SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-KSB

                [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

         For the fiscal year October 31, 1997 Commission file no.1-12938

                                       OR

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

                        For the transition period from to
                             Commission file number

                    INTERSTATE NATIONAL DEALER SERVICES, INC.

             (Exact name of registrant as specified in its charter)

    Delaware                                                  11-3078398
   (State or other jurisdiction of                          (I.R.S. Employer
   incorporation or organization)                           Identification No.)

    333 Earle Ovington Blvd.
    Mitchel Field, New York                                        11553
 (Address of principal executive offices)                        (Zip Code)

                                (516) 228-8600
               (Registrant's telephone number, including area code)

      Securities registered under Section 12 (b) of the Exchange Act:
                                                   Name of Each Exchange
       Title of Each Class                          on Which Registered

  Common Stock, par value $.01 per share                 NASDAQ
  Common Stock Purchase rights                           NASDAQ  
 
      Securities registered under Section 12 (g) of the Exchange Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes x No

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

The  Registrant's  revenues  for the fiscal  year ended  October  31,  1997 were
$37,928,719.   The   aggregate   market  value  of  the  voting  stock  held  by
non-affiliates  of the  Registrant,  based  upon the  closing  sale price of the
Common  Stock on  January 13, 1998 as reported  on the  NASDAQ  National Market
("NASDAQ"), was approximately $30,600,000.

As of January 13,1998, Registrant had issued and outstanding 4,623,016 shares of
Common Stock.

Transitional Small Business Issuer Disclosure Format (check one): Yes  No  x


<PAGE>
PART I

Item 1.  Business

General

    Interstate  National Dealer Services,  Inc. (the "Company") was incorporated
in Delaware in 1991 and commenced  operations in November 1991 with the purchase
of certain assets and the assumption of certain liabilities of INDS Group, Inc.,
a California  corporation (the "Predecessor") which commenced operations in 1981
under the name Interstate  National  Dealer  Services Group,  Inc. The Company's
principal  executive  offices are located at 333 Earle Ovington  Blvd.,  Mitchel
Field, New York 11553, and its telephone number is (516) 228-8600.

    The  Company  designs,   markets  and  administers   service  contracts  and
warranties for new and used motor vehicles and  recreational  vehicles and, to a
lesser extent,  watercraft,  motorcycles and other  vehicles.  A vehicle service
contract is an agreement  between either the dealer or the administrator and the
vehicle purchaser under which the dealer or the administrator  agrees to replace
or  repair  for a  specific  term  designated  vehicle  parts in the  event of a
mechanical breakdown.  Vehicle service contracts supplement,  or are in lieu of,
manufacturers'  warranties  and provide a variety of extended  coverage  options
(typically  ranging  from three  months to seven  years  and/or  3,000  miles to
150,000 miles) generally offered for sale by dealers to vehicle  purchasers in a
manner similar to other options.  In some instances,  service contracts are sold
directly to the vehicle owners by the Company or others.

    The  Company  offers a variety  of vehicle  service  contract  and  warranty
programs  through its nationwide  sales force of  approximately  100 independent
sales agents  consisting of both companies and individuals  (the "Agents").  The
Company enters into a non-exclusive  agreement with each dealer, under which the
Company obtains insurance  coverage to cover such dealer's  liability for claims
under its vehicle  service  contracts and assists such dealer,  and  purchasers,
with  the  making,  processing  and  adjustment  of  claims.  The  Company  also
administers service contracts and claims for other service contract marketers.

    In April 1995, the Company formed an affiliated insurance company,  National
Service Contract Insurance Company Risk Retention Group, Inc. ("NSC").  Prior to
March 1996,  substantially all of the insurance policies arranged by the Company
as administrator to its dealers had been underwritten by The Travelers Indemnity
Company  ("Travelers")  and National  Warranty  Insurance,  Risk Retention Group
("National Warranty"). Commencing March 1996, the insurance policies arranged by
the Company were underwritten by Travelers and NSC.

    Each dealer pays a net rate for each  service  contract or warranty  sold by
such dealer.  This payment  includes (i) an  administrative  fee for the Company
from  which the  Company  pays any  commission  due the  Agent,  (ii)  insurance
premiums and fees for the insurance underwriter, and (iii) a claim reserve to be
placed in an interest-bearing loss reserve account maintained for the benefit of
the contract  purchaser.  The net rate for service  contracts ranges from $75 to
over $3,000 per  contract  with a typical  average net rate per contract of $360
for a new car,  $400  for a used  car and  $500  for a new or used  recreational
vehicle.  Each dealer is free to  determine  the price at which it will sell the
service  contract to the purchaser.  The amount a dealer charges for the service
contract  in excess of the net rate is  additional  income to such  dealer.  The
administrative fee for the Company ranges from $30 to $212 (prior to the payment
to the Agent of any  commission  which  generally  ranges  from $10 to $100) per
contract,  which fee  varies  based on the type of  service  contract  sold by a
dealer.

    The various vehicle  service  contract  programs  offered by the Company are
designed to provide dealers with an additional source of revenue and to increase
dealers'  ability  to sell  vehicles.  For  example,  certain  of the  Company's
programs provide that dealers and other  participants (such as Agents) who reach
certain sales volumes receive additional revenues if, and to the extent,  claims
paid on their service contracts are less than the claims reserves maintained for
such contracts. Under certain circumstances, the Company may also be entitled to
unconsumed claim reserves,  including reserves  attributable to dealers who have
not achieved specified sales volumes of service contracts.

    Initially,  the Company's  business  focused on extended  warranties for new
automobiles and, to a lesser extent,  used cars. In the past three fiscal years,
however,  the mix of the  Company's  business  has  changed  such  that a higher
percentage of sales are from warranties for used cars. In addition,  the Company
has  expanded  into other  markets  and has  realized an  increasing  portion of
revenues from its recreational vehicle programs.


<PAGE>


Marketing

    The  Company  markets  its  services  and  products,  using its  network  of
independent  Agents,  primarily  to dealers  and,  to a lesser  extent,  leasing
companies,  finance companies and other service contract marketers.  The Company
promotes its services and products to the Agents and, to some extent, to dealers
primarily   through  the  participation  of  the  Company  at  trade  shows  and
advertising  in trade  publications.  The Company has also  obtained  Agents and
dealers through  recommendations  and referrals from existing Agents and dealers
and others, some of which receive a commission from the Company upon the sale of
its services and products. To assure a high level of competence and awareness of
its current  administrative  services and products, the Company provides initial
and on-going training for its Agents and dealers.

    The dealers  participating in the Company's programs sell motor vehicles and
recreational  vehicles  manufactured  by all of the  major  manufacturers  whose
products are sold in North America.  Most of the Company's dealers sell products
from more than one  manufacturer.  Accordingly,  the Company  does not focus its
sales and  marketing  efforts on any one  vehicle  manufacturer  or on any small
group of manufacturers.

    The Company  enters into an  independent  agent  agreement  with each of its
Agents  which  generally is  terminable  at any time by the Company or the Agent
upon giving of 30 days' written notice or by the Company  immediately for cause.
The agreement provides that, among other things, the Agents solicit dealers,  on
a non-exclusive  basis, for the Company within designated  territories which may
include one or more states or portions thereof. Most Agents are compensated on a
flat rate  commission  basis.  Agents may sell  products  and  services of other
companies,  including competitors of the Company, and have no obligation to sell
the products and services  offered by the Company.  As of October 31, 1997,  the
Company had  approximately  100 "active"  Agents (that is, Agents who within the
prior 12 months have sold the Company's products and services).

    In order to sell service contracts to vehicle owners who had not purchased a
service contract through their dealers at the time of the vehicle purchase,  the
Company also makes sales  through its own and a third party's  direct  marketing
facility.  To  facilitate  such  sales,  the Company  offers a service  contract
financing  program.  Under the  Company's  financing  program,  a purchaser of a
service contract is given the option to pay for such contract on a monthly basis
over a period of time,  without interest.  As of October 31, 1997, the Company's
receivables from its financing  program totaled  approximately  $7,141,000.  The
Company  believes its exposure from these financed  contracts is limited because
the service  contract is terminated  if the purchaser  fails to make his monthly
payments to the Company.

Competition

    The business of marketing  administrative  services and related  products to
dealers,  and specifically  services related to motor vehicle service contracts,
is highly  competitive and dominated by the major automotive  manufacturers  and
other independent third-party  administrators.  The Company is unable to predict
the extent to which  automobile  manufacturers  (by, for example,  extending the
period covered under vehicle warranties) may reduce a dealer's ability to market
extended vehicle service contracts such as those administered by the Company.

    Although management of the Company believes that it is competitive with most
third-party administrators,  the Company's position in the overall market is not
significant.  In addition,  many of the Company's competitors have significantly
better financial resources and operating resources than those of the Company. In
order to be  competitive  in the  marketplace,  the Company  provides  insurance
coverage at competitive prices, offers a range of products and services believed
not to be available from most of its competitors and supports sales with service
to its dealers and the vehicle purchaser.  The Company requires its salespersons
to provide support  services to its dealers and it maintains a toll-free line to
facilitate customer service.

Seasonality

    A sale of a service  contract by the Company is  dependent  upon the sale of
the primary product (such as motor vehicles and recreational  vehicles)  covered
by the service contract.  As a result, the Company's revenues are reduced in the
winter  months  when  sales  of new and used  motor  vehicles  and  recreational
vehicles are lower in some regions than during the other months of the year.


<PAGE>


Government Regulation

    The service contract programs  developed and marketed by the Company and its
related  operations are regulated by the statutes and regulations of a number of
states.  Generally,  some states require registration of administrators and some
state statutes concern the scope of service contract coverage and the content of
the service contract or warranty document. In the latter instances,  these state
statutes typically require that specific  provisions be included in the contract
expressly  stating  the  purchaser's  rights  in the  event of a claim,  how the
service contract or warranty may be canceled and identification of the insurance
underwriter   indemnifying  the  dealers  or  administrators  against  loss  for
performance under the terms of the contracts. The Company believes that it is in
compliance in all material  respects with the applicable  regulations  governing
vehicle  service  contracts  and  warranties  in the  states  in  which  it does
business,  and in some  cases  relies on its  insurance  underwriters  and their
managing  agents to monitor such  regulations  and respond to any inquiries from
state authorities.

    The  issuance  of  insurance  policies  in respect of service  contracts  is
regulated  under the  insurance  laws and  regulations  of the  various  states.
Although  the  Company  believes  that  its  activities  as a  service  contract
administrator  are not directly  proscribed by such  regulations,  the Company's
ability  to  perform  its  activities  as a service  contract  administrator  is
effected by such  regulations.  The Company does not believe that as a result of
performing such activities it can be  characterized  as an insurance  company or
insurance  agent  under any state  insurance  statute  in the states in which it
currently operates. In the event that any state insurance regulators require the
Company to comply with insurance  statutes or regulations or become an insurance
agent,  the Company  will  evaluate  the cost of such  compliance  to  determine
whether the Company  will  conduct  business in the state.  NSC,  the  Company's
insurance  affiliate,  is  regulated  by federal  statutes  and must comply with
certain state  registration  requirements.  The Company  believes that NSC is in
compliance in all material  respects with the insurance laws and  regulations in
the states in which NSC does business.

    It is possible  that some states in which the Company now conducts  business
may effect  changes in the current laws which may regulate the activities of the
Company,  including the imposition of new financial or other requirements on the
Company.  In  such  event,  the  Company  would  have  to  meet  the  regulatory
requirements or cease to conduct business in such state or states.

