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 (Fee Required).

   For the fiscal year October 31, 1996 Commission file no.1-12938

                                       OR

         [ ]TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required).

                        For the transition period from to
                               Commission file 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 & Boston Stock Exchange
  Common Stock Purchase Warrants                NASDAQ & Boston Stock Exchange
  Common Stock Purchase Rights                  NASDAQ & Boston Stock Exchange

      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,  1996 were
$21,354,148.   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 7, 1997 as  reported  on the  NASDAQ  SmallCap  Market
("NASDAQ"), was approximately $12,737,000.

As of January 7, 1997, Registrant had issued and outstanding 3,384,233 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
("Private  Labels").  One such Private Label accounted for  approximately 11% of
all service contract revenue received by the Company in fiscal 1996.

    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.

    The Company's business has historically  focused on extended  warranties for
new  automobiles  and,  to a lesser  extent,  used cars.  In the past two 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 sought to expand  into other  markets,  such as  recreational  vehicles  and
watercraft,  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.

    To date the Company's penetration in certain markets, such as the watercraft
and motorcycle  industries,  has been low partially as a result of the Company's
inability to obtain  insurance  coverage.  To improve its market  penetration in
these  markets,  as well as in the new and used motor  vehicle and  recreational
vehicle industries,  the Company (a) formed NSC to underwrite insurance policies
arranged  for  by  the  Company  and  (b)  has  increased  its  promotional  and
advertising efforts through additional  participation in trade shows,  increased
advertising in trade publications and the recruitment of new Agents.

    The Company  enters into an  independent  agent  agreement  with each of its
Agents which 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, 1996,  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, 1996, the Company's
receivable from its financing  program  totaled  approximately  $3,627,000.  The
Company  believes its exposure from these financed  contracts is minimal because
the service  contract is terminated  if the purchaser  fails to make his monthly
payments to the Company.

    In  September  1994,  the  Company  entered  into an  agreement  with  Chase
Financial Management Corporation ("Chase"),  an affiliate of The Chase Manhattan
Bank.  Pursuant to the agreement,  Chase, one of the country's leading providers
of retail financing to purchasers of recreational  vehicles and marine products,
markets  the  Company's   service   contract  program  to  its  dealer  base  of
approximately 1,000 recreational vehicle and marine dealers in the country.

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 or parts 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

<PAGE>

and support staff to  communicate  regularly with its dealers and it maintains a
toll-free line to facilitate consumer 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.

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. The Company does not currently transact business in Florida but
intends to do so in the future  through a recently  formed  subsidiary  which is
licensed to do business in that state.

Employees

    As of December  31,  1996,  the Company had 77  full-time  employees  and 41
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

<PAGE>

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  20,500 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 7,500 square feet are occupied  pursuant to a six-year  sublease which
commenced October 1996, at an annual rent of approximately $121,000. (See Note 8
to the Notes to  Consolidated  Financial  Statements  for future lease  payments
under this lease and sublease).


Item 3.  Litigation

    In November  1995,  INDS  Agency,  Inc. an agent for the Company in northern
California  controlled  by Alan  Pallie,  a  shareholder  of the  Company  and a
controlling  person of the  Predecessor,  filed a lawsuit against the Company in
state court in Northern  California  alleging various breaches by the Company of
its agency agreement and claiming unspecified damages estimated by the plaintiff
to exceed $50,000 and requesting  declaratory relief as to certain provisions of
the Agreement.  The Company  answered the complaint,  successfully  obtained the
dismissal of certain of the claims and filed counterclaims  against INDS Agency.
In November  1996,  the parties  reached an agreement in principle to settle the
litigation.  Under the terms of the  settlement,  the  Company  will pay to INDS
Agency  $55,000 on  account  of its  monetary  claims  and the  parties  reached
agreement  as to  various  other  matters  in  dispute,  including  the scope of
exclusivity of INDS Agency's  territory,  the computation of commissions and the
exclusion of certain  types of programs from the agency  agreement.  The Company
reserved for this  litigation  in its financial  statements  for the 1996 fiscal
year.


