<PAGE>
 
                       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 (FEE REQUIRED) for the fiscal year ended December 31, 1996

( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the transition period 
     from ______________ to ______________

Commission File No. 0-15227

                             THE DWYER GROUP, INC.
                             ---------------------
                 (Name of small business issuer in its charter)

           Delaware                                      73-0941783
           --------                                      ---------- 
(State or other jurisdiction of                       (I.R.S. Employer     
incorporation or organization)                     Identification Number) 


                         1010 N. University Parks Drive
                               Waco, Texas  76707
                               ------------------
             (Address and zip code of principal executive offices)

                                 (817) 745-2400
                                 --------------
                (Issuer's telephone number including area code)

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

 Securities registered under Section 12(g) of the Exchange Act:   Common Stock
                                ($.10 par value)


          Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 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 is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.        [ ]

     Issuer's revenues for its most recent fiscal year:  $ 14,092,943
                                                         ------------

     Aggregate market value of the voting stock held by nonaffiliates computed
     by average bid and asked prices of such stock, as of April 10, 1997:
     $4,546,325

     Aggregate number of shares of Common Stock outstanding as of the close of
     business on April 10, 1997:  7,113,127


  Transitional Small Business Disclosure Format (check one): [ ] Yes  [X] No

                      DOCUMENTS INCORPORATED BY REFERENCE
                                      None

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                               TABLE OF CONTENTS



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<S>         <C>                                                                       <C>
PART I                                                                          

Item 1.     DESCRIPTION OF BUSINESS........................................             3
            General........................................................             3
            Franchise Operations...........................................             4
            Marketing......................................................             9
            Competition....................................................            10
            Trade Names and Service Marks..................................            10
            Regulation.....................................................            11
            Employees......................................................            12
                                                                                
Item 2.     DESCRIPTION OF PROPERTIES......................................            12
                                                                                
Item 3.     LEGAL PROCEEDINGS..............................................            12
                                                                                
Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............            12
                                                                                
PART II                                                                         
                                                                                
Item 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER       
            MATTERS........................................................            13
                                                                                
Item 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS...........................            13
                                                                                
Item 7.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................            18
                                                                                
Item 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND     
            FINANCIAL DISCLOSURE...........................................            18
                                                                                
PART III                                                                        
                                                                                
Item 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;       
            COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..............            19
                                                                                
Item 10.    EXECUTIVE COMPENSATION.........................................            21
                                                                                
Item 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.            24
                                                                                
Item 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................            25
                                                                                
Item 13.    EXHIBITS, AND REPORTS ON FORM 8-K..............................            26
 
</TABLE>

                                       2
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                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

     The Dwyer Group, Inc. (the "Company") provides a diverse array of specialty
services through its wholly-owned service-based franchising subsidiaries.  The
Company currently owns seven such franchising businesses, which have an
aggregate of approximately 1400 franchises located in all 50 states, and,
through their master licensees, in sixteen foreign countries.  The Company has
positioned itself as a consolidator of franchising businesses in order to
benefit from economies of scale achievable through the pooling of resources.
The Company believes that franchisees are attracted to the Company's franchise
opportunities because of the depth of the Company's support services, the
commitment to the Company's mission and vision and the established reputation of
its management team.

     The Company's current franchising businesses include:

     .  Rainbow International Carpet Dyeing and Cleaning Co. ("Rainbow") is a
        franchisor of carpet cleaning, dyeing, air duct cleaning, and
        restoration services, with 417 franchises in the United States, and,
        through master franchise licensees, 128 foreign franchise operations in
        twelve foreign countries. For the year ended December 31, 1996,
        Rainbow's operations accounted for approximately 21.3% of the Company's
        revenues.

     .  Mr. Rooter Corporation ("Mr. Rooter") is a franchisor of plumbing repair
        and drain cleaning services under the service mark "Mr. Rooter," (R)
        with 180 franchisees operating 197 franchise operations in the United
        States and, through master licenses, 66 foreign franchises in 7 foreign
        countries. For the year ended December 31, 1996, Mr. Rooter's operations
        accounted for approximately 28.1% of the Company's revenues.

     .  General Business Services, Inc. ("GBS") is a franchisor of business
        management services to small businesses, with 340 franchises located
        throughout the United States, one franchise in Canada, and two
        franchises in Thailand through a master franchise licensee. Such
        business management services include, among others, business counseling,
        tax counseling, accounting services and products, financial counseling
        and personnel services. In addition, General Tax Services, Inc. ("GTS"),
        a wholly-owned, non-franchising subsidiary of GBS located in Maryland,
        provides tax return preparation and tax research services to GBS and EKW
        franchisees. GTS commenced operations in June 1993. For the year ended
        December 31, 1996, GBS's operations accounted for approximately 24.4% of
        the Company's revenues.

     .  Edwin K. Williams & Co. ("EKW") is a franchisor of information systems
        and financial management services, specifically designed to meet the
        special needs of small businesses. EKW, which was acquired effective 
        May 1, 1994, has a total of 177 franchises located throughout the United
        States, and one master franchise licensee in Canada. Its financial
        management services include, among others, accounting and bookkeeping
        services and systems, financial management analysis, payroll processing,
        and tax preparation and planning services. For the year ended December
        31, 1996, EKW's operations accounted for approximately 11.1% of the
        Company's revenues.

     .  Aire Serv Heating & Air Conditioning, Inc. ("Aire Serv") is a franchisor
        of heating, ventilating and air conditioning service businesses. Aire-
        Serv was organized in December 1992, began offering franchises in 1993
        and has 44 United States franchises and one foreign master licensee. For
        the year ended December 31, 1996, Aire-Serv's operations accounted for
        approximately 3.0% of the Company's revenues.

     .  Mr. Electric Corp. ("Mr. Electric") is a franchisor of electrical repair
        and service businesses under the service mark "Mr. Electric"(R). Mr.
        Electric was organized in September 1994 and has 32 franchises in the
        United States, and has granted two foreign master licenses. For the year
        ended December 31, 1996, Mr. Electric's operations accounted for
        approximately 4.5% of the Company's revenues.

                                       3
<PAGE>
 
     .  Mr. Appliance Corp. ("Mr. Appliance") is a franchisor of major household
        appliance service and repair businesses. Mr. Appliance was incorporated
        on January 4, 1996, began franchising in September 1996 and has 3
        franchises in the United States. For the year ended December 31, 1996,
        Mr. Appliance's operations accounted for approximately .6% of the
        Company's revenues.

     The Company was incorporated in 1970 in the State of Oklahoma under the
name Mr. Rooter Corporation of America, Inc. The Company's name was changed to
Mr. Rooter Corporation in 1972, and in 1986 the Company was reincorporated as a
Delaware corporation. The Company acquired GBS and Rainbow, each a Texas
corporation, as a result of a reorganization approved by the Board of Directors
on May 24, 1993. Prior to such time, GBS and Rainbow were wholly-owned by Mr.
Donald Dwyer, the Company's Chairman who died December 4, 1994. On June 1, 1993,
Mr. Dwyer was issued 8,070,000 shares (4,035,000 shares after reverse split) of
Common Stock of the Company in exchange for all of his shares of GBS and Rainbow
(the "Exchange"), and Rainbow and GBS became wholly-owned subsidiaries of the
Company. These acquisitions are accounted for in the Company's Consolidated
Financial Statements in a manner similar to a pooling of interests. Following
the Exchange, the Board approved a plan to convert the Company into a holding
company and to form a new subsidiary to operate the Mr. Rooter business. On July
30, 1993, this new subsidiary was incorporated in Texas under the name Mr.
Rooter Corporation and the Company was renamed The Dwyer Group, Inc.

     As of May 1, 1994, the Company acquired EKW, a Colorado corporation and a
wholly-owned subsidiary of Ekwill Acquisition Corporation, a California
corporation ("Ekwill"), for approximately $1,150,000 by purchasing all of the
outstanding capital stock of Ekwill from Ekwill's two shareholders. The
acquisition was financed by a short-term loan from an unaffiliated entity which
was repaid in July 1994 from the proceeds of the Company's 1994 public offering.

     The Company's principal executive offices are located at 1010 North
University Parks Drive, Waco, Texas 76707, and its telephone number is (817)
745-2400.  All references herein to the Company include Rainbow, Mr. Rooter,
GBS, EKW, Aire Serv, Mr. Electric and Mr. Appliance unless the context otherwise
specifies.


FRANCHISE OPERATIONS

     The Company's goal is to build on its successful systems of franchising
businesses to develop strong new franchises and provide them with ongoing expert
franchise support.

     The franchising industry is fragmented, consisting chiefly of small single-
service or single-concept franchising companies.  The Company's philosophy is to
be a multi-concept franchising consolidator, by bringing its franchising
expertise to bear on a number of businesses in various service fields.  The
Company applies its franchise systems management and marketing skills to
maximize the profitability of franchise businesses.  Thus, instead of
franchising only one line of business, the Company's philosophy is to benefit
from economies of scale achievable through the pooling of resources.

     The Company, as a consolidator of franchising businesses, believes that its
existing broad base of franchisees, the diversity of services provided by its
current operations, its centralized financial, marketing, training and support
staff, and the adaptability and versatility of its established franchise
operating system, have positioned it to capitalize on the projected
opportunities for growth in the franchising industry.  In addition, the Company
believes that, when coupled with the franchise sales and operations expertise
developed by its management over the last 24 years, such attributes will provide
the Company with a strong competitive advantage.

     Each of the Company's franchising businesses requires the owners and/or key
employees of its franchisees to undergo training at the Company's World
Headquarters in Waco, Texas prior to operating one of the Company's franchises.
The training program for each franchisee will differ depending upon the type of
franchise purchased.  For example, Rainbow franchisees are taught how to dye,
clean, deodorize and repair carpets, clean upholstery and perform restoration
services.  GBS and EKW franchisees are taught record keeping and  tax and
business counseling.  Mr. Rooter, Aire Serv, Mr. Electric and Mr. Appliance, on
the other hand, are primarily "conversion" franchisors, which recruit existing
people operating in the "trades" and teach them through franchising an improved
business methodology.  All of the Company's franchisees, however, receive
extensive instruction with respect to broad-based marketing techniques, as well
as guidelines and methods for hiring and managing personnel, providing quality
customer service and managing and collecting 

                                       4
<PAGE>
 
receivables, among other things. In addition, the Company's training program,
which utilizes proprietary motivational techniques developed by the Company,
educates each franchisee about the extensive support services offered by the
Company and how best to take advantage of them.

     Following their completion of the Company's initial training course (which 
represents the majority of the services required to be provided for revenue
recognition), the Company's franchisees continue to receive a broad range of
services and support from the Company on an ongoing basis. Certain of the
Company's franchising businesses maintain field trainers to assist franchisees
in resolving day-to-day difficulties encountered in operating their franchises.
Each of the Company's franchising businesses also provide numerous follow-up
training sessions for its franchisees each year at various locations around the
United States. In addition, the Company employs directors of franchise systems
management on the staff of each of its franchising businesses whose sole
responsibilities are to coach the Company's franchisees and provide them with
marketing support. Each franchisee is contacted by such a director approximately
once a month (more often when necessary) to discuss marketing techniques and
business development. Furthermore, each of the Company's franchising businesses
provides to its franchisees an updated Confidential Operations Manual, which
serves as a reference guide for all aspects of their franchise operations. The
Company believes that its proactive support philosophy with respect to its
franchisees is its primary distinguishing feature.

          Pursuant to foreign master license agreements, the Company licenses
individuals and/or other legal entities, which are typically residents of the
foreign country, the rights to use the Company's trademarks and systems to grant
franchise rights in the defined foreign geographic territory.  Foreign franchise
rights are sold based upon the population of the geographic territory, the
estimated number of potential franchises that could  be sold in such territory
and the relationship of that foreign territory's gross national product per
capita to that of the United States.

     Each of the heads of the Company's franchise subsidiaries receives, in
addition to salary and commissions, bonus compensation based on the overall
performance of the subsidiary for which he is responsible.  Thus, the emphasis
is on profitable growth, not just sales.


Rainbow International Carpet Dyeing and Cleaning Company

     Rainbow International Carpet Dyeing and Cleaning Company is a franchisor of
carpet and upholstery cleaning, dyeing, air duct cleaning, and restoration
service businesses.  At December 31, 1996, Rainbow had 417 franchises in the
United States, and 128 franchises through master franchise licenses in 12
foreign countries.

     Rainbow offers individual franchises for the operation of a carpet and
upholstery cleaning, dyeing and related services business (such related services
include, but are not limited to, air duct cleaning, problem odor removal, carpet
repair, drapery cleaning and water and smoke damage restoration) for residential
and commercial locations.  The franchised business often begins as a single
truck operation which can later be expanded into a multi-truck operation as the
franchisee builds his customer base.

     An individual's initial franchise fee is a minimum of $15,000 depending
upon the population of the franchise territory which can be financed in part
through Rainbow at Rainbow's discretion, plus approximately $8,000 to $21,000
for an equipment package, supplies, chemicals and promotional materials;
approximately $7,500 to $20,000 for a new or used cargo van (unless one is
already owned), including $450 for purchasing and applying trademark decals and
advertisements on the van; up to $2,000 for first year insurance premiums; up to
$2,000 for travel, lodging, food and other miscellaneous expenses incurred
during training and a minimum working capital of at least $2,500.  During the
term of a franchise agreement, the franchisee is required to pay Rainbow a
continuing royalty of 7% of its weekly gross sales plus a 2% national
advertising fee.

     No previous knowledge, experience or skills for the carpet cleaning or
dyeing business are required prior to purchasing a Rainbow franchise.  Instead,
new franchisees are thoroughly trained on all aspects of the business under an
operating system that the Company believes has proven to be successful.  Beyond
initial business and technical training (two weeks), extensive ongoing support
emphasizing the development of the franchisee's marketing and business
management skills is provided by individually assigned franchise systems
managers or through regional training meetings and toll free telephone number
support.

                                       5
<PAGE>
 
Mr. Rooter Corporation

     Mr. Rooter is a franchisor of plumbing repair and drain cleaning services
under the service mark "Mr. Rooter" and related trade and service marks.  Prior
to 1989, Mr. Rooter's franchise sales primarily resulted from referrals from
existing Mr. Rooter franchisees.  In 1989, when Mr. Dwyer acquired control of
Mr. Rooter, additional franchise sales staff were hired and trained to actively
sell franchises.  At the time of Mr. Dwyer's acquisition of the Company, Mr.
Rooter had 22 franchises.  By the end of 1996, Mr. Rooter had a total of 180
franchisees operating 197 franchises in 43 states and had granted master
franchise licenses covering seven foreign countries.  Mr. Rooter has shown
significant growth in income from royalties paid by franchisees (from $234,000
in 1989 to $2,664,000 in 1996).

     Mr. Rooter franchisees are required to operate their franchises in
accordance with specified methods, techniques and standards and with specified
equipment within a designated geographic territory.  Franchisees are typically
able to service their territory by establishing only one service center within
such territory.  Mr. Rooter emphasizes and promotes fast, efficient and high
quality service, seven days a week, using the most modern equipment available
for residential, commercial and industrial drain systems and plumbing repair.

     A new franchisee pays an initial franchise fee of $175 for each 1,000 of
the franchise territory's population, with a minimum initial fee of $17,500. In
general, Mr. Rooter sells its franchises to licensed plumbers. No training is
provided on the technical aspects of operating a plumbing or drain cleaning
business. Instead, Mr. Rooter concentrates its training and support efforts on
marketing issues, customer service, pricing, profit development and
maximization, and growth and personnel management. In addition, the franchisee
is required to maintain an advertisement in the Yellow Pages of the telephone
directory serving the franchised territory. Regional consultants provide
technical support for franchisees in their region.

     In addition to the initial franchise fee, under the terms of Mr. Rooter's
standard franchise agreement, a franchisee pays a weekly royalty which ranges
from 3% to 6% of gross sales.  In addition to the weekly royalty, the
franchisees pay a weekly advertising fee equal to 2% of their gross sales which
must be used by Mr. Rooter for national advertising and marketing.  Mr. Rooter
currently advertises nationally on two major television networks and network
radio.  The term of the initial franchise agreement is for ten years, which may
be renewed for additional five year terms at the option of the franchisee upon
certain conditions (six months prior notice) and payment of $2,500 renewal fee.
Mr. Rooter may terminate a franchise agreement in the event that a franchisee
breaches the terms of his franchise agreement.

General Business Services, Inc.

     GBS is a franchisor of business management services and accounting services
to small businesses.  At December 31, 1996, GBS had a total of 340 franchisees
located throughout the United States, one franchisee in Canada and two
franchisees in Thailand through a master franchise licensee.  Such business
management services include counseling in financing, accounting, tax matters
(including tax counseling and planning), marketing and profit development.  In
addition, General Tax Services, Inc. ("GTS"), a wholly-owned, non-franchising
subsidiary of GBS located in Maryland, provides tax return preparation and tax
research services to GBS franchisees.

     GBS franchisees are typically independent business persons serving small
business owners and professionals.  Under the GBS license agreement, a
franchisee obtains the right to use the GBS system and all other trademarks,
trade symbols, emblems, signs or slogans that GBS has adopted or may adopt and
designate for use in connection with the GBS services. GBS provides its
franchisees with the information that it believes a franchisee needs to
appropriately counsel other businesses.

     The initial franchise fee is $30,000, which must be paid in full prior to
attendance at GBS's basic training program.  In addition to the initial
franchise fee, the franchisee is required to pay GBS a continuing royalty fee
between 2.0% and 8%, based on both gross billings and length of service.
Currently the initial term of the franchise agreement is ten years and is
renewable for succeeding five year terms.  GBS may terminate a franchise
agreement in the event that a franchisee breaches the terms of his franchise
agreement.

     Ordinarily, the franchisee enters into his own contractual arrangements
with clients for providing tax and other related business counseling services.
As an independent business counselor, the franchisee meets with his clients

                                       6
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periodically, sets his own fees, installs the record keeping systems, counsels
his clients on decisions affecting their businesses and collects information
necessary for the preparation of income tax returns.  GTS prepares income tax
returns for the client businesses (submitted by the franchisee) based on the
information supplied by the GBS franchisee.  The franchisee is then billed by
GTS for the tax return services, based on the time and complexity of return
preparation.  GTS's tax return services are performed at the GTS office in
Columbia, Maryland by a group of tax specialists, including attorneys, certified
public accountants and enrolled agents.


