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 fiscal 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: 0-13499-D

                              WORLD SERVICES, INC.
                  --------------------------------------------
                 (Name of small business issuer in its charter)

        South Dakota                                       46-0355586
-------------------------------                        -------------------
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                         Identification No.)

   404 South Lincoln, P.O. Box 786
       Aberdeen, South Dakota                           57402
--------------------------------------                  ------
(Address of principal executive offices)               Zip Code

Issuer's telephone number:   (605) 225-4131
                             ---------------

Securities registered under Section 12(b) of the Exchange Act:  None

Securities  registered  under Section  12(g) of the Exchange Act:  Common Stock,
$.001 par value

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the Exchange  Act 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 at least the past 90 days.
Yes  X  No     .
    ---    ---





<PAGE>



     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B 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. [XX]

     Issuer's revenues for its most recent fiscal year: $176,900

     Aggregate  market  value  of  voting  stock  held by  non-affiliates  as of
December  31,  1996:  $-0-.  There  is  currently  no  trading  market  for  the
Registrant's securities.

     Number of  shares of common  stock,  $.001  par  value,  outstanding  as of
December 31, 1996:     5,229,907
                     ---------------

     Documents  incorporated  by  reference:  No documents are  incorporated  by
reference into this annual report on Form 10-KSB.




                                        2

<PAGE>

                              WORLD SERVICES, INC.

                                   FORM 10-KSB

                                     PART I

Item 1. Description of Business
        -----------------------

(a) Business Development.

     General. World Services, Inc. (the "Registrant") was incorporated under the
laws of the State of South Dakota on December 17, 1979 under the name of Midwest
Management & Marketing  Corporation.  The name was changed in July 1983 to World
Services,  Inc. The Registrant,  a diversified  financial  holding company,  was
formed to invest in and manage companies primarily in the real estate, insurance
and banking industries, along with other service industries.

     In May 1983, the Registrant adopted a business plan whereby it would become
a one-stop financial service company by either acquiring  operating companies or
founding new ones in the following service areas: insurance,  real estate, stock
brokerage,  commodities, travel and banking. The Registrant is also the owner of
approximately   22%  of  the  outstanding   stock  of  First  Savings  and  Loan
Association,  Inc. ("First  Savings") and the owner of approximately  16% of the
outstanding stock of Super 8 Motel Developers, Inc. ("Super 8").

     The current  members of the Board of Directors  were appointed in 1989 upon
the  resignation  of the  former  members of the  Board.  Since  that time,  the
Registrant has been maintained as a valid South Dakota corporation,  it has been
collecting receivables and settling debts incurred by the Registrant through the
cessation  of its  active  operations,  and has been  maintaining  the books and
records  to allow the  Registrant  to obtain  audited  financial  statements  as
necessary.  The Registrant has not engaged in any significant  business activity
for more than the past five years.

     First Savings -- Summary. First Savings (formerly known as "Midwest Savings
& Loan Association,  Inc.") commenced operations in May 1983. In May 1985, First
Savings  registered its common stock pursuant to Section 12(g) of the Securities
and  Exchange  Act of 1934.  First  Savings is  primarily  engaged in  obtaining
savings deposits from the general public and making loans to enable borrowers to
purchase  or  refinance  residential  and  other  real  estate.  See  "Financial
Statements."

     Super 8 -- Summary. In a series of transactions during 1984, the Registrant
acquired shares of World Venture Capital Corporation which subsequently  changed
its name to Super 8 Venture Capital, Inc. ("S8VC") which shares, at December 31,
1985,  constituted  43.9%  of the  outstanding  common  stock  of S8VC and had a


<PAGE>

carrying  value of  $628,327.  In May 1986 S8VC was  liquidated  and its  assets
consisting of cash,  the  Registrant's  common stock and common stock of Super 8
Motel Developers, Inc. ("Super 8") were distributed to shareholders. As a result
of the liquidation and subsequent transactions,  the Registrant received 796,952
shares or  approximately  16% of Super 8's  common  stock,  $16,689  in cash and
125,000 shares of its own common stock. Super 8 Motel Developers Inc. is engaged
in the acquisition and operation of budget motels. See "Narrative Description of
Business" and "Financial Statements."

(b) Business of Issuer.

     In the near future,  the Registrant  intends to maintain its investments in
Super 8.  Because  of  certain  requirements  of the  federal  Office  of Thrift
Supervision  ("OTS"),  the Company may be required to dispose of its interest in
First  Savings.  In  addition,  the  Registrant  intends  to  consider  business
combinations  and financing  opportunities,  although  there can be no assurance
that the Registrant will be able to complete either.

First Savings and Loan Association, Inc.
----------------------------------------

     Acquisition  of  Interest.   In  a  series  of  cash  purchases   totalling
approximately  $270,021,  from February 1981 through March 1983,  the Registrant
acquired approximately 22% of the outstanding capital stock of First Savings and
Loan Association, Inc. ("First Savings"), a South Dakota corporation,  operating
primarily  in the city of  Aberdeen.  In May 1985 the  Registrant  purchased  an
additional 4,250 shares of First Savings stock for $2,000. The Registrant may be
deemed a promoter of First Savings as such term is defined under the  Securities
Exchange Act of 1934.  First  Savings is engaged in the  business of  attracting
funds in the form of savings  deposits from the general  public and  originating
loans secured by  residential,  commercial and other  improved real estate,  and
operates under the rules of the OTS, the Federal Deposit  Insurance  Corporation
("FDIC") and the State Banking  Commission of South Dakota.  All of its accounts
are FDIC insured up to a maximum of $100,000 per account.  First Savings' common
stock has been registered  pursuant to Section 12(g) of the Securities  Exchange
Act of 1934.

     Current Activities. First Savings has continued its operations as a savings
and loan  association  whose  principal  activities are accepting  deposits from
customers  and making  loans to  borrowers.  The  Registrant  has no  managerial
control over First  Savings,  and has no  representatives  on the First  Savings
Board of Directors.  During 1991 and 1992, the  Registrant  sold 3,524 shares of
First  Savings  Common  Stock,   which  reduced  its  ownership  from  22.4%  to
approximately  22%. In 1996, the Registrant  received dividend income from First
Savings  of  approximately  $17,000,  and in 1995,  the  Registrant  received  a
dividend of $34,000.  These are the first  dividends the Registrant has received
from  First  Savings  in more  than  the  last  nine  years.  Management  of the
Registrant  believes that the market value of its First Savings shares equals or
exceeds its current cost basis.


                                        4

<PAGE>


     Regulatory  Requirements.  Under  South  Dakota  law  a  savings  and  loan
association is subject to examination by the director of the Division of Banking
and Finance of the  Department  of Commerce.  OTS  regulations  require a member
savings and loan association to maintain cash,  certain time deposits,  bankers'
acceptances  and specific  United States  government and state or federal agency
obligations  ("liquid  assets") in an amount equal to or greater than a specific
percentage of the monthly average of its net withdraw-able  savings deposits and
borrowings  payable  in one year or less  ("short  term  borrowings").  The base
liquidity  requirement  may be  changed  from time to time by the OTS to amounts
within a certain  specified  range.  Liquid  assets  must  constitute  a certain
percentage of the monthly  average of net  withdrawable  savings plus short term
borrowings.  Failure to meet these liquidity requirements may result in monetary
penalties.  Based upon the First Savings financial statements included herewith,
the Registrant believes that First Savings is currently in compliance with these
liquidity requirements.

     The FDIC  requires  an annual  audit by  independent  accountants  and also
regularly conducts its own examination of insured  institutions.  It may revalue
assets of an institution,  based upon its appraisals, and requires establishment
of specific reserves. The FDIC also requires an annual insurance premium payment
and can also assess additional premiums against each insured institution.  First
Savings is  required to  maintain  its net worth in excess of certain  specified
minimum  levels.  If an insured savings and loan  association  fails to meet the
foregoing  reserve  or  net  worth  requirements,  the  FDIC  may  require  such
association to take  corrective  action.  Sanctions for not complying with these
net worth  requirements may include a reduction in the rate of interest that may
be paid on savings accounts, limitations on operational expenses, limitations on
the receipt of deposits to those made to existing  accounts,  or  limitations on
lending.  The FDIC has the  authority  to  terminate  the  insurance of accounts
pursuant to procedures established for that purpose. If insurance of accounts is
terminated by the FDIC, the savings and loan association  subject to termination
proceedings  will  continue  to be insured by the FDIC for a period of two years
following the date of termination.

     In  addition,  the  Federal  Home  Loan  Bank  requires  savings  and  loan
associations to maintain reserves against their transaction accounts,  primarily
NOW and super NOW accounts and nonpersonal time deposits.  The Federal Home Loan
Bank regulations  generally  require that reserves must be maintained at certain
level  against  transaction  accounts.  Savings and loan  associations  have the
authority to borrow from a Federal Home Loan Bank's  "discount  window," but the
Federal Home Loan Bank's  regulations  require a savings and loan to exhaust all
OTS sources before borrowing from a Federal Home Loan Bank.

     First Savings is subject to various  consumer  protection  laws such as the
Federal  Truth-In-Lending  Act,  the  Equal  Credit  Opportunity  Act,  and  the
Financial  Privacy  Acts.  Each of these laws and  related  regulations  provide
significant  penalties in the event of  noncompliance  with the statutes.  First
Savings structures its lending programs to improve and stabilize its operational

                                        5

<PAGE>

results  and to make  its loan  portfolio  interest-rate-sensitive  by  offering
short-term  or  adjustable  real  estate  loans  and  short-term   consumer  and
commercial  loans.  First  Savings also  invests  such funds in mortgage  backed
securities and investment and money market  securities.  First Savings' earnings
are largely dependent on the difference  between the income it receives from its
loans and securities investment portfolios and its cost of funds. First Savings'
operations,  and the operations of savings and loan associations generally,  are
significantly  influenced by general  economic  conditions,  by the monetary and
fiscal  policies of the federal  government  and by the  regulatory  policies of
various federal regulatory authorities.  Savings deposits and costs of funds are
influenced  by in interest  rates on competing  investments  and general  market
rates of interest.  Lending  activities  are affected by the demand for mortgage
financing and for consumer and other types of loans which is in turn affected by
the  interest  rates at which such  financing  may be offered and other  factors
affecting the supply of housing and the availability of funds.

         Office of Thrift Supervision ("OTS") Challenge.  In September 1996, the
Registrant  was contacted by the federal OTS concerning  certain  changes in the
alleged control of First Savings stock,  the ownership of First Savings stock by
certain  affiliates  of the  Registrant,  and a  threatened  action  against the
Registrant  as a result  thereof.  OTS notified the  Registrant  and some of its
directors that they may be in violation of OTS Reg. No. 574.4(b),  relating to a
requirement  of  submitting  either a change of control  notice or  rebuttals of
concerted  action  or  control.  The  Registrant  has  cooperated  with and will
     continue to cooperate with OTS in its investigation and expects to reach a
resolution of this matter.

     Competition.  First Savings is in  competition  with other savings and loan
associations,  commercial banks, credit unions, and other financial institutions
in Aberdeen,  South Dakota and  nationally.  The  financial  services  industry,
including  banking and making loans,  has become less regional and more national
since  1988 as a result of  improved  communications  and  computer  technology.
Financial institutions compete for deposits from customers primarily by offering
higher interest rates.  Financial institutions compete for lending activities by
offering  lower   interests   rates  and  loan  expenses,   and  more  favorable
qualification  terms.  Many of First  Savings'  competitors  have  significantly
greater capitalization and market presence than has First Savings. First Savings
has  been  able  to  maintain  its  presence  in  Aberdeen,  South  Dakota  as a
locally-owned  institution  providing  personalized  service with local,  timely
decision-making ability.

Super 8 Motel Developers, Inc.
------------------------------

     Acquisition.  Super 8 Motel  Developers,  Inc., a South Dakota  corporation
("Super 8"), is engaged in the  acquisition  and  development  and management of
budget motels.  Super 8 was formerly 40% owned by Super 8 Venture Capital,  Inc.
("S8VC"),  a South Dakota corporation formed in April 1984 to invest in, develop
and manage motels. In connection with the formation of S8VC, 125,000 shares of



                                        6

<PAGE>

the  Registrant's  unregistered  common stock were issued in  September  1984 in
exchange for  2,500,000  shares of common  stock of S8VC which was  subsequently
reduced to 2,249,993 shares.

     Business  of Super 8. The  primary  objective  of Super 8 is to develop and
operate franchise budget motels primarily in Virginia, West Virginia,  Maryland,
Delaware  and the  District of Columbia.  Super 8 acquired  exclusive  franchise
rights in July 1984 from  Super 8 Motels,  Inc.,  for  $250,000.  The  agreement
grants  Super 8  certain  exclusive  rights  in the  above-referenced  states to
construct, own, and operate motels using the Super 8 name and to represent Super
8 Motels,  Inc. in the sale of  franchises  within that  territory.  Significant
terms of the agreement and amendments thereto are as follows:

     1.   The term of the agreement is through 2004;

     2.   The initial  franchise  fee payable by motels which are owned at least
          51% by Super 8 is $10,000;

     3.   Super  8 is  to  receive  one-third  of  the  initial  franchise  fee,
          presently $20,000, of each franchise sold by the Super 8 system in the
          territory; and

     4.   A  specified  percentage  of the  annual  gross  room  rentals of each
          operating unit is to be tendered to Super 8 Motels,  Inc. as a fee for
          services rendered and royalties.  Super 8 Motels, Inc. will pay 25% of
          the fee it receives from each motel unit in the territory as a fee for
          services  rendered by Super 8. Those payments are to continue from the
          date such motel unit in the territory first commences  monthly royalty
          payments for ten years (for motels  opened on or before July 11, 1990)
          and for 15 years (for motels opened after July 11, 1990). Subfranchise
          fee income to Super 8 under this  agreement  were $422,600  during the
          year ended December 31, 1996, and $433,357 (1995).

     Super 8 acquired  these  franchise  rights in July 1984.  As of March 1988,
Super 8 had  interests  in  nineteen  motels  operating  and four  motels  under
construction;  as of December  31, 1996,  Super 8 had  interests in 29 operating
motels.  The size of motels vary from 42 to 73 units and are, in most instances,
located adjacent to restaurant facilities.

     At  December  31,  1996,  Super 8 was also a general  partner  in 9 limited
partnerships,  (which  are in  addition  to the 29  motels  owned  by Super 8 at
December  31,  1996),  all of which were  formed  for the  purpose of owning and
operating Super 8 Motels.

     In  1996,  the  Registrant   received  dividend  income  from  Super  8  of
approximately  $160,000.  Management of the Registrant  believes that the market
value of its investment in Super 8 equals or exceeds its current cost basis.



                                        7

<PAGE>

     Competition. Super 8 is in competition with a large number of lower priced,
"budget" motel chains, such as Motel 6, Days Inn, Econolodge,  and Red Roof Inn.
In addition,  there are many  individually-owned  motels which are not part of a
chain, or which are members of a marketing  organization such as "Best Western."
Super 8 generally  competes  with these other motels on pricing,  location,  and
advertising.

Plan of Operations
------------------

     To date, the  Registrant has not been engaged in any operations  other than
attempting to organize its affairs, settle its obligations,  collect receivables
and, more recently,  bring the Registrant up to date with required  governmental
filings and compliance with other regulatory requirements.  The current Board of
Directors  has not been  authorized by the  shareholders  to commence any active
business operations, and has not sought any possible business combination.

     In the future, the Board will seek direction from the shareholders as to an
appropriate  course for the Registrant to follow after the meeting.  This course
could include any of several alternatives, briefly identified as follows:

1.   Dissolution and Liquidation.  Pursuant to this alternative,  the Registrant
     would seek  shareholder  approval for the liquidation of the Registrant and
     the distribution of net assets to shareholders on a pro rata basis.