    The Company  does  business in 47 states and believes it has complied in all
material  respects with  applicable  regulations in all such states.  Of such 47
states,  the  Company is able to sell only  certain  products  and  services  in
Connecticut,  Wisconsin and Washington because of certain insurance  regulations
in these states.

Employees

    As of December  31,  1997,  the Company had 90  full-time  employees  and 71
part-time  employees.  None of the Company  employees is  represented by a labor
union, and the Company considers its relations with its employees to be good.

Forward Looking Statements

    The statements contained in this annual report that are not historical facts
are  "forward-looking  statements."  The Company cautions readers of this annual
report  that a number of  important  factors  could cause the  Company's  actual
future  results  to  differ   materially   from  those  expressed  in  any  such
forward-looking  statements.  These  important  factors,  and other factors that
could affect the Company,  are described in the Company's Current Report on Form
8-K filed with the  Securities  and  Exchange  Commission  on December 23, 1996.
Readers of this annual report are referred to such filing.

Item 2.  Properties

    The Company currently  occupies  approximately  26,500 square feet of office
space at 333 Earle Ovington Blvd., Mitchel Field, New York 11553. Of such space,
13,000  square feet are occupied  pursuant to a ten-year  lease which  commenced
March 1, 1995,  at an initial  annual rent of  approximately  $300,000,  and the
remaining 13,500 square feet are occupied  pursuant to a six-year sublease which
commenced  October 1996 and was amended in November  1997, at an amended  annual
rent  of  approximately  $237,000.  (See  Note 9 to the  Notes  to  Consolidated
Financial Statements for future lease payments under this lease and sublease.)
<PAGE>

Item 3.  Litigation

    There are no material legal  proceedings  pending  against the Company other
than ordinary routine litigation incidental to the business,  and the Company is
not aware of any threatened  material legal proceedings to which the Company may
be a party.


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

    None.

Item  5.   Market  for   Registrant's   Common   Equity  and   Related
Stockholder Matters

    From July 22, 1994 until January  23,1997,  the Company's  common stock, par
value $.01 per share (the "Common  Stock") and the Company's  redeemable  common
stock purchase warrants,  exercisable to purchase one share of Common Stock (the
"Warrants"),  traded on the NASDAQ SmallCap Market under the symbols "ISTN," and
"ISTNW," respectively,  and on the Boston Stock Exchange under the symbols "IST"
and "ISTW,"  respectively.  On January  23,1997,  the Company's common stock and
Warrants were listed for trading on the NASDAQ  National Market System and, as a
result,  were no  longer  traded on the  SmallCap  Market  or the  Boston  Stock
Exchange. On September 29, 1997 the Company exercised its right to redeem all of
its outstanding  Warrants.  The Warrants remained  exercisable until October 29,
1997,  thirty days after the date of the  redemption  notice.  As of October 29,
1997, 1,218,983 of the 1,225,100 then outstanding warrants had been exercised by
the  holders  thereof  for a price of $5.50 per share and the  Company  received
proceeds of approximately $6,704,000 from such exercises. All remaining Warrants
are no longer exercisable.

The  following  table  sets  forth for the  periods  indicated  the high and low
closing  sales  prices of the shares of Common Stock and Warrants as reported by
NASDAQ.  The  quotations  represent  prices  between  dealers and do not include
retail mark-up, mark-down or commission.


                                 Common
                                  Stock            Warrants
                                 -------           ---------          

                             High      Low       High     Low

    11/01/95 to 01/31/96     2-1/4    1-7/32     11/32    1/8 

    02/01/96 to 04/30/96     4-5/8    2-3/8      1-13/16  5/16

    05/01/96 to 07/31/96     5-3/8    3-5/16     1-13/16  1-1/16

    08/01/96 to 10/31/96     6        4-1/2      1-15/16  1-3/8

    11/01/96 to 01/31/97     5-3/4    5          2-1/2    1-11/16

    02/01/97 to 04/30/97     7-9/32   5-5/8      2-5/8    1-15/16

    05/01/97 to 07/31/97     7-11/16  6-1/2      3        2     

    08/01/97 to 10/31/97     10-3/4   7-1/16     5        2-5/16
   
    11/01/97 to 01/13/98     10-1/8   7-3/4      N/A      N/A     

  As of January 13, 1998, there were 41 holders of record of Common Stock.

    The Company  has not paid cash  dividends  on the Common  Stock and does not
contemplate  paying cash  dividends  in the  foreseeable  future.  Instead,  the
Company intends to retain earnings for use in the Company's operations.


<PAGE>


    In  September  1995,  the  Board  of  Directors  of the  Company  adopted  a
Shareholders  Rights Plan (the  "Rights  Plan") to help  protect  the  Company's
stockholders   against  certain  coercive  takeover  tactics  commonly  used  by
corporate  raiders  to  deprive  stockholders  of the  long-term  value of their
investment  through  transactions  that do not treat all  stockholders  equally.
Under the terms of the Rights Plan,  the Board of Directors  declared a dividend
of one common stock  purchase  right (a "Right") for each  outstanding  share of
Common Stock of the Company held by  stockholders of record on November 10, 1995
(the "Record Date"). Each Right entitles the holder to purchase from the Company
one share of Common  Stock at a price of $25 per share,  subject to  adjustment.
The  description  and terms of the  Rights  are set forth in a Rights  Agreement
dated as of October 24, 1995 between the Company and Continental  Stock Transfer
& Trust Company, as Rights Agent.

    Until the earlier to occur of (i) 10 days  following  a public  announcement
that a person  or group of  affiliated  or  associated  persons  (an  "Acquiring
Person") has  acquired  beneficial  ownership of 15% or more of the  outstanding
shares of Common  Stock or (ii) 10  business  days (or such later date as may be
determined by action of the Board of Directors  prior to such time as any person
becomes an Acquiring  Person)  following the commencement of, or an announcement
of an intention to make, a tender offer or exchange  offer the  consummation  of
which would  result in the  beneficial  ownership by a person or group of 15% or
more of such  outstanding  shares (the  earlier of such dates  being  called the
"Distribution  Date"),  the Rights will be evidenced  with respect to any of the
Common Stock  certificates  outstanding  as of the Record  Date,  by such Common
Stock certificate with a copy of the Summary of Rights to Purchase Common Shares
attached thereto.  The Rights are not exercisable  until the Distribution  Date.
The Rights  will expire on November  10,  2005 (the  "Final  Expiration  Date"),
unless the Final  Expiration  Date is  extended or unless the Rights are earlier
redeemed by the Company, in each case, as described below.

    In the event that, after the Distribution Date, the Company is acquired in a
merger  or  other  business  combination  transaction  or  50%  or  more  of its
consolidated  assets or earning power are sold, proper provision will be made so
that each  holder of a Right will  thereafter  have the right to  receive,  upon
exercise thereof at the then current exercise price of the Right, that number of
shares  of  common  stock  of the  acquiring  company  which at the time of such
transaction  will have a market  value of two times  the  exercise  price of the
Right.  In the  event  that any  person  becomes  an  Acquiring  Person,  proper
provision  shall be made so that  each  holder  of a Right,  other  than  Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter  have the right to receive  upon  exercise  that  number of shares of
Common Stock having a market value of two times the exercise price of the Right.

    At any time  after the  acquisition  by an  Acquiring  Person of  beneficial
ownership  of 15% or more of the  outstanding  Common  Stock  and  prior  to the
acquisition by such Acquiring  Person of 50% or more of the  outstanding  Common
Stock, the Board of Directors of the Company may exchange the Rights (other than
Rights owned by such  Acquiring  Person which have become void),  in whole or in
part , at an exchange  ratio of one share of Common Stock per Right  (subject to
adjustment).

    At any time prior to the  acquisition  by an Acquiring  Person of beneficial
ownership of 15% or more of the outstanding Common Stock, the Board of Directors
of the  Company may redeem the Rights in whole,  but not in part,  at a price of
$.01 per Right (the  "Redemption  Price").  The  redemption of the Rights may be
made effective at such time, on such basis and with such conditions as the Board
of  Directors  in its  sole  discretion  may  establish.  Immediately  upon  any
redemption  of the Rights,  the right to exercise the Rights will  terminate and
the only right of the holders of Rights will be to receive the Redemption Price.

    The terms of the  Rights may be  amended  by the Board of  Directors  of the
Company  without the consent of the holders of the Rights,  except that from and
after such time as any person becomes an Acquiring  Person no such amendment may
adversely  affect the  interests  of the  holders of the Rights  (other than the
Acquiring Person).

    Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company,  including,  without  limitation,  the right to
vote or to receive dividends.

    There is no  separate  public  trading  market  for the  Rights.  Until  the
Distribution  Date, the Rights may be transferred  with and only with the shares
of Common Stock.

Use of Proceeds from Registered Securities

      On July 22, 1994,  the Company's  Registration  Statement on Form SB-2, as
amended (File No. 33-74222-NY), was declared effective.  Thereafter, on July 29,

<PAGE>

1994, the Company  completed its public offering (the "Offering") of Units (each
Unit  consisting  of one share of Common Stock and one  Redeemable  Common Stock
Purchase Warrant of the Company (a "Warrant")),  Common Stock and Warrants.  The
managing underwriter of the Offering was Westfield Financial Corporation.

      With respect to the Units,  Common Stock and  Warrants,  (i) the amount of
each  security  registered  in  connection  with  the  Offering  (including  the
underwriters'  overallotment  option),  (ii) the aggregate price of the Offering
amount of each security,  (iii) the amount of each security sold  (including the
exercise of the  underwriters'  overallotment  option),  and (iv) the  aggregate
Offering  price of the  amount of each  security  sold (for the  account  of the
Company and the account of MRN Capital Company,  the selling shareholder) are as
follows:

--------------------------------------------------------------------
                             Aggregate                  
                             Price of                   Aggregate
                             Offering                   Offering
Title of         Amount       Amount                    Price of
Security       Registered   Registered   Amount sold   Amount Sold  
--------------------------------------------------------------------
--------------------------------------------------------------------

    Units      1,265,000    $6,325,000    1,225,100    $6,125,500
--------------------------------------------------------------------
--------------------------------------------------------------------
                            Included in                Included in
                             price of                   price of
Common stock   2,530,000  Units offered   1,225,100    Units sold
--------------------------------------------------------------------
--------------------------------------------------------------------
                            Included in                Included in
                             price of                   price of
  Warrants     1,265,000  Units offered   1,225,100    Units sold
--------------------------------------------------------------------
--------------------------------------------------------------------
Common Stock
(with
respect to     
Selling
Stockholder)    133,000      $665,000      133,000      $135,000  
--------------------------------------------------------------------

      The actual amount of expenses  incurred by the Company in connection  with
the issuance and  distribution of the Units,  Common Stock and Warrants (none of
which was paid to directors,  officers or to persons  owning ten percent or more
of any class of equity  securities  of the  Company)  was  $1,913,445,  of which
$612,550, $245,921 and $1,054,974 covered the cost of underwriting discounts and
commissions,  expenses paid to or for the underwriters  and other  miscellaneous
expenses, respectively. The amount of net Offering proceeds to the Company after
deducting the foregoing expenses was $4,212,055.

      As of January 13, 1998, the actual amount of net Offering  proceeds to the
Company used for purchase and  installation of machinery and equipment;  working
capital;  investment in an affiliated insurance company; and investment in a new
subsidiary (none of which were paid to directors,  officers or to persons owning
ten  percent  or more of any class of equity  securities  of the  Company)  was:
$1,535,131,  $1,002,298,  $1,124,626 and $550,000, respectively. The Company did
not  use  any of the  net  Offering  proceeds  for  purchases  of  real  estate;
acquisition of other businesses;  or repayment of indebtedness.
The foregoing  description  of the  Company's use of Offering  proceeds does not
represent a material  change from that  described  in the  Company's  prospectus
relating to the Offering.