Edwin K. Williams & Co.

     EKW is a franchisor of information systems and financial management and
accounting services to small businesses.  At December 31, 1996, there were a
total of 177 EKW franchises located throughout the United States and one master
franchise licensee in Canada.  EKW's services include bookkeeping and business
management services, business counseling, tax services and other related
services to small businesses.  EKW catered exclusively to the retail petroleum
industry from 1935 until the early 1970's.  Although it has since expanded its
client base, a significant portion of its present client base still consists of
petroleum retail outlets.

     EKW has developed a distinctive system for providing bookkeeping and
business management systems and services to oil jobbers (wholesale and retail),
retail petroleum marketing outlets and service station owners, and other retail,
wholesale and service business establishments.  In connection with such system,
EKW has designed and developed proprietary computer software.  Under the
standard EKW license agreement, a franchisee obtains the right to use the EKW
system, including the software, and all other trade names, trademarks, service
marks and certain copyright works and materials, customer lists and other trade
secrets designated for use in connection with EKW services.

     The initial franchise fee is $30,000 which must be paid in full prior to
attending EKW's basic training program.  In addition, the franchisee is also
required to pay to EKW a monthly royalty fee between 2% and 8%, based on gross
billings and length of service.  Tax support services, including a tax support
hot line, tax update bulletins and an annual tax training seminar, are provided
by GTS.  The initial term of the franchise agreement is ten years and is
renewable for succeeding five year terms.  In addition, all supplies and other
customer service materials used by the franchisee must be purchased from EKW,
unless otherwise approved by EKW.

     EKW provides its franchisees with certain proprietary information,
including the software prescribed by EKW for a franchisee's business operations,
and an initial two-week training course.  In addition, all new franchisees spend
up to one week in an existing franchisee's office.  EKW franchisees are required
to have 24 hours per year of continuing education in taxation, accounting and
other subjects related to its business.  A franchisee is assigned a non-
exclusive marketing area, generally consisting of one or more counties, a small
portion of which will be designated as an exclusive office location area.


Aire Serv Heating & Air Conditioning, Inc.

     Aire Serv is a franchisor of heating, ventilating and air conditioning
service businesses providing installation, maintenance, repair and related
services of residential and commercial heating and air conditioning equipment.
Aire Serv was organized in December 1992, began offering franchises in 1993,
and, at December 31, 1996, had 44 Aire Serv franchises in the United States and
one in Canada.

     The minimum initial franchise fee is $14,500, payable in full at the time
of the franchisee's execution of a franchise agreement.  The minimum initial
franchise fee is based on a territory population of approximately 100,000.  The
initial franchise fee is increased by $150 for each additional 1,000 of
population contained in the franchise territory.  Aire Serv may, at its
discretion, agree to finance a portion of the initial franchise fee.

     The term of an Aire Serv franchise agreement is ten years from the date
specified in the agreement.  A franchisee may elect to renew the term of the
franchise for additional five-year periods upon certain conditions and payment
by such franchisee of a $2,500 renewal fee to Aire Serv.

                                       7
<PAGE>
 
     During the term of its license agreement, the franchisee is required to pay
to Aire Serv (i) an advertising fee equal to 2% of the franchisee's weekly gross
sales and (ii) a continuing royalty fee between 2.5% and 4.5%, also based on the
franchisee's weekly gross sales.  In addition, the franchisee is required to
maintain an advertisement in the Yellow Pages of the telephone directory serving
the franchised territory. Beyond initial business training (one week), extensive
ongoing support emphasizing the development of the franchisee's marketing and
business management skills is provided by individually assigned franchise
systems managers or through regional training meetings and toll free telephone
number support.


Mr. Electric Corp.

     Mr. Electric is a franchisor of electrical repair and service businesses
under the service mark "Mr. Electric".  Mr. Electric was organized in September
1994, and at December 31, 1996 had 32 franchises in the United States and one
foreign master licensee.

     The minimum initial franchise fee is $15,000, payable in full at the time
of the franchisee's execution of a license agreement.  The minimum initial
franchise fee is based on a territory population of approximately 100,000.  The
initial franchise fee is increased by $150 for each additional 1,000 of
population contained in the franchise territory.  Mr. Electric may, at its
discretion, agree to finance up to one-half of the initial franchise fee.

     The initial Mr. Electric franchise agreement term is ten years from the
date specified in the agreement.  An election to renew the contract may be made
by the franchisee for additional five year periods upon certain conditions and
payment by such franchisee of a $2,500 renewal fee.

     During the term of its license agreement, the franchisee is required to pay
Mr. Electric (i) an advertising fee equal to 2% of the franchisee's weekly gross
sales and (ii) a continuing royalty fee of between 3% and 6%, also based on the
franchisee's weekly gross sales.  In addition, franchisees are required to
engage in local  promotion of the services and products available, as well as
maintain an advertisement in the Yellow Pages of the telephone directory serving
the franchised territory.  Beyond initial business training (one week),
extensive ongoing support emphasizing the development of the franchisee's
marketing and business management skills is provided by individually assigned
franchise systems managers or through regional training meetings and toll free
telephone number support.


Mr. Appliance Corp.

          Mr. Appliance is a franchisor of major household appliance service and
repair businesses.  Mr. Appliance was organized in January 1996, and at December
31, 1996 had 3 franchises in the United States.

          The minimum initial franchise fee is $12,500, payable in full at the
time of the franchisee's execution of a license agreement.  The minimum initial
franchise fee is based on a territory population of approximately 100,000.  The
initial franchise fee is increased by $125 for each additional 1,000 of
population contained in the franchise territory.  Mr. Appliance may, at its
discretion, agree to finance up to one-half of the initial franchise fee.

     The initial Mr. Appliance franchise agreement term is ten years from the
date specified in the agreement.  An election to renew the contract may be made
by the franchisee for additional five year periods upon certain conditions and
payment by such franchisee of a $2,500 renewal fee.

     During the term of its license agreement, the franchisee is required to pay
to Mr. Appliance (i) an advertising fee equal to 2% of the franchisee's weekly
gross sales and (ii) a continuing royalty fee of between 3% to 6%, also based on
the franchisee's weekly gross sales.  In addition, franchisees are required to
engage in local promotion of the services and products available, as well as
maintain an advertisement in the Yellow Pages of the telephone directory serving
the franchised territory.  The franchisee is also provided a computerized
business package which standardizes the franchise operation.  Beyond initial
business  training (two weeks), extensive ongoing support emphasizing the
development of the franchisee's marketing and business management skills is
provided by individually assigned franchise systems managers or through regional
training meetings and toll free telephone number support.

                                       8
<PAGE>
 
MARKETING

     Rainbow's marketing strategy for franchise sales in the United States and
Canada is based on the sale of individual franchise territories to business-
minded individuals.  The primary lead sources are referrals, print advertising
and franchise trade shows.  Recently, contractors have also been targeted with
Rainbow's new emphasis on fire, smoke and water restoration services.
International expansion has been targeted through the sale of additional master
licenses in selected foreign countries.  The market for Rainbow's carpet
cleaning, dyeing and water and fire restoration services extends through the
residential, commercial, industrial and municipal markets.

     Mr. Rooter considers the market for the drain cleaning and plumbing
industry to be extensive.  It is composed of residential, commercial, industrial
and municipal markets.  Mr. Rooter's marketing strategy and efforts are directed
toward the sale of franchised operations in all major population areas.  The
franchisees follow specific marketing guidelines provided by Mr. Rooter during
their franchise training sessions and as an ongoing service.  These marketing
techniques help the franchisee capture a larger market share, which in turn
provides a more consistent stream of revenue.

     GBS' and EKW's marketing strategy is focused on existing accountants or
individuals with an accounting background.  GBS and EKW franchisees' services
are marketed to individuals as well as businesses, corporations, organizations,
partnerships and other entities who require bookkeeping, accounting, tax return
preparation, counseling and similar services.  The market for the business
counseling industry is considered to be extensive.  GBS's and EKW's marketing
efforts are directed toward small-to-medium sized companies that employ up to
250 employees.  In addition, EKW has a strong marketing presence and resulting
large client base of petroleum retail outlets.

     Aire Serv's marketing strategy is focused on the sale of franchises to
existing HVAC contractors.  The Company believes that the heating, ventilating
and air conditioning ("HVAC") market is extensive.  The Aire Serv franchisee,
equipped with state-of-the-art marketing techniques, guidelines and industry
expertise provided by Aire Serv, targets the residential and light commercial
segments of the HVAC market.  Aire Serv provides its franchisees with the
critical elements necessary to achieve success as a retailing contractor and
works with the franchisees to implement and execute effective strategies and
systems in these areas.  Whether a client is residential or commercial, the
emphasis is on the service and replacement segments.  Aire Serv intends to
create a national name in HVAC service through establishing consumer awareness.

     Mr. Electric's marketing strategy is focused on the sale of franchises to
existing electrical contractors and electricians.  Mr. Electric's targeted
approach supplies the proven system to make an electrical service and repair
franchise business successful.  Franchisees receive extensive training in sales,
marketing and business systems which allow them to achieve a greater market
share and increase their gross sales and profits.  Mr. Electric is creating
national name recognition in the electrical service and repair industry.

          Mr. Appliance's marketing strategy is to sell franchises to existing
appliance dealers and appliance servicers.  Mr. Appliance provides the proven
system, technical and management support, and training to make a major appliance
repair and service franchise successful.  Franchisees receive extensive training
in sales, marketing and business systems.


COMPETITION

     The Company's markets and those of its franchisees are highly competitive.
The Company competes directly with other local and national franchisors which
are also seeking to sell their franchises or business opportunities to
prospective franchisees.  Mr. Rooter franchisees compete principally with Roto-
Rooter, Inc., a nationally recognized provider of sewer and drain cleaning
services in the United States, as well as numerous plumbers, small drain
cleaning firms and regional and local firms in other segments of the market,
such as septic tank pumping and hydrojet cleaning.  The Company believes that
Mr. Rooter is distinguished from its primary competition because Mr. Rooter
franchisees concentrate on providing plumbing repair while most competitors
focus on providing either drain and sewer cleaning or plumbing services.  The
principal competitors of Rainbow's franchisees are Stanley Steemer
International, Inc., Duraclean International, Inc., Harris Research, Inc.,
Steamatic, Inc., Serv-Pro Industries, Inc. and Servicemaster Co., all of which
operate on a national basis, as well as independent carpet cleaning and
restoration companies.  The major competitors of GBS and EKW franchises, such as
Comprehensive Business Services, Inc., and Padget Business Services U.S.A.,
Inc., specialize in providing general 

                                       9
<PAGE>
 
accounting and bookkeeping services to small businesses. Local accountants,
bookkeepers and individual consultants also provide sources of competition.
National tax preparation services, such as H & R Block Co., and many of the
local tax preparers compete with GBS, although such competitors tend to
concentrate on individual tax returns rather than on business returns. Local or
regional HVAC contractors are Aire Serv's primary source of competition and, to
a lesser extent, national home improvement retailers provide competition in some
markets. Local electricians are Mr. Electric's primary source of competition.
Mr. Appliance is the first company to offer franchises in the fragmented
appliance repair and service industry. Local appliance repairmen are Mr.
Appliance's primary competition.

     The Company's franchisees generally compete on the basis of price, training
and support services and reputation.  During 1996, companies such as American
Residential Services have entered the home service market through the
acquisition of existing companies.

     In addition, the Company expects to encounter competition in attempting to
effectuate acquisitions of franchise companies.  Potential competitors, many of
which are well established and have extensive experience in connection with
identifying and effecting business acquisitions, may include other franchise
companies, leveraged acquisition partnerships (leveraged buy out funds),
business development companies, investment partnerships and corporations
(including venture capital entities), small business investment companies, large
industrial and financial companies seeking acquisitions directly or through
affiliates and wealthy individuals.  These competitors may have greater
financial resources than the Company to take advantage of these opportunities.
In the event that the Company succeeds in effecting acquisitions, the Company
will, in all likelihood, become subject to intense competition from competitors
of the acquired business.  The degree of competition characterizing the industry
of any prospective acquisition candidate cannot be presently ascertained.


TRADE NAMES AND SERVICE MARKS

     The Company believes that its trademarks and service marks are important to
the marketing of its franchises and the sale of services to consumers by its
franchisees.  The Company through its subsidiaries, currently holds the
following federally registered trademarks and service marks: "Mr. Rooter"(R),
the stylized Mr. Rooter logo, "Mr. Winkie Design", "Quick-as-a-Wink"(R), "Super
Kleens"(R), "America's Trouble Shooter"(R), "North America's Trouble
Shooter"(R), "Aire Serv"(R), the stylized Aire Serv logo, "America's Comfort
Company"(R), "Mr. Electric"(R), the stylized Mr. Electric design, the "Rainbow
International Carpet Dyeing & Cleaning" stylized global device, "Rainbow
International"(R), "Vehicle Stripe Design for Rainbow", "GBS"(R),
"Dollartrak"(R), "GBS General Business Services"(R), "Dollartrak Systems", "EKW
Since 1935"(R), "E.K. Williams & Co." (R), "EKW * Manager", "Good Accounting
Doesn't Cost -- It Pays!", and "E.K. Williams & Co. The Accounting and Tax
People For Small Business Since 1935". The Company has applied for federal
trademark and service mark registration for "Mr. Appliance", the stylized Mr.
Appliance logo, the van stripe design for each of Mr. Rooter, Mr. Electric, Mr.
Appliance and Aire Serv and a new stylized logo for Rainbow. The Company holds a
state trademark registration for "Mr. Rooter" in Texas and a service mark
registration for "Rainbow International Carpet Dyeing & Cleaning Co." in 13
states. In addition, the Company holds copyrights in connection with all of its
training manuals and materials which it considers proprietary.

     Although the Company is not aware of any current use of similar marks,
there can be no assurance that the Company's marks do not or will not violate
the proprietary rights of others, that the Company's marks would be upheld if
challenged or that the Company would not be prevented from using its marks.  Any
limitations on the use by the Company of its trade names or service marks and
the ability of its franchisees to use such marks would have an adverse effect on
the Company.


REGULATION

     The offer and sale of franchises is subject to extensive federal and state
laws and substantial regulation under such laws by government agencies,
including the Federal Trade Commission (the "FTC") and various state
authorities.  Pursuant to FTC regulations, the Company is required to furnish to
prospective franchisees a current franchise offering disclosure document
containing information prescribed by the FTC.  The Company uses Uniform
Franchise Offering Circulars to satisfy this disclosure obligation.  In
addition, in certain states, the Company is required to register or file with
such states and to provide prescribed disclosures.  The Company is required to
update its offering disclosure documents to reflect the occurrence of material
events.

                                       10
<PAGE>
 
     The occurrence of any such events may from time to time require the Company
to cease offering and selling franchises until the disclosure document relating
to such franchising business is updated.  There can be no assurance that the
Company will be able to update its disclosure documents (or in the case of any
newly acquired franchising business, prepare an adequate disclosure document) or
become registered in certain states in a time frame consistent with its
expansion plans, continue offering and selling franchises or comply with
existing or future franchise regulations in any particular state.  The failure
to take any of these actions could have an adverse effect on the Company.

     The Company is also subject to a number of state laws that regulate certain
substantive aspects of the franchisor-franchisee relationship, such as
termination, cancellation or non-renewal of a franchise (including requirements
that "good cause" exist as a basis for such termination and that a franchisee be
given advance notice of and a right to cure a default prior to termination) and
may require the franchisor to deal with its franchisees in good faith, prohibit
interference with the right of free association among franchisees, and regulate
discrimination among franchisees in charges, royalties or fees.  If the Company
is unable to comply with the franchise laws, rules and regulations of a
particular state relating to offers and sales of franchises, the Company will
generally be unable to engage in offering or selling franchises in or from such
state.  In addition, the Company is subject to franchise laws in Alberta, Canada
where, although it has granted foreign master licenses, it also offers and sells
franchises directly.  Amendments to existing statutes and regulations, adoption
of new statutes and regulations and the Company's expansion into new states and
foreign jurisdictions could require the Company to continually alter methods of
operations at costs which could be substantial.

     The Company believes that it is in substantial compliance with all of the
foregoing federal, state and foreign franchising laws and the regulations
promulgated thereunder and has obtained all licenses and permits necessary for
the conduct of its business.  Failure to comply with such laws and regulations
in the future could subject the Company to civil remedies, including fines or
injunctions, as well as possible criminal sanctions, which would have a material
adverse effect on the Company.  The Company's franchisees are also subject to
various federal, state and local laws affecting their franchise businesses,
including state and local licensing, zoning, land use, construction and
environmental regulations and various safety and other standards.  The failure
of such franchisees to comply with applicable regulations could interrupt the
operations of the affected franchise or otherwise adversely affect the franchise
or the Company.


EMPLOYEES

     As of December 31, 1996, the Company had 110 full-time employees and 12
part-time employees, none of whom belong to unions, as detailed below:


<TABLE>
<CAPTION>
                           Full-time  Part-time  Total
                           ---------  ---------  -----
          <S>              <C>        <C>        <C>

          Corporate........       41          3     44
          Mr. Rooter.......       14          1     15
          Aire Serve.......        3          -      3
          Rainbow..........       18          -     18
          GBS..............       21          7     28
          Mr. Electric.....        5          -      5
          E.K. Williams....        6          1      7
          Mr. Appliance....        2          -      2

          Total............      110         12    122
 
</TABLE>

                                       11
<PAGE>
 
ITEM 2.   DESCRIPTION OF PROPERTIES

     The Company's principal executive and administrative offices are presently
located at 1010 - 1020  N. University Parks Drive, Waco, Texas.  These
facilities are leased from the Estate of Donald Dwyer under various operating
leases expiring at different dates through October 31, 2000.  Monthly rental for
these offices is $31,417.  See "Certain Transactions."

     In July 1996, the Company sold a 30,658 square foot warehouse and three
acres of land at 3321 Mary Street, Waco, Texas, which was used for the Company's
manufacturing concern until 1993.  Since 1993 the property has been leased to an
unrelated party for $4,500 per month.

