<PAGE>
                             Washington, D.C. 20549
                                  FORM 10-KSB
(Mark One)

__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996

                                       OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________to __________.

                         Commission file number 0-24638
                               MOUNTBATTEN, INC.
          ( Name of small business issuer as specified in its charter)

Pennsylvania                                    23-2633708
----------------------------                    ------------------------------
(State or other jurisdiction                    IRS Employer Identification No.
of incorporation or organization)

33 Rock Hill Road
Bala Cynwyd, Pennsylvania                       19004
----------------------------------------        ------------------------------
(Address of principal executive offices)        (Zip Code)

       Registrant's telephone number, including area code (610) 664-2259

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.001 par value
                        -------------------------------
                                (Title of class)

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

         Check if  disclosure  of  delinquent  filers in response to Item 405
of Regulation  S-B,  is not  contained  in this  form,  and no  disclosure
will be contained,  to the best of the  registrant's  knowledge,  in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ X ]

State issuer's revenues for the most recent fiscal year:  $7,829,171

The aggregate market value of the voting stock held by non-affiliates, as of
March 24, 1997 was approximately $15.9 million.

As of March 24, 1997 the aggregate number of shares outstanding was 2,528,530.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Part III of this Form 10-KSB incorporates by reference information from the
registrant's proxy statement in connection with its 1997 Annual Meeting of
Shareholders to be filed with the Commission pursuant to Rule 14a-6(b) under
the Exchange Act.

Transitional Small Business Disclosure Format (check one) Yes__  No X
                                                                   ---



<PAGE>



Item 1.  Description of Business

 A.      Description of the Business

         Mountbatten, Inc. (the "Company") engages in the underwriting of
surety bonds,  primarily  contract  bonds,  through its wholly  owned
subsidiary,  The Mountbatten  Surety  Company,  Inc.  (the  "Surety  Company").
Contract  bonds constitute  a  specialty  market  within the  property  and
casualty  insurance industry,  and are generally posted by contractors  (and/or
subcontractors) to guarantee  completion  of their  work on  government  and
private  construction projects.

         Suretyship is an extension of credit in the form of an agreement by
the "surety" for the benefit of the "obligee" to guarantee payment or
performance by the  "principal."  When a surety bond is issued,  the  obligee
holds the surety responsible  for the obligation of the  principal.  The surety
and the principal are jointly responsible to the obligee for the debt or
obligation,  which is the subject of the surety bond.  Surety bonds are often
required by law, and a typeof surety bond known as a "contract bond" is often
required by a party,  whether private  or   governmental,   entering  into  a
construction,   rehabilitation, remediation or similar contract. In some
instances,  bonds are furnished in lieu of cash  deposits,  but often a bond is
required and a cash  alternative  is not permitted.

         The Surety  Company  wrote its first bond in October 1992. In May 1994,
the Surety  Company  received  a Treasury  Listing  (the  "T-Listing")  to
write federally  required  bonds  anywhere in the United  States and its
territories. Prior to July 1994,  the Surety  Company was licensed to write
bonds only in the Commonwealth  of  Pennsylvania.  The  following  table sets
forth  information, chronologically,  with  respect to those  states in which
the Surety Company is presently licensed to write bonds:

State                               Date of Admission
-----                               -----------------
Pennsylvania                        September 11, 1992
Delaware                            July 13, 1994
Maryland                            October 7, 1994
New Jersey                          March 31, 1995
Virginia                            August 17, 1995
District of Columbia                September 1, 1995
New York                            October 19, 1995
Ohio                                November 28, 1995
Kentucky                            April 26, 1996
Tennessee                           September 23, 1996
Indiana                             September 30, 1996
Connecticut                         December 1, 1996
Mississippi                         December 1, 1996
Illinois                            December 5, 1996
South Carolina                      February 3, 1997

In addition, the Surety Company has applied for a license to underwrite bonds
in Alabama, Georgia, North Carolina and West Virginia, and anticipates filing
license applications in various other states.

B.       Bond Products

         The Surety  Company  writes  primarily  contract bonds to guarantee
the required  performance and payments of contractors and subcontractors
engaged in construction  and,  to a  lesser  extent,  environmental remediation
projects. Projects  bonded by the Surety  Company  generally  have  durations
that do not exceed two years;  most are  completed in one year or less.  The
Surety  Company also  writes  a  variety  of  other  surety  bonds, although it
is  focusing increasingly on contract bonds. The Surety Company does not

<PAGE>

provide financial guarantee bonds, bail bonds, bonds for remediation of
groundwater contamination or bonds covering a variety of risks deemed
inappropriate for the Surety Company; nor does it underwrite any liability
insurance.

         The following table sets forth information concerning the nature of
the bonds written by the Surety Company for the years ended December 31, 1996
and 1995:

<TABLE>
<CAPTION>

                                                        Years ended December 31
                                                        -----------------------

                                              1996                                           1995
                                              ----                                           ----
                                                                 % of                                                % of
                                                    Gross        Gross                               Gross           Gross
                                       % of        Premiums    Premiums                % of         Premiums       Premiums
Type of Bond               Number      Total        Written     Written     Number     Total         Written        Written
------------               ------      -----       --------    --------     ------     -----        --------       ---------
<S>                       <C>          <C>         <C>         <C>          <C>        <C>          <C>            <C>

Contract bonds             1,112       80.1%     $ 7,541,676     96.3%       892       81.4%      $ 4,450,089          95.3%
Non-contract bonds           277       19.9%         287,495      3.7%       204       18.6%          221,588           4.7%
                           -----       -----     -----------     -----       ---       -----      -----------          -----
Total                      1,389      100.0%     $ 7,829,171     100.0%    1,096      100.0%      $ 4,671,677         100.0%
                           =====      =====      ===========     ======    =====      ======      ===========         ======
</TABLE>


         Prior to November  1995,  the  reinsurance  program  required  that
the Company  not  write any bond  exceeding  $3  million,  or bonds on the same
work program in favor of the  principal  exceeding  $4.5  million  in the
aggregate. Effective  November 1, 1995, the Company secured a new  reinsurance
treaty that increased  the maximum  single bond limit to $5  million, and the
work program aggregate to $7.5 million. Effective November 1, 1996, the Company
secured a new reinsurance treaty that increased the work program aggregate to
$10 million. While  future  increases  in  the  Surety  Company's  maximum bond
size are anticipated,  management  believes  that the  current  maximum  bond
size of $5 million will allow the Surety Company to continue to penetrate
selected markets for contract bonds.