Item 6.  Management's  Discussion and Analysis of Financial  Condition
and Results of Operations

Results of Operations

    For the Year ended  October 31,  1997  compared to the Year ended
October 31, 1996

    Revenues  increased  approximately  $16,575,000,  or 78%,  to  approximately
$37,929,000  for the year ended  October 31,  1997 as compared to  approximately
$21,354,000  for the year ended  October 31,  1996.  This  increase was due to a
number of factors:  (i) a significant  increase in administrative  and insurance
fees resulting from an increase in the number of service contracts  accepted for
administration by the Company in fiscal 1997; (ii) a significant increase in the
recognition of deferred contract revenue as a result of an increase in the total
number  of  unexpired  service  contracts  under  administration;  and  (iii)  a
significant increase in revenue from sales through  telemarketing.  The increase
in the number of service  contracts  accepted for  administration  during fiscal
1997 was  primarily  due to the  aggressive  efforts by the Company in enrolling
additional  producers to sell the Company's  products and to a more  diversified
array of products offered by the Company.


<PAGE>


    Gross margin increased by approximately $6,177,000, or 41%, to approximately
$21,082,000  for the year ended October 31, 1997,  as compared to  approximately
$14,905,000  for the year ended  October 31,  1996.  This  increase is primarily
attributable to the increase in revenues as described above.

    Costs  of  services   provided,   which  consist  primarily  of  claims  and
cancellation  costs,  increased  by  approximately  $10,397,000,   or  161%,  to
approximately  $16,846,000  for the year ended  October 31, 1997, as compared to
approximately $6,449,000 for the year ended October 31, 1996. As a percentage of
revenues,  cost of services provided increased to 44% for the year ended October
31,  1997 as  compared  to 30% in the same  period  in 1996.  Claims  costs  are
directly   affected  by  the  total   number  of   unexpired   contracts   under
administration,  which has increased on a yearly basis.  Cancellation  costs are
primarily  affected by the total number of contracts accepted for administration
during the period, which has also increased.

    Selling,  general and  administrative  expenses  increased by  approximately
$4,546,000,  or 33%, to approximately $18,291,000 for the year ended October 31,
1997,  up from  approximately  $13,745,000  for the year ended October 31, 1996.
This  increase  was in  large  part due to (i)  increases  in  selling  expenses
primarily  due to  increased  commissions  paid as a result of  increased  sales
volume;  and (ii)  increases  in  general  and  administrative  expenses  due to
increased  personnel,  telephone,  printing  and postage  costs  resulting  from
increased sales volume. The increase in general and administrative  expenses was
partially  offset by a reduction  in  licensing  fees paid by the Company to the
Predecessor  resulting from the Company's  buy-out of such license in March 1996
for $100,000. As a percentage of revenues,  selling,  general and administrative
expenses decreased to 48% for the year ended October 31, 1997 as compared to 64%
in the same period in 1996.

    Other  income,   net  increased  by   approximately   $299,000  or  67%,  to
approximately  $744,000  for the year ended  October  31,  1997,  as compared to
approximately  $445,000 for the year ended  October 31, 1996.  This increase was
the result of an increase in investment  income  generated by funds  provided by
operating activities.

    For the year ended  October 31, 1997,  the Company had income  before income
taxes of  approximately  $3,535,000 and recorded a provision for income taxes of
approximately   $1,398,000,  as  compared  to  income  before  income  taxes  of
approximately  $1,604,000  and a  provision  for income  taxes of  approximately
$641,000  in the  same  period  in  1996.  Net  income  increased  approximately
$1,174,000,  or 122%, to approximately $2,137,000 for the year ended October 31,
1997 as compared to approximately $963,000 for the year ended October 31, 1996.

Liquidity and Capital Resources

    Cash and cash  equivalents  and United States  Treasury Notes, at cost, were
approximately  $26,857,000  at October 31,  1997,  as compared to  approximately
$13,230,000 at October 31, 1996. The increase of  approximately  $13,627,000 was
primarily the result of proceeds from the exercise of the Company's  outstanding
warrants (approximately $6,704,000) and cash provided by the Company's operating
activities less cash used for the purchase of furniture,  fixtures and equipment
and the payment of long-term debt.

    During the fiscal year ended  October 31, 1997,  the Company  entered into a
$3,000,000  revolving  credit facility with the Chase Manhattan Bank.  Under the
terms of the  facility,  advances bear interest at 1/2% above the prime rate and
the Company is obligated to pay an  annual  facility fee of 1/2%  of the  total
available amount. Outstanding amounts under the credit facility are secured by a
pledge of all accounts  receivable  of the Company.  As at October 31, 1997,  no
amounts had been borrowed under the credit facility.

    The Company believes that its current available cash and anticipated  levels
of  internally  generated  funds  will  be  sufficient  to  fund  its  financial
requirements at least for the next fiscal year at the Company's present level of
revenues and business activity.

Capital Expenditures

    The Company intends to spend  approximately  $320,000 in fiscal 1998 for the
purchase of computer  hardware and software,  telephone  equipment and leasehold
improvements  to enable the Company to  administer  the  contracts  generated by
increased sales volume.


<PAGE>


Impact of Inflation

    The Company  does not believe  that  inflation  has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.

Year 2000

    The Year 2000 issue exists  because many computer  systems and  applications
currently  use  two-digit  date fields to designate a year.  As the century date
change occurs,  date-sensitive  systems will recognize the year 2000 as 1900, or
not at all.  This  inability to  recognize  or properly  treat the Year 2000 may
cause  systems  to  process  critical  financial  and  operational   information
incorrectly.  The Company  believes,  based upon its internal  reviews and other
factors,  that the future external and internal costs to be incurred relating to
the  modification  of  internal-use  software  for the Year 2000 will not have a
material effect on the Company's results of operations or financial position.

Item 7.  Financial Statements

       Annexed hereto starting on page F-1.


<PAGE>
           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                 Page

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                          F-2

FINANCIAL STATEMENTS:

  Consolidated Balance Sheets as of October 31, 1997 and 1996     F-3

  Consolidated Statements of Operations for the years ended
  October 31, 1997 and 1996                                       F-4

  Consolidated Statements of Stockholders' Equity for the years
  ended October 31, 1997 and 1996                                 F-5

  Consolidated Statements of Cash Flows for the years ended
  October 31, 1997 and 1996                                       F-6

  Notes to Consolidated Financial Statements                      F-7
























                                  F-1


<PAGE>






                REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Interstate National Dealer Services, Inc.:


We have  audited the  accompanying  consolidated  balance  sheets of  Interstate
National Dealer Services,  Inc. (a Delaware  corporation) and subsidiaries as of
October  31,  1997  and  1996,  and  the  related  consolidated   statements  of
operations,  stockholders' equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Interstate  National  Dealer
Services, Inc. and subsidiaries as of October 31, 1997 and 1996, and the results
of their  operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.



                                          ARTHUR ANDERSEN LLP





Melville, New York
January 6, 1998


                                  F-2




<PAGE>


           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         AS OF OCTOBER 31, 1997 AND 1996

                  ASSETS                                  1997          1996
                  ------                               --------         -----

CURRENT ASSETS:
  Cash and cash equivalents                       $ 20,846,524     $13,230,203
  United States Treasury Notes, at cost              6,010,337           -    
  Accounts receivable                                8,891,963       4,138,051
  Prepaid expenses                                     367,932         250,169
                                                    -----------     -----------
           Total current assets                     36,116,756      17,618,423

RESTRICTED CASH                                      1,633,068       1,975,505

FURNITURE, FIXTURES AND EQUIPMENT,  at cost,
 less accumulated  depreciation and amortization
 of $530,281 and $283,850, respectively              1,179,293         881,548

INTANGIBLE ASSETS, less accumulated amortization
 of $127,401 and $81,232, respectively                  97,599         143,768

DEFERRED INCOME TAXES                                1,491,771         852,980

NOTE FROM RELATED PARTY                                110,000            - 

OTHER ASSETS                                           654,074         686,945
                                                  -------------     -----------
                                                   $41,282,561     $22,159,169
     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                 $ 2,929,476     $ 1,569,897
  Accrued expenses                                   1,040,721         512,115
  Accrued commissions                                1,080,178         548,472
  Reserve for claims                                 1,120,527         653,847
  Current portion of long-term debt to related party    -              160,000
  Other liabilities                                    241,598         155,752
                                                     -----------    -----------
           Total current liabilities                 6,412,500       3,600,083

DEFERRED CONTRACT REVENUE                           18,478,155      10,678,266

CONTINGENCY PAYABLE                                  1,633,068       1,975,505
                                                    -----------    ------------
           Total liabilities                        26,523,723      16,253,854
                                                    -----------    ------------

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY:
  Preferred stock, par value $.01 per share;
   authorized 1,000,000 shares; no issued shares        -               -
  Common stock, par value $.01 per share;
   authorized 10,000,000 shares; issued and
   outstanding 4,623,016 and 3,384,233 shares,
   respectively                                         46,231          33,843
  Additional paid-in capital                        11,052,054       4,347,592
  Retained earnings                                  3,660,553       1,523,880
                                                   ------------    ------------

           Total stockholders' equity               14,758,838       5,905,315
                                                   ------------    ------------
                                                  $ 41,282,561    $ 22,159,169


      The accompanying notes to financial statements are an integral
               part of these consolidated balance sheets.

                                  F-3


<PAGE>


           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996


                                                     1997           1996

REVENUES                                         $ 37,928,719   $ 21,354,148

OPERATING COSTS AND EXPENSES:
  Costs of services provided                       16,846,370      6,449,347
  Selling, general and administrative expenses     18,290,862     13,745,177
  
                                                   ----------      ---------  
           Operating income                         2,791,487      1,159,624

OTHER INCOME (EXPENSE):
  Interest income                                     771,702        499,118
  Interest expense                                    (27,968)       (54,556)
                                                 -------------    -----------
           Income before income taxes               3,535,221      1,604,186

PROVISION FOR INCOME TAXES                          1,398,548        640,711
                                                 -------------    -----------

           Net income                            $  2,136,673    $   963,475
                                                 =============   ============


NET INCOME PER SHARE:
  
  Primary                                        $        .52     $      .27 
                                                 ============     ==========   
  Weighted average shares outstanding               4,290,078      3,501,983
                                                 ============     ==========


  Fully Diluted                                  $        .48     $      .27 
                                                 ============     ==========   
  Weighted average shares outstanding               4,512,611      3,501,983
                                                 ============     ==========






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











                                  F-4


<PAGE>



           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996



                               Common Stock                Additional
                             Number of          Paid-in     Retained
                               Shares   Amount  Capital     Earnings    Total



BALANCE AT OCTOBER 31, 1995 3,325,167 $33,252  $4,324,116 $  560,405  $4,917,773

Shares issued pursuant to 
 exercise of stock options     59,066     591      23,476       -         24,067

Net income for the year ended
 October 31, 1996                -        -         -        963,475     963,475
                            --------- -------  ---------     -------   ---------


BALANCE AT OCTOBER 31, 1996 3,384,233  33,843   4,347,592  1,523,880   5,905,315

Shares issued pursuant to
 exercise of warrants       1,218,983  12,190   6,692,216       -      6,704,406

Shares issued pursuant to
 exercise of stock options     19,800     198      12,246       -         12,444

