<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                  FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
                          -----------------
 
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934  (NO FEE REQUIRED)
For the transition period from _____________________ to ___________________
Commission file number     04863
                        ___________
 
                   SOUTHERN INVESTORS SERVICE COMPANY, INC.
                (Name of small business issuer in its charter)
         Delaware                                            74-1223691
--------------------------------------------------------------------------------
(State or other jurisdiction of                            (I.R.S. Employer 
 incorporation or organization)                             Identification No.)
   

2727 North Loop West, Suite 200, Houston, Texas                    77008 
--------------------------------------------------------------------------------
   (Address of principal executive offices)                      (Zip Code)
                
Issuer's telephone number (713) 869-7800
                          ______________
Securities registered under Section 12(b) of the Exchange Act:

  Title of each class               Name of each exchange on which registered
        None
-------------------------------------------------------------------------------
 
Securities registered under Section 12(g) of the Exchange Act:
                        Common Stock $1.00  Par Value 
-------------------------------------------------------------------------------
                               (Title of Class)

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

   State issuer's revenues for its most recent fiscal year.  $3.0 Million
                                                         
   State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.  (See definition of affiliate in Rule 12b-2 of the Exchange Act). $0.00 as
of March 21, 1997

   State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 3,168,929 shares, Common Stock
$1.00 Par Value as of March 21, 1997

                      DOCUMENTS INCORPORATED BY REFERENCE

   Information contained in the Company's proxy statement to be used in
connection with the 1997 annual meeting is incorporated by reference into 
Part III.
<PAGE>
 
                                    PART I

ITEM 1. DESCRIPTION OF BUSINESS

  Southern Investors Service Company, Inc., was incorporated under the laws of
the State of Delaware in 1972.  Southern Investors Service Company, Inc. and its
subsidiaries (Company) are currently engaged in the operation of a resort
property in west Texas and in the management of residential real estate
development in Texas.

  Prior to 1990, the Company was engaged in the ownership and development of
real estate in the Houston, Texas area.  The operations were significantly
reduced as a result of various debt settlements with lenders and other
creditors.  These settlements resulted in the transfer of substantially all of
the Company's holdings to its creditors during 1990.  Cash flow from operations
has not been adequate to meet the Company's obligations for the past several
years and management projects negative cash flow from operations for 1997.  The
Company has emphasized the management of its resort development in west Texas
and the management of real estate development and operations for others.
Currently, the Company's primary operations include the management of ten
residential developments, two office buildings and its resort in west Texas.
See Note 7 of the Notes to Consolidated Financial Statements of the Company for
a discussion of related party transactions.  Some of these activities are
conducted through joint ventures in which the Company has equity interests.
Unless otherwise indicated, the term "Company" includes these joint ventures.

  The Company's future financial condition depends upon its ability to generate
cash at levels to meet operating needs and debt obligations.  Management is
currently reviewing possible options to settle the Company's existing
liabilities with its very limited resources.  These options include, but are not
limited to, continued efforts to reduce operating expenses (including interest
expense), attempts to increase revenues of the Company's resort development,
continued negotiations with various creditors to settle their accounts for cash
payments at substantially less than the amount due, the settlement of
liabilities through the transfer of assets to creditors in satisfaction of their
claims, a possible plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code or possible liquidation of the Company.

LIABILITY SETTLEMENTS

  During 1995, a joint venture in which the Company had a 19.4% ownership
interest had a note payable with an outstanding principal balance of $5.2
million which was due and payable.  The joint venture was unable to repay this
note at its maturity.  During January 1996, the venture obtained a new loan from
a bank in the original principal amount of $3.0 million.  The proceeds of this
new loan were used to settle the $5.2 million loan plus accrued interest in
full.  As a condition of the new loan, the bank required a ten year lease on the
entire building to be executed by the partners in the ratio of their ownership
interests.  However, due to the financial condition of the Company, the bank
would not accept the Company's lease.  In addition, the building was in need of
repairs and the Company would have been required to make additional capital
contributions to fund these repairs.  The Company, also owed the venture
approximately $70,000 in past due rent for periods prior to 1992.  This rent was
forgiven in January 1996.  As a result of these obligations, the Company sold
its partnership interest to Hallmark Residential Group, Inc. (Hallmark), a
company controlled by Walter M.  Mischer (Chairman of the Board of Directors of
the Company).  In exchange, Hallmark 

                                       2
<PAGE>
 
assumed the Company's obligations in connection with this joint venture and
entered into the ten year lease. In connection with this sale, the Company
retained a 25% cash flow interest in Hallmark's 20% ownership interest. The
Company recognized an extraordinary gain on the settlement of these obligations
of $408,000 during 1996.

  During 1996, the Company settled certain notes payable with aggregate
outstanding principal balance of $345,000 and related accrued interest of
$200,000.  These obligations were satisfied by the foreclosure of properties
which were pledged as collateral for these notes which had an aggregate book
value of $227,000 and a cash payment of $30,000.  The Company recognized
extraordinary gains on these settlements of $288,000.  In addition, the Company
settled certain obligations in connection with cash flow assignments granted to
creditors during 1990, and recorded extraordinary gains of $205,000.
 
  During 1992, the Company restructured the debt of one of its partnerships.
In connection with this restructure, the Company issued a $300,000 principal
amount note payable to the other joint venture partner.  This note was secured
by the Company's 20% equity interest in the venture and was due September 1995.
Due to the Company's financial condition, it was unable to retire this note at
maturity.  During December 1995, the partnership through which the Company held
its 20% interest in the joint venture admitted a new limited partner (Walter M.
Mischer, Trustee) in exchange for a capital contribution of $306,000.  These
funds were used to repay the note and accrued interest.  In exchange for the
capital contribution, the new limited partner will receive (i) the first
$306,000 of any future cash flow, (ii) interest on the $306,000 at 10%
compounded annually, and (iii) 66 2/3% of any remaining cash flow.  As a result
of this transaction, the Company's effective ownership in this partnership was
reduced to 6.7%.

  The Company's other debt consists of unsecured notes payable which were due
September 30, 1993.  These notes are payable to trade creditors of a subsidiary
of the Company that ceased operations during 1989.  The Company has made offers
to these creditors to settle existing claims at less than the amounts due.
During 1996, the Company had made payments of $98,000 in settlement of $186,000
in principal amount of these trade creditor notes plus accrued interest.  During
1995, the Company made payments of $7,000 in settlement of $29,000 in principal
amount of these trade creditor notes plus accrued interest.  As of  December 31,
1996, $473,000 in trade creditor notes and related accrued interest remain in
default.

  The settlements discussed above resulted in extraordinary gains of $1,108,000
in 1996 and $33,000 in 1995.

CONTINUED OPERATIONS

  Management believes that the settlements discussed above have improved the
Company's financial condition, however, debt totaling $4,960,000 has matured and
is currently due and debt totaling $338,000 matures in 1997.  See Note 5 of the
Notes to Consolidated Financial Statements for a discussion of the Company's
debt.

  The ability of the Company to continue as a going concern is dependent upon
its ability to settle or restructure its remaining debt and other obligations
and generate positive cash flow to cover its operating expenses and other cash
requirements. The Company's financial statements have been 

                                       3
<PAGE>
 
prepared in conformity with generally accepted accounting principles assuming
that the Company will continue as a going concern. The financial statements of
the Company do not include any adjustments relating to the recoverability of
asset carrying amounts that might be necessary should the Company be unable to
continue as a going concern. In the event the Company fails to continue as a
going concern, the value of its assets may be substantially less than the value
that normally would be realized in the ordinary course of business.

OPERATIONS

GENERAL

  The Company's most significant asset consists of its resort development in
west Texas known as Lajitas on the Rio Grande.  Rental and other revenue from
the operation of this facility totaled $2.0 million and $2.3 million for the
years ended December 31, 1996 and 1995, respectively.  See Item 2, "Description
of Property."

  Since 1990, the Company has emphasized the management of real estate
development for others. The Company has entered into contracts to manage,
operate and develop residential property, including the performance of various
administrative functions.  As of December 31, 1996, the Company managed nine
residential developments, which provide for total monthly payments of
approximately $54,000.  Walter M. Mischer has effective ownership interests
ranging from 33% to 100% in these residential developments.  In addition, during
1995, the Company entered into a management agreement which provides for monthly
payments of $6,000 with a partnership in which Mr. Walter M. Mischer, Jr. has a
50% ownership interest.  Such contracts may be canceled on 30 days' notice.  See
Note 7 of the Notes to Consolidated Financial Statements of the Company for a
discussion of management contracts with related parties.