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

    None.



<PAGE>

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


    Since July 22, 1994,  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"),
have been 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.  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

    11/01/94 to 01/31/95     4-5/8    1-1/4      7/8      3/16

    02/01/95 to 04/30/95     1-15/16  1-1/8      3/16     1/8

    05/01/95 to 07/31/95     1-15/32   3/4       7/32     1/8

    08/01/95 to 10/31/95     1-21/32   1-5/16    7/32     5/32

    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     3-15/16   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 01/07/97     6         5-1/8     2-1/2    1-10/16  


    As of January 7, 1997,  there were 39 holders of record of Common  Stock and
15 holders of record of Warrants.

    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.

    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"),

<PAGE>

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.


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

Results of Operations

    For the Year ended  October 31,  1996  compared to the Year ended
October 31, 1995

    Revenues  increased  approximately  $7,605,000,  or  55%,  to  approximately
$21,354,000  for the year ended  October 31,  1996 as compared to  approximately
$13,749,000  for the year ended  October 31,  1995.  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 1996; (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) an
increase in the average price per contract  sold.  The increase in the number of
service contracts accepted for  administration  during fiscal 1996 was primarily
due to the aggressive efforts by the Company in enrolling  additional  producers
to  sell  the  Company's  products  as well as to a more  diversified  array  of
products offered by the Company.

    Cost  of  services  provided,  which  consist  primarily  of  claims  costs,
increased by approximately  $3,079,000,  or 91%, to approximately  $6,449,000 in
the year ended October 31, 1996, as compared to approximately  $3,370,000 in the
year ended  October 31,  1995.  As a percentage  of  revenues,  cost of services
provided  increased to 30% in the year ended October 31, 1996 as compared to 25%
in the same  period  in  1995.  The  increase  was due to a  number  of  factors
anticipated by the Company:  (i) claims costs are directly affected by the total
number of unexpired  contracts  under  administration,  which has increased on a
yearly  basis;  (ii)  there has been a shift in the mix of  contracts  sold,  as
described  under Item 1; and (iii) the average  claim cost has increased as more

<PAGE>
contracts are written on used cars as opposed to new cars and as more  contracts
are written for recreational vehicles.

    Selling,  general and  administrative  expenses  increased by  approximately
$3,790,000,  or 38%, to approximately  $13,745,000 in the year ended October 31,
1996, up from approximately  $9,955,000 in the year ended October 31, 1995. 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 and postage  costs as a result of  additional  staffing to
handle  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 the license
in March 1996 for $100,000.  As a percentage of revenues,  selling,  general and
administrative  expenses  decreased to 64% in the year ended October 31, 1996 as
compared to 72% in the same period in 1995.

    Other  income,   net  increased  by   approximately   $119,000  or  37%,  to
approximately  $445,000  in the year ended  October  31,  1996,  as  compared to
approximately  $326,000 in the year ended October 31, 1995. This increase is the
result of an  increase  in  investment  income  generated  by funds  provided by
operating activities.

    In the year ended  October 31, 1996,  the Company had income  before  income
taxes of  approximately  $1,604,000 and recorded a provision for income taxes of
approximately   $641,000,   as  compared  to  income   before  income  taxes  of
approximately  $568,000  and a  provision  for  income  taxes  of  approximately
$228,000  in the  same  period  in  1995.  Net  income  increased  approximately
$623,000, or 183%, to approximately $963,000 for the year ended October 31, 1996
as compared  to  approximately  $340,000  for the year ended  October 31,  1995.
Income  before  income  taxes  for the year  ended  October  31,  1995  included
non-recurring relocation costs of approximately $183,000.