     The Company also leases office space in Columbia, Maryland, for  its GTS
operations, from an unrelated party for $2,035 per month.  This lease expires
September 30, 2001. For its satellite EKW support office, EKW sub-leases office
space in Westminster, Colorado from a franchisee for $700 per month on a month-
to-month basis.

ITEM 3.   LEGAL PROCEEDINGS

     The Company is engaged in various legal proceedings incidental to its
normal business activities.  Management has estimated a potential range of loss
due to these proceedings not to exceed $100,000.


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

     No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1996.


                                    PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Since July 1994, the Company's Common Stock has traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol "DWYR".  Prior
to that time, the Company's Common Stock was quoted on the Nasdaq Small-Cap
Market.  Prior to July 1993 the Common Stock was quoted under the symbol "ROOT".

     The following table sets forth the quarterly high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market,  for each
quarter during the last two fiscal years.  These per share quotations represent
inter-dealer prices and do not include retail mark-ups, mark-downs or
commissions and may not represent actual transactions.


<TABLE>
<CAPTION>
                                           COMMON STOCK
                                       --------------------
                                           HIGH       LOW
                                       ------------  ------
<S>                                    <C>           <C>
 
FISCAL YEAR ENDED DECEMBER 31, 1995
     First Quarter                            4       3
     Second Quarter                           3 3/4   2 1/2
     Third Quarter                            3 7/8   2 1/2
     Fourth Quarter                           3 1/8   2 3/8
 
FISCAL YEAR ENDED DECEMBER 31, 1996
     First Quarter                            3       2 1/2
     Second Quarter                           3 1/4   2 3/8
     Third Quarter                            3 1/16  2 1/4
     Fourth Quarter                           2 3/4   1 5/8
</TABLE>

                                       12
<PAGE>
 
     On April 10, 1997, the high and low prices of the Common Stock as reported
by the Nasdaq National Market were $1.625 and $1.625 per share, respectively.
As of such date, there were approximately 405 shareholders of record and 800
beneficial shareholders of the Common Stock.

     No cash dividends have been paid by the Company on its Common Stock, and
the Company does not currently intend to pay cash dividends on its Common Stock,
but will retain earnings for the operation and development of its business.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS

     As discussed in Note 15 to the consolidated financial statements, in 
connection with the December 31, 1996 year end accounting closing and subsequent
analyses performed, the Company recorded a prior period adjustment for the 
correction of an error in the consolidated financial statements for the year 
ended December 31, 1995 relating to the carrying value of certain individual 
franchises and regional franchises. The Management's Discussion and Analysis 
which follows incorporates those adjustments.

RESULTS OF OPERATIONS

     The following table sets forth for the periods indicated the approximate
dollar amount (in thousands) and percentage of revenue and earnings from
continuing operations derived from each of the Company's subsidiaries.
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,      
                                      ---------------------------------------  
REVENUES:                                   1996                   1995      
                                      ---------------       -----------------  
<S>                                   <C>       <C>         <C>         <C>    
Mr. Rooter                            $ 3,964    28.1%      $ 3,015      22.1% 
Rainbow                                 3,007    21.3         3,267      23.9 
GBS                                     3,438    24.4         3,467      25.4  
Aire Serv                                 422     3.0           795       5.8  
E.K. Williams                           1,566    11.1         1,616      11.9  
Mr. Electric                              626     4.5           724       5.3  
Mr. Appliance (1)                          87      .6            --        --  
Other (2)                                 983     7.0           768       5.6
                                      -------   -----       -------     -----  
                                                                        
                                      $14,093   100.0%      $13,652     100.0% 
                                      =======   =====       =======     =====   

INCOME (LOSS):
 
Mr. Rooter                            $ 634     143.7%         (197)    (19.2)%
Rainbow                                 471     106.8           541      52.6 
GBS                                    (733)   (166.2)         (882)    (85.7) 
Aire Serv                              (718)   (162.8)         (688)    (66.9)
E.K. Williams                            32       7.3           112      10.9
Mr. Electric                           (238)    (54.0)          149      14.5
Mr. Appliance (1)                       (24)     (5.4)           --        -- 
Other (2)                               135      30.6           (64)     (6.2)  
                                      -------   -----       -------     -----  
                                      $(441)    100.0%      $(1,029)    100.0%
                                      ======    =====       =======     =====   
</TABLE>
___________________________
(1)  Mr. Appliance commenced franchise activities in September 1996.
 
(2)  Includes revenues or earnings of The Dwyer Group, Inc. (Parent holding
     company) which  maintains all corporate activities and functions
     (accounting, legal, data processing and administrative).

                                       13
<PAGE>
 
Year ended December 31, 1996, compared to year ended December 31, 1995:

     The Company incurred a net loss of $441,000, or $.06 per share for the year
ended December 31, 1996, an increase of $588,000, or 57.1%, as compared to
generating a net loss of $1,029,000, or $.14 per share for the year ended
December 31, 1995.

     Total revenues for fiscal 1996 were $14,093,000, an increase of $441,000,
or 3.2%, compared to revenues of $13,652,000 for the year ended December 31,
1995. This net increase in revenues is comprised of the following components:
royalty income increased $735,000, or 11.2%; franchise sales decreased $740,000,
or 17.5%; product sales increased $182,000, or 27.2%; other income
increased $280,000, or 32.5%; and tax services increased $17,000, or 2.5%.

     The Company recognizes revenues from franchise royalties (net of an
allowance for uncollectible amounts) when due from the franchisees. Increases in
royalty income occurred in: Mr. Rooter - $586,000 or 28.2%; GBS - $133,000 or
16.2%; Aire Serv - $37,000 or 17.6%; and Mr. Electric - $96,000 or 387.3%. These
increases, which coincide with the increased business revenues of the
existing franchisees as well as an increase in the number of franchisees 
producing revenue, are a direct result of the Company's emphasis placed on
providing strong franchise support services, and it's methods and programs
created to assist franchisees in building successful businesses. This in turn is
very instrumental to the future of the Company as royalties are the foundation
for the Company's long-term financial strength.

     Franchise sales revenue represents the initial franchise fees charged by
the Company to buyers of its individual and regional franchises as well as fees
for its foreign master licenses. Mr. Rooter, with franchise sales increasing
from $734,000 in 1995 to $1,000,000 in 1996 (an increase of $266,000 or 36.2%)
and Mr. Appliance, which was organized in January 1996 and recorded $86,000 of
franchise sales in fiscal 1996, were the companies within The Dwyer Group, Inc.
with franchise sales increases. Mr. Rooter's franchise sales increase is
primarily due to increased franchise sales activity on which down payments and
revenue recognition criteria have been met. Offsetting the above franchise sales
increases were decreases in Aire Serv, GBS, Mr. Electric, and Rainbow of
$428,000 (77.6%), $356,000 (20.5%), $216,000 (31.9%) and $83,000 (16.3%),
respectively. The Aire Serv decrease is primarily due to the management planned
slowdown of Aire Serv franchise sales to allow for the restructure and ultimate
enhancement of the Aire Serv franchise package. The enhanced Aire Serv franchise
package now includes a new franchise marketing plan, flat rate pricing manuals
and added services the Aire Serv franchise will offer such as air duct cleaning
and blower door testing. The GBS franchise sales decrease is primarily
attributable to the planned cessation of GBS regional franchise sales.
GBS regional franchise sales in 1995 were $457,400 as compared to -0- for 1996. 
In addition, GBS accrued against franchise sales approximately $179,000 at 
December 31, 1996 for anticipated refunds. The $216,000 franchise 
sales decrease in 1996 for Mr. Electric generally relates to the decline in 
regional franchises. During 1995, four regional franchises were sold totaling 
$290,000. In 1996, only one regional franchise was sold totaling $125,000. In 
addition, although Mr. Electric sold 19 individual franchises in 1996 as 
compared to 12 in 1995, the territories sold in 1995 were, on the average, 
larger than the franchise territories sold in 1996, therefore commanding a 
larger individual franchise average sales amount ($5,500 higher average per 
individual franchise sold in 1995 as compared to 1996).

     The product sales increase of $182,000 in 1996 over the prior year, is
primarily due to GBS directly selling its recordkeeping systems and forms rather
than a third party seller as in 1995. GBS sold approximagely $255,000 of product
during 1996. EKW product sales decreased $73,000 to approximately $595,000 in
1996. EKW and GBS sell products such as manual recordkeeping systems and forms
to its franchisees and outside customers.

     The increase in other income of approximately $280,000 is primarily due to
increased administrative and management services fees to related parties of 
approximately $215,000.

     In total, costs and expenses for the year ended December 31, 1996 decreased
$571,000 (3.7%) to $14,692,000 as compared to costs and expenses of $15,263,000 
for the year ended December 31, 1995.  This decrease is primarily due to the 
decrease from 1995 to 1996 in the write down of assets held for sale ($400,000) 
and the non-recurring disposal of assets held for sale ($285,000).  In addition,
cost of tax services decreased approximately $260,000 due primarily to the 
implementation of cost cutting measures at GTS.  These decreases were somewhat 
offset by the following 1996 increased costs and expenses: compensation expenses
increased from $4,747,000 in 1995 to $5,036,000 in 1996, a $289,000 (6.1%) 
increase; and convention expenses increased from $204,000 in 1995 to $374,000 in
1996, a $170,000 (83.5%).

     The $289,000 increase in compensation costs is primarily attributable to 
the creation throughout 1995 of several new corporate departments and positions 
(telecommunications, office services, international marketing, MIS, V.P. of 
Operations and a Collections Manager). Such additions had a full year of 
expenses in 1996. In 1996, national accounts and human resources departments 
were added. Also in 1996, the Company enhanced its vacation policy which
resulted in a $59,000 expense to establish the initial accrual. In addition, Mr.
Electric compensation costs increased approximately $100,000 (60.1%), as the
September 1994 start-up company continues to build its management staff and
position Mr. Electric to be able to continually develop existing franchisees as
well as the expected growth of new franchisees.

    The 1996 annual convention held in Las Vegas, Nevada, was the biggest in 
attendance in the history of the Company. The expenses in conjunction with the 
1996 convention rose 83.5% ($170,000) to $374,000 in 1996 from $204,000 in 1995.

     Income taxes consist of tax benefits plus deferred taxes related primarily
to differences between the basis of property, plant and equipment, inventory,
and accounts receivable for financial and income tax reporting. For the years
ended December 31, 1996 and December 31, 1995, the Company recorded income
tax benefits of approximately $158,000 and $582,000, respectively.

     During the fourth quarter of 1996, various year-end adjustments were
recorded to the consolidated financial statements. The effect of these
adjustments was a net decrease in total assets of $2,301,000, a net decrease in
liabilities of $305,000, a net decrease in stockholders' equity and
corresponding increased net loss of $1,996,000. These adjustments were primarily
to increase the allowance for doubtful accounts and notes receivable,
adjustments to and write-downs of assets held for sale, and write-offs of notes
receivable.  The 1996 10-QSB's, as previously reported, are in the process of 
restatement.


LIQUIDITY AND CAPITAL RESOURCES:

     At December 31, 1996, the Company's working capital ratio was approximately
2.7 to 1 compared to approximately 3.0 to 1 at December 31, 1995. In addition,
the Company had working capital of approximately $4,366,000 at December 31,
1996, including $460,000 of franchise funds held for advertising as compared to
approximately $5,243,000 of working capital, including $354,000 of franchisee
funds held for advertising at December 31, 1995. The decrease in the Company's
working capital ratio and working capital at December 31, 1996 is primarily due
to a $1,626,000 decrease in cash and cash equivalents offset in part by a
$793,000 increase in short term investments and marketable securities, a
$289,000 increase in federal income tax receivable ($479,000 was actually paid
to the I.R.S. during 1996 for estimated 1996 federal income taxes)and a net
current receivable decrease of approximately $217,000 regarding related party
receivables and payables.

     Total trade notes receivable decreased approximately $96,000 from December
31, 1995 to December 31, 1996. This decrease in trade notes receivable is mainly
comprised of additional new notes receivable of $2,907,000, which was offset by:
note payments of $450,000; transfers to assets held for sale of $667,000;
transfers to SunTrust Credit of $324,000; additions to the provision for
doubtful notes receivable of $777,000; and write-offs of notes receivable of
$785,000.

                                      14
<PAGE>
 
     Capital expenditures for the year ended December 1996 were approximately
$404,000 compared to approximately $632,000 for the year ended December 31,
1995. Management believes that the Company's cash flow from operations
supplemented by the Company's positive cash position will be adequate to fund
the Company's capital requirements.

     Total notes receivable from related parties increased $794,000 from 
December 31, 1995 to December 31, 1996.  The Company converted approximately 
$909,000 of related party accounts receivable to interest bearing notes 
receivable in 1996.  During 1996 related parties paid approximately $445,000 of 
note principal ($419,000 from the estate of Donald J. Dwyer) and $43,000 
interest ($38,000 from the estate of Donald J. Dwyer).

     Net cash used by operating activities for the year ended December 31, 1996
totaled approximately $1,134,000 as compared to approximately $1,105,000 used by
operating activities for the year ended December 31, 1995. Net cash used in
investing activities for the year ended December 31, 1996 decreased by
approximately $142,000 to $947,000, as compared to the year ended December 31,
1995. The primary uses of cash for investing activities were: $812,000 for the
purchase of marketable securities; $393,000 in additional notes and accounts
receivable from related parties; and $404,000 for the purchase of property and
equipment. Net cash provided by financing activities in the year ended December
31, 1996 decreased by approximately $82,000 as compared to the prior year,
primarily as a result of decreased payments received on the shareholder note of
approximately $112,000.

     In 1993, the Company entered into the Franchise Financing Agreement with
Stephens Franchise Financing, which is now SunTrust Credit Corporation
("SunTrust"), pursuant to which SunTrust agreed to extend credit to qualified
Mr. 

                                       15
<PAGE>
 
Rooter and Aire Serv franchisees up to an aggregate amount of $10,000,000.
As of December 31, 1996 and 1995, the aggregate principal amounts of outstanding
franchisee indebtedness under such agreement was approximately $2,431,000 and
$2,749,000, respectively.  Pursuant to the terms of the Company's agreement with
SunTrust, until the entire principal balance of such indebtedness is repaid in
full, the Company is liable on such franchisee indebtedness in the event a
default with respect to such indebtedness occurs, the Company has 180 days to
correct the default.  If the default is not corrected within 180 days, the
Company is obligated to make the monthly installments on the note until paid in
full or the franchise is sold to another approved party.  During 1996 and 1995,
the Company exchanged notes it owned aggregating approximately $324,000 and
$261,000, respectively, to SunTrust for franchisee defaulted notes.  In
addition, approximately $24,000 and $58,000 was paid to SunTrust during 1996
and 1995, respectively representing monthly installments on behalf of
franchisees in default.  The Company believes that its agreement with Stephens
significantly improves its liquidity and working capital position.

     In September, 1996, the Parent, Mr. Rooter, Aire Serv, Mr. Appliance, and 
Mr. Electric entered into an agreement with Phoenix Leasing Incorporated 
("Phoenix") to finance franchise sales for franchise applicants who meet 
Phoenix's qualifications.  Phoenix agreed to provide up to $3,000,000 in debt 
financing to the franchisees provided that each franchisee's obligations to 
Phoenix under its debt financing be guaranteed by the Parent and the franchising
subsidiary for such franchisee.  On or about the 15th day of each calendar 
month, the Parent will receive from Phoenix an Aging Report of the amounts due 
and owing by the franchisees as of the first day of such month.  If an Aging 
Report shows that any franchisee has failed to make all of the scheduled monthly
payments due during any sixty (60) day period, then the Parent, within ten (10) 
days of delivery of such Aging Report, shall pay all of such franchisee's 
delinquent scheduled payments, together with all late charges then due and 
Phoenix shall bill the Parent directly for amounts due and payable under such 
franchisee's loan agreement.  At December 31, 1996, the Parent was contingently 
liable for approximately $29,000 relating to such notes.

     In connection with its franchising activities, the Company regularly
extends credit to prospective franchisees to finance their purchase of
franchises.  The repayment of such indebtedness is secured by the assets of such
franchises, including the franchise rights sold to the franchisees.  The Company
does recognize as revenue, franchise sales represented by notes from Rainbow,
GBS, EKW, Mr. Rooter, Mr. Electric, Mr. Appliance and Aire Serv franchisees who
have made a down payment in cash of at least 20% of the sales price and
completed training.  At December 31, 1996 and 1995, notes receivable (in excess
of those recognized as deferred liabilities), less allowance for doubtful
collections, were approximately $2,958,000 and $2,652,000, respectively. For the
year ended December 31, 1996, the Company increased the allowance for doubtful
notes receivable collection approximately $777,000 compared to a $434,000
increase for the year ended December 31, 1995. At December 31, 1996, the
Company's allowance for doubtful note collections was $1,633,000, which the
Company believes is currently adequate for the size and nature of its notes
receivable.

     In February 1995, The Dwyer Group, Inc. reached an agreement with the
estate of the late Donald J. Dwyer, Sr. regarding resolution of the discrepancy
between the amount of life insurance on Mr. Dwyer's life which had been reported
and that which was actually in force.  The face amount of life insurance on Mr.
Dwyer's life in force at the time of his death was less than the $2,000,000 of
life insurance in force as stated at the time of the July 19, 1994 offering of
Common Stock.  The life insurance in force at the time of Mr. Dwyer's death was
$1,050,000, a portion of which ($136,000) had been borrowed against for the
benefit of a wholly-owned subsidiary of the Company, which owned the policies.
On February 10, 1995 the estate executed a promissory note in the amount of
$950,000 bearing interest of 9% per annum payable on or before February 9, 1997
resolving the discrepancy of life insurance in force and life insurance
previously reported to be in force on Mr. Dwyer's life.  This transaction was
recorded in February 1995 as an additional capital contribution and as a note
receivable.  The note receivable has been classified as a reduction in
stockholders' equity.  During 1995 the estate paid principal and interest in the
amount of $531,000 and $65,000, respectively.  During 1996, the estate paid the
remaining principal of $419,000 and interest in the amount of $38,000.

FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY:

     The Company's operating results could vary significantly from period to
period as the result of a variety of factors, including the timing of
acquisitions, the length of the Company's franchise sales cycles; the ability of
franchisees to collect their receivables and satisfy obligations under franchise
agreements with the Company; seasonal conditions in the markets in which the
Company's franchisees operate and competitive factors.  For instance, Rainbow's
revenues have historically decreased during cold weather months and increased
during hot weather months and GBS's and EKW's revenues typically 

                                       16
<PAGE>
 
increase significantly during the tax season. There can be no assurance that
such factors will not result in significant fluctuations in the Company's
operating results in the future.


INFLATION:

     Inflation has not historically had a material effect on the Company's
operations.


ACCOUNTING MATTERS:

          In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement requires that
after a transfer of financial assets, an entity recognizes the financial assets
it controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities it extinguished.
This Statement is effective for transfer of financial assets and extinguishments
of liabilities occurring after December 31, 1996. In December 1996, FASB issued
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". This Statement deferred
the effective date of FASB Statement No. 125 for secured lending and similar
transactions to transactions occurring after December 31, 1997. The Company will
adopt that Statement effective January 1, 1997.

     In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share.  SFAS No.
128 requires the replacement of primary earnings per share with basic earnings
per share.  Basic earnings per share excludes dilution, and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period.  The Company will be required to
adopt the provisions of SFAS No. 128 for fiscal 1997.

ITEM 7.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company, together with the
independent auditor's report thereon of Coopers & Lybrand LLP, appears on pages
31 through 38 of this report. See Index to Financial Statements on 30 of this
report.

                                       17
<PAGE>
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     On July 31, 1995, the Audit Committee of the Board of Directors of the
Company approved the dismissal of Grant Thornton LLP as its independent public
accountants and the appointment of Coopers & Lybrand L.L.P. as its independent
public accountants, effective on such date, and the Board of Directors of the
Company took action necessary to effect such change.  The Company had not
consulted Coopers & Lybrand L.L.P. prior to such appointment with respect to any
matter of accounting principles or practices, financial statement disclosure,
auditing scope or procedure, or any disagreement with the Company's independent
public accountants.  From 1989 until such date, the Company had engaged Grant
Thornton LLP as its independent public accountants.  During the period of the
engagement of Grant Thornton LLP by the Company, there were no disagreements
between Grant Thornton LLP and the Company on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Grant
Thornton LLP would have caused them to make reference to the disagreements in
any of their financial reports to the Company.  In addition, no report on the
financial statements of the Company rendered by Grant Thornton LLP contained an
adverse opinion or a disclaimer of opinion or was qualified or modified as to
uncertainty, the scope of audit performed, or accounting principles.


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

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

<TABLE>
<CAPTION>
 
NAME                    AGE                         POSITION
----                    ---                         --------
<S>                     <C>  <C>
Theresa Dwyer.........   62  Chairperson of the Board of Directors
Robert Tunmire........   38  President and Chief Executive Officer and Director
John Appel............   55  Vice President
Dina Dwyer-Owens......   34  Secretary and Vice President of Operations and Director
Stephen E. Beatty.....   45  Treasurer and Chief Financial Officer
Donald J. Dwyer, Jr...   32  Director
James L. Sirbasku.....   57  Director
John P. Hayes.........   47  Director
Donald E. Latin.......   66  Director
</TABLE>

     All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified.  Officers of the Company
serve at the will of the Board of Directors.

Theresa Dwyer has been Chairperson of the Board of Directors since July 1995 and
Director of the Company since December 1994.  She has been the majority
stockholder and President of the following privately held companies: Worldwide
Cabinet Systems, Inc.; Worldwide Refinishing Systems, Inc.; Worldwide Whirlpool
Systems, Inc.; Worldwide Franchise Consultants, Ltd.; Aames Auto Leasing, Inc.;
and Sun Screen of Austin, Inc. since December 1994.  She also serves as Vice
President of Worldwide Supply, Inc., and Secretary of Dwyer Real Estate and
Development, Inc.  Mrs. Dwyer serves as Co-Executrix of the Estate of Donald J.
Dwyer.  Prior to December 1994 Mrs. Dwyer was self-employed.

Robert Tunmire has been President of the Company since December 1994 after
serving as Executive Vice President since June 1993.  Mr. Tunmire served as
President of the Company, then operating as Mr. Rooter Corporation, from January
1992 through May 1993, after serving from May 1989 as Director and Executive
Vice President.  Mr. Tunmire currently serves as President of Mr. Rooter, Mr.
Electric, Mr. Appliance and Aire Serv.  From December 1980 until May 1989, Mr.

                                       18
<PAGE>
 
Tunmire was employed by Rainbow, most recently as Executive Vice President of
Franchise Counseling.  Mr. Tunmire has approximately 22 years experience in the
franchising industry.

Stephen E. Beatty has served as the Company's Treasurer and Chief Financial
Officer since December 1994.  He previously served as Controller of the Company
from April 1993 to December 1994.  Prior to that time, Mr. Beatty served as
Controller for Gulf Stream Coach, Inc., a company that manufactures recreational
vehicles from August 1991 to April 1993.  Mr. Beatty served as Treasurer and
Vice President of Finance for SMI International, Inc., a company specializing in
franchising businesses, from April 1987 to June 1991.  Mr. Beatty previously
served as Controller and Treasurer of SMI International, Inc. from April 1986 to
June 1991, and Controller from October 1983 to April 1986.

John Appel, who has over 25 years of franchising experience, has served as Vice
President of the Company since December 1994 and as President of General
Business Services and E.K. Williams since July 1, 1996.  Mr. Appel served as
President of Rainbow from February 1, 1992 through June 1995.  Before coming to
Rainbow, he served for seven years as President of Leadership Management, Inc.,
a company specializing in franchising businesses, and prior to 1986 he was
employed by Success Motivation Institute, Inc., a franchising company, most
recently as Vice President of Franchising.

Dina Dwyer-Owens has been Vice President of Operations since September 1995
after serving as Co-Chair of the Board of Directors from December 1994 to July
1995, and has been a Director and Secretary of the Company since May 1989.  Ms.
Dwyer-Owens has been employed by Dwyer Real Estate and Development, a real
estate concern located in Waco, TX  since June 1981, most recently as President.
She also serves as Director to Rainbow and Mr. Rooter.

Donald J. Dwyer, Jr. has served as a Director since May 1989.  Mr. Dwyer is
currently, and has been since 1994, employed by the Company as Director of
International Operations.  He previously served as Director of International
Operations for Rainbow from 1987 to 1994.  Mr. Dwyer serves as Co - Executor of
the Estate of Donald J. Dwyer.

James L. Sirbasku has served as a Director since July 1994.  He has served as
Chairman and Chief Executive Officer of Profiles International, Inc., an
international company providing pre-employment evaluation systems, since March
1991.  From 1980 to 1991, Mr. Sirbasku served as President of SMI International,
Inc., a company specializing in franchising businesses.

John P. Hayes has served as a Director since July 1994.  He founded and served,
from January 1987 to 1995, as President of The Hayes Group, Inc., an
international marketing and promotion company specializing in franchised
businesses. Since January 1996, Mr. Hayes has served as a consultant to
franchisors.

Donald E. Latin  founded and, since 1986, has served as President of D. Latin
and Company, Inc., an investment banking  company which provides such corporate
finance services as: the raising of capital, mergers and acquisitions, valuation
of businesses, fairness opinions, and other financial advisory services.

Donald J. Dwyer, Jr. and Dina Dwyer-Owens are the son and daughter,
respectively, of Theresa Dwyer and the late founder, Donald J. Dwyer.


SIGNIFICANT EMPLOYEES

Michael Bidwell, age 39, has been President of Rainbow since July 1995.  Mr.
Bidwell was a Rainbow franchisee in Tucson, Arizona from April 1984 to June
1995, and a Mr. Rooter franchisee from August 1992 to June 1995.  From 1986 to
June 1995, Mr. Bidwell served as President of Ramsoo, Inc., an Arizona
corporation, which operated the Rainbow and Mr. Rooter franchises in Tucson,
Arizona.

Richard Cross, age 48, has been Chief Operating Officer of Mr. Rooter, Mr.
Electric and Aire Serv since December 1994 and Mr. Appliance since January 1996.
Mr. Cross previously served as Vice President of Marketing from December 1991

                                       19
<PAGE>
 
to October 1993. Prior to that time, he served as National Marketing Director
for Leadership Management, Inc., a company specializing in franchising
businesses, from December 1986 to November 1991.


BOARD PARTICIPATION AND STRUCTURE

The Board of Directors met 5 times during 1996 and took action 59 times by means
of written consent.  Each director attended all of the meetings and signed each
consent.  Directors are not compensated for their services as directors.  Non-
employee directors are reimbursed for expenses incurred for their attendance at
Board of Directors meetings and are eligible to receive stock options.

The Audit Committee met 4 times during 1996.


SECTION 16(A)  BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
officers and directors of the Company and persons who beneficially own more than
ten percent of the Company's Common Stock to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC").  Officers, directors, and greater than 10 percent
beneficial owners also are required by rules promulgated by the SEC to furnish
the Company with copies of all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by it with
respect to the fiscal year ended December 31, 1996, or written representations
from certain reporting persons, the Company believes that all filing
requirements applicable to its directors, officers and persons who own more than
ten percent of a registered class of the Company's equity securities have been
complied with, except that during fiscal 1996, Messrs. Tunmire, Dwyer, Hayes,
Appel Sirbasku,  and Ms. Dwyer and Ms. Dwyer-Owens were late in filing one
report required pursuant to Section 16(a).  Mr. Beatty was late in filing two
reports required pursuant to Section 16(a).  No other officer, director, or ten
percent shareholder was late in filing his or its reports pursuant to Section
16(a).

                                       20
<PAGE>
 
ITEM 10.   EXECUTIVE COMPENSATION

     Summary Compensation Table.  The following information sets forth
compensation earned by the Company's Chief Executive Officer and all other of
its executive officers whose annual compensation exceeded $100,000 for services
rendered for the Company and its Subsidiaries during the fiscal years indicated:


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                         LONG TERM        
                                     ANNUAL COMPENSATION                COMPENSATION      
                           -------------------------------------   ---------------------- 
      NAME AND                                                     SECURITIES UNDERLYING
 PRINCIPAL POSITION    YEAR     SALARY($)      BONUS($)  OTHER($)        OPTIONS($)
---------------------  ----  ----------------  --------  --------  ----------------------
<S>                    <C>     <C>             <C>       <C>               <C>    
Robert Tunmire,        1996     $  215,818(1)     ----                        ----       
   President & CEO     1995     $  196,414(1)  $20,779                     100,000       
                       1994     $  158,780(1)  $88,756                        ----       

John Appel,            1996     $  137,004(1)     ----                       5,000       
   Vice President      1995     $  123,882(1)  $21,389                        ----       
                       1994     $  123,059(1)  $23,474                        ----       

Stephen Beatty(2)      1996     $   98,679     $10,000                       5,000       
   Treasurer & CFO     1995     $   85,829     $15,000                      12,500       
                       1994     $   51,544     $15,000                        ----       

Michael Bidwell(3)     1996     $  118,360     $44,360                        ----       
                       1995     $   68,495     $14,101                      25,000       

Paul Woody(4)          1996     $  104,808        ----   $338,256           25,000       
                       1995     $  115,385        ----   $ 28,846           25,000       
</TABLE>
(1)  Includes salary and any commissions from franchise sales.

(2)  Mr. Beatty was appointed Treasurer and Chief Financial Officer of the
     Company effective December 19, 1994.

(3)  Mr. Bidwell was appointed President of Rainbow effective July 15, 1995.

(4)  Mr. Woody, who was appointed President of GBS and EKW effective June 1,
     1995, left the employ of GBS and EKW on June 28, 1996 and returned to
     Oklahoma city to operate his 25 year old GBS franchise. Pursuant to the
     terms of Mr. Woody's stock option agreement which granted 25,000 stock
     options to Mr. Woody on June 1, 1995 at $3.375, these options terminated 30
     days subsequent to the termination of Mr. Woody's employment. A Mutual
     Termination of Employment Agreement was executed on June 30, 1996 pursuant
     to which the Company purchased Mr. Woody's house in Waco, Texas in exchange
     for the $18,873 equity in the house at the date of the agreement,
     reimbursed Mr. Woody $9,050 for his 1995 closing costs which were incurred
     during his 1995 move to Waco, Texas, and paid Mr. Woody's actual moving
     costs from Waco, Texas to Oklahoma City, OK.

     GBS and EKW subsequently executed a 3 year consulting agreement beginning
     July 1, 1996 with Mr. Woody, who will provide franchise training and
     various professional services in conjunction with the future growth and
     development of GBS and EKW.  For services rendered under this 3 year
     consulting agreement, Mr. Woody was paid a fee of $305,000 in advance to be
     amortized over the 3 year life of the consulting agreement.  In addition,
     expenses incurred by Mr. Woody directly attributable to services rendered
     under the consulting agreement are to 

                                       21
<PAGE>
 
     be reimbursed. In conjunction with this consulting agreement, Mr. Woody was
     granted 25,000 non-qualified stock options to acquire 25,000 shares of
     common stock of the Company at $3.375 per share. This stock option
     agreement expires on July 1, 2001. Stock options under this agreement
     become exercisable in 5,000 increments beginning July 1, 1996 and each year
     thereafter through July 1, 2000.



                     This portion intentionally left blank.

                                       22
<PAGE>
 
The following table sets forth information regarding options granted to the
named executive officers during the fiscal year ended December 31, 1996:

                       OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                           PERCENT OF TOTAL
                         NUMBER OF        OPTIONS GRANTED TO   EXERCISE
                   SECURITIES UNDERLYING       EMPLOYEES       OR BASE   EXPIRATION
      NAME            OPTIONS GRANTED       IN FISCAL YEAR      PRICE(1)    DATE
-----------------  ---------------------  -------------------  --------  -----------
<S>                <C>                    <C>                  <C>       <C>
Robert Tunmire             ----                  ----            ----        ----
Stephen Beatty            5,000                    7%            3.00          (2)
John Appel                5,000                    7%            3.00          (2)
Paul Woody               25,000                   N/A            3.375    7/1/2001
Michael Bidwell            ----                  ----             ----        ----
</TABLE>
_________________________
(1)  Reflects the dollars per share exercise price which equals the closing
     market price of the underlying security on
     the date of grant.

(2)  The Incentive Stock Option Agreements do not contain a specific option
     expiration date. Each incentive stock option granted under the 1986 Stock
     Option Plan ("SOP") will not be exercisable more than 10 years from the
     date the option is granted except for incentive stock option grants to any
     person owning 10% or more of the Company's Common Stock whose options
     expire 5 years from the date of the grant. In addition, incentive options
     whether or not then exercisable, terminate immediately upon termination of
     employment for cause. If an employee's termination is not for cause, the
     employee has the right to exercise stock options, to the extent exercisable
     at the date of cessation of employment, at any time within 30 days of that
     employment cessation date. Unless otherwise determined by the Board of
     Directors at the time an option is granted, incentive options and non-
     incentive options under the SOP become exercisable at the rate of 20% of
     the number of shares covered thereby per year, beginning one year from the
     date of grant.

                                      23
<PAGE>
 
     The following table shows option exercises during the year ended December
31, 1996 and the value of unexercised options at December 31, 1996 for the named
executive officers who exercised options during 1996 or who had unexercised
options at December 31, 1996.
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTION VALUES
                       ---------------------------------
<TABLE>
<CAPTION>
                                                        NUMBER OF
                                                        SECURITIES
                                                        UNDERLYING            VALUE OF
                                                       UNEXERCISED        UNEXERCISED IN-
                                                    OPTIONS AT FISCAL    THE-MONEY OPTIONS
                                                         YEAR END        AT FISCAL YEAR END
                   SHARES ACQUIRED                    (EXERCISABLE/        (EXERCISABLE/
      NAME           ON EXERCISE    VALUE REALIZED    UNEXERCISABLE)    UNEXERCISABLE) /(1)/
-----------------  ---------------  --------------  ------------------  --------------------
<S>                <C>              <C>             <C>                 <C>
Robert Tunmire                ----            ----      63,434/66,667           $101,139/-0-
John Appel                    ----            ----      20,000/10,000                -0-/-0-
Stephen Beatty                ----            ----       2,500/15,000                -0-/-0-
Michael Bidwell               ----            ----       5,000/20,000                -0-/-0-
Paul Woody                    ----            ----       5,000/20,000                -0-/-0-
</TABLE>
_____________________________
(1)  The closing price of the Common Stock on December 31, 1996 was $2.00 per
     share.
(2)  Mr. Dwyer assigned 295,000 of the 385,000 remaining unexercised options to
     purchase shares of the Company's Common Stock (which options are governed
     by that certain Stock Option Agreement dated April 28, 1989 by and between
     Mr. Rooter Corporation (now The Dwyer Group, Inc.) and Donald J. Dwyer) to
     a bank.


ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of December 31, 1996, certain information
regarding the beneficial ownership of Common Stock by (i) each of named
executive officers, (ii) each person known by the Company to own beneficially
more than 5% of the outstanding Common Stock, (iii) each director of the Company
and (iv) all directors and officers as a group:

<TABLE>
<CAPTION>
                                          BENEFICIAL OWNERSHIP (1)
NAME AND ADDRESS                          -------------------------
OF BENEFICIAL                               NUMBER
OWNER                                      OF SHARES   PERCENT (2)
----------------                          -----------  ------------
<S>                                       <C>          <C>
Estate of Donald J. Dwyer(3)(4)             4,610,920         64.0%
Dina Dwyer-Owens (3)(5)                         3,913           *
Robert Tunmire (3)(6)                          83,040          1.2%
Donald J. Dwyer, Jr. (3)(7)                 4,618,520         64.1%
Theresa Dwyer (3)(7)                        4,612,220         64.0%
John Hayes (8)                                 20,250           *

</TABLE> 

                                       24
<PAGE>
 
<TABLE> 
<CAPTION> 
<S>                                       <C>          <C>
James Sirbasku (9)                             15,000           *
Donald E. Latin (10)                           15,000           *
John Appel (3)(11)                             20,000           *
Steve Beatty (3)(12)                            3,500           * 
Renaissance Capital Growth & Income           
 Fund III (13)                                700,000          9.8%
All officers and directors as a             
group (nine persons) (14)                   4,780,523         65.2%
</TABLE>
______________________
 *   Less than 1%.