  The Company has a 6.7% equity interest in a ten-story building located at 2707
North Loop West. The Company also has a cash flow interest in 2727 North Loop
West, where its corporate headquarters are located. The Company has management
contracts covering these two properties which provide for monthly fees of
approximately $10,000.  Approximately 89% of the aggregate space in these two
buildings is leased.

  In addition, the Company's equity interests in real estate joint ventures
range from 6.7% to 50%.  As of December 31, 1996, the real estate joint ventures
accounted for on the equity method had total assets of $2.1 million.  See Note 3
of the Notes to Consolidated Financial Statements of the Company for a
discussion of the Company's investments in joint ventures, and Note 7 for a
discussion of lot sales contracts with related parties.

MANAGEMENT OF RESIDENTIAL REAL ESTATE DEVELOPMENT

  In connection with its management activities, the Company has entered into
contracts to develop residential subdivisions and commercial sites.  These
subdivisions, most of which are located in independent school districts within a
25-mile radius of downtown Houston, may include residential lots and commercial
sites held for sale to builders and other developers.

                                       4
<PAGE>
 
  Following the purchase of development acreage by the owner, a master plan is
devised for the proposed subdivision setting forth the residential lots and
commercial sites to be developed.  The Company negotiates contracts for, and
supervises the construction of, all improvements to the development acreage to
prepare the lots for sale to homebuilders.

  Unless the acreage is located within a municipality or an existing utility
district, the Company will assist in the formation of a municipal utility
district to supply water, sanitary sewage and storm drainage service to the
planned subdivision.

EMPLOYEES

  The Company employed a total of 93 persons on a full-time basis and a total of
6 persons on a part-time basis, as of December 31, 1996.

COMPETITION

  Real estate development management is a highly competitive business.  The
Company competes with a number of other experienced managers and developers in
the greater Houston area.  Certain of these competitors operate on a nationwide
basis and have substantially greater financial resources than the Company.  The
Company's resort development in west Texas does not have any direct competition
due to its location.  The only other resort facility in the area offering
accommodations and other amenities is the Big Bend National Park.

REGULATION

  The Company's real estate development management activities are subject to
regulation by municipal, county, state and federal governments. Federal
regulatory agencies, such as the Veterans Administration and the Federal Housing
Administration, provide mortgage guarantees or insurance to lenders only when
the mortgaged properties comply with requirements affecting the design criteria
of the subdivisions.  Most of the subdivisions are designed to comply with the
requirements of such federal agencies, although in many instances mortgage funds
are supplied by conventional lenders.  The Company may be required to
participate in filing environmental impact statements or similar documents prior
to the commencement of the development of certain subdivisions that are subject
to the provisions of the Environmental Protection Act.  Subdivision developments
within the city of Houston or its extraterritorial jurisdiction are also subject
to certain land platting and other standards administered by the City of Houston
Department of Planning and Development.  In addition, the Texas Natural Resource
and Conservation Commission (TNRCC) must issue a permit approving the discharge
of treated sewage effluents and the Harris-Galveston Coastal Subsidence District
must issue a water well permit.  Compliance with the regulations promulgated by
these authorities does not have a materially adverse effect on the management
activities of the Company.

  The successful development of subdivisions in the greater Houston area is
dependent to a significant degree upon the developer's ability to secure the
formation of municipal utility districts for its subdivisions. The organization
of municipal utility districts is subject to approval by either the Legislature
of the State of Texas or the TNRCC.  The issuance of bonds by a municipal
utility district is subject to the approval of the projects as feasible by the
TNRCC and the approval of the bonds as 

                                       5
<PAGE>
 
legally issuable by the Attorney General of the State of Texas. Municipal and
county governments also regulate certain municipal utility district activities.

  The Company's real estate management activities are subject to local building
code requirements.

CURRENT BUSINESS CONDITIONS

  Current economic conditions affecting the Company and its financial condition
are discussed more fully in Item 6, "Management's Discussion and Analysis or
Plan of Operation" and in Note 1 of the Notes to Consolidated Financial
Statements of the Company.

ENVIRONMENTAL MATTERS

  The management operations of the Company are subject to various federal, state
and local laws and regulations relating to the environment.  Violation of any of
these federal statutes and regulations or orders issued thereunder, as well as
any relevant state and local laws and regulations, could result in civil or
criminal enforcement actions.  Engineers or other qualified experts perform
geological fault and environmental site assessments, wetland determinations and
review hazardous and toxic waste site history.  Development of some properties
may be significantly impacted by wetlands regulations. Enforcement of these
regulations is managed by the Army Corps of Engineers and the U.S. Fish and
Wildlife Department as to the application of wetlands regulations.  Ongoing
modification of these regulations could mean that portions of properties that
were considered not to contain wetlands, now, in fact, contain wetlands.  To
qualify for Federal Housing Administration's approved status, all subdivisions
are subject to inspection for wetlands by the U.S. Fish and Wildlife Department.
In the absence of the Army Corps of Engineers or U.S. Fish and Wildlife
Department's inspection of the property, it cannot be accurately predicted as to
whether or not any particular property contains wetlands.  In addition  to other
applicable law, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), provides for cleanup of sites from
which there has been a release or threatened release of hazardous substances and
authorizes the Environmental Protection Agency (EPA) to take any necessary
response actions at such sites, including requiring potentially responsible
parties (PRPs) to take or pay for such actions.  PRPs are broadly defined under
CERCLA and include past and present owners and operators of a site.  Courts have
interpreted CERCLA to impose strict, joint and several liability upon persons
liable for response costs.  The Company is not aware of any potentially material
environmental liability relating to any property in which the Company has an
interest.  However, there can be no assurance that no such liability exists, or
that future developments will not result in material costs and liabilities being
imposed on the Company.  It is possible that future environmental requirements
may be more stringent than current requirements.

OTHER FACTORS

  The real estate management and development businesses are sensitive to changes
in economic conditions, interest rates, availability of mortgage funds for new
residential and commercial construction, employment levels and demand for
housing in a particular area.  Scarcity of mortgage funds, high unemployment and
decreased housing demand could affect the Company adversely.

                                       6
<PAGE>
 
  The Company's subdivision management and development activities, as well as
its resort in west Texas, are sensitive to weather conditions.  Prolonged
periods of inclement weather may impact these operations adversely.

FEDERAL TAX LAW CHANGES

  The effects on the Company of the Revenue Reconciliation Act of 1993 and the
Tax Reform Act of 1986 are discussed in Note 4 of the Notes to Consolidated
Financial Statements of the Company.

ITEM 2.  DESCRIPTION OF PROPERTY

  The Company's most significant asset consists of a resort development in west
Texas known as Lajitas on the Rio Grande.  The Company's net investment in this
property was $2.5 million or 72% of total assets as of December 31, 1996.  The
development consists of approximately 24,000 acres of land located in the
southwest portion of Brewster County adjacent to the western border of Big Bend
National Park.  A substantial portion of the 24,000 acres is pledged to secure
borrowings of the Company.  The development includes a hotel, condominiums, a
restaurant, meeting rooms, various shops and other facilities in various
separate one and two-story buildings.  The development has ancillary site
improvements consisting of a nine-hole golf course, recreational vehicle park,
swimming pool, tennis courts, landing strip and an airplane hangar.

  Rental and other revenues from the operation of these facilities totaled $2.0
million and $2.3 million for the years ended December 31, 1996 and 1995,
respectively.  Rental revenue and occupancy statistics for the Company's resort
operations for each of the two years ended December 31, 1996 are summarized as
follows:
 
                                             Year Ended December 31,
                                            -------------------------
                                                1996         1995
                                            ------------  -----------
Hotel rooms:
  % Occupancy                                        39%          52%
  Average rate                               $    57.99   $    55.19
  Total revenue                              $  729,000   $  950,000
Condominiums:
  % Occupancy                                        25%          34%
  Average rate                               $   113.33   $   116.21
  Total revenue                              $  134,000   $  237,000
 
Total rental revenues                        $  863,000   $1,187,000
Restaurant, bar and golf course revenues        705,000      702,000
Other revenues                                  455,000      444,000
                                             ----------   ----------
Total revenues                               $2,023,000   $2,333,000
                                             ==========   ==========

  The development has a basis for federal income tax reporting of approximately
$1.7 million as of December 31, 1996.  The improvements are depreciated using
the straight-line method with lives which range from twelve to forty years.  The
realty tax rate for 1996 was $1.77 per $100 assessed value and total taxes were
approximately $64,000 for the year ended December 31, 1996.  Due to the location
of the development and lack of public fire protection, the Company considers the
cost of 

                                       7
<PAGE>
 
obtaining insurance prohibitive and consequently, does not carry property
insurance for this development.

