
December 31, 1995                        --               --             65,138

Proceeds From
Issuance
Of Common Stock                          --               --            450,509
                                 ------------      -----------      -----------
Stockholders' Equity
(Deficit)
December 31, 1995                $(85,534,593)     $    (8,189)     $ 1,935,065

Net Loss for the
Year Ended
December 31, 1996                    (104,803)            --           (104,803)

Market Adjustment
December 31, 1996                        --               --            (27,430)
                                 ------------      -----------      -----------
                                 $(85,639,396)     $    (8,189)     $ 1,802,832
                                 ============      ===========      ===========

      See Accompanying notes


                                       F-6
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
               Consolidated Statements of Cash Flows For the Years
                     Ended December 31, 1996, 1995 and 1994

                                         1996           1995            1994
                                         ----           ----            ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET (LOSS)                            $(104,803)    $  (739,908)    $  (385,838)

Adjustments to Reconcile Net
 Loss to Net Cash Used in
 Operating Activities:
 (Recovery of) provision for
 Losses on Mortgage Loans,
 Notes and Interest Receivable             --              --             4,939

Loss on sale of Security
  Investment                               --            38,878            --
Amortization of Premium or
 (Discount) on Investment
  Securities                               (335)            976           4,096

Net Change in:
 Interest Receivable on Cash
 and Cash Equivalents and
 Investment Securities                     (402)          8,363          12,852
Prepaid Insurance                        (6,290)         40,091          18,965
Other Assets                              5,907          21,118         204,022
Accounts Payable and Accrued
 Expenses                                (1,056)        (28,287)        (50,907)
                                      ---------     -----------     -----------
Net Cash Used in Operating            $(106,979)    $  (658,769)    $  (191,871)
 Activities
                                      ---------     -----------     -----------
CASH FLOW FROM INVESTING
ACTIVITIES:
 Purchase of Investment
  Securities                               --          (891,000)     (2,126,765)

 Proceeds from Sale and
 Maturity of Investment
  Securities                               --         1,932,719         150,000

 Investment in Mortgage               $(256,189)    $  (375,000)    $      --


                                       F-7
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
                CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994

                                          1996           1995          1994
                                          ----           ----          ----
Principal Collections
 on Mortgage Loans                      $  41,206      $  3,277     $      --
                                        ---------      --------     -----------
Cash (Used in) provided
 By Investing activities                $(214,983)     $669,996     $(1,976,765)
                                        ---------      --------     -----------
CASH FLOWS USED IN
 FINANCING ACTIVITIES:

 Proceeds from the
 Issuance of Common Stock                    --         450,509            --
                                        ---------      --------     -----------
Cash provided in Financing
 Activities                                  --        $450,509            --
                                        ---------      --------     -----------
Net (Decrease) Increase
 in Cash and Cash Equivalents           $(321,962)     $461,736     $(2,168,636)

Cash and Cash Equivalents
 at Beginning of Year                     736,897       275,161       2,443,797
                                        ---------      --------     -----------
Cash and Cash Equivalents
 at End of Year                         $ 414,935      $736,897     $   275,161
                                        =========      ========     ===========

      See accompanying notes


                                       F-8
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.    BASIS OF PRESENTATION

Banyan Hotel Investment Fund (the "Fund") was organized under the laws of the
State of Massachusetts, pursuant to a Declaration of Trust filed March 19, 1985,
and subsequently reorganized as a Delaware Corporation on March 13, 1987. The
Fund's primary purpose is to invest in mortgage loans.

The accompanying consolidated financial statements include the accounts of the
Fund and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.

B.    INCOME TAXES

For the year ended December 31, 1994, the Fund was treated as a real estate
investment trust ("REIT") under Internal Revenue Code Sections 856-860. In order
to qualify, the Fund was required to distribute at least 95% of its taxable
income to stockholders and meet asset and income tests as well as certain other
requirements. During 1995, the Fund elected to discontinue its "REIT" status
effective for the year ended December 31, 1995. As a result of this election the
Fund is being taxed as a C-Corp., for federal and state tax purposes and could
be subject to a corporate level federal and state tax.

Effective January 1, 1995 in connection with the Company's election mentioned
above, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109 "Accounting for Income Taxes". The adoption of SFAS No. 109 did not have
a material effect on the Financial Statements of the Company. Under SFAS No. 109
deferred tax assets and liabilities are determined based on the difference
between the Financial Statement carrying amounts and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that would be
in effect when the differences are expected to reverse.