Net income for the year ended
 October 31, 1997                -        -         -      2,136,673   2,136,673
                            --------- -------  ----------  ---------  ----------
 


BALANCE AT OCTOBER 31, 1997 4,623,016 $46,231 $11,052,054 $3,660,553 $14,758,838
                            ========= ======= =========== ========== ===========


















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











                                       F-5


<PAGE>


           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996


                                                       1997        1996

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                       $2,136,673  $  963,475
  Adjustments to reconcile net income to net
    cash provided by operating activities:
   Depreciation and amortization                      339,891     203,262
   Deferred income taxes                             (638,791)   (852,980)
   Increase (decrease) in cash resulting from
    changes in operating assets and liabilities:
    Accounts receivable                            (4,753,912) (1,609,685)
    Prepaid expenses                                 (117,763)    (33,968)
    Restricted cash                                   342,437    (469,994)
    Other assets                                       (2,839)    (45,198)
    Accounts payable                                1,359,579       3,098
    Accrued expenses                                  528,606     196,857
    Accrued commissions                               531,706      (4,890)
    Reserve for claims                                466,680     300,350
    Other liabilities                                  85,846      51,844
    Deferred contract revenue                       7,799,889   5,459,985
    Contingency payable                              (342,437)    469,994 
                                                   ----------   ----------

       Net cash provided by operating activities    7,735,565   4,632,150
                                                   ----------   ----------  

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net (purchases)redemptions of United States
   Treasury Notes                                  (6,010,337)    972,600
  Purchase of furniture, fixtures and equipment, 
   net                                               (555,757)   (439,951)
  Note from related party                            (110,000)       -
  Purchase of license                                    -       (100,000)
                                                     ---------   --------- 
       Net cash (used in) provided by investing
        activities                                 (6,676,094)    432,649 

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of warrants                6,704,406        -
  Payment of long-term debt to related party         (160,000)   (200,000)
  Proceeds from exercise of stock options              12,444      24,067
                                                     ---------  ---------- 
       Net cash provided by (used in) financing 
        activities                                  6,556,850    (175,933)
                                                   -----------   ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS           7,616,321   4,888,866

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR       13,230,203   8,341,337
                                                   ----------  ----------
CASH AND CASH EQUIVALENTS, END OF YEAR           $ 20,846,524 $13,230,203
                                                 ============ ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Income taxes                                 $ 2,083,791  $ 1,457,621
                                                 ============ ===========
    Interest                                     $    27,967  $    64,311
                                                 ============ ===========


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

                                       F-6


<PAGE>
         INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            OCTOBER 31, 1997 AND 1996

1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business

Interstate  National  Dealer  Services,  Inc. and  subsidiaries  (the "Company")
designs,  markets  and  administers  service  contracts  and  warranties  in the
continental  United  States for new and used  motor  vehicles  and  recreational
vehicles and to a lesser extent,  watercraft,  motorcycles and other vehicles. A
vehicle  service  contract  is an  agreement  between  either  the dealer or the
administrator   and  the  vehicle  purchaser  under  which  the  dealer  or  the
administrator agrees to replace or repair for a specific term designated vehicle
parts  in  the  event  of a  mechanical  breakdown.  Vehicle  service  contracts
supplement,  or are in lieu of, manufacturers'  warranties and provide a variety
of extended coverage options (typically ranging from three months to seven years
and/or 3,000 miles to 150,000  miles)  generally  offered for sale by dealers to
vehicle  purchasers in a manner  similar to other  options.  In some  instances,
service  contracts are sold directly to the vehicle  owners.  The Company enters
into a non-exclusive agreement with each dealer, under which the Company obtains
insurance coverage to cover such dealer's liability for claims under its vehicle
service  contracts  and assists such dealer,  and  purchasers,  with the making,
processing  and  adjustment  of claims.  The Company  also  administers  service
contracts and claims for other service  contract  marketers.  In April 1995, the
Company  formed an  affiliated  insurance  company,  National  Service  Contract
Insurance  Company Risk  Retention  Group,  Inc.  ("NSC").  Prior to March 1996,
substantially  all  of  the  insurance  policies  arranged  by  the  Company  as
administrator  to its  dealers  had  been  underwritten  by  two  non-affiliated
insurance  companies.  Commencing March 1996, the insurance policies arranged by
the  Company  are  underwritten  by NSC and a  single  non-affiliated  insurance
company.

On November 1, 1991, the Company  purchased for $200,000  certain assets of INDS
Group, Inc. (hereinafter referred to as "Seller") and commenced operations.  The
purchase price was allocated to the assets acquired as follows:

    Covenant not-to-compete agreement         $ 100,000
    Other assets                                 30,000
    Leasehold interest                           25,000
    Furniture, fixtures and equipment            20,000
    Excess of cost over fair value 
     of net assets acquired                      25,000
                                              ---------
                                              $ 200,000
Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its subsidiaries,  all of which are wholly-owned.  All significant  intercompany
transactions and balances have been eliminated in consolidation. As required for
insurance companies, NSC has a December 31 year end.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

                                       F-7


<PAGE>


Furniture, Fixtures and Equipment

Furniture,  fixtures  and  equipment  are stated at cost.  Depreciation  for all
assets  acquired prior to fiscal 1995 is calculated  using  accelerated  methods
over the  estimated  useful  lives of the  assets.  Depreciation  for all assets
acquired  thereafter  is  calculated  using the  straight  line  method over the
estimated useful lives of the assets. The asset lives are as follows:
      Furniture and fixtures          7 years
      Office equipment                5 to 10 years
      Leasehold improvements          The remaining lease term or useful life of
                                      asset, whichever is shorter.

Restricted Cash

Pursuant to an agreement among the Company,  the  non-affiliated  underwriter of
the insurance  policies  administered  by the Company and its managing  agent, a
specified  amount is required to be  deposited  into an escrow  account for each
contract sold by the Company and underwritten by such insurer.  These funds held
in escrow by an  independent  third party are to be used for paying the costs of
administering  service  contracts  should the Company be unable to do so for any
reason.  Under the agreement,  the Company is entitled to receive on a quarterly
basis,  any  funds in excess  of a  specified  amount  for each  active  service
contract.  For the years ended October 31, 1997 and 1996,  the Company  received
approximately  $136,000  and  $98,000,  respectively,  of such funds,  which are
reflected in revenues in the accompanying consolidated statements of operations.
The balance in this escrow account totaled  approximately  $753,000 and $732,000
at October 31, 1997 and 1996, respectively. The same amounts have been reflected
as contingency payable in the accompanying consolidated balance sheets.

Certain of the service contract programs offered by the Company provide that the
claim reserves generated by each dealer be placed in  interest-bearing  accounts
maintained by PNC Bank, New England.  To the extent such reserves are unconsumed
on expired contracts, then (a) with respect to dealers who reach specified sales
volumes of service contracts,  such unconsumed  reserves and any interest earned
thereon are  distributed  (subject  to the  underwriter's  consent  based on its
satisfaction  that  a  dealer's  reserves  are  in an  amount  in  excess  of an
actuarially  acceptable  level) to the dealer and (b) with respect to each other
dealer, such unconsumed reserves and any interest earned thereon are distributed
to the Company (subject to the  underwriter's  consent based on its satisfaction
that a dealer's reserves are in an amount in excess of an actuarially acceptable
level).  The  Company  received  approximately  $254,000  and  $244,000  of such
unconsumed reserves for the years ended October 31, 1997 and 1996, respectively,
which are reflected in revenues in the accompanying  consolidated  statements of
operations. The balance in these interest-bearing accounts totaled approximately
$880,000 and  $1,243,000  at October 31, 1997 and 1996,  respectively.  The same
amounts  have  been  reflected  as  contingency   payable  in  the  accompanying
consolidated balance sheets.

Intangible Assets

Intangible  assets,  which consist of a license  agreement with the Seller (Note
9), a covenant  not-to-compete  agreement with the Seller and the excess of cost
over the fair value of net assets  acquired  relating to the  acquisition of the
Company, are being amortized on a straight-line basis as follows:

    License agreement                        10 years
    Covenant not-to-compete agreement         7 years
    Excess of cost over fair value of 
     net assets acquired                      5 years

                                       F-8


<PAGE>


Reserve for Claims

Reserve  for claims  represents  claims  that were  approved  for  payment as of
October 31, 1997 and 1996, but not paid as of those respective dates.

Revenues

Revenues relating to administrative  and insurance fees from the sale of vehicle
service contracts are recognized when the service contract sold by the dealer is
approved and accepted by the Company.  Revenues are deferred on vehicle  service
contracts in those instances where the Company  directly  receives cash for that
portion of the total  service  contract  that is allocated  to estimated  claims
reserves.  Deferred  contract revenue is recorded as earned over the life of the
service contract in proportion to expected claims.

Income Taxes

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards  ("SFAS") No. 109,  "Accounting  for Income  Taxes".  This
pronouncement  establishes  financial accounting and reporting standards for the
effects of income  taxes that result from the  Company's  activities  during the
current and  preceding  years and requires an asset and  liability  approach for
financial  accounting  and reporting for income taxes.  The provision for income
taxes is based upon income after  adjustment for those permanent items which are
not considered in the  determination  of taxable  income.  Deferred taxes result
when the  Company  records  deductions  or  recognizes  revenue  for  income tax
purposes in a different year than for financial reporting purposes.

Net Income Per Share

Primary net income per share is computed based upon the weighted  average number
of common and common  equivalent  shares  outstanding  during the period.  Fully
diluted net income per share is computed as above,  except that the  outstanding
warrants are assumed to have been exercised at the beginning of the period.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported  amounts of certain 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.

Stock Based Compensation

The Company  accounts for  stock-based  compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation". This pronouncement establishes a
fair  value  based  method  of  accounting   and   reporting   for   stock-based
compensation.  Under SFAS No.  123,  companies  may elect to follow the new fair
value based method or to continue to report under  Accounting  Principles  Board
Opinion No. 25 ("APB  25"),  "Accounting  for Stock  Issued to  Employees".  The
Company has elected to follow the  accounting  guidance of APB 25 with pro forma
disclosure of the fair value method specified in SFAS No. 123.