         The following table sets forth information concerning the dollar
amount of bonds written by the Surety Company for the years ended December 31,
1996 and 1995:
<TABLE>
<CAPTION>

                                                        Years ended December 31
                                                        -----------------------

                                              1996                                           1995
                                              ----                                           ----
                                                                 % of                                                % of
                                                    Gross        Gross                               Gross           Gross
                                       % of        Premiums    Premiums                % of         Premiums       Premiums
Bond Amount                Number      Total        Written     Written     Number     Total         Written        Written
------------               ------      -----       --------    --------     ------     -----        --------       ---------
<S>                       <C>          <C>         <C>         <C>          <C>        <C>          <C>            <C>

$150,000 orless             896        64.5%        $912,120     11.7%        774       70.6%      $    771,796       16.5%
$150,001 - $250,000         132         9.5%         565,590      7.2%        103        9.4%           477,384       10.2%
$250,001 - $500,000         168        12.1%       1,331,933     17.0%        101        9.2%           818,754       17.5%
$500,001 - $750,000          59         4.2%         726,215      9.2%         45        4.1%           578,867       12.4%
$750,001 - $1,000,000        36         2.6%         663,188      8.5%         26        2.4%           464,714       10.0%
$1,000,001 - $1,500,000      36         2.6%         886,583     11.3%         23        2.1%           576,936       12.3%
$1,500,001 - $2,000,000      23         1.7%         804,420     10.3%         13        1.2%           477,356       10.2%
$2,000,001 - $3,000,000      22         1.6%         945,908     12.1%         10        0.9%           419,623        9.0%
OVER $3,000,000              17         1.2%         993,214     12.7%          1        0.1%            86,247        1.9%
                          -----       ------       ----------   ------      -----      ------      ------------      ------
Total                     1,389       100.0%       $7,829,171   100.0%      1,096      100.0%      $  4,671,677      100.0%

</TABLE>


         The Surety Company uses bond forms  prepared by the American Institute
of  Architects  ("AIA"),  or bond  forms  specified  by the  bond obligee,  for
<PAGE>

performance,  payment and bid bonds. The Surety Company also uses an internally
generated indemnity agreement to document its rights with respect to entities
or persons it bonds.  Among other  things,  the  indemnity  agreement provides
the Surety Company with an assignment of the principal's contract rights and a
confession  of  judgment against the bond principal in the event of a default
under the indemnity agreement, the principal's obligation, or both.

C.       Underwriting

         The Surety Company places a high priority on minimizing bond claims
and losses. Accordingly,  the Surety Company underwrites each bond submission
at its home office and has granted no binding authority to its independent
brokers and agents.  The Surety Company believes that its use of both financial
analysis and technical analysis in the bond underwriting process permits it to
achieve better underwriting results than would otherwise be possible through
financial analysis alone.   Technical analysis  procedures in the underwriting
process using management's expertise in the construction industry can provide
an indication of substandard construction or record-keeping practices that
might increase the likelihood of a bond claim.

D.       Claims and Reserves

         The Surety Company  attempts to actively  manage disputes and claims
in an effort to minimize losses.  Depending on the relevant factors, the Surety
Company can pursue its rights at law and under the general indemnity agreements
associated  with a bond;  may  enforce  its rights  with  respect to collateral
securing  the bond;  may pay the claim or may  complete  the  project using any
remaining project funds due the bonded contractor as well as, or in addition
to, seeking the remedies referred to previously.

         While  the  Surety  Company  does  not  bond  projects with durations
exceeding two years, and while it attempts to obtain releases from bond
obligees upon  completion of bonded  projects,  in cases where releases are not
obtained, claims may be asserted  following  completion of the contract.  AIA
performance bonds permit claims for up to two years following the scheduled
date of the final contract payment, and AIA payment bonds permit claims up to
one year after the bond principal ceases work on the project.

         The Surety  Company  maintains  incurred but not reported loss ("IBNR")
reserves with respect  to claims that have been  incurred  but not reported.
Because of the Company's limited operating  history and claims  experience, its
IBNR reserves are primarily  based on both data derived from the experience of
industry, as well as the Surety Company's actual experience. A limited number
of claims have been filed against the Surety Company.  The Surety Company has
established case reserves to provide for all  anticipated  payments and related
expenses on known claims.

         IBNR  reserves  are reviewed  and  certified  at least  annually by
the Surety Company's independent actuary. Such certification has been obtained
as of December 31, 1996.  The Surety Company believes that aggregate reserves
make reasonable and sufficient provision for payments on reported and
unreported claims.

E.       Sales and Marketing

         Substantially all the Surety Company's business is produced by its
network of  independent  brokers  and  independent  agents. The Surety Company
documents its agent relationships with a broad agency agreement, which relies
on pre-negotiated commission and incentive commission schedules. The Surety
Company has established  similar agency arrangements in all of the states in
which it is licensed to write bonds.





<PAGE>


F.       Regulation

         Surety  companies  are  generally  regulated  as property and casualty
insurance  companies even though surety bonds differ in important respects from
traditional forms of property and casualty insurance.  Thus, surety companies,
like  other types of  insurance companies, are subject to supervision  and
regulation in the states in which they transact business. Such supervision and
regulation, designed primarily for the  protection of policyholders (or bond
obligees)  and  not  shareholders, relates to most aspects of an insurance
company's  business and includes such matters as  authorized lines of business,
underwriting  standards,  financial condition standards, licensing, investment
policies,  premium levels and the filing of quarterly, annual and other reports
based on statutory  accounting  principles and a variety of other financial and
nonfinancial matters.

         Because the Company is domiciled in the Commonwealth of Pennsylvania,
the Pennsylvania  Insurance  Department (the "Department") has primary
authority over it. The Surety Company is also subject to the supervision and
regulation of the  appropriate  agency  in any  state in which the  Surety
Company obtains a license to transact business.

         In general, the Surety Company must obtain a license in a given state
in order to write bonds covering risks therein.  In order to obtain a license,
the Surety Company must submit detailed financial and other  information,  and
satisfy  statutory and  regulatory requirements,  as well as informal criteria
applied by the state insurance department.

         In May 1994, the Surety Company received a certificate of authority,
or "T-Listing," from the United States  Department of the Treasury, allowing it
to write bonds required by the United States government. The T-Listing entitles
the Surety Company to write federally required bonds anywhere in the United
States or  its territories,  currently  in  amounts  up  to $669,000
(representing approximately 10% of the Surety Company's  statutory
policyholders' surplus at December 31,  1995). The Surety Company is authorized
to write larger bonds so long as a T-Listed reinsurer with greater bonding
authority (such as the Surety Company's current reinsurer) provides a "Miller
Act" endorsement  undertaking to be liable directly to the bond obligee in the
event the Surety Company  defaults on its bond. The Surety Company  intends to
write bonds regularly on this basis. The Company expects its T-Listing amount
to increase in the 1997 Treasury Circular.

         The range of premium rates charged by the Surety  Company for its
bonds has been filed with and approved by the Department. The Department's
approval is required  to increase  or  decrease  premiums  in the future beyond
the current ranges of approved premium rates. The Surety Company would
additionally require rate approvals from other states in which it is licensed
in order to change its premium rates from the ranges currently approved.

         Most states,  including  Pennsylvania,  have enacted  legislation that
regulates  insurance holding company systems.  Each insurance  holding company
system is required  to register with the insurance supervisory agency of its
state  of  domicile,  and  furnish  information  concerning  the operations of
companies within the system.  Pursuant to these laws, the Department may
examine the Company and the Surety Company,  require disclosure of material
transactions by the holding company, and require prior approval of certain
transactions, such as extraordinary dividends from an insurance company to its
holding company.

         All  transactions  between the Company and the Surety  Company must be
fair  and  equitable.  Approval  by the  applicable  Insurance  Commissioner is
required  prior to  consummation  of  transactions affecting the control of an
insurer.  In  Pennsylvania,  the acquisition of 10% or more of the  outstanding
capital stock of an insurer or its holding company is presumed to be a change
in control.