2.   Continuation  of the  Registrant  as a  going  concern.  Pursuant  to  this
     alternative,  the  Registrant,  through its elected  Board of Directors and
     management,   would  seek  business   opportunities  and  consider  various
     possibilities  of  reorganization   with  the  intention  of  allowing  the
     Registrant to engage in active business operations.

3.   Sale or distribution of the Registrant's minority interests.  In connection
     with  either or both of the  foregoing  alternatives,  the  Registrant  may
     consider the sale of its minority  interests in Super 8 and First  Savings.
     This may be necessary to avoid the  application of the  Investment  Company
     Act, as discussed  below.  Divestiture of its interest in First Savings may
     be necessary to comply with OTS regulation as discussed above.

4.   Seeking a waiver  from the  application  of the  Investment  Company Act or
     registering as an Investment Company or BDC.

     The Board of Directors has not made any  determination  as to which, if any
of the  foregoing  alternatives,  it may  recommend to the  shareholders  of the
Registrant.  Any such  recommendation  will be in the form of a proxy  statement
meeting the requirements of Schedule 14A of the Securities Exchange Act of 1934,
as amended.



                                        8

<PAGE>

Possible Liquidation
--------------------

     To  the  extent  the  Board  of  Directors  recommends  liquidation  to the
shareholders,  it will do so in accordance  with the applicable  requirements of
South Dakota corporation law and the requirements of the Securities Exchange Act
of 1934. Because the Registrant has attempted to sell its interest in both First
Savings and Super 8 previously,  there can be no assurance  that the  Registrant
will be able to do so in  connection  with any  liquidation  plan.  Furthermore,
there can be no assurance  whether the Registrant  would be offered a fair price
in connection with any attempt to liquidate those interests.

     Consequently,  it is  possible  that  the  Registrant  may  propose  to the
shareholders  that it not  attempt to sell the  Registrant's  interest in either
First Savings or Super 8, but rather that the  Registrant  distribute  the First
Savings  and  Super 8  shares  to the  Registrant's  shareholders  in a pro rata
distribution.  There are significant  regulatory hurdles that must be considered
in connection  with either spin off or a sale which the  Registrant  has not yet
contemplated.  Any such transaction  will,  however,  only be done in accordance
with all applicable  requirements,  including the requirements of the Securities
Exchange Act of 1934,  state  corporation  laws,  and state and federal  banking
laws.

Business Combinations.
----------------------

     If  the  Registrant   proposes  to  implement  a  business  plan  to  seek,
investigate, and, if warranted, to acquire an interest in a business opportunity
which  management  believes  may  provide  a return  to the  Registrant  and its
shareholders.  The  Registrant  has no  significant  capital  available to it to
acquire a business  opportunity,  and there can be no assurance  that it will be
able to do so. The  Registrant  may attempt to do so using its  unissued  common
stock instead of cash or debt; any such issuance will likely provide significant
dilution to the Registrant's existing shareholders.

     The  Registrant  has  not  yet  identified  a  business   opportunity   for
acquisition.  It is  expected  to seek out  developing  companies  to allow  the
Registrant  to expand into new products or markets,  or to develop a new product
or  service.  Established  businesses  which may be  experiencing  financial  or
operating  difficulties  and  would  be in need of the  additional  capital  and
management expertise the Registrant could provide also will be investigated.  In
some instances,  a business opportunity may involve the acquisition of or merger
with a corporation  which does not need  substantial  additional  cash but which
desires to establish a public trading market for its securities.

     The  Registrant  anticipates  that the selection of a business  opportunity
will  be a  complex  process  and  will  involve  a  number  of  risks,  because
potentially  available  business  opportunities  may  occur  in  many  different
industries and may be in various stages of development. Due in part to depressed
economic  conditions  in a  number  of  geographic  areas,  rapid  technological
advances being made in some industries and shortages of available capital,


                                        9

<PAGE>

management  believes that there are numerous  firms  seeking  either the limited
additional  capital which the Registrant will have or the benefits of a publicly
traded  corporation,  or both.  The  perceived  benefits  of a  publicly  traded
corporation  may  include   facilitating  or  improving  the  terms  upon  which
additional  equity  financing  may be  sought,  providing  liquidity  for estate
planning  needs  of  principle  shareholders,  creating  a means  for  providing
incentive  stock  options  or  similar  benefits  to  key  employees,  providing
liquidity for all shareholders and other factors.

     In seeking business opportunities, management's decision will be based upon
the objective of seeking  long-term  capital  appreciation  in real value of the
Registrant's  investment.  Current  income  will be only a minor  factor in such
decisions.

     It is anticipated  that the Registrant  will  essentially be limited to one
business  venture in the foreseeable  future,  due to the  Registrant's  limited
financing. This lack of diversification will not permit the Registrant to offset
potential losses from one business opportunity against profits from another, and
should be  considered an adverse  factor  affecting any decision to purchase the
Registrant's securities.

     In some cases,  management  of the  Registrant  will have the  authority to
effect  acquisitions  without  submitting the proposal to the  shareholders  for
their consideration. In some instances, however, the proposed participation in a
business   opportunity   may  be  submitted  to  the   shareholders   for  their
consideration,  either  voluntarily  by the  Board  of  Directors  to  seek  the
shareholders' advice and consent, or because of a requirement of state law to do
so.

Sale or Distribution of Minority Interests
------------------------------------------

     The Registrant  may determine to sell all or a portion of the  Registrant's
interests in either First  Savings,  Super 8, or both,  in  connection  with any
business combination that may be pursued by the Registrant.  Alternatively,  the
Registrant might consider  distributing to the Registrant's  shareholders,  on a
pro rata basis,  interests in Super 8, First Savings, or both. In both cases, it
is likely that any such sale or distribution would require shareholder  approval
under  South  Dakota  law,  as well as  possible  approval  by the South  Dakota
Attorney General and Secretary of State.

Registration Under or Waiver of Investment Company Act
------------------------------------------------------

     In its proxy statement for the meeting of  shareholders  held September 29,
1988, the Registrant stated that if the proposal to sell the Registrant's assets
was approved and the transactions  completed,  the Registrant  intended to elect
treatment as a business development company ("BDC") under the Investment Company
Act of 1940 (the "1940 Act").  The  transactions  anticipated  by the Registrant
were the sale of the travel and the real estate operations to certain affiliates
(which  occurred in March 1989),  and the sale of the  Registrant's  interest in

                                       10

<PAGE>

First Savings. The Registrant was never able to dispose of its interest in First
Savings on economically reasonable terms. Furthermore, the Registrant never made
an  election  to be  treated  as a BDC  because  the  Registrant  did  not  have
sufficient working capital to complete the steps necessary for such an election.

     The Registrant  currently  might be considered an  "investment  company" as
that term is defined in the 1940 Act.  An  investment  company  is  generally  a
company that is engaged in the business of investing,  holding,  reinvesting, or
trading of investment securities.  Investment securities are defined by the 1940
Act to include all  securities  except  United  States  government  obligations,
certain  other  securities  and cash  where the  Registrant  has less than a 50%
interest in the issuer.  Under that definition,  both the Super 8 securities and
the First Savings securities would classify as investment securities.

     Because  these   securities  have  such  a  significant   position  in  the
Registrant's  financial  statements,  it is  possible  that the  Securities  and
Exchange  Commission  may take the position that the Registrant is an investment
company  and should be  registered  as such under the 1940 Act.  The  Registrant
believes,  however, that if the 1940 Act is applicable at all, the Registrant is
an inadvertent  investment  company.  This status  resulted from the sale by the
Registrant of its operating assets in 1988-1989,  and the Registrant's inability
to sell its interest in Super 8 or First Savings. The Registrant does not intend
nor does it have  authority  to engage in the  business of  investing,  holding,
reinvesting, or trading of investment securities.

     The Registrant intends to vigorously resist classification as an investment
company,  and to take advantage of any exemptions or exceptions from application
of the 1940 Act, which allows an entity a one-time  option during any three-year
period to claim an exemption as a "transient"  investment company. The necessity
of asserting any such  resistance,  or making any claim of  exemption,  could be
time consuming and costly, or even prohibitive,  given the Registrant's  limited
resources.

Employees and Consultants
-------------------------

     The  Registrant  currently has no employees.  Management  anticipates  that
employees and/or consultants will be retained as may be necessary to operate the
Registrant following any business combination. See also "Management."


Item 2. Description of Property
        -----------------------

     The Registrant  currently  maintains its offices at no charge in the office
of Tarrell Realty,  Aberdeen,  South Dakota, a company owned by Ronne Tarrell, a
director of the Registrant. The office facilities are provided to the Registrant
pursuant to an oral agreement. Management believes that this arrangement will be
suitable for its needs for the immediate future, until such time as any business
combination has been substantially completed.


                                       11

<PAGE>

     The Registrant owns no real property and no material personal property.


Item 3. Legal Proceedings
        -----------------

     The  Registrant  is  not a  party  to any  legal  proceedings  and no  such
proceedings  are known to be contemplated  except for the OTS inquiry  described
above.

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

     No  matters  were  submitted  to a vote of  shareholders  during the fourth
quarter  of  the  fiscal  year.  The  Registrant  did  hold  an  meeting  of the
shareholders  in January 1996, at which meeting the directors of the  Registrant
were reelected.


                                       12

<PAGE>
                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters
         ---------------------------------------------------------

(a) Market Information.

     The  Registrant's  Common  Stock is not  eligible for listing on the NASDAQ
system, and trading,  if any, has been strictly limited to the  over-the-counter
market.  To the  knowledge of the  Registrant,  there has been no trading in the
Registrant's Common Stock for a significant period of time. The Common Stock has
been quoted from time to time in the "Pink  Sheets"  maintained  by the National
Quotation Bureau,  Inc.  Management  believes that no established trading market
exists for the Registrant's Common Stock.

(b) Holders.

     (b)(1) The approximate number of record holders of the Registrant's  Common
Stock,  $.001 par value, as of December 31, 1996 was  approximately  3,600. This
figure does not reflect an  indeterminable  number of shareholders  whose shares
are held in "street name."

(c) Dividends.

     The Registrant has not paid a dividend with respect to its Common Stock and
cannot be  expected  to pay a dividend  on its Common  Stock in the  foreseeable
future.


Item 6. Management's Discussion and Analysis or Plan of Operation
        ---------------------------------------------------------

Results of Operations

Years Ended December 31, 1995 and 1996
--------------------------------------

     As  stated  above,  until  recently  the  Registrant  has been  essentially
inactive since early 1988. Until 1995, the Registrant's  activities consisted of
nothing more than  maintaining its investments in First Savings and Super 8. The
Registrant's   only  earnings  have  been  from  dividends   received  from  its
investments in 1988,  1993, 1994, 1995 and 1996 and a nominal amount of interest
earned on deposits.

     Expenditures  increased during 1996 as the Registrant  incurred general and
administrative  expenses in connection  with expenses  necessary to continue the
effectuation of the Registrant's Plan of Operations and preparation of responses
to the OTS as a result of its investigation. See Item 1(b) - Plan of Operations.


                                       13

<PAGE>

     Except for  dividends  which may be paid to the  Registrant by either First
Savings or Super 8 (neither  of which can be  assured),  and  interest  from any
funds on deposit,  the Registrant  anticipates  no other income.  The Registrant
anticipates increased expenses during he current 1997 fiscal year as it plans to
hold a formal  shareholders  meeting  and  solicit  proxies in  connection  with
possible divestiture of assets.

Liquidity and Capital Resources

December 31, 1995 and 1996
--------------------------

     At the time the Registrant  ceased active  business  operations in 1989, it
was  essentially  out of money  and has been  unable  to raise  any  substantial
amounts of money since that time.  The  Registrant  disposed of its interests in
its travel agency, real estate operations and insurance  operations in an effort
to minimize  its  general and  administrative  expenses  and to raise cash.  The
Registrant  did not receive  dividends from Super 8 during the 1995 fiscal year,
but  received  approximately  $160,000 in  dividends  from Super 8 in 1996.  The
Registrant  received  dividends of  approximately  $34,000 from First Savings in
fiscal 1995 and $17,000 in fiscal 1996.

     At December 31, 1995 and 1996, the  Registrant  had net working  capital of
$199,000 and $335,000  respectively,  as a result of cash dividends  received by
the Registrant from Super 8 and First Savings. Prior to 1994, the Registrant had
significant working capital deficits.

     The  Registrant's  most  significant  assets are its  investments  in First
Savings and Super 8, which are carried on the equity method of accounting and at
cost,  respectively.  Management  believes  that the fair market  value of these
investments is equal to or in excess of their  respective book values.  However,
as a result of the  extent of the  Registrant's  percentage  ownership  in First
Savings and Super 8 and its inability to significantly influence these entities,
the  ultimate  realization  of these  investments  may be subject to  conditions
outside the  control of the  Registrant.  Furthermore  the  Registrant  received
dividends of  approximately  $34,000 and $17,000 from First Savings  during 1995
and 1996, respectively,  and dividends of approximately $160,000 from Super 8 in
1996,  which  have  provided  the  Registrant  with  a  means  of  bringing  its
obligations current and to formulate and effectuate its plan of operations.

     During the years  ended  December  31,  1995 and  December  31,  1996,  the
Registrant  had limited cash flows from investing and financing  activities.  In
1996 the Registrant  purchased a certificate of deposit in the amount of $60,000
from  Dakota  Bank,  Aberdeen,  South  Dakota,  using the  dividend  proceeds it
received from Super 8 and First Savings.

                                       14

<PAGE>

Item 7. Financial Statements
        --------------------

     The Registrant's  audited financial  statements,  described as follows, are
appended to the signature page of this report.

World Services, Inc.
--------------------

      Independent Auditor's Report.......................................

      Balance Sheet - December 31, 1996..................................

      Statements of Operations - For the Years
      Ended December 31, 1996 and 1995...................................

      Statement of Changes in Stockholder's Equity (Deficit) -
      For the Period from January 1, 1995 through December 31, 1996......

      Statements of Cash Flow - For the Years
      Ended December 31, 1996 and 1995...................................

      Notes to Financial Statements......................................

First Savings and Loan Association, Inc.
----------------------------------------

      Independent Auditor's Report.......................................

      Balance Sheets - September 30, 1996, and 1995 .....................

      Statements of Income - For the Years
      Ended September 30, 1996, 1995 and 1994............................

      Statement of Stockholder's Equity -
      For the Years Ended September 30, 1996, 1995 and 1994..............

      Statements of Cash Flows - For the Years
      Ended September 30, 1996, 1995 and 1994............................

      Notes to Financial Statements......................................

Super 8 Motel Developers, Inc.
------------------------------


      INDEPENDENT AUDITORS' REPORT.......................................




                                       15

<PAGE>

     FINANCIAL STATEMENTS:................................................

     Consolidated Balance Sheets..........................................
     Consolidated Statements of Operations for the
     Years Ended December 31, 1996 and 1995...............................
     Consolidated Statements of Stockholders' Equity
     for the Years Ended December 31, 1996 and 1995.......................
     Consolidated Statements of Cash Flows................................
     Notes to Consolidated Financial Statements...........................

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

     Since inception, the Registrant has not filed a Form 8-K reporting a change
of  accountants,   nor  has  there  been  any  material  disagreement  with  its
accountants on any matter regarding accounting or financial disclosure.


                                       16

<PAGE>
                                    PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act
--------------------------------------------------------------------------------

(a) Identification of Directors and Executive Officers.

     The  officers  and  directors  of the  Registrant  are  listed  below.  The
directors  of the  Registrant  are elected to hold office  until the next annual
meeting of shareholders and until their respective  successors have been elected
and qualified.  Officers of the Registrant are elected by the Board of Directors
and hold office until their successors are elected and qualified.

