U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB
(Mark One)
   [X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

               For the fiscal year ended        December 31, 1996
                                         ----------------------------------

   [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

          For the transition period from ______________ to _________________

                      Commission file number            0-22132
                                             -------------------------------

                          BUCKHEAD AMERICA CORPORATION
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

           DELAWARE                                        58-2023732
------------------------------------        ------------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization

           4243 Dunwoody Club Drive, Suite 200, Atlanta, Georgia 30350
--------------------------------------------------------------------------------
                    (Address of principal executive offices)

Issuer's telephone number.    (770)-393-2662
                            ----------------------------------------------------

Securities registered under Section 12(b) of the Exchange Act:

           None                                       None
 -------------------------------------------------------------------------------
   (Title of each class)          (Name of each exchange on which registered)

Securities registered under Section 12(g) of the Exchange Act:

                          Common stock, par value $.01
--------------------------------------------------------------------------------
                              (Title of Class) $.01

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes  X  No
                                                                       ---   ---

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]

     State issuer's revenues for its most recent fiscal year. $ 13,872,805
                                                              -------------

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days. As of February 28, 1997: $ 5,889,439
                               ------------

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest practicable date. As of February 28, 1997:

            Common Stock, par value $.01 - 1,771,127 shares outstanding
            -----------------------------------------------------------

                         DOCUMENTS INCORPORATED BY REFERENCE

      No  documents  which are  required  to be listed  under this  caption  are
incorporated by reference.

Transitional Small Business Disclosure Format (Check one): Yes   ; No   X  .
                                                              ---      ---
                                        1


<PAGE>

                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT
--------------------

      FORM AND YEAR OF ORGANIZATION. Buckhead America Corporation ("Buckhead" or
the "Company") and most of its wholly-owned  subsidiaries  were  incorporated in
Delaware on December 17, 1992 in connection  with the bankruptcy  reorganization
of Buckhead America Corporation ("Old Buckhead"), a Georgia corporation formerly
known  as  Days  Inns  of  America,  Inc.  ("Days  Inns"),  and  certain  of its
affiliates.  The  Company,  the  successor-in-interest  to  certain  assets  and
liabilities  of Days Inns,  commenced  operations  on December 29,  1992.  Other
wholly-owned  subsidiaries were subsequently created,  generally for the purpose
of acquiring assets.  Unless the context otherwise  requires,  references to the
Company herein include the Company and its subsidiaries.

      MATERIAL  PURCHASES AND SALES OF SIGNIFICANT  ASSETS..  In March 1993, the
Company  acquired  through  foreclosure  a 180-room  Days Inn hotel in  Daytona,
Florida  (the  "Daytona  Hotel") and in  September  1994,  the Company  acquired
through  foreclosure  a 150-room  Days Inns hotel in Miami,  Florida (the "Miami
Hotel").

      In May 1994, the Company, through a newly formed, wholly-owned subsidiary,
BAC Franchising Inc., a Delaware corporation,  acquired the trademark rights and
license agreements  comprising the Country Hearth Inn mid-priced hotel franchise
system.

      On May 15, 1995,  Buckhead acquired a fifty-five percent (55%) interest in
Heritage Inn  Associates,  Ltd., a  partnership  which owns a 150-room  hotel in
Orlando,   Florida  formerly  known  as  the  Heritage  Inn.   Immediately  upon
acquisition,  the hotel  (the  "Orlando  Hotel")was  converted  to  operate as a
Country Hearth Inn.

      On  December  7,  1995  Buckhead   purchased  three  Homeplace  Inn  hotel
properties  in Texas from  affiliates  of  American  Liberty  Hospitality,  Inc.
("ALH").  Immediately upon acquisition, the acquired hotels (the "Texas Hotels")
along with three other ALH owned  Homeplace  Inn  properties  were  converted to
operate as Country Hearth Inns.

      Buckhead  and  ALH  also  entered  into an  agreement  which  granted  ALH
preferential  rights to licensing of Country Hearth Inns in Texas. ALH agreed to
develop 12 new Country Hearth Inns in Texas over a five year period.

      On March 11,  1996 the  Company  acquired  an  82-room  hotel in  Atlanta,
Georgia.  During the latter  half of 1996 the hotel (the  "Atlanta  Hotel")  was
renovated and refurbished and presently operates as a Country Hearth Inn.


                                        2


<PAGE>



            On August 30, 1996 the Company  acquired a 96-room  hotel in Dalton,
Georgia.  Renovation and  refurbishment  of that hotel was completed in February
1997 and the hotel (the "Dalton Hotel")  presently  operates as a Country Hearth
Inn.

      On December 28, 1996 the Company sold the Miami Hotel.

      Additionally,  during 1994,  1995, and 1996 the Company expanded its hotel
franchising  operations by developing  updated prototype hotels,  implementing a
franchise  sales  and  marketing  plan,  and  establishing  a  centralized  room
reservation system. The Company became licensed to sell Country Hearth Inn hotel
franchises in 49 states.  As of February 28, 1997,  nineteen Country Hearth Inns
were open and operating in nine states, six of which were Company owned.



BUSINESS
--------

      PRINCIPAL  PRODUCTS AND SERVICES.  The Company operates in the hospitality
industry and its principal holdings include hotels,  loans and other investments
secured by hotels,  franchising  rights and other related assets.  Its principal
product is the  Country  Hearth Inn  mid-priced  hotel  chain  which the Company
acquired in May 1994. The primary activity of the Company involves the expansion
of the Country  Hearth chain.  Expansion of the chain has been effected  through
direct  acquisition  and  conversion  of existing  hotels and through  franchise
sales.

      A substantial  portion of the Company's  assets were  transferred to it by
Old Buckhead.  In addition to a significant amount of cash, the principal assets
transferred to the Company were notes  receivable  primarily  secured by limited
service hotel properties, other unsecured receivables, and limited service hotel
properties acquired through  foreclosure.  As a result of the assets transferred
to it, the initial  operations of the Company  included  mortgage  servicing and
hotel management.

      The  Daytona  hotel  is  operated  under  a Days  Inn  license  agreement.
Marketing is generally  conducted on a localized basis and through  national and
regional programs implemented by the franchisor. The Daytona Hotel is managed by
the Company.

      The Orlando,  Atlanta, Dalton, and Texas hotels are operated under Country
Hearth Inns license agreements.  Marketing is generally conducted on a localized
basis and through national and regional programs implemented by the Company. ALH
manages the Texas Hotels under a hotel management  agreement.  All other Company
owned hotels are managed by the  Company.  Additionally,  the Company  manages a
Country Hearth Inn in Lake Park, Georgia under a hotel management agreement.








                                         3

<PAGE>



      COMPETITION.  There  is  significant  competition  in  every  phase of the
hospitality   industry   including   development,    construction,   management,
franchising,  and in loan servicing.  The Company competes in a very limited way
with other hotel management companies because the Company generally manages only
hotels which it owns.  There are many hotel  management  companies in the United
States,  and  many of them  are  significantly  larger  than  the  Company.  The
Company's  operations  also involve  collecting  and  servicing  hotel  mortgage
receivables.  The terms of these  mortgages  are  fixed.  The  Company  does not
compete  as it  relates  to  those  mortgages.  However,  the  mortgages  are on
hospitality  related properties and the collectibility of the mortgages could be
affected by competition  faced by the maker of the mortgage.  As stated earlier,
there is significant competition in the hospitality industry. There are numerous
hotel chains that operate on a national and regional basis. There is significant
competition  in  the  areas  of  price,  location,  quality  and  service.  This
competition could affect the collectibility of these mortgages.

      As a  franchisor,  the  Company  competes  with a large  number  of  hotel
franchise  companies,  most of whom are much  larger  than the  Company  and own
brands which are more nationally recognized than the Company's.

      The Company is a relatively new entrant in the hotel industry. It believes
that its management is experienced in hotel franchising, hotel management and in
loan servicing. In addition, the Company may identify other opportunities in the
hospitality industry.  However, existing hotel companies and new entrants to the
hotel industry in markets which the Company may pursue will present  significant
competition which may have an adverse effect on the Company.

      REGULATION.  Sales of franchises are principally  regulated through fairly
uniform  state  laws.  Such  laws  generally  provide  for  registration  by the
franchisor  of  standardized  offering  documents and  compliance  with numerous
financial   qualifications.   The  Company  undertook  substantial  registration
activities and is presently licensed to sell Country Hearth Inn franchises in 49
states.

      RESEARCH  AND  DEVELOPMENT.  During 1995 and 1996,  the  Company  invested
approximately  $25,000 each year in market studies,  environmental  studies, and
other feasibility analyses relating to potential hotel acquisitions.

      ENVIRONMENTAL   COMPLIANCE.   The  Company's  operations  and  maintenance
policies and procedures at each owned property  include  policies and procedures
regarding  environmental  compliance.  The  costs  of  such  compliance  is  not
significant.

      EMPLOYEES. As of February 28, 1997, the Company has 11 full-time corporate
employees  and 117  full-time  and 40  part-time  hotel  employees.  No  Company
personnel are presently employed under collective bargaining agreements.








                                         4


<PAGE>


RISK FACTORS
------------

      This Form 10-KSB contains  forward  looking  statements that involve risks
and  uncertainties.  Statements  contained  in this  Form  10-KSB  that  are not
historical  facts are forward  looking  statements  that are subject to the safe
harbor  created by the Private  Securities  Litigation  Reform Act of 1995.  The
Company's actual results may differ  significantly from the results indicated by
such forward looking statements. For a discussion of risk factors, see the "RISK
FACTOR" section contained in the  Company's Registration Statement  on  Form S-3
(File No. 333-05313).

ITEM 2.  DESCRIPTION OF PROPERTY.

CORPORATE OFFICES
-----------------

      The  Company's  corporate  headquarters  are located at 4243 Dunwoody Club
Drive,  Suite 200,  Atlanta,  Georgia.  The Company leases  approximately  3,600
square  feet as its  corporate  headquarters.  The lease  term  extends  through
October 1997 at an annual rate of  approximately  $49,000.  The Company believes
that such headquarters are adequate for its current needs.

OWNED REAL PROPERTIES
---------------------

      LAND.  As  of  February  28,  1997,  the  Company  owned  six  parcels  of
undeveloped and unencumbered land, with an aggregate book value of $215,500. All
of such parcels are held for sale.

      DAYTONA  HOTEL.  The  Company  owns a 180-room  Days Inn hotel in Daytona,
Florida  (the  "Daytona  Hotel"),  which was  acquired  by the  Company  through
foreclosure  in March 1993.  The hotel was acquired  subject to a first mortgage
which was in default. The mortgage note was restructured  effective May 15, 1994
and  as  of  December  31,  1996  had  an  unpaid  balance  of  $2,108,868.  The
restructured  note bears interest at 8%, and is due in monthly  installments  of
$15,850  until April 15, 1999 at which time the then  remaining  balance will be
due.

      The market for comparable rooms is extremely  competitive due to the large
number of  hotels/motels  in the Daytona area.  The area does benefit,  however,
from certain event  related  demand  peaks.  Average room  occupancy and average
daily rate during 1996 was 46.0% and $41.45, respectively.

      Renovation and  environmental  programs are  continuously  ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management,  the property is adequately  covered by insurance and is suitable
and  adequate  for its present use.  Property  taxes in 1996 were  approximately
$64,000.


                                         5


<PAGE>



      Differences  between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for  depreciable  real  property  and 5-10 years for all other
depreciable property.

      ORLANDO  HOTEL.  On May  15,  1995,  the  Company  acquired  the  majority
ownership of a 150-room hotel in Orlando,  Florida (the "Orlando Hotel").  Prior
to the  acquisition,  the Company held a second mortgage on the property with an
aggregate principal and interest balance of approximately $2.8 million (the "Old
Second  Mortgage").  The second mortgage  balance was reduced to $1 million (the
"New Second  Mortgage") in exchange for a fifty-five  percent (55%)  interest in
Heritage Inn Associates,  Ltd., the partnership  which owns the hotel. The hotel
was also subject to a first mortgage which collateralized certain Orange County,
Florida industrial development bonds (the "Orlando IRB").

      The Orlando IRB and the New Second  Mortgage were fully paid and satisfied
in November  1996 with  proceeds  from a new first  mortgage loan secured by the
property (the "First Mortgage Loan"). The First Mortgage Loan had a December 31,
1996  balance  of  $4,593,580,  bears  interest  at 9.55% and  requires  monthly
principal and interest payments of $43,028 until December 2016 at which time the
then remaining balance is due and payable.

      The market for hotel rooms in Orlando is extremely  competitive due to the
multitude of  properties  in the area.  The Orlando  Hotel does benefit from the
large  number  or  local  attractions  and from the  Orlando  Convention  Center
activities.  The hotel is  positioned  as a lower  priced  alternative  property
situated among  mega-room  high rises.  Average room occupancy and average daily
rate during 1996 was 84.7% and $63.12, respectively.

      Renovation and  environmental  programs are  continuously  ongoing and the
Company  believes  adequate  funds are available for these  purposes.  The First
Mortgage  Loan  required  the  Company  to  expend  approximately  $200,000  for
maintenance and improvements;  as of February 28, 1997, these  requirements were
substantially  completed.  In  the  opinion  of  management,   the  property  is
adequately  covered by  insurance  and is suitable  and adequate for its present
use. Property taxes in 1996 were approximately $110,000.

      Differences  between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for  depreciable  real  property  and 5-10 years for all other
depreciable property.