<PAGE>


G.       Competition

         The surety industry is highly  competitive.  Many surety companies are
larger than the Surety Company,  have considerably  greater financial and other
resources, have greater experience in the surety industry and, unlike the
Surety Company,  offer a broad line of  insurance  products.  In  addition, the
Surety Company is at a competitive  disadvantage  against  companies that have
an A.M. Best "letter" rating  and/or licenses to write surety bonds on a
broader geographic  basis. A.M. Best has assigned a "number" rating of 5
(Secure) to the Surety Company, and will assign a "letter" rating to the Surety
Company in 1998, once five  full  years of  operations  have been  completed.
While many of the largest surety companies have targeted the market for bonds
of $5 million or more, many other surety companies actively target the Surety
Company's primary market niche for bonds up to $5 million.  The Surety Company
attempts to meet this competition by providing its brokers, agents and
customers with high quality, timely and innovative services.

H.       Employees

         The  Company employs  17 full time employees  at its  Bala  Cynwyd,
Pennsylvania offices.  Management believes that employee relations are
generally good.

Item 2.           Description of Property

         The Company  leases  3,675  square feet of office space at 33 Rock
Hill Road, Bala Cynwyd, Pennsylvania 19004 at an annual cost of  approximately
$64,782,  exclusive  of sublease  income  (approximately  $7,692) from a single
tenant presently  occupying  approximately 400 square feet of such office space
with a month-to-month term. The lease term expires September 30, 1999, provided
that the Company may terminate the lease at any time by giving 60 days advance
written notice and paying a specified amount of the landlord's cost to improve
the space. The Company has not purchased or developed real estate for
investment purposes, or made real estate loans.  Accordingly, it has no
properties arising from such activities.

Item 3.           Legal Proceedings

         The  Company is not involved in any pending or threatened legal or
administrative proceedings other than those undertaken in the ordinary course
of its surety business.

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

         No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the year
ended December 31, 1996.

                       Executive Officers of the Company

         The names of the  executive officers  of the Company,  together with
certain information regarding them, are as follows:


Name                    Age      Position
----                    ---      --------
Kenneth L. Brier        47       President and Chief Executive Officer since
                                  1992
Ted A. Drauschak        36       Executive Vice President since 1992
Joel D. Cooperman       44       Vice President - Finance, Treasurer, and
                                  Chief Financial Officer since 1995;
                                  Formerly Vice President - Finance,
                                  Treasurer, and Chief Financial Officer with
                                  O'Brien Environmental Energy, Inc. from
                                  January 1981 through April 1995
Stephen C. Fletcher     40       Vice President and President of the Surety
                                  Company Bond Division since 1992
<PAGE>

                                    Part II

Item 5.           Market for Common Equity and Related Stockholder Matters

         The Registrant's  common stock was originally traded in the
over-the-counter  market on the Nasdaq  SmallCap  Market System under the
symbol MTBN.  The Company  publicly  listed its common  stock as a result of an
initial public offering that was completed in September 1994. On December 26,
1995 the Registrant's  common stock began trading on the Nasdaq National Market
System under the same symbol.  The following table sets forth the high and low
trading prices as reported by Nasdaq:

<TABLE>
<CAPTION>

                                     1996                             1995
                                     ----                             ----

                            High            Low              High              Low
                            ----            ---              ----              ---
<S>                         <C> <C>          <C>             <C> <C>          <C> <C>
First Quarter               6 1/4          5                 6 3/8            4 1/2
Second Quarter              8 1/2          5 1/4             6                5 1/4
Third Quarter               8 1/2          7                 6                5 1/8
Fourth Quarter              8 3/4          7 3/4             5 3/4            4 7/8

</TABLE>

         On  March  24,  1997  the closing  price was $9.375.   There  were
approximately  51  holders  of record of the common stock of the Company.  The
Company believes that there are approximately  750  beneficial owners of its
common stock.

         The Registrant has paid no dividends in the past, though it may elect
to do so in the  future.  Dividends  are  subject to the dividend restrictions
imposed on the Surety  Company by the  Department.  Pennsylvania insurance laws
currently  prohibit  dividends  that would leave the Surety Company  with total
capital and surplus in an amount less than the Department requires to conduct a
surety business. These laws also afford the Department 30 days to disapprove
the payment of  dividends in excess of  "unassigned  surplus" (i.e.,
undistributed accumulated surplus including net income and realized gains) or
"extraordinary dividends" (i.e. dividends over a twelve-month period that
exceed the greater of 10% of policyholders' surplus as shown on the latest
annual statement filed with the Department, or net income shown on such
statement).



<PAGE>


Item 6.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Introduction

         The Company's principal business activity is to underwrite surety
bonds through its wholly owned  subsidiary,  the Surety  Company.  The Surety
Company wrote its first bond in October 1992. In May 1994, the Surety Company
received a Treasury Listing (the "T-Listing") to write federally required bonds
anywhere in the United States and its territories.  Prior to July 1994,  the
Surety Company was licensed it write bonds only in the Commonwealth of
Pennsylvania.  The following table sets forth information, chronologically,
with respect to those states in which the Surety Company is presently licensed
to write bonds:

State                               Date of Admission
-----                               -----------------
Pennsylvania                        September 11, 1992
Delaware                            July 13, 1994
Maryland                            October 7, 1994
New Jersey                          March 31, 1995
Virginia                            August 17, 1995
District of Columbia                September 1, 1995
New York                            October 19, 1995
Ohio                                November 28, 1995
Kentucky                            April 26, 1996
Tennessee                           September 23, 1996
Indiana                             September 30, 1996
Connecticut                         December 1, 1996
Mississippi                         December 1, 1996
Illinois                            December 5, 1996
South Carolina                      February 3, 1997


In addition, the Surety Company has applied for a license to underwrite bonds
in Alabama, Georgia, North Carolina and West Virginia, and anticipates filing
license applications in various other states.


Results of Operations

         Year ended  December 31, 1996 compared to year ended December 31,
1995: During the year ended December 31, 1996, the Surety Company generated
$7,829,171 of gross written  premiums, compared to $4,671,677 of gross written
premiums during the year ended December 31, 1995, representing an increase of
$3,157,494 or 68%.  Management  attributes the increase in gross written
premiums primarily to the Surety Company's increased  penetration of the states
in which the Surety Company became  licensed prior to 1996.  Because the Surety
Company either began marketing efforts or became licensed in the other states
listed above relatively late in 1996, its expansion in these markets did not
significantly impact gross written premiums in 1996.

         For the year ended December 31, 1996, ceded reinsurance premiums
totaled  $1,287,308,  representing approximately 16% of gross written premiums.
For the year  ended  December  31, 1995,  ceded  reinsurance  premiums  totaled
$717,741, representing approximately 15% of gross written premiums. The
increase in ceded reinsurance  premiums  from the 1995  period  to the 1996


                                       1
<PAGE>


period was primarily  the result of the  increase in gross  written  premiums
as well as an increase in reinsurance coverage limits and reinstatements.