     The current officers and directors of the Registrant are:

Name                           Age              Position
----                           ---              --------

Ronne Tarrell                  55               President, Director
Delores Bower                  53               Vice President, Director
David Jorgenson                61               Secretary, Treasurer, Director
Delbert Harty                  57               Director
Terry Heinz                    39               Director

     A brief summary of the business  experience of each person who is currently
an officer or director of the  Registrant,  and such  person's  service with the
Registrant is as follows:

     Ronne  Tarrell  has  been  president  since  1993  and a  director  of  the
Registrant since 1990. He is a licensed realtor in the State of South Dakota and
has owned and operated Tarrell Realty in Aberdeen,  South Dakota,  for more than
the past five  years.  Mr.  Tarrell is not a director  of any other  corporation
which has a class of securities  registered under the Securities Exchange Act of
1934.

     Delores  Bower has been Vice  President  and a Director  of the  Registrant
since 1990. She has been  financial  director of Midwest Paint, a privately held
company in Aberdeen, South Dakota, for more than the past five years. Mrs. Bower
is not a  director  of any other  corporation  which  has a class of  securities
registered under the Securities Exchange Act of 1934.

     David Jorgenson has been Secretary and Treasurer since 1993, and a director
of the Registrant  since 1990.  Mr.  Jorgenson is manager of a small business in
Aberdeen,  South  Dakota.  For the five prior years,  Mr.  Jorgenson was a state
video lottery  inspector for the State of South Dakota  Lottery  Commission.  In



                                       17

<PAGE>

addition,  Mr.  Jorgenson  manages his own  investments.  Mr. Jorgenson is not a
director of any other  corporation  which has a class of  securities  registered
under the Securities Exchange Act of 1934.

     Delbert Harty has been a director of the Registrant since 1993. He has been
retired for more than the last five years,  and  currently  manages his personal
investments.  Prior to retirement  he was employed as a machinist.  Mr. Harty is
not a  director  of any  other  corporation  which  has a  class  of  securities
registered under the Securities Exchange Act of 1934.

     Terry Heinz has been a director of the Registrant since 1993. Since October
1993,  Mr.  Heinz has been an  account  executive  at Tel Serv,  Inc.,  a direct
marketing firm in Aberdeen,  South Dakota. From April 1984 until October 1993 he
was a sales  representative for Dial-Net, a marketing firm in Sioux Falls, South
Dakota.  Mr. Heinz is not a director of any other  corporation which has a class
of securities registered under the Securities Exchange Act of 1934.

(b) Significant Employees.

     The Registrant has no salaried employees at the present time.

(c) Family Relationships.

     There are no family  relationships  among any of the Registrant's  officers
and/or directors.

(d) Involvement in Certain Legal Proceedings.

     During  the past  five  years,  no  current  director,  executive  officer,
promoter or control person of the Registrant has:

          (1) Filed or has had filed  against  him a petition  under the federal
bankruptcy laws or any state insolvency law, nor has a receiver, fiscal agent or
similar  officer been  appointed by a court for the business or property of such
person, or any partnership in which he was a general partner, or any corporation
or business  association  of which he was an executive  officer at or within two
years before such filings;

          (2) Been convicted in a criminal proceeding or is a named subject of a
pending  criminal  proceeding  (excluding  traffic  violations  and other  minor
offenses);


                                       18

<PAGE>

          (3)  Been  the  subject  of  any  order,   judgment,  or  decree,  not
subsequently  reversed,   suspended  or  vacated,  of  any  court  of  competent
jurisdiction,   permanently  or  temporarily  enjoining  such  person  from,  or
otherwise limiting, the following activities:

               (i) Acting as a futures commission merchant,  introducing broker,
commodity  trading  advisor,  commodity  pool operator,  floor broker,  leverage
transaction  merchant,  any other  person  regulated  by the  Commodity  Futures
Trading  Commission,  or an associated person of any of the foregoing,  or as an
investment  adviser,  underwriter,  broker  or dealer  in  securities,  or as an
affiliated  person,  director,  or employee  of any  investment  company,  bank,
savings and loan association or insurance company,  or engaging in or continuing
any conduct or practice in connection with such activity;

               (ii) Engaging in any type of business practice; or

               (iii) Engaging in any activity in connection with the purchase or
sale of any security or commodity or in connection with any violation of federal
or state securities laws or federal commodities laws;

          (4)  Been  the  subject  of  any  order,   judgment  or  decree,   not
subsequently  reversed,  suspended or vacated, of any federal or state authority
barring,  suspending  or  otherwise  limiting for more than 60 days the right of
such person to engage in any activity described in paragraph (3)(i) above, or to
be associated with persons engaged in any such activity; or

          (5) Been found by a court of competent  jurisdiction in a civil action
or by the Securities and Exchange Commission (the "Commission") to have violated
any federal or state  securities  law,  and the judgment in such civil action or
finding by the  Commission has not been  subsequently  reversed,  suspended,  or
vacated.

          (6) Been found by a court of competent  jurisdiction in a civil action
or by the  Commodity  Futures  Trading  Commission  to have violated any federal
commodities  law,  and the  judgment  in such  civil  action or  finding  by the
Commodity  Futures  Trading  Commission  has  not  been  subsequently  reversed,
suspended or vacated.

Item 10. Executive Compensation
         ----------------------

(a)(1) & (2)  Cash Compensation.

     Officers and Director  received $150 per directors  meeting attended during
1996. Prior to 1996, no cash compensation was paid.


                                       19

<PAGE>


(b)(1)  Compensation Under Plans.

     The  Registrant  has  no  stock  option  plan,   stock  bonus  plan,  other
compensatory  plan or  arrangement,  or  employee  benefit  plan for  employees,
consultants, officers, or directors.

(c) Other Compensation.

     No  compensation  was paid or distributed to any officer or director of the
Registrant for services rendered to the Registrant during the 1996 fiscal year.

(d) Compensation of Directors.

     In 1996,  the  Registrant  paid its directors  $150 per  directors  meeting
attended for their  services.  In addition,  officers and  directors may receive
reimbursement for out-of-pocket expenses incurred by them in connection with the
business of the Registrant.

     The Registrant has no other arrangements  pursuant to which any director of
the  Registrant  was  compensated  during the 1996 fiscal year for services as a
director.

(e) Termination of Employment and Change in Control.

     The Registrant has no compensation  plan or arrangement with respect to any
executive  officer  which plan or  arrangement  results or will  result from the
resignation, retirement or any other termination of such individual's employment
with the Registrant.  The Registrant has no plan or arrangement  with respect to
any such persons which will result from a change in control of the Registrant or
a change in the individual's responsibilities following a change in control.

Item 11. Security Ownership of Certain Beneficial Owners and Management
         --------------------------------------------------------------

(a) Security Ownership of Certain Beneficial Owners.

     The following  table sets forth  information as of December 31, 1996, as to
the beneficial ownership of shares of the Registrant's only outstanding class of
securities,  its Common  Stock,  by each  person who,  to the  knowledge  of the
Registrant at that date, was a beneficial owner of 5% or more of the outstanding
shares of Common Stock. The table does not include information  regarding shares
of Common Stock held in the names of certain  depositories/clearing  agencies as
nominee for various  brokers and  individuals.  No such broker or  individual is
believed to hold greater than 5% of the Registrant's Common Stock.

                                       20

<PAGE>
        Name and Address                Amount of
          of Beneficial                Beneficial                 Percent of
              Owner                       Owner                     Class
        -----------------              -----------                ----------

          Murray Woulfe             379,834 shares(1)                7.4%
         HCR 70 Box 2206
      Lake George, MN 56458
----------

(1)  Ownership is direct. 115,000 of these shares are held in escrow pursuant to
     an agreement  with the Director of  Securities  of South Dakota  until,  if
     even, the Registrant achieves net earnings per share of $0.06 for any three
     year period,  two of which must be  consecutive.  Mr.  Woulfe has agreed to
     place an additional 150,000 shares into this escrow.


                                       21

<PAGE>

(b) Security Ownership of Management.

     The following  table sets forth  information as of December 31, 1996, as to
the beneficial ownership of shares of the Registrant's only outstanding class of
securities,  its Common Stock, by each person who is a director and/or executive
officer of the  Registrant,  and by all officers and directors of the Registrant
as a group.

          Name and Address               Amount of
           of Beneficial                Beneficial           Percent of
              Owner                     Owner (2)               Class
          ----------------              -----------          ----------

        Ronne Tarrell (1)(3)            6,667 shares                 *

        Delores Bower (1)(4)          163,505 shares              3.1%

        David Jorgenson (1)             2,900 shares                 *

        Delbert Harty (1)(3)           14,834 shares                 *

        Terry Heinz (1)                   800 shares                 *

        Officers and                  188,706 shares              3.5%
        directors as a
        group (five
        persons)
----------

*    Less than one percent.

(1)  Ownership is direct.

(2)  There are no warrants outstanding by which any officer,  director, or other
     person has the right to purchase shares of the Registrant's Common Stock.

(3)  These shares are held in escrow  pursuant to an agreement with the Director
     of Securities of South Dakota until,  if even, the Registrant  achieves net
     earnings per share of $0.06 for any three year period, two of which must be
     consecutive.

(4)  15,005 of these shares are held in escrow pursuant to an agreement with the
     Director of  Securities  of South Dakota  until,  if even,  the  Registrant
     achieves net earnings per share of $0.06 for any three year period,  two of
     which must be consecutive.

                                       22

<PAGE>

(c) Changes in Control.

     There was a change  in  control  of the  Registrant  in 1990,  by which the
current  members of the Board of Directors was appointed and the former  members
resigned. There has been no change of control since that time.

Item 12. Certain Relationships and Related Transactions
         ----------------------------------------------

(a)(b)(c) Transactions with Management and Others.

     All funds held by the  Registrant are deposited with First Savings and Loan
Association,  Inc.,  except for those funds  related to the $60,000  Dakota Bank
certificate  of deposit.  The current  balance on deposit with First  Savings is
greater than  $100,000.  Any funds over $100,000 will not receive the benefit of
FDIC insurance.

(d) Transactions with Promoters.

     Not applicable.


                                       23

<PAGE>

Item 13. Exhibits and Reports on Form 8-K.
         ---------------------------------

     (a)  Exhibits  required  to be filed are  listed  below and,  except  where
incorporated by reference, immediately follow the Financial Statements.

Number        Description

   3.1        Articles of Incorporation, as amended(1)

   3.2        Bylaws(1)

  10.1        Agreements relating to sale of assets:

  10.2        Purchase Agreement dated March 31, 1989 between World Services,
              Inc. and Rezatto II, Inc.(1)

  10.3        Addendum Agreement dated December 29, 1989 between World
              Services, Inc. and Rezatto II, Inc.(1)

  22.1        Subsidiaries of the Registrant:

              (a)  First Savings and Loan Association, Inc., a South Dakota
              corporation
              (b)  Super 8 Motel Developers, Inc., a South Dakota corporation

  (b)          During the last quarter of the period covered by this report the
 Registrant filed no reports on Form 8-K.

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

(1)  Incorporated  by reference  from the same  numbered  exhibit filed with the
     Registrant's  Report on Form 10-KSB for the fiscal years ended December 13,
     1988, 1990, 1991, 1992, 1993 and 1994.


                                       24

<PAGE>
                                   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.

March 27, 1997
                                             WORLD SERVICES, INC.


                                             By  /S/  RONNE TARRELL
                                                -------------------------------
                                                Ronne Tarrell, President


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

                                         /S/  RONNE TARRELL
March 27, 1997                           ---------------------------------------
                                         Ronne Tarrell, President, Principal
                                         Executive Officer, and Director

                                         /S/  DAVID JORGENSON
March 27, 1997                           ---------------------------------------
                                         David Jorgenson, Secretary, Treasurer,
                                         Principal Accounting Officer, Principal
                                         Financial Officer, and Director


                                         /S/  DELORES BOWER
March 27, 1997                           ---------------------------------------
                                         Delores Bower, Director


                                         /S/  DELBERT HARTY
March 27, 1997                           ---------------------------------------
                                         Delbert Harty, Director


                                         /S/  TERRY HEINZ
March 27, 1997                           ---------------------------------------
                                         Terry Heinz, Director


<PAGE>

                          INDEX TO FINANCIAL STATEMENTS



                                                                        PAGE
                                                                        ----

Independent Auditor's Report.........................................    F-2

Balance Sheet - December 31, 1996....................................    F-3

Statements of Operations - For the Years Ended
  December 31, 1996 and 1995.........................................    F-4

Statement  of Changes in  Stockholders'  Equity -
  For the Period from January 1,
  1995 through December 31, 1996.....................................    F-5

Statements of Cash Flows - For the Years Ended
  December 31, 1996 and 1995.........................................    F-6

Notes to Financial Statements........................................    F-7



                                       F-1

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT





The Stockholders and Board of Directors
World Services, Inc.
Aberdeen, South Dakota



We have audited the  accompanying  balance sheet of World Services,  Inc., as of
December  31,  1996,  and the  related  statements  of  operations,  changes  in
stockholders'  equity,  and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's manage-
ment. Our responsibility is to express an opinion on these financial  statements
based on our audits. We did not audit the financial  statements of First Savings
and Loan Association, Inc (FSL), the investment in which, as discussed in Note 2
to  the  financial  statements,  is  accounted  for  by  the  equity  method  of
accounting.  The  Company's  investment  in FSL was $335,000 as of September 30,
1996, and the Company's equity in its net income was $45,000 and $40,000 for the
years ended  December 31, 1996 and 1995,  respectively.  The Company  received a
dividend  of  $17,000  and  $34,000  from FSL in 1996 and  1995.  The  financial
statements of FSL were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for FSL is
based solely on the report of the other auditors.

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  and the  reports  of  other  auditors  provide  a
reasonable basis for our opinion.

In our  opinion,  based on our audits and the  reports  of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the financial position of World Services,  Inc. as of December 31, 1996, and the
results of its  operations  and its cash flows for the years ended  December 31,
1996 and 1995, in conformity with generally accepted accounting principles.




HEIN + ASSOCIATES LLP

Denver, Colorado
February 17, 1997

                                      F-2

<PAGE>



                              WORLD SERVICES, INC.

                                  BALANCE SHEET
                                DECEMBER 31, 1996



                                     ASSETS
                                     ------

CURRENT ASSETS:
    Cash and cash equivalents                                 $    28,000
    Certificate of deposit                                        290,000
    Other                                                          17,000
                                                              -----------
             Total current assets                                 335,000

INVESTMENTS AND OTHER ASSETS:
    Investment in First Savings & Loan                            335,000
    Investment in Super 8 Motel Developers                        568,000
    Other                                                           4,000
                                                              -----------

TOTAL ASSETS                                                  $ 1,242,000
                                                              ===========


            LIABILITIES AND STOCKHOLDERS' EQUITY
                                                             

CURRENT LIABILITIES -
    Accounts payable and accrued expenses                     $         -

STOCKHOLDERS' EQUITY:
    Common stock, par value $.001 per share;
         50,000,000 shares authorized,
         5,359,000 shares issued                                    5,000
    Additional paid-in capital                                  6,545,000
    Treasury stock at cost, 129,000 shares                         (3,000)
    Accumulated deficit                                        (5,305,000)
                                                              -----------
             Total stockholders' equity                         1,242,000
                                                              -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                    $ 1,242,000
                                                              ===========














              See accompanying notes to these financial statements.