      TEXAS HOTELS.  On December 7, 1995 Buckhead  purchased three Homeplace Inn
hotel properties in Texas from affiliates of American Liberty Hospitality,  Inc.
("ALH").  The three hotels secure a first mortgage loan with a December 31, 1996
balance of  $2,355,362.  The remainder of the $3.6 million  purchase  price (the
estimated  fair  value)  was paid with  approximately  $950,000  cash and 41,558
shares of the Company's  common stock.  The first mortgage loan matures December
7, 2002,  bears  interest at 9.05%,  requires  monthly  payments of $21,680,  is


                                         6


<PAGE>


guaranteed by the Company,  and contains  certain  minimum net worth and debt to
equity  ratio  requirements  --  See  "MARKET  FOR  COMMON  EQUITY  AND  RELATED
STOCKHOLDER MATTERS -- DIVIDENDS."

      Immediately  upon  acquisition,  the acquired  hotels (the "Texas Hotels")
along with three other ALH owned  Homeplace  Inn  properties  were  converted to
operate as Country Hearth Inns.

      The Texas Hotels are limited service 40-room properties located in smaller
southeastern  Texas  cities.  Generally,  comparable  rooms are not  immediately
available  in  their  selected  markets.   Occupancy  and  room  rates  averaged
approximately 58.3% and $45.01, respectively, during 1996.

      Renovation and  environmental  programs are  continuously  ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of  management,  the  properties  are  adequately  covered by insurance  and are
suitable  and adequate for their  present  use.  Property  taxes in 1996 totaled
approximately $41,000.

      Differences  between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for  depreciable  real  property  and 5-10 years for all other
depreciable property.

      ATLANTA HOTEL. On March 11, 1996, the Company acquired an 82-room hotel in
Atlanta,  Georgia formerly known as the Sandy Springs Inn (the "Atlanta Hotel").
During the latter half of 1996,  the hotel was  renovated  and  refurbished  for
conversion to operate as a Country Hearth Inn. The conversion was  substantially
completed  in  January  1997  at  a  total  cost  of   approximately   $800,000,
approximately half of such was financed through lease arrangements.

      The Atlanta Hotel  secures a first  mortgage loan with a December 31, 1996
balance of  $2,170,713.  The loan bears  interest at 9.5% and  requires  monthly
payments of $20,350 until August 11, 2006.

      The market for hotel rooms in Atlanta is extremely  competitive due to the
multitude of  properties  in the area..  The hotel is positioned as a moderately
priced property targeted  primarily at business  travelers . Prior to and during
renovation,  the hotel had average room  occupancy of 46.6% and an average daily
rate of $59.18. Due to the recent  renovation,  performance of the hotel will be
more dependent on future marketing efforts as opposed to historical performance.

      Renovation and  environmental  programs are  continuously  ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management,  the property is adequately  covered by insurance and is suitable
and  adequate  for its present use.  Property  taxes in 1996 were  approximately
$40,000.


                                         7


<PAGE>



      Differences  between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for  depreciable  real  property  and 5-10 years for all other
depreciable property.

      DALTON HOTEL. On August 30, 1996 , the Company acquired a 96-room hotel in
Dalton,  Georgia  formerly  known as the Sunset Inn (the  "Dalton  Hotel").  The
Company immediately  initiated a renovation and refurbishment project to convert
the hotel to operate as a Country  Hearth Inn.  The  project  was  substantially
completed in February 1997 at a total cost of approximately $650,000.

      The Dalton Hotel  secures a first  mortgage  loan with a December 31, 1996
balance of  $1,046,148.  The loan bears  interest at 9.15% and requires  monthly
payments  of $9,549  until  September  1, 2001 at which time the then  remaining
balance is due.

      The property is positioned to compete with the existing low and moderately
priced  properties  in the  area.  It will  also  compete  with  new  properties
presently under development in the area. It is located adjacent to and is highly
visible  from  I-75,  a  major  north/south   interstate  highway.   Performance
statistics  during 1996 are not  meaningful due to the heavy  renovations  which
were in progress.  Future  operations  of the property  will be dependent on the
success of future marketing efforts.

      Renovation and  environmental  programs are  continuously  ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management,  the property is adequately  covered by insurance and is suitable
and  adequate  for its present use.  Property  taxes in 1996 were  approximately
$21,000 on an annualized basis.

      Differences  between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for  depreciable  real  property  and 5-10 years for all other
depreciable property.


REAL PROPERTIES PROPOSED TO BE ACQUIRED
---------------------------------------

      The Company  announced in March 1997 that it had entered into two separate
purchase agreements for the acquisition of hotels,  hotel management  contracts,
and a hotel  management  business--See  "Managements  Discussion and Analysis of
Financial Condition and Results of  Operations--FINANCIAL  CONDITION AND CHANGES
IN FINANCIAL CONDITION."


INVESTMENT POLICIES
-------------------

      A  substantial  portion of the  Company's  existing  real  estate and real
estate  related  assets were acquired  directly or indirectly as a result of the


                                         8


<PAGE>


transfer of assets from Old Buckhead and are  principally  hospitality  related.
Asset  acquisitions  since  inception have also been  predominately  hospitality
related  and made for the  primary  purpose  of  generating  additional  income.
Further,  management's  experience and expertise is in the hospitality business.
Accordingly,  the  Company  has  determined  that it  will  primarily  seek  out
investments in the hospitality  industry. In that regard, the Board of Directors
has  determined  that the Company  will focus upon  investments  in  hospitality
related companies with income growth potential.  Such investments could take the
form of (a) hotel property purchases,  (b) hotel mortgage  purchases,  (c) hotel
mortgage servicing, (d) hotel management and/or (e) hotel franchising. The Board
of Directors has not set any  limitations  on the percentage of assets which may
be invested in any one  investment.  The policy herein may be changed  without a
vote of security holders.




ITEM 3.  LEGAL PROCEEDINGS.

      The Company is not a party in any  pending  legal  proceedings  other than
routine litigation that is incidental to its business.


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

      None.



























                                        9


<PAGE>



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION
------------------

      The  Company's  Common  Stock  trades on The Nasdaq Stock Market under the
symbol: BUCK.

      The following  table presents the high and low sales prices for the Common
Stock for each quarter of 1995 and 1996.
                                                           ($ Per Share)
                                                           -------------
                                                           High     Low
                                                           ----     ---
      Quarter ended March 31, 1995                         4.00    3.25
      Quarter ended June 30, 1995                          5.12    3.25
      Quarter ended September 30, 1995                     5.25    4.50
      Quarter ended December 31, 1995                      6.62    5.00
      Quarter ended March 31, 1996                         6.62    5.00
      Quarter ended June 30, 1996                          7.75    5.00
      Quarter ended September 30, 1996                     6.87    5.62
      Quarter ended December 31, 1996                      6.87    5.50

      The sales price  amounts have been supplied by The Nasdaq Stock Market and
do not include retail  mark-up,  mark-down,  or commission and may not represent
actual transactions.

HOLDERS
-------

      As  of  February  28,  1997,   the  Company   estimates  that  there  were
approximately 1,000 holders of record of its Common Stock.

DIVIDENDS
---------

      The Company has no specific  restrictions  which  prohibit  the payment of
dividends  to  its  shareholders.   Dividends,  if  any,  would  be  limited  to
unrestricted cash and other assets not otherwise pledged.

      The first  mortgage loan documents  related to the Company's  Texas Hotels
contain certain financial  covenants  regarding the Company's net worth and debt
to equity ratio -- See "Description of Property -- OWNED REAL PROPERTIES - TEXAS
HOTELS." As of December 31, 1996, the Company's  adjusted net worth,  as defined
in the loan  documents,  exceeded the minimum (i.e.  was favorable) by over $4.3
million.  The Company's debt to equity ratio,  as defined in the loan documents,
was below the maximum (i.e. was favorable) by 66%.

                                       10


<PAGE>



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
------------------------------------------------------

      The  Company  completed  its  second  full  year  of  Country  Hearth  Inn
franchising,  marketing,  and conversion  activities.  At the start of 1995, the
Country Hearth chain had five properties open and operating in three states.  As
of February 28, 1997, there were nineteen  properties open and operating in nine
states.  Further,  the Company has more than thirty  properties  under  contract
which,  upon  closing,  would be  converted  to operate as Country  Hearth Inns.
Approximately half of these conversions would occur in 1997.

       The Company  completed its licensing and  registration  activities and is
presently  authorized to sell Country  Hearth Inn  franchises in 49 states.  The
Company hired full time sales and  marketing  professionals,  developed  updated
prototype  hotels,  developed hotel  operations  manuals,  designed and produced
franchise marketing  materials,  began significant trade advertising  campaigns,
and established a centralized room reservation  system.  The Company also sought
out suitable  acquisition  candidates  for  conversion  to Country  Hearth Inns.
Future  activities  of the Company are expected to continue to be focused on the
growth of the Country Hearth system.

      Growth of the Country Hearth system in 1995 and 1996 was  attributable  to
direct  acquisition and conversion of existing  properties and through franchise
sales  activities.  In May 1995, the Company  acquired  majority  ownership in a
150-room hotel in Orlando, Florida (the "Orlando Hotel"). Upon acquisition,  the
property  was  immediately  converted  to operate as a Country  Hearth  Inn.  In
December 1995, the Company acquired three additional hotel properties located in
southeastern  Texas (the "Texas  Hotels").  These  properties,  along with three
other existing Texas properties,  were also immediately  converted to operate as
Country  Hearth Inns.  The Company has  executed  development  agreements  which
provide for further expansion of the chain in Texas and in the Midwest.

      In 1996,  the Company  acquired an 82-room hotel in Atlanta,  Georgia (the
"Atlanta  Hotel") and a 96-room hotel in Dalton,  Georgia (the "Dalton  Hotel").
Both of these  properties  have been fully  renovated  and  refurbished  and are
presently operating as Country Hearth Inns.  Additionally,  the Company executed
nine license  agreements for development or conversion of Country Hearth Inns in
seven states.

      The primary source of funds for the hotel  acquisitions was the use of new
and  existing  mortgage  financing.  Renovations  and  refurbishments  are being
financed  through  lease  arrangements,  unrestricted  cash,  and mortgage  note
increases.  Management  believes that property operations will generate adequate
cash  flows  for the  servicing  of such  debt and  that  adequate  sources  are
available for similar future transactions.


                                         11


<PAGE>



      In March 1997, the Company announced that it had entered into two separate
agreements for the  acquisition of hotels,  hotel  management  contracts,  and a
hotel  management  business.  One  agreement  provides for the purchase of eight
Hatfield Inns located in Kentucky and Missouri (the "Hatfield  Agreement").  The
Hatfield   Agreement,   if   consummated,   would  require  the   assumption  of
approximately  $7  million  in  debt  and  the  issuance  of $3  million  of 10%
cumulative preferred convertible stock of the Company. The preferred stock would
be convertible  to common stock after seven years at the then market price.  The
Company  intends to convert the  properties to Country  Hearth Inns;  conversion
costs are not  expected  to be  significant.  The  operations  of the hotels are
expected to service the debt and the preferred stock requirements.

      The second  agreement is for the  acquisition of Lodgekeeper  Group,  Inc.
("Lodgekeeper"), a closely held concern that manages 24 hotels in Ohio, Indiana,
and  Michigan.  Lodgekeeper  operates 18 hotels under  long-term  leases,  holds
management  contracts on five  Country  Hearth  Inns,  and owns one  independent
hotel,  among other assets. The transaction,  if consummated,  would require the
payment of  approximately  $850,000 in cash and the  issuance  of  approximately
$850,000 of Company common stock,  along with the assumption of approximately $4
million in debt. If the transaction is  consummated,  the Company would evaluate
each property acquired for possible conversion to a Country Hearth Inn.

      Both  agreements  are  subject  to  significant  due  diligence  and other
contingencies.  The  authorization  to issue preferred  shares of the Company is
subject  to  shareholder  approval.   Management  of  the  Company  provides  no
assurances that either transaction will be completed or that, if completed,  the
final terms will be the same as described above.

      A significant  source of unrestricted  funds during the last two years has
been the  successful  resolution  of  claims  against  the  former  Days Inns of
America,  Inc.  ("Old  Buckhead").  Approximately  $2.4  million  in 1995 and $1
million  in  1996  were  released  to  the  Company  as a  result  of  favorable
settlements of these claims. The remaining  liabilities and restricted funds for
these claims now total less than $20,000.  Management  believes such amounts are
adequate;  however,  actual  settlements could vary significantly from estimated
amounts.  Further  material  amounts  to be  released  to the  Company  are  not
anticipated.

      During  1995 and 1996,  the Company  received  aggregate  note  receivable
principal payments in excess of $5 million.  Most of these receipts were used to
reduce the  Company's  note payable to Trilon  International,  Inc.  ("Trilon").
Additionally,  the Company received nearly $1 million of collections on impaired
notes,  including  a $700,000  deposit  from the sale of one note.  The sale was
completed in 1997 resulting in an additional $800,000 receipt.

      The Company's note payable to Trilon had been secured by notes receivable,
cash, and the Company's  interest in the Orlando Hotel and two Days Inns, one in
Daytona,  Florida (the  "Daytona  Hotel") and one in Miami,  Florida (the "Miami
Hotel").  The Trilon note was fully paid and satisfied in November 1996 with the
proceeds from the refinancing of the Orlando Hotel.



                                       12


<PAGE>





      The combined  result of the above  transactions  resulted in a decrease in
current  maturities of long-term debt from more than $4.1 million as of December
31, 1995 to less than $350,000 as of December 31, 1996.  Aggregate maturities of
long-term  debt over the next two years  totals less than  $600,000.  Management
believes that the operations of the secured hotels will adequately service their
debt requirements as presently structured.

      The  Company's  financial  position was further  improved in December 1996
upon the sale of the Miami Hotel. The Company received net cash proceeds of $1.2
million in addition to retiring $5.5 million of long-term debt.

      All of the hotel property debt previously  described is nonrecourse to the
Company  except for debt on the Texas Hotels which is guaranteed by the Company.
Such debt obligation also contains certain  requirements as to minimum net worth
and maximum debt to equity ratios. Management does not expect these requirements
to significantly impact future financing options.