         Effective  November  1, 1995,  the  Company secured a new reinsurance
treaty that  increased the Company's maximum single bond limit and work program
aggregate imit from $3 million and $4.5 million,  respectively,  to $5 million
and $7.5 million, respectively. In addition, the Company's reinsurance coverage
limits and  reinstatements  were  increased. Under this treaty (effective from
November 1995 through October 1996) the ceded reinsurance premiums represented
approximately  16.75% of gross written premiums, adjusted for the Company's 5%
participation  in the first  layer.  Effective  November 1, 1996,  the  Company
secured a new  reinsurance  treaty that  increased  the Company's work program
aggregate  limit from $7.5  million to $10  million.  Under the new reinsurance
treaty  (effective from November 1996 through October 1997), the maximum single
bond limit remains at $5 million.  However, the Company's aggregate reinsurance
coverage limits and reinstatements are increased, and ceded reinsurance
premiums are  expected  to  represent  approximately 15.26% of gross written
premiums, adjusted for the Company's 5% participation in the first and second
layers.

         For the year ended  December  31,  1996,  claims and claim  adjustment
expenses incurred were $519,708, or an incurred loss and loss adjustment
expense ratio of 8.4%, compared to $369,639, or an incurred loss and loss
adjustment expense ratio of 9.7%, for the year ended December 31, 1995.  The
increase in claim and claim adjustment expenses in 1996 reflects primarily the
increase in the Company's business volume.

         Of the $519,708 of claims and claim adjustment expenses incurred in
1996,  $340,784  relates to known claims, most of which is associated with two
bonded  principals, and $178,924 relates to the increase in reserves for IBNR,
which is primarily driven by net earned premiums in force at December 31, 1996.

         A limited number of claims have been filed on the  Surety  Company's
bonds.  Accordingly,  the  Surety  Company  has established case reserves  of
$634,156,  gross  of  reinsurance,  to  provide  for  future claims and  claim
adjustment expense payments.

         For the year  ended  December  31,  1996, commission  expenses  were
$2,233,048, representing approximately 29% of gross written premiums, compared
to $1,338,794,  or  approximately  29% of gross written  premiums, for the year
ended  December 31, 1995.  The increase in commission expenses in 1996 relates
primarily to the increase in gross written premiums.

         For the years ended December 31, 1996 and 1995, the Company  incurred
salary and  benefits  costs of  $1,299,702  and  $1,013,571, respectively.  The
increase in salary and benefit costs in 1996 reflects an increase in the number
of employees, including additional underwriters and related support personnel,
a controller,  increased compensation and merit bonuses for these  personnel,
as well as additional  compensation  awarded to senior  management by the
Company's compensation committee.

         For the year  ended  December   31,  1996,  the  Company  incurred
approximately   $144,128  for  professional  services  and  $705,188 for other
operating  expenses,  compared to $131,715 and $451,054,  respectively, for the
similar period in 1995. This increase reflected legal, accounting, auditing,
and various other expenses incurred to comply with regulatory reporting
obligations, licensure  and tax  requirements  in states in which the Company
is licensed to transact business,  licensing of additional agents, and required
infrastructure changes to support the  Company's  current and expected future
levels of gross written premiums.

         For the years ended December 31, 1996 and 1995, the Company generated
$421,810 and $389,991,  respectively, of income from its investments, comprised
exclusively of U.S. Government securities. The yield on average invested assets
for 1996 and 1995 was 5.6% and 5.9%, respectively.  The increase  in  interest
income in 1996 was due to the investment of additional funds generated from the


                                       2
<PAGE>

Company's operations, offset by lower yields. On December 29, 1995, the Company
sold all of its U.S. government securities having original  maturities of less
than one year, and  reinvested the proceeds of $4,635,219 in a U.S. government
security maturing in November 2000 with an effective yield to maturity of 5.44%.

         Interest expense (associated with a note payable in the original
amount of $170,000) for 1996 and 1995 was $0 and $4,517, respectively. The note
was repaid in April 1995.

         The provision for income taxes for 1996 was $593,831 (an effective tax
rate of 34.3%), as compared to $172,206 (an  effective  tax rate of 19.6%) for
1995. The 1995 effective tax rate was reduced by the elimination in 1995 of the
deferred tax asset valuation allowance in the amount of $112,895. The valuation
allowance  was  eliminated  due  to  management's  favorable assessment of the
earnings potential of the Company.

         Net income for the year ended  December 31, 1996 was $1,135,370,  as
compared  to  $705,125  for the year ended  December  31,  1995, an increase of
$430,245, or 61%.

Seasonality

         Because  most of  the Surety Company's premiums are generated  on
construction  related  bonds,   and are associated with jobs primarily  in
Mid-Atlantic   States,   the  Surety  Company's  business  has been seasonal.
Accordingly, operating results have varied from quarter to quarter, with
premium levels lowest from November to March. Seasonality is expected to have
less of an effect on premium  activity as the Surety Company becomes licensed
and generates business in states having more temperate climates.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995

         Except  for  historical   information   provided  in  the Management's
Discussion  and  Analysis,   statements  made  throughout  this  document are
forward-looking  and  contain  information  about financial  results,  economic
conditions, trends and known uncertainties. The Company cautions the reader
that actual results could differ materially from those expected by the Company,
depending on the outcome of certain  factors (some of which are described with
the  forward-looking  statements)  including:  1) adverse loss  development for
projects  bonded by the  Company  in prior  years;  2)  heightened competition,
particularly  price  competition,  reducing margins;  3) significant changes in
interest rates.

Liquidity and Capital Resources

         Initial operations of the Surety Company were financed by
contributions from the Company, principally from the sale of common stock by
the Company.  Continuing operations have been financed by internally generated
cash flow from operations.  Costs  incurred by the Company are shared with the
Surety Company under a services  agreement  which  provides for the Surety
Company to reimburse the Company for costs paid by the Company which are deemed
to benefit the Surety Company.  As in 1996,  the  Surety Company may elect to
pay dividends in the future, subject to the dividend restrictions of the
Commonwealth of Pennsylvania insurance laws and regulations.  The Company
expects to maintain a high level of liquidity  through,  among  other  things,
the continued investment in  U.S. government securities and other high-grade
investment instruments.

         During 1996,  approximately $1,018,000  of  the Company's cash  and
investment portfolio was converted to U.S. Treasury instruments in conjunction
with the final licensure  requirements  of the Commonwealth of Kentucky and the
State of Illinois. Management anticipates that additional "deposit"
requirements will be required to be  satisfied  in those  states in which the
Surety Company intends to seek a license to write surety bonds.


                                       3
<PAGE>


         The Company  had approximately $9,248,000  of  investments and cash
equivalents at December 31, 1996, and  approximately $7,442,000 of investments
and cash equivalents at December 31, 1995. The Company's  anticipated expansion
plans will require additional personnel and financial  resources. While certain
costs are expected to increase due to the changes in infrastructure as
discussed above, management believes that the Company and the Surety Company
have adequate liquidity to pay all claims and meet all other obligations for
the next twelve months, at a minimum.

         The Surety Company requires capital to support its bond underwriting.
Management believes that the statutory surplus of the Surety Company, which was
approximately $7,975,000 at December 31, 1996, will be sufficient to support
the Surety Company's current and anticipated premiums and losses.



<PAGE>


Item 7.           Financial Statements
                                                                          Page
                                                                          ----

Report of Independent Accountants                                          12

Consolidated Balance Sheets as of December 31, 1996 and 1995               13

Consolidated Statements of Operations for the years ended
   December 31, 1996 and 1995                                              14

Consolidated Statements of Changes in Shareholders' Equity for the
   years ended December 31, 1996 and 1995                                  15

Consolidated Statements of Cash Flows for the years ended
   December 31, 1996 and 1995                                              16

Notes to Consolidated Financial Statements                                 17



<PAGE>











                       REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and Shareholders
of Mountbatten, Inc.