Liquidity and Capital Resources

    Cash and cash  equivalents  were  approximately  $13,230,000  at October 31,
1996, as compared to  approximately  $9,314,000 of cash and cash equivalents and
United States  Treasury  Notes,  at cost,  at October 31, 1995.  The increase of
approximately  $3,916,000  is the  result  of  cash  provided  by the  Company's
operating activities less cash used for the purchase of furniture,  fixtures and
equipment, the payment of long-term debt and the buy-out of the license from the
Predecessor.

    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  $300,000 in fiscal 1997 for the
purchase of new computer hardware and software to enable the Company to increase
its sales volume.

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.

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, 1996 and 1995     F-3

  Consolidated Statements of Operations for the years ended
  October 31, 1996 and 1995                                       F-4

  Consolidated Statements of Stockholders' Equity for the years
  ended October 31, 1996 and 1995                                 F-5

  Consolidated Statements of Cash Flows for the years ended
  October 31, 1996 and 1995                                       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,  1996  and  1995,  and  the  related  consolidated   statements  of
operations,  stockholders' equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the 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, 1996 and 1995, and the results
of their  operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.



                                          ARTHUR ANDERSEN LLP





Melville, New York
January 8, 1997








                                  F-2




<PAGE>


           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         AS OF OCTOBER 31, 1996 AND 1995

                  ASSETS                                  1996          1995
                  ------                               --------         -----

CURRENT ASSETS:
  Cash and cash equivalents                       $ 13,230,203     $ 8,341,337
  United States Treasury Notes, at cost              -                 972,600
  Accounts receivable                                4,138,051       2,528,366
  Prepaid expenses                                     250,169         216,201
                                                    -----------     -----------
           Total current assets                     17,618,423      12,058,504

RESTRICTED CASH                                      1,975,505       1,505,511

FURNITURE, FIXTURES AND EQUIPMENT,  at cost,
 less accumulated  depreciation and amortization
 of $283,850 and $150,453, respectively                881,548         586,860

INTANGIBLE ASSETS, less accumulated amortization
 of $81,232 and $59,649, respectively                  143,768          65,351

DEFERRED INCOME TAXES                                  852,980            -

OTHER ASSETS                                           686,945         678,163
                                                  -------------     -----------
                                                   $22,159,169     $14,894,389
     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                 $ 1,569,897     $ 1,566,799
  Accrued expenses                                     512,115         315,258
  Accrued commissions                                  548,472         553,362
  Reserve for claims                                   653,847         353,497
  Current portion of long-term debt to related party   160,000         200,000
  Other liabilities                                    155,752         103,908
                                                     -----------    -----------
           Total current liabilities                 3,600,083       3,092,824

DEFERRED CONTRACT REVENUE                           10,678,266       5,218,281

CONTINGENCY PAYABLE                                  1,975,505       1,505,511

LONG-TERM DEBT TO RELATED PARTY                          -             160,000
                                                    -----------    ------------
           Total liabilities                        16,253,854       9,976,616
                                                    -----------    ------------

COMMITMENTS AND CONTINGENCIES (Note 8)

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 3,384,233 and 3,325,167 shares,
   respectively                                         33,843          33,252
  Additional paid-in capital                         4,347,592       4,324,116
  Retained earnings                                  1,523,880         560,405
                                                   ------------    ------------

           Total stockholders' equity                5,905,315       4,917,773
                                                   ------------    ------------
                                                  $ 22,159,169    $ 14,894,389


      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, 1996 AND 1995


                                                     1996           1995

REVENUES                                         $ 21,354,148   $ 13,749,249

OPERATING COSTS AND EXPENSES:
  Costs of services provided                        6,449,347      3,369,572
  Selling, general and administrative expenses     13,745,177      9,954,647
  Relocation costs (Note 1)                            -             182,725
                                                   ----------      ---------  
           Operating income                         1,159,624        242,305

OTHER INCOME (EXPENSE):
  Interest income                                     499,118        364,502
  Interest expense                                    (54,556)       (38,955)
                                                 -------------    -----------
           Income before income taxes               1,604,186        567,852