(1)  Each beneficial owner's percentage ownership is determined by assuming that
     options or warrants that are held by such person (but not those held by any
     other person) and which are exercisable have been exercised. Unless
     otherwise noted, the Company believes that all persons named in the table
     have sole voting and investment power with respect to all shares of Common
     Stock beneficially owned by them.

(2)  Based on a total of 7,113,127 shares of Common Stock outstanding prior to
     the exercise of any outstanding options or warrants.

(3)  The principal business address of each of these individuals is c/o the
     Company, 1010 N. University Parks Drive, Waco, Texas 76707.

(4)  Mr. Dwyer, former Chairman of the Board, President and CEO of the Company,
     died December 4, 1994. The number of shares beneficially owned includes the
     90,000 Option Shares (held by Mr. Dwyer's estate), currently exercisable
     pursuant to a Stock Option Agreement dated April 28, 1989, and 244,700
     shares of Common Stock owned by another stockholder of the Company in
     connection with which Mr. Dwyer's estate has sole voting power pursuant to
     a Shareholder Voting, Proxy and Stock Sale Agreement between Mr. Dwyer and
     such stockholder. It also includes 340,300 of Mr. Dwyer's shares of Common
     Stock which are being held in escrow pending GBS's achievement of certain
     pre-tax income levels. Mr. Dwyer's estate retains voting power in
     connection with such shares. Theresa Dwyer and Donald J. Dwyer, Jr. serve
     as Co-Executors of the Estate of Donald J. Dwyer.

(5)  Includes 2,500 shares of Common Stock now exercisable or exercisable within
     60 days under an Incentive Stock Option Plan.

(6)  Includes 63,434 shares of Common Stock now exercisable or exercisable
     within 60 days under an Incentive Stock Option Plan.

(7)  Includes 4,610,920 shares of Common Stock beneficially held by the Estate
     of Donald J. Dwyer. Theresa Dwyer and Donald J. Dwyer, Jr. serve as
     Independent Co-Executors of the Estate of Donald J. Dwyer, and as such,
     share voting and disposition power with respect to such shares and may be
     deemed to beneficially own such shares. Also includes for Donald J. Dwyer,
     Jr., 1,000 shares of Common Stock now exercisable or exercisable within 60
     days under an Incentive Stock Option Plan.

(8)  Includes 20,000 shares of Common Stock now exercisable or exercisable
     within 60 days pursuant to options granted Mr. Hayes. The principal
     business address of Mr. Hayes is 6612 Dupper Court, Dallas, Texas 75252.

(9)  Includes 10,000 shares of Common stock now exercisable or exercisable
     within 60 days pursuant to options granted Mr. Sirbasku. The principal
     business address of Mr. Sirbasku is 5205 Lakeshore Drive, Waco, TX 76710.

                                       25
<PAGE>
 
(10) Includes 10,000 shares of Common Stock now exercisable or exercisable
     within 60 days pursuant to options granted Mr. Latin. The principal
     business address of Mr. Latin is 600 N. Pearl Street, Suite 2250; Dallas,
     TX 75201.

(11) Includes 20,000 shares of Common Stock now exercisable or exercisable
     within 60 days under an Incentive Stock Option Plan.

(12) Includes 3,500 shares of Common Stock now exercisable or exercisable within
     60 days under an Incentive Stock Option Plan.

(13) The principal business address of Renaissance Capital Growth & Income Fund
     III, Inc. is c/o Renaissance Capital Group, Inc., 8080 N. Central
     Expressway, Suite 210; Dallas, TX 75206.

(14) Includes 129,434 shares of Common Stock now exercisable or exercisable
     within 60 days under an Incentive Stock Option Plan and the 90,000 Option
     Shares exercisable under a non-Option Plan stock option.


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company currently leases its principal executive and administrative
facilities from the majority stockholder, the Estate of Donald J. Dwyer, under
various leases expiring at various times through October 31, 2000 requiring
total monthly lease payments of $31,417.  In addition to rent, the Company
receives repairs and maintenance, promotional materials and other services from
entities controlled by such  majority stockholder.  The Company expensed
$629,769 for such rent and services in 1996 and $618,106 in 1995.

     The Company recognized income from related parties for accounting, legal
and administrative services, interest income, product sales commissions and
management fees totaling $812,985 in 1996 and $554,116 in 1995.

     In addition, from time to time, the Company and its affiliates have made
advances to each other, which generally have not had specific repayment terms
and have been reflected in the Company's financial statements as accounts
receivable or payable from related parties.  These advances typically result
from the payment of an invoice by one entity for services or items performed or
delivered on behalf of the Company and one or more of its affiliates.  The
company that pays the invoice is eventually reimbursed by the other companies
for the appropriate amount based on a pro rata allocation of the services
provided to each company.

     Donald J. Dwyer, Jr., and Dina Dwyer-Owens are the son and daughter,
respectively, of Theresa Dwyer and the late founder, Donald J. Dwyer.

     At the time of Mr. Dwyer's death in December 1994, life insurance with a
face a value of approximately $1,050,000 was owned by Rainbow.  Rainbow had
outstanding loans against the value of the policy for $136,000 leaving a balance
due of $914,000. Therefore the Company recorded income from the insurance
proceeds of $914,000. The Company received $50,000 of the total life insurance
proceeds (914,000) in December 1994. The remaining $864,000 proceeds of this
insurance were pledged to the lender of the Industrial Revenue Bonds ("IRB's")
which were secured by Rainbow's guaranty. Proceeds of $864,000 were utilized to
pay down the IRB's and also Housing Finance Revenue Bonds for which Rainbow had
previously guaranteed and for which the remaining insurance process were
assigned for the benefit of the estate. As such, the Company in December 1994
recorded a note receivable from Mr. Dwyer's estate of $864,000. This $864,000
note was paid in full during 1995, including $34,087 of interest.

     Beginning June 1995, the Company agreed to pay Don Latin, an independent
director, $2500 per month for investment banking consulting services.  In
addition, in August 1995 the Company entered into a consulting agreement with
another independent director, John Hayes, to provide consulting services
regarding public relations, marketing and special projects for the company.
During 1996 and 1995 the Company expensed approximately $171,000 and $108,000
for Mr. Hayes' services, respectively.

                                       26
<PAGE>
 
     In December 1996 the Company, together with selected related parties,
agreed to convert $908,632 of related party accounts receivable and accounts
receivable from affiliates to interest bearing (9.25%) notes receivable. These
notes are payable in full by December 31, 2006. In total, accounts and notes
receivable from related parties and officers (current and long-term) increased
approximately $285,000, to $1,861,368 at December 31, 1996 when compared to
December 31, 1995.

     In February 1995, the Company reached an agreement with the estate of the
late Donald J. Dwyer, Sr. regarding resolution of the discrepancy between the
amount of life insurance on Mr. Dwyer's life which had been reported and that
which was actually in force. The face amount of life insurance on Mr. Dwyer's
life in force at the time of his death was less than the $2,000,000 of life
insurance in force as stated at the time of the July 19, 1994 offering of Common
Stock. The life insurance in force at the time of Mr. Dwyer's death was
$1,050,000, a portion of which ($136,000) had been borrowed against for the
benefit of a wholly-owned subsidiary of the Company, which owned the policies.
On February 10, 1995 the estate executed a promissory note in the amount of
$950,000 bearing interest of 9% per annum payable February 9, 1997 resolving the
discrepancy of life insurance in force and life insurance previously reported to
be in force on Mr. Dwyer's life. This transaction was recorded in February 1995
as an additional capital contribution and as a note receivable. The note
receivable has been classified as a reduction in stockholders' equity. During
1995 the estate paid principal and interest in the amount of $531,103 and
$65,355, respectively. During 1996 the estate paid the remaining principal of
$418,896 and interest of $38,376.


ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

 (a) Documents filed as a part of this report:

     1. Financial Statements
        --------------------

        The Consolidated Financial Statements of the Company are included in
     Part II, Item 7. See index on page 30.


     2. Exhibits
        --------

  3.1   Certificate of Incorporation, as amended (1)
  3.2   Certificate of Amendment of Certificate of Incorporation filed June 12,
        1987 (2)
  3.3   Certificate of Amendment of Certificate of Incorporation filed May 8,
        1988 (2)
  3.4   Certificate of Amendment of Certificate of Incorporation filed July 30,
        1993 (2)
  3.5   Bylaws (1)
  4.1   Form of Representative's Warrant Agreement, including Representative's
        Warrant (2)
  4.2   Warrants to Purchase Common Stock issued to Norcross 
        Securities, Inc. (2)
 10.1   Stock Option Plan, as amended, and form of Employee Stock Option
        Agreement (1)
 10.2   Form of Rainbow International Carpet Dyeing and Cleaning Co. License
        Agreement (2)
 10.3   Form of Mr. Rooter Corporation Franchise Agreement (2)
 10.4   Form of General Business Services License Agreement (2)
 10.5   Form of Aire-Serv Corporation Franchise Agreement (2)
 10.6   Certificate of Registration of Service Mark "MR. ROOTER" (1)
 10.7   Certificate of Registration of Service Mark "QUICK-AS-A-WINK" (1)
 10.8   Certificate of Registration of Mr. Rooter logo (1)
 10.9   Certificate of Registration of Service Mark "Super Kleens" logo (1)
 10.10  Certificate of Registration for Service Mark "America's Trouble 
        Shooter" (1)
 10.11  Certificate of Registration of Trademark "MR. ROOTER" issued by Office
        of Consumer and Corporate Affairs in Canada (1)
 10.12  Lease Agreement between Donald J. Dwyer and Mr. Rooter Corporation,
        dated December 20, 1991 (2)
 10.13  Lease Agreement between Donald J. Dwyer and Rainbow International
        Carpet Dyeing and Cleaning Training Center, commencing 
        January 1, 1993(2)

                                       27
<PAGE>
 
 10.14  Lease Agreement between Donald J. Dwyer and Rainbow International
        Carpet Dyeing and Cleaning Waco Franchise, commencing 
        January 1, 1993 (2)
 10.15  Lease Agreement between Donald J. Dwyer and General Business Services,
        dated August 31, 1993 (2)
 10.16  Lease Agreement between Donald J. Dwyer and Rainbow International,
        dated September 1, 1993 (2)
 10.17  Lease Agreement between Donald J. Dwyer and The Dwyer Group, Inc.,
        dated February 18, 1994 (2)
 10.18  Agreement and Plan of Reorganization and Share Exchange (3)
 10.19  Agreement for Purchase and Sale of Assets of National Manufacturing &
        Supply Corporation (4)
 10.20  Franchisee Financing Agreement dated July 2, 1993, with Addendum dated
        December 23, 1993 (4)
 10.21  Shareholders' Voting Proxy and Stock Sale Agreement, between Donald J.
        Dwyer, Sr. and Vernon Lee Russell and wife, Sylvia Russell, and the 
        Company (5)
 10.22  Stock Purchase Agreement between Donald J. Dwyer, Sr., Vernon Lee
        Russell and Sylvia Russell (5)
 10.23  Stock Option Agreement between the Company and Donald J. Dwyer (5)
 10.24  Incentive Stock Option Agreement between the Company and John Appel for
        25,000 shares of the Company's Common Stock (4)
 10.25  Incentive Stock Option Agreement between the Company and Douglas C.
        Holsted for 12,500 shares of the Company's Common Stock (1)
 10.26  Incentive Stock Option Agreement between the Company and Dina Dwyer-
        Owens for 2,500 shares of the Company's Common Stock (1)
 10.27  Incentive Stock Option Agreement between the Company and Robert A.
        Tunmire for 50,000 shares of the Company's Common Stock (1)
 10.28  Employment Contract between the Company and Donald J. Dwyer (1)
 10.29  Guaranty Agreement, executed December 1, 1982 by Rainbow International
        Carpet Dyeing and Cleaning Company (2)
 10.30  Guaranty Agreement, executed May 1, 1984 by Rainbow International
        Carpet Dyeing and Cleaning Company (2)
 10.31  Promissory Note, executed January 7, 1993, by and between Pride Venture
        Capital, Inc. and GTL Services, Ltd. (2)
 10.32  Form of Affiliate Transactions Agreement (2)
 10.33  Stock Purchase Agreement dated May 14, 1994 by and between The Dwyer
        Group, Inc., Co Data AG and Central Data BV (6)
 10.34  Irrevocable Stock or Bond Power, Note and Security Agreement, dated May
        25, 1994, by and between Christian Mission Concerns, as lender, and the
        Company, as borrower (2)
 10.35  Mutual Release by and between General Business Services, Pride Venture
        Capital and GTL Services Ltd., effective June 10, 1994 (2)
 10.36  Assignment of Judgments and Claims, executed by and between General
        Business Services, Inc., Pride Venture Capital, Inc., and GTL Services,
        Ltd., dated June 10, 1994 (3)
 10.37  Promissory Note, executed June 8, 1994, by and between the Company and
        NationsBank of Texas, N.A. (2)
 10.38  Promissory Note, executed June 9, 1994, by and between the Company and
        Central National Bank (2)
 10.39  Certificate of Registration of Service Mark "Aire Serv", dated Jan. 25,
        1994 (7)
 10.40  Stock Purchase Agreement dated September 14, 1994, by and between E.K.
        Williams & Co. and Service Station Computers Systems, Inc.(7)
 10.41  Form of Stock Option Agreement by and between the Company and James
        Sirbasku for 10,000 shares of the Company's Common Stock.(7)
 10.42  Form of Stock Option Agreement by and between the Company and John
        Hayes for 10,000 shares of the Company's Common Stock.(7)
 10.43  Form of Stock Option Agreement by and between the Company and Anthony
        DeSio for 10,000 shares of the Company's Common Stock.(7)
 10.44  Incentive Stock Option Agreement by and between the Company and Matthew
        Michel.(7)
 10.45* Mutual Release by and between General Business Services, Inc., and
        Paul Woody effective June 30, 1996.
 10.46* Consulting Agreement by and between General Business Services, Inc.,
        E.K. Williams & Co., and Paul Woody effective July 1, 1996.
 10.47* Form of Stock Option Agreement by and between the Company and Paul
        Woody for 25,000 shares of the Company's Common Stock.
 21     List of Subsidiaries.(2)

                                       28
<PAGE>
 
 27*    Financial Data Schedules.

* Filed herewith.
__________________________

(1)  Incorporated by reference to the Registrant's Form S-18 registration
     statement (SEC File No. 33-7290-FW).

(2)  Incorporated by reference to the Registrant's Form SB-2 registration
     statement (No. 33-78814).

(3)  Incorporated by reference to the Registrant's Form 8-K/A dated as of June
     1, 1993 (SEC File No. 0-15227)

(4)  Incorporated by reference to the Registrant's Form 10-K for its fiscal year
     ended December 31, 1993 (SEC File
     No. 0-15227).

(5)  Incorporated by reference to the Registrant's Schedule 13D of Donald J.
     Dwyer, dated May 4, 1989,  filed May 9,
     1989 (SEC File No. 0-15227).

(6)  Incorporated by reference to the Registrant's Form 8-K dated as of May 14,
     1994 (SEC File No. 0-15227).

(7)  Incorporated by reference to the Registrant's Form 10-KSB for its fiscal
     year ended December 31, 1994 (SEC File
     No. 0-152227.)

     (a)  Reports on Form 8-K

          NONE

                                       29
<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, in the City of Waco and the State of Texas on this 24th day of
April, 1997.


              The Dwyer Group, Inc.


              By:       /s/Robert Tunmire
                       -------------------------
                       Robert Tunmire, President
                       and Chief Executive Officer


     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 date indicated.


<TABLE>  
<CAPTION> 
Signatures                          Title                       Date
----------                          -----                       ---- 
<S>                         <C>                             <C>
 
/s/ Theresa Dwyer           Chairperson of the              April 24, 1997
--------------------------  Board of Directors 
Theresa Dwyer                                  
 
/s/ Robert Tunmire          President and                   April 24, 1997
--------------------------  Chief Executive Officer      
Robert Tunmire              (Principal Executive Officer) 
                                                          
 
/s/ Dina Dwyer-Owens        Secretary and                   April 24, 1997
--------------------------  Vice President of Operations 
Dina Dwyer-Owens                                         
 
/s/ Stephen E. Beatty       Treasurer and Chief             April 24, 1997
--------------------------  Financial Officer       
Stephen E. Beatty           (Principal Financial and 
                            Accounting Officer)      
                                                     
 
/s/ James Sirbasku          Director                        April 24, 1997
--------------------------  
James Sirbasku
 
/s/ Donald J. Dwyer, Jr.    Director                        April 24, 1997
--------------------------  
Donald J. Dwyer, Jr.
 
/s/ John P. Hayes           Director                        April 24, 1997
--------------------------  
John P. Hayes
 
/s/ Donald E. Latin         Director                        April 24, 1997
--------------------------  
Donald E. Latin
</TABLE>

                                       30
<PAGE>
 
INDEX TO FINANCIAL STATEMENTS


                                                                   Page
                                                                   -----

Reports of Independent Accountants                                   32

Consolidated Balance Sheets as of December 31, 1996 and 1995.        33

Consolidated Statements of Operations for the years ended           
December 31, 1996 and 1995                                           35

Consolidated Statements of Stockholders' Equity for the years 
ended December 31, 1996 and 1995                                     37

Consolidated Statements of Cash Flows for the years ended 
December 31, 1996 and 1995                                           38

Notes to Consolidated Financial Statements                           41

                                       31
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS
____________________________________________________________


Board of Directors
The Dwyer Group, Inc.
Waco, Texas

We have audited the accompanying consolidated balance sheets of The Dwyer Group,
Inc. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Dwyer Group, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

As discussed in Note 15 to the consolidated financial statements, the Company 
recorded a prior period adjustment for the correction of an error in the 
consolidated financial statements for the year ended December 31, 1995, relating
to certain individual franchises and regional franchises.