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Mountbatten, Inc. and its subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.






PRICE WATERHOUSE LLP


Boston, Massachusetts
February 21, 1997


<PAGE>


                        Mountbatten, Inc. and Subsidiary
                          Consolidated Balance Sheets
<TABLE>
<CAPTION>



                                                                           As of                          As of
                                                                    December 31, 1996               December 31, 1995
                                                                   ------------------               -----------------
<S>                                                                <C>                              <C>
ASSETS
Fixed maturities:
Available-for-sale, at fair value (amortized cost of
$8,596,475 and $6,665,324, respectively)                               $8,487,946                       $6,685,900
                                                                       ----------                       ----------
                                                                        8,487,946                        6,685,900

Cash and cash equivalents                                                 759,749                          755,639
Premiums receivable                                                       562,820                          385,372
Reinsurance receivable                                                    294,911                          205,037
Subrogation recoverable                                                   606,476                          393,999
Accrued investment income                                                  60,196                           36,673
Property and equipment, net                                                56,838                           52,519
Deferred acquisition costs                                                393,447                          270,687
Prepaid reinsurance premiums                                                    -                           39,166
Deferred tax asset                                                         32,223                          113,597
Other assets                                                                4,215                           59,318
                                                                      -----------                       ----------
    TOTAL ASSETS                                                      $11,258,821                       $8,997,907
                                                                      ===========                       ==========
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Unpaid claims and claim adjustment expenses                            $1,153,270                        $602,265
Unearned premiums                                                         954,101                         621,403
Reinsurance premium payable                                               353,834                               -
Accrued expenses and other liabilities                                    254,927                         246,592
Federal income taxes payable                                              161,505                         196,624
                                                                       ----------                        --------
    TOTAL LIABILITIES                                                   2,877,637                       1,666,884
                                                                       ----------                       ---------

Shareholders' Equity

Common stock, par value $.001 per share;
 authorized 20,000,000 shares; issued and
 and outstanding, 2,528,530 shares.                                         2,529                           2,529
Additional paid in capital                                              6,762,934                       6,762,934
Net unrealized (depreciation) appreciation, fixed maturities              (71,629)                         13,580
Retained earnings                                                       1,687,350                         551,980
                                                                        ---------                       ---------
    TOTAL SHAREHOLDERS' EQUITY                                          8,381,184                       7,331,023
                                                                        ---------                       ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
     EQUITY                                                           $11,258,821                      $8,997,907
                                                                      ===========                      ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements

<PAGE>


                        Mountbatten, Inc. and Subsidiary
                     Consolidated Statements of Operations

                                                     Year ended
                                                     December 31,
                                                     ------------
                                               1996                 1995
Underwriting:
  Gross written premiums                    $7,829,171          $4,671,677
  Premiums ceded                            (1,287,308)           (717,741)
                                            -----------         -----------

  Net written premiums                       6,541,863            3,953,936

  Change in unearned premium                  (332,698)           (157,306)
                                             ----------          ----------

  Net earned premiums                        6,209,165           3,796,630
                                             ---------           ---------

  Claims and claims adjustment expenses        519,708             369,639
  Commission expense                         2,233,048           1,338,794
  Salaries and benefits                      1,299,702           1,013,571
  Professional fees                            144,128             131,715
  Other operating expenses                     705,188             451,054
                                             ---------           ---------

                                             4,901,774           3,304,773
                                             ---------           ---------

  Underwriting income                        1,307,391             491,857
  Other income (expense)
     Interest income                           421,810             389,991
     Interest expense                                -              (4,517)
                                             ---------           ----------

  Income before income taxes                 1,729,201             877,331

  Provision for income taxes                   593,831             172,206
                                             ---------            --------

  Net income                                $1,135,370            $705,125
                                            ==========            ========

  Earnings per share:                            $0.42               $0.27

  Weighted average shares outstanding        2,691,751           2,590,733


   The accompanying notes are an integral part of these financial statements


<PAGE>


                        Mountbatten, Inc. and Subsidiary
           Consolidated Statements of Changes in Shareholders' Equity
                               December 31, 1996

<TABLE>
<CAPTION>
                                                                             Net unrealized
                                                                              appreciation,          Retained             Total
                                         Common          Additional               fixed              earnings         shareholders
                                     Shares   Amount    paid in capital         maturities           (deficit)           equity
                                     ------   ------    ---------------         ----------           ---------         -----------

<S>                               <C>          <C>           <C>                                     <C>               <C>
Balance at December 31, 1994     2,528,530     2,529         6,762,934                                (153,145)         6,612,318

Net income                                                                                             705,125            705,125

Net unrealized appreciation,
  Fixed maturities                                                               13,580                                    13,580
                                 ---------    ------        ----------         --------             ----------         ----------

Balance at December 31,1995      2,528,530    $2,529        $6,762,934          $13,580             $  551,980         $7,331,023
                                 =========    ======        ==========         ========             ==========         ==========

Net income                                                                                           1,135,370          1,135,370

Net unrealized depreciation,
  Fixed maturities                                                              (85,209)                                  (85,209)
                                ----------   -------        ----------         ---------            ----------         -----------

Balance at December 31,1996      2,528,530    $2,529        $6,762,934         $(71,629)            $1,687,350         $8,381,184
                                 =========    ======        ==========         =========            ==========         ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements


<PAGE>


                        Mountbatten, Inc. and Subsidiary
                     Consolidated Statements of Cash Flows

                                                       Year ended December 31,
                                                       -----------------------
                                                         1996            1995
                                                        ------          ------
Operating activities:
  Net income                                           $1,135,370      $705,125
  Adjustments to reconcile net income to net cash
  Provided by (used in) operating activities:
   Depreciation and amortization                           26,391        17,654
   Change in:
    Premiums receivable                                  (177,448)      (26,953)
    Reinsurance receivable                                (89,874)     (205,037)
    Subrogation recoverable                              (212,477)     (257,641)
    Accrued investment income                             (23,523)       18,188
    Unearned premiums                                     332,698       157,307
    Unpaid claims and claim adjustmentexpenses            551,005       406,607
    Prepaid reinsurance premiums                           39,166         2,088
    Reinsurance premium payable                           353,834          -
    Accrued expenses and other liabilities                  8,335       196,572
    Deferred acquisition costs                           (122,760)      (56,554)
    Deferred tax asset                                     81,374       (97,866)
    Federal income taxes payable                          (35,119)       65,667
    Other, net                                             99,059       (35,867)
                                                         --------       --------
Net cash provided by operating activities               1,966,031       889,290
                                                        ---------       --------
Investing activities:
  Purchase of equipment                                   (30,710)      (43,200)
  Purchase of investments                              (3,952,428)  (23,472,564)
  Maturities of investments                             2,021,217    23,379,443
                                                       ----------   ------------

Net cash used in investing activities                  (1,961,921)     (136,321)
                                                       -----------  ------------

Financing activities:
  Repayment of note payable                                  -         (170,000)
                                                       -----------  ------------
Net cash provided by financing activities                    -         (170,000)
                                                       -----------  ------------

Net increase in cash and cash equivalents                   4,110       582,969

Cash and cash equivalents at beginning of period          755,639       172,670
                                                      -----------   -----------
Cash and cash equivalents at end of period               $759,749      $755,639

Supplemental disclosure of cash flow information: The Company made payments of
$503,680 during the year ended December 31, 1996 for federal income taxes.
Payments of $4,517 and $211,401 were made by the Company during the year ended
December 31, 1995 for interest and federal income taxes, respectively.