PROVISION FOR INCOME TAXES                            640,711        228,340
                                                 -------------    -----------

           Net income                            $    963,475    $   339,512
                                                 =============   ============

Net income per share                                $     .27        $   .10
                                                    =========        ========

Weighted average shares outstanding                 3,501,983      3,458,592
                                                   ==========      ==========









      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, 1996 AND 1995



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



BALANCE AT OCTOBER 31, 1994   3,325,167 $33,252 $4,324,116 $  220,893 $4,578,261

Net income for the year ended
 October 31, 1995                  -        -        -        339,512    339,512
                              --------- ------- ----------    ------- ----------


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
                              ========= ======= ========== ========== ==========


















       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, 1996 AND 1995


                                                       1996        1995

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                       $  963,475  $  339,512
  Adjustments to reconcile net income to net
    cash provided by operating activities:
   Depreciation and amortization                      203,262     100,600
   Deferred income taxes                             (852,980)       -
   Increase (decrease) in cash resulting from
    changes in operating assets and liabilities:
    Accounts receivable                            (1,609,685) (1,220,831)
    Prepaid expenses                                  (33,968)   (127,368)
    Restricted cash                                  (469,994)    520,983
    Other assets                                      (45,198)   (618,614)
    Accounts payable                                    3,098     842,353
    Accrued expenses                                  196,857     257,232
    Accrued commissions                                (4,890)    211,077
    Reserve for claims                                300,350     174,457
    Other liabilities                                  51,844      79,300
    Deferred contract revenue                       5,459,985   3,232,055
    Contingency payable                               469,994    (520,983)
                                                   ----------   ----------

       Net cash provided by operating activities    4,632,150   3,269,773
                                                   ----------   ----------  

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net redemptions of United States Treasury Notes     972,600       2,530
  Purchase of furniture, fixtures and equipment, net (439,951)   (462,555)
  Purchase of license                                (100,000)       -
                                                     ---------   --------- 
       Net cash provided by (used in) investing
        activities                                    432,649    (460,025)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment of long-term debt to related party         (200,000)       -
  Proceeds from exercise of stock options              24,067        -
                                                     ---------  ---------- 
       Net cash used in financing activities         (175,933)       -
                                                   -----------  ----------

NET INCREASE IN CASH AND CASH EQUIVALENTS           4,888,866   2,809,748

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR        8,341,337   5,531,589
                                                   ----------  ----------
CASH AND CASH EQUIVALENTS, END OF YEAR           $ 13,230,203 $ 8,341,337
                                                 ============ ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Income taxes                                 $ 1,457,621  $   206,028
                                                 ============ ===========
    Interest                                     $    64,311  $    22,200
                                                 ============ ===========


      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, 1996 AND 1995

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, 1996 and 1995,  the Company  received
approximately  $98,000 and  $155,000,  respectively,  of such  funds,  which are
reflected in revenues in the accompanying consolidated statements of operations.
The balance in this escrow account totaled  approximately  $732,000 and $758,000
at October 31, 1996 and 1995, 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  $244,000  and  $37,000  of  such
unconsumed reserves for the years ended October 31, 1996 and 1995, respectively,
which are reflected in revenues in the accompanying  consolidated  statements of
operations. The balance in these interest-bearing accounts totaled approximately
$1,243,000  and  $748,000 at October 31, 1996 and 1995,  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
8), 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, 1996 and 1995, 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.

Relocation Costs

In March 1995, the Company  consolidated  and relocated its Great Neck, New York
and Novato,  California  offices to its new  corporate  headquarters  located in
Mitchel  Field,  New York.  In  connection  with this  relocation,  the  Company
incurred related training and relocation expenses of approximately  $183,000 for
the fiscal year ended October 31, 1995.

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

Net  income per share is  computed  based upon the  weighted  average  number of
common and common equivalent shares outstanding during the period.  Common stock
equivalents are considered in the weighted average share computation for periods
in which they are dilutive.