      The Company has not encountered liquidity  shortfalls,  the need for short
term financing,  or the need to raise additional equity capital.  As of December
31, 1996, the Company had  approximately  $4.5 million of unrestricted  cash and
short-term  investments.  Management believes such amount to be adequate for its
present operational and financing needs.

      Approximately $1.6 million of the December 31, 1996 short-term investments
are represented by industrial  revenue bonds ("IRB's")  secured by a hotel.  The
IRB's were called at par and as a result, the Company's  shareholders' equity at
December 31, 1996 includes a $455,000 unrealized gain. Such gain was realized in
February 1997 when the IRB's were liquidated.

      Not  reflected on the  Company's  balance sheet are potential net deferred
tax assets of  approximately  $4 million.  The  benefit of these  assets will be
realized  if  and  to the  extent  the  Company  sustains  continued  profitable
operations.














                                       13

<PAGE>



RESULTS OF OPERATIONS
---------------------

      The acquisition of the Miami Hotel in September 1994 and the Orlando Hotel
in May 1995 caused hotel  revenues to nearly triple in 1995 and  contributed  to
hotel profit before interest and depreciation of $1.9 million.  The inclusion of
the  Orlando  Hotel and the Texas  Hotels for a full year in 1996 along with the
1996  acquisitions  of the Atlanta and Dalton  Hotels  caused hotel  revenues to
exceed $9.9 million and hotel profit before  interest and  depreciation  grew to
nearly $2.6 million.

      Due to the  seasonality  of the lodging  industry,  the  Company's  fiscal
fourth quarter hotel results are traditionally lower than other periods.

       All of the Company's owned hotels reported  positive cash flow after debt
service  in 1995 and 1996,  except  for the Dalton  Hotel  which was  undergoing
renovations.  Hotel revenues and profit before interest and depreciation in 1997
will be reduced  as a result of the sale of the Miami  Hotel in  December  1996.
However, if the proposed Hatfield and Lodgekeeper  transactions are consummated,
such  revenues and profits  would be  significantly  increased.  Their  combined
revenues for 1996  amounted to $14  million.  The impact on the  Company's  1997
revenues  and  profits  is  dependent  on the  timing of the  completion  of the
transactions, if completed.

      The  second  largest  source of  recurring  revenues  in 1995 and 1996 was
interest income.  These revenues decreased in both years,  however,  as the note
portfolio and funds  available for investment  decreased.  Further  decreases in
note  receivable  interest  income  are  expected  in  1997 as a  result  of the
declining note  portfolio.  Investment  interest income will be dependent on the
amount of funds available for investment which is mostly dependent on the volume
and nature of capital transactions the Company completes.

      Franchising  activities  generated revenues of more than $400,000 in 1995,
the first full year of franchising activity, and more than $550,000 in 1996. The
Company's  intention  is to  dedicate  most  of  its  resources  (financial  and
personnel)  to  the  growth  of  its  Country   Hearth  Inn  franchise   system.
Management's goal is to significantly increase franchise fee revenues.

      The Company recognized gains on property sales in 1996 of nearly $600,000,
including  the gain on the sale of the  Miami  Hotel of  $445,000.  The  Company
expects it may sell one or two parcels of undeveloped land in 1997; the proceeds
from such sales are presently unknown.

      As previously  stated,  the Company realized gains of $2.4 million in 1995
and an additional $1 million in 1996 from favorable  settlements of Old Buckhead
claims. Half of the 1995 amount resulted from the resolution the Glenstone Lodge
claim which was settled in the third quarter of 1995. The remaining reserves for
similar claims are not significant.


                                         14


<PAGE>



      Other  income also  includes  $153,000  in 1995 and  $831,000 in 1996 from
collections on impaired loans. As previously stated, an additional  $800,000 was
collected in 1997.

      Franchise  operations  expenses nearly doubled in 1996 compared with 1995.
Such increases are attributable to personnel additions in the areas of franchise
sales  and  marketing  ,  and  franchise  services  and  administration.   Also,
significant  expenditures were made in the sales and marketing of Country Hearth
Inn  franchise  opportunities  in  addition to  consumer  marketing.  Management
believes these investments will be recouped from future franchise fee revenues.

      Interest  expense  increased  in 1995 and 1996 as a result of the mortgage
financing on the acquired hotels. Based on the Company's current debt structure,
interest  expense in 1997 will decline  primarily as a result of the sale of the
Miami  Hotel  and the  payoff  of  Trilon.  All of the  Company's  present  debt
obligations  are fixed rate until  December  2000, at which time the rate on the
Texas Hotels debt may change.  The  proposed  acquisitions  would  significantly
increase  interest expense,  if consummated.  Average borrowing rates related to
the transactions are presently expected to range from 9% to 11%.

      Similarly,  depreciation and amortization  expenses  increased in 1995 and
1996 as a result of the hotel  acquisitions and will decrease in 1997 due to the
sale of the Miami Hotel.  The  proposed  acquisitions  would also  significantly
increase depreciation expense.

      The  Company  reported  no income  tax  expense  in 1995 or 1996.  This is
attributable  to  differences  in the book and tax bases of  certain  assets and
liabilities.  The Company expects its 1996 federal income tax return,  which has
not  yet  been  filed,   will  report  a  net  operating  loss  carryforward  of
approximately  $23  million.  The  benefits  from  such a  carryforward  will be
realized  if  and  to the  extent  the  Company  sustains  continued  profitable
operations.

















                                       15


<PAGE>



ITEM 7.  FINANCIAL STATEMENTS.

ANNUAL FINANCIAL STATEMENTS
---------------------------

      The Company's consolidated financial statements with independent auditors'
report thereon are included on pages 17 through 42 which follow.


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

      None.





































                                       16


<PAGE>












                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                        Consolidated Financial Statements

                           December 31, 1996 and 1995


                    With Independent Auditors' Report Thereon














17

<PAGE>




                          Independent Auditors' Report


The Board of Directors
Buckhead America Corporation:


We have audited the accompanying consolidated balance sheets of Buckhead America
Corporation  and  subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income,  shareholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the 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  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Buckhead America
Corporation  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.




                                                         KPMG PEAT MARWICK LLP

February 21, 1997, except for
    note 13, which is dated as of
    March 13, 1997

















                                      18

<PAGE>
                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1996 and 1995
<TABLE>
<CAPTION>
                                 Assets                                  1996           1995
                                 ------                                  ----           ----
<S>                                                                 <C>             <C>
Current assets:
    Cash and cash equivalents, including restricted cash of
      $338,882 in 1996 and $2,164,417 in 1995 (note 3)              $  1,801,670       3,172,661
    Short-term investments (note 4)                                    3,026,873       1,691,547
    Current portions of notes receivable (note 5)                        466,988       2,577,134
    Accounts receivable                                                  305,229         270,901
    Accrued interest receivable                                           91,641         145,406
    Other current assets                                                 168,994         120,422
                                                                    ------------    ------------
           Total current assets                                        5,861,395       7,978,071

Noncurrent portions of notes receivable (note 5)                         465,518         792,455
Property and equipment, at cost, net of accumulated
    depreciation (notes 6 and 8)                                      18,730,897      19,580,248
Long-term investments (note 4)                                              --         1,191,589
Deferred costs (note 7)                                                1,650,558       1,473,785
Other assets (note 7)                                                    326,727            --
                                                                    ------------    ------------

                                                                    $ 27,035,095      31,016,148
                                                                    ============    ============

                  Liabilities and Shareholders' Equity
                  ------------------------------------
Current liabilities:
    Accounts payable and accrued expenses                           $    915,576         948,782
    Current portions of notes payable (note 8)                           337,567       4,168,912
    Estimated allowed amounts of unsettled claims (notes 3 and 9)         18,308         738,352
                                                                    ------------    ------------
           Total current liabilities                                   1,271,451       5,856,046

Noncurrent portions of notes payable (note 8)                         12,081,392      13,884,730
                                                                    ------------    ------------
           Total liabilities                                          13,352,843      19,740,776
                                                                    ------------    ------------

Minority interest in partnership                                         598,118         445,893

Shareholders' equity (notes 8 and 11):
    Common stock; $.01 par value; 3,000,000 shares
      authorized; 1,817,977 and 1,807,977 shares issued
      and 1,771,127 and 1,761,127 shares outstanding
      at December 31, 1996 and 1995, respectively                         18,180          18,080
    Additional paid-in capital                                         6,288,574       6,254,274
    Retained earnings                                                  6,712,073       4,895,229
    Unrealized gain on investment securities                             455,128          51,717
    Treasury stock, 46,850 shares in 1996 and 1995
      (notes 6 and 12)                                                  (389,821)       (389,821)
                                                                    ------------    ------------
           Total shareholders' equity                                 13,084,134      10,829,479

Commitment (note 8)

                                                                    $ 27,035,095      31,016,148
                                                                    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      19

<PAGE>
                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                        Consolidated Statements of Income

                     Years ended December 31, 1996 and 1995

                                                           1996          1995
                                                           ----          ----

Revenues:
    Hotel revenues                                     $ 9,979,477     6,719,030
                                                       -----------   -----------

    Interest income:
      Notes receivable                                     256,228       718,413
      Investments                                          786,641       714,040
                                                       -----------   -----------
           Total interest income                         1,042,869     1,432,453
                                                       -----------   -----------

    Franchise fee income                                   554,073       407,184
    Gains on property sales (note 6)                       586,864          --
    Other income (notes 9 and 12)                        1,709,522     2,508,113
                                                       -----------   -----------
           Total revenues                               13,872,805    11,066,780
                                                       -----------   -----------

Expenses:
    Hotel operations                                     7,404,412     4,819,475
    Franchise operations                                 1,254,943       660,636
    Other operating and administrative (note 12)           934,543     1,067,516
    Depreciation and amortization                          956,900       678,434
    Interest                                             1,505,163     1,369,405
                                                       -----------   -----------
           Total operating, administrative, and
               interest expenses                        12,055,961     8,595,466
                                                       -----------   -----------

           Income before income taxes                    1,816,844     2,471,314

Provision for income taxes (note 10)                          --            --
                                                       -----------   -----------

           Net income                                  $ 1,816,844     2,471,314
                                                       ===========   ===========

Primary and fully diluted net income per common
    and common equivalent share                          $  1.00        1.41
                                                            ====        ====

Weighted average number of common and common
 equivalent shares used to calculate net income
 per share:
      Primary                                            1,814,510     1,751,190
                                                         =========     =========

      Fully diluted                                      1,815,049     1,755,361
                                                         =========     =========


See accompanying notes to consolidated financial statements.







                                      20

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                 Consolidated Statements of Shareholders' Equity

                     Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
                                                                           Unrealized
                                                 Additional                  gain on                    Total
                                       Common      paid-in     Retained    investment  Treasury     shareholders'
                                        stock      capital     earnings    securities    stock         equity
                                        -----      -------     --------    ----------    -----         ------
<S>                                 <C>            <C>          <C>         <C>          <C>           <C>
Balances at December 31, 1994       $  17,664      6,010,537    2,423,915         -      (357,993)     8,094,123
Acquisition of 7,073 common
    shares (notes 6 and 12)                -              -            -          -       (31,828)       (31,828)
Issue of 41,558 common shares
    for acquisition of assets (note 6)    416        243,737           -          -            -         244,153
Change in  unrealized gain on
    investment securities                  -              -            -      51,717           -          51,717
Net income                                 -              -     2,471,314         -            -       2,471,314
                                       ------    -----------    ---------   --------     --------    -----------
Balances at December 31, 1995          18,080      6,254,274    4,895,229     51,717     (389,821)    10,829,479

Issue of 10,000 common shares
    pursuant to exercise of option        100         34,300           -          -            -          34,400
Change in  unrealized gain on
    investment securities                  -              -            -     403,411           -         403,411
Net income                                 -              -     1,816,844         -            -       1,816,844
                                       ------    -----------    ---------   --------     --------    -----------

Balances at December 31, 1996       $  18,180      6,288,574    6,712,073    455,128     (389,821)    13,084,134
                                       ======      =========    =========    =======      =======     ==========
</TABLE>


See accompanying notes to consolidated financial statements.



