                                       F-9


<PAGE>


Recently Issued Accounting Standard

In February 1997, the Financial  Accounting Standards Board issued SFAS No. 128,
Earnings Per Share.  This  statement  establishes  standards  for  computing and
presenting  earnings per share ("EPS"),  replacing the presentation of currently
required primary EPS with a presentation of Basic EPS. For entities with complex
capital  structures,  the statement requires the dual presentation of both Basic
EPS and Diluted EPS on the face of the statement of  operations.  Under this new
standard, Basic EPS is computed based on weighted average shares outstanding and
excludes any potential  dilution;  Diluted EPS reflects  potential dilution from
the  exercise  or  conversion  of  securities  into  common  stock or from other
contracts to issue common stock and is similar to the currently  required  fully
diluted  EPS.  SFAS No. 128 is effective  for  financial  statements  issued for
periods ending after December 15, 1997,  including interim periods,  and earlier
application  is not  permitted.  When  adopted,  the Company will be required to
restate its EPS data for all prior periods  presented.  Pro forma EPS under SFAS
No. 128 is as follows: 
                                                 1997         1996

Basic EPS                                       $ .62        $ .28
Weighted average shares outstanding           3,434,008    3,369,684
Diluted EPS                                     $ .54        $ .27
Weighted average shares outstanding           3,949,744    3,501,983


2.  FURNITURE, FIXTURES AND EQUIPMENT:

Furniture, fixtures and equipment consists of the following :

                                 October 31,
                                 1997      1996
    
    Furniture and fixtures    $  424,096 $ 325,429
    Office equipment           1,225,667   791,465
    Leasehold improvements        59,811    48,504
                              ---------- ---------
                               1,709,574 1,165,398
    Less:  Accumulated
     depreciation and
     amortization                530,281   283,850
                               -------------------
                              $1,179,293 $ 881,548

3.  INTANGIBLE ASSETS:

Intangible  assets  consists of a license  agreement with the Seller and amounts
allocated  from the purchase  price in connection  with the  acquisition  of the
Company's  assets and  operations  on November 1, 1991,  and are  summarized  as
follows:
                                           October 31,
                                         1997     1996
    License agreement                 $100,000  $100,000
    Covenant not-to-compete agreement  100,000   100,000
    Excess of cost over fair value 
     of net assets acquired             25,000    25,000
                                      --------   --------
                                       225,000   225,000

    Less:  Accumulated amortization    127,401    81,232
                                      -------    ------
                                     $ 97,599   $143,768
                                     ========   ========

                                       F-10


<PAGE>


4.  INCOME TAXES:

The provision for income taxes consists of the following :
                                       October 31,
                                    1997       1996
Federal :
         Current                $1,564,233   $1,157,105
         Deferred                 (463,523)    (660,771)

State :
         Current                   473,106      336,586
         Deferred                 (175,268)    (192,209)
                                 ----------   ----------
                                $1,398,548     $640,711

The deferred income taxes of approximately  $1,492,000,  which have been paid as
of October 31, 1997,  result from  temporary  differences  between the financial
accounting and income tax treatment of deferred contract revenue.

The differences between the provision for income taxes and income taxes computed
using the U.S. statutory Federal income tax rate were as follows :
                                      October 31,
                                   1997      1996

    U.S. Federal statutory rate     34%       34%
    State income taxes, net of 
     Federal benefit                 6         6
                                    --        --
    Effective tax rate              40%       40%

5.  LONG-TERM DEBT TO RELATED PARTY:

Long-term  debt to related party  consists of unsecured  notes payable to Target
Insurance  Ltd.  ("Target"),  which  is  owned by  certain  shareholders  of the
Company. As of October 31, 1997, all of the notes had been paid in full.
                                                October 31,
                                                   1996

   Note payable, with interest at 8.5%,
    paid October 21, 1997                      $100,000

   Note payable, with interest at 8%,
    paid October 21, 1997                        60,000
                                              ---------
                                                160,000
   Less: Current portion                       (160,000)
                                              ---------
                                            $     -

6. LINE OF CREDIT:

During the fiscal  year ended  October 31,  1997,  the  Company  entered  into a
$3,000,000  revolving  credit facility with the Chase Manhattan Bank.  Under the
terms of the  facility,  advances bear interest at 1/2% above the prime rate and
the Company is obligated to pay an  annual  facility fee of 1/2%  of the  total
available amount. Outstanding amounts under the credit facility are secured by a
pledge of all accounts  receivable  of the Company.  As at October 31, 1997,  no
amounts had been borrowed under the credit facility.

                                       F-11


<PAGE>


7.  STOCKHOLDERS' EQUITY:

a)  Warrants

In  connection  with a July 1994 public  offering of Common  Stock,  the Company
issued  warrants for the  purchase of 1,225,100  shares of its Common Stock at a
price per share of $5.50. On September 29, 1997 the Company  exercised its right
to redeem all of its outstanding  warrants.  The warrants  remained  exercisable
until October 29, 1997, thirty days after the date of the redemption  notice. As
of October 29, 1997,  1,218,983 of the 1,225,100 then  outstanding  warrants had
been  exercised  by the  holders  thereof for a price of $5.50 per share and the
Company received proceeds of $6,704,406 in connection therewith.

b)  1993 Stock Option Plan

On  November  1, 1992,  the  Company  granted  certain  officers  and  employees
non-qualified  stock options for the purchase of up to 184,000  shares of common
stock  and on May 5,  1993,  such  non-qualified  stock  options  were  formally
included in the Company's 1993 Stock Option Plan (the "Plan") adopted as of such
date.  Under the Plan,  as  amended,  344,000  shares of common  stock have been
reserved for issuance upon exercise of incentive stock options or  non-qualified
stock options to be granted to officers and employees  who are  instrumental  to
the  success  of the  Company.  The  majority  of  options  are  exercisable  in
increments of 20% of the underlying  option shares per annum following the first
anniversary of the issuance date.  However, no option shall be exercisable after
the expiration of ten years from the date the option was granted.

The following  options to purchase the Company's  common shares were outstanding
under the Plan at October 31, 1997:
                                                    Weighted
                                                    Average
                                     Number         Exercise
                                    of Shares       Price
    October 31, 1995                220,667       $  .64
      Granted                       154,934         3.23
      Exercised                     (59,066)         .41
      Canceled                      (39,701)        1.16
                                    --------
    October 31, 1996                276,834        $2.10
      Exercised                     (19,800)         .63
      Canceled                       (3,400)        1.41
                                  ----------
    October 31, 1997                253,634        $2.23

As of October 31, 1997,  options to purchase 165,434 shares were exercisable and
11,500 shares were available for future grant.

c)  1996 Incentive Plan

On December  18, 1995 the Board of  Directors  of the Company  approved the 1996
Incentive  Plan (the  "Incentive  Plan").  The  Incentive  Plan  authorizes  the
granting of incentive  awards through  grants of share options,  grants of share
appreciation  rights,  grants of share purchase  awards and grants of restricted
share awards to those individual directors and/or employees who are instrumental
to the  success of the  Company.  The  aggregate  number of shares  which may be
issued pursuant to the Incentive Plan shall not exceed 300,000.  The majority of
options issued under the Incentive Plan are  exercisable in increments of 20% of
the underlying option shares per annum following the first

                                       F-12


<PAGE>


 anniversary of the issuance date. However, no option shall be exercisable after
the expiration of ten years from the date the option was granted.

The following  options to purchase the Company's  common shares were outstanding
under the Incentive Plan at October 31, 1997:
                                                    Weighted
                                                    Average
                                     Number         Exercise
                                    of Shares       Price
    October 31, 1995                   -         $    -
      Granted                       105,000         4.36
                                    -------
    October 31, 1996                105,000        $4.36
      Granted                        37,500         6.73
                                  ---------
    October 31, 1997                142,500        $4.98

As of October 31, 1997,  options to purchase 55,000 shares were  exercisable and
157,500 shares were available for future grant.


d)  Other Options

On June 12, 1996,  the Company  granted  certain  officers  non-qualified  stock
options for the purchase of 180,000 shares of common stock at a weighted average
exercise price of $4.63 per share. The exercise prices exceeded the market value
per share on the date of grant.  The options were  immediately  exercisable  and
expire ten years from the date of grant.

e)  SFAS No. 123

The  Company  has  adopted  the  disclosure-only  provisions  of SFAS  No.  123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been  recognized  for the stock  option  plans.  Had  compensation  cost for the
Company's  stock  option  plans been  determined  based on the fair value at the
grant date for  options  granted  in fiscal  1997 and 1996 as  described  by the
provisions  of SFAS No. 123, the  Company's  net income and net income per share
would have been decreased as indicated below:

                                      1997       1996

Net income - as reported         $2,136,673   $963,475
Net income - pro forma            2,098,580    575,087
Net income per share - as reported     .52         .27
Net income per share - pro forma       .49         .16


The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes  option-pricing model. The following weighted-average  assumptions
were used for grants in 1997:  dividend yield of 0%; expected volatility of 50%;
risk-free  interest  rate of 6.5%;  expected life of 5 years and a fair value of
$3.48. The following weighted-average  assumptions were used for grants in 1996:
dividend yield of 0%;  expected  volatility of 50%;  risk-free  interest rate of
6.7%; expected life of 5 years and a fair value of $2.10.


                                       F-13


<PAGE>


f)  Shareholders Rights Plan

In September  1995, the Board of Directors of the Company adopted a Shareholders
Rights  Plan (the  "Rights  Plan") to help  protect the  Company's  stockholders
against certain coercive  takeover tactics commonly used by corporate raiders to
deprive  stockholders  of  the  long-term  value  of  their  investment  through
transactions that do not treat all stockholders equally.  Under the terms of the
Rights  Plan,  the Board of  Directors  declared a dividend of one common  stock
purchase  right (a "Right")  for each  outstanding  share of Common Stock of the
Company held by stockholders of record on November 10, 1995. Each Right entitles
the holder to purchase  from the Company one share of Common Stock at a price of
$25 per share, subject to adjustment.

8.  RELATED PARTY TRANSACTIONS:

In April 1997 the  Company  made a loan to one of its  officers in the amount of
$110,000. The loan bears interest at 7 percent per annum, payable quarterly, and
is due in full in April 2002.  Interest  income of $3,375 was  recorded  for the
year ended October 31, 1997.

I.N.D.S.  Agency,  Inc., a company  controlled by a  shareholder  of the Company
executed  an agent  agreement  with the Seller  which was assumed by the Company
upon the acquisition of the business in 1991.  Under the terms of the agreement,
such company  receives a commission  for each  service  contract it places.  The
Company recorded  commission expense relating to this agreement of approximately
$869,000  and  $698,000  for  the  years  ended   October  31,  1997  and  1996,
respectively.

In November  1996,  NSC  entered  into a  reinsurance  agreement  with  Reliance
National Indemnity Company ("Reliance") which provided reinsurance for losses to
NSC under certain circumstances.  Also in November 1996, Reliance entered into a
reinsurance  agreement  with Target  which  provided  reinsurance  for losses to
Reliance under its agreement  with NSC. In November  1996,  the Company  entered
into  agreements to indemnify  Reliance and Target for any losses incurred under
the aforementioned reinsurance agreements.  There were no such losses, and there
were no payments made by the Company under the indemnification agreements. All 
of the aforementioned agreements were terminated in December 1997.

9.  COMMITMENTS AND CONTINGENCIES:

Leases

In December 1994, the Company  entered into a 10 year lease agreement for office
space in Mitchel Field,  New York which enabled the Company to  consolidate  its
Great Neck, New York and Novato,  California  operations.  The term of the lease
commenced on March 1, 1995 and shall  terminate  on February  28,  2005.  In May
1996, the Company entered into a 6 year sublease for additional  office space at
its Mitchel Field location. In November 1997, the sublease was amended to expand
the  additional  office  space  available  to the Company at its  Mitchel  Field
location.  The term of the  sublease  commenced  on  October  1,  1996 and shall
terminate on November 30, 2002.  Future  minimum lease  payments under the lease
and sublease are as follows:
           Fiscal year                       Amount
           -----------                       ------
              1998                       $  578,000
              1999                          636,000
              2000                          650,000
              2001                          666,000
              2002                          465,000
           Thereafter                     1,078,000
                                          ---------
                                         $4,073,000

                                       F-14


<PAGE>


Rent  expense  totaled  approximately  $479,000 and $368,000 for the years ended
October 31, 1997 and 1996, respectively.

Royalties

In connection  with the  acquisition of the Company,  the Seller and the Company
entered into a License Agreement dated September 25, 1991, pursuant to which the
Seller granted the Company a ten-year exclusive license to use certain programs,
administrative systems,  computer systems,  reports,  software,  trade names and
other  proprietary  rights  developed  by the  Seller  in  connection  with  the
business.