   The accompanying notes are an integral part of these financial statements



<PAGE>


                        Mountbatten, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

Note 1 - Description of Business:

Mountbatten, Inc. ("Mountbatten") commenced operations on February 1, 1992.
Mountbatten acts as a holding company for The Mountbatten Surety Company, Inc.
(the "Surety Company"). The Surety Company underwrites performance, payment
and other bonds, and is licensed to conduct business in the Commonwealths of
Pennsylvania, Virginia, and Kentucky, the States of Delaware, Maryland, New
Jersey, New York, Ohio, Tennessee, Indiana, Connecticut, Mississippi, Illinois,
South Carolina, and the District of Columbia. The Surety Company distributes
bonds in these states through independent agents and brokers. (Mountbatten
together with the Surety Company are referred to below as the "Company").


Note 2 - Summary of Significant Accounting Policies:

Basis of presentation:

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). The consolidated financial
statements include the accounts of Mountbatten, Inc. and its subsidiary, the
Surety Company. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and related disclosures in the notes to the consolidated financial
statements. Significant estimates used in determining subrogation recoverable,
unearned premiums and unpaid claims and claim expenses are discussed throughout
these notes. Actual results could differ from those estimates. All intercompany
amounts are eliminated in consolidation.


New accounting pronouncements:

In October 1995, the Financial Accounting Standards Board issued Statement No.
123 "Accounting for Stock-Based Compensation" (SFAS No. 123). The statement
defines a fair value based method of accounting for an employee stock option.
Companies may, however, elect to adopt this new accounting rule through a pro
forma disclosure option, while continuing to use the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the disclosure option, companies must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting below had been applied.

Under the new fair value method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service (or
vesting) period. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date
over the amount an employee must pay to acquire the stock.

The Company has elected to adopt the disclosure option under SFAS No. 123 and
will continue to account for stock-based compensation using the intrinsic value
based method under APB No. 25. See Note 9 to the consolidated financial
statements for additional information.

During the fourth quarter of 1995, the FASB issued a guide to  implementation of
SFAS  No.  115,  "Accounting  for  Certain   Investments  in  Debt  and  Equity
Securities." SFAS No. 115 required that debt and equity securities be
classified into different categories and carried at fair value if they are not
classified as held-to-maturity. The guide permitted a one-time  opportunity to
reclassify securities subject to SFAS No. 115. Consequently, Mountbatten
reclassified all of its securities to available-for-sale as of


                                       6
<PAGE>

Note 2 - Summary of Significant Accounting Policies: - (continued)

November 30, 1995.  This reclassification did not have a material effect on the
consolidated financial statements.

Premium recognition:

Premiums are recognized as earned over the estimated period of bond performance
or project completion, which is generally less than one year. Ceded reinsurance
premiums are recognized on a similar basis. Unearned premiums represent the
portion of net premiums applicable to the unexpired portion of the bond. The
estimates are based primarily on management's understanding of a bonded
project's stage of completion supplemented by historical completion patterns.


Cash equivalents:

Cash equivalents include highly liquid money market instruments with original
maturities of three months or less.


Investments:

The Company accounts for its investments in fixed maturity securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires that an enterprise classify debt and
equity securities into either of these categories as applicable:
held-to-maturity, available for sale or trading. SFAS No. 115 also requires that
unrealized gains and losses for trading securities be included in earnings,
while unrealized gains and losses for available-for-sale securities be excluded
from earnings and reported as a separate component of shareholders' equity until
realized. At December 31, 1996 and 1995, the Company's investments in fixed
maturity securities were classified as available-for-sale.

Prior to the Company reclassifying its securities as available for sale at
November 30, 1995, the Company classified its investment in debt securities as
held-to-maturity. These securities were carried at amortized cost, which
approximated market. Any premium or discount was amortized on a monthly basis
as interest was earned.


Fixed assets:

Fixed assets, which are comprised of furniture and fixtures, computer equipment
and leasehold improvements, are recorded at cost and are depreciated using the
straight line method over their useful lives, which range from three to five
years.


Deferred policy acquisition costs:

Acquisition costs which vary with and are primarily related to the production
of premiums, primarily commissions, premium taxes, and certain underwriting
expenses, are deferred and amortized ratably over the terms of the related
insurance contracts, to the extent such costs are deemed to be recoverable.
Future underwriting and investment income are considered in determining the
recoverability of such acquisition costs. Amortization expense related to
deferred policy acquisition cost is included as an adjustment to commission
expense, salaries and benefits, and other operating expenses.


                                       7
<PAGE>

Note 2 - Summary of Significant Accounting Policies: - (continued)

Reinsurance receivable:

Reinsurance receivable is an estimate of an amount to be received from its
reinsurer relating to unpaid claims and claims adjustment expenses, offset by
an amount received from the reinsurer.


Subrogation recoverable:

The Surety Company requires bond applicants to enter into an indemnity agreement
which obligates the insured to reimburse the Surety Company for any claims paid
and costs incurred that are related to the bond. Subrogation recoverable
represents amounts estimated to be recovered by the Surety Company from bonded
principals for claim costs incurred by the Surety Company after a failure of a
bonded principal to fulfill a bonded obligation. The Company records
subrogation recoverable when a claim is incurred and it is probable that the
costs will be recovered. Changes in estimates of subrogation recoverable are
credited or charged to income in the period in which they are determined and
are included in claims and claim adjustment expenses.


Unpaid claims and claim adjustment expenses:

  The reserve for claims and claim adjustment expenses is based on management's
individual case estimates of the ultimate future payments to be made on
reported claims and related expenses, and on estimates for incurred but not
reported ("IBNR") claims. Claim reserve estimates are revised by management, as
information becomes available. Changes in these estimates are charged or
credited to income in the period in which they are determined. Claim adjustment
expenses include costs associated directly with specific claims paid or in the
process of settlement.


Income taxes:

Income taxes are provided based on income reported in the financial statements.
Deferred federal income taxes are provided based on an asset and liability
approach in accordance with SFAS 109, "Accounting for Income Taxes," which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities.


Note 3 - Investments:

The amortized cost and estimated fair values of fixed maturity investments at
December 31, 1996 and 1995 are as follows:


                                     December 31, 1996      December 31, 1995
                                     -----------------      -----------------
                                    Cost     Fair Value    Cost     Fair Value
                                    ----     ----------    ----     ----------

     U.S. Treasury Securities   $8,596,475   $8,487,946  $6,665,324 $6,685,900


U.S. Treasury instruments with a fair market value of approximately $1,819,000
and $812,000 were held on deposit with various insurance departments as of
December 31, 1996 and 1995, respectively.