                                              2

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                     Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
                                                                   1996           1995
                                                                   ----           ----
<S>                                                            <C>            <C>
Cash flows from operating activities:
    Net income                                                 $ 1,816,844      2,471,314
    Adjustments to reconcile net income to net cash provided
      by operating activities:
        Depreciation and amortization                              956,900        678,434
        Sales (purchases) of trading securities, net               417,525       (206,477)
        Realized gains on trading securities                       (24,748)       (81,019)
        Unrealized holding gains on trading securities            (163,103)      (103,265)
        Gains on property sales                                   (586,864)          --
        Minority interest in partnership profits                   174,725         39,420
        Interest added to notes receivable                            --          (80,000)
        (Decrease) increase in accounts payable and
          accrued expenses                                         (33,206)       226,761
        Settlements of allowed claims                             (720,044)    (2,568,240)
        Working capital surplus assumed in acquisitions               --          747,798
        Other, net                                                 (89,135)      (102,717)
                                                               -----------    -----------
              Net cash provided by operating activities          1,748,894      1,022,009
                                                               -----------    -----------

Cash flows from investing activities:
    Note receivable principal receipts                           2,719,472      2,509,394
    Originations of notes receivable                              (282,389)      (730,000)
    Cash portion of asset acquisitions                          (1,163,457)      (956,217)
    Increase in other assets                                      (326,727)          --
    Acquisition of trademark rights and franchise licenses         (63,942)      (120,443)
    Investment maturities                                           90,000         75,000
    Proceeds from property sales                                 1,342,859           --
    Capital expenditures                                        (1,681,306)      (435,938)
                                                               -----------    -----------
              Net cash provided by investing activities            634,510        341,796
                                                               -----------    -----------

Cash flows from financing activities:
    Repayments of notes payable                                 (4,143,064)    (2,772,008)
    Distribution to minority interest partners                     (22,500)       (36,002)
    Issuance of common shares                                       34,400           --
    Proceeds from property refinancing                             376,769           --
                                                               -----------    -----------
              Net cash used in financing activities             (3,754,395)    (2,808,010)
                                                               -----------    -----------

              Net decrease in cash and cash equivalents         (1,370,991)    (1,444,205)

Cash and cash equivalents at beginning of period                 3,172,661      4,616,866
                                                               -----------    -----------

Cash and cash equivalents at end of period                     $ 1,801,670      3,172,661
                                                               ===========    ===========

Supplemental disclosures of cash flow information -
    cash paid for interest, net of interest capitalized
    of $110,412 in 1996                                        $ 1,476,618      1,391,142
                                                               ===========    ===========

                                                                        (Continued)
</TABLE>
                                     22

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>

Supplemental disclosures of noncash investing and financing activities:

      In 1996,  the Company  recorded the following  activity  related to noncash and
partial cash transactions:

<S>                                                                      <C>
           Acquisition of two hotels through partial cash transactions:
               Cash portions                                             $ 1,163,457
               Debt issued                                                 3,450,000
                                                                         -----------

               Property and equipment acquired                           $ 4,613,457
                                                                         ===========

           Sale of two hotels through partial cash transactions:
               Book value of properties sold                             $ 6,297,614
               Debt retired                                               (5,541,619)
                                                                         -----------
                                                                             755,995
               Gains on property sales                                       586,864
                                                                         -----------

               Proceeds from property sales                              $ 1,342,859
                                                                         ===========

           Refinanced debt relating to hotel property:
               New debt issued                                           $ 4,600,000
               Old debt retired                                           (4,000,000)
                                                                         -----------
                                                                             600,000
               New debt issuance costs                                      (223,231)
                                                                         -----------

               Proceeds from property refinancing                        $   376,769
                                                                         ===========

      In 1995,  the Company  recorded the following  activity  related to noncash and
partial cash transactions:

           Acquisition of hotel through a noncash debt for equity swap:
                  Costs:
                     Note receivable forgiven                            $ 1,799,600
                     Debt assumed                                          5,400,000
                     Minority interest remaining                             442,475
                                                                         -----------

                                                                         $ 7,642,075
                                                                         ===========
                  Allocated to:
                     Working capital acquired                            $   747,798
                     Property and equipment, net                           6,523,466
                     Deferred costs                                          370,811
                                                                         -----------

                                                                         $ 7,642,075
                                                                         ===========

                                                                         (Continued)
</TABLE>

                                        23


<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>

<S>                                                                      <C>
           Acquisition of three hotels through a partial cash transaction:
                  Costs:
                     Cash                                                $   956,217
                     41,558 common shares issued                             244,153
                     Debt issued                                           2,400,000
                                                                         -----------

                                                                         $ 3,600,370
                                                                         ===========

                  Allocated to:
                     Property and equipment                              $ 3,450,000
                     Deferred costs                                          150,370
                                                                         ------------

                                                                         $ 3,600,370
                                                                         ===========
</TABLE>

    The Company  acquired  3,938  shares of its own common  stock during 1995 as
    additional  contingent  consideration  in  connection  with a 1993 sale of a
    hotel property.


See accompanying notes to consolidated financial statements.





























                                         24

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1996 and 1995


(1)    The Company
       -----------

       Buckhead  America  Corporation  and its  consolidated  subsidiaries  (the
       Company)  were  created  in  December  1992  and  effectively   commenced
       operations  on January 1, 1993.  The Company also includes a 55% interest
       in a  partnership  acquired  in May  1995.  All  other  subsidiaries  are
       directly or indirectly wholly owned.

       The  Company  operates  in the  hospitality  industry  and its  principal
       holdings include hotels,  loans and other investments  secured by hotels,
       hotel franchising rights, and other related assets. Its principal product
       is the Country Hearth Inn  mid-priced  hotel  franchise  system which the
       Company  acquired  in May  1994.  The  primary  activity  of the  Company
       involves the expansion of the Country Hearth franchise system.  Expansion
       of the franchise system has been effected through direct  acquisition and
       conversion of existing hotels and through franchise sales. The Company is
       licensed to sell Country Hearth Inn hotel franchises in 49 states.

       Other activities of the Company include loan servicing, hotel management,
       and  administration  of certain  trust funds and trust assets (notes 3(a)
       and 12). The Company earns fees and other income from these activities.

(2)    Summary of Significant Accounting Policies
       ------------------------------------------

      (a)  Principles of Consolidation
           ---------------------------

           The  accompanying  financial  statements  include the accounts of the
           Company and its  consolidated  wholly owned  subsidiaries.  They also
           include,  on a  consolidated  basis,  the  accounts  of  a  55%-owned
           partnership which owns a hotel subject to a nonrecourse mortgage. The
           accounts of the  partnership  are  consolidated on a gross basis with
           the minority partners' balance sheet interest reflected separately on
           a net basis. The minority  partners' share of partnership  income was
           $174,725 and $39,420 in 1996 and 1995, respectively,  and is included
           in  hotel  operations   expense  in  the  accompanying   consolidated
           statements of income.

      (b)  Cash and Cash Equivalents
           -------------------------

           Cash and cash  equivalents  include demand and savings  deposits with
           financial institutions,  cash on hand, and funds held by trustees for
           the benefit of the Company or its  creditors.  The Company  considers
           all highly  liquid  instruments  with  maturities  of less than three
           months to be cash equivalents.






                                                                   (Continued)
                                        25

<PAGE>
                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

      (c)  Notes Receivable
           ----------------

           Notes receivable are recorded at cost, less the related allowance for
           impaired notes receivable. As of January 1, 1995, the Company adopted
           the provisions of Statement of Financial  Accounting  Standard (SFAS)
           No. 114, Accounting by Creditors for Impairment of a Loan, as amended
           by  SFAS  No.  118,  Accounting  by  Creditors  for  Impairment  of a
           Loan-Income  Recognition  and  Disclosure.  The Company,  considering
           current  information and events  regarding the borrowers'  ability to
           repay their obligations, values its notes receivable, for which it is
           probable  that the Company  will be unable to collect the full amount
           due in accordance  with the note  agreement,  at the present value of
           the  expected  future  cash  flows,  market  price  of the  loan,  if
           available,  or the value of the  underlying  collateral,  if any. The
           Company does not accrue interest for notes  receivable  considered to
           be impaired  under SFAS No.  114.  Cash  receipts  on impaired  notes
           receivable is either applied against  principal or may be reported as
           interest  income  depending  on  management's   judgment  as  to  the
           collectibility  of  principal.  The adoption of SFAS No. 114 and SFAS
           No. 118  required no increase to the  allowance  for  impaired  notes
           receivable and had no impact on net income in 1996 or 1995.

      (d)  Property and Equipment
           ----------------------

           Property  and  equipment  is stated at cost,  including  interest and
           taxes incurred during  construction,  less accumulated  depreciation.
           Properties  acquired by foreclosure are recorded at the lower of cost
           or fair value at the time of foreclosure.

           Depreciation  is  calculated  on the  straight-line  method  over the
           estimated useful lives of the assets.

      (e)  Deferred Costs
           --------------

           Deferred  costs  primarily  consist  of  costs  associated  with  the
           acquisition  of  trademark  rights  and  franchise  licenses  and are
           amortized over the estimated useful lives of the assets,  which range
           from 10 - 20 years.  Deferred  costs also  include  unamortized  debt
           issue costs which are amortized on the interest  method over the term
           of the related debt.

      (f)  Investments
           -----------

           The Company  classifies its debt and marketable  equity securities in
           one of three  categories:  trading,  available  for sale,  or held to
           maturity.  The Company has classified  all its  investments as either
           "trading" or "available for sale."  Available for sale securities are
           recorded at fair value with unrealized  gains and losses,  net of the
           related tax effect, reported as a separate component of shareholders'
           equity until realized.  Trading  securities are also recorded at fair
           value.  Unrealized holding gains and losses on trading securities are
           included in interest income on the consolidated statements of income.

                                                                   (Continued)






                                         26

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


      (g)  Other Assets
           ------------

           Other assets consist of deposits and  investments in  partnerships or
           corporate joint ventures other than those which are  consolidated due
           to  control.  Investees  in which  the  Company  has the  ability  to
           exercise  significant  influence  are  accounted for using the equity
           method.

      (h)  Income Taxes
           ------------

           Income taxes are accounted for under the asset and liability  method.
           Deferred tax assets and liabilities are recognized for the future tax
           consequences   attributable  to  differences  between  the  financial
           statement  carrying  amounts of existing  assets and  liabilities and
           their  respective  tax  bases  and  operating  loss  and  tax  credit
           carryforwards. Deferred tax assets and liabilities are measured using
           enacted tax rates expected to apply to taxable income in the years in
           which those  temporary  differences  are  expected to be recovered or
           settled.  The effect on  deferred  tax assets  and  liabilities  of a
           change  in tax rates is  recognized  in  income  in the  period  that
           includes the enactment date.

           A valuation allowance is recognized when it appears it is more likely
           than  not  that  some  or all of  deferred  tax  assets  will  not be
           realized.

      (i)  Treasury Stock
           --------------

           Treasury  stock is stated at cost. In noncash  exchanges,  fair value
           represents cost.

      (j)  Revenue Recognition
           -------------------

           Initial hotel franchise fees are recognized as income upon receipt as
           the Company  has no future  obligations  associated  with the initial
           fees. The Company also receives  continuing royalty,  marketing,  and
           other fees based upon a percentage  of each hotel's  gross  revenues.
           These continuing fees are recognized when earned.

      (k)  Marketing Costs
           ---------------

           The  Company  incurs  costs for  various  marketing  and  advertising
           efforts.  All costs related to marketing and advertising are expensed
           in the period  incurred.  Marketing  costs  amounted to $397,555  and
           $242,968   for  the  years   ended   December   31,  1996  and  1995,
           respectively, and are included in franchise operations expense in the
           accompanying consolidated statements of income.

      (l)  Fair Value of Financial Instruments
           -----------------------------------

           Management  believes  that  the  carrying  amounts  of cash  and cash
           equivalents,  accounts and interest receivable, other current assets,
           accounts payable and accrued  expenses,  estimated allowed amounts of
           unsettled  claims,  current  portions of notes receivable and payable
           are  reasonable  approximations  of their fair  value  because of the
           short maturity of these instruments.
                                                                   (Continued)
                                         27

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


           The  fair  value  of  noncurrent  portions  of  notes  receivable  is
           determined  as the  present  value  of  expected  future  cash  flows
           discounted  at the interest  rate  currently  offered by the Company,
           which   approximates   rates  currently   offered  by  local  lending
           institutions  for loans of similar terms to companies with comparable
           credit risk. Based on this valuation methodology, management believes
           that  the  carrying  amount  of  the  noncurrent  portions  of  notes
           receivable is a reasonable approximation of its fair value.

           The fair values of short-term and long-term investments (both trading
           and  available-for-sale)  are  based on quoted  market  prices at the
           reporting date for those or similar  investments.  The fair values of
           the Company's  short-term and long-term  investments are disclosed in
           note 4.

           The fair value of the Company's  noncurrent portions of notes payable
           is estimated by discounting  the future cash flows of each instrument
           at  rates   currently   offered  to  the  Company  for  similar  debt
           instruments of comparable maturities by the Company's bankers.  Based
           on this valuation methodology,  management believes that the carrying
           amount of the  noncurrent  portions of notes  payable is a reasonable
           estimation of its fair value.

      (m)  Reclassifications
           -----------------

           Certain  reclassifications  have  been made to the 1995  balances  to
           conform with classifications adopted in 1996.

      (n)  Use of Estimates
           ----------------

           Management  of  the  Company  has  made a  number  of  estimates  and
           assumptions  relating to the reporting of assets and  liabilities and
           the disclosure of contingent  assets and liabilities to prepare these
           financial statements in conformity with generally accepted accounting
           principles. Actual results could differ from those estimates.

      (o)  Stock Options
           -------------

           The Company accounts for its stock option plan in accordance with the
           provisions of Accounting  Principles Board Opinion No. 25, Accounting
           for  Stock  Issued to  Employees  ("APB  Opinion  25"),  and  related
           interpretations.  As such,  compensation  expense is recorded only to
           the extent that the market price of the underlying  stock at the date
           of grant exceeds the exercise  price.  In October 1995, SFAS No. 123,
           Accounting for Stock-Based Compensation,  was issued. SFAS 123 allows
           entities to apply the  provisions  of APB Opinion 25 for  recognizing
           stock-based  compensation expense in the basic financial  statements.
           However,  companies are encouraged to adopt a new  accounting  method
           based  on the  estimated  fair  value  of  stock-based  compensation.
           Companies  that do not  follow the new fair  value  based  method are
           required to provide expanded  disclosures in the footnotes.  SFAS 123
           is effective for the fiscal year ended December 31, 1996. The Company
           has  elected to continue  to apply the  provisions  of APB Opinion 25
           and, to the extent material, follow the disclosure provisions of SFAS
           123.
                                                                   (Continued)

                                        28

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


           Stock options  granted  represent  common stock  equivalents  for the
           purpose of computing net income per share  amounts.  The Company uses
           the treasury  stock  method for  computing  common stock  equivalents
           resulting  from grants of stock  options.  Under the  treasury  stock
           method, outstanding options, whether or not exercisable,  are assumed
           to have been  exercised  and the  proceeds  from such used to acquire
           treasury shares at market prices. The average market price during the
           period is used for the  purpose of  computing  primary net income per
           share. The market price at the end of the period,  if higher than the
           average,  is used for the  purpose of  computing  fully  diluted  net
           income per share.