Under the terms of the License  Agreement,  with respect to each vehicle service
contract entered into between a dealer and its customer, the Company paid to the
Seller a royalty  in an  amount  equal to the  lesser  of (a) $5.00 per  vehicle
service  contract  or (b) 15% of the  administrative  fee  paid  to the  Company
thereunder.  Upon the payment of an aggregate of  $1,100,000 in royalties to the
Seller,  the  Company  had the right to  purchase  such  licensed  products  for
$100,000 payable in three monthly  installments of $33,333. In March 1996, after
having paid an  aggregate  of  $1,100,000  in  royalties to the Seller under the
License  Agreement,  the Company  exercised its right and purchased the license.
Royalty expense incurred in connection with this agreement totaled approximately
$121,000 for the year ended October 31, 1996.


Employment Agreements

a)   On  December  1, 1993,  the Company  entered  into a  five-year  employment
     agreement with its chairman and chief executive officer at an annual salary
     of $150,000 plus a non-accountable  reimbursement of expenses of $1,000 per
     month.  In fiscal 1996, the employment  agreement was amended to extend its
     term for an additional five years from the original date of termination and
     in fiscal 1997,  the employment  agreement was further  amended to increase
     the  annual  salary to  $200,000.  During the term of such  agreement,  the
     chairman is entitled to receive an annual  bonus at the  discretion  of the
     Company's Board of Directors. The chairman is also provided with the use of
     a leased car and reimbursed for all operating  expenses thereof.  Under the
     terms of such agreement,  if the chairman's  employment with the Company is
     terminated  other than for cause, he is entitled to receive an amount equal
     to the greater of (a) the aggregate salary and discretionary  bonus paid or
     payable by the Company  for the most  recent two fiscal  years prior to his
     termination of employment or (b) the aggregate salary payable from the date
     of termination of employment  through the expiration of such agreement.  In
     fiscal 1995,  the Company  amended the  employment  contract to provide for
     assistance  to the chairman  with respect to the purchase by his trustee of
     split-dollar  life  insurance  policies  which benefit the chairman and his
     family.  The funds disbursed by the Company are included in other assets in
     the accompanying consolidated balance sheets in the amount of approximately
     $186,000  and  $123,000 at October 31,  1997 and 1996,  respectively.  This
     amount will be fully reimbursed to the Company in the event of death of the
     insured or termination of the agreement.

b)   On  December  1, 1993,  the Company  entered  into a  five-year  employment
     agreement  with its former chief  financial  officer at an annual salary of
     $72,000 plus a non-accountable reimbursement of expenses of $250 per month.
     On December 18, 1995, the Company amended the employment  agreement  naming
     the former  chief  financial  officer to the  position  of chief  operating
     officer and president at an annual salary of $100,000 effective November 1,
     1995.  In fiscal 1996,  the  employment  agreement  was further  amended to
     extend its term for an  additional  five years  from the  original  date of
     termination and was amended in fiscal 1997 to increase the annual salary to

                                       F-15


<PAGE>


            $125,000.  During  the  term of such  agreement,  the  president  is
      entitled to receive an annual  bonus at the  discretion  of the  Company's
      Board of  Directors.  The  president  is also  provided  with the use of a
      leased car and is reimbursed for all operating expenses thereof. Under the
      terms of such agreement, if the president's employment with the Company is
      terminated  other than for  cause,  she is  entitled  to receive an amount
      equal to the aggregate  salary paid or payable by the Company for the most
      recent two fiscal years prior to her termination of employment.

c)   As of December 1, 1993,  the Company  entered  into a five-year  employment
     agreement  with its vice  president,  marketing,  at an  annual  salary  of
     approximately  $69,000  including  reimbursement  of  expenses  incurred in
     connection with the use of his car. He also receives monthly commissions in
     an amount  equal to 2% of (a) all  administrative  fees paid to the Company
     during such month minus (b) the  aggregate  selling  expenses  incurred for
     such month minus (c) $150,000. In fiscal 1996, the employment agreement was
     amended to extend its term for an additional  three years from the original
     date of termination. During the term of such agreement, the vice president,
     marketing,  is entitled to receive an annual bonus at the discretion of the
     Company's  Board of Directors.  Under the terms of such  agreement,  if his
     employment  with the  Company is  terminated  other  than for cause,  he is
     entitled to receive compensation in an amount equal to the aggregate salary
     paid or payable by the Company to him for the most recent two fiscal  years
     prior to his termination of employment.
    
     The future  aggregate  minimum  annual  compensation  required  under these
agreements is approximately $394,000.

Litigation

In the normal  course of  business,  the  Company  is a party to various  claims
and/or  litigation.  Management  believes that the settlement of all such claims
and/or litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations.

10. MERGER:

INDS Holdings,  Inc.  ("Holdings") was formed in connection with the acquisition
of the business from the Seller. Certain  directors/officers/shareholders of the
Company  owned  100% of the  outstanding  shares  of common  stock of  Holdings.
Target, which is also owned by the directors/officers/  shareholders, owned 100%
of all the outstanding shares of preferred stock of Holdings.

On November 12, 1993,  Holdings,  the owner of 935,000 shares of common stock of
the Company, merged with and into the Company. Pursuant to such merger, (a) each
of the officers referred to above received 467,500 shares of common stock of the
Company  and (b)  Target,  in  exchange  for the  preferred  stock of  Holdings,
received a  promissory  note  issued by the Company in the  principal  amount of
$60,000  maturing on October 21, 1997, and bearing  interest at a rate of 8% per
annum. In addition,  pursuant to such merger, the Company became obligated under
the terms of a loan made by Target to  Holdings,  which loan is  evidenced  by a
promissory note dated October 22, 1991 in the principal amount of $100,000. Such
promissory note matured on October 21, 1997, and bore interest at a rate of 8.5%
per annum. These notes were paid in full in October 1997 as further described in
Note 5.



                                       F-16


<PAGE>


11. SUBSEQUENT EVENT:

In December 1997, the Company  received a payment of $500,000 in settlement of a
dispute with an unaffiliated party. This amount will be included in other income
in the first quarter of fiscal 1998.














































                                       F-17


<PAGE>


Item 8. Changes In and  Disagreements  with  Accountant  on Accounting
and Financial Disclosure

    None.


PART III


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

     The table below sets forth certain  information as of January 13, 1998 with
respect to the  executive  officers and  directors  of the  Company.  Other than
Chester J. Luby and Cindy H. Luby,  who are  father  and  daughter,  none of the
executive officers or directors of the Company is related.

    Name                            Age              Position

Chester J. Luby. . . . . . . .       66   Chairman, Chief Executive Officer and
                                           Director*

Cindy H. Luby. . . . . . . . .       43   President, Chief Operating Officer
                                           and Director**

Lawrence J. Altman . . . . . .       50   Senior Vice President, Marketing

Zvi D. Sprung . . . . . . . ..       48   Chief Financial Officer, Treasurer
                                           and Secretary

Robert E. Schulman . . . . . .       72   Director***

William H. Brown . . . . . . .       67   Director**

Donald Kirsch. . . . . . . . . .     66   Director*


    * Term expires 2000

  **  Term expires 1998

 ***  Term expires 1999

    The Board of Directors of the Company is divided into three classes  serving
staggered three year terms. The Company's Certificate of Incorporation  provides
that  directors may be removed with or without  cause only upon the  affirmative
vote of holders of at least 66-2/3% of the voting power of the then  outstanding
shares of any class or series of capital  stock of the Company  entitled to vote
generally in the election of directors, voting as a class.

    Chester J. Luby has been the Chairman,  Chief Executive  Officer, a director
and a principal stockholder of the Company since its inception in 1991. For more
than five years, Mr. Luby has been the president and a principal  stockholder of
Target Agency,  Inc.  ("Agency"),  Target  Insurance Ltd., a Bermuda joint stock
company  ("Target"),  and Dealers  Extended  Services,  Inc.  ("DESI"),  private
companies  involved  in  various  aspects  of  insurance  and  service  contract
businesses.  Mr.  Luby is a graduate of the  University  of Chicago and Yale Law
School and a member of the New York and Florida bars.

    Cindy H. Luby was  elected  President  and Chief  Operating  Officer  of the
Company  in  December  1995 and has been a  director  of the  Company  since its
inception. Ms. Luby was Vice President,  Chief Financial Officer,  Treasurer and
Secretary of the Company from its  inception in 1991 until  December  1995.  For

<PAGE>

more than five years,  Ms. Luby has been a vice president of Agency,  Target and
DESI. Ms. Luby is a licensed life and property and casualty  insurance agent and
is a graduate of Wellesley  College and General  Motors School of  Merchandising
and Management.

    Lawrence J.  Altman was elected  Senior  Vice  President,  Marketing  of the
Company in April 1997. Mr. Altman was Vice President,  Marketing, of the Company
since its  inception  in 1991  until  April  1997.  For more than five years Mr.
Altman has been a vice  president of Agency and DESI.  From 1973 to the present,
Mr. Altman has been in the vehicle service  contract  industry as an employee of
companies selling or designing,  marketing and  administering  such contracts as
well as an independent agent marketing such contracts.

     Zvi D.  Sprung  joined the  Company in August  1995 and was  elected  Chief
Financial  Officer,  Treasurer and Secretary in December 1995.  Prior to joining
the Company, Mr. Sprung was Controller of Advanced Media, Inc. (1994-95),  Chief
Financial  officer of Pharmhouse  Corp.  (1992-94)  and  Controller of Long Lake
Energy Corporation (1987-92). Mr. Sprung is a Certified Public Accountant in the
state of New York.

    Robert E. Schulman is President of MRN Capital  Company,  a private  venture
capital company,  and Vice President and Director of Carbo  Industries,  Inc., a
private gasoline and oil distribution  company.  Until December 31, 1993, he was
President and Chairman of the Board of Sound One Corp.,  a public motion picture
post production  company.  He is currently a financial tax consultant to various
other companies and a certified public accountant and has been a director of the
Company since September 1994.

    William H. Brown has been  President  of Leroy  Holdings,  Inc., a privately
held vehicle leasing  company,  for more than the last five years. He has been a
director of the Company since September 1994.

    Donald Kirsch is Chairman and  President of The Wall Street Group,  Inc. and
President  and  Chief  Executive  Officer  of  Wall  Street  Consultants,  Inc.,
financial  consulting and public  relations firms. He has been a director of the
Company since December 1996.

    Based  solely on its review of copies  received by the Company of reports of
ownership of and changes in ownership of  securities  filed with the  Securities
and Exchange  Commission by the Company's  officers,  directors and greater than
10% shareholders, or written representations from certain reporting persons that
no Forms 5 were required for those persons,  the Company  believes that,  during
the year ended  October 31,  1997,  all filing  requirements  applicable  to its
officers,  directors  and greater than 10%  shareholders  were  complied with as
required  by Section  16 (a) of the  Securities  and  Exchange  Act of 1934,  as
amended.



<PAGE>


Item 10.  Executive Compensation

    The  following  table  summarizes  the  compensation  paid or accrued by the
Company for services  rendered during the years indicated to the Company's Chief
Executive  Officer and to its  executive  officers  whose  salaries  and bonuses
exceeded  $100,000  during the fiscal  year ended  October  31, 1997 (the "Named
Executives").  The Company did not grant any  restricted  stock  awards or stock
appreciation  rights or make any  long-term  incentive  plan payouts  during the
years indicated.
   