                                       F-3

<PAGE>
<TABLE>
<CAPTION>
                              WORLD SERVICES, INC. AND SUBSIDIARIES

                                    STATEMENTS OF OPERATIONS

                                                                        YEARS ENDED
                                                                        DECEMBER 31,
                                                               -----------------------------
                                                                  1996               1995
                                                               ---------          ----------
<S>                                                             <C>                <C>   
REVENUES:
    Interest income                                            $  15,000           $   7,000
    Dividend income                                              160,000               -
                                                               ---------           ---------
                                                                 175,000               7,000
                                                               ---------           ---------
EXPENSES:
    Legal and accounting                                          34,000              43,000
    Other general and administrative expenses                     22,000               7,000
                                                               ---------           ---------
                                                                  56,000              50,000
                                                               ---------           ---------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS (LOSS) OF
    AFFILIATED COMPANIES                                         119,000             (43,000)

EQUITY IN EARNINGS OF AFFILIATED COMPANIES (NOTE 2)               45,000              40,000
                                                               ---------           ---------

NET INCOME (LOSS)                                              $ 164,000           $  (3,000)
                                                               =========           =========

INCOME (LOSS) PER SHARE OF COMMON STOCK                        $     .03           $       *
                                                               =========           =========

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                  5,358,000           5,358,000
                                                               =========           =========

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

*Less than $.01 per share.







                      See accompanying notes to these financial statements.

                                               F-4
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
   
                                          WORLD SERVICES, INC. AND SUBSIDIARIES

                                      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                     FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1996
                                                                                                     
                                          COMMON STOCK             Additional
                                    -----------------------         Paid-in        Treasury       Accumulated
                                     Shares          Amount         Capital         Stock          Deficit            Total
                                     ------          ------        ----------      --------      ------------         -----
<S>                                 <C>              <C>           <C>             <C>           <C>                <C>       
BALANCE, January 1, 1995            5,359,000        $5,000        $6,545,000      $(3,000)      $(5,466,000)       $1,081,000

    Net income                         -                -             -               -               (3,000)           (3,000)
                                    ---------        ------        ----------      -------       -----------        ----------


 BALANCE, December 31, 1995         5,359,000        5,000         6,545,000       (3,000)        (5,469,000)        1,078,000

    Net income                         -                -             -               -              164,000           164,000
                                    ---------        -----         ---------       ------         ----------        ----------


 BALANCE, December 31, 1996         5,359,000        $5,000        $6,545,000      $(3,000)      $(5,305,000)        $1,242,000
                                    =========        ======        ==========      =======       ===========         ==========








                                  See accompanying notes to these financial statements.
                                                               

                                                           F-5
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                                          WORLD SERVICES, INC. AND SUBSIDIARIES

                                                STATEMENTS OF CASH FLOWS
                                                                                                YEARS ENDED
                                                                                                DECEMBER 31,
                                                                                         --------------------------
                                                                                           1996             1995
                                                                                         ---------        ---------
<S>                                                                                       <C>             <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                                   $ 164,000        $  (3,000)
     Adjustments to  reconcile  net income  (loss) to net cash used in operating
         activities:
             Equity in earnings of affiliate                                               (45,000)         (40,000)
             Increase in other assets                                                      (17,000)            --
             (Decrease) increase in accounts payable and accrued expenses                  (10,000)          10,000
                                                                                         ---------        ---------
             Net cash used in operating activities                                          92,000          (33,000)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Dividends from First Savings and Loan                                                  17,000           34,000
     Purchase of certificate of deposit                                                    (90,000)            --
                                                                                         ---------        ---------
             Net cash (used in) provided by investing activities                           (73,000)          34,000


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                            19,000            1,000

CASH AND CASH EQUIVALENTS, at beginning of period                                            9,000            8,000
                                                                                         ---------        ---------

CASH AND CASH EQUIVALENTS, at end of period                                              $  28,000        $   9,000
                                                                                         =========        =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
     Cash payments for:
         Income taxes                                                                    $    --          $     --
                                                                                         =========        ==========  

         Interest                                                                        $    --          $     --
                                                                                         =========        ==========  







                                  See accompanying notes to these financial statements 

                                                          F-6
</TABLE>

<PAGE>
                      WORLD SERVICES, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
   --------------------------------------------------------------------

     Nature of Operations - World Services,  Inc. (the Company) was incorporated
     in December  1979 as Midwest  Management  & Marketing  Corporation  and was
     renamed World Services, Inc. in July 1983. The Company was formed to invest
     in and manage companies  primarily involved in the insurance,  real estate,
     and financial institution industries,  along with other service industries.
     The  Company  divested  itself of all  operating  subsidiaries  by 1989 and
     currently holds two investments.

     The Company's  investment in First Savings & Loan  Association,  Inc. (FSL)
     (see Note 2) is stated at the  Company's  equity in net  assets,  which has
     been  increased or decreased for dividends  paid to the Company and for the
     Company's share of equity in  undistributed  earnings of the investee based
     upon  its  respective  fiscal  year-end  of  September  30.  The  Company's
     investment in Super 8 Motel Developers, Inc. (S8MD) is carried at cost.

     Earnings  Per Share - The  computations  of  earnings  (loss) per share are
     based on the  weighted  average of common  shares  outstanding  during each
     fiscal period.

     Cash Equivalents - For purposes of the statement of cash flows, the Company
     considers all highly  liquid debt  instruments  purchased  with an original
     maturity of three months or less to be cash equivalents.

     Use of Estimates - The preparation of the Company's financial statements in
     conformity  with  generally  accepted  accounting  principles  requires the
     Company's  management  to make  estimates and  assumptions  that affect the
     amounts  reported in these  financial  statements and  accompanying  notes.
     Actual results could differ from those estimates.

     The Company makes significant  assumptions concerning the fair market value
     of its investment in S8MD. Due to inherent  uncertainties in the estimation
     process,  it is at  least  reasonably  possible  that  assumptions  made in
     assessing  the  fair  market  value  of S8MD  could  be  revised,  and such
     revisions could be material.

     Income Taxes - The Company  accounts  for income taxes under the  liability
     method,  which requires  recognition of deferred tax assets and liabilities
     for the expected future tax  consequences of events that have been included
     in the  financial  statements.  Under this method,  deferred tax assets and
     liabilities  are determined  based on the difference  between the financial
     statements and tax bases of assets and liabilities  using enacted tax rates
     in effect for the year in which the differences are expected to reverse.

     Impairment of Long-Lived  Assets - Effective  January 1, 1996,  the Company
     adopted Financial Accounting Standards No. 121 (FAS 121). In the event that
     facts and  circumstances  indicate  that the cost of assets or other assets
     may be impaired, an evaluation of recoverability would be performed.  If an
     evaluation  is  required,  the  estimated  future  undiscounted  cash flows
     associated with the asset would be compared to the asset's  carrying amount
     to determine if a write-down to market value or discounted  cash flow value
     is required.  Adoption of FAS 121 had no effect on the financial statements
     for the year ended December 31, 1996.


                                       F-7

<PAGE>
                      WORLD SERVICES, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


2. INVESTMENTS IN COMPANIES:
   -------------------------

     The Company  currently  owns  approximately  22% of FSL  (formerly  Midwest
     Savings and Loan).  The investment is accounted for under the equity method
     of accounting. The Company received $17,000 and $34,000 in dividends during
     1996 and 1995, respectively.

     The Company also owns  approximately 16% of the outstanding common stock of
     Super 8 Motel  Developers,  Inc.  (S8MD).  The  investment is accounted for
     under the cost method,  which management  believes is equal to or in excess
     of market value.  S8MD is a privately  held company,  for which the Company
     does not exercise significant influence. The Company recorded approximately
     $160,000 in dividend income from S8MD during 1996.

     The financial  statements  of FSL and S8MD were audited by other  auditors.
     Summarized  statements of financial  information  for FSL and S8MD,  are as
     follows:

                    SUMMARIZED FINANCIAL INFORMATION FOR FSL
                    ----------------------------------------
                               (Amounts in 000's)

                                                        FOR THE YEARS ENDED
                                                            SEPTEMBER 30,
                                                       -----------------------
                                                         1996           1995
                                                       --------       --------

Total assets                                           $ 14,328       $ 14,248
                                                       ========       ========

Total liabilities                                      $ 12,677       $ 12,741
                                                       ========       ========

Stockholders' equity                                   $  1,651       $  1,507
                                                       ========       ========

Net income                                             $    206       $    182
                                                       ========       ========



                                       F-8

<PAGE>
                      WORLD SERVICES, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


                    SUMMARIZED FINANCIAL INFORMATION FOR S8MD
                    -----------------------------------------
                               (Amounts in 000's)

                                                       FOR THE YEARS ENDED
                                                            DECEMBER 31
                                                      -----------------------
                                                        1996           1995
                                                      --------       --------
                                                    
Total assets                                          $ 30,608       $ 29,610
                                                      ========       ========

Total liabilities                                     $ 26,241       $ 25,182
                                                      ========       ========

Total stockholders' equity                            $  4,367       $  4,428
                                                      ========       ========

Revenues                                              $ 15,511       $ 14,305
                                                      ========       ========

Expenses                                              $ 14,596       $ 13,188
                                                      ========       ========

Net income                                            $    915       $  1,117
                                                      ========       ========


3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
   ------------------------------------

     The  estimated  fair  values  for  financial  instruments  under  Financial
     Accounting  Standards  No. 107,  Disclosures  about Fair value of Financial
     Instruments,  are  determined at discrete  points in time based on relevant
     market  information.  These estimates  involve  uncertainties and cannot be
     determined  with  precision.  The  estimated  fair  value of the  Company's
     certificates  of deposit,  approximate  their carrying value because of the
     short  maturity of these  instruments.  The  Company's  investment in First
     Savings and Loan is accounted  for under the equity  method.  However,  the
     Company  believes the  carrying  value  approximates  the fair market value
     based on the Company's internal valuation.  The fair value of the Company's
     investment in S8MD is determined on the basis of  comparisons  with similar
     companies whose shares are publicly traded. After taking into effect a lack
     of  marketability of the S8MD shares and the Company's lack of control over
     S8MD,   management  believes  that  the  fair  value  of  the  S8MD  shares
     approximates its carrying value.


4. CONCENTRATION OF CREDIT RISK:
   ----------------------------

     Credit risk  represents the accounting loss that would be recognized at the
     reporting  date  if   counterparties   failed   completely  to  perform  as
     contracted. Concentrations of credit risk (whether on or off balance sheet)
     that arise from  financial  instruments  exist for groups of  customers  or
     counterparties when they have similar economic  characteristics  that would
     cause  their  ability  to  meet  contractual  obligations  to be  similarly
     effected by changes in economic or other  conditions  described  below.  In
     accordance  with  Financial  Accounting  Standards  No. 105,  Disclosure of
     Information about Financial Instruments with Off-Balance-Sheet Risk and

                                       F-9

<PAGE>

                      WORLD SERVICES, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


     Financial  Instruments with  Concentrations of Credit Risk, the credit risk
     amounts  shown do not take  into  account  the value of any  collateral  or
     security.

5. INCOME TAXES:
   -------------

     The  Company's  actual  effective  income  tax rate  differs  from the U.S.
     Federal corporate income tax rate of 34% as follows:

                                                         December 31,
                                                   ------------------------
                                                    1996             1995
                                                   -------         --------

       Statutory Rate                                 34%            (34)%
       Dividend treatment for tax                    (23)             (79)
       Reduction in valuation allowance              (11)             113
                                                    ----             ----

       Effective tax rate                            -0-%             -0-%
                                                    ====             ====  


     Long-term deferred tax assets (liabilities) are comprised of the following:

                                                            December 31,
                                                      ------------------------
                                                         1996          1995
                                                      ----------    ----------

        Net operating loss carryforward and           $1,087,000    $1,095,000
            investment tax credit carryforwards
        FSL basis difference                             (41,000)      (31,000)
                                                      ----------    ----------
                                                       1,046,000     1,064,000

        Less valuation allowance                      (1,046,000)   (1,064,000)
                                                      ----------    ----------
                                                      $        -    $        -
                                                      ==========    ==========

     As of December 31, 1996, the Company has net operating  loss  carryforwards
     for income tax  purposes of  $3,100,000  which  expire in the years 1997 to
     2011. The net operating loss  carryforwards  may be limited with respect to
     their  availability  due to prior  ownership  changes and the  consolidated
     return   regulations.   In  addition,   there  are  investment  tax  credit
     carryforwards  of  $28,000.  The  change  in  the  deferred  tax  valuation
     allowance from 1995 to 1996 was a decrease of 18,000.



                                      F-10

<PAGE>

                      WORLD SERVICES, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS



6. STOCKHOLDERS' EQUITY:
   ---------------------

     In May  1980,  the 32  promoters  of the  Company  entered  into an  escrow
     agreement  restricting  the sale of their shares (total of 730,020  shares)
     until  the  Company  generates   earnings  per  share  of  $.06  (based  on
     approximately 1.9 million outstanding shares) for three years, two of which
     must be consecutive. An additional 100,000 shares issued in May 1983, to an
     officer and director,  are also restricted under the escrow agreement.  The
     Division of Securities in 1986 released  113,834 shares that were issued to
     a founder and were sold on a  bankruptcy  auction.  The  remaining  716,186
     shares  are to be held in  escrow  until  the  above  conditions  are  met.
     Additionally,  management of the Company has had conversations with a prior
     officer  and  director  and  believes  that  150,000  shares  issued to the
     officer/  director in 1986 are part of the escrow  agreement and therefore,
     will be placed into escrow during 1997.



                                      F-11

<PAGE>



                        FIRST SAVINGS & LOAN ASSOCIATION
                              OF SOUTH DAKOTA, INC.
                             ABERDEEN, SOUTH DAKOTA

                              FINANCIAL STATEMENTS
                        AS OF SEPTEMBER 30, 1996 AND 1995
                       (With Independent Auditor's Report)



<PAGE>

                                 C O N T E N T S
                                 ---------------


                                                                       Page
                                                                       ----

INDEPENDENT AUDITOR'S REPORT..........................................   1

FINANCIAL STATEMENTS:

  Balance Sheets......................................................   2

  Statements of Income................................................   3

  Statements of Stockholders' Equity..................................   5

  Statements of Cash Flows............................................   6

  Notes to Financial Statements.......................................   8




<PAGE>

                                                                               1
==========================================
Eide Helmeke PLLP
Certified Public Accountants & Consultants



                          INDEPENDENT AUDITOR'S REPORT




To the Board of Directors
First Savings & Loan Association of
  South Dakota, Inc.
Aberdeen, South Dakota

We have  audited  the  accompanying  balance  sheets  of  First  Savings  & Loan
Association  of South Dakota,  Inc. as of September  30, 1996 and 1995,  and the
related statements of income,  stockholders'  equity, and cash flows for each of
the  three  years in the  period  ended  September  30,  1996.  These  financial
statements  are  the  responsibility  of  the  Association's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  financial  position  of  First  Savings  &  Loan
Association  of South Dakota,  Inc. as of September  30, 1996 and 1995,  and the
results of its  operations and its cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted accounting
principles.



EIDE HELMEKE PLLP

October 15, 1996
Aberdeen, South Dakota
<PAGE>


                                                                               2

FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
(000's omitted)
--------------------------------------------------------------------------------
                                                              1996      1995
--------------------------------------------------------------------------------
ASSETS



ASSETS:
  Cash and due from banks                                    $   865   $ 1,987
  Interest bearing deposits with banks                         1,094     1,089
  Investment securities (Note 3)                                  65        82
  Loans held for sale                                            809       255
  Loans receivable, net (Note 2)                              11,096    10,462
  Office properties and equipment, net (Note 6)                  182       193
  Interest receivable                                            115       116
  Federal Home Loan Bank Stock, at cost                           51        51
  Deferred income tax benefit                                     33         -
  Other assets                                                    18        13
--------------------------------------------------------------------------------
    Total assets                                             $14,328   $14,248
================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
  Deposits (Note 7)                                          $12,413   $12,475
  Interest payable                                               143       132
  Advance payments by borrowers for taxes and insurance           19        19
  Income taxes payable                                             4       102
  Special assessment payable                                      73         -
  Other liabilities                                               25        13
--------------------------------------------------------------------------------
    
    Total liabilities                                         12,677    12,741
================================================================================

STOCKHOLDERS' EQUITY:
  Capital stock ($ 1 par value, 1,000,000 shares
   authorized, 774,277 shares issued and outstanding)            774       744
  Additional paid-in capital                                     376       376
  Retained earnings:
   Restricted                                                     39        21
   Unrestricted                                                  462       336
--------------------------------------------------------------------------------

    Total stockholders' equity                                 1,651     1,507
--------------------------------------------------------------------------------


    Total liabilities and stockholders' equity                $14,328   $14,248
================================================================================
                                        
See Notes to Financial Statements.