COOPERS & LYBRAND L.L.P
Fort Worth, Texas
April 11, 1997

                                       32
<PAGE>
 
                     THE DWYER GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
 
                                                               DECEMBER 31       
                                                         ------------------------
                                                            1996         1995    
                                                         -----------  -----------
                                                                       Restated
                                                                        Note 15  
                                                                      -----------
<S>                                                      <C>          <C>        
CURRENT ASSETS                                                                   
   Cash and cash equivalents                            $  1,820,167  $ 3,446,166
   Short term investments held to maturity                 1,084,061    1,000,000
   Marketable securities, available for sale                 709,246         ----
   Trade accounts receivable, net of                                             
    allowance for doubtful accounts of                                           
    $429,647 and $491,613, respectively                      616,959      696,389
   Accounts receivable from related                                              
    parties                                                  317,053      825,029 
   Accrued interest receivable                               183,272      150,748
   Trade notes receivable, current                                               
    portion                                                  686,117      826,418 
   Inventories                                               143,794      136,728
   Prepaid expenses                                          260,947      148,854
   Federal income tax receivable                             935,443      646,641
   Notes receivable from related                                                 
    parties, current portion                                 130,453         ----
                                                         -----------  ----------- 
                                                                                 
TOTAL CURRENT ASSETS                                       6,887,512    7,876,973

ACCOUNTS RECEIVABLE FROM                                                         
RELATED PARTIES, long term portion                            97,290       97,916
                                                                                 
PROPERTY AND EQUIPMENT, at cost less                                             
   accumulated depreciation                                1,259,863    1,472,863
                                                                                 
ASSETS HELD FOR SALE (NOTE 15)                               452,428      398,651
                                                                                 
                                                                                 
                                                                                 
TRADE NOTES RECEIVABLE, long term                                                
 portion, net allowance for doubtful notes                                       
 of $1,633,092 and $855,849 respectively                   4,521,896    4,478,071
                                                                                 
PURCHASED FRANCHISE RIGHTS, at cost less                                         
   accumulated amortization of $419,124                                          
    and $331,466, respectively                             1,177,929    1,306,456 
                                                                                 
PATENTS, TRADEMARKS AND OTHER, at cost                                           
   less accumulated amortization of                                             
     $96,077 and $65,009, respectively                       173,346      139,160 
                                                                                 
NOTES RECEIVABLE FROM RELATED PARTIES,                                           
   long term portion                                       1,316,572      653,403 
                                                                                 
INVESTMENT, EQUITY METHOD                                    389,241      428,423
                                                                                 
NET DEFERRED TAX ASSET                                       342,046      217,005
                                                                                 
OTHER ASSETS                                                 613,955      199,778
                                                         -----------  -----------
TOTAL ASSETS                                             $17,232,078  $17,268,699
                                                         ===========  =========== 
 
</TABLE>

                                       33
<PAGE>
 
                     THE DWYER GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                  (CONTINUED)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
 
                                                 DECEMBER 31,
                                          -------------------------
                                             1996          1995
                                          -----------   -----------
                                                         Restated
CURRENT LIABILITIES:                                      Note 15
--------------------                                    -----------
<S>                                       <C>           <C>
   Trade accounts payable                 $ 1,007,146   $   883,307
   Accounts payable to related parties         61,490       222,227
   Accrued liabilities                      1,149,890     1,208,409
   Other payables                              22,527        67,759
   Current portion of notes payable and
    capital lease obligations                 280,689       252,289
                                          -----------   -----------
                                                      
 
TOTAL CURRENT LIABILITIES                   2,521,742     2,633,991
 
NOTES PAYABLE & CAPITAL LEASE
 OBLIGATIONS, less current portion            612,381       276,677
                         
 
DEFERRED FRANCHISE SALES REVENUE            2,250,299     2,652,057
 
FRANCHISE FUNDS HELD FOR ADVERTISING          459,586       318,447
                                          -----------   -----------
 
TOTAL LIABILITIES                           5,844,008     5,881,172
 
Commitments and contingent liabilities
 (Notes 10 and 12)
 
STOCKHOLDERS' EQUITY:
   Preferred stock, $1 par value -
    shares authorized,                                              
     500,000; outstanding, none                 -----         ----- 
   Common stock, authorized 15,000,000
    shares of $.10 par value; issued 
    7,235,552 shares at December 31, 1996
    and 1995, respectively                    723,556       723,556 
   Additional paid-in capital               8,941,029     8,941,029
   Retained earnings (Note 15)              1,796,836     2,237,959
   Note receivable from shareholder             -----      (418,896)
   Unrealized gain on available for                                 
    sale securities                            22,770         ----- 
   Treasury stock, at cost (122,425 shares
    at December 31, 1996 and 1995, 
    respectively)                             (96,121)      (96,121) 
                                          -----------   -----------
TOTAL STOCKHOLDERS' EQUITY                 11,388,070    11,387,527
                                          -----------   -----------
                                                                    
TOTAL LIABILITIES AND STOCKHOLDERS'                                  
 EQUITY                                   $17,232,078   $17,268,699  
                                          ===========   ===========  
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       34
<PAGE>
 
                     THE DWYER GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
 
                                            YEAR ENDED DECEMBER 31,
                                          ----------------------------
 
                                              1996           1995
                                           -----------    -----------
                                                           Restated
                                                            Note 15
                                                          -----------
<S>                                        <C>            <C>
REVENUES:                                  
   Royalty income                          $ 7,324,213    $ 6,588,983
   Franchise sales                           3,495,792      4,235,649
   Tax services                                728,267        710,823
   Product sales                               850,129        668,544
   Interest                                    553,931        587,704
   Other (Note 9)                            1,140,611        860,543
                                           -----------    -----------
                                            14,092,943     13,652,246
 
COSTS AND EXPENSES:
   Cost of product sales                       476,780        340,053
   Cost of tax services                        857,975      1,117,791
   General, administrative, selling         12,145,453     11,996,575
   Depreciation and amortization               522,068        432,443
   Interest                                     47,342         48,913
   Write down of assets held for sale          634,289      1,034,302
   Loss on disposal of assets held for           
    sale                                         8,041        292,614
                                           -----------    -----------
                                            14,619,948     15,262,691
 
Loss before benefit for income taxes          (599,005)    (1,610,445) 

Benefit from income taxes                      157,882        581,941 
                                           -----------    -----------
 
Net loss                                   $  (441,123)   $(1,028,504)
                                           ===========    ===========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       35
<PAGE>
 
                     THE DWYER GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED

<TABLE>
<CAPTION>
                                           YEARS ENDED DECEMBER 31,
                                          --------------------------
                                              1996          1995
                                           ----------    ----------
                                                          Restated
                                                           Note 15
                                                         ----------
<S>                                       <C>           <C>
Net Loss  per common share             
                                           $    (0.06)   $    (0.14) 
                                           ==========    ==========   
Weighted average common 
 shares outstanding                         7,113,127     7,206,489 
                                           ==========    ========== 
</TABLE>



   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       36
<PAGE>
 
                             THE DWYER GROUP, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
 
 
                                                                                       UNREALIZED
                                                                                        GAIN ON
                                                 ADDITIONAL               RECEIVABLE   AVAILABLE
                               COMMON    STOCK    PAID-IN     RETAINED       FROM       FOR SALE   TREASURY    STOCK
                               SHARES   DOLLARS   CAPITAL     EARNINGS   SHAREHOLDER   SECURITIES   SHARES    DOLLARS      TOTAL
                             ---------  -------  ----------  ----------  ------------  ----------  --------  ---------  -----------
<S>                          <C>        <C>      <C>         <C>         <C>           <C>         <C>       <C>        <C>
Balance at December 31,                                                                                                            
 1994                        7,234,552  723,456   7,989,489  3,266,463         -----         ----   137,425   (137,989)  11,841,419 
                             --------- --------  ---------- ----------   -----------     --------   -------  ---------  ----------- 
Net loss for the year            -----    -----       -----   (515,206)        -----         ----     -----      -----     (515,206)
Stock options exercised          1,000      100       1,540      -----         -----         ----     -----      -----        1,640
Contributions from                                                                                                                 
 stockholder                     -----    -----     950,000      -----      (950,000)        ----     -----      -----        ----- 
Payments received on                                                                                                               
 stockholder note                -----    -----       -----      -----       531,104         ----     -----      -----      531,104 
Purchase of treasury stock       -----    -----       -----      -----         -----         ----    55,000   (203,993)    (203,993)
Sales of treasury stock          -----    -----       -----      -----         -----         ----   (70,000)   245,861      245,861
                             --------- --------  ---------- ----------   -----------     --------   -------  ---------  -----------
 
Balance as December 31,
 1995, as previously                                                                                                               
 reported                    7,235,552  723,556   8,941,029  2,751,257      (418,896)        ----   122,425    (96,121)  11,900,825 
 
Restatement (Note 15)                                         (513,298)                                                    (513,298)

Balance at December 31,                                                                                    
 1995 as adjusted            7,235,552  723,556   8,941,029  2,237,959      (418,896)        ----   122,425    (96,121)  11,387,527
                             --------- --------  ---------- ----------   -----------     --------   -------  ---------  -----------
 
Net loss for the year            -----    -----       -----   (441,123)        -----         ----     -----      -----     (441,123)
Payments received on
 stockholder note                -----    -----       -----      -----       418,896         ----     -----      -----      418,896
Increase in unrealized
 appreciation included
 in carrying value of
 investments (net of tax
 of $12,262)                     -----    -----       -----      -----         -----       22,770     -----      -----       22,770
                             --------- --------  ---------- ----------   -----------     --------   -------  ---------  -----------

Balance as December 31,
 1996                        7,235,552 $723,556  $8,941,029 $1,796,836         -----     $ 22,770   122,425  $ (96,121) $11,388,070
                             ========= ========  ========== ==========   ===========     ========   =======  =========  ===========
</TABLE>


   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       37
<PAGE>
 
                    THE DWYER GROUP, INC., AND SUBISDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                              ------------------------
                                                1996            1995
                                                ----            ----
                                                          Restated Note 15
                                                          ----------------
<S>                                       <C>             <C>
Cash Flows from Operating Activities:                  
Net loss                                   $  (441,123)    $(1,028,504)
   Adjustments to reconcile net loss                                 
   to net cash used in operating                                
   activities:                                                      
     Depreciation and amortization             522,068         432,443
     Provision for doubtful accounts                                 
      receivable and notes receivable          946,846       1,183,531
     Notes receivable issued for         
      franchise sales                       (1,353,434)     (3,513,119)
     Equity in earnings of investment           13,465          33,561 
     Gain on disposal of property              (42,673)           ----
     Write down of assets held for sale        634,289       1,034,302 
     Loss on disposal of assets held                                 
      for sale                                   8,041         292,614
     Write off of deferred revenue             (87,650)           ----
     Unrealized gains on available for   
      sale securities                           22,770            ----
     Deferred tax asset                       (125,041)       (239,707)
   Changes in assets and liabilities:              
     Accounts receivable                      (332,045)       (209,553)
     Accrued interest receivable               (32,524)       (112,248)
     Inventories                                (7,066)         23,110
     Prepaid expenses                         (112,093)        (37,649)
     Federal income tax receivable            (288,802)       (646,641)
     Other assets                              (11,677)       (106,324)
     Accounts payable and accrued   
      liabilities                               65,319         760,673
     Accounts payable to related                                     
      parties                                 (160,737)        222,227
     Income taxes payable                         ----        (370,271)
     Other payables                            (45,232)       (111,875)
     Franchisee funds held for                                       
      advertising                              141,139          25,452
     Deferred franchise sales revenue         (189,290)      1,047,394
     Other                                    (109,338)         31,841
                                           -----------     -----------
Net cash used in operating activities         (984,788)     (1,288,743)
                                           -----------     -----------
Cash Flows from Investing Activities:                                

     Proceeds from sale of notes          
      receivable                               175,433         379,175
     Payments received on note            
      receivables                              450,037       1,059,087
     Purchases of property and            
      equipment                               (403,507)       (681,372)
     Proceeds from sale of property                                  
      and equipment                            322,661            ----
     Payments for patents, trademarks     
      and franchise rights                     (66,334)        (40,881)
     Net change in notes and accounts                                
      receivable from related parties         (392,668)        421,068
     Acquisition of assets held for                                  
      sale                                    (257,697)       (828,102)
     Proceeds from sale of assets                                
      held for sale                             96,400          70,000
     Purchase of short-term investments,  
      held to maturity                         (84,061)     (1,000,000)
     Purchase of marketable securities,   
      available for sale                      (811,742)           ----
     Acquistion of other assets               (252,500)           ----
     Sales of marketable securities,      
      available for sale                       102,496            ----
     Payments on notes receivable         
      from related parties                      26,033            ----
                                           -----------     -----------
       Net cash used in investing                                    
        activities                          (1,095,449)       (621,025)
                                           -----------     -----------
</TABLE>

                                       38
<PAGE>
 
                    THE DWYER GROUP, INC., AND SUBISDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (CONTINUED)

<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                                         -------------------------------
                                            1996                 1995
                                         -----------          -----------
                                                           RESTATED NOTE 15
                                                           ----------------
<S>                                       <C>              <C> 
Cash Flows from Financing Activities:
   Proceeds from debt issued                 589,559             176,622
   Principal payments of debt               (554,217)           (215,095)
   Proceeds from redemption of stock                                     
    options                                      ---               1,640 
   Payments received on shareholder 
    note                                     418,896             531,104
   Purchase of treasury stock                    ---            (203,993)
   Sales of treasury stock                       ---             245,861
                                         -----------         -----------
 
      Net cash provided by financing 
       activities                            454,238             536,139   
                                         -----------         -----------
Net decrease in cash and cash                                              
 equivalents                              (1,625,999)         (1,373,629)  
                                                                           
Cash and cash equivalents, at beginning                                    
 of year                                   3,446,166           4,819,795   
                                         -----------         -----------
                                                                           
Cash and cash equivalents, end of                                       
 year                                    $ 1,820,167         $ 3,446,166   
                                         ===========         ===========   

Cash paid during the year for:
   Interest                              $    51,000         $    43,000
   Income taxes                              479,000             642,000

</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       39
<PAGE>
 
                     THE DWYER GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  Organization
    ------------

The Dwyer Group, Inc. (the "Parent") is a holding company for service-based
businesses providing specialty services internationally through franchising.
The consolidated financial statements include the accounts of The Dwyer Group,
Inc. and its wholly-owned subsidiaries (collectively the "Subsidiaries" and
together with the Parent, the "Company"). All material intercompany accounts and
transactions have been eliminated in consolidation.

The Company was incorporated in 1970 in the State of Oklahoma under the name Mr.
Rooter Corporation of America, Inc. The Company's name was changed to Mr. Rooter
Corporation ("Mr. Rooter") in 1972, and in 1986 it was reincorporated as a
Delaware corporation. Until May 1, 1993, the Company operated in two segments:
franchising plumbing repair and sewer and drain cleaning services as well as
manufacturing and selling sewer and drain cleaning equipment and supplies. On
May 1, 1993, substantially all of the assets of the manufacturing operations
were sold.

On March 1, 1993, the Company, through Mr. Rooter's wholly-owned subsidiary Aire
Serv Heating and Air Conditioning, Inc. ("Aire Serv"), began to grant licenses
to operate air conditioning and heating repair services under the trade name
Aire Serv.

On June 1, 1993, the Company acquired all of the shares of common stock of
Rainbow International Carpet Dyeing & Cleaning Co. ("Rainbow"), and General
Business Services, Inc. ("GBS") from its majority stockholder, Mr. Donald J.
Dwyer, for 8,070,000 shares (4,035,000 shares after reverse split) of common
stock. With the acquisition of GBS, the Company began operating in another
segment, tax services, through GBS's wholly-owned subsidiary, General Tax
Services, Inc. ("GTS"). These acquisitions have been accounted for similar to a
pooling of interests because all companies were under common control.

Following the acquisition of  Rainbow and GBS, the Board of Directors approved a
plan to convert the Company into a holding company and to form a new subsidiary
to operate the Mr. Rooter business.  On July 30, 1993, this new subsidiary was
incorporated in Texas under the name Mr. Rooter Corporation and the Company was
renamed The Dwyer Group, Inc.

Effective May 1, 1994, the Company acquired Edwin K. Williams & Co. ("EKW"), a
Colorado corporation and wholly-owned subsidiary of Ekwill Acquisition
Corporation ("Ekwill"), a California corporation, for approximately $1,150,000
cash by purchasing all of the outstanding capital stock of Ekwill from Ekwill's
two shareholders. The acquisition of Ekwill has been accounted for using the
purchase method of accounting; accordingly, assets acquired and liabilities
assumed were recorded at their estimated fair values.

Effective September 1, 1994, EKW purchased 33 1/3% of the capital stock of
Service Station Computer Systems, Inc. ("SSCS") for $500,000 cash.  The
investment in SSCS has been accounted for under the equity method.

On September 6, 1994, the Company formed a new wholly-owned subsidiary, Mr.
Electric Corp., ("Mr. Electric"), a Texas corporation.  Mr. Electric is engaged
in franchising electrical contracting service businesses.

On January 4, 1996, the Company formed a new wholly-owned subsidiary, Mr.
Appliance Corp., ("Mr. Appliance").  Appliance is a Texas corporation engaged in
franchising major household appliance service and repair businesses.


B.  Inventories
    -----------

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

                                       41
<PAGE>
 
C.  Property and Equipment
    ----------------------

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to forty years.  The
cost of equipment held under capital leases is equal to the lower of the net
present value of the minimum lease payments or the fair value of the leased
property at the inception of the lease.  Amortization of property capitalized 
under capital leases is included with depreciation expense.


D.  Earnings Per Common Share
    -------------------------

Earnings per share of common stock is computed based on the weighted average
number of shares and common equivalent shares outstanding during each of the
periods.  Earnings per share include the dilutive effect of unexercised stock
options and warrants.

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which 
establishes standards for computing and presenting earnings per share.  SFAS No.
128 requires the replacement of primary earnings per share with basic earnings 
per share.  Basic earnings per share excludes dilution, and is computed by 
dividing income available to common stockholders by the weighted average number 
of common shares outstanding during the period.  The Company will be required to
adopt the provisions of SFAS No. 128 for fiscal 1997.