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.

Recently Issued Accounting Standard

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which establishes a fair value based
method of accounting and reporting

                                       F-9


<PAGE>


for stock-based compensation.  Under SFAS 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 is required  to adopt SFAS 123 in its fiscal  year 1997 and  anticipates
continuing to follow the accounting guidance of APB 25 with pro forma disclosure
of the fair value method specified in SFAS 123.

2.  FURNITURE, FIXTURES AND EQUIPMENT:

Furniture, fixtures and equipment consists of the following :

                                     October 31,
                                   1996      1995
                                  ------    -----

    Furniture and fixtures    $  325,429 $ 224,889
    Office equipment             791,465   484,836
    Leasehold improvements        48,504    27,588
                              ---------- ---------
                               1,165,398   737,313
    Less:Accumulated
     depreciation and
      amortization               283,850   150,453
                               --------- ---------
                               $ 881,548 $ 586,860

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,
                                         1996     1995
                                         ----     ----

    License agreement                 $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   125,000

    Less:  Accumulated amortization     81,232    59,649
                                       -------   -------
                                      $143,768  $ 65,351
                                      ========  ========

4.  INCOME TAXES:

The provision for income taxes consists of the following :

                                   October 31,
                                    1996      1995
                                    ----      ----

         Federal :
         Current                $1,157,105   $175,693
         Deferred                 (660,771)       -

         State :
         Current                   336,586     52,647
         Deferred                 (192,209)      -
                                  ---------   -------
                                  $640,711   $228,340
                                  ========   ======== 

The deferred income taxes of approximately $853,000, the majority of which has
 

                                      F-10

<PAGE>
been paid as of October 31, 1996, 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. Federal income tax rate were as follows :
                                       October 31,
                                     1996      1995
                                     ----      ----

    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 follows:
                                                            October 31,
                                                          1996       1995
                                                          ----       ---- 
 Note payable, with interest at the greater of (a) 10% 
  or (b) 1% above the prime rate of interest, paid
  October 24, 1996                                       $    -    $200,000

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

 Note payable, with interest at 8%, due October 21,
  1997                                                     60,000    60,000
                                                          -------   -------   
                                                          160,000   360,000
 Less: Current portion                                   (160,000) (200,000)
                                                         --------- --------
                                                         $   -     $160,000
                                                         ========= ========

6.  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. Each warrant is exercisable on or before July 1999.

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.

                                    F-11
<PAGE>


The following  options to purchase the Company's  common shares were outstanding
under the Plan at October 31, 1996:

                                     Number        Option
                                    of Shares       Price
                                    --------        -----

    October 31, 1994                172,667          $ .40 
      Granted                        48,000           1.50
      Exercised                       -                 -
      Canceled                        -                 -
                                    -------       
    October 31, 1995                220,667            .40  - 1.50 
      Granted                       154,934          1.3125 - 4.25
      Exercised                     (59,066)          .40   - 1.50
      Canceled                      (39,701)          .40   - 1.50
                                    -------
    October 31, 1996                276,834          $.40   - 4.25
                                    =======

As of October 31, 1996,  options to purchase 140,434 shares were exercisable and
8,100 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.  In 1996, the
Company granted certain directors,  officers and employees stock options for the
purchase of up to 105,000 shares of common stock at exercise prices ranging from
$4.00 per share to $4.75 per share.  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 anniversary of the issuance date.  However,
no option shall be  exercisable  after the expiration of ten years from the date
the option was granted. As of October 31, 1996, 105,000 options were outstanding
under the Incentive  Plan,  none of which were  exercisable,  and 195,000 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,  half at an exercise
price of $4.50 per share and half at an exercise price of $4.75 per share. These
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)  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.


                                      F-12


<PAGE>


7.  RELATED PARTY TRANSACTIONS:

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
$698,000  and  $618,000  for  the  years  ended   October  31,  1996  and  1995,
respectively.