  The Company's principal executive offices are located in northwest Houston and
are leased on a month to month basis for an aggregate annual rental of
approximately $75,000.  Of the 20,000 square feet contained on the second floor,
the Company has subleased approximately 3,000 square feet from companies
affiliated with Mr. Mischer.  The Company owns or leases office furniture,
furnishings, equipment and vehicles as management deems necessary for its
operations.  Information concerning encumbrances on the property owned by the
Company and subleases from a related party is contained in Notes 3, 5 and 7 of
the Notes to Consolidated Financial Statements of the Company.

  See "Real Estate Operations" in Item 1 for information with respect to
additional properties owned or managed by the Company.

  The Company has planned no significant additions to its properties 
during 1997.

ITEM 3.  LEGAL PROCEEDINGS

  The information with respect to legal proceedings is contained in Note 6 of
the Notes to Consolidated Financial Statements of the Company.

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

  No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.

                                       8
<PAGE>
 
                                    PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  The Company's common stock is traded on the over-the-counter market, but is
not quoted on the National Association of Securities Dealers Automated Quotation
(NASDAQ) system.  According to National Quotation Bureau, Incorporated, the last
reported price of the Company's common stock was $.0625 on June 18, 1993.  There
were no prices quoted after that date.

  The approximate number of holders of record of the Company's stock as of 
March 17, 1997 was 518.  No dividends have been paid by the Company since its
inception and the Company has no plans to pay dividends in the foreseeable
future.

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

  This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  All statements other than
statements of historical fact included in this section and elsewhere in this
report are forward looking statements and, although the Company believes that
the expectations reflected in such forward looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
The Company's business and financial results are subject to various risks and
uncertainties, including the Company's ability to settle or restructure its
remaining debt and other obligations and to generate positive cash flow to cover
its operating expenses, that may cause actual results to differ materially from
the Company's expectations.  The Company does not intend to provide updated
information other than as otherwise required by applicable law.  All subsequent
written and oral forward looking statement attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements contained in this paragraph and elsewhere in this report.

                                       9
<PAGE>
 
  The following is a summary of certain financial information regarding the
Company.  All amounts are stated in thousands of dollars, except per share
amounts.  This summary should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto.
 
                                            Year Ended December 31,
                                           -------------------------
                                               1996         1995
                                           ------------  -----------
 
Resort revenues                              $   2,023    $   2,333
Real estate revenues, net                          997        1,431
Resort operating expenses                       (2,490)      (2,268)
Other operating expenses                          (933)        (966)
Interest expense                                  (403)        (458)
                                             ---------    ---------
Income (loss) before extraordinary gain           (806)          72
Extraordinary gain on debt settlements           1,108           33
                                             ---------    ---------
Net income                                   $     302    $     105
                                             =========    =========
Income (loss) per common share:
  Before extraordinary gain                  $   (0.25)   $    0.02
  Net income                                 $    0.10    $    0.03
Total assets                                 $   3,422    $   4,074
Total debt                                   $   5,545    $   6,134
Total stockholders' deficit                  $  (4,552)   $  (4,854)

CURRENT BUSINESS CONDITIONS, CERTAIN EVENTS AND UNCERTAINTIES

  Prior to 1996, the Company had sustained losses from operations for  several
years and the Company anticipates that it will incur a loss from operations for
1997.  Such losses depleted the Company's stockholders' equity in 1989.  Cash
flow from operations has not been sufficient to meet liquidity needs during the
past several years and the Company anticipates negative cash flow from
operations during 1997.  The Company's operations are concentrated in Texas,
which from 1986 to 1988 was adversely affected by the downturn in the energy and
real estate markets.  Reduced revenues during this period resulted in a
deterioration of the Company's financial condition and its ability to meet its
obligations.  As a result, since 1989, the Company has entered into a series of
transactions to significantly reduce its debt obligations through the transfer
of a significant amount of the Company's assets to its lenders and creditors.

LIABILITY SETTLEMENTS

  During 1995, a joint venture in which the Company had a 19.4% ownership
interest had a note payable with an outstanding principal balance of $5.2
million which was due and payable.  The joint venture was unable to repay this
note at its maturity.  During January 1996, the venture obtained a new loan from
a bank in the original principal amount of $3.0 million.  The proceeds of this
new loan were used to settle the $5.2 million loan plus accrued interest in
full.  As a condition of the new loan, the bank required a ten year lease on the
entire building to be executed by the partners in the ratio of their ownership
interests.  However, due to the financial condition of the Company, the bank
would not accept the Company's lease.  In addition, the building was in need of
repairs and the Company would have been required to make additional capital
contributions to fund these repairs.  The Company, also owed the venture
approximately $70,000 in past due rent for periods prior to 1992.  

                                       10
<PAGE>
 
This rent was forgiven in January 1996. As a result of these obligations, the
Company sold its partnership interest to Hallmark Residential Group, Inc.
(Hallmark), a company controlled by Walter M. Mischer. In exchange, Hallmark
assumed the Company's obligations in connection with this joint venture and
entered into the ten year lease. In connection with this sale, the Company
retained a 25% cash flow interest in Hallmark's 20% ownership interest. The
Company recognized an extraordinary gain on the settlement of these obligations
of $408,000, during 1996.

  During 1996, the Company settled certain notes payable with aggregate
outstanding principal balance of $345,000 and related accrued interest of
$200,000.  These obligations were satisfied by the foreclosure of properties
pledged as collateral for these notes which had an aggregate book value of
$227,000 and a cash payment of $30,000.  The Company recognized extraordinary
gains on these settlements of $288,000.  In addition, the Company settled
certain obligations in connection with cash flow assignments granted to
creditors during 1990, and recorded extraordinary gains of $205,000.

  During 1992, the Company restructured the debt of one of it its partnerships.
In connection with this restructure, the Company issued a $300,000 principal
amount note payable to the other joint venture partner. This note was secured by
the Company's 20% equity interest in the venture and was due September 1995. Due
to the Company's financial condition, it was unable to retire this note at
maturity. During December 1995, the partnership through which the Company held
its 20% interest in the joint venture admitted a new limited partner (Walter M.
Mischer, Trustee) in exchange for a capital contribution of $306,000. These
funds were used to repay the note and accrued interest. In exchange for the
capital contribution, the new limited partner will receive (i) the first
$306,000 of any future cash flow, (ii) interest on the $306,000 at 10%
compounded annually, and (iii) 66 2/3% of any remaining cash flow. As a result
of this transaction, the Company's effective ownership in this partnership was
reduced to 6.7%.

  The Company's other debt consists of unsecured notes payable which were due
September 30, 1993.  These notes are payable to trade creditors of a subsidiary
of the Company that ceased operations during 1989.  The Company has made offers
to these creditors to settle existing claims at less than the amounts due.
During 1996, the Company had made payments of $98,000 in settlement of $186,000
in principal amount of these trade creditor notes plus accrued interest.  During
1995, the Company made payments of $7,000 in settlement of $29,000 in principal
amount of these trade creditor notes plus accrued interest.  As of December 31,
1996, $473,000 in trade creditor notes and related accrued interest remain in
default.

  The settlements discussed above resulted in extraordinary gains of $1,108,000
in 1996 and $33,000 in 1995.

CONTINUED OPERATIONS

  As more fully described in Note 5 of the Notes to Consolidated Financial
Statements, the Company continues to be delinquent on certain debt with an
outstanding principal balance of approximately $4,960,000 and debt with
aggregate outstanding balances of approximately $338,000 will mature during
1997.  The Company has also guaranteed certain debt of one of its former
subsidiaries which had an outstanding balance of $1.1 million at December 31,
1996.  The Company must settle or restructure existing debt and generate
positive cash flow to cover operating expenses and other cash requirements to
continue as a going concern and to realize the carrying amount of its 

                                       11
<PAGE>
 
assets. The Company's future financial condition depends upon its ability to
generate cash at levels to meet operating needs and debt obligations. Management
is currently reviewing possible options to settle the Company's existing
liabilities with its very limited resources. These options include, but are not
limited to, continued efforts to reduce operating expenses (including interest
expense), attempts to increase revenues of the Company's resort development,
continued negotiations with various creditors to settle their accounts for cash
payments at substantially less than the amount due, the settlement of
liabilities through the transfer of assets to creditors in satisfaction of their
claims, a possible plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code or possible liquidation of the Company. The consolidated
financial statements do not include any adjustments relating to the
recoverability of asset carrying amounts or the amount and classification of
liabilities that might be necessary if the Company is unable to continue as a
going concern.