                                       8
<PAGE>


Note 3 - Investments (continued):

The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1996 and 1995 are shown below by the expected maturity period:


                                             December 31, 1996
                                             -----------------
                                            Cost        Fair Value
                                            ----        ----------

    Less than one year                    $3,968,458    $3,967,729
    Due after one year through five        4,628,017     4,520,217
    years                                 ----------    -----------

    Total                                 $8,596,475    $8,487,946
                                          ==========    ==========


Note 4 - Fixed Assets

Fixed assets consists of:

                                                             December 31,
                                                              -----------
                                                          1996           1995
                                                          ----           ----

          Furniture and fixtures                         $41,733       $31,890
          Office equipment (primarily computers)          58,212        43,814
          Leasehold Improvements                          14,900         8,431
                                                         -------       -------
                                                         114,845        84,135
          Less: accumulated depreciation/amortization    (58,007)      (31,616)
                                                         --------      --------
                                                         $56,838       $52,519
                                                         =======       =======


The Company occupies its office space under operating leases that expire
September 30, 1999, if not terminated by either party by delivering written
notice 60 days prior to the expiration of the current term. Rent expense for
1996 and 1995 was $58,374 and $43,916, respectively.

As of December 31, 1996, the future minimum rental commitments payable under
its operating lease are as follows:

             1997                              $  64,782
             1998                                 64,782
             1999                                 48,587
                                               ---------
                                                $178,151
                                               =========

Note 5 - Income Taxes

Mountbatten, Inc. files a consolidated income tax return with its wholly-owned
subsidiary, the Surety Company, and is a party to a tax sharing agreement with
the Surety Company. The Company had a gross deferred tax asset at December 31,
1994, which was offset by a valuation allowance of $112,895. The valuation
allowance reflected management's assessment that, based upon available
information at that time, there was not sufficient positive
evidence to determine that it was more likely than not that the


                                       9
<PAGE>

Note 5 - Income Taxes (continued)

entire deferred tax asset would be realized due to management's assessment of
the Company's earnings potential. Adjustments to the valuation allowance are
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. During 1995, the valuation allowance of
$112,895 was eliminated to reflect the reversal of certain temporary
differences and management's assessment that the earnings potential of the
Company was sufficient to provide positive evidence that the deferred tax asset
will be realized.

The tax effect of temporary differences, which give rise to deferred income tax
assets and liabilities as of December 31 were as follows:

                                                          1996         1995
                                                          ----         ----
Deferred tax liabilities:
 Deferred acquisition costs                          ($133,772)     ($92,034)
 Subrogation receivable discounting                    (30,958)      (21,918)
 Other                                                      -         (6,246)
                                                      --------      ---------
Gross deferred tax liabilities                        (164,730)     (120,198)
                                                      --------      ---------
Deferred tax assets:
 Loss reserve discounting                               30,828        17,466
 Net unrealized value, fixed maturities                 36,900            -
 Unearned premium reserve                               64,879        42,256
 Organizational and startup costs                       62,606       108,113
 Accrued salaries and benefits                              -         65,960
 Other                                                   1,740            -
                                                      --------      --------
 Gross deferred tax asset                              196,953       233,795
                                                      --------      --------
 Deferred tax asset, net                               $32,223      $113,597
                                                      ========      ========

The components of income tax expense were as follows:

                                                        1996          1995
                                                        ----          ----
 Current federal tax expense                          $468,561      $277,068
 Deferred federal tax expense                          125,270      (104,862)
                                                      --------      ---------
 Total federal income tax expense                     $593,831      $172,206
                                                      ========      ========

The provision for income taxes differs from the amount of income tax determined
by applying the applicable statutory federal income tax to pretax income from
operations as a result of the following differences:

                                                        1996          1995
                                                        ----          ----

 Tax expense at statutory rate (34%)                   $587,928      $298,293
 Other, net                                               5,903       (13,192)
 Valuation allowance                                         -       (112,895)
                                                       --------      ---------
 Total federal income tax expense                      $593,831      $172,206
                                                       ========      ========


                                       10
<PAGE>


Note 5 - Income Taxes (continued)

The tax effect of temporary differences which resulted in the deferred tax
(benefit) were as follows:

                                                       1996          1995
                                                       ----          ----
 Deferred acquisition costs                          $ 41,738      $ 19,228
 Accrued salaries and benefits                         65,960       (65,960)
 Organizational and startup costs                      45,508        45,508
 Loss reserve discounting                             (13,362)      (11,872)
 Subrogation receivable discounting                     9,041        13,758
 Unearned premium reserve                             (22,623)      (13,502)
 Professional fees                                         -         21,728
 Other                                                   (992)         (910)
 Valuation allowance                                       -       (112,895)
                                                    ---------     ----------
 Deferred tax benefit                                $125,270     ($104,862)
                                                     ========     ==========

Note 6 - Unpaid Claims and Claim Expense Reserves and Reinsurance Receivable:

The process by which reserves are established for insured events and related
litigation requires reliance upon estimates based on the Surety Company's
limited claims experience, supplemented with available industry data. The
Surety Company's limited claims experience creates uncertainty with respect to
the estimation of loss and loss adjustment expense reserves. As information
develops which varies from expected experience, provides additional data or, in
some cases, augments data which previously were not considered sufficient in
determining reserves, adjustments to reserves may be required. Included in loss
reserves at December 31, 1996 and 1995 are case reserves totaling $634,156 and
$300,090, respectively, and IBNR reserves of $519,114 and $302,175,
respectively.

Reinsurance receivable of $294,911 at December 31, 1996 includes $324,994
related to unpaid losses, offset by $30,083 received from the reinsurer as an
overpayment. Reinsurance receivable of $205,037 at December 31, 1995 includes
$129,199 and $75,838 of receivables related to paid and unpaid losses,
respectively.

Activity in the reserve for unpaid claims and claim adjustment expenses for the
years ended December 31, 1996 and 1995 were as follows:

                                                 1996               1995
                                                 ----               ----

   Gross Reserves - January 1                  $ 602,265         $ 195,658
   Less subrogation recoverable                  393,999           136,358
   Less reinsurance receivable                    75,838                -
                                              ----------         ---------
   Net reserve- January 1                        132,428            59,300
                                              ----------         ---------

   Incurred losses related to:
     Current year                                768,722           407,957
     Prior year                                 (249,014)          (38,318)

  Paid related to:
     Current Year                                409,802           214,310
     Prior Year                                   20,531            82,201
                                              ----------          --------
  Net reserve- December 31                       221,800           132,428
  Plus subrogation receivable                    606,476           393,999
  Plus reinsurance receivable                    324,994            75,838
                                              ----------          --------
  Gross Reserves - December 31                $1,153,270          $602,265
                                              ==========          ========


                                       11
<PAGE>


Note 6 - Unpaid Claims and Claim Expense Reserves and Reinsurance Receivable
         (continued)

As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $249,014 and $38,318 in 1996 and
1995, respectively.


Note 7 - Note Payable

The note payable of $170,000, due to a commercial bank, was repaid in April
1995.


Note 8 - Reinsurance:

In the normal course of business, the Company enters into contracts to cede
reinsurance primarily to limit losses from large exposures and to permit
recovery of a portion of direct losses; however, such a transfer of risk does
not relieve the Company from contingent liability for these losses.