E.  Cash and Cash Equivalents
    -------------------------

The Company considers all cash and highly liquid investments purchased with a
maturity of three months or less to be cash or cash equivalents. The Company
maintains its cash in bank deposit accounts and certificates of deposit which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risks on cash and cash equivalents. Cash equivalents at December 31, 1996
include, but are not limited to, $490,000 in money market funds and $200,000 in
certificates of deposit. Included in cash equivalents at December 31, 1995 is
$1,374,575 in money market funds and $1,040,494 in certificates of deposit.
Cash and cash equivalents include funds collected from Rainbow, Mr. Rooter, 
Mr. Electric and Aire Serv franchisees and held for national advertising
expenditures only. At December 31, 1996 and 1995 these national advertising
funds held totaled $460,000 and $354,000, respectively.

F.  Short Term Investments
    ----------------------

The company considers all highly liquid debt instruments purchased with a
maturity of not less than three months but not more than twelve months to be
short term investments. At December 31, 1996 the Company maintained a $1,084,000
Canadian bank certificate of deposit purchased with a twelve month maturity
(August 1997) which is to be held to maturity and is carried at cost. The
Company believes it is not exposed to any significant credit risk regarding this
short term investment.

Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity.  Realized gains and losses are included in income.


G.  Franchise Operations
    --------------------

Revenues from the sale of regional franchise agreements and individual
franchises in the United States and master license agreements in foreign
countries are generally recognized, net of an allowance for uncollectible
amounts, when substantially all significant services to be provided by the
Company have been performed.  Regional franchise agreements grant the regional
franchisee the right to sell individual franchises for the Company in the
regional franchisee's territory.  The regional franchisee generally receives a
commission on individual franchises sold as well as a share of future royalties
received by the Company from franchisees in the regional franchisee's territory.
Interest on trade notes receivable is accrued and recorded as income, net of an
allowance for uncollectible amounts, when due.  In situations, however, where
revenue from such sales is collectible over an extended period of time, down
payments are not sufficient and/or collectibility is not reasonably certain,
revenue is recognized on the installment method as amounts are collected.
Interest on trade notes receivable resulting from sales recorded on the
installment method is recorded when received.

                                       42
<PAGE>
 
Revenue from franchise royalties is generally recognized, net of an allowance
for uncollectible amounts, when due from the franchisees.  The Company collects
and holds in escrow 2% of Rainbow, Mr. Rooter, Aire-Serv, Mr. Appliance, and Mr.
Electric franchisee's sales to be used for national advertising.

Revenue from product sales is recognized when orders are shipped.  Revenue from
tax services is recognized upon the completion of the tax service.  For master
license agreements, revenues are recognized upon completion of all significant
initial services provided to the master licensee and upon satisfaction of all
material conditions of the master license.


H.  Assets Held for Sale
    --------------------

On occasion, the Company purchases franchise territories from existing
franchisees, which it markets to new franchisees. If there is a committed buyer
for the acquired franchise territory, the acquisition is recorded as an asset
held for sale at the lower of cost or fair market value. Any gain or loss
realized when the territory is sold is included in operations, see Note 15. The
cost of acquiring a franchise territory where there is not a committed buyer is
expensed.

The Company may repurchase regional franchise rights. Regional franchise
repurchases are recorded at the lower of cost or fair value based upon estimated
cash flows from existing franchises operating in the region. Periodically the
Company assesses the fair value of these areas based on estimated, undiscounted
future cash flows to determine if an impairment in the value has occurred and an
adjustment is necessary. If an adjustment is required, a discounted cash flow
analysis is performed and an impairment loss is recorded. The Company had an
investment of $235,567 in such regional franchises held for sale at December 31,
1996.


I.  Income Taxes
    ------------
Income taxes are provided for the tax effects of transactions reported in the 
financial statements and consist of taxes currently due plus deferred taxes 
related primarily to differences between the basis of Property, Plant & 
Equipment, Inventory, and Accounts and Notes Receivable for financial and income
tax reporting.  The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or 
deductible when the assets and liabilities are recovered or settled.

The Company files a consolidated tax return on behalf of its Subsidiaries. 
Income tax expense is allocated to the Parent and the Subsidiaries as if they 
filed separate tax returns.


J.  Purchased Franchise Rights and Patents and Trademarks
    -----------------------------------------------------

The costs of intangible assets are amortized using the straight-line method over
their estimated lives of seven to fifteen years. Annually, the Company reviews
the recoverability of purchased franchise rights in accordance with SFAS No.
121. The measurement of possible impairment is based primarily on the ability to
recover the balance of the purchased franchise rights from expected future
operating cash flows.

K.  Equity Method Investment
    ------------------------

As of September 1, 1994, E.K. Williams acquired 33 1/3% of the outstanding 
Capital Stock of Service Station Computer Systems, Inc.  ("SSCS") for $500,000 
cash, SSCS is a private concern headquartered in Salinas, California who 
develops and provides computerized bookkeeping products to conventional service 
stations, self-serve stations and convenience store operations.  The investment 
in SSCS has been accounted for using the equity method of accounting.  The cost 
of

                                       43
<PAGE>
 
SSCS in excess of amounts attributable to tangible assets at September 1, 1994
(acquisition date) was approximately $257,000 and is being amortized to
operations over a 10 year period using the straight-line method.


L.  Reclassifications
    -----------------

Certain reclassifications have been made to prior year financial statements to
conform to 1996 presentation.


M.  Use of Estimates
    ----------------

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


N.  Investment Securities
    ---------------------

At December 31, 1996 and 1995, the amortized cost and estimated fair values of 
investment securities by type and contractual maturity are shown below.

<TABLE> 
<CAPTION> 
                                                DECEMBER 31, 1996
                                ----------------------------------------------
                                AMORTIZED         GROSS         ESTIMATED FAIR
                                  COST          UNREALIZED           VALUE
                                                  GAINS
<S>                             <C>             <C>             <C> 

Held-to-Maturity
 Certificate of Deposit
 (due within 1 year)            $1,084,061        $36,179          $1,120,239

Available-for-sale
 Securities                     $  674,214        $35,032          $  709,246


                                                DECEMBER 31, 1995
                                ----------------------------------------------
                                AMORTIZED         GROSS         ESTIMATED FAIR
                                  COST          UNREALIZED           VALUE
                                                  GAINS

Held-to-Maturity
 Certificate of Deposit
 (due within 1 year)            $1,000,000        $25,594          $1,025,594
</TABLE> 

During 1996, the Company sold available-for-sale debt securities for gross 
proceeds of $102,496.  There were no sales of securities classified as 
held-to-maturity investments during 1996 and 1995.

Also included in other assets are debt securities, held to maturity and earning
10.5%.  These securities have a carrying value of $200,000 and $100,000 at 
December 31, 1996 and 1995, respectively, and mature on September 1, 2000.  
Management estimates that the fair value of these securities is $200,000 at
December 31, 1996.


NOTE 2.   REORGANIZATION AND ACQUISITION OF AFFILIATES

In June, 1993, the Company acquired two corporations, Rainbow and GBS,
controlled by its majority stockholder and Chairman for approximately 8,070,000
shares (4,035,000 shares after reverse split) of common stock.  GBS was
purchased by the stockholder on January 11, 1993.  Prior to the acquisition,
both companies were "S" corporations with income taxable to the stockholder not
to the corporation.  The acquisitions are accounted for in a manner similar to a
pooling of interests.

As of May 1, 1994, the Company acquired EKW, a Colorado corporation and 
wholly-owned subsidiary of Ekwill, a California corporation ("Ekwill"), for 
approximately $1,150,000 by purchasing all of the outstanding capital stock of 
Ekwill from Ekwill's two shareholders, CO Data AG, a Swiss company, and Central 
Data BV, a Dutch company, neither of which is affiliated with the Company. The 
acquisition was financed by a short-term loan from an unaffiliated entity at an 
annual interest rate of 12%, and repaid in August 1994. EKW grants licenses for 
the operation of business consulting services (counseling in finance, 
accounting, bookkeeping, tax matters and profit development) to small 
businesses. The acquisition of EKW and Ekwill has been accounted for as a 
purchase and its results of operations have been included in the consolidated 
financial statements from the effective date of acquisition, May 1, 1994. The 
cost of the acquisition was allocated on the basis of the estimated fair value 
of the assets acquired and liabilities assumed. The allocation resulted in 
allocation to purchased franchise rights of approximately $681,000. The 
purchased franchise rights are being amortized over 10 years on a straight-line 
basis.


NOTE 3.    COMMON STOCK, STOCK OPTIONS, WARRANTS AND CERTAIN TRANSACTIONS

A.  Common Stock
    ------------

On December 14, 1994, the Company announced that its Board of Directors
authorized the repurchase of up to 355,500 shares of its common stock
outstanding.  From December 1994 through April 1995 the Company acquired 70,000
shares of Treasury Stock at an approximate cost of $246,000.  On June 9, 1995
the Company sold these 70,000 shares of Treasury Stock, at $3.50 per share.

                                       44
<PAGE>
 
B.  Warrants
    --------

In connection with its July 1994 secondary public offering and included in the
Company's Registration Statement on Form SB-2 (SEC File No. 33-78814) filed with
the Securities and Exchange Commission, the Company issued to the underwriter's
representatives warrants covering the purchase of an additional 125,000 shares
of the Company's common stock at an exercise price of $6.16 (145% of the public
offering price).  Such warrants are exercisable from July 19, 1995 through
July19, 1999.  In addition, 50,000 warrant shares, which Norcross Securities,
Inc., who is a market maker for the Company, acquired from the underwriters of
the Company's initial public offering, were also included in the Registration
Statement on Form SB-2 (SEC File No. 33-78814) filed by the Company in
conjunction with its secondary public offering. These warrants could not be
exercised for a period of twenty-four months from the date of the Offering
Prospectus (July 19, 1994).  After expiration of such two-year period, and for a
period of twelve months (through July 19, 1997), these warrants may be exercised
at a price of $4.25 (secondary offering price per share).


C.  Stock-Based Compensation Plan
    -----------------------------

The Company sponsors various stock-based compensation plans (the "Plans"), which
are described below.  The Company applies APB Opinion 25 and related
Interpretations in accounting for its stock-based compensation plans.  In 1995,
the FASB issued FASB Statement No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of its stock-based compensation
plans.  Adoption of the cost recognition provision of SFAS 123 is optional and
the Company has decided not to elect these provisions of SFAS 123.  However, pro
forma disclosures as if the Company adopted the cost recognition provisions of
SFAS 123 in 1995 are required by SFAS 123 and are presented below.

Under the Plans, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in the form of incentive stock options qualified
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
and nonqualified stock options not qualified under Section 422 of the Code.
Awards may be granted to selected employees and directors of the Company or any
subsidiary.  In 1996 and 1995, the Company granted both incentive stock options
and nonqualified stock options.

Employee Stock Options

In 1996, the Company granted a total of 79,000 awards in the form of incentive
stock options and nonqualified stock options under the Plans.  In 1995, the
Company granted a total of 202,500 awards in the form of incentive stock options
and nonqualified stock options under the Plans. Under the Plans, the incentive
options granted have contractual terms of either 8 or 10 years and the
nonqualified options have contractual terms of 5 years.  The incentive options
granted vest on graded schedule, 20% per year, over 5 years, beginning on the
first anniversary of the date of grant.  The nonqualified options vest either
100% as of the date of grant or 20% per year, over 5 year, beginning on the date
of grant.  All options granted have an exercise price that is equal to the fair
market value of a share of common stock on the grant date.

A summary of the status of the Company's stock options as of December 31, 1996
and December 31, 1995  and the changes during the year ended on those dates is
presented below:   

<TABLE>
<CAPTION>
                                                               1996                                         1995
                                          -----------------------------------------------  --------------------------------------
                                                                             Weighted                                Weighted
                                          # Shares of Underlying              Average      # Share of Underlying      Average
                                                 Options                  Exercise Prices         Options         Exercise Prices
                                          ----------------------          ---------------  ---------------------  ---------------
<S>                                       <C>                             <C>              <C>                    <C>
Outstanding at beginning of the year                  793,326                       $2.32                604,326            $2.07
Granted                                                79,000                       $2.85                202,500            $2.87
Exercised                                                   0                   n/a                        1,000            $1.64
</TABLE> 

                                       45
<PAGE>
 
<TABLE>
<CAPTION> 
<S>                                       <C>                             <C>              <C>                    <C>
Forfeited                                              37,500                       $3.13                 12,500            $2.76
Expired                                                     0                   n/a                            0        n/a
                                                      -------                                            -------
Outstanding at end of year                            834,826                       $2.33                793,326            $2.32
Exercisable at end of year                            647,156                       $2.14                595,826            $2.10
 
 
                                                                  1996                                    1995
                                                                --------                                --------
Weighted-average fair value of all
 options granted during the year                                  $1.54                                   $1.40
</TABLE>
                                        

The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996 and 1995, respectively:  dividend yield of 0% for
both years; risk-free interest rates are different for each grant and range from
5.21% to 6.98%; the expected lives of options are from 2.5 to 6 years; and
volatility of 50% for all grants.

The following table summarized information about stock options outstanding at
 ecember 31, 1996:
<TABLE> 
<CAPTION>
 
 
                    Options Outstanding                          Options Exercisable
-----------------------------------------------------------  ---------------------------
                     Number     Wgtd. Avg.                     Number
    Range of       Outstanding   Remaining     Wgtd. Avg.    Exercisable    Wgtd. Avg.
 Exercise Prices   at 12/31/96  Contr. Life  Exercise Price  at 12/31/96  Exercise Price
-----------------  -----------  -----------  --------------  -----------  --------------
                  
<S>                <C>          <C>          <C>             <C>          <C>
$1.00 to $2.50         551,101         2.86           $1.59      470,931           $1.45
$2.51 to $4.25         283,725         4.52           $3.61      176,225           $3.97
$1.00 to $4.25         834,826         3.43           $2.28      647,156           $2.14
</TABLE>

Non-Employee Stock Options

In 1996, the Company granted 25,000 non-qualified stock options to a non-
employee of the Company.  These options have a contractual term of five years
and vest on a graded schedule of 20% per year, for the next 5 years, beginning
on the date of grant.  As of December 31, 1996, all of the stock options are
outstanding with a weighted-average contractual life of 4.5 years and 5,000 of
these stock options are exercisable at a weight-average price of $3.375.  In
1996, the Company expensed approximately $12,398 as compensation, pursuant to
the requirements of SFAS No. 123.

The fair value of $1.65 was calculated for the stock option granted to non-
employees in 1996.  The fair value was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996:  dividend yield of 0%; risk-free interest rate
of 6.46.%; the expected life of the options is 4.5 years; and volatility of
50%.

Pro Forma net Loss and Net Loss Per Common Share

Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's net loss and net loss per
common share for 1996 and 1995 would approximate the pro forma amounts below:

<TABLE> 
<CAPTION>
                                       For the Year Ended December 31
                               -------------------------------------------------
                               As Reported   Pro Forma  As Reported  Pro Forma
                                   1996        1996         1995        1995 
                               -----------   ---------  -----------  -----------
<S>                            <C>           <C>        <C>          <C>
SFAS 123 Charge                       ----   $  71,000         ----  $    42,000
APB25 Charge                          ----        ----                      ----
Net Loss                         $(441,000)  $(512,000) $(1,029,000) $(1,017,000)
Net Loss Per Common Share           $(0.06)     $(0.07)      $(0.14)      $(0.15)
 
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts SFAS 123 does not apply to awards prior to 1995.

                                       46
<PAGE>
 
NOTE 4.  TRADE NOTES RECEIVABLE - FRANCHISE FEES AND DEFERRED FRANCHISE SALES
REVENUE

The Company receives various notes from the sale of new franchises.  These notes
receivable are generally collateralized by the rights to the related franchise
territory sold, and bear interest at approximately market rates prevailing at
the dates of the transactions.  A summary of such notes receivable as of
December 31, is as follows:

<TABLE>  
<CAPTION>
                                       1996         1995
                                     --------    -----------
<S>                                  <C>          <C>
 
Amounts due within one year          $  616,959   $  826,418
Amounts due after one year, net of
  allowance for uncollectible
  amounts of $1,633,092 and $855,849
  in 1996 and 1995, respectively      4,521,896    4,478,071
                                     ----------   ----------
 
Total notes receivable               $5,138,855   $5,304,489
                                     ==========   ==========
 
</TABLE>  



At December 31, 1996 and 1995, the amounts of deferred revenue from franchise
sales were $2,250,299 and $2,652,057, respectively.  Fees from franchise
sales accounted for by the installment method are collectible in the years 1996
through 2007.


NOTE 5.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The following method and assumptions were used in estimating fair value
disclosures for financial instruments in accordance with Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments:

Cash and cash equivalents - the carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values

Short- term investments - the fair value of short-term investments are estimated
using current interest rates offered for investments of a similar dollar amount
and remaining maturity.

Accounts receivable, accrued interest receivable, accounts payable, accrued
liabilities, and other payables - the carrying amounts reported in the balance
sheet approximates the fair value because of the relatively short maturities of
these items.

Trade notes receivable - the fair values for fixed rate notes receivable are
estimated using discounted cash flow analyses, using interest rates currently
being offered for notes receivable with similar terms to franchisees of similar
credit quality.

Notes payables - the fair values for fixed-rate notes payable are estimated
using a discounted cash flow calculation that applies interest rates currently
available to the Company for issuance of debt with similar terms and remaining
maturities.

                                       47
<PAGE>
 
Assets held for sale - the carrying amount reported in the balance sheet
approximates fair value as these assets are carried at the lower of cost or fair
value.