RESULTS OF OPERATIONS

  Loss before extraordinary gains was $806,000 in 1996 compared with income
before extraordinary gains of $72,000 in 1995. The Company recorded
extraordinary gains on debt settlements of  $1,108,000 during 1996 and $33,000
during 1995.  Net income was $302,000 or $.10 per share for 1996 compared to net
income of $105,000 or $.03 per share for 1995.

  Rentals and other income from the Company's resort in west Texas were $2.0
million and $2.3 million for the years ended December 31, 1996 and 1995,
respectively.  The decrease in rental and other income was due to decreased
occupancy during 1996 which was higher during 1995 as a result of rentals in
connection with the production of a movie during 1995.  In addition, occupancy
declined during 1996 due to dry weather and low water conditions for rafting and
other river related activities. Resort operating expenses increased due to
additional expenditures for maintenance, operating supplies, linen and glassware
replacements and other operating expenses.  See Item 2, "Description of
Property" included herein for a discussion  of the Company's resort development.

  Real estate revenues decreased to $997,000 in 1996 from $1,431,000 in 1995.
This decrease was primarily due to the 1995 receipt of $225,000 in connection
with its ownership of a net profits interest in a Houston subdivision.  The net
profits interest was retained by the Company as part of a 1990 debt restructure
and the conditions of the profits interest were satisfied during 1995.  In
addition, during 1995 the Company received a construction supervision fee of
$239,000 in connection with a lease of a portion of the building in which the
Company had a joint venture ownership interest.  During 1995, the Company sold
all of its shares of the stock of Space Industries, Inc. for a gain of $143,000.
All of these transactions represented 100% of the revenues to be earned from
these sources and are considered nonrecurring items of income.  During 1996, the
Company sold a large portion of its minority ownership in Jackson Supply
Company, a former subsidiary of the Company and recorded a profit of $116,000.
These amounts are included in interest and other income shown below.

                                       12
<PAGE>
 
  Real estate revenues, net include the following amounts:
 

(Thousands of Dollars)                       Year Ended December 31, 
--------------------------------------------------------------------------------
                                                 1996         1995    
--------------------------------------------------------------------------------
                                                                      
Management fees                                $      795    $     777
Interest and other income                             150          633
Equity in income of real                                              
  estate joint ventures                               43            21
Sales of real estate                                 107            --
Cost of real estate sales                            (98)           --
--------------------------------------------------------------------------------
Total real estate revenues, net                $     997     $   1,431
================================================================================

LIQUIDITY AND CAPITAL RESOURCES

  Cash flow from operations has not been sufficient to meet the Company's
obligations for the past several years and management anticipates that cash flow
from operations will not be sufficient to meet its liquidity needs in 1997. The
financial condition of the Company indicates that, unless operating results and
cash flow improve, the Company will be required to borrow funds or to continue
to sell assets.  There can be no assurance that the Company could arrange to
borrow funds from other sources or to sell sufficient assets to meet its cash
needs or restructure its existing debt.
 
  As of December 31, 1996, the Company was delinquent on notes payable and other
long-term debt of approximately $4,960,000 and interest payments of $1,299,000.
During 1997, approximately $338,000 of principal payments on real estate notes
payable and other long-term debt will be due. In addition, as of December 31,
1996, the Company had recorded accounts payable and accrued expenses and other
liabilities of $2.4 million. Management is currently reviewing possible options
to settle the Company's existing liabilities with its very limited resources.
These options include, but are not limited to, continued efforts to reduce
operating expenses (including interest expense), attempts to increase revenues
of the Company's resort development, continued negotiations with various
creditors to settle their accounts for cash payments at substantially less than
the amount due, the settlement of liabilities through the transfer of assets to
creditors in satisfaction of their claims, a possible plan of reorganization
under Chapter 11 of the U.S. Bankruptcy Code or possible liquidation of the
Company.  The Company's debts and obligations are discussed in Notes 1, 3, 5, 6,
and 7 of Notes to Consolidated Financial Statements of the Company.

  With the exception of the improvements and a portion of the land located at
the Company's resort development in west Texas, substantially all of the
Company's real estate assets are pledged to secure debt.  Management believes
that in a stable market the values of the properties would exceed the balances
of the loans which they secure.  If the Company were to sell or dispose of its
real estate assets as a result of the maturity or acceleration of the underlying
debt or for reasons other than those arising in the normal course of business,
it is anticipated that sales prices would be significantly less than the current
carrying amount of the assets and such sales or dispositions would not generate
sufficient funds to retire the debt related to such assets.

                                       13
<PAGE>
 
  In assessing the Company's liquidity, the impact of the Revenue Reconciliation
Act of 1993 has been considered.  Although the impact of the tax law changes is
difficult to determine, the Company does not expect these changes to
significantly affect its cash flow in the foreseeable future because of its net
operating loss carryforward.  The Company's federal income taxes are disclosed
in Note 4 of the Notes to Consolidated Financial Statements of the Company.

  The impact of inflation on the Company over the past several years has been
minimal.

  No major additions to property, plant and equipment are anticipated.

ITEM 7.  FINANCIAL STATEMENTS

  The financial statement data required pursuant to this item are included
herein.

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

  None.

                                       14
<PAGE>
 
                                   PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

  The information required by Item 9 is contained in the Company's proxy
statement to be used in connection with its 1997 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Director,"
which information is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

  The information required by Item 10 is contained in the Company's proxy
statement to be used in connection with its 1997 annual meeting of stockholders
under the caption "Executive Compensation," which information is incorporated
herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by Item 11 is contained in the Company's proxy
statement to be used in connection with its 1997 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Director,"
which information is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by Item 12 is contained in the Company's proxy
statement to be used in connection with its 1997 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Director,"
which information is incorporated herein by reference.

                                       15
<PAGE>
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

  (A) Exhibits Required by Item 601 of Regulation S-B
                                                      *Filed Herein or
                                                      Incorporated by Reference
                                                      from Exhibit
                                                      _________________________

      (3)  (a)  Certificate of Incorporation as       3(a) 1981 Form 10-K
                 Amended through June 6, 1989
           (b)  Articles of Amendment to              3(b) 1989 Form 10-K
                 Certificate of Incorporation
                 dated June 7, 1989
           (c)  Articles of Amendment to              3(c) 1993 Form 10-KSB
                 Certificate of Incorporation
                 dated May 21, 1993
           (d)  Bylaws as Amended through             3(b) June 30, 1989
                 date hereof                               Form 10-Q
  
       (22)    Subsidiaries of the Registrant              Exhibit 21
 
       (27)    Financial Data Schedule                     Exhibit 27

        (2)    Financial Statements -

               Report of Independent Public Accountants

               Consolidated Balance Sheet -
                December 31, 1996

               Consolidated Statements of Income for
                each of the Two Years Ended
                December 31, 1996 and 1995

               Consolidated Statements of Changes in Stock-
                holders' Deficit for each of the Two Years
                Ended December 31, 1996 and 1995

               Consolidated Statements of Cash Flows for
                each of the Two Years Ended
                December 31, 1996 and 1995

               Notes to Consolidated Financial Statements

  (B) Reports on Form 8-K

      The Company filed no reports on Form 8-K during the quarter ended
      December 31, 1996.

                                       16
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Southern Investors Service Company, Inc.:

We have audited the accompanying consolidated balance sheet of Southern
Investors Service Company, Inc. (a Delaware Corporation), and subsidiaries (the
Company) as of December 31, 1996, and the related consolidated statements of
income, changes in stockholders' deficit and cash flows for each of the two
years in the period ended December 31, 1996.  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 audit.

We conducted our audit 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 audit provides 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 Southern Investors Service
Company, Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

The Company's cash flow from operations has not been adequate to meet the
Company's obligations for the past several years.  Management projects negative
cash flow from operations for 1997 and the Company has a deficit in
stockholders' equity.  As described in Note 5 to the Consolidated Financial
Statements, even though the Company has restructured certain indebtedness in the
last several years, it continues to be delinquent on $4,960,000 of debt and debt
with an aggregate outstanding balance of approximately $338,000 matures in 1997.
As discussed in Note 6 to the Consolidated Financial Statements, the Company is
involved in litigation and other contingencies, the outcome of which are
uncertain at this time.  These factors raise substantial doubt about the
Company's ability to continue as a going concern and to realize the carrying
amount of its assets.  Management is currently reviewing options in regard to
these matters as described in Note 1 to the Consolidated Financial Statements.
There can be no assurance that actual events will occur in accordance with the
assumptions considered in the options management is currently reviewing.  The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern and the consolidated financial
statements do not include any adjustments, which could be significant, that
might result from the outcome of the uncertainties described above.