8.  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.  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
           -----------                       ------
              1997                       $  479,000
              1998                          501,000
              1999                          520,000
              2000                          535,000
              2001                          550,000
           Thereafter                     1,532,000
                                          ---------
                                         $4,117,000
                                         ==========

Rent  expense  totaled  approximately  $368,000 and $278,000 for the years ended
October 31, 1996 and 1995, 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  and  $340,000  for  the  years  ended   October  31,  1996  and  1995,
respectively.


                                      F-13


<PAGE>


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.
    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 $123,000 and $60,000 at
    October 31, 1996 and 1995, 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.  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 $319,000.


                                      F-14
<PAGE>

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.

9.  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  matures on October 21, 1997,  and bears  interest at a rate of
8.5% per annum. These notes are further described in Note 5.




























                                      F-15





<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 7, 1997 with
respect to the executive officers,  directors and certain significant  employees
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. . . . . . . .       65   Chairman, Chief Executive Officer and
                                           Director*

Cindy H. Luby. . . . . . . . .       42   President, Chief Operating Officer
                                           and Director**

Lawrence J. Altman . . . . . .       49   Vice President, Marketing

Zvi D. Sprung . . . . . . . ..       47   Chief Financial Officer, Treasurer
                                           and Secretary

Albert V. Meneses . . .  . . .       45   Vice President, Claims

Louis F. Dente . . . . . . . .       66   Director+

Robert E. Schulman . . . . . .       71   Director***

William H. Brown . . . . . . .       66   Director**

Donald Kirsch. . . . . . . . . .     65   Director*


    * Term expires 1997

  **  Term expires 1998

 ***  Term expires 1999

   +  Mr. Dente resigned from the Board on January 6, 1997.

    The Board of Directors of the Company is divided into three classes  serving
staggered  three year terms.  The  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.

<PAGE>

    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
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 has been the Vice  President,  Marketing,  of the Company
since its inception in 1991. 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), CFO 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.

    Albert V. Meneses was elected Vice President, Claims of the Company in April
1995.  From inception in 1991 until 1994,  Mr. Meneses was Claims  Supervisor of
the Company and from 1994 until April 1995 Mr. Meneses was Claims Manager.  From
1989 to inception Mr. Meneses was a Claims  Adjuster for the  Predecessor.  From
1972 to 1989, Mr. Meneses was in the  automotive  industry as a service  manager
for various dealers and distributors.

    Louis F.  Dente  has been a  director  and a  principal  stockholder  of the
Company  from its  inception in 1991 until his  resignation  on January 6, 1997.
From 1991 until  November  1995 Mr.  Dente was the  President of the Company and
from 1981 until the Company  commenced  operations  in 1991,  Mr.  Dente was the
Executive Vice President of the Predecessor.

    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 was elected a director by
the Board of Directors in December 1996.


<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, 1996 (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)    1996       $153,975  $72,815   170,000       $62,920
 Chairman and Chief   1995        150,000   37,484    15,000        60,000
 Executive Officer    1994        143,500
       -

Cindy H. Luby (2)     1996        106,184   48,543   146,434          -
 Presient and Chief   1995         73,980   24,990     5,000          -
 Operating Officer    1994         73,266     -                        -

Lawrence J. Altman(3) 1996        134,702    5,000    26,500          -
 Vice President,      1995        104,300     -        5,000          -
    Marketing         1994         76,426     -                        -



(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.

(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 includes $62,920 and $60,000 of 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  1996  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, Directors of the Company who were not otherwise
affiliated with the Company were awarded 15,000 options to purchase Common Stock
under the Company's 1996 Incentive Plan. Messrs. Schulman and Brown were granted
these options in April 1996 upon approval by the Company's  stockholders  of the
Incentive  Plan.  Mr. Kirsch was granted these options in December 1996 upon his
election to the Board of Directors.  These options,  none of which are currently
exercisable, become exercisable at the rate of 5,000 options per year.