   
                          Summary Compensation Table


                                                    Long-Term
                                                   Compensation
                    Fiscal Year        Annual       Securities
  Name and            Ended          Compensation   Underlying     All Other
Principal Position  October 31,    Salary    Bonus   Options    Compensation (4)

Chester J.Luby (1)    1997       $154,167  $137,829       -         $62,919
 Chairman and Chief   1996        153,975    72,815    170,000       62,920
 Executive Officer    1995        150,000    37,484     15,000       60,000
        

Cindy H. Luby (2)     1997        100,961    98,450       -             -
 Presient and Chief   1996        106,184    48,543    146,434          -
 Operating Officer    1995         73,980    24,990      5,000          -

Lawrence J. Altman(3) 1997        164,890       -         -             -
 Senior Vice          1996        134,702     5,000     26,500          -
 President,           1995        104,300       -        5,000          -
 Marketing



(1) Annual compensation paid to Mr. Luby was pursuant to an Employment Agreement
    effective  as of December 1, 1993  between  the  Company  and Mr.  Luby,  as
    amended.

(2) Annual compensation paid to Ms. Luby was pursuant to an Employment Agreement
    effective  as of December 1, 1993  between  the  Company  and Ms.  Luby,  as
    amended.  In April  1997,  the  Company  provided a loan to Ms.  Luby in the
    amount of $110,000 to assist her in the purchase of a new residence in close
    proximity  to the  Company's  offices.  The  loan  bears  interest,  payable
    quarterly in arrears, at 7% per annum, is unsecured,  and is due and payable
    in full April 2002.  The loan may be prepaid by Ms. Luby in whole or in part
    at any time. In January 1998, Ms. Luby prepaid $20,000 of the loan.

(3) Annual  compensation  paid  to Mr.  Altman  was  pursuant  to an  Employment
    Agreement  effective  as of  December  1, 1993  between  the Company and Mr.
    Altman, as amended.

(4) Amount  represents split dollar life insurance  premiums paid by the Company
    for the benefit of Mr. Luby.  Amount does not include certain other personal
    benefits,  the total  value of which was less than the  lesser of $50,000 or
    ten percent of the total salary and bonus paid or accrued by the Company for
    services rendered by such officer during the fiscal year indicated.


    In  fiscal  1997  the  Directors  of the  Company  who  were  not  otherwise
affiliated  with the Company,  received a fee of $1,000 plus travel expenses for
attendance at Board or Committee  meetings,  while Directors that were employees
of the Company did not receive any compensation for their attendance at Board or
Committee  meetings.  In  addition,  Mr.  Kirsch was awarded  15,000  options to
purchase  Common Stock under the Company's  1996 Incentive Plan in December 1996
upon his election to the Board of Directors.  These options,  5,000 of which are
currently exercisable, become exercisable at the rate of 5,000 options per year.

    The Company did not grant any  options or stock  appreciation  rights to the
Named Executives during the fiscal year ended October 31, 1997.


<PAGE>


    The following table sets forth information  concerning the exercise of stock
options by the Named  Executives  during the fiscal year ended  October 31, 1997
and the value of  unexercised  options as of October  31, 1997 held by the Named
Executives.


               Aggregated Option Exercises in Last Fiscal Year
                                       and
                          Fiscal Year End Option Values


              Shares                                      Value of Unexercised
             Acquired     Value   Number of Unexercised   In-the-Money Options
            on Exercise Realized   Options at October    at October 31, 1997(1)
                                       31,1997
                                  Exercis-  Unexercis-   Exercis-    Unexercis-
                                    able        able       able          able
Chester Luby     -      $    -     170,000     30,000    $952,054     $247,840
Cindy Luby       -           -     146,034     25,800     832,361      216,483
Lawrence
 Altman       10,000      48,500    14,500     31,000     112,333      204,068


(1) Based on the  closing  price of the Common  Stock on NASDAQ on  October  31,
1997.


Stock Option Plan

    The  Company's  Amended and Restated 1993 Stock Option Plan, as amended (the
"Option  Plan"),  is designed to attract,  retain and motivate key  employees by
granting them options to purchase Common Stock. The Option Plan provides for the
grant of a maximum of 344,000 shares of Common Stock and permits the granting of
stock options to employees which are either  "incentive stock options"  ("ISOs")
meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or "nonqualified stock options" ("NSOs").  The Option Plan
is  administered  by a Stock Option and  Compensation  Committee of the Board of
Directors  established  for such purpose and  consisting of Robert  Schulman and
William Brown,  independent  directors of the Board of Directors of the Company.
Subject  to  the  terms  of the  Option  Plan,  such  Committee  determines  the
recipients  of options and the number of options to be granted  under the Option
Plan.  The Option  Plan also  provides  for the Stock  Option  and  Compensation
Committee to establish an exercise price for ISOs and NSOs that is not less than
the fair market  value per share at the date of grant.  As of October 31,  1997,
options to purchase  253,634 shares of Common Stock were  outstanding  under the
Option Plan,  182,234 of which are  exercisable  at January 13, 1998.  Under the
Option Plan, a total of 11,500 additional options may be granted.

Incentive Plan

    The Company's  1996 Incentive Plan (the  "Incentive  Plan"),  is designed to
assist the Company in attracting and retaining selected  individuals to serve as
directors, officers, consultants, advisors and employees of the Company who will
contribute to the Company's long-term success. The Incentive Plan authorizes the
granting of incentive awards through grants of options to purchase Common Stock,
grants of Common Stock  appreciation  rights,  grants of Common  Stock  purchase
awards and grants of restricted  Common Stock.  The Incentive  Plan provides for
the grant of a  maximum  of  300,000  shares of  Common  Stock and  permits  the
granting of stock  options  which are either ISOs  meeting the  requirements  of
Section  422 of the Code,  or NSOs.  The  Incentive  Plan is  administered  by a
Committee of the Board of Directors  established for such purpose and consisting
of Robert  Schulman  and William  Brown,  independent  directors of the Company.
Subject  to the terms of the  Incentive  Plan,  such  Committee  determines  the
recipients  of awards and the number of awards to be granted under the Incentive
Plan.  The  Incentive  Plan also  provides  for the  Committee  to  establish an
exercise price for ISOs and NSOs that is not less than the fair market value per
share at the date of grant.

    In  addition  to grants of  discretionary  awards  by the Stock  Option  and
Compensation  Committee,  the Incentive  Plan  provides for automatic  grants of
options to purchase  15,000 shares to all  independent  directors (as defined in
the Incentive  Plan) at an exercise  price equal to the fair market value of the
Common Stock,  upon adoption of the Incentive  Plan by the  stockholders  of the
Company and, if later,  upon the  appointment of an independent  director to the
Board of Directors. As a result of this provision of the Incentive Plan, options
to purchase 15,000 shares were automatically granted to each of Messrs. Schulman
and Brown in April 1996 and options to purchase 15,000 shares were automatically

<PAGE>

granted to Mr.  Kirsch upon his  election in  December  1996.  As of October 31,
1997,  options to purchase 142,500 shares of Common Stock were outstanding under
the Incentive Plan, 70,000 of which are exercisable at January 13, 1998.

Employment Agreements

      On  December  1, 1993,  the Company  entered  into a five-year  employment
agreement  with Chester J. Luby  providing  for his  employment  as Chairman and
Chief  Executive  Officer of the Company at an annual  salary of $150,000 plus a
non-accountable  reimbursement  of expenses of $1,000 per month. In fiscal 1996,
the  Company  amended  the  employment  agreement  to  extend  its  term  for an
additional  five years from the original  date of  termination  and in September
1997, the Company further amended the agreement to increase the annual salary to
$200,000. Mr. Luby is entitled to receive during the term of such agreement,  an
annual  bonus  at the  discretion  of  the  Company's  Board  of  Directors  and
reimbursement for membership in certain organizations. Mr. Luby is also provided
with the use of a leased car and reimbursed for all operating  expenses thereof.
Under the terms of such agreement,  if Mr. Luby's employment with the Company is
terminated  other than for cause,  he is entitled to receive  compensation in an
amount equal to the greater of (a) the aggregate salary and discretionary  bonus
paid or payable by the Company for the most recent two fiscal years prior to his
termination of employment and (b) the aggregate  salary payable to Mr. Luby from
the date of termination of employment  through the expiration of such agreement.
In fiscal  1995 the  Company  amended the  employment  agreement  to provide for
assistance  to  Mr.  Luby  with  respect  to the  purchase  by  his  trustee  of
split-dollar life insurance  policies which benefit Mr. Luby and his family. The
amounts disbursed by the Company are recorded as non-interest  bearing loans and
total  approximately  $186,000  as of October  31,  1997.  This  amount  will be
reimbursed to the Company in the event of death of the insured or termination of
the agreement.

    On  December  1, 1993,  the  Company  entered  into a  five-year  employment
agreement  with Cindy H. Luby  providing for her  employment as Chief  Financial
Officer at an annual salary of $72,000 plus a  non-accountable  reimbursement of
expenses  of $250 per month.  On December  18,  1995,  the  Company  amended the
employment  agreement to reflect the appointment of Ms. Luby to the positions of
Chief Operating Officer and President at an annual salary of $100,000  effective
November 1, 1995. In fiscal 1996, the Company  further  amended the agreement to
extend  its  term  for an  additional  five  years  from  the  original  date of
termination and in September 1997, the Company amended the agreement to increase
the annual salary to $125,000.  Ms. Luby is entitled to receive  during the term
of such  agreement,  an annual bonus at the discretion of the Company's Board of
Directors.  Ms.  Luby is also  provided  with  the  use of a  leased  car and is
reimbursed  for  all  operating  expenses  thereof.  Under  the  terms  of  such
agreement,  if Ms. Luby's  employment with the Company is terminated  other than
for cause,  she is entitled to receive an amount equal to the  aggregate  salary
paid or payable by the Company for the most recent two fiscal years prior to her
termination of employment.

    As of December  1, 1993,  the Company  entered  into a five-year  employment
agreement  with  Lawrence  J.  Altman  providing  for  his  employment  as  Vice
President,  Marketing  of the Company at an annual  salary of $69,150  including
reimbursement  of expenses  incurred in connection  with the use of his car. Mr.
Altman also  receives  monthly  commissions  in an amount equal to 2% of (a) all
administrative  fees  paid  to the  Company  during  such  month  minus  (b) the
aggregate selling expenses incurred for such month minus (c) $150,000. In fiscal
1996,  the Company  amended the  employment  agreement to extend its term for an
additional  three years from the original  date of  termination.  Mr.  Altman is
entitled to receive  during the term of such  agreement,  an annual bonus at the
discretion  of the  Company's  Board  of  Directors.  Under  the  terms  of such
agreement,  if Mr. Altman's employment with the Company is terminated other than
for cause,  he is entitled  to receive  compensation  in an amount  equal to the
aggregate  salary  paid or payable by the Company to him for the most recent two
fiscal years prior to his termination of employment.