<PAGE>


                                                                               3

FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
(OOO's omitted, except for per share amounts)
--------------------------------------------------------------------------------
                                        1996         1995           1994
--------------------------------------------------------------------------------

INTEREST INCOME:                                  
  Interest and fees on loans           $1,074       $  953         $  810
  Dividends on FHLB stock                   3            5              3
  Other interest income                    90           94             80
--------------------------------------------------------------------------------

     Total interest income              1,167        1,052            893

INTEREST EXPENSE ON DEPOSITS              526          479            377
--------------------------------------------------------------------------------

NET INTEREST INCOME                       641          573            516

PROVISION FOR LOAN LOSSES                  30           50             71
--------------------------------------------------------------------------------

NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES               671          623            587
--------------------------------------------------------------------------------

NON-INTEREST INCOME:
  Gain from sale of loans                 145          102            174
  SBA loan servicing fees                  21           15             14
  Overdraft charges                        23           18             26
  Other fees, charges and
    miscellaneous income                   51           36             41
--------------------------------------------------------------------------------

     Total non-interest income            240          171            255
--------------------------------------------------------------------------------

NON-INTEREST EXPENSES:
  Salaries and employee benefits          292          251            275
  Net occupancy expense of premises       106          101            102
  Computer maintenance and updates         28           19             12
  Office supplies and postage              37           31             33
  Advertising                              15           11             12
  Assessment and examination fees         106           31             29
  Professional fees                        29           28             38
  Other operating expenses                 42           35             41
--------------------------------------------------------------------------------

     Total non-interest expenses          655          507            542
--------------------------------------------------------------------------------

(continued on next page)

<PAGE>

                                                                               4

STATEMENTS OF INCOME - page 2
(000's omitted, except for per share amounts)
--------------------------------------------------------------------------------

                                           1996       1995          1994
--------------------------------------------------------------------------------

INCOME BEFORE INCOME TAXES                 256         287           300

INCOME TAXES (Note 11):
  Current                                  (83)       (105)          (14)
  Deferred                                  33           -           (76)
--------------------------------------------------------------------------------

INCOME BEFORE CUMULATIVE
  EFFECT ADJUSTMENT                        206         182           210

CUMULATIVE EFFECT ON PRIOR YEARS
  OF ACCOUNTING CHANGE                       -           -            76
--------------------------------------------------------------------------------

NET INCOME                               $ 206        $ 182        $ 286
================================================================================

INCOME PER SHARE:

  Before cumulative
   effect adjustment                     $0.27        $0.24        $0.27
  Cumulative effect adjustment               -            -         0.10
--------------------------------------------------------------------------------

                                         $0.27        $0.24        $0.37
================================================================================


WEIGHTED AVERAGE COMMON
  SHARES OUTSTANDING                       774          774          774
================================================================================



See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>


                                                                                                  5

FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
(OOO's omitted)
----------------------------------------------------------------------------------------------------


                                                 Additional   Restricted   Unrestricted    Total
                                    Capital       Paid-In      Retained      Retained   Stockholders'
                                     Stock        Capital      Earnings      Earnings      Equity
-----------------------------------------------------------------------------------------------------
<S>                                 <C>           <C>          <C>          <C>           <C>    
Balance, October 1, 1993             $ 774         $ 376        $    -       $  (18)       $ 1,132

Net income                               -             -             -          286            286
-----------------------------------------------------------------------------------------------------

Balance, September 30, 1994            774           376             -          268          1,418

Dividends paid                           -             -             -          (93)           (93)

Transfer                                 -             -            21          (21)             -

Net income                               -             -             -          182            182
-----------------------------------------------------------------------------------------------------

Balance, September 30, 1995            774           376            21          336         1,507

Dividends paid                           -             -             -          (62)          (62)

Transfer                                 -             -            18          (18)            -

Net income                               -             -             -          206           206
-----------------------------------------------------------------------------------------------------

Balance, September 30, 1996          $ 774         $ 376          $ 39        $ 462        $ 1,651
=====================================================================================================
  
 
                                                                             
                                                                          

See Notes to Financial Statements.



</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                                6

FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
(OOO's omitted)
--------------------------------------------------------------------------------------------------

                                                            1996            1995            1994
--------------------------------------------------------------------------------------------------

<S>                                                        <C>             <C>              <C>  
CASH FLOWS FROM OPERATING ACTIVITES:
 Net income                                                $ 206           $ 182           $ 286
 Adjustments  to reconcile net income to net cash
  provided by (used in) operating activities:
   Provision for loan losses                                 (30)            (50)            (71)
   Amortization of deferred loan fees                         (3)             (1)             (1)
   Interest added to time                                    
    deposits in other banks                                    -              (2)             (6)                                 
   Depreciation                                               38              34              35                     
   Deferred  income taxes                                    (33)              -               -
   Loss on sale of fixed assets                                2               -               2
   (Gain) loss on sale of foreclosed real estate               -               1              (6)
   Gain on sale of loans held for sale                      (145)           (102)           (174)
   Changes in assets  and  liabilities:
    Loans held for sale                                     (409)             51            (376)
    Interest  receivable                                       1             (16)             (9)
    Prepaid  income taxes                                      -              22             (22)                               
    Other assets                                              (5)              4              (3)
    Accounts payable                                           -               -              (2)
    Interest payable                                          11              48             (18)
    Income taxes payable                                     (98)            102              (3)
    Special assessment payable                                73               -               -
    Other liabilities                                         12               6              (7)
---------------------------------------------------------------------------------------------------

   Net cash provided by (used in) operating activities      (380)            279            (375)     


CASH FLOWS FROM INVESTING ACTIVITIES:
 Net proceeds from redemption of (payments for)
  time deposits in other banks                                (5)              3            (100)
 Proceeds from the sale of foreclosed real estate              -               1              16
 Net (increase) decrease in loans                           (601)           (727)             66
 Purchase of fixed assets                                    (29)            (10)           (110)
 Principal repayment from investment securities               17               4              11
--------------------------------------------------------------------------------------------------

   Net cash used in investing activities                    (618)           (729)           (117)
--------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITES:
 Dividends paid                                              (62)            (93)              -
 Net increase (decrease) in deposit accounts                 (62)          1,290              63
 Payments on capitalized lease obligation                      -               -             (20)
---------------------------------------------------------------------------------------------------

   Net cash provided by (used in) financing activities      (124)          1,197              43
---------------------------------------------------------------------------------------------------

(continued on next page)

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                         7

STATEMENTS OF CASH FLOWS - page 2
(OOO's omitted)
-------------------------------------------------------------------------------------------

                                                       1996          1995            1994
-------------------------------------------------------------------------------------------

<S>                                               <C>             <C>              <C>    
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                 (1,122)            747            (449)

CASH AND CASH EQUIVALENTS BEGINNING OF YEAR         1,987           1,240           1,689

CASH AND CASH EQUIVALENTS END OF YEAR             $   865         $ 1,987         $ 1,240
===========================================================================================


SUPPLEMENTAL DISCLOSURE OF CASH
 FLOW INFORMATION:

  Cash paid during the year for:
   Interest                                        $  515          $  431         $   395
===========================================================================================

   Income taxes (refund)                           $  181          $  (19)        $    36
===========================================================================================
                        

SUPPLEMENTAL SCHEDULE OF NONCASH
 INVESTING ACTIVITIES:

 Transfers from loans to real
  estate acquired through foreclosure              $    -          $    -         $     -
===========================================================================================
</TABLE>

 
                                                                         

See Notes to Financial Statements.









<PAGE>
                                                                               8






FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

Nature of operations - The Association  provides a variety of financial services
to individuals  and corporate  customers  located  primarily in northeast  South
Dakota. The Association's primary source of revenue is single-family residential
loans to middle-income individuals.

Investment  securities - The  Association  has adopted FASB  Statement  No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."  Pursuant to
adopting FASB 115, the Association has classified all of its securities holdings
in the following category:

        SECURITIES HELD TO MATURITY - Securities  classified as held to maturity
        are those  debt  securities  the  Association  has both the  intent  and
        ability to hold to maturity  regardless of changes in market conditions,
        liquidity  needs  or  changes  in  general  economic  conditions.  These
        securities are carried at cost adjusted for  amortization of premium and
        accretion of discount,  which are recognized  using the interest  method
        over the period to maturity.

Loans  receivable - Loans  receivable are stated at unpaid  principal  balances,
less the allowances  for loan losses,  and net deferred loan  origination  fees.
Loans held for sale are  carried  at the lower of  aggregate  cost or  estimated
market value.

The allowance for loan losses is  maintained at a level which,  in  management's
judgment,  is adequate to absorb credit losses  inherent in the loan  portfolio.
The  amount  of  the  allowance  is  based  on  management's  evaluation  of the
collectibility  of the loan  portfolio,  including the nature of the  portfolio,
credit concentrations,  trends in historical loss experience,  specific impaired
loans, economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally  determined  based on collateral  values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.

Uncollectible  interest on loans that are over 90 days past due is charged  off.
Such  interest  if  ultimately  collected,  will  be  reported  as  income  when
collected.

Loan  origination fees - Loan fees are accounted for in accordance with FASB No.
91,  "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring  Loans and  Initial  Direct  Costs of  Leases."  Loan fees and certain
direct loan origination costs are deferred,  and amortized as a yield adjustment
to interest  income using the interest  method over the  contracted  life of the
loans, adjusted for prepayments based on the Association's historical prepayment
experience.

Office  properties and equipment - Property and equipment is stated at cost less
accumulated  depreciation  and  amortization.  Depreciation is computed over the
useful  lives  of  the  assets  using  straight-line  and  accelerated  methods.
Estimated useful lives are as follows:

            Leasehold improvements                      5-40 years
            Furniture and equipment                     5-15 years


(continued on next page)


<PAGE>

                                                                               9
NOTES TO FINANCIAL STATEMENTS - page 2
--------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
---------------------------------------------------

Cash  equivalents - Cash  equivalents  consist of cash and funds due from banks.
For purposes of the  statements  of cash flows,  the  Association  considers all
highly liquid debt instruments with original  maturities when purchased of three
months or less to be cash  equivalents.  The cash  effects of the change in time
deposits in other banks, loans,  deposits,  and customer certificates of deposit
are shown as net amounts on the statement of cash flows.

Income per share - The income per share were  computed by dividing net income by
weighted average common shares (774,277) outstanding.

Restricted  retained earnings - Restricted  retained earnings represents amounts
required to be  restricted  pursuant to the payment of dividends  in  accordance
with Office of Thrift Supervision (OTS) mandate.  The amount restricted is equal
to  10% of  the  Association's  net  income  and  becomes  restricted  upon  the
Association's declaration of dividends related to such net income.

Income taxes - Income taxes are provided for the tax effects of the transactions
reported in the  financial  statements  and consist of taxes  currently due plus
deferred taxes related  primarily to differences  between the allowance for loan
losses, accumulated depreciation,  and the basis of accounting for financial and
income tax  reporting.  The deferred tax assets and  liabilities  represent  the
future tax  return  consequences  of those  differences,  which  will  either be
taxable or deductible when the assets and liabilities are recovered and settled.

Use of estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the reported  amounts of assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.  Material estimates that are particularly  susceptible to significant
change in the near term relate to the  determination  of the  allowance for loan
losses.

Reclassification  - Certain prior year amounts have been reclassified to conform
to the 1996 presentation.


NOTE 2 - LOANS RECEIVABLE (000's omitted)
-----------------------------------------

Loans receivable at September 30, 1996 and 1995 consisted of the following:

                                                            1996          1995
                                                            ----          ----
  Loans secured by first mortgages on real estate:
    Secured by 1 to 4 family residences                  $  3,542      $  3,796
    Secured by other properties                             2,089         1,563
    Construction                                              555           282
                                                           ------       -------
                                                            6,186         5,641
    Less deferred loan origination fees                         2             5
                                                           ------       -------
      Total first mortgages                                 6,184         5,636
                                                           ------       -------


(continued on next page)


<PAGE>

                                                                              10
NOTES TO FINANCIAL STATEMENTS - page 3
--------------------------------------------------------------------------------


NOTE 2 - LOANS RECEIVABLE (000's omitted) - continued
-----------------------------------------

                                                        1996            1995
                                                        ----            ----
        Other loans:
          Consumer loans                                2,147           2,407
          Loans on deposits                               372             502
          Commercial                                    2,491           2,019
          Overdrafts on deposit accounts                   21              16
                                                      -------         -------
            Total other loans                           5,031           4,944
                                                      -------         -------

        Total loans                                    11,215          10,580
        Less: allowance for loan losses                   119             118
                                                      -------         -------

                                                     $ 11,096        $ 10,462
                                                      =======         =======

Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>

                                                             1996           1995          1994
                                                             ----           ----          ----

      <S>                                                   <C>            <C>           <C>  
        Allowance for loan losses, October 1                $ 118          $ 125         $ 139
        Reductions (addition to income)                       (30)          ( 50)         ( 71)
        Charge offs and recoveries, net                        31             43            57
                                                             ----           ----          ----

        Allowance for loan losses, September 30             $ 119          $ 118         $ 125
                                                             ====           ====          ====
</TABLE>

At September 30, 1996 and 1995,  the  Association  had  $1,053,664 and $180,241,
respectively,  of  loans in  process  and no  installment  loans  which  include
unearned interest.

The  Association  sold the SBA  guaranteed  portion  of  certain  loans  and was
servicing those loans for others as follows:

                                       1996                      1995
                                       ----                      ----

        September 30               $ 1,498,117               $ 1,383,278
                                     =========                 =========

At September 30, 1996 and 1995, the  Association  had loans  amounting to $4,678
and $46,478 that were  specifically  classified  as impaired.  The allowance for
loan losses related to impaired loans amount to approximately $4,678 and $11,600
as of September 30, 1996 and 1995.










(continued on next page)


<PAGE>

                                                                              11
NOTES TO FINANCIAL STATEMENTS - page 4
--------------------------------------------------------------------------------


NOTE 3 - INVESTMENT SECURITIES
------------------------------

Securities held to maturity consist of the following:
<TABLE>
<CAPTION>


                                   September 30, 1996                                 September 30, 1995
                      --------------------------------------------      ---------------------------------------------
                                     Gross        Gross                                Gross         Gross
                      Amortized   Unrealized   Unrealized    Fair       Amortized   Unrealized    Unrealized    Fair
                        Cost         Gains       Losses      Value        Cost         Gains        Losses      Value
                        ----         -----       ------      -----        ----         -----        ------      -----
<S>                      <C>        <C>          <C>         <C>         <C>          <C>           <C>         <C>
State and local
 governments           $  65        $  -         $  -       $  65        $ 82         $  -          $  -       $  82
                         ===          ===          ===        ===          ==           ===           ===        ===
</TABLE>

The amortized cost and estimated  market value of debt securities  being held to
maturity at September 30, 1996, by contractual maturity, are shown below:

                                                              Estimated
                                                 Amortized      Market
                                                   Cost          Value

               Due after 10 years                $  65           $  65
                                                   ===             ===


NOTE 4 - FINANCIAL INSTRUMENTS (000's omitted)
----------------------------------------------

Financial Instruments with Off-Balance Sheet Risk

The Association is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the  financing  needs of its customers and
to reduce its own exposure to fluctuations  in interest  rates.  These financial
instruments include outstanding loan commitments.