<PAGE>


    The  following  table  sets forth  certain  information  concerning  options
granted  during the fiscal year ended October 31, 1996 to the Named  Executives.
The Company did not grant any stock  appreciation  rights during the fiscal year
ended October 31, 1996.

                      Option Grants in Last Fiscal Year



                Number of    Percentage of Total
                Securities      Option Shares
                Underlying     Granted Employees   Exercise Price   Expiration
 Name         Options Granted   in Fiscal 1996        Per Share        Date

Chester J.Luby (1) 10,000          2.27%              $1.4438       12/18/2005
               (1) 10,000          2.27%               1.9688       12/18/2005
               (2) 50,000         11.37%               4.2500       06/12/2006
               (2) 50,000         11.37%               4.5000       06/12/2006
               (2) 50,000         11.37%               4.7500       06/12/2006


Cindy H. Luby  (1) 10,000          2.27%              $1.3125       12/18/2005
               (1) 10,000          2.27%               1.9688       12/18/2005
               (2) 46,434         10.55%               4.2500       06/12/2006
               (2) 40,000          9.09%               4.5000       06/12/2006
               (2) 40,000          9.09%               4.7500       06/12/2006

Lawrence J.    (1)  2,500          0.57%              $1.3125       12/18/2005
 Altman        (3)  8,000          1.82%               4.2500       06/12/2006
               (3)  8,000          1.82%               4.5000       06/12/2006
               (3)  8,000          1.82%               4.7500       06/12/2006


(1) Grants became  exercisable in December 1996, at an annual rate of 20% of the
underlying shares of Common Stock.
(2) Grants became exercisable in June 1996.
(3) Grants  become  exercisable  in June 1997,  at an annual  rate of 20% of the
underlying shares of Common Stock.


    The following table sets forth information  concerning the exercise of stock
options by the Named  Executives  during the fiscal year ended  October 31, 1996
and the value of  unexercised  options as of October  31, 1996 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, 1996(1)
                                       31,1996
                                  Exercis-  Unexercis-   Exercis-    Unexercis-
                                    able        able       able          able
Chester Luby  10,000    $  9,750   158,000     42,000    $118,375     $156,519
Cindy Luby    13,600      13,260   134,234     37,600     107,995      146,117
Lawrence
 Altman       10,000      26,625    11,400     44,100      52,053      100,535


(1) Based on the  closing  price of the Common  Stock on NASDAQ on  October  31,
1996.

<PAGE>

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,  1996,
options to purchase  276,834 shares of Common Stock were  outstanding  under the
Option  Plan,  158,234 of which are  exercisable  at January 7, 1997.  Under the
Option Plan, a total of 8,100 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
granted to Mr.  Kirsch upon his  election in  December  1996.  As of October 31,
1996,  options to purchase 105,000 shares of Common Stock were outstanding under
the Incentive Plan, none of which are exercisable at January 7, 1997.

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.  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 $122,920 as
of October 31, 1996.  This amount will be reimbursed to the Company in the event
of death of the insured or termination of the agreement.

<PAGE>

    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 naming 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.  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.


<PAGE>


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 7, 1997, 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.

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

Chester J. Luby                              680,800(2)           19.0%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Louis F. Dente                               409,116(3)           12.1%
  384 Ocean Avenue North.
  Long Branch, New Jersey 07740

Joan S. Luby                                 492,500(4)           14.5%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Cindy H. Luby                                186,394(5)            5.2%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Lawrence J. Altman                            67,500(6)            2.0%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Zvi D. Sprung                                 14,500(7)             -
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Robert E. Schulman                           101,534(8)            3.0%

William H. Brown                              18,000(9)             -

Donald Kirsch                                 15,000(10)            -

First Wilshire Securities Management, Inc.   408,000(11)          12.1%

All directors and executive officers 
 as a group (seven persons)                1,083,728              28.0%



(1) Excludes (i) 1,225,100  shares of Common Stock issuable upon the exercise of
    the Warrants issued to the public as part of the Company's  public offering;
    (ii) 110,000  shares of Common Stock  issuable upon the exercise of the Unit
    Purchase  Options issued to the  underwriters in the Company's IPO and (iii)
    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 3,384,233 shares
    of Common Stock  outstanding  on January 7, 1997 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.