C.    INCOME (LOSS) PER SHARE

For 1994, earnings per share was calculated using 10,920,285 weighted average
shares outstanding during the year. For 1995 earnings per share was calculated
based on 12,082,080 weighted average shares outstanding. For 1996 earnings per
share was calculated based on 12,338,051 weighted shares outstanding.

D.    CASH AND CASH EQUIVALENTS

The Fund considers all highly liquid instruments purchased with a maturity of
three months or less tobe cash and cash equivalents.


                                       F-9
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

E.    INVESTMENT SECURITIES

Effective January 1, 1994, the fund adopted the provisions of Financial
Accounting Standard No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Accordingly, Investment Securities are classified as
available for sale and carried at fair value, as determined by quoted market
prices, with unrealized gains and losses reflected in the Statement of
Shareholder Equity. Realized gains and losses are determined on a specific
identification basis. The carrying value of investment securities is adjusted
for amortization of premium and discounts using a level yield method.

F.    USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the Financial Statements and accompanying notes.
Actual results could differ from these estimates.

2.    INVESTMENT SECURITIES

The Fund's investment securities portfolio at December 31, 1996 is as follows:

                            Approximate Amortized       
                            Cost Net of Principal       Approximate Estimated
                             Paydowns Received at          Market Value at   
                               December 31st                December 31st    
                            ---------------------       ---------------------
Title of Each Issue
 and Name of Issuer          1996          1995           1996         1995
                             ----          ----           ----         ----
Federal National
Mortgage Assn.(1)
7.25% 5/25/22              $891,430      $891,000       $864,000     $891,000
                           ======================       =====================

(1)   The Guaranteed REMIC Pass-Through Certificates are guaranteed as to timely
      payment of principal and interest by the Federal National Mortgage
      Association. The maturity of the principal of the above investment is
      dependent upon the repayment of the underlying U.S. Agency sponsored
      mortgages. The rate of repayment is dependent upon the current market
      level of interest rates on mortgage loans as it relates to the interest
      rates of the mortgages underlying each REMIC security. The expected
      maturity of these investment securities, under the market conditions as of
      the fourth quarter of 1996 is expected to be from February 25, 2005 to
      February 25, 2011. These expectations may change as interest rates on
      mortgage loans change.


                                     F-10
<PAGE>

                         BANYAN HOTEL INVESTMENT FUND
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

3.    MORTGAGE LOANS RECEIVABLE

      During the third quarter of 1995, the Fund assigned its interest in a
previously written off Mortgage Loan on the Omni Park Centre Hotel for $75,000.
Inasmuch as the entire loan had previously been written off, this receipt is
reflected as income on the accompanying financial statements.

      On October 10, 1995, the Fund made a first mortgage loan in the amount of
$375,000 which is secured by a commercial property in New York City, as well as
by a personal guaranty of one of the principals of the borrower. The loan calls
for interest at 12% per annum with monthly payments based on a ten (10) year
amortization schedule and a balloon payment of the total balance in five (5)
years.

      On February 13, 1996, the Fund made a first mortgage loan in the amount of
$150,000 which is secured by a commercial property in New York City. The loan
represents less than 17% of the appraised value of the property, bears interest
at the rate of 10% per annum and calls for monthly payments on a five year
self-liquidating basis.

      On February 29, 1996, the Fund made a first mortgage loan in the
approximate amount of $106,000, which is secured by an industrial property in
Lake Worth, Florida. The property securing the mortgage is controlled by Harvey
Polly, who has personally guaranteed the mortgage. The loan calls for 10%
interest per annum, payable monthly, with a balloon payment of principal after
five years.

      The carrying amounts and fair value of the mortgage loans are as follows:

                         Original Loan          Carrying
   Loan Date                Amount               Amount             Fair Value
----------------         -------------          --------            ----------
October  10,1995           $375,000             $350,633             $377,739
February 13,1996            150,000              129,883              129,883
February 29,1996            106,000              106,000              106,000

      The fair value was determined by calculating the present value of the
future principal and interest payments at a market discount rate.