      (p)  Impairment of Long-Lived Assets and Long-Lived Assets to Be  Disposed
           ---------------------------------------------------------------------
           Of
           --

           The Company  adopted the  provisions of SFAS No. 121,  Accounting for
           the Impairment of Long-Lived  Assets and for Long-Lived  Assets to Be
           Disposed  Of, on  January  1,  1996.  This  statement  requires  that
           long-lived  assets and certain  identifiable  intangibles be reviewed
           for impairment  whenever events or changes in circumstances  indicate
           that  the  carrying  amount  of an  asset  may  not  be  recoverable.
           Recoverability  of  assets  to be  held  and  used is  measured  by a
           comparison  of the  carrying  amount of an asset to  future  net cash
           flows  expected  to be  generated  by the asset.  If such  assets are
           considered  to  be  impaired,  the  impairment  to be  recognized  is
           measured  by the  amount by which the  carrying  amount of the assets
           exceed the fair value of the  assets.  Assets to be  disposed  of are
           reported at the lower of the carrying amount or fair value less costs
           to sell. Adoption of this statement did not have a material impact on
           the  Company's   financial  position,   results  of  operations,   or
           liquidity.


























                                                                   (Continued)
                                        2

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(3)    Cash and Cash Equivalents

       Cash and cash  equivalents  at December  31, 1996 and 1995  included  the
       following:

                                                          1996          1995
                                                          ----          ----

        Unrestricted cash:
            Demand deposits, money market funds,
               and overnight investments              $ 1,244,396       595,069
            Hotel demand deposits, savings accounts,
               and cash on hand                           218,392       413,175
                                                        ---------     ---------
                                                        1,462,788     1,008,244

        Restricted cash:
            Unsettled claim reserves (a)                   18,308       838,641
            Trilon collateral (note 8)                         -        470,000
            Orlando IRB reserve (note 8)                       -        500,000
            Miami IRB reserve (note 8)                         -        339,510
            Mortgage-related escrows (b)                  320,574        16,266
                                                        ---------     ---------
                                                          338,882     2,164,417

                                                      $ 1,801,670     3,172,661
                                                        =========     =========

           (a)   The Company acts as a trustee and  administers  certain aspects
                 of claims  asserted in the  bankruptcy  of the entity  formerly
                 known as Days Inns of America, Inc. (the Days Bankruptcy).  The
                 residual  amounts,  if any, in certain of the  related  reserve
                 accounts  inure to the  benefit  of the  Company.  Accordingly,
                 these  accounts,  along  with  the  related  liabilities,   are
                 reflected in the accompanying consolidated balance sheets. Such
                 liabilities  are  reflected as  "estimated  allowed  amounts of
                 unsettled claims" (note 9).

           (b)   Mortgage-related  escrows are standard reserve accounts held by
                 or on behalf of the  holders of  mortgages  on certain  Company
                 properties (note 8). Such amounts are restricted to the payment
                 of insurance,  property  taxes,  and/or  property and equipment
                 replacements  and   enhancements   relating  to  the  mortgaged
                 properties.














                                                                   (Continued)
                                         30


<PAGE>
                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(4)    Investments

       The amortized cost, gross  unrealized  gains,  gross  unrealized  holding
       losses,  and fair value for trading and available for sale  securities by
       investment  type and class of  investment  at December 31, 1996 and 1995,
       were as follows:

<TABLE>
<CAPTION>
                                                                    1996
                                          ------------------------------------------------------
                                                            Gross          Gross
                                                         unrealized     unrealized
                                           Amortized       holding        holding       Fair
                                             cost           gains         losses        value
                                             ----           -----         ------        -----
<S>                                       <C>             <C>            <C>          <C>
           Trading securities:
               U.S. government and
                 agency obligations       $ 1,184,742          -             -         1,184,742
               Equity securities               10,763     268,703        (2,335)         277,131
                                            ---------     -------         -----       ----------
                                            1,195,505     268,703        (2,335)       1,461,873
           Available for sale securities:
               IRBs ($1,565,000 par
                 value)                     1,109,872     455,128            -         1,565,000
                                            ---------     -------        ------        ---------

                    Total                 $ 2,305,377     723,831        (2,335)       3,026,873
                                            =========     =======         =====        =========

                                                                    1995
                                           -----------------------------------------------------
                                                            Gross          Gross
                                                         unrealized     unrealized
                                           Amortized       holding        holding       Fair
                                             cost           gains         losses        value
                                             ----           -----         ------        -----
           Trading securities:
               U.S. government and
                 agency obligations       $ 1,578,949         416          (670)       1,578,695
               Equity securities                9,333     105,561        (2,042)         112,852
                                            ---------     -------        ------        ---------

                      Total               $ 1,588,282     105,977        (2,712)       1,691,547
                                            =========     =======         =====        =========

           Available for sale securities:
               IRBs ($1,655,000 par
                 value)                   $ 1,139,872      51,717            -         1,191,589
               DIMT                                -           -             -                -
                                            ---------   ---------        ------        ---------

                      Total               $ 1,139,872      51,717            -         1,191,589
                                            =========   =========        ======        =========
</TABLE>

       At December 31, 1996, all  investments  are classified as short-term.  At
       December 31, 1995,  all trading  securities  are classified as short-term
       and all available for sale securities are classified as long-term.

       The IRBs were secured by a Days Inn hotel located in Birmingham,  Alabama
       and were  called at par on February 1, 1997.  Their  floating  tax-exempt
       interest rate averaged 7% during 1996 and 1995.
                                                                   (Continued)
                                       31

<PAGE>
                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       Equity  securities  are primarily  concentrated  in  hospitality  related
       companies.

       Proceeds  from the sale of  investment  securities  were  $3,887,000  and
       $4,972,000 in 1996 and 1995, respectively.  Net realized gains calculated
       on a specific  identification  basis and included in investment income in
       1996 was $24,748 and in 1995 was $81,019.

       The  Company  owned the equity  certificates  representing  the  residual
       interest in the Days Inns Mortgage Trust (DIMT),  a  special-purpose  CMO
       Trust.  The Company  initially  recorded the investment at zero which was
       the estimated net realizable value of the certificates.  During 1996, the
       Company  sold an option to  purchase  the equity  certificates  to a DIMT
       bondholder.  As  a  result  of  the  sale  of  the  option,  the  Company
       reclassified  its  investment in DIMT from available for sale to trading,
       and the option price of $275,000 is included in 1996  investment  income.
       In February  1997, the option was exercised and the Company sold the DIMT
       equity  certificates for $100,000.  Such amount is included in unrealized
       holding gains on trading securities at December 31, 1996.

       During  1995,  equity  securities  with  net  unrealized   holding  gains
       amounting  to  $103,519  were  reclassified  from  available  for sale to
       trading; such gains are included in 1995 investment income.

(5)    Notes Receivable
       ----------------

       Notes receivable at December 31, 1996 consist of the following:

                                                       Other
                                       Secured         notes          Total
                                       -------         -----          -----

         Principal balances       $    1,849,254       525,062      2,374,316
         Less allowances               1,341,810       100,000      1,441,810
                                       ---------       -------      ---------
                                         507,444       425,062        932,506
         Less current portions           359,481       107,507        466,988
                                     -----------       -------   ------------

         Noncurrent portions      $      147,963       317,555        465,518
                                     ===========       =======   ============

         Number of notes                  6              2              8
                                          =              =              =

     Notes receivable at December 31, 1995 consist of the following:

<TABLE>
<CAPTION>
                                                  Secured
                                          -------------------------       Other
                                          Pledged         Unpledged       notes            Total
                                          -------         ---------       -----            -----
<S>                                 <C>                     <C>            <C>            <C>
         Principal balances         $     4,497,410         730,000        522,629        5,750,039
         Less allowances                  2,048,982              -         331,468        2,380,450
                                          ---------       ---------        -------        ---------
                                          2,448,428         730,000        191,161        3,369,589
         Less current portions            1,780,118         730,000         67,016        2,577,134
                                          ---------         -------     ----------        ---------

         Noncurrent portions        $       668,310              -         124,145          792,455
                                       ============       =========        =======     ============

         Number of notes                     9               1              2               12
                                            ==               =              =               ==
</TABLE>
                                                                  (Continued)
                                        3

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The secured  notes are  primarily  collateralized  by  mortgages on hotel
       properties and provide for an average  effective  yield of  approximately
       9%.  The  1995  pledged  notes  were  part  of the  Trilon  note  payable
       collateral (note 8).

       The recorded  investment in notes  receivable for which an impairment has
       been  recognized  as of  December  31,  1996 and  1995 was  approximately
       $1,290,954  and  $2,122,000,  respectively,  and the  Company  has  fully
       reserved  for these  notes.  Cash  received in payment of impaired  loans
       during 1996 and 1995 amounted to $831,468 and $153,681, respectively, and
       is included in other income.

       The activity in the  allowance for doubtful  accounts for impaired  notes
       receivable for the years ended December 31, 1996 and 1995 was:
<TABLE>
<CAPTION>
                                                                     1996       1995
                                                                    ----       ----
<S>                                                              <C>          <C>
         Allowance for doubtful accounts at beginning of year    $ 2,122,422  3,076,103
         Additions charged to bad debt expense                            -          -
         Write-downs charged against the allowance                        -    (800,000)
         Collections on impaired notes                              (831,468)  (153,681)
                                                                   ---------  ---------

         Allowance for doubtful accounts at end of year          $ 1,290,954  2,122,422
                                                                   =========  =========
</TABLE>































                                                                   (Continued)
                                        33

<PAGE>
                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(6)    Property and Equipment
       ----------------------

  Property and equipment at December 31, 1996 and 1995 consist of the following:

<TABLE>
<CAPTION>

                                                                          1996              1995
                                                                          ----              ----
<S>                                                                   <C>              <C>
         Hotel properties:
         Country Hearth Inn in Atlanta, Georgia:
            Land and building                                         $   3,592,420               -
            Furniture, fixtures, and equipment                              230,011               -
                                                                      -------------    ------------
                                                                          3,822,431               -
               Accumulated depreciation                                     (18,500)              -
                                                                      -------------    ------------
                                                                          3,803,931               -
                                                                      -------------    ------------

         Country Hearth Inn in Dalton, Georgia:
               Land and building                                          1,821,040               -
               Furniture, fixtures, and equipment                           100,000               -
                                                                      -------------    ------------
                                                                          1,921,040               -
                                                                      -------------    ------------

         Country Hearth Inn hotel in Orlando, Florida:
               Land and building                                          6,909,268        6,778,734
               Furniture, fixtures, and equipment                           546,419          531,481
                                                                      -------------    -------------
                                                                          7,455,687        7,310,215
               Accumulated depreciation                                  (1,080,268)        (840,268)
                                                                      -------------    -------------
                                                                          6,375,419        6,469,947

         Three Country Hearth Inn hotels in southeastern Texas:
               Land and buildings                                         3,033,000        3,033,000
               Furniture, fixtures, and equipment                           522,793          417,000
                                                                      -------------    -------------
                                                                          3,555,793        3,450,000
               Accumulated depreciation                                    (162,500)          (6,500)
                                                                      -------------    -------------
                                                                          3,393,293        3,443,500

         Days Inn hotel in Daytona, Florida:
               Land and building                                          3,025,591        2,976,151
               Furniture, fixtures, and equipment                           326,729          320,433
                                                                      -------------    -------------
                                                                          3,352,320        3,296,584
               Accumulated depreciation                                    (359,391)        (263,391)
                                                                      -------------    -------------
                                                                          2,992,929        3,033,193

         Days Inn hotel in Miami, Florida:
               Land and building                                                 -         5,355,616
               Furniture, fixtures, and equipment                                -         1,463,915
                                                                      -------------    -------------
                                                                                 -         6,819,531
               Accumulated depreciation                                          -          (390,000)
                                                                      -------------    -------------
                                                                                 -         6,429,531

     Other furniture and equipment, net                                     28,785           38,577
     Land held for sale                                                     215,500          165,500
                                                                      -------------    -------------

                    Total property and equipment                      $  18,730,897       19,580,248
                                                                      =============    =============
</TABLE>
                                                                   (Continued)
                                        34

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       In March 1996, the Company acquired an 82-room hotel in Atlanta,  Georgia
       formerly  known as the Sandy Springs Inn. The  $3,060,000  purchase price
       was partially funded by a seller-provided  $2,330,000 first mortgage loan
       (note 8). The remainder was paid in cash. During the latter half of 1996,
       the  Company   spent   approximately   $700,000   for   renovations   and
       refurbishments  and  converted  the hotel to a Country  Hearth  Inn.  The
       operations  of the hotel are  included  in the 1996  consolidated  income
       statement from the date of acquisition.

       In August 1996, the Company  acquired a 96-room hotel in Dalton,  Georgia
       formerly  known as the Sunset  Inn.  The  $1,400,000  purchase  price was
       partially  funded by a $1,050,000  first  mortgage loan from a local bank
       and a seller-provided $70,000 purchase money note (note 8). The remainder
       was paid in cash. The Company completed renovations and refurbishments in
       February  1997  and  converted  the  hotel  to  a  Country   Hearth  Inn.
       Expenditures for such in 1996 amounted to $444,970. The operations of the
       hotel are included in the 1996  consolidated  income  statement  from the
       date of acquisition.