The  Association  has  outstanding  mortgage  loan  commitments  of $335,272 and
$550,947 at  September  30, 1996 and 1995,  respectively.  The  Association  has
approved  these loans and intends to advance the loan  proceeds to the  borrower
upon the  closing  of the loan.  There is no loss to the  Association  if either
party fails to perform on these  commitments.  All of these loans are fixed rate
loans that will be resold.

Significant Group Concentrations of Credit Risk

The  Association  maintains a cash  balance  with a financial  institution  that
represents a concentration of credit risk because the deposit exceeds the amount
insured  by  the  Federal  Deposit   Insurance   Corporation   ($100,000).   The
Association's  uninsured  cash  balances  totaled  $521,362  and  $1,401,086  at
September 30, 1996 and 1995, respectively.

The  Association  has deposits with the Federal Home Loan Bank that  represent a
concentration   of  credit  risk   because  the  deposits  are  not  insured  or
collateralized by the Federal Home Loan Bank. Such deposits totaled $177,389 and
$363,760 at September 30, 1996 and 1995, respectively.




(continued on next page)


<PAGE>

                                                                              12
NOTES TO FINANCIAL STATEMENTS - page 5
--------------------------------------------------------------------------------


NOTE 4 - FINANCIAL INSTRUMENTS (000's omitted) - continued
----------------------------------------------

Most of the  Association's  loan  activity  is  with  customers  located  in the
northeast  part of the  state.  Generally,  the loans are  secured  by assets or
stock.  The loans are expected to be repaid from cash flow or proceeds  from the
sale of selected  assets of the  borrowers.  Credit losses  arising from lending
transactions   with  highly  leveraged   entities  compare  favorable  with  the
Association's credit loss experience on its loan portfolio as a whole.

Fair Values of Financial Instruments

Statement of Financial  Accounting  Standards  No. 107,  Disclosures  About Fair
Value of Financial  Instruments  (Statement  107),  requires the  disclosure  of
estimated fair values of all asset,  liability and  off-balance  sheet financial
instruments.

Fair value  estimates  are made at a specific  point in time,  based on relevant
market information and information about the financial  instruments.  Because no
market  exists  for  a  significant  portion  of  the  Association's   financial
instruments,  fair  value  estimates  are based on  judgments  regarding  future
expected loss experience,  current economic conditions, risk characteristics and
other   factors.   These   estimates  are   subjective  in  nature  and  involve
uncertainties  and matters of  significant  judgment and,  therefore,  cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.

The  estimated  fair values of the  Association's  financial  instruments  as of
September 30, 1996 are as follows:

                                                      Carrying          Fair
                                                       Value            Value
                                                      --------          -----
     Financial assets:
       Cash and due from banks                        $    865         $    865
       Interest-bearing time deposits with
          banks, investment securities and
          Federal Home loan Bank stock                   1,210            1,210
       Loans, net                                       11,905           11,905
       Interest receivable                                 115              115
                                                       -------          -------

           Total financial assets                     $ 14,095         $ 14,095
                                                       =======          =======

     Financial liabilities:
       Nonmaturity deposits                           $  4,826         $  4,826
       Deposits with stated maturities                   7,587            7,607
       Interest payable                                    143              143
                                                       -------          -------

           Total financial liabilities                $ 12,556         $ 12,576
                                                       =======          =======






(continued on next page)


<PAGE>

                                                                              13
NOTES TO FINANCIAL STATEMENTS - page 6
--------------------------------------------------------------------------------


NOTE 4 - FINANCIAL INSTRUMENTS (000's omitted) - continued
----------------------------------------------

The following  methods and assumptions are used by the Association in estimating
fair values of financial instruments:

Cash  and due  from  banks - The  carrying  value  of cash  and due  from  banks
approximates  fair value due to the relatively  short period of time between the
origination of the instruments and their expected realization.

Interest-bearing  time deposits with banks,  investment  securities  and Federal
Home Loan Bank stock - Fair values of interest-bearing time deposits with banks,
investment  securities  and  Federal  Home Loan Bank stock are  estimated  using
quoted market prices, when available. If quoted market prices are not available,
fair value is estimated using quoted market prices for similar assets.

Loans - Fair values for loans are  estimated  based on  contractual  cash flows,
discounted using an appropriate  rate.  Discount rates and cash flow assumptions
are based upon the type and the associated risk characteristics.

Interest  receivable and payable - The carrying value of interest receivable and
payable  approximates  fair  value due to the  relatively  short  period of time
between origination and expected realization.

Deposits - The fair value of  deposits  with  stated  maturities  is the present
value of the  contractual  cash flows,  including  principal and  interest,  and
servicing costs,  discounted  using the rates currently  offered for deposits of
similar remaining maturities.

In  accordance  with  Statement  107, the fair value of deposits  with no stated
maturity,  such as demand deposit,  savings,  NOW and money market accounts,  is
disclosed  as the  amount  payable  on  demand.  The fair  value  above does not
consider the benefit  resulting  from the low-cost  funding  provided by deposit
liabilities as compared to wholesale  funding rates nor the benefit derived from
the customer relationship inherent to existing deposits.


NOTE 5 - TRANSACTIONS WITH RELATED PARTIES
------------------------------------------

The  Association  has entered  into  banking  transactions  with its  directors,
principal officers,  their immediate families and affiliated  companies in which
they are principal  stockholders.  Such  transactions  were made in the ordinary
course of  business on  substantially  the same terms and  conditions  including
interest  rates  and  collateral,  as  those  prevailing  at the  same  time for
comparable  transactions  with other  customers,  and did not, in the opinion of
management,  involve more than normal credit risk or present  other  unfavorable
features. The aggregate amount of loans to such related parties was $210,569 and
$226,497 at September 30, 1996 and 1995, respectively.







(continued on next page)


<PAGE>

                                                                              14
NOTES TO FINANCIAL STATEMENTS - page 7
--------------------------------------------------------------------------------


NOTE 5 - TRANSACTIONS WITH RELATED PARTIES - continued
--------------------------------------------

The activity relating to such loans was as follows:

           Balance, September 30, 1995                           $ 226,497
             Additions                                             192,013
             Repayments and renewals                               207,941
                                                                  --------

           Balance, September 30, 1996                           $ 210,569
                                                                   =======


NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT (000's omitted)
--------------------------------------------------------

Office properties and equipment at September 30, 1996 and 1995 are as follows:

                                                     1996           1995
                                                     ----           ----

            Land                                    $  31          $  31
            Leasehold improvements                     65             65
            Furniture and equipment                   287            264
                                                      ---            ---
                                                      383            360
            Accumulated depreciation                 (201)          (167)
                                                      ---            ---

                                                    $ 182          $ 193
                                                      ===            ===

Depreciation  expense totaled  $38,325,  $34,485 and $34,777 for the years ended
September 30, 1996, 1995 and 1994, respectively.


NOTE 7 - DEPOSITS (000's omitted)
---------------------------------

A summary of deposits is as follows:
                                                        1996           1995
                                                        ----           ----

        Commercial Checking
          (Non-Interest Bearing)                     $  1,624       $  1,515
        Super NOW Checking                              1,377          1,151
        Regular Savings                                   408            440
        Money Market Demand Deposits                    1,417          1,489
        Certificates of Deposits                        7,587          7,880
                                                       ------         ------

                                                     $ 12,413       $ 12,475
                                                       ======         ======

At September 30, 1996 and 1995, the  Association  had $1,358,329 and $1,750,831,
respectively, of certificate accounts with balances of $100,000 or more.


(continued on next page)


<PAGE>

                                                                              15
NOTES TO FINANCIAL STATEMENTS - page 8
--------------------------------------------------------------------------------


NOTE 7 - DEPOSITS (000's omitted) - continued
---------------------------------

The  following  sets  forth the  amounts  and  maturities  of time  deposits  at
September 30, 1996:

                                  Year Ended September 30,
                    --------------------------------------------
                       1997        1998          1999       2000      Total


Total               $ 6,255       $ 966         $ 359     $    7     $ 7,587
                      =====         ===         =====       ====       =====

The  Association  held deposits of $302,105 and $156,164 for related  parties at
September 30, 1996 and 1995, respectively.


NOTE 8 - SPECIAL ASSESSMENT PAYABLE
-----------------------------------

In 1996, the Federal  Deposit  Insurance  Corporation  (FDIC) imposed a one-time
assessment on all thrift institutions holding Savings Association Insurance Fund
(SAIF) deposits  (pursuant to legislation passed during 1996) for the purpose of
rebuilding  the SAIF to an acceptable  level.  The assessment is calculated at a
rate of $.657 for every  $100 of SAIF  deposits  held by the  Association  as of
March 31, 1995.


NOTE 9 - OPERATING LEASE
------------------------

The Association  leases its office building from Mack Rentals (see Note 5) under
a noncancelable  operating  lease. The lease requires monthly payments of $2,500
through December,  1991 and has renewal options at $3,000 through December, 1994
and $3,300  through  December,  1999.  The  Association  also pays  maintenance,
insurance and real estate taxes relating to the building.

Future minimum lease payments under the lease are as follows:

                     1997                       $ 39,600
                     1998                         39,600
                     1999                         39,600
                     2000                          9,900


NOTE 10 - RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
--------------------------------------------------

The  Federal  Deposit  Insurance  Corporation  imposed,  as a  condition  of its
insurance of the Association's deposit amounts, that the Association may not pay
a dividend,  other than stock dividend, on its common stock if the amount of its
net worth is or would become, as a result of the payment of such dividend,  less
than that required under applicable regulations of the Federal Deposit Insurance
Corporation (see note 10). Pursuant to Chapter 52-4-24 of South Dakota statutes,
the  Association  is  authorized  to pay dividends on shares of its common stock
after  payment or provision  has been made for all  expenses,  losses,  required
reserves and dividends payable on its savings accounts.


(continued on next page)


<PAGE>

                                                                              16
NOTES TO FINANCIAL STATEMENTS - page 9
--------------------------------------------------------------------------------


NOTE 11 - NET WORTH REQUIREMENTS
--------------------------------

At September 30, 1996, the Association's  regulatory net worth requirements were
as follows:
<TABLE>
<CAPTION>
                                             % of                              % of             Excess
                          Requirements      Assets           Actual          Assets           (Shortfall)
                          ------------      ------           ------          ------           -----------

<S>                        <C>               <C>          <C>                 <C>             <C>        
Tangible Capital           $ 215,000         1.50%        $ 1,650,000         11.52%          $ 1,435,000
Core Capital                 430,000         3.00           1,650,000         11.52             1,220,000
Risk Based Capital           807,000         8.00           1,776,000         17.60               969,000
</TABLE>


NOTE 12 - INCOME TAX EXPENSES (000's omitted)
---------------------------------------------

The  Association  is  allowed a special  bad debt  deduction  under the  reserve
method,  computed using actual experience  percentages (IRC Section 585) in lieu
of bad  debt  deduction  for  specific  charge-offs.  The  Association  used the
"experience  method"  for 1995 and 1996 and  anticipates  using  this  method in
future years.

The Association has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Information related to the type and amount of the
Association's deferred tax asset is as follows:

      Deferred tax asset related to conversion to cash
         basis of accounting for income tax purposes                $ 33
                                                                      ==

No valuation  allowance  has been provided for the deferred tax asset because it
is felt by the Association that this asset will be realized in future years.

The  deferred  tax asset above has been  reflected  on the balance  sheet of the
Association as follows:

                                                    1996            1995
                                                    ----            ----

       Deferred income tax benefit                 $   33          $    -
                                                     ====            ====

Income tax  expenses of the  Association  are less than the amounts  computed by
applying the Federal  income tax statutory rate to income before income taxes as
indicated in the following analysis:

                                                   (000's omitted)
                                                    September 30,
                                          1996          1995           1994
                                          ----          ----           ----
    Expected income tax expense at
      federal tax rate (Note 1)          $ 87          $  98          $ 102
    Current timing differences             (8)           (11)           (83)
    Deferred timing differences           (33)           -               76
    State income taxes (Note 1)             8             21              6
    Surtax exemption                       (4)            (3)           (11)
                                          ---            ---             --

                                         $ 50          $ 105           $ 90
                                           ==            ===             ==

(continued on next page)

<PAGE>

                                                                              17
NOTES TO FINANCIAL STATEMENTS - page 10
--------------------------------------------------------------------------------

NOTE 13 - RECONCILIATION OF NET WORTH AND NET INCOME AS REPORTED
          TO THE FEDERAL HOME LOAN BANK
---------------------------------------------------------------

      Net worth as reported to Federal Home Loan Bank                $ 1,651
                                                                       =====

      Net worth per financial statements                             $ 1,651
                                                                       =====

      Net income as reported to Federal Home Loan Bank               $   206
                                                                       =====

      Net income per financial statements                            $   206
                                                                       =====


NOTE 14 - CUMULATIVE EFFECT ON CHANGE IN ACCOUNTING PRINCIPLE
-------------------------------------------------------------

Effective  October 1, 1994,  the  Association  adopted  Statement  of  Financial
Accounting  Standards No. 109,  "Accounting  for Income  Taxes".  The cumulative
effect on the change in  accounting  principle  is included in  determining  net
income for 1994. Financial statements for prior years have not been restated.




                                    # # # # #


<PAGE>


                         SUPER 8 MOTEL DEVELOPERS, INC.
                                AND SUBSIDIARIES
                             ABERDEEN, SOUTH DAKOTA

                        CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 1996 AND 1995
                       (With Independent Auditor's Report)



<PAGE>




                                 C O N T E N T S
                                 ---------------


                                                                         Page
                                                                         ----

INDEPENDENT AUDITOR'S REPORT...............................................1

FINANCIAL STATEMENTS:

  Consolidated Balance Sheets..............................................3

  Consolidated Statements of Operations....................................4

  Consolidated Statements of Stockholders' Equity..........................5

  Consolidated Statements of Cash Flows....................................6

  Notes to Consolidated Financial Statements...............................8




<PAGE>

                                                                               1
==========================================
Eide Helmeke PLLP
Certified Public Accountants & Consultants

 
                          INDEPENDENT AUDITOR'S REPORT




To the Board of Directors
Super 8 Motel Developers, Inc.
Aberdeen, South Dakota

We have audited the accompanying  consolidated historical cost balance sheets of
Super 8 Motel Developers, Inc. and Subsidiaries as of December 31, 1996 and 1995
and the related consolidated statements of operations,  stockholders' equity and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these 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 consolidated  historical cost financial statements referred
to above present fairly,  in all material  respects,  the financial  position of
Super 8 Motel Developers, Inc. and Subsidiaries as of December 31, 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.

We have also  compiled the  supplemental  current value balance sheet of Super 8
Motel  Developers,  Inc.  and  Subsidiaries  as of December 31, 1996 and 1995 in
accordance  with standards  established  by the American  Institute of Certified
Public Accountants.

A compilation is limited to presenting information that is the representation of
management in the form of financial statements.  We have not audited or reviewed
the current value balance sheets and, accordingly,  do not express an opinion or
any other form of assurance on them.


<PAGE>
                                            
                                                                               2

As described in Note 18 to the balance  sheet,  the  supplemental  current value
balance  sheets have been prepared by management to present  relevant  financial
information  that is not provided by the historical  cost balance sheets and are
not  intended  to  be a  presentation  in  accordance  with  generally  accepted
accounting  principles.  In addition,  the  supplemental  current  value balance
sheets do not  purport to present  the net  realizable,  liquidation,  or market
value of the Company as a whole. Furthermore, amounts ultimately realized by the
Company  from the  disposal  of assets may vary  significantly  from the current
values presented.