                                                             Arthur Andersen LLP

Houston, Texas
March 7, 1997

                                       17
<PAGE>
 
           SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 1996
                            (Thousands of Dollars)
 
ASSETS
 
REAL ESTATE ASSETS:
 Resort development, net                                      $  2,471
 Real estate held for resale or development                         98
 Equity in real estate joint ventures, net                         499
                                                              --------
  Total real estate assets                                       3,068
 
CASH                                                               154
ACCOUNTS RECEIVABLE                                                188
OTHER ASSETS                                                        12
                                                              --------
  Total assets                                                $  3,422
                                                              ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
LIABILITIES:
  Notes payable, including $4,487 matured                     $  5,072
  Other debt, matured                                              473
  Accounts payable and accrued expenses                          2,120
  Other liabilities                                                309
                                                              --------
       Total liabilities                                         7,974
                                                              --------
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' DEFICIT:
  Preferred stock, $1 par, 1,000,000
       shares authorized, none issued                               --
  Common stock, $1 par, 10,000,000 shares authorized,
       3,281,331 shares issued                                   3,281
  Additional paid-in capital                                     3,031
  Retained deficit                                             (10,738)
  Less treasury stock, 112,402 shares, at cost                    (126)
                                                              --------
       Total stockholders' deficit                              (4,552)
                                                              --------
       Total liabilities and stockholders' deficit            $  3,422
                                                              ========
 
        The accompanying notes are an integral part of this statement.

                                       18
<PAGE>
 
           SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                            (Thousands of Dollars,
                           Except Per Share Amounts)
 
                                                  Year Ended December 31,
                                                  -----------------------
                                                     1996         1995       
                                                  ----------   ----------    
                                                                             
RESORT REVENUES                                   $    2,023   $    2,333    
                                                                             
REAL ESTATE REVENUES, NET                                997        1,431    
                                                  ----------   ----------    
                                                       3,020        3,764    
                                                  ----------   ----------    
RESORT OPERATING EXPENSES                              2,490        2,268    
                                                                             
OTHER OPERATING EXPENSES                                 933          966    
                                                  ----------   ----------    
                                                       3,423        3,234    
                                                  ----------   ----------    
INCOME (LOSS) FROM OPERATIONS                           (403)         530    
                                                                             
INTEREST EXPENSE                                        (403)        (458)   
                                                  ----------   ----------    
INCOME (LOSS) BEFORE INCOME TAXES  AND                                       
 EXTRAORDINARY GAINS                                    (806)          72    
                                                                             
INCOME TAXES (Net of tax operating loss                                      
 carryforward realization of $24 in 1995)                 --           --    
                                                  ----------   ----------    
INCOME (LOSS) BEFORE EXTRAORDINARY                                           
 GAINS                                                  (806)          72    
                                                                             
EXTRAORDINARY GAINS ON DEBT SETTLEMENTS                                      
 (Net of tax provision and operating                                         
 loss carryforward realization of                                          
 $377 and $11)                                         1,108           33    
                                                  ----------   ----------    
NET INCOME                                        $      302   $      105    
                                                  ==========   ==========    
INCOME PER COMMON SHARE:                                                     
                                                                             
 Income (Loss) before extraordinary gains         $    (0.25)  $     0.02    
                                                  ==========   ==========    
 Net Income                                       $     0.10   $     0.03    
                                                  ==========   ==========    
AVERAGE NUMBER OF SHARES OUTSTANDING               3,168,929    3,168,929    
                                                  ==========   ==========    
 
       The accompanying notes are an integral part of these statements.

                                       19
<PAGE>
 
           SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
                            (Thousands of Dollars)

 
                                Common Stock                
                              -----------------  Additional 
                                                  Paid-In    Retained  Treasury 
                               Shares    Amount   Capital     Deficit    Stock  
                              --------- -------- ----------  --------- --------
                                                                                
BALANCE, December 31, 1994    3,281,331  $ 3,281   $  3,031  $(11,145)  $  (126)
  Net income                         --       --         --       105        -- 
                              ---------  -------   --------  --------   ------- 
                                                                                
BALANCE, December 31, 1995    3,281,331    3,281      3,031   (11,040)     (126)
  Net income                         --       --         --       302        -- 
                              ---------  -------   --------  --------   ------- 
                                                                                
BALANCE, December 31, 1996    3,281,331  $ 3,281   $  3,031  ($10,738)    ($126)
                              =========  =======   ========  ========   =======



       The accompanying notes are an integral part of these statements.

                                       20
<PAGE>
 
           SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Thousands of Dollars)
 
 
                                                        Year Ended December 31,
                                                       ------------------------
                                                           1996         1995   
                                                       ------------  ----------
Cash flows from operating activities:                                          
  Net income                                             $   302       $   105 
  Adjustments to reconcile net income                                          
    to net cash provided by (used in)                                          
    operating activities:                                                      
    Extraordinary gains on debt settlements               (1,108)          (33)
    Equity in undistributed income of real estate                              
      joint ventures                                         (43)          (21) 
    Distribution from real estate joint                                        
      ventures, net                                           84            36  
    Gain from sale of assets                                (116)         (143)
    Depreciation and amortization                            222           234  
  Change in assets and liabilities:                                            
    Investments in real estate, net                          (72)           --  
     Decrease (increase) in accounts                                           
       receivable and other assets                           110          (365)
    Increase in accounts payable,                                              
      accrued expenses and other                             455           207 
                                                         -------       -------  
             Net cash provided by (used in)                                     
              operating activities                          (166)           20  
                                                                                
Cash flows from investing activities:                                           
  Proceeds from sale of investments                          116           250 
                                                         -------       -------  
Cash flows from financing activities:                                           
  Borrowings                                                 188            --
  Payments on notes payable and other debt                  (301)          (46)
                                                         -------       -------  
             Net cash used in financing activities          (113)          (46) 
                                                                                
Net increase (decrease) in cash                             (163)          224  
Beginning cash                                               317            93  
                                                         -------       -------
Ending cash                                              $   154       $   317  
                                                         =======       =======
 


       The accompanying notes are an integral part of these statements.

                                       21
<PAGE>
 
           SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  CURRENT BUSINESS CONDITIONS

  Southern Investors Service Company, Inc. and its subsidiaries' (Company)
operations are concentrated in Texas, which from 1986 to 1988 was adversely
affected by the downturn in the energy and real estate markets.  During 1990,
the Company reached an agreement with certain of its creditors to resolve
defaults under various loans and to settle the outstanding debt and remaining
deficiencies.  The settlement provided for the conveyance to the creditors of
title to certain collateral securing the loans and the assignment of
distribution rights of certain real estate projects.  Total debt satisfied was
$85.4 million for the conveyance and assignments of a significant portion of the
Company's assets.  As a result, the Company's cash flow from operations has not
been sufficient to meet the Company's obligations for the past several years.
The Company has sustained net operating losses in 1996 and prior years and
anticipates that it will incur a net operating loss for 1997. Such losses
depleted the Company's stockholders' equity in 1989.  The 1995 income from
operations was due primarily to nonrecurring sales of assets and restructure of
partnership interests in equity joint ventures.  The Company's ability to
continue as a going concern is dependent upon its ability to settle or
restructure existing debt and generate positive cash flow to cover operating
expenses and other cash requirements.

  Management believes that the debt settlements discussed below have improved
the Company's financial condition, however, debt totaling $4,960,000 has matured
and is currently due and debt totaling $338,000 matures in 1997.  The ability of
the Company to continue as a going concern is dependent upon its ability to
settle or restructure its remaining debt and other obligations and generate
positive cash flow to cover operating expenses and other cash requirements.
Management is currently reviewing possible options to settle the Company's
existing liabilities with its very limited resources.  These options include,
but are not limited to, continued efforts to reduce operating expenses
(including interest expense), attempts to increase revenues of the Company's
resort development, continued negotiations with various creditors to settle
their accounts for cash payments at substantially less than the amount due, the
settlement of liabilities through the transfer of assets to creditors in
satisfaction of their claims, a possible plan of reorganization under Chapter 11
of the U.S. Bankruptcy Code or possible liquidation of the Company.  There is no
assurance that the Company could arrange to borrow funds or raise capital from
other sources.  While management believes that its assumptions are reasonable,
there is no assurance that actual events will occur in accordance with such
assumptions.  Accordingly, management's assumptions may need to be revised as
actual events occur which differ from such assumptions.  The consolidated
financial statements do not include any adjustments, which could be significant,
relating to the recoverability of asset carrying amounts or the amount and
classification of liabilities that might be necessary if the Company is unable
to continue as a going concern.