       In May 1995, the Company acquired majority  ownership in a 150-room hotel
       in Orlando,  Florida  formerly  known as the Heritage  Inn.  Prior to the
       acquisition,  the Company held a second  mortgage on the property with an
       aggregate principal and interest balance of approximately $2,800,000 (the
       Old  Second  Mortgage).  The  second  mortgage  balance  was  reduced  to
       $1,000,000 (the New Second Mortgage) in exchange for a fifty-five percent
       (55%) interest in Heritage Inn Associates,  Ltd., the  partnership  which
       owns the  hotel.  The hotel was also  subject to a first  mortgage  which
       collateralized  certain Orange  County,  Florida  industrial  development
       bonds with an aggregate unpaid balance of $4,400,000 at December 31, 1995
       (note 8). The new second  mortgage and the industrial  development  bonds
       were fully paid and  satisfied in November  1996 with proceeds from a new
       $4,600,000  first  mortgage  loan  (note  8)  secured  by  the  property.
       Immediately  upon  acquisition,  the hotel was  converted to operate as a
       Country  Hearth Inn. The hotel  operates as a Country  Hearth Inn under a
       license  agreement  with the Company and is also  managed by the Company.
       The  accounts  of  Heritage  Inn  Associates,  Ltd.  are  included in the
       consolidated balance sheet at December 31, 1996 and 1995, and the results
       of its  operations  are included in the  consolidated  income  statements
       since May 1995.

       In  December  1995,  the  Company  purchased  three  Homeplace  Inn hotel
       properties in  southeastern  Texas from  affiliates  of American  Liberty
       Hospitality,  Inc.  (ALH).  The three hotels  secure a  $2,400,000  first
       mortgage loan (note 8). The remainder of the purchase price was paid with
       $956,217  cash and  41,558  shares of the  Company's  common  stock.  The
       operations  of  the  three  hotels  are  included  in  the   accompanying
       consolidated   statements  of  income  from  the  date  of   acquisition.
       Immediately upon acquisition,  the acquired hotels along with three other
       ALH owned  Homeplace Inn properties  were converted to operate as Country
       Hearth Inns under license  agreements with the Company.  ALH continues to
       manage the hotels under  agreements  which  provide for  management  fees
       equal to 4% of gross  revenues.  The Company and ALH also entered into an
       agreement  which grants ALH  preferential  rights to licensing of Country
       Hearth Inns in Texas.

       The 180-room hotel in Daytona,  Florida was acquired through  foreclosure
       in 1993.  The  Company's  foreclosure  was  completed  subject to a first
       mortgage note payable (note 8). The hotel is managed by the Company.

                                                                   (Continued)
                                        35

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       All of the above  described hotel  acquisitions  were accounted for using
       the purchase  method.  The following table presents,  on an unaudited pro
       forma basis,  the  Company's  1996 and 1995  consolidated  revenues,  net
       income,  and net income per share that would have been reported if all of
       these   transactions  had  occurred  at  the  beginning  of  the  periods
       presented. The unaudited pro forma results are not necessarily indicative
       of the results which will occur in the future.

                                                   For the year ended
                                                   ------------------
                                                   1996           1995
                                                   ----           ----

                  Revenues                     $ 14,688,596     14,928,806
                  Net income                      1,964,128      2,630,757
                  Net income per share               1.08          1.49

       The 150-room hotel in Miami,  Florida was acquired through foreclosure in
       September 1994. The acquisition of the hotel was subject to an Industrial
       revenue  bond and a tax note  payable  (note  8).  The  hotel was sold in
       December 1996 resulting in a gain of $445,761.

       In 1996,  the  Company  acquired  and sold a hotel in Lake Park,  Georgia
       resulting in gain of $141,103.

       The Company  acquired 3,938 shares of its own common stock during 1995 as
       additional  contingent  consideration in connection with a 1993 sale of a
       hotel property.

(7)    Deferred Costs and Other Assets
       -------------------------------

       Deferred costs at December 31, 1996 and 1995 consist of the following:

                                                         1996         1995
                                                         ----         ----

           Country Hearth Inn franchise system:
               Trademark rights                   $     584,300       584,300
               Franchise licenses                       931,117       912,416
               Other deferred costs                     142,243        97,002
                                                     ----------    ----------
                                                      1,657,660     l,593,718
           Accumulated amortization                    (230,333)     (119,933)
                                                     ----------    ----------
                                                      1,427,327     1,473,785
           Unamortized debt issue costs                 223,231            -
                                                     ----------    ---------

                                                  $   1,650,558     1,473,785
                                                      =========     =========







                                                                   (Continued)
                                         36

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       Other assets at December 31, 1996 and 1995 consist of the following:

                                                          1996      1995
                                                          ----      ----

           Contract deposits                      $       35,000      -
           Investment in joint venture                   291,727      -
                                                         -------   ---------

                                                  $      326,727      -
                                                         =======   =========

       The  investment  in joint  venture  represents  a 27% interest in a joint
       venture to develop and  construct a 93-room  County  Hearth Inn in Mason,
       Ohio. The property is expected to commence operations in May 1997.

(8)    Notes Payable
       -------------

       Notes payable at December 31, 1996 and 1995 consist of the following:

                                                          1996         1995
                                                          ----         ----

           Trilon note payable                        $         -      3,201,871
           First mortgage note payable (Daytona)         2,108,868     2,129,228
           First mortgage note payable (Texas)           2,355,362     2,400,000
           Industrial revenue bond payable (Orlando)            -      4,400,000
           First mortgage note payable (Orlando)         4,593,580            -
           First mortgage note payable (Atlanta)         2,170,713            -
           Industrial revenue bond payable (Miami)              -      5,123,149
           Capital leases (Miami)                               -         16,894
           Tax note payable (Miami)                             -        513,701
           First mortgage note payable (Dalton)          1,046,148            -
           Purchase money note payable (Dalton)             70,000            -
           Wrapped mortgage note payable                    74,288       135,466
           Promissory notes payable                             -        133,333
                                                        ----------    ----------
                                                        12,418,959    18,053,642
           Less current portions                           337,567     4,168,912
                                                        ----------    ----------

           Noncurrent portions of notes payable       $ 12,081,392    13,884,730
                                                        ==========    ==========

       The  Trilon  note  payable  bore  interest  at 10%  and  was  secured  by
       restricted cash, hotel properties, and notes receivable with an aggregate
       net book value of  approximately  $7,000,000 as of December 31, 1995. The
       Trilon  note  payable  was fully paid and  satisfied  in  November  1996.
       Proceeds from notes  receivable and the Orlando  refinancing  (see below)
       were used to retire the debt.

       The Daytona  first  mortgage note payable is secured by the Daytona hotel
       property.  The note bears interest at 8% and requires monthly payments of
       $15,850 until April 15, 1999 at which time the then remaining  balance is
       due and payable.
                                                                   (Continued)
                                         37


<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The  Texas  first   mortgage   note  payable  is  secured  by  the  three
       southeastern  Texas hotel  properties.  The note bears interest at 9.056%
       and requires  monthly payments of $21,680 until December 7, 2000 at which
       time the interest  rate and payment  amount may be  adjusted.  The entire
       unpaid balance is due and payable on December 7, 2002.

       The partnership which owns the Orlando hotel property was obligated on an
       industrial revenue bond (Orlando IRB) with a December 31, 1995 balance of
       $4,400,000,  which was  collateralized  by the Orlando hotel property and
       certain  restricted  cash.  The Orlando  IRB bore  interest at a floating
       tax-exempt   rate  and  also  required  the  payment  of  certain  credit
       enhancement  fees.  The average  effective  borrowing rate on the Orlando
       IRB, including enhancement during 1995, was approximately 6.5%.

       The Orlando IRB was paid off in November  1996 with  proceeds  from a new
       $4,600,000  first  mortgage note payable.  The new note is secured by the
       Orlando hotel  property,  bears interest at 9.55%,  and requires  monthly
       payments  of  $43,028  until  December  11,  2016 at which  time the then
       remaining balance is due and payable.

       The Atlanta  first  mortgage note payable is secured by the Atlanta hotel
       property,  bears  interest  at 9.5%,  and  requires  monthly  payments of
       $20,350 until August 11, 2006.

       The Company  acquired the Miami hotel  subject to an  industrial  revenue
       bond  (Miami  IRB) and a tax note  payable.  The  Miami  IRB,  which  was
       collateralized  by the Miami hotel property and certain  restricted cash,
       had a principal  due balance of $4,075,000  along with deferred  interest
       which had  accrued on the debt  totaling  $1,048,149.  The Miami IRB bore
       interest at 11.315%. The tax note related to delinquent property taxes of
       the former owner having an original  principal amount of $625,638 bearing
       interest  at  9%.  The  Company   also   assumed   ownership  of  various
       miscellaneous  capital leases on property at the Miami hotel.  All of the
       debt  relating to the Miami hotel was fully paid and  satisfied  upon the
       sale of the hotel by the Company in December 1996 (note 6).

       The Dalton  first  mortgage  note  payable is secured by the Dalton hotel
       property,  bears  interest at 9.15%,  and  requires  monthly  payments of
       $9,549 until  September 1, 2001 at which time the then remaining  balance
       is due and payable.

       The purchase  money note bears interest at 10% and is due in one lump-sum
       payment of principal and interest on August 30, 1997.

       The wrapped mortgage note payable  represents a note  collateralized by a
       property  on  which  the  Company  holds  a  wrap-around   mortgage  note
       receivable  with an aggregate  book value of  approximately  $215,000 and
       $347,000 at  December  31,  1996 and 1995,  respectively.  The note bears
       interest at 11% and requires monthly payments of $6,088 until February 1,
       1998.

       The  promissory  notes payable were incurred by the Company in connection
       with the  purchase  of the Country  Hearth Inn  trademark  and  franchise
       rights  in May  1994.  Originally,  there  were  three  notes,  each with
       principal  balances of $66,667 bearing  interest at 8%. One such note was
       paid off in 1995 and the remaining two were paid off in 1996.

                                                                   (Continued)
                                         3

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The combined  aggregate  amount of  maturities  for all notes payable for
       each of the next five years and thereafter is as follows:

                                                                    Minimum
           Year ending December 31,                                 amount
           ------------------------                                 ------

                    1997                                         $     337,567
                    1998                                               242,072
                    1999                                             2,290,337
                    2000                                               248,148
                    2001                                             1,202,092
                    Thereafter                                       8,098,743
                                                                 -------------

                                                                 $  12,418,959
                                                                 =============

       Except for the purchase money note and the Texas first mortgage note, all
       notes  payable are  nonrecourse  and the  Company is not a  guarantor  or
       otherwise contingently liable on any other indebtedness.

       The Texas first  mortgage  note is  guaranteed  by the Company,  contains
       certain minimum net worth  requirements,  and requires the maintenance of
       certain debt to equity ratios.

       The  Orlando  first  mortgage  note  requires  approximately  $200,000 of
       capital expenditures in 1997.

 (9)   Other Income
       ------------

       Other  income  primarily  consists  of  favorable   settlements  of  Days
       Bankruptcy  claims  and  changes  in  estimates  of  allowed  amounts  of
       remaining  unsettled  claims (note 3).  Other  income in 1995  includes a
       $1,200,000  gain  resulting  from  the  favorable  settlement  of a claim
       asserted by Glenstone Lodge.  Management  considers remaining reserves to
       be adequate for all future allowed claims.

       Other income also includes $831,468 in 1996 and $153,681 in 1995 relating
       to  collections on impaired loans (note 5).


















                                                                   (Continued)
                                         39

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(10)   Income Taxes
       ------------

       The Company recognized no current or deferred,  Federal or state,  income
       tax expense for the years ended December 31, 1996 and 1995.  Total income
       tax expense  recognized  differs from the amount computed by applying the
       U.S.  Federal  income tax rate of 34% to pretax income as a result of the
       following:

<TABLE>
<CAPTION>
                                                                     1996           1995
                                                                     ----           ----
<S>                                                              <C>                 <C>
           Computed "expected" tax expense                       $   618,000         840,000
           Increase (reduction) in income taxes resulting from:
               State taxes, net of Federal tax benefit                39,000          (9,000)
               Income not subject to taxation                       (282,000)       (915,000)
               Change in valuation allowance for deferred
                 tax assets                                         (375,000)         84,000
                                                                     -------      ----------

                                                                 $        -               -
                                                                   =========      =========
</TABLE>

       At December 31, 1996,  the Company has net operating  loss  carryforwards
       for Federal  income tax purposes of  approximately  $23 million  which is
       available to offset future taxable income, if any, through 2010.

       The tax effects of temporary  differences  that give rise to  significant
       portions of deferred tax assets and  liabilities  as of December 31, 1996
       and 1995 are presented below:

<TABLE>
<CAPTION>
                                                                      1996              1995
                                                                      ----              ----
<S>                                                               <C>                <C>
         Deferred tax assets:
             Notes receivable allowances                          $   490,000          810,000
             IRB discount                                             155,000          175,000
             Net operating loss carryforwards                       6,595,000        6,535,000
             Effect of state income taxes                             360,000          400,000
             Other, net                                                26,000           26,000
                                                                    ---------        ---------
                  Total deferred tax assets                         7,626,000        7,946,000

             Less valuation allowance                               3,511,000        3,886,000
                                                                    ---------        ---------

                  Net deferred tax assets                           4,115,000        4,060,000

         Deferred tax liabilities - Partnership losses              4,115,000        4,060,000
                                                                    ---------        ---------

                  Net deferred taxes                              $        -                -
                                                                    =========        =========
</TABLE>

                                                                   (Continued)
                                           4

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The  valuation  allowance for deferred tax assets as of December 31, 1996
       and 1995 was $3,511,000 and $3,886,000,  respectively.  The net change in
       the total valuation  allowance for the year ended December 31, 1996 was a
       decrease of $375,000 and for year ended December 31, 1995 was an increase
       of $84,000.  In  assessing  the  realizability  of  deferred  tax assets,
       management considers whether it is more likely than not that some portion
       or all of  the  deferred  tax  assets  will  be  realized.  The  ultimate
       realization  of deferred tax assets is dependent  upon the  generation of
       future  taxable  income by the Company  during the periods in which those
       temporary   differences  become  deductible.   Management  considers  the
       projected   future  taxable   income  and  tax  planning   strategies  in
       determining the valuation allowance.