<PAGE>


(2) Includes 200,000 shares issuable upon the exercise of stock options, 165,000
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 12,000 options per year.

(3) Includes 2,266 shares owned by Mr. Dente's wife.

(4) Includes 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.

(5) Includes 171,834 shares issuable upon the exercise of stock options, 139,234
    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,  to which shares Ms. Luby disclaims  beneficial
    ownership.

(6) Includes 55,500 shares  issuable upon the exercise of stock options,  12,900
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 13,100 options per year.

(7) All of these shares are issuable upon the exercise of stock options,  500 of
    which are currently  exercisable and the balance of which become exercisable
    at the rate of 2,900 options per year.

(8) Includes (a) 15,000 shares issuable upon the exercise of stock options, none
    of which are currently  exercisable and which become exercisable at the rate
    of 5,000  options  per year,  (b) 3,000  shares  issuable  upon  exercise of
    warrants to purchase  Common Stock (the  "Independent  Director  Warrants"),
    1,200 of which are  currently  exercisable  and the balance of which  become
    exercisable at the rate of 600  Independent  Director  Warrants per year and
    (c) 83,534  shares owned by MRN Capital  Company of which Mr.  Schulman is a
    controlling person.

(9) Includes (a) 15,000 shares issuable upon the exercise of stock options, none
    of which are currently  exercisable and which become exercisable at the rate
    of 5,000  options per year and (b) 3,000 shares  issuable  upon  exercise of
    Independent Director Warrants,  1,200 of which are currently exercisable and
    the  balance  of which  become  exercisable  at the rate of 600  Independent
    Director Warrants per year.

(10)All of these shares are issuable  upon the exercise of stock  options,  none
    of which are currently  exercisable and which become exercisable at the rate
    of 5,000 options per year.

(11)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.

    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,  1996,  all filing  requirements  applicable  to its
officers,  trustees  and greater than 10%  shareholders  were  complied  with as
required  by Section  16 (a) of the  Securities  and  Exchange  Act of 1934,  as
amended.

Item 12.  Certain Relationships and Related Transactions

    On October 25, 1991, in connection  with the  acquisition  by the Company of
the assets of the Predecessor (the  "Acquisition"),  Target made a $200,000 loan
to the Company,  which loan matured and was paid in October 1996.  The loan bore
interest  at a rate per annum  equal to the  greater of (i) 10% and (ii) 1% plus
the prime rate.

    In connection with the  Acquisition,  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 bears interest at the rate of 8% per annum,  matures on October 21,
1997. The Company has the right to prepay the note at any time. 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 bears  interest at 8.5% per annum,  matures on
October 21, 1997, and is prepayable at any time by the Company.

<PAGE>


    In 1984,  Agency executed a standard Agent  Agreement with the  Predecessor,
which  agreement  was  assumed  by the  Company  upon  the  Acquisition.  In the
Company's  fiscal  years ended  October 31, 1995 and October 31, 1996 Agency was
paid commissions aggregating, approximately $11,000 and $650 respectively.



<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.
 10.33 Amendment to Employment Agreement between the Company and Cindy H.
       Luby, dated as of November 1, 1995.
 10.34 Amendment to Employment Agreement between the Company and Cindy H.
       Luby, dated as of May 1, 1996.
 10.35 Amendment to Employment Agreement between the Company and Lawrence J.
       Altman, dated as of May 1, 1996.
 10.36 1996 Incentive Plan. (4)
 21.1  List of Subsidiaries.
 27    Financial Data Schedule. (5)


 (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 Registration Statement on Form S-8,
      File No. 333-09571.
 (5)  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, 1997

                            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