                                     F-11
<PAGE>

                         BANYAN HOTEL INVESTMENT FUND
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

3.    MORTGAGE LOANS RECEIVABLE

      Annual maturities of mortgage loans receivable during the next five years
are summarized as follows:

           Years Ending December 31st                        Amount
           --------------------------                        ------
                  1997                                     $  49,990
                  1998                                        55,750
                  1999                                        62,180
                  2000                                        69,358
                  2001                                        45,625
                  2002 and thereafter                        303,803
                                                           ---------
                                                           $ 586,706
                                                           =========

4.    INVESTMENT IN PARTNERSHIP

      In 1991, in connection with a release from liability related to a loan
made by the Fund, the Fund acquired a 50% limited partnership interest in the
partnership which owns the Santa Barbara Biltmore Resort. The Fund did not
record losses related it its interest in the Santa Barbara Biltmore during 1996
and 1995 since the carrying value of the partnership interest was reduced to
zero as of December 1992, and the Fund has no obligation to make additional
capital contributions to, or pay the liabilities of, the partnership.


                                     F-12
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5.    TRANSACTIONS WITH AFFILIATES

      For the period January 1, 1994 to February 15, 1995 administrative costs,
primarily salaries and general and administrative expenses, were paid to Banyan
Management Corp. ("BMC"). The Fund's payments to BMC for the years ended
December 31, 1995 and 1994 were $83,855 and $96,917, respectively. The 1995
total included a $46,354 termination fee. Subsequent to February 15, 1995 some
administrative services were performed by Oak Realty Group, Inc., for which they
were paid $20,741. Oak Realty Group., Inc., is an Illinois Corporation owned
100% by the Fund's former president.

      Prior to the February 15, 1995 acquisition of the Fund by Mr. Polly, as
one of its administrative services, BMC served as the paying agent for general
and administrative costs of the Fund. As part of providing this payment service,
BMC maintained a bank account on behalf of the Fund.

      Effective February 15, 1995 the Fund began renting space from an
affiliated company. Rent paid to the affiliate amounted to $15,050 during 1996
and $21,500 during 1995 which is equal to the rent paid by the affiliate to the
landlord. The lease expired on July 31, 1996 and the Fund executed a new lease
with the landlord for a period of two years. The Fund's future rental payments
will be $42,155.

      During 1996 and 1995, the Fund reimbursed an affiliated company $20,082
and $19,330 for health insurance premiums paid on behalf of the Fund. Included
in this reimbursement is $6,290 and $4,166 which is prepaid as of December 31,
1996 and 1995, respectively.

      During 1995 in connection with the change in control the Fund purchased
for the prior Directors a Directors and Officers Liability Insurance Policy. The
policy cost approximately $305,000 was charged to expense in 1995.

6.    INVESTMENT IN LIQUIDATING TRUST

      The Fund has an interest in a Liquidating Trust received as final
settlement of guarantees of VMS Realty Partners of loans made by the Fund in
prior years. During 1996 and 1995 the Fund recorded $3,146 and $30,154,
respectively, on its Statement of Income and Expenses as a recovery of the
Provision for Losses on Mortgage Loans, Notes and Interest Receivable related to
the distributions received from the liquidating trust. The $3,146 net recovery
recorded in 1996 includes the $5,033 distribution received net of an estimated
$1,887 due to the Class Action Settlement Fund representing the fund's share of
amounts due per the terms of the previously settled VMS Securities litigation.


                                     F-13
<PAGE>

                          BANYAN HOTEL INVESTMENT FUND
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7.    RECOVERY OF CLASS ACTION SETTLEMENT COSTS AND EXPENSES

      On January 25, 1994, the Fund received net proceeds of $90,693 relating to
a recovery of payments previously made into an escrow established as part of the
1992 class action settlement of the VMS Securities Litigation. The escrow was
established to provide the directors of the Fund with cash to fund the cost of
any litigation in which they might be named as defendants post settlement of the
class action. Subsequently, the directors released the proceeds from the escrow,
and the Fund purchased an insurance policy to cover the directors.

8.    INCOME TAXES

      As of December 31, 1996, the Fund had a net operative loss carry forward
of approximately $74,725,166 which expires between 2005 and 2010. The
utilization of the net operating losses may be subject to limitations contained
in the Internal Revenue Code.

      A summary of the components of deferred taxes is as follows:

                                                       1996            1995
                                                       ----            ----
          Deferred Tax Asset 
            Non Current:
          Net Operating Loss Carry Forward          $29,890,066     $31,987,840
          Valuation  Allowance                      (29,890,066)    (31,987,840)
                                                    -----------     ----------- 
                                                        -0-             -0-
                                                    ===========     =========== 


                                     F-14