LIABILITY SETTLEMENTS

  During 1995, a joint venture in which the Company had a 19.4% ownership
interest had a note payable with an outstanding principal balance of $5.2
million which was due and payable.  The joint venture was unable to repay this
note at its maturity.  During January 1996, the venture obtained a new loan from
a bank in the original principal amount of $3.0 million.  The proceeds of this
new loan 

                                       22
<PAGE>
 
were used to settle the $5.2 million loan plus accrued interest in full. As a
condition of the new loan, the bank required a ten year lease on the entire
building to be executed by the partners in the ratio of their ownership
interests. However, due to the financial condition of the Company, the bank
would not accept the Company's lease. In addition, the building was in need of
repairs and the Company would have been required to make additional capital
contributions to fund these repairs. The Company, also owed the venture
approximately $70,000 in past due rent for periods prior to 1992. This rent was
forgiven in January 1996. As a result of these obligations, the Company sold its
partnership interest to Hallmark Residential Group, Inc. (Hallmark), a company
controlled by Walter M. Mischer, Chairman of the Board of Directors of the
Company. In exchange, Hallmark assumed the Company's obligations in connection
with this joint venture and entered into the ten year lease. In connection with
this sale, the Company retained a 25% cash flow interest in Hallmark's 20%
ownership interest. The Company recognized an extraordinary gain on the
settlement of these obligations of $408,000 during 1996.

  During 1996, the Company settled certain notes payable with aggregate
outstanding principal balance of $345,000 and related accrued interest of
$200,000.  These obligations were satisfied by the foreclosure of properties
pledged as collateral for these notes which had an aggregate book value of
$227,000 and a cash payment of $30,000.  The Company recognized extraordinary
gains on these settlements of $288,000.  In addition, the Company settled
certain obligations in connection with cash flow assignments granted to
creditors during 1990, and recorded extraordinary gains of $205,000.

  The Company's other debt consists of unsecured notes payable which were due
September 30, 1993.  These notes are payable to trade creditors of a subsidiary
of the Company that ceased operations during 1989.  The Company has made offers
to these creditors to settle existing claims at less than the amounts due.
During 1996, the Company had made payments of $98,000 in settlement of $186,000
in principal amount of these trade creditor notes plus accrued interest.  During
1995, the Company made payments of $7,000 in settlement of $29,000 in principal
amount of these trade creditor notes plus accrued interest.  As of 
December 31, 1996, $473,000 in trade creditor notes and related accrued interest
remain in default.

  The settlements discussed above resulted in extraordinary gains of $1,108,000
in 1996 and $33,000 in 1995.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  PRINCIPLES OF CONSOLIDATION

  The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries and joint ventures.  Income and expenses are
recorded on the accrual basis of accounting, and all significant intercompany
accounts and transactions have been eliminated.  The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ from those
estimates.

                                       23
<PAGE>
 
  The Company records its investment in real estate joint ventures in which its
ownership equals or exceeds 20% but is 50% or less and which the Company does
not control on the equity method.  Those ventures in which the Company's
ownership is less than 20% are carried at cost unless the Company exercises
significant influence.

  Income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences, and operating loss and tax
credit carryforwards, and deferred tax liabilities are recognized for taxable
temporary differences.  Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.  Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.

  NEW ACCOUNTING STANDARD REGARDING IMPAIRMENT

  In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."  This statement
establishes the recognition and measurement standards related to the impairment
of long-lived assets.  The Company adopted this standard during 1995.  The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations.

  FAIR VALUE OF FINANCIAL INSTRUMENTS

  The carrying amounts of cash and accounts receivable approximate fair value
due to relatively short maturities.  It was not practicable to estimate the fair
value of debt and related accrued interest as significant amounts of debt have
matured or will mature during 1997.  The Company is in process of negotiating
with lenders to settle debt for cash payments or transfer of other assets at
substantially less than amounts due.

  REAL ESTATE OPERATIONS

  Profits from sales of real estate are recognized only upon delivery of a deed,
transfer of all attributes of ownership, receipt from the purchaser of an
adequate cash down payment, and the absence of obligations to perform
significant activities after the sale.  If the required cash down payments have
not been received, sales and related costs are recorded but the gross profits
are deferred and recognized on the installment method of accounting until
sufficient cash payments have been received.  Deferred gross profit of $309,000
as of December 31, 1996 is included in other liabilities in the accompanying
Consolidated Balance Sheet.

  Residential lots and real estate held for resale or development are stated at
the lower of cost or net realizable value. The estimated net realizable value of
real estate is based upon the anticipated sales price in the normal course of
business less estimated costs of completion and direct costs of disposal. If the
Company estimates that the cost upon completion will exceed the net realizable
value, the Company provides a reserve for such excess costs. Cost includes the
land acquisition cost, general improvements and interest, property taxes and
other carrying costs capitalized during development. Interest is capitalized on
the average amount of accumulated expenditures for property being developed
using an effective rate based on related debt. Interest and

                                       24
<PAGE>
 
property tax capitalization continues until the assets are ready for sale or
until development of the property is suspended. Costs are allocated to tracts
based upon the relative sales value of the tracts.

  Management continues to monitor the impact of changes in economic conditions
to determine the effect on the carrying value of its real estate assets in
accordance with SFAS No. 121.  The effect of any significant changes will be
reported in income in the period such effect can be reasonably estimated.  If
the Company were to sell or dispose of its real estate assets as a result of the
maturity or acceleration of the underlying debt or because the Company is not
able to continue as a going concern, it is anticipated that sales or
dispositions would not generate sufficient funds to retire the related debt and
would be significantly less than the current carrying amount of assets.

  DEPRECIATION

  Resort development properties are carried at amortized cost and are
depreciated on the straight-line basis over their estimated useful lives net of
estimated salvage value.  At December 31, 1996, accumulated depreciation totaled
approximately $4,135,000.

  Upon sale or retirement of depreciable assets, the cost and the related
accumulated depreciation are removed from the accounts and the resulting profit
or loss is reflected in income.  The costs of ordinary maintenance and repairs
are expensed, whereas renewals and major replacements are capitalized and
expensed to future operations through depreciation charges.

  INCOME PER COMMON SHARE

  Income per common share is computed by dividing income by the weighted average
number of shares outstanding giving effect to treasury stock.

  PREFERRED STOCK

  The Company has authorized 1 million shares of $1.00 par value preferred
stock.  No such stock has been issued.  The preferred stock may be issued in one
or more series, with the shares in each such series having such voting powers
and such designations, preferences and relative participating, optional
redemption, conversion, exchange and other special rights and restrictions as
may be fixed by a resolution of the Company's Board of Directors.

(3)  REAL ESTATE OPERATIONS

  Real estate revenues, net include the following amounts:
(Thousands of Dollars)                                 Year Ended December 31,
--------------------------------------------------------------------------------
                                                          1996         1995  
--------------------------------------------------------------------------------
                                                                            
Management fees                                          $ 795       $  777  
Interest and other income                                  150          633  
Equity in income of real estate joint ventures              43           21  
Sales of real estate                                       107           --  
Cost of real estate sales                                  (98)          --  
--------------------------------------------------------------------------------
Total real estate revenues, net                          $ 997       $1,431  
================================================================================

                                       25
<PAGE>
 
  The combined condensed balance sheet and statements of income of the real
estate joint ventures accounted for on the equity method are set forth below:



Balance Sheet                                                     December 31,
--------------------------------------------------------------------------------
(Thousands of Dollars)                                                1996     
--------------------------------------------------------------------------------
ASSETS:
Cash                                                                $      4
Developed residential lots                                               589
Real estate held for resale or development                             1,553
--------------------------------------------------------------------------------
                                                                    $  2,146
================================================================================
LIABILITIES & VENTURERS' EQUITY: 
Accounts payable and accrued liabilities                            $    146
Venturers' equity: 
 Company and its subsidiaries                                            144
 Other ventures                                                        1,856
--------------------------------------------------------------------------------
                                                                    $  2,146
================================================================================

Statements of Income                                     Year Ended December 31,
--------------------------------------------------------------------------------
(Thousands of Dollars)                                    1996          1995  
--------------------------------------------------------------------------------
REVENUES:                                                                     
 Sales of real estate                                $   1,445      $  1,286  
 Cost of sales                                             922           855  
--------------------------------------------------------------------------------
                                                           523           431
 Rental and other income                                   242         3,828
--------------------------------------------------------------------------------
                                                           765         4,259
EXPENSES:
 Operating expenses                                        242         3,287
 Interest expense                                           --           662
--------------------------------------------------------------------------------
Income before gain on debt settlements                     523           310
Gain on debt settlements                                 1,118(a)         --
--------------------------------------------------------------------------------
Net income                                           $   1,641      $    310
================================================================================
Equity of the Company                
 in income before extraordinary gains                $      43      $     21
================================================================================

     (a)  The Company's equity in the gain on debt settlements is reported in 
the accompanying consolidated statement of income as an extraordinary gain.