<TABLE>
<CAPTION>
                                                       DECEMBER 31, 1996              DECEMBER 31, 1995      
                                                   ------------------------     ----------------------------
                                                   CARRYING                          CARRYING                
                                                    AMOUNT       FAIR VALUE           AMOUNT     FAIR VALUE 
                                                   --------      ----------     ---------------  -----------
<S>                                                <C>           <C>                 <C>         <C>        
Assets:                                                                                                     
     Cash and cash equivalents                     $  1,820,167   $ 1,820,167        $3,446,166   $3,446,166
     Short term investment                            1,084,061     1,120,239         1,000,000    1,025,594
     Trade accounts receivable                          616,959       616,959           696,389      696,389 
     Accounts receivable from related parties           414,343       414,343           922,945      922,945
     Accrued interest receivable                        183,272       183,272           150,748      150,748
     Trade notes receivable                           5,208,013     5,039,864         5,304,489    4,797,515
     Notes receivable from related parties            1,447,025     1,447,025           653,403      653,403
     Assets held for sale                               452,428       452,428           398,651      398,651
                                                                                                           
Liabilities:                                                                                               
     Trade accounts payable                           1,007,146     1,007,146           888,307      888,307
     Accounts payable to related parties                 61,490        61,490           222,227      222,227
     Accrued liabilities                              1,149,890     1,149,890         1,208,409    1,208,409
     Other payables                                      22,527        22,527            67,759       67,759
     Notes payable and capital lease obligations        893,070       893,070           528,966      475,875
 
</TABLE>

NOTE 6.  PROPERTY AND EQUIPMENT

A summary of property and equipment as follows:

<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                      --------------------------
                                         1996           1995
                                      ----------      ----------
     <S>                              <C>            <C>
     Land                             $   57,159      $   97,159
     Building and Improvements           184,392         450,431
     Machinery and Equipment           1,530,787       1,141,512
     Furniture and Fixtures              288,864         462,244
     Vehicles                               ---            8,300
                                      ----------      ----------
                                                   
                                       2,061,202       2,159,646
                                                   
     Less accumulated depreciation       801,339         686,783
                                      ----------      ----------
                                                  
                                      $1,259,863      $1,472,863
                                      ==========      ==========
 
</TABLE>

Depreciation expense for the years ended December 31, 1996 and 1995 was
$336,765 and $243,355, respectively.

                                       48
<PAGE>
 
NOTE 7.  INCOME TAXES

Income tax benefit for the years ended December 31, 1996 and 1995
were as follows:
<TABLE> 
<CAPTION> 
                                            1996         1995
                                            ----         ----
                                                      (Restated)
         <S>                              <C>         <C>                   
         Current                          $ (32,841)  $(342,234)
         Deferred                          (125,041)   (239,707)
                                          ---------   ---------

         Total benefit                    $(157,882)  $(581,941)
                                          =========   =========
</TABLE> 

A reconciliation of income tax expense at the federal statutory rate to the
income tax provision at the Company's effective rate is as follows for the years
ended December 31, 1996 and 1995:
<TABLE> 
<CAPTION> 
                                            1996                   1995
                                            ----                   ----
                                    Amount      Percent    Amount      Percent
                                    ------      -------    ------      ------- 
<S>                                <C>         <C>        <C>          <C> 
Federal statutory income tax rate  $(191,184)      (32%)   $(552,365)     (34%)
Valuation allowance                                  -       (29,955)     ( 2%)
Other                                 33,302         6%          379        0% 
                                   ---------    -------     ---------  -------  
                                                                                
Total tax benefit                  $(157,882)      (26%)   $(581,941)     (36%)
                                   =========   =======     =========   =======  
</TABLE>

The components of deferred income tax assets and liabilities at December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
                                                1996          1995
                                                ----          ----
                                                           (Restated)
<S>                                         <C>            <C>
Deferred tax liabilities:                              
   Accelerated depreciation and                               
    amortization                            $  (59,226)    $  (41,817)
   Franchise agreements                       (190,853)      (190,756)
   IRC Section 481 Adjustment
     (changes in accounting method)           (420,505)           ---
                                            ----------     ----------
Total deferred income tax liabilities         (670,584)      (232,573)
                                                       
Deferred tax assets:                                   
   Accrued expenses                             99,312         16,780
   Equity earnings from subsidiary not                       
    currently available                         18,607         14,029
   Net operating losses and tax credits        905,513        928,308
   Reserves                                    621,608        268,073
   Deferred fees                               142,581            ---
   Other                                         2,620            ---
                                            ----------     ----------
Total deferred tax assets                    1,790,241      1,227,189
                                                       
Valuation allowance                            777,611        777,611
                                            ----------     ----------
                                                       
Net deferred income tax (asset)             $  342,046     $  217,005
                                            ==========     ==========
</TABLE>

The Company has available at December 31, 1995, unused preacquisition operating
loss and alternative minimum tax carryforwards of EKW.  The operating loss
carryforwards expire, if not utilized, between 2004 and 2007.  Approximately
$109,000 of the net operating loss carryfowards expire in 2004, $215,000 in 2006
and $32,000 in 2007.  The alternative minimum tax carryforward has no expiration
date.  These preacquisition carryforwards may be used only to offset taxable
income, if any, of EKW and may not be used to offset future taxable income of
any other member of the group with which EKW files a consolidated return.  The
amount of the preacquisition carryforwards which may be applied in any one year
is limited by the Internal Revenue Code to the lesser of EKW's taxable income or
$67,000.  These carryovers have only been recognized for financial reporting
purposes to the extent of EKW taxable temporary differences.  To the extent that
these carryovers exceed EKW taxable temporary differences a valuation allowance
has been created.

                                       49
<PAGE>
 
NOTE 8.  NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

The following notes payable and capital lease obligations were outstanding at
December 31,

<TABLE>  
<CAPTION>
 
                                                                         1996      1995
                                                                       --------  --------
<S>                                                                    <C>       <C>
 
Note payable to bank at 1% over prime (10.75% at
December 31, 1995) due in monthly payments of 
$1,469 through December 1999, collateralized by
land and buildings.  Note paid in full December 1996.                  $    -0-  $ 61,163
 
Note payable to bank at 1% over bank's base rate
(10.25% at December 31, 1995) due in 60 monthly payments
of $6,666 beginning August 1994, collateralized
by GBS assets.                                                              -0-   270,228
 
12.5% note payable due in monthly payments of $2,631 
through June 1996 collateralized by 184,871 shares of 
EKW stock.                                                                  -0-    13,467

$40,000 Bank line of credit at 6.9% interest, payable
interest only until maturity on January 31, 1996.                           -0-    31,500

7.75% mortgage loan at bank due in monthly payments of
$1,029 through November 2025, collateralized by
property in Waco, TX.                                                   142,230       -0-

9.25% mortgage loan at bank due in monthly payments of
$185.48 through November 2010, collateralized by 2/nd/
lien on property in Waco, TX.                                            17,308       -0-

7.76% note payable due in monthly payments of $429
through march 25, 1997, including interest, collateralized
by a van.                                                                 1,339     6,178

Note payable under a line of credit of $200,000, at 7%
interest.  Guaranteed by a $200,000 advertising fund
certificate of deposit.  Expires May 1997.                              150,000       -0-

Note payable to bank at 9.5% interest, due December 6, 2000,
collateralized by telephone system.                                     183,856       -0-

8% note payable to an individual, due in monthly payments of
$3,436 through March 1997.                                                9,889    43,818

10% note payable to an employee due in monthly payments 
starting August 1996 for 34 months.                                      30,219    54,338

Note payable to finance company assumed in 1996 pursuant to
Aire Serv regional franchise repurchase.  $60,000 original
note balance at 10% interest dated October 1, 1994 with a 
6 year term.                                                             53,354       -0-

Note payable with no interest to individual third party due
in initial payment of $4,000 in March 1997 with monthly
payments of $1,500 until paid.                                           56,409       -0-

Note payable with no interest to employee. Minimum due for
$1,000 per month beginning December 1996 with a balloon of the 
remaining balance due November 2002.                                    150,000       -0-

Obligations under capital leases, interest of approximately
13.5%, due in monthly installments through December 2000.                98,466    48,274
                                                                       --------  --------
                                                                        893,070   528,966
Less current portion of notes payable and capital lease
obligations.                                                            280,689   252,289
                                                                       --------  --------

Notes Payable & capital lease obligation - long term                   $612,381  $276,677
                                                                       ========  ========
</TABLE>  

                                       50
<PAGE>
 
Maturities of notes payable and capital lease obligations at December
31, 1996, are as follows:

<TABLE>   
<CAPTION> 
          Year Ending December 31,
          ------------------------
          <S>             <C> 
          1997            $280,689
          1998             126,357
          1999             124,910
          2000             111,504
          2001              28,425
          2002 and beyond  221,185 
                           -------
                          $893,070
                          ========
</TABLE>   


NOTE 9.  RELATED PARTY TRANSACTIONS

The Company engages in a number of transactions with its majority stockholder,
and with entities controlled by the majority stockholder ("affiliates").  The
Company currently leases its principal executive and administrative facilities
from the majority stockholder, under various leases expiring at various times
through October 31, 2001 requiring monthly lease payments of $31,417.  In
addition to rent, the Company receives repairs and maintenance, promotional
materials and other services from entities controlled by its majority
stockholder. The Company expensed $629,769 for these rents and services in 1996,
and $618,106 in 1995.

The Company recognized income from related parties for accounting, legal and
administrative services, interest income, product sales commissions and
management fees totaling $812,985 in 1996 and $554,116 in 1995. In addition,
from time to time, the Company and its affiliates have made advances to each
other, which generally have not had specific repayment terms and have been
reflected in the Company's financial statements as accounts receivable or
payable from related parties. These advances typically result from the payment
of an invoice by one entity for services or items performed or delivered on
behalf of the Company and one or more of its affiliates. The company that pays
the invoice is eventually reimbursed by the other companies for the appropriate
amount based on a pro rata allocation of the services provided to each company.

In 1982 and 1984, Rainbow guaranteed the repayment of approximately $1,500,000
of Mr. Donald Dwyer's personal indebtedness evidenced by industrial revenue
bonds ("IRB's") in connection with Mr. Dwyer's improvements to certain real
estate holdings, including the building of office facilities occupied by the
Company and certain other companies. Rainbow's guaranty was released in 1995 due
to Mr. Dwyer's indebtedness being paid through life insurance proceeds as 
discussed below.   

At the time of Mr. Dwyer's death in December 1994, life insurance with a face
value of approximately $1,050,000 was owned by Rainbow. Rainbow had outstanding
loans against the value of the policy for $136,000 leaving a remaining balance
of $914,000. Therefore, the Company recorded income from the insurance proceeds
of $914,000. The Company received $50,000 of life insurance proceeds in December
1994. The remaining $864,000 proceeds of this insurance were pledged to the
lender of the Industrial Revenue Bonds ("IRB's"), which were secured by
Rainbow's guaranty. Therefore, because of Rainbow's guaranty, the $864,000 of
remaining insurance proceeds were utilized to pay down the IRB's and also
Housing Finance Revenue Bonds for which Rainbow had previously guaranteed and
for which the remaining insurance proceeds were assigned for the benefit of the
estate. As such, the Company in December 1994 recorded a note receivable from
Mr. Dwyer's estate of $864,000. This $864,000 note was paid in full during 1995,
including $34,087 of interest.

The Company, beginning June 1995, agreed to pay an independent director $2,500
per month for investment banking consulting.  In addition, in August 1995 the
Company entered into a consulting agreement with another independent director to
provide consulting services regarding public relations, marketing and special
projects for the Company. During 1996 the Company expensed approximately

                                       51

<PAGE>
 
$171,000 for this independent directors' services. In December 1996, the
Company, along with selected related parties, agreed to convert $908,632 of
related party accounts receivable and accounts receivable from affiliates to
interest bearing (9.25%) notes receivable. These notes are payable in full by
December 31, 2006. In total, accounts and notes receivable from related parties
and officers (current and long-term) increased approximately $285,000 at
December 31, 1996 when compared to December 31, 1995. In February 1995, the
Company reached an agreement with the estate of the late Donald J. Dwyer, Sr.
regarding resolution of the discrepancy between the amount of life insurance on
Mr. Dwyer's life which had been reported and that which was actually in force.
The face amount of life insurance on Mr. Dwyer's life in force at the time of
his death was less than the $2,000,000 of life insurance in force as stated at
the time of the July 19, 1994 offering of Common Stock. The life insurance in
force at the time of Mr. Dwyer's death was $1,050,000, a portion of which
($136,000) had been borrowed against for the benefit of a wholly-owned
subsidiary of the Company, which owned the policies. On February10, 1995 the
estate executed a promissory note in the amount of $950,000 bearing interest of
9% per annum payable February 9, 1997 resolving the discrepancy of life
insurance in force and life insurance previously reported to be in force on Mr.
Dwyer's life. This transaction was recorded in February 1995 as an additional
capital contribution and as a note receivable. The note receivable has since
been classified as a reduction in stockholders' equity. During 1995 the estate
paid principal and interest in the amount of $531,103 and $65,355, respectively.
On December 4, 1996 the estate paid the remaining principal balance and accrued
interest of $418,896 and $38,376, respectively.

NOTE 10. CONCENTRATION OF CREDIT RISK AND CONTINGENCIES FROM NOTES RECEIVABLE

The Company extends credit to individuals to purchase franchises.  These
individuals typically operate their franchises as an owner/manager.  Generally,
the loans are collateralized by the related franchise territory rights.  The
individual's ability to perform is dependent upon the economic condition of the
franchise. In addition, Mr. Rooter, Aire Serv and Mr. Electric have entered into
an agreement with SunTrust Credit ("STI") to finance franchise sales for
franchise applicants who meet STI's qualifications. This financing is with
recourse and STI's recourse states that, in the event of the franchisee's
default, Mr. Rooter, Aire-Serv or Mr. Electric whichever is applicable, has one
hundred eight days to correct the default by getting the franchisee to pay or to
sell the franchise to another approved party, making the original note good, or
by exchanging the note in default with a current note. If at the end of the
first 180 days the default has not been corrected, the responsible company must
pay to STI monthly installments specified in the defaulted franchisee's note,
and all other amounts, if any, specified in the defaulted franchisee's note,
until the note (principal, interest and other amounts, if any) is paid in full.
During 1996 and 1995, Mr. Rooter and Aire Serv exchanged with STI several of
their notes, aggregating approximately $324,000 and $261,000, respectively, for
defaulted notes. In addition, approximately $24,000 and $58,000 were paid by Mr.
Rooter during 1996 and 1995, respectively, to STI, representing monthly
installments on behalf of franchisees. At December 31, 1996 and 1995, Rooter,
Aire-Serv and Mr. Electric were contingently liable for approximately $2,431,000
and $2,749,000 respectively, relating to such notes.

In September, 1996, the Parent, Mr. Rooter, Aire Serv, Mr. Appliance, and Mr. 
Electric entered into an agreement with Phoenix Leasing Incorporated ("Phoenix")
to finance franchise sales for franchise applicants who meet Phoenix's 
qualifications.  Phoenix agreed to provide up to $3,000,000 in debt financing to
the franchisees provided that each franchisee's obligations to Phoenix under its
debt financing be guaranteed by the Parent and the franchising subsidiary for 
such franchisee.  On or about the 15/th/ day of each calendar month, the Parent 
will receive from Phoenix an Aging Report of the amounts due and owing by the 
franchisees as of the first day of such month.  If an Aging Report shows that 
any franchisee has failed to make all of the scheduled monthly payments due 
during any sixty (60) day period, then the Parent, within ten (10) days of 
delivery of such Aging Report, shall pay all of such franchisee's delinquent 
scheduled payments, together with all late charges then due and Phoenix shall 
bill the Parent directly for amounts due and payable under such franchisee's 
loan agreement.  At December 31, 1996, the Parent was contingently liable for 
approximately $29,000 relating to such notes.

                                       52
<PAGE>
 
NOTE 11.  EMPLOYEE BENEFIT PLANS

On July 1, 1995 the Company initiated and continues to sponsor a 401(k) plan
covering all full-time employees who have attained age 21 and completed 90 days
of service.  Plan participants may contribute up to 15% of their annual
compensation before taxes for investment in several investment alternatives.
Employees are fully vested with respect to their contributions.  The Company did
not make any contributions to the plan during 1995 or 1996.  Each year the Board
of Directors will determine the amount of any company contribution based upon
the Company's profitability.

NOTE 12.  COMMITMENT AND CONTINGENCIES

The Company leases its facilities from the majority shareholder under month to
month and non-cancelable operating leases expiring at various dates through
October 31, 2000.  The approximate minimum rental commitments under operating
leases are as follows:
<TABLE>
<CAPTION>
For Years Ending
----------------
<S>                  <C>
     1997            $410,000
     1998             114,000
     1999             103,000
     2000              58,000
     2001              18,000
                     --------
                     $703,000
                     ========
</TABLE> 
                                       53
<PAGE>
 
NOTE 13.   LITIGATION

The Company and its subsidiaries are parties to various legal proceedings
incidental to its normal business activities; many of which are covered by
insurance.  Management of the Company does not believe that the outcome of each
such proceeding or all of them combined will have a material adverse affect on
the Company or its consolidated financial position.  Management has estimated a
potential range of loss due to these proceedings not to exceed $100,000.


NOTE 14.   FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of 1996, various year-end adjustments were recorded to
the consolidated financial statements. The effect of these adjustments was a net
decrease in total assets of $2,301,000, a net decrease in liabilities of
$305,000, a net decrease in stockholder's equity and corresponding increased
net loss of $1,996,000. These adjustments were primarily to increase the
allowance for doubtful accounts and notes receivable, adjustments to and write
downs of assets held for sale and write offs of notes receivables.


NOTE 15. PRIOR PERIOD ADJUSTMENT AND RESTATEMENT OF PREVIOUSLY ISSUED
         FINANCIAL RESULTS

In connection with the December 31, 1996 year end accounting closing and 
subsequent analyses performed, it was determined that an error had been made 
relating to the carrying value of certain nonoperating individual franchises and
regional franchises held for sale at December 31, 1995.  Accordingly, the 
Company has restated its previously issued consolidated financial statements for
the year ended December 31, 1995 to correct the error.  The adjustments to these
assets reduced previously reported total assets at December 31, 1995 by 
$571,445, reduced assets held for resale by $788,450, reduced liabilities by 
$58,147, reduced retained earnings by $513,298 and increased the previously 
reported net loss for the year ended December 31, 1995 by $513,298.  The net 
loss per share for the year ended December 31, 1995 increased by $.07 per share.
                                       
                                      54