(11)   Stock Option Plan
       -----------------

       The  Company's  1995 Stock  Option Plan (the Option  Plan) was adopted on
       April  17,  1995  and  approved  at  the  Company's   Annual  Meeting  of
       Shareholders  on May 25, 1995. The Option Plan authorized the issuance of
       options for up to 170,000 shares of the Company's  common stock.  Granted
       options vest one-third immediately, one-third on the first anniversary of
       the grant date,  and  one-third  on the second  anniversary  of the grant
       date. The exercise price for all options represents the fair value of the
       common stock at the grant date.  All options  terminate  five years after
       vesting, or earlier under certain conditions.

       The following stock option activity during the periods is as follows:

                                               Number          Weighted-average
                                              of shares         exercise price
                                              ---------         --------------

             Balance at December 31, 1994           -           $   -
               Granted                         110,000             3.44
                                               -------             ----
             Balance at December 31, 1995      110,000             3.44

               Granted                          56,000             5.69
               Exercised                       (10,000)            3.44
                                               -------             ----

             Balance December 31, 1996         156,000          $  4.25
                                               =======             ====

       The pro forma and fair  value  disclosures  required  by SFAS 123 are not
       provided  herein  due to  their  immaterial  effect  resulting  from  the
       immaterial options granted and outstanding.

(12)   Related Party Transactions
       --------------------------

       Following the Days Bankruptcy, a trust was created (the Creditors' Trust)
       to pursue  certain  claims for the benefit of  unsecured  creditors.  The
       Company  acts as  trustee  for the  Creditors'  Trust.  The  Company  was
       reimbursed  $100,000  and  $60,000  in 1996 and 1995,  respectively,  for
       expenses  incurred related to the Creditors'  Trust.  Other operating and
       administrative  expenses in the accompanying  1996 and 1995  consolidated
       statements of income are presented net of such amounts, respectively.

                                                                   (Continued)
                                           41

<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The three outside  directors of the Company  received  consulting fees of
       $20,000  each in 1995 for  services  provided  to the  Creditors'  Trust.
       Similarly,  the Company's  president and chief executive officer received
       $30,000.

       The Company performed  accounting and tax services for DIMT. Other income
       in 1996 and 1995  includes  $31,025 and  $75,200,  respectively,  for the
       performance of such services.  A portion of the 1995 amount was paid with
       3,135 shares of the Company's common stock.

       The Chairman of the Company's board of directors was a partner in the law
       firm of Berlack,  Israels, & Liberman (Berlack) during a portion of 1995.
       Berlack has  provided  legal  services to the Company and the  Creditors'
       Trust. Fees and expenses incurred by the Company and the Creditors' Trust
       to Berlack are as follows:

                                                    1996             1995
                                                    ----             ----

       Incurred by the Company                  $        -          97,191
                                                  =========        =======

       Incurred by the Creditors' Trust         $ 1,280,640        476,227
                                                  =========        =======

       During  1995,  the  Company's  chairman  affiliated  with the law firm of
       Rosenman & Colin.  The  Creditors'  Trust paid such law firm  $82,203 for
       services and expenses incurred in 1995.

(13)   Subsequent Events
       -----------------

       On March 12,  1997,  the Company  entered  into an  agreement  to acquire
       Hatfield  Inns LLC, a closely  held owner and operator of eight hotels in
       Kentucky and Missouri. The transaction, if consummated, would include the
       assumption  of  approximately  $7,000,000  in debt  and the  issuance  of
       $3,000,000 in convertible  preferred shares of Company stock. The Company
       intends to convert the hotels to Country Hearth Inns.

       On March 13,  1997,  the Company  entered  into an  agreement  to acquire
       Lodgekeeper Group, Inc., a closely held concern that manages 24 hotels in
       Ohio,  Indiana,  and  Michigan.  Lodgekeeper  operates  18  hotels  under
       long-term leases, holds management contracts on five Country Hearth Inns,
       and owns one independent hotel,  among other assets. The transaction,  if
       consummated,  would require the payment of approximately $850,000 in cash
       and  approximately  $850,000  in  Company  common  stock  along  with the
       assumption of  approximately  $4,000,000 in debt. If the  transaction  is
       consummated,  the Company  would  evaluate  each  property  acquired  for
       possible conversion to a Country Hearth Inn.

       Both  agreements  are  subject to  significant  due  diligence  and other
       contingencies. The authorization to issue preferred shares of the Company
       is subject to shareholder approval.




                                       42

<PAGE>
                                    PART III

ITEM  9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.


DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------

      The directors and executive officers of the Company are as follows:

                                                                   Year Joined
Name                 Age         Position                          The Company
----                 ---         --------                          -----------

Robert M. Miller     45          Chairman of the Board of Directors    1992

Douglas C. Collins   44          Director                              1992
                                 President, Chief Executive
                                  Officer and Treasurer

William K. Stern     70          Director                              1992

Leon M. Wagner       44          Director                              1994

Robert B. Lee        42          Senior Vice President, Chief          1992
                                  Financial Officer and Secretary

Gregory C. Plank     51          President - BAC Franchising, Inc.     1996

      ROBERT M. MILLER.  Mr.  Miller,  the chairman of the board of directors of
the Company,  was a partner in the law firm of Berlack,  Israels & Liberman from
1984 to  1995.  Mr.  Miller's  practice  involved  corporate  restructuring  and
reorganization,  both in and out of bankruptcy.  Mr. Miller has been involved in
numerous  reorganizations  (including R.H. Macy & Co., Inc.,  Zale  Corporation,
Integrated Resources,  Inc., Insilco Corporation and First City Industries).  In
1995, Mr. Miller  affiliated  with the law firm of Rosenman & Colin. In November
1996, Mr. Miller  founded  Cakewalk LLC,  which owns various  independent  music
labels.

      DOUGLAS C. COLLINS.  Mr.  Collins  became  President  and Chief  Executive
Officer of the  Company in December  1992.  Prior to joining  the  Company,  Mr.
Collins  served as President of Days Inns from February  1992 through  September
1992 and Director of Days Inns from  September  1992 through  November 1992. Mr.
Collins served as Senior Vice President and Chief Financial Officer of Days Inns
from August 1990 through  February 1992,  after serving as President of Imperial
Hotels Corporation,  a hotel chain owner and operator, from April 1988 until May
1990. Mr. Collins joined Imperial Hotels  Corporation in August 1980, serving as
Vice President of Finance and Development from June 1984 to April 1988.


                                       43


<PAGE>



      WILLIAM K. STERN.  Mr.  Stern,  a director of the Company,  has over forty
years of experience in the hospitality industry. He had served as Vice President
of  Loews  Hotels   since  1969  and  as   President  of  Loews   Representation
International, Inc. ("LRI"), a separate division of Loews Hotels, since 1972. In
1987, Mr. Stern established "The Grande Collection of Hotels," a deluxe division
of LRI.  Mr.  Stern  also  served as the Chief  Executive  Officer of the Grande
Collection   division.   Mr.  Stern  has  been  the  owner  of  Stern   Services
International, a hotel consulting company, since 1992.

      LEON M.  WAGNER.  Mr.  Wagner,  a director  of the  Company,  is  Managing
Director of CIBC Wood Gundy Securities Corp., a registered broker-dealer.  Prior
to joining CIBC in 1995,  Mr. Wagner was the Vice Chairman of Argosy  Securities
Group ("Argosy").  Argosy was an investment firm and a registered broker-dealer.
Mr. Wagner  became a director of the Company on June 27, 1994.  Prior to joining
Argosy,  Mr. Wagner was a partner in  Dabney/Resnick  and Wagner,  a Los Angeles
based firm  specializing  in high yield  securities.  Between  1986 and 1990 Mr.
Wagner  was a Senior  Vice  President  in the High  Yield and  Convertible  Bond
Department at Drexel Burnham Lambert where he  participated in the  structuring,
issuance and trading of many debt and equity securities.

      ROBERT B. LEE. Mr. Lee became  Secretary  of the Company in December  1992
and became Vice President and Chief Financial  Officer in July 1993. Mr. Lee was
named  Senior  Vice  President  of  Buckhead  in May 1996.  Prior to joining the
Company,  Mr. Lee served as the  Corporate  Controller of Days Inns from October
1990 until  December  1992. He  functioned  in numerous  capacities up to senior
manager in the  accounting and audit practice of KPMG Peat Marwick from December
1979 to October 1990.

      GREGORY C. PLANK. Mr. Plank became President of BAC Franchising, Inc., the
Company's Country Hearth Inn franchising  subsidiary,  in May 1996. From 1991 to
1996,  Mr. Plank  served as  Executive  Vice  President  of Forte  Hotels,  Inc.
overseeing  Travelodge and  Thriftlodge  in North and South  America.  Mr. Plank
previously  served as Vice  President of Marketing  for Ramada and has held Vice
President  positions in development  and operations for Sheraton Inns,  Hawthorn
Suites, and independent developers.




      The members of the Company's  Board of Directors  are elected  annually to
serve one year  terms.  The  holders  of Common  Stock will elect a new Board of
Directors  at the next annual  meeting,  which is scheduled to occur on or about
Wednesday, May 28, 1997.




                                       44


<PAGE>



INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
----------------------------------------

        None


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------

Based solely on its review of copies of forms received by it pursuant to Section
16(a)  of  the  Securities   Exchange  Act  of  1934,  as  amended,  or  written
representations from certain reporting persons, the Company believes that during
1996 all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with.
































                                       45


<PAGE>



ITEM 10.  EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE
--------------------------

      The following table sets forth the compensation paid by the Company to the
named executive officers for the years ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>

                                                           Long Term
                                                         Compensation
                                                              Awards
                                    Annual Compensation   Securities      All Other
Name and                                 Salary     Bonus  Underlying     Compensa-
Principal Position         Year       ($)            ($)     Options (#) tion  ($)
------------------         -------------------------------------------------------
<S>                        <C>         <C>        <C>      <C>            <C>
Douglas C. Collins         1996        $235,000   72,000   7,000 (b)      $4,750(c)
Chief Executive Officer    1995         210,000   82,500  30,000 (b)       4,620(c)
                           1994         200,000   30,000                   4,620(c)

Robert B. Lee              1996          98,600   22,292   4,000 (b)       3,022(c)
Chief Financial Officer    1995          88,800   17,760  10,000 (b)       2,664(c)
                           1994          84,500   10,000                   2,362(c)

Gregory C. Plank           1996 (a)      81,000   24,111  15,000 (b)      35,312(d)
President - Franchising

</TABLE>


  (a) Mr. Plank's employment with the Company began on May 20, 1996.

  (b) See "OPTION GRANTS TABLE."

  (c) Employer's portion of 401(k) contribution.

  (d) Relocation allowance.















                                       46


<PAGE>



OPTION GRANTS TABLE
-------------------

      The  following  table  sets  forth the  number  of shares of Common  Stock
underlying options granted to the named executive officers during the year ended
December 31, 1996.

<TABLE>
<CAPTION>

                       Number of       Percent of
                       Shares of            Total
                       Common Stock       Options
                       Underlying      Granted to      Exercise
                       Options          Employees         Price       Expiration
Name                   Granted (#) in Fiscal 1996    ($/Share)          Date (e)
----                   ----------- -------------- -------------         --------
<S>                    <C>                  <C>      <C>                <C> <C>
Douglas C. Collins     2,333                5.83%    $ 5.38 (d)   April 26, 2001
                       2,333                5.83%    $ 5.38 (d)   April 26, 2002
                       2,334                5.84%    $ 5.38 (d)   April 26, 2003

Robert B. Lee          1,333                3.33%    $ 5.38 (d)   April 26, 2001
                       1,333                3.33%    $ 5.38 (d)   April 26, 2002
                       1,334                3.34%    $ 5.38 (d)   April 26, 2003

Gregory C. Plank       5,000               12.50%    $ 6.25 (d) October 20, 2001
                       5,000               12.50%    $ 6.25 (d) October 20, 2002
                       5,000               12.50%    $ 6.25 (d) October 20, 2003

</TABLE>


(d) The exercise price was fixed as the market price at the date of grant.

(e) The options expire five years after the date they become vested.
















                                      47


<PAGE>



AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
------------------------------------------------------------------

       The following  table sets forth the number and fiscal  year-end  value of
unexercised  options granted to the named executive  officers as of December 31,
1996.

                                        Number of
                                        Shares of
                                     Common Stock                    Value of
                                       Underlying                 Unexercised
                                      Unexercised                In-the-Money
                                       Options at                  Options at
                                        FY-End(#)                   FY-End($)

                                     Exercisable/                Exercisable/
       Name                         Unexercisable               Unexercisable
       ----                         -------------               -------------

       Douglas C. Collins                 22,333/                    $52,646/
                                          14,667                      28,494

       Robert B. Lee                       7,999/                    $17,891/
                                            6001                      10,189

       Gregory C. Plank                    5,000/                      -
                                          10,000                       -


       No options were exercised by the named executive officers during 1996.



COMPENSATION OF DIRECTORS
-------------------------

      Mr.  Miller,  the  chairman  of the  board of  directors  of the  Company,
receives  annual fees of $62,000 and $750 per  attendance  at board of directors
meetings.

      Each of the Company's other outside  directors,  Mr. Stern and Mr. Wagner,
receive an annual fee of $12,000 and $750 per  attendance  at board of directors
meetings.


      Stern  Services  International,  a company  owned by Mr.  Stern,  received
$2,000 in 1996 for consulting services performed for the Company.