Eide Helmeke PLLP


March 5, 1997
Aberdeen, South Dakota
<PAGE>



<TABLE>
<CAPTION>
                                                                                                     

                                                                                                          2
SUPER 8 MOTEL DEVELOPERS, INC.  AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
------------------------------------------------------------------------------------------------------------


ASSETS

                                                       1996                               1995
                                         -------------------------------    --------------------------------
                                         Supplemental                        Supplemental
                                           Current                              Current
                                             Value            Historical         Value            Historical
                                           (Note 18)             Cost          (Note 18)              Cost
--------------------------------------------------------------------------------------------------------------
                                           (Compiled)                          (Compiled)

<S>                                        <C>                <C>               <C>              <C>  
CASH AND CASH
 EQUIVALENTS                               $ 1,205,451       $ 1,205,451       $   158,431       $   158,431
--------------------------------------------------------------------------------------------------------------

RECEIVABLES:
 Trade                                         274,098           274,098           269,433           269,433
 Note                                          155,492           155,492           178,332           178,332
 Other                                          12,945            12,945            20,680            20,680
--------------------------------------------------------------------------------------------------------------

     Total receivables                         442,535           442,535           468,445           468,445
--------------------------------------------------------------------------------------------------------------

PREPAID EXPENSES                               233,660           233,660           226,570           226,570
--------------------------------------------------------------------------------------------------------------

INVESTMENT IN LIMITED
 PARTNERSHIPS                                  763,041           763,041           951,310           951,310
--------------------------------------------------------------------------------------------------------------

MOTEL PROPERTIES AND
 EQUIPMENT, NET                             46,710,000        25,601,748        44,132,000        26,663,396
--------------------------------------------------------------------------------------------------------------

OTHER ASSETS:
 Unamortized sub-franchise rights            1,516,000              --           1,631,000              --
 Unamortized financing costs                      --           1,419,386              --             916,642
 Unamortized franchise fees                       --             178,101              --             192,692
 Unamortized organization costs                   --                --                --                  21
 Deferred income taxes                           8,000             8,000              --                --
 Restricted cash                               737,223           737,223            24,766            24,766
 Other                                          18,800            18,800             7,616             7,616
--------------------------------------------------------------------------------------------------------------

     Total other assets                      2,280,023         2,361,510         1,663,382         1,141,737
--------------------------------------------------------------------------------------------------------------

     Total assets                          $51,634,710       $30,607,945       $ 47,60O,138      $29,609,889
==============================================================================================================

See Notes to Consolidated Financial Statements. 

</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                                                                                    3
----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

                                                           1996                                     1995
                                            ----------------------------------      ----------------------------------
                                            Supplemental                             Supplemental
                                              Current                                 Current
                                               Value                Historical         Value               Historical
                                              (Note 18)              Cost             (Note 18)               Cost
----------------------------------------------------------------------------------------------------------------------
                                              (Compiled)                              (Compiled)

<S>                                           <C>                 <C>                 <C>                   <C>   
LIABILITIES:
  Operating line of credit                    $      --           $      --           $   750,000         $   750,000
  Accounts payable and
    accrued expenses, other
    than income taxes                             718,467             718,467             725,426             725,426
  Income taxes                                       --                  --                25,028              25,028
  Notes payable                                25,522,950          25,522,950          23,540,379          23,540,379
  Deferred income taxes                              --                  --               141,000             141,000
  Income taxes and sales
    commissions on realization
    of estimated values                         8,103,800                --             7,022,900                --
----------------------------------------------------------------------------------------------------------------------

       Total liabilities                       34,345,217          26,241,417          32,204,733          25,181,833
----------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND
  CONTINGENCIES                                      --                  --                  --                  --
----------------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY:
  Common stock: authorized
    500,000,000 shares, $.10 par
    value; issued and outstanding,
    4,882508 shares                               488,251             488,251             488,251             488,251
  Additional paid-in capital                    2,279,628           2,279,628           2,279,628           2,279,628
  Retained earnings                             1,598,649           1,598,649           1,660,177           1,660,177
  Unrealized appreciation                      12,922,965                --            10,967,349                --
----------------------------------------------------------------------------------------------------------------------

       Total stockholders' equity              17,289,493           4,366,528          15,395,405           4,428,O56
----------------------------------------------------------------------------------------------------------------------

       Total liabilities and
         stockholders' equity                 $51,634,710         $ 30,607,945        $47,600,138         $29,609,889
=======================================================================================================================


</TABLE>




<PAGE>
<TABLE>
<CAPTION>


                                                                                                     4

SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------------------------------

                                                                     1996                      1995
--------------------------------------------------------------------------------------------------------
<S>                                                             <C>                          <C>   
OPERATIONS

REVENUES:
  Motel revenues                                                 $ 14,372,606              $ 13,477,148
  Motel management fees                                               339,957                   327,711
  Accounting fees                                                      85,800                    85,020
  Sub-franchise fees                                                  422,600                   433,357
  Equity in net income (loss) of limited partnerships                  77,569                  (280,898)
  Interest income                                                     219,632                   247,608
  Other income                                                         27,508                    24,241
  Net loss on disposal of assets                                      (34 240)                   (8,698)
--------------------------------------------------------------------------------------------------------
 
      Total revenues                                               15,511,432                14,305,489
--------------------------------------------------------------------------------------------------------
                                                                                           

COSTS AND EXPENSES:
  Operating expenses:
    Motel operating and management expenses                         9,258,170                 8,396,971
    Administration expenses                                           374,680                   341,667
    Special charge                                                    250,000                      --
--------------------------------------------------------------------------------------------------------
                                                                    9,882,850                 8,738,638
    Interest                                                        2,325,410                 2,293,313
--------------------------------------------------------------------------------------------------------
  
      Total costs and expenses                                     12,208,260                11,031,951
--------------------------------------------------------------------------------------------------------

     Income before depreciation and amortization                    3,303,172                 3,273,538
    
    Depreciation and amortization                                   1,491,903                 1,566,146
--------------------------------------------------------------------------------------------------------
                                                                                           

INCOME BEFORE INCOME TAXES
 AND EXTRAORDINARY ITEM                                             1,811,269                 1,707,392

PROVISION FOR INCOME TAXES                                            725,000                   590,000
--------------------------------------------------------------------------------------------------------
                                                                                           

INCOME BEFORE EXTRAORDINARY ITEM                                    1,086,269                 1,117,392

EXTRAORDINARY ITEM:
 Loss on early extinguishment of debt net of
  related income taxes of $115,000                                    171,295                      --
-------------------------------------------------------------------------------------------------------

NET INCOME                                                          $ 914,974               $ 1,117,392
========================================================================================================
                                                                                           





See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                                                                                               5

SUPER 8 MOTEL DEVELOPERS,  INC.  AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,1996 AND 1995
-------------------------------------------------------------------------------------------------

                                                                   Additional
                                              Common                Paid-in            Retained
                                               Stock                Capital             Earnings
-------------------------------------------------------------------------------------------------

<S>                                          <C>                  <C>                <C>        
BALANCE, JANUARY 1, 1995                     $  488,251           $2,279,628         $   542,785

NET INCOME                                        --                    --             1,117,392
-------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 1995                      488,251            2,279,628           1,660,177

CASH DIVIDENDS                                    --                    --              (976,502)

NET INCOME                                        --                    --               914,974
-------------------------------------------------------------------------------------------------

BALANCE DECEMBER 31, 1996                    $  488,251           $2,279,628         $ 1,598,649
=================================================================================================






See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                                          6

SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
-------------------------------------------------------------------------------------------------------------

                                                                            1996                   1995
-------------------------------------------------------------------------------------------------------------

<S>                                                                      <C>                     <C>   
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                            $    914,974            $  1,117,392
  Adjustments to reconcile net income to net
    cash provided bv operating activities:
     Depreciation                                                          1,383,438               1,444,553
     Amortization                                                            108,465                 121,593
     Special charge                                                          250,000                    --
     Noncash portion of loss on extinguishment of debt                       286,295                    --
     Net loss on disposal of property                                         34,240                   8,698
     Allocation of net (income) loss of limited partnerships                 (77,569)                280,898
     Deferred income taxes                                                  (149,000)                 89,000
     Changes in assets and liabilities:
       Accounts and notes receivable                                          25,910                 (48,021)
       Net repayments from (advances to) limited partnerships                249,688                 (79,059)
       Prepaid expenses                                                       (7,090)               (124,957)
       Other assets                                                         (723,641)                114,151
       Accounts payable, accrued expenses and income taxes                   (31,987)               (745,875)
--------------------------------------------------------------------------------------------------------------

      Net cash provided by operating activities                            2,263,723               2,178,373
--------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Distributions from limited partnerships                                     16,150                  67,091
  Investment in limited partnership                                             --                  (151,896)
  Payments for motel properties and equipment                               (624,202)             (1,566,948)
 Proceeds from sale of property and equipment                                 18,172                   3,090
--------------------------------------------------------------------------------------------------------------

      Net cash used in investing activities                                 (589,880)             (1,648,663)
--------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments on operating line                                              (750,000)               (225,000)
  Proceeds from notes payable                                             24,517,725                 957,749
  Financing costs                                                           (882,892)               (650,077)
  Principal payments on notes payable                                    (22,535,154)             (1,767,489)
  Cash dividends paid                                                       (976,502)                   --
--------------------------------------------------------------------------------------------------------------

      Net cash used in financing activities                                 (626,823)             (1,684,817)
--------------------------------------------------------------------------------------------------------------




(continued on next page)
</TABLE>




<PAGE>
<TABLE>
<CAPTION>

                                                                                  7

CONSOLIDATED STATEMENTS OF CASH FLOWS - page 2
------------------------------------------------------------------------------------

                                                      1996                 1995
------------------------------------------------------------------------------------

<S>                                                 <C>                  <C>   
NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                               1,047,020           (1,155,107)
     
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF YEAR                                             158,431            1,313,538
------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS AT END OF YEAR          $ 1,205,451           $  158,431
====================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
    Cash paid for interest                        $ 2,244,286           $ 2,316,208
====================================================================================

    Cash paid for income taxes                    $   723,427           $ 1,484,935
=====================================================================================




</TABLE>

See Notes to Consolidated Financial Statements.












<PAGE>

                                                                               8
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

Principles of consolidation - The consolidated  financial statements include the
accounts of the  Company  and its  wholly-owned  subsidiaries.  All  significant
intercompany accounts and transactions have been eliminated.

Cash and cash equivalents - For the purpose of reporting cash flows, the Company
considers  time deposits  with a maturity of three months or less,  cash held as
compensating balances, and bank repurchase agreements to be cash equivalents.

Receivables  - The Company  grants  credit to  customers in the  Virginia,  West
Virginia,  Maryland,  Delaware  and  District  of  Columbia  areas.  The  direct
write-off method is used for recognizing bad debt expense.

Motel  properties  and  equipment  - These  assets  are  stated at cost less any
impairment   losses  relating  to  FAS  121.   Expenditures   for  renewals  and
improvements  that  significantly  add to the productive  capacity or extend the
useful  life of an asset  are  capitalized.  Expenditures  for  maintenance  and
repairs  are  charged to expense  currently.  When  depreciable  properties  are
retired or sold, the cost and related  accumulated  depreciation  are eliminated
from the accounts and the resultant gain or loss is reflected in income.

Depreciation  is provided for over the estimated  useful lives of the individual
assets using the straight-line  method.  The range of the estimated useful lives
used in the computation of depreciation is as follows:

           Motel buildings and improvements              10-31 years
           Furniture, fixtures and equipment              3- 7 years

Sub-franchise rights - This cost is being written-off on the straight-line basis
over ten  years.  The  territorial  rights  are  subject  to  certain  terms and
conditions as set forth in the agreement.

Financing  costs - Financing  costs consist of direct costs,  such as loan fees,
legal costs and commitment fees,  associated with obtaining  financing for motel
properties.  The costs are being amortized using the  straight-line  method over
the term of the loan.

Franchise  fees - Franchise  fees consist of the amounts paid to Super 8 Motels,
Inc.  for the  right to use the  Franchisor's  trademark.  These  fees are being
amortized  using  the  straight-line  method  over  the  term  of the  franchise
agreements, twenty years.

Organization   costs  -  Organization   costs  are  being  amortized  using  the
straight-line method over a five-year period.

Investments in limited  partnerships - The Company's  investments in the limited
partnerships are stated at cost, adjusted for the Company's share of partnership
earnings or losses,  cash distributions  received,  unrecognized gain on sale of
the property and advances made to supplement operations of the partnerships.

Deferred  income taxes - Deferred  taxes arise  primarily  from  differences  in
recognizing  income  from sales of motel  properties,  depreciation  methods and
asset lives for book and tax reporting purposes.

(continued on next page)


<PAGE>

                                                                               9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 2
--------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
---------------------------------------------------

Estimates - The preparation of financial statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.


NOTE 2 - NATURE OF OPERATIONS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
---------------------------------------------------------------------------

The  Company was  organized  in April  1984,  and is engaged in the  business of
developing,  owning and  operating  Super 8 Motels,  primarily  in the States of
Virginia, West Virginia, Maryland, Delaware and the District of Columbia.

The essential nature of the Company's operation is such that current obligations
must be liquidated  out of future  revenues to be derived from the rental of its
motel  properties.  Therefore,  assets are essentially  reflected in the balance
sheet in relative  order of  liquidity  and  liabilities  in  relative  order of
currency.


NOTE 3 - CASH AND CASH EQUIVALENTS
----------------------------------

At December 31, 1996 and 1995, the carrying  amount of the Company's  total cash
and cash equivalents was $1,205,451 and $158,431, respectively. In addition, the
Company  considers as cash  equivalents its share of deposits held in a combined
cash account with related parties.  Accordingly,  the Company's cash equivalents
may be affected by negative  cash  balances of related  parties  included in the
combined account (see Note 17).

The Company  maintains its  temporary  cash with high credit  quality  financial
institutions  and limits the amount of credit  exposure  through the use of bank
repurchase  agreements  which  are  collateralized  by  United  States  treasury
securities. At times, cash on deposit may exceed the federally insured limit.


NOTE 4 - NOTES RECEIVABLE
-------------------------

At December 31, 1996, the Company held a contract receivable from the purchasers
of its Dumfries,  Virginia  motel  property.  The note bears interest at 10%, is
secured by a second deed of trust and is due December 2001.

Minimum  principal  payments  to be received on the above note for the next five
years are as follows:

                      1997                          $ 25,200
                      1998                            27,900
                      1999                            30,800
                      2000                            34,000
                      2001                            37,600

(continued on next page)


<PAGE>

                                                                              10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 3
--------------------------------------------------------------------------------


NOTE 5 - INVESTMENT IN LIMITED PARTNERSHIPS
-------------------------------------------

At  December  31,  1996,  the  Company  was a  general  partner  in ten  limited
partnerships,  all of which were formed for the purpose of owning and  operating
Super 8 Motels. The Company's  investment is increased for its share of earnings
and  any  advances  to the  partnerships  which  are  made  for the  purpose  of
supplementing  operations and, in one instance,  to guarantee cash distributions
to its limited partners. Any advances to the partnerships are unsecured,  due on
demand,  and bear  interest  at variable  rates,  currently  9.5% to 10.5%.  The
Company's  investment is decreased by its share of  partnership  losses and cash
distributions  received.  The investment is also increased by syndication  costs
incurred and decreased by  unrecognized  gains on the sale of the  property.  At
December 31, 1996 and 1995,  syndication  costs  incurred  totaled  $179,521 and
unrecognized gains on the sale of property totaled $744,253.  The following is a
schedule of the Company's  investments in limited  partnerships  at December 31,
1996 and 1995:

        Location                                1996               1995
        --------                                ----               ----

   Aberdeen, Maryland                       $  (40,604)        $  (40,782)
   Bristol, Virginia                           (56,300)           (55,363)
   Culpeper, Virginia                           23,292              1,632
   Farmville, Virginia                          74,259            (21,878)
   Fredericksburg/
    Waynesboro, Virginia                       (11,198)           (12,788)
   Havre de Grace, Maryland                    339,597            524,450
   Richmond Airport/
    Harrisonburg, Virginia                     (10,698)           (10,210)
   Richmond Broad St., Virginia/
    Martinsburg, West Virginia                 120,109             72,063
   Richmond Midlothian, Virginia               323,980            339,582
   Waldorf, Maryland                               604            154,604
                                             ---------           --------

                                             $ 763,041          $ 951,310
                                              ========           ========

The condensed  combined  financial  information  on the above  investments is as
follows:

                                                      December 31,
                                           ----------------------------------
                                               1996                  1995
                                               ----                  ----

Assets                                     $15,375,389            $16,575,723
                                           ===========            ===========

Liabilities                                $12,428,478            $15,125,141
Partners' equity                             2,946,911              1,450,582
                                           -----------            -----------

                                           $15,375,389            $16,575,723
                                           ===========            ===========
Net income before depreciation
  and amortization                         $ 1,512,761            $   882,917
                                           ===========            ===========

Net income                                 $   735,439            $    95,137
                                           ===========            ===========

(continued on next page)


<PAGE>

                                                                              11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 4
---------------------------------------------------

NOTE 6 - MOTEL PROPERTIES AND EQUIPMENT
---------------------------------------

The Company's property and equipment  consisted primarily of 29 and 28 operating
motels as of December 31, 1996 and 1995, respectively. 