     The Company had a 20% equity interest in a joint venture that owned a 10
story office building. During December 1995, the Company's ownership was reduced
to 6.7%. Accordingly, as of December 31, 1995, the investment is accounted for
on the cost method. The Company's investment in this joint venture is $355,000.
In addition as discussed in Note 1, the Company sold its 19.4% ownership in
another joint venture during January 1996.

                                       26
<PAGE>
 
  No federal income tax provision is included in the combined condensed
statements of income for the joint ventures since each venturer will report in
its tax return its share of each joint venture's income.

(4)  FEDERAL INCOME TAXES

  The estimated tax effect of temporary differences and tax attributes
representing deferred tax liabilities and assets is summarized as follows:
 
                                                            December 31,
--------------------------------------------------------------------------------
(Thousands of Dollars)                                          1996
--------------------------------------------------------------------------------

Tax benefits due to:
  Tax loss carryforwards                                     $  9,777
  Accrued expenses and other liabilities                          150
  Other                                                            74
                                                             --------
  Gross deferred tax asset                                     10,001
Deferred tax liability due to:                                       
  Accelerated depreciation                                        (48)
  Basis difference in real estate assets                         (799)
                                                             --------
  Net deferred tax asset                                        9,154
  Less-Valuation allowance                                     (9,154)
                                                             --------
                                                             $     --
                                                             ======== 

  The Company estimates that as of December 31, 1996, its loss carryforward for
federal income tax reporting purposes, after giving consideration to the tax
effect of the debt settlements as discussed in Note 1, is approximately $28.8
million, of which approximately $7.3 million is capital loss carryforward. The
capital loss carryforward will begin to expire in 1997 and the operating loss
carryforward will begin to expire in 2002.  The tax benefit of the operating
loss carryforward has been recognized as a reduction of the deferred taxes
provided on temporary differences which are expected to reverse during the
carryforward period.  The valuation allowance as of December 31, 1996 totaled
$9,154,000, a decrease of approximately $102,000 from December 31, 1995
primarily due to utilization of net operating loss carryforwards to offset
current tax liabilities resulting from the debt restructurings.

  No taxes were paid during 1996 or 1995.
  
  In October 1986, the Tax Reform Act of 1986 (the Act) was passed. The Act
substantially changed the rules regarding the availability of a corporation's
operating loss carryforward following a significant change of ownership. Under
most circumstances, the limitations on the use of the operating loss
carryforward are imposed if the equity ownership of a corporation's 5%
stockholders increases by more than 50% over the lowest percentage of equity
ownership of such stockholders during the three year period prior to the date of
the ownership change. No change of ownership had occurred through December 31,
1996. The Revenue Reconciliation Act of 1993 did not have a material impact on
the Company's financial position or results of operation.

                                       27
<PAGE>
 
  (5)  NOTES PAYABLE AND OTHER DEBT

  NOTES PAYABLE

The Company's notes payable are summarized as follows:

                                                               December 31,
(Thousands of Dollars)                                             1996
--------------------------------------------------------------------------------
    Matured notes, partially secured by real
      estate, bearing interest at rates ranging
      from 6% to 10%                                            $  1,047
 
    Matured notes issued to various debenture holders,
     bearing interest at 6%                                        3,440
 
    Note payable to Walter M. Mischer secured by
      real estate, due during 1997, and bearing
      interest at the prime rate plus 1%                             338
 
    Notes payable to Walter M. Mischer (See Note 7)                   73
 
    Other                                                            174
                                                                --------
                                                                $  5,072
                                                                ========

  As of December 31, 1996, the Company was delinquent on principal and interest
payments of $4,487,000 and $1,299,000, respectively, on its notes payable.  The
Company is currently negotiating settlement of these debts.

  During 1993 the Company restructured debentures with an aggregate principal
balance of $2,331,000, debenture loans advanced by certain debenture holders
with aggregate principal balances of $639,000 and accrued and unpaid interest
with respect to these Debentures and debenture loans of approximately $470,000
in exchange for unsecured promissory notes of the Company.  These notes with an
aggregate principal balance of $3,440,000 bear interest at 6% compounded
annually and were due October 2, 1996.

  OTHER DEBT

  At December 31, 1996, other debt of $473,000 consists of unsecured notes
payable and related accrued interest payable to trade creditors of a subsidiary
of the Company that ceased operations during 1989, which were due September 30,
1993.  See Note 1 for a discussion of the settlement of certain of these notes.

  With the exception of the improvements and a portion of the land located at
the Company's resort in west Texas, substantially all of the Company's real
estate assets are pledged as collateral.  Minimum annual principal payments on
total notes payable and other debt during the years 1997 through 2001 are
$338,000, $20,000, $0, $0, and $226,000, respectively, not including the
delinquent principal amounts discussed above.  Additional amounts may become due
to obtain the release of real estate which is sold.

                                       28
<PAGE>
 
  As of December 31, 1996, the Company has not received any notices of default
or acceleration from any of its lenders.

  Interest paid on the consolidated indebtedness during the years ended 
December 31, 1996 and 1995 was $25,000 and $28,000, respectively.

(6)  COMMITMENTS AND CONTINGENCIES

  The Company has guaranteed a revolving line of credit of a former subsidiary.
This loan has an outstanding balance of $1.1 million at December 31, 1996.

  Due to the location of the Company's investment in the west Texas resort
development and lack of public fire protection, the cost of obtaining insurance
is considered prohibitive; consequently, property insurance is not carried by
the Company for this development.

  The Company has a month to month lease with Hallmark which provides for
aggregate annual payments of approximately $75,000.

  A suit was filed May 17, 1993, against the Company and thirteen others in the
165th District Court of Harris County, Texas by Angela and Daniel Thibodeaux, et
al, seeking unspecified damages for injuries that allegedly occurred during
1991, as the result of a fall by Angela Thibodeaux and her son at the Point
Royal Apartments.  The suit claims that the Company and the other defendants
were negligent in failing to adequately inspect and repair the property.  The
Company was a general partner in a partnership which owned the Point Royal
Apartments.  The Company denies any wrongdoing and intends to vigorously defend
against these allegations.

  The Company is also named a defendant in lawsuits and other claims arising in
the ordinary course of the Company's business.  If the Company, in the light of
its present circumstances, were required to make substantial cash expenditures
in connection with current and future lawsuits and other claims, such
expenditures might have a material adverse effect on the Company's consolidated
financial position and might affect the Company's ability to continue as a going
concern.

(7)  RELATED PARTY TRANSACTIONS

  During 1996 and 1995, the Company settled certain obligations with related
parties.  These settlements are discussed in Note 1.

  During 1992, the Company restructured the debt of one of its partnerships.  In
connection with this restructure, the Company issued a $300,000 principal amount
note payable to the other joint venture partner.  This note was secured by the
Company's 20% equity interest in the venture and was due September 1995.  Due to
the Company's financial condition, it was unable to retire this note at
maturity.  During December 1995, the partnership through which the Company held
its 20% interest in the joint venture admitted a new limited partner (Walter M.
Mischer, Trustee) in exchange for a capital contribution of $306,000.  These
funds were used to repay the note and accrued interest.  In exchange for the
capital contribution, the new limited partner will receive (i) the first
$306,000 of any future cash flow, (ii) interest on the $306,000 at 10%
compounded annually, and (iii) 66 2/3% of any 

                                       29
<PAGE>
 
remaining cash flow. As a result of this transaction, the Company's effective
ownership in this partnership was reduced to 6.7%.