Item 11.  Security Ownership of Certain Beneficial Owners and
Management

    The  following  table  sets  forth  information   regarding  the  beneficial
ownership of shares of Common Stock,  as of January 13, 1998, by each person who
beneficially owns more than five percent of such shares, by each director of the
Company,  by each  executive  officer of the  Company and by all  directors  and
executive officers of the Company as a group. Each person named in the table has
sole  voting and  investment  power with  respect to all shares of Common  Stock
shown as  beneficially  owned by him or it, except as otherwise set forth in the
notes to the table.
<PAGE>


                                              Shares        Percent of Shares
Name and Address of                         Beneficially       Beneficially
  Beneficial Owner                            Owned              Owned (1)

Chester J. Luby                              680,800(2)           14.1%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Joan S. Luby                                 492,500(3)           10.6%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Cindy H. Luby                                184,894(4)            3.9%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Lawrence J. Altman                            67,500(5)            1.4%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Zvi D. Sprung                                 19,500(6)             -
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Robert E. Schulman                            18,000(7)             -  

William H. Brown                              18,000(8)             -

Donald Kirsch                                 15,000(9)             -

First Wilshire Securities Management, Inc.   408,000(10)           8.8%

All directors and executive officers 
 as a group (seven persons)                1,005,194              19.7%

(1) Excludes (i) 110,000  shares of Common Stock  issuable  upon the exercise of
    the Unit  Purchase  Options  issued  to the  underwriters  in the  Company's
    initial  public  offering and (ii) 110,000  shares of Common Stock  issuable
    upon  exercise of the Warrants  issued as part of the Units  comprising  the
    Unit Purchase Options.  Amount and Percent of Shares  Beneficially Owned was
    computed based on 4,623,016 shares of Common Stock outstanding on January 
    13 ,1998 and, in each person's case, the number  of shares of Common  Stock
    issuable upon the exercise of options and/or  Independent  Director Warrants
    (defined  below) held by such person,  or in the case of all  directors  and
    executive officers as a group, the number of shares of Common Stock issuable
    upon the exercise of options and/or  Independent  Director  Warrants held by
    all such members of such group, but does not include the number of shares of
    Common Stock  issuable  upon the exercise of any other  outstanding  options
    and/or Independent Director Warrants.

(2) Includes 200,000 shares issuable upon the exercise of stock options, 177,000
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 12,000 options per year.

(3) Includes 15,000 shares  issuable upon the exercise of stock options,  10,000
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 5,000 options per year.

(4) Includes 171,834 shares issuable upon the exercise of stock options, 151,034
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 11,800 options per year. Also includes 960 shares
    owned by Ms.  Luby's  husband,  as to which Ms.  Luby  disclaims  beneficial
    ownership.

(5) Includes 45,500 shares  issuable upon the exercise of stock options,  16,000
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 13,100 options per year.
<PAGE>

(6) All of these shares are issuable upon the exercise of stock  options,  3,400
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 3,900 options per year.

(7) Includes (a) 15,000  shares  issuable  upon the  exercise of stock  options,
    5,000 of which are  currently  exercisable  and the balance of which  become
    exercisable  at the rate of 5,000  options  per  year and (b)  3,000  shares
    issuable   upon   exercise  of  warrants  to  purchase   Common  Stock  (the
    "Independent  Director Warrants"),  1,800 of which are currently exercisable
    and the balance of which become  exercisable at the rate of 600  Independent
    Director Warrants per year.

(8) Includes (a) 15,000  shares  issuable  upon the  exercise of stock  options,
    5,000 of which are  currently  exercisable  and the balance of which  become
    exercisable  at the rate of 5,000  options  per  year and (b)  3,000  shares
    issuable upon exercise of Independent Director Warrants,  1,800 of which are
    currently  exercisable  and the balance of which become  exercisable  at the
    rate of 600 Independent Director Warrants per year.

(9) All of these shares are issuable upon the exercise of stock  options,  5,000
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 5,000 options per year.

(10)Pursuant  to  Schedule  13G  supplied  to the  Company in July  1996.  First
    Wilshire Securities  Management,  Inc., a broker and investment advisor, has
    sole voting power over 86,800 of the 408,000 shares.



Item 12.  Certain Relationships and Related Transactions

    In  connection  with the  acquisition  by the  Company  of the assets of the
Predecessor,  INDS Holdings, Inc. ("Holdings"),  a company controlled by Chester
and Joan Luby,  purchased  935,000  shares of the Company's  Common Stock.  Upon
consummation of the  Acquisition,  all of the common stock of Holdings was owned
by Mr. and Mrs. Luby,  and Target owned all of the preferred  stock of Holdings.
Target is also owned and  controlled by Mr. and Mrs. Luby. On November 23, 1993,
Holdings was merged into the Company, as a result of which the Company issued to
each of Mr. and Mrs. Luby 467,500  shares of Common Stock and issued to Target a
promissory Note in the amount of $60,000.  This note, which bore interest at the
rate of 8% per annum, matured and was paid on October 21, 1997. In addition,  as
a result of the merger,  the Company assumed the obligations of Holdings under a
promissory  note to Target in the amount of $100,000  arising out of a loan made
by Target to Holdings. This note, which bore interest at 8.5% per annum, matured
and was paid on October 21, 1997.

    In November  1996,  NSC entered into a reinsurance  agreement  with Reliance
National Indemnity Company ("Reliance") which provided reinsurance for losses to
NSC under certain circumstances.  Also in November 1996, Reliance entered into a
reinsurance  agreement  with Target  which  provided  reinsurance  for losses to
Reliance  under its  agreement  with NSC.  During fiscal 1997,  Target  received
approximately $67,300 in premiums under its agreement with Reliance. In November
1996, the Company entered into  agreements to indemnify  Reliance and Target for
any losses incurred under the aforementioned reinsurance agreements.  There were
no such  losses,  and  there  were no  payments  made by the  Company  under the
indemnification agreements. All of the aforementioned agreements were  
terminated in December 1997.


<PAGE>


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

  A) Exhibits

  Exhibit
  No.                          Description

  2.1  Certificate of Merger of INDS Holdings,  Inc. ("Holdings") into
       the Company.(1)
  3.1  Restated Certificate of Incorporation of the Company.(1)
  3.2  Bylaws of the Company, as amended.(1)
  3.3  Amended and Restated Certificate of Incorporation of the Company.(1)
  3.4  Amended and Restated Bylaws of the Company.(1)
  4.1  Form of Common Stock Certificate.(1)
  4.2  Form of Warrant Agreement and Form of Warrant Certificates.(1)
  4.3  Form  of  Unit  Purchase  Option  Agreement  and  Form  of Unit
       Purchase Option Certificate.(1)
  4.4  Rights  Agreement dated as of October 24, 1995 between the Company and
       Continental Stock Transfer & Trust Company, which includes as exhibits
       the Form of Right  Certificate  as Exhibit A and the Summary of Rights
       to Purchase Common Shares as Exhibit B.(2)
 10.1  Employment  Agreement  between  the  Company  and  Louis F.
       Dente ("Dente"), dated September 5, 1991.(1)
 10.2  Employment  Agreement  between  the  Company and Chester J. Luby, dated
       as of December 1, 1993.(1)
 10.3  Employment  Agreement  between  the  Company  and  Cindy H.Luby, dated
       as of December 1, 1993.(1)
 10.4  Employment  Agreement  between the Company and  Lawrence J.Altman, dated
       as of December 1, 1993.(1)
 10.5  Amended and Restated 1993 Stock Option Plan.(1)
 10.8  License  Agreement, dated September 25, 1991, between INDS Group, Inc.
       ("Seller")as licensor, and the Company, as licensee.(1)
 10.10 Restated Contingent Claim Reserve and Administration Escrow Contract,
       dated August 7, 1991, among Seller (as  predecessor-in-interest to
       the Company), The  Travelers  Indemnity  Company ("Travelers"), Brokerage
       Professionals, Inc. ("BPI")and The Massachusetts Company, Inc. (the 
       "Escrow Agent").(1)
 10.11 Replacement Administrator Agreement, dated October 1,1991, among Seller
       (as  predecessor-in-interest  to the Company),  Travelers,  BPI
       and Automotive Professionals, Inc. ("API").(1)
 10.12 INDS/BPI-Program  Agreement,  dated October 1, 1991,  among Seller
       (as predecessor-in-interest to the Company), Travelers and BPI.(1)
 10.13 Escrow Account Agreement for Automobile Vehicle Service Contract Primary
        Loss Primary  Loss  Reserve  Funds,  dated  August 22,  1991,  among
        Seller (as predecessor-in-interest to the Company), BPI and the Escrow
        Agent.(1)
 10.14 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
       among the Company, Seller and Travelers.(1)
 10.15 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
       among the Company, Seller and BPI.(1)
 10.16 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
       among the Company, Seller and the Escrow Agent.(1)
 10.17 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
       among the Company, Seller and the API.(1)
 10.18 Letter Agreement, dated August 8, 1991, with National Warranty Risk
       Retention Group.(1)
 10.19 Form of Independent Agent Agreement.(1)
 10.20 Form of  Administrator Agreement.(1)
 10.21 Form of Dealer Administrator Agreement.(1)
 10.22 Promissory Note, dated October 22, 1991, executed by Holdings
       (as predecessor-in-interest to the Company) in favor of Target Insurance
       Ltd.,in the principal amount of $100,000.(1)
 10.23 Consulting Agreement dated December 1, 1992, between the Company and
       MRN Capital Company.(1)



<PAGE>


 Exhibit
  No.                          Description

 10.24 Promissory Note, dated November 12, 1993, executed by the Company in
       favor of Target, in the principal amount of $60,000.(1)
 10.25 Services Agreement, dated as of January 1, 1993,  between the Company
       and Target Agency, Inc.(1)
 10.26 Pre-Incorporation Agreement dated September 25, 1991,among Chester J.
       Luby, Louis F. Dente and Alan Pallie.(1)
 10.27 Agreement of Purchase and Sale, dated September 25, 1991, between Seller
       and the Company.(1)
 10.28 Form of Service Contract Financing Program Agreement.(1)
 10.29 Amendment  to  Amended  and  Restated   1993  Stock  Option Plan.(1)
 10.31 Lease, dated December 2, 1994, between The Omni Partners, a Limited
       Partnership, as lessor, and the Company, as lessee.(3)
 10.32 Amendment to Employment  Agreement  between the Company and Chester J.
       Luby, dated as of May 1, 1996.(4)
 10.33 Amendment to Employment Agreement between the Company and Cindy H.
       Luby, dated as of November 1, 1995.(4)
 10.34 Amendment to Employment Agreement between the Company and Cindy H.
       Luby, dated as of May 1, 1996. (4)
 10.35 Amendment to Employment Agreement between the Company and Lawrence J.
       Altman, dated as of May 1, 1996.(4)
 10.36 1996 Incentive Plan. (5)
 11    Computation of per share earnings. 
 21.1  List of Subsidiaries.
 27    Financial Data Schedule. (6)


 (1)  Incorporated by reference to Registration Statement on Form SB-2,
      File No. 33-74222-NY.
 (2)  Incorporated by reference to Registration Statement on Form 8-A dated
      October 26, 1995.
 (3)  Incorporated  by reference to Annual Report on Form 10-KSB for the fiscal
      year ended October 31, 1994.
 (4)  Incorporated  by reference to Annual Report on Form 10-KSB for the fiscal
      year ended October 31, 1996.
 (5)  Incorporated by reference to Registration Statement on Form S-8,
      File No. 333-09571.
 (6)  This Exhibit is filed for EDGAR filing purposes only.



  B) Reports on Form 8-K.

    No reports on Form 8-K were  filed  during  the last  quarter of the period
    covered by this report.



<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.

                            INTERSTATE NATIONAL DEALER SERVICES, INC.

  January 21, 1998

                            By             /s/Cindy H. Luby
                                            Cindy H. Luby
                               President and Chief Operating Officer


      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
  report  has been  signed  below by the  following  persons  on  behalf  of the
  registrant and in the capacities indicated, on the date set forth above.

           Signature                             Title


        /s/Chester J. Luby           Chairman of the Board
         Chester J. Luby               (Chief Executive Officer)


        /s/Cindy H. Luby             President and Director
         Cindy H. Luby                 (Chief Operating Officer)


        /s/Zvi D. Sprung             Chief Financial Officer
         Zvi D. Sprung                 (Chief Accounting Officer)


       /s/Robert E. Schulman         Director
         Robert E. Schulman


        /s/William H. Brown          Director
         William H. Brown


        /s/Donald Kirsch             Director
         Donald Kirsch