                                                      1996              1995
                                                      ----               ----

Land                                               $ 6,425,967       $ 6,231,269
Motel buildings and improvements                    24,025,861        23,234,539
Furniture, fixtures and equipment                    6,471,025         6,183,685
                                                   -----------       -----------
                                                    36,922,853        35,649,493
Less accumulated depreciation                       11,321,105        10,239,357
                                                   -----------       -----------
                                                    25,601,748        25,410,136
Construction in progress                                  --           1,253,260
                                                   -----------       -----------

                                                   $25,601,748       $26,663,396
                                                   ===========       ===========


NOTE 7 - SUB-FRANCHISE RIGHTS
-----------------------------

The  sub-franchise  rights,  acquired July 11, 1984 for $250,000,  was an amount
paid to Super 8 Motels, Inc. for the exclusive rights in the states of Virginia,
West  Virginia,  Maryland,  Delaware and the District of Columbia to  construct,
own, and operate motels using the Super 8 name and to represent  Super 8 Motels,
Inc. in the sale of franchises within said territory.

Significant terms of the agreement and amendments thereto are as follows:

a.   The term of the agreement is 20 years from the date of execution.

b.   The initial  franchise  fee payable by motels,  which are owned at least 51
     percent by the Company, is $10,000.

c.   The Company is to receive one-third of the initial franchise fee, presently
     $20,000, of each franchise sold by the Super 8 system in said territory.

d.   Under the current franchise agreement of Super 8 Motels,  Inc., a specified
     percentage of the annual gross room rentals of each operating unit is to be
     tendered  to  Super 8  Motels,  Inc.  as a fee for  services  rendered  and
     royalties.  The Company will  receive from Super 8 Motels,  Inc. 25% of the
     fee received from each motel located in the territory as  compensation  for
     services rendered.  Those payments are to continue from the date such motel
     unit in said territory  first  commences  monthly  royalty  payments for 10
     years for motels  open on or before  July 11,  1990 and 15 years for motels
     opened after July 11, 1990.

Sub-franchise  fee income  under this  agreement  totaled  $422,600 and $433,357
during the years ended December 31, 1996 and 1995.




(continued on next page)


<PAGE>

                                                                              12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 5
--------------------------------------------------------------------------------


NOTE 8 - NOTES PAYABLE
----------------------

The Company's  long-term debt consists of mortgage notes  collateralized by real
estate,  furniture,  fixtures  and  equipment.  The notes  which  have fixed and
variable  rates  ranging from 8.25% to 10.25% are  generally  payable in monthly
installments  and due at  varying  dates  through  2016.  The  weighted  average
interest  rate of the notes was 8.73% and 9.5% as of December 31, 1996 and 1995,
respectively.

Approximate principal maturities during the next five years are as follows:

                    1997                     $    558,500
                    1998                          610,400
                    1999                          666,800
                    2000                          728,400
                    2001                        1,244,500

At December 31, 1995, the Company had one motel under construction.  The Company
had a  construction  and permanent  financing  commitment of $1,025,000 of which
only  $477,750 had been drawn against the  construction  loan as of December 31,
1995. Interest expense capitalized totaled $18,507.

The Company had an operating  line of credit which  matured  during 1996 and was
not renewed.


NOTE 9 - SPECIAL CHARGE
-----------------------

The Company has entered into a contract to sell its Portsmouth,  Virginia, motel
property. The transaction, which is anticipated to close February 26, 1997, will
result in a loss of approximately $250,000.


NOTE 10 - LAND LEASE

In July 1987, the Company entered into an agreement to lease a parcel of land on
which it has  developed a motel.  The initial  term of the lease is 60 years and
called for initial rental of $35,200 per year.  The lease  payments  increase by
10% at the end of five  years  and by 10% at the  end of each  five-year  period
thereafter  throughout the term of the lease. The lease also requires contingent
rental  payments  equal to two and  one-half  percent of the amount by which the
motel's gross sales exceed $1,200,000. For the years ended December 31, 1996 and
1995, there were no payments  required under this provision as the motel's sales
did not exceed $1,200,000.

Future  minimum  payments for the initial term as of December 31, 1996 under the
lease are as follows:

                       1997                        $     39,688
                       1998                              42,592
                       1999                              42,592
                       2000                              42,592
                       2001                              42,592
                    Thereafter                        3,212,969
                                                      ---------
                                                    $ 3,423,025
                                                      =========

(continuied on next page)

<PAGE>

                                                                              13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 6
--------------------------------------------------------------------------------

NOTE 11 - RELATED PARTY TRANSACTIONS AND OTHER AGREEMENTS
---------------------------------------------------------

The Company  conducts  business  with a major  shareholder  and certain  limited
partnerships (see Note 5).

The following is a summary of transactions with related parties:

                                            1996                  1995
                                            ----                  ----
      Revenues:
        Management fees                   $ 339,957             $ 327,711
        Accounting fees                      85,800                85,020
        Interest income                     131,440               219,110

      Costs and expenses:
        Travel expenses                       4,455                 7,260
        Office rent                          44,539                38,908


NOTE 12 - FRANCHISE AGREEMENTS
------------------------------

The Company's  wholly-owned  subsidiaries operate Super 8 motels under franchise
agreements with Super 8 Motels, Inc. As part of the agreement,  the subsidiaries
are obligated to pay Super 8 Motels,  Inc. room  royalties  equal to 4% of total
room rental revenues and 1% or 2% of room rentals as a national advertising fee.
The Company  participates  in a national  media  campaign  sponsored  by Super 8
Motels, Inc. under which the motels contribute an additional 1% of room revenues
through December 31, 1997.

The following is a summary of fees paid under the franchise agreements:

                                                 1996                  1995
                                                 ----                  ----

      Royalty fees                            $ 563,472             $ 526,806
      National advertising fee                  245,979               229,315
      National media fee                        141,108               131,702

The  franchise  agreements  also  place  restrictions  on  the  transfer  of the
franchise and the sale or lease of the motel  without  prior written  consent of
the franchisor.


NOTE 13 - LIFE INSURANCE
------------------------

The  Company  is the owner and  beneficiary  of two  $1,000,000  life  insurance
policies insuring the lives of its president and chief executive officer.






(continued on next page)


<PAGE>

                                                                              14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 7
--------------------------------------------------------------------------------


NOTE 14 - INCOME TAXES
----------------------

The provision for income taxes consists of the following components:

                                         1996                   1995
                                         ----                   ----

      Current taxes                   $ 759,000              $ 501,000
      Deferred income taxes            (149,000)                89,000
                                        -------                -------

                                      $ 610,000              $ 590,000
                                        =======                =======

Deferred tax assets and  liabilities  are  calculated  based on their  estimated
effect on future  cash  flows.  Deferred  tax  assets are  recognized  for asset
impairment losses in 1996 and alternative  minimum tax (AMT) credits in 1995. In
addition, a deferred tax liability has been recognized for the taxable temporary
differences  related to different  depreciation  methods for  financial  and tax
purposes.  The net deferred tax asset  (liability) in the  accompanying  balance
sheets consists of the following:

                                                  1996                  1995
                                                  ----                  ----

   Deferred tax assets                       $ 100,000            $   78,000
   Deferred tax liabilities                   ( 92,000)             (219,000)
                                               -------               -------

   Net deferred tax asset (liability)       $    8,000             $(141,000)
                                              ========               =======


NOTE 15 - EXTRAORDINARY ITEM
----------------------------

The extraordinary  item represents the write-off of unamortized  financing costs
in  connection  with the  refinancing  of  twenty-four  of the  Company's  motel
properties in January,  1996.  The amount of the write-off was $171,295,  net of
related income taxes of $115,000.


NOTE 16 - STOCK OPTION AGREEMENTS
---------------------------------

The Company has entered into stock  option  agreements  with  various  employees
which  allow the  employees  to purchase  up to 55,589  shares of the  Company's
common stock at fair market  value as of December 31, 1996 and 1995.  No options
were  exercised  in 1996 or 1995 and options for 29,411  shares  expired  during
1995.









(continued on next page)


<PAGE>

                                                                              15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 8
--------------------------------------------------------------------------------


NOTE 17 - COMMITMENTS AND CONTINGENCIES
---------------------------------------

The Company,  as general partner,  is contingently liable for liabilities of the
limited  partnerships  as listed in Note 5. The  balance of the  mortgage  notes
totaled approximately  $3,548,000 at December 31, 1996. The Company also remains
contingently  liable on the mortgage  notes of the Dumfries  property,  totaling
approximately  $1,784,000  at  December  31,  1996.  Management  believes  these
obligations are adequately secured by the underlying collateral.

The Company maintains a combined bank account for the limited partnership motels
managed by the Company  (see Notes 5 and 11).  As such,  the  overdrafts  of one
partnership  are offset by cash balances of the Company and other  partnerships.
Upon  dissolution  of the  combined  bank  account or sale or  liquidation  of a
partnership  with a positive  cash  balance,  the  Company may be liable for any
unfunded positive balances.  The December 31, 1996 and 1995 balances relating to
these entities totaled approximately $521,500 and $396,300,  respectively. These
balances are not included in the consolidated balance sheet.

At December 31, 1996,  the Company and its  subsidiaries  were the defendants in
two  lawsuits  in which the  plaintiffs  allege  they were denied full and equal
enjoyment of services, facilities, privileges and accommodations for the alleged
refusal to rent rooms.  The  plaintiffs in both lawsuits seek  compensatory  and
punitive  damages.  The trial for one  lawsuit  began on March 17,  1997 and the
Company was found  innocent of all charges.  The trial for the other  lawsuit is
set for June 1997.  Potential loss exposure could range from $1 nominal  damages
to $1,000,000.  However,  the ultimate  outcome of this litigation is unknown at
the present time. Accordingly,  no provision for any liability that might result
has been made in the accompanying  financial  statements.  Based on management's
understanding  and  evaluation  of the relevant  facts and  circumstances,  they
believe that the Company has  meritorious  defenses to the litigation  described
above.  Management  believes  that the  litigation  should  not have a  material
adverse effect on the financial condition of the Company.


NOTE 18 - CRITERIA USED IN THE SUPPLEMENTAL CURRENT VALUE PRESENTATION
          (COMPILED)
-----------------------------------------------------------------------

A  variety  of  criteria  may  be  used  in the  preparation  of  current  value
presentations;  accordingly, the criteria used could vary from one enterprise to
another.  The supplemental current value balance sheets have been prepared using
the criteria which the Company  believes are  appropriate in the  circumstances.
The  supplemental  current  value  balance  sheets  present  relevant  financial
information  that is not provided by the  historical  cost balance sheets and is
not  intended  to  be a  presentation  in  conformity  with  generally  accepted
accounting  principles.  The supplemental  current value amounts are intended to
represent  normal  exchange  prices of the  tangible net assets.  Current  value
amounts are not  intended to  represent  amounts that might result from a forced
sale of the net  assets,  nor do  such  amounts  contemplate  the  value  of the
business  which  might  include  identifiable  and  unidentifiable  intangibles.
Amounts  that may  ultimately  be realized by the Company  from the  disposal of
assets may vary significantly from the current values presented. Because current
values are not presented for certain properties under development, current-value
equity does not  necessarily  represent the market value of the net assets or of
the  Company  as  a  whole.  Therefore,  the  current  value  presentation  is a
supplement  to, and not a  replacement  for, the  historical  cost basis balance
sheet.  The preceding notes to balance sheet should be read in conjunction  with
the supplemental current value presentation.

(continued on next page)


<PAGE>

                                                                              16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 9
--------------------------------------------------------------------------------


NOTE 18 - CRITERIA USED IN THE SUPPLEMENTAL CURRENT VALUE PRESENTATION
          (COMPILED) - continued
----------------------------------------------------------------------

Management's estimates of unrealized appreciation at December 31, 1996 and 1995,
are summarized as follows:
                                                   1996                1995
                                                   ----                ----

     Motel properties                           $ 46,710,000        $ 44,132,000
     Sub-franchise rights                          1,516,000           1,631,000
                                                 -----------         -----------
                                                  48,226,000          45,763,000
     Less:
        Historical cost basis                     27,199,235          27,772,751

        Sales commissions on realization
           of estimated current values             1,446,800           1,372,900
                                                 -----------         -----------
                                                  19,579,965          16,617,349
        Income taxes on realization of
           estimated current values                6,657,000           5,650,000
                                                 -----------         -----------

        Unrealized appreciation                 $ 12,922,965        $ 10,967,349
                                                  ==========          ==========

Assumptions for current value estimates:

     Assets and liabilities included in current value estimation:
     ------------------------------------------------------------

     The current value  computation of assets is limited to operating motels (29
     and 28 at  December  31,  1996 and 1995,  respectively),  one  motel  under
     construction  at December 31, 1995 and the Company's  sub-franchise  rights
     for all Super 8 Motels in its territory.

     General business intangibles,  such as financing costs,  franchise fees and
     organization  costs have not been carried  forward from the historical cost
     basis to the  supplemental  current  value  presentation.  Other assets and
     liabilities  have not been  revalued  since  the  historical  cost of those
     assets and the  recorded  basis of those  liabilities  approximate  current
     values.

     The current  value of the  operating  motel  properties  was  determined by
     capitalizing  adjusted  net  income at 12% in 1996 and 1995.  Adjusted  net
     income  consists  of net  income  before  debt  service,  amortization  and
     depreciation.   The  Company's  motel  under  construction  was  valued  at
     historical cost.










(continued on next page)


<PAGE>

                                                                              17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 10
--------------------------------------------------------------------------------


NOTE 18 - CRITERIA USED IN THE SUPPLEMENTAL CURRENT VALUE PRESENTATION
          (COMPILED) - continued
----------------------------------------------------------------------

     Sub-franchise rights:
     ---------------------

     The Company receives from Super 8 Motels, Inc. (the franchisor) twenty-five
     percent of the annual royalty fees Super 8 Motels,  Inc. receives from each
     motel located in the Company's territory. Estimates of the current value of
     this  agreement are based upon the present value (using an interest rate of
     10%) of future  estimated  cash flows from royalty fees under the agreement
     on operating motels in the Company's territory.

     Income  taxes and sales  commissions  on  realization  of estimate  current
     values:
     ---------------------------------------------------------------------------

     Even  though  the  Company  does  not  anticipate  a sale  of its  property
     interests,  a provision of 3% of the estimated  gross current value of such
     interests has been made for estimated sales costs which would be payable on
     realization  of the  current  values.  Likewise,  income  taxes  have  been
     provided at an assumed rate of 34% of the estimated current value in excess
     of historical cost.


NOTE 19 - SUBSEQUENT EVENT
--------------------------

Subsequent  to December 31, 1996,  the Company  sold its  Portsmouth,  Virginia,
motel property.



                                    # # # # #