                                       48


<PAGE>



EMPLOYMENT  CONTRACTS  AND  TERMINATION  OF  EMPLOYMENT  AND   CHANGE-IN-CONTROL
--------------------------------------------------------------------------------
ARRANGEMENTS
------------

       DOUGLAS C. COLLINS.  The Company has entered into an employment  contract
with Mr.  Collins  for a term which  expires in July 1999.  If the  contract  is
terminated  by the Company (1) prior to the end of its term,  (2) other than for
cause,  and (3) within twelve months following a  change-in-control  (generally,
acquisition of control of over 50% of the Common Stock or a change in a majority
of the board of directors),  Mr. Collins shall be entitled to the greater of (x)
his annual base salary payable  through the end of his  employment  term and (y)
one-half of his base  salary for the rest of the year in which such  termination
occurs.  If such event  occurred  as of January 1, 1997,  Mr.  Collins  would be
entitled to a payment of $587,500.

       If Mr.  Collins  terminates  his  contract  (1)  between  90 and 120 days
following a change-  in-control  or (2) within 30 days  following  any demotion,
diminution of responsibility or pay or forced relocation occurring within twelve
months of a  change-in-control,  he shall be  entitled  to the lesser of (x) his
annual base salary through the end of his  employment  term, and (y) one-half of
his base  salary for the year in which such  termination  occurs.  If such event
occurred as of January 1, 1997,  Mr.  Collins  would be entitled to a payment of
$117,500.

       If Mr. Collins'  employment is otherwise  terminated without cause before
the expiration of his employment  term, the Company must pay him an amount equal
to his annual base salary for the year in which such termination occurs. If such
event occurred as of January 1, 1997, Mr. Collins would be entitled to a payment
of $235,000.

       ROBERT B. LEE. The Company has entered into an  employment  contract with
Mr. Lee for a term which  expires in July 1999. If the contract is terminated by
the Company (1) prior to the end of its term, (2) other than for cause,  and (3)
within twelve months following a  change-in-control  (generally,  acquisition of
control of over 50% of the Common  Stock or a change in a majority  of the board
of  directors),  Mr. Lee shall be entitled to the greater of (x) his annual base
salary payable  through the end of his  employment  term and (y) one-half of his
base salary for the rest of the year in which such termination  occurs.  If such
event  occurred as of January 1, 1997, Mr. Lee would be entitled to a payment of
$262,500.

       If Mr. Lee  terminates his contract (1) between 90 and 120 days following
a change-in- control or (2) within 30 days following any demotion, diminution of
responsibility or pay or forced  relocation  occurring within twelve months of a
change-in-control,  he shall be  entitled  to the lesser of (x) his annual  base
salary  through the end of his  employment  term,  and (y)  one-half of his base
salary for the year in which such termination  occurs. If such event occurred as
of January 1, 1997, Mr. Lee would be entitled to a payment of $52,500.

       If Mr. Lee's employment is otherwise  terminated without cause before the
expiration of his  employment  term, the Company must pay him an amount equal to
his annual base salary for the year in which such  termination  occurs.  If such
event  occurred as of January 1, 1997, Mr. Lee would be entitled to a payment of
$105,000.

                                      49

<PAGE>



       GREGORY C. PLANK.  The Company has entered  into an  employment  contract
with Mr.  Plank for a term  which  expires in April  1999.  If the  contract  is
terminated  by the Company (1) prior to the end of its term,  (2) other than for
cause,  and (3) within twelve months following a  change-in-control  (generally,
acquisition of control of over 50% of the Common Stock or a change in a majority
of the board of  directors),  Mr.  Plank shall be entitled to the greater of (x)
his annual base salary payable  through the end of his  employment  term and (y)
one-half of his base  salary for the rest of the year in which such  termination
occurs.  If such  event  occurred  as of January 1,  1997,  Mr.  Plank  would be
entitled to a payment of $427,200.

       If Mr.  Plank  terminates  his  contract  (1)  between  90 and  120  days
following a change-  in-control  or (2) within 30 days  following  any demotion,
diminution of responsibility or pay or forced relocation occurring within twelve
months of a  change-in-control,  he shall be  entitled  to the lesser of (x) his
annual base salary through the end of his  employment  term, and (y) one-half of
his base  salary for the year in which such  termination  occurs.  If such event
occurred  as of January 1, 1997,  Mr.  Plank  would be  entitled to a payment of
$80,000.

       If Mr. Plank's  employment is otherwise  terminated  without cause before
the expiration of his employment  term, the Company must pay him an amount equal
to his annual base salary for the year in which such termination occurs. If such
event  occurred as of January 1, 1997,  Mr. Plank would be entitled to a payment
of $160,000.




























                                       50


<PAGE>




ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------

       The following  table sets forth  information as of February 28, 1997 with
respect  to the  beneficial  ownership  of shares of the  Common  Stock  held by
beneficial owners of more than 5% of the Common Stock. The information set forth
below is based upon the Company's stock records and information  obtained by the
Company from the persons named below.  Unless otherwise  indicated,  each person
has sole voting and investment power with respect to such shares.

         Name and Address                 Amount and Nature of         Percent
      of Beneficial Ownership             Beneficial Ownership         of Class
      -----------------------             --------------------         --------

      NY Motel Enterprises                   103,700 -  Direct           5.86%
      440 West 57th Street
      New York, NY   10019

      Leon M. & Marsha C. Wagner             116,025 -  (a)              6.47%
      1325 Avenue of the Americas
      22nd Floor
      New York, NY 10019

      Heartland Advisors, Inc.               183,000 -  Investment      10.33%
      790 North Milwaukee Street                        Advisor
      Milwaukee, WI 53202

      Hotel-Motel Management Corporation     210,200 -  Direct          11.87%
      3485 N. Desert Drive - Suite 106
      Building 2
      East Point, GA  30344

      Tower Investment Group, Inc.           264,531 -  Investment      14.94%
      Suite 270                                         Advisor
      777 South Harbour Island Boulevard
      Tampa, FL 33602


(a) Mr. Wagner holds 13,299 shares  directly and Ms. Wagner,  his spouse,  holds
12,082 shares  directly.  They share investment and voting power with respect to
67,311  shares.  Mr. Wagner also has the right to acquire an  additional  23,333
shares within the next 60 days pursuant to an option agreement.


                                       51


<PAGE>



SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------

      The following  table sets forth,  as of February 28, 1997,  all beneficial
holdings of  outstanding  Common Stock by the directors and the named  executive
officers of the Company and all directors and executive officers as a group. The
information  set forth  below is based  upon the  Company's  stock  records  and
information  obtained  by the  Company  from the  persons  named  below.  Unless
otherwise  indicated,  each  person has sole  voting and  investment  power with
respect to such shares.

           Name of                      Amount and Nature of         Percent
      Beneficial Holder                 Beneficial Ownership         of Class
      -----------------                 --------------------         --------

      Robert M. Miller                    45,255 - (a)                2.39 %
      Douglas C. Collins                  53,274 - (b)                2.81 %
      William K. Stern                    33,333 - (c)                1.76 %
      Leon M. Wagner                      103,943 - (d)               5.49 %
      Robert B. Lee                       26,474 - (e)                1.40 %
      Gregory C. Plank                    7,000 - (f)                  0.4 %
      Directors and Officers              262,771 - (a-f)            13.87 %
      as a group (6 persons)

      (a) Mr. Miller holds 21,255  shares  directly and has the right to acquire
24,000  additional  shares  within  the  next  60  days  pursuant  to an  option
agreement.
      (b) Mr.  Collins  holds  12,100  shares  directly  and holds 6,508  shares
indirectly  through DC Hospitality,  Inc., which is 85% owned by Mr. Collins and
15% owned by Mr. Lee. Mr.  Collins  also has the right to acquire an  additional
34,666 shares within the next 60 days pursuant to an option agreement
      (c) Mr.  Stern holds 10,000  shares  directly and has the right to acquire
23,333  additional  shares  within  the  next  60  days  pursuant  to an  option
agreement.
      (d) Mr.  Wagner  holds  13,299  shares  directly  and  shares  voting  and
investment power of 67,311 shares held jointly with his spouse.  Mr. Wagner also
has the right to acquire an  additional  23,333  shares  within the next 60 days
pursuant to an option agreement.  (Excludes 12,082 shares held by his spouse, as
to which Mr. Wagner disclaims beneficial ownership.)
      (e) Mr. Lee holds 7,300 shares directly and holds 6,508 shares  indirectly
through DC Hospitality, Inc., which is 15% owned by Mr. Lee and 85% owned by Mr.
Collins.  Mr.  Lee also has the right to  acquire an  additional  12,666  shares
within the next 60 days pursuant to an option agreement.
      (f) Mr.  Plank holds 2,000  shares  directly  and has the right to acquire
5,000 additional shares within the next 60 days pursuant to an option agreement.


      The  address  of each  director  and  executive  officer is in care of the
 Company, Suite 200, 4243 Dunwoody Club Drive, Atlanta, Georgia 30350.




                                         52


<PAGE>




CHANGES IN CONTROL
------------------

      To the best of the Company's  knowledge,  there are no arrangements  which
may result in a change of control.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


      Robert M.  Miller,  the chairman of the board of directors of the Company,
was a partner in the law firm of Berlack,  Israels & Liberman ("Berlack") during
a portion of 1995.  Berlack has been  engaged by the Company to provide  general
corporate legal services.  For services provided to the Company in 1995, Berlack
received fees of $97,191.

      Berlack also provides legal services to Buckhead Creditors' Trust, a trust
which is  beneficially  owned by certain  former  creditors  of Old Buckhead and
created to pursue certain claims against the former owners of Old Buckhead.  The
Company acts as the trustee for Buckhead Creditors' Trust. During 1995 and 1996,
Berlack  billed  aggregate  fees and  expenses to Buckhead  Creditors'  Trust of
$476,227 and $1,280,640, respectively.

      During 1995, Mr. Miller  affiliated with the law firm of Rosenman & Colin.
Buckhead  Creditors'  Trust paid such law firm $82,203 for services and expenses
incurred in 1995.




























                                         53

<PAGE>



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)   INDEX TO EXHIBITS
      -----------------

   Exhibit     Description                                                Page
   -------     -----------                                                ----

   2(a)        Closing Agreement dated May 15, 1995 between               ***
               Heritage Inn Associates, Ltd. and
               BLM EB, Inc.

   2(b)        Agreement for Purchase and Sale of Hotel between           ****
               Buckhead and ALH Properties No. One, Inc.

   2(c)        Agreement for Purchase and Sale of Hotel between           ****
               Buckhead and ALH Properties No. Two, Inc.

    3(i)       Articles of Incorporation                                  *

    3(i)(a)    Certificate of Amendment of Certificate of Incorporation   **

    3(ii)      By-Laws - Amended and Restated as of June 27, 1994         **

    4(ii)      Mortgage Note Payable dated as of November 7. 1996         58
               made by Heritage Inn Associates, LP as maker,
               to Bloomfield Acceptance Company, LLC

   10(ii)(a)   Employment Agreement dated as of June 30, 1993             *
               between the Company and Douglas C. Collins

   10(ii)(b)   Amendment to Douglas C. Collins Employment Agreement       #

   10(ii)(c)   Employment Agreement dated as of June 30, 1993             #
               between the Company and Robert B. Lee

   10(ii)(d)   Amendment to Robert B. Lee Employment Agreement            #

   10(ii)(e)   Employment Agreement dated as of April 29, 1996            65
               between the Company and Gregory C. Plank

   10(ii)(f)   1995 Stock Option Plan                                     *****

   21          Subsidiaries of the Company                                75

   23          Accountants' Consent                                       76

   27          Financial Data Schedule (Electronic filing only)

                                       54


<PAGE>

   *           Previously filed as an Exhibit to the  Registrant's  Registration
               Statement  on Form 10-SB which  became  effective on November 22,
               1993 and incorporated herein by reference.

   **          Previously filed as the same Exhibit number to the  Registrant's
               December  31, 1994  Form  10-KSB  and  incorporated   herein  by
               reference.

   ***         Previously  filed as an Exhibit to the  Registrant's May 15, 1995
               Form 8-K and incorporated herein by reference.

   ****        Previously  filed as an Exhibit to the  Registrant's  December 7,
               1995 Form 8-K and incorporated herein by reference.

   *****       Previously  filed as  Appendix A to the  Registrant's  Definitive
               Proxy Statement dated April 25, 1995 and  incorporated  herein by
               reference.


   #           Previously filed as an Exhibit to the  Registrant's  December 31,
               1995 Form 10-KSB and incorporated herein by reference.



















                                       55


<PAGE>



(b)              REPORTS ON FORM 8-K.
                 --------------------

   The Company has not filed any reports on Form 8-K during the last  quarter of
   the period covered by this report.









































                                       56


<PAGE>



                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

(Registrant) BUCKHEAD AMERICA CORPORATION
             ----------------------------

By: (Signature and Title):


         /s/ Douglas C. Collins             By:    /s/ Robert B. Lee
        ----------------------------              ------------------------------
        Douglas C. Collins                        Robert B. Lee
        President &                               Senior Vice President & Chief
        Chief Executive Officer                   Financial & Accounting Officer



Date:   March 31 , 1997                     Date:  March 31 , 1997
             ----                                       ----


In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

By: (Signature and Title)                                    Date


 /s/ Douglas C. Collins                                      March   31  , 1997
---------------------------                                        ------
Douglas C. Collins
Director


 /s/ Robert M. Miller                                        March    31 , 1997
---------------------------                                        ------
Robert M. Miller
Director


 /s/ William K. Stern                                        March    31  , 1997
---------------------------                                        -------
William K. Stern
Director


 /s/ Leon M. Wagner                                          March    31  , 1997
---------------------------                                        -------
Leon M. Wagner
Director

                                        57