  In connection with various debt settlements during the past several years, Mr.
Mischer had loaned or advanced the Company various amounts.  In 1993, these
loans and advances were consolidated into a single note in the principal amount
of $338,000.  This note bears interest at the prime rate plus 1% and is due 
May 18, 1997.  This note is secured by approximately 14,720 acres of land
located adjacent to the Company's resort in west Texas. In addition, during
1996, the Company executed two additional notes to Mr. Mischer. One note in the
original principal amount of $25,688 is unsecured and is payable in monthly
payments of $640 per month, bears interest at the rate of 9% and is due March
1998. At December 31, 1996, the outstanding principal balance was $21,546. The
second note is secured by receivables, is payable monthly as collections on the
related receivables are received, bears interest at the rate of 9%, with a
final maturity of July 2001. As of December 31, 1996, the outstanding principal
balance was $51,014.

  During 1990, the Company entered into a series of transactions relating to its
75% joint venture interest in Heritage Park Venture II (Heritage Park) and its
net profits interest in the Fairwood subdivision.  Prior to these transactions,
the Company had effectively conveyed to others substantially all of its
beneficial interest in Heritage Park.  The Company arranged the sale to
Hallmark, a Company in which Mr. Mischer then owned 56% of the common stock, of
an unencumbered 62.5% interest in Heritage Park for $2,285,000 in cash and
$186,000 payable from future cash flow from Heritage Park.  To consummate the
sale of an unencumbered 62.5% interest in the venture, the Company negotiated
recission of its purchase of Hallmark common stock and subordinated debentures
and reacquisition of the rights to proceeds from Heritage Park that had been
conveyed to its lenders.  The Company paid $2,285,000 of the proceeds received
from the sale of the 62.5% interest in Heritage Park to reacquire its beneficial
interest in Heritage Park that it had conveyed to its lenders and to settle
$1,267,000 of its indebtedness with the lenders.  The Company retained all
rights to the $186,000 portion of sale proceeds payable from future cash flow
from Heritage Park, a 12.5% joint venture interest in Heritage Park and a net
profits interest in Fairwood and recognized a $685,000 gain on this series of
transactions.  The Company received cash distributions of $95,000 and $261,000
and recognized income of $72,000 and $272,000 during 1996 and 1995,
respectively, relating to its remaining 12.5% equity interest in Heritage Park
and cash flow interest in Fairwood.

  On December 15, 1989, Mr. Mischer and Walter M. Mischer, Jr. agreed to make
debenture loans to the Company equal to all future principal payments and 72% of
future interest payments received on the Debentures held by them.  In 1991, Mr.
Mischer and Mr. Mischer, Jr. agreed to make debenture loans to the Company equal
to 100% of the interest payments received on the Debentures on June 1 and
December 1, 1991.  Such debenture loans made to the Company bear interest at the
same rate as the applicable 7% or 8.5% Debenture and were due on 
September 30, 1993.  See Note 5 describing the terms of the Debenture
modification. In addition, Mr. Mischer and Mr. Mischer, Jr. made debenture loans
of $133,000 which amount is equal to 72% of interest payments received during
1989 on the Debentures held by them. Such debenture loans made to the Company
during 1989 bear interest at 6% and 7% per annum and were due on September 30,
1993. During 1993, in connection with the restructure of the Company's
Debentures, the Company issued $3,440,000 in unsecured promissory notes to
certain directors, stockholders and affiliates including notes to Mr. Mischer,
Mr. Mischer, Jr., John D. Weil and John W. Storms, Trustee, in the aggregate
principal amount of $2,995,000 to consolidate amounts due for the debenture
loans discussed above, 

                                       30
<PAGE>
 
Debentures held by them and accrued and unpaid interest. These notes bear
interest at 6% compounded annually and were due October 2, 1996.

  Mr. Mischer and Mr. Mischer, Jr. participate in real estate projects in the
Houston area which may compete with the Company's projects.

  As a result of a series of transactions occurring during 1989 and 1990, the
Company's effective investment in Jackson Supply Company (Jackson) was reduced
to 10%.  In connection with these transactions, Mr. Mischer and the president of
Jackson have effective investments in Jackson of 75% and 15%, respectively.
Since the Company has an effective investment of less than 20% of the voting
stock of Jackson, it accounted for its investment in Jackson on the cost method
subsequent to December 31, 1990.  During 1996, the Company sold a portion of its
minority ownership in a former subsidiary to the former subsidiary's president
for a gain of $116,000.  The Company has guaranteed Jackson's revolving line of
credit with a bank.  At December 31, 1996, the revolving line of credit had an
outstanding principal balance of $1.1 million.

  In January 1990, the Company entered into an agreement with a limited
partnership, in which Mr. Mischer holds an effective interest of 50%, to manage
the development and sales of a residential property for a monthly fee of
$10,000.  In addition, the Company manages real estate projects in which Mr.
Mischer has effective ownership interests ranging from 33% to 100% for an
aggregate monthly management fee of $44,000.  The Company also has management
contracts on the two office buildings in which Mr. Mischer has an ownership
interest which provide for aggregate monthly management fees of $10,000.  In
addition, during 1995, the Company entered into a management agreement with a
partnership in which Mr. Mischer, Jr. has a 50% ownership interest which
provides for monthly payments of $6,000.  The management contracts are
cancelable upon thirty days notice.  As of December 31, 1996, the Company had
accounts receivable from these and other projects of $112,000.

  A joint venture in which Mr. Mischer has an ownership interest has options to
purchase lots from a joint venture in which the Company is a venturer.  A total
of 84 lots and 75 lots were purchased by this affiliated joint venture for an
aggregate amount of $1,445,000 and $1,286,000 during 1996 and 1995,
respectively.  This joint venture has outstanding option contracts totaling
$1,323,000 covering 75 lots with the affiliated joint venture at
December 31, 1996.

  Due to the Company's lack of adequate resources and its need for additional
employee housing units at its resort in west Texas, a company owned by Mr.
Mischer, contracted with the Company for the construction of additional employee
housing.  During 1995 and 1994, the Company billed and collected $80,000 and
$204,000, respectively, representing the entire cost of these units from Mr.
Mischer.  These units are owned by Mr. Mischer and leased to the Company for
aggregate annual rentals of $25,000.

  During 1992 and 1987, Mr. Mischer purchased certain notes receivable held by a
subsidiary of the Company at face amount of $83,000 and $546,000, respectively.
The Company is required at Mr. Mischer's election to repurchase, at par, any
note with a payment more than 90 days delinquent.  None of these notes have been
repurchased through December 31, 1996.

                                       31
<PAGE>
 
  In the opinion of the management of the Company, all of the transactions
described above were effected on terms at least as favorable to the Company as
those which could have been obtained from unaffiliated third parties.

(8)  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses included the following:
 
                                                      December 31,
      ------------------------------------------------------------
      (Thousands of Dollars)                              1996
      ------------------------------------------------------------
 
      Trade accounts payable                             $  167  
      Accrued interest payable                            1,406
      Accrued taxes payable                                 211
      Accrued insurance settlements                         273
      Other accrued liabilities                              63
                                                         ------
                                                         $2,120
                                                         ====== 

                                       32
<PAGE>
 
                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                   SOUTHERN INVESTORS SERVICE COMPANY, INC.

                         By:    /s/ WALTER M. MISCHER

                         __________________________________ 
                         Walter M. Mischer
                         Chairman of the Board
                         Chief Executive Officer

                         Date:  March 27, 1997
 
  Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ WALTER M. MISCHER               DATE:  MARCH 27,1997
___________________________________ 
Walter M. Mischer
Chairman of the Board and
Chief Executive Officer
Director


/s/ WALTER M. MISCHER, JR.          DATE:  MARCH 27, 1997
___________________________________
Walter M. Mischer, Jr.
President and Director
Chief Operating Officer


/s/ ERIC SCHUMANN                   DATE:  MARCH 27, 1997
___________________________________
Eric Schumann
Senior Vice President - Finance
Principal Financial and Accounting Officer


/s/ JOHN D. WEIL                    DATE:  MARCH 27, 1997
___________________________________
John D. Weil
Director

                                       33
<PAGE>
 
                               INDEX TO EXHIBITS
                       BY PAGE IN SEQUENTIAL NUMBER COPY



Document or Exhibit                                               Page No.
--------------------------------------------------------------------------

Exhibit 21   Subsidiaries of the Registrant .......................  39

Exhibit 27   Financial Data Schedule ..............................  40

                                       34