The Company's current reinsurance program provides four layers of reinsurance.
Under the first layer, the Company retains 100% of all losses up to $150,000
and the reinsurer assumes 95% of the next $850,000, subject to a maximum annual
recovery by the Company of $3,230,000. The second layer provides $1,000,000 of
coverage (95% to be assumed by the reinsurer) on any loss discovered for any
principal in excess of the first $1,000,000 of loss with an aggregate annual
maximum of $2,850,000. The third layer provides $2,500,000 of coverage on any
loss discovered for any principal in excess of the first $2,000,000 of loss
with an aggregate annual maximum of $5,000,000. The fourth layer provides
$3,000,000 of coverage on any loss discovered for any principal in excess of
the first $4,500,000 with an aggregate annual maximum of $3,000,000.

Prior to November 1995, the reinsurance program required that the Company not
write any bond exceeding $3,000,000 or bonds on the same work program in favor
of the principal exceeding $4,500,000 in the aggregate. Under this program, the
maximum bond duration could not exceed 24 months.

Effective November 1995, the reinsurance program required that the Company not
write any bond exceeding $5,000,000, or bonds on the same work program in favor
of the principal exceeding $7,500,000 in the aggregate. The work program limit
of $7,500,000 increased to $10,000,000 effective November 1996.


Note 9 - Shareholders' Equity

Statutory surplus and dividend restrictions:

The Surety Company is subject to the minimum capital and surplus requirements
of the Commonwealth of Pennsylvania insurance laws and regulations. Under
applicable Pennsylvania laws and regulations, the Company is required to
maintain a minimum of $1,125,000 of paid in capital. The maximum amount of
dividends which can be paid by the Surety Company to shareholders without the
prior approval of the Insurance Commissioner is subject to restrictions
relating to statutory surplus. Statutory surplus at December 31, 1996 and 1995
was $7,975,119 and $6,691,311, respectively, and statutory net income for the
years ended December 31, 1996 and 1995 was $1,260,999 and $601,970,
respectively. In September 1996, the Surety Company paid a dividend of $336,242
to its shareholder. The maximum dividend that may be paid without the approval
prior to October 1997 is approximately $332,000. After September 1997 the
maximum dividend that may be paid without prior approval is approximately
$798,000, less any dividends paid during the previous twelve months.


                                       12
<PAGE>

 Note 9 - Shareholders' Equity (continued)

Subject to these restrictions, dividends may be paid as determined by the
Board of Directors.

Stock options and warrants:

In November 1993 the Company granted incentive stock options to selected
individuals to purchase 186,000 shares of common stock (35,000 shares and
151,000 shares at an exercise price of $4.95 and $4.50, respectively). 500 of
these incentive stock options were cancelled in December 1995. These options
become exercisable over a five-year period commencing one year after the date
of grant.

In November 1993 the Company granted non-qualified stock options to selected
individuals to purchase 81,000 shares of common stock at an exercise price of
$4.50 per share. These options vested immediately, and are exercisable for a
ten-year period after the date of grant.

 In July 1993, the Company issued a warrant to an underwriter to purchase 4,800
shares of common stock at an exercise price of $4.50 per share of common stock
until July 1996. The exercise price then increases by $.45 per share until July
1999. The warrant expires July 2000.

The Company sold to the underwriter, for nominal consideration in connection
with the initial public offering, warrants to purchase 100,000 shares of common
stock at an exercise price of $6.00 per share. These warrants became
exercisable during a four-year period commencing August 1995, and they expire
August 1999.

In February 1995, the Company granted incentive stock options to selected
individuals to purchase 19,000 shares of common stock at an exercise price of
$5.00 per share. These options vest over a four-year period and are exercisable
for a ten-year period after the date of grant. In September 1995, 2,000 of
these incentive stock options were canceled.

In February 1995, the Company granted incentive stock options to an individual
to purchase 15,000 shares of common stock at an exercise price of $5.50 per
share. These options vest over a two-year period and are exercisable for a
five-year period after the date of grant

In February 1995, the Company granted non-qualified stock options to selected
individuals to purchase 8,000 shares of common stock at an exercise price of
$5.00 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant. In June 1995, 4,000 of these
non-qualified stock options were canceled.

In April 1995, the Company granted non-qualified and incentive stock options to
a selected individual to purchase 10,000 and 30,000 shares, respectively, of
common stock at an exercise price of $5.25 per share. The non-qualified stock
option vested immediately, and is exercisable for a ten-year period after the
date of the grant. The incentive stock option vests over a five-year period,
and is exercisable for a ten-year period after the date of the grant.

On November 3, 1995, the Company adopted the Equity Incentive Plan for Key
Employees and the non-qualified Equity Incentive Plan for Outside Directors
whereby key employees and outside directors may be granted options to purchase
shares of the Company's common stock at a price not less than the fair market
value of such shares, as determined by the Company's Board of Directors, at the
date on which the options are granted. The options are exercisable during the
period selected by the Board of Directors, but no earlier than six months after
the date of grant and no later than ten years from the date of grant. A total
of 250,000 and 50,000 shares of common stock were reserved for issuance
under the Key Employees and Outside Directors Plans, respectively.


                                       13



<PAGE>


Note 9 - Shareholders' Equity (continued)

As of December 31, 1996, reserved shares for stock options granted under all
plans totaled approximately 665,000.

In January 1996, the Company granted incentive stock options to selected
individuals to purchase 63,750 and 20,000 shares of common stock at an exercise
price of $5.25 and $5.78 per share, respectively. These options all vest over a
five-year period, and are exercisable for a ten-year and five-year period,
respectively, after the date of the grant. 250 and 500 of these incentive stock
options were cancelled in September and December 1995, respectively.

In January 1996, the Company granted non-qualified stock options to selected
individuals to purchase 35,000 shares of common stock at an exercise price of
$5.25 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.

In May 1996, the Company granted non-qualified stock options to selected
individuals to purchase 8,000 shares of common stock at an exercise price of
$5.50 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.

In December 1996, the Company granted incentive stock options to selected
individuals to purchase 28,000 shares of common stock at an exercise price of
$8 per share. These options vest over a five-year period, and are exercisable
for a ten-year period after the date of grant.

In December 1996, the Company granted non-qualified stock options to selected
individuals to purchase 64,000 shares of common stock at an exercise price of
$8 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.

Information regarding these plans is as follows:

<TABLE>
<CAPTION>

                                            1996                                  1995
                                ------------------------------           ----------------------------
                                              Weighted Average                       Weighted Average
                                Shares        Exercise Price             Shares      Exercise Price
                                ------        ----------------           ------      ---------------
<S>                            <C>            <C>                        <C>         <C>
Options outstanding-
beginning of year               447,300           $5.00                  371,300          $4.95

Options granted                 218,000           $6.47                   76,000          $5.23
                                -------           -----                  -------          -----
Options outstanding-
end of year                     665,300           $5.48                  447,300          $5.00
                                =======           =====                  =======          =====

Weighted average fair value
of options, granted during
the year                         $3.20                                    $2.59
                                 =====                                    =====

</TABLE>


The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation." Accordingly, under SFAS No. 123, no compensation expense has
been recognized for the stock option plans. Had compensation cost been
determined based on the fair value at the grant date for awards in 1996 and
1995 consistent with the accounting provision of SFAS No. 123, where the fair
value of the stock option grants are recognized on a straight line basis over
the vesting period of the grant, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:


<PAGE>


Note 9 - Shareholders' Equity (continued)

                                             1996                      1995

Net earnings - as reported                  $1,135,370               $705,125
Net earnings - pro forma                    $793,370                 $497,206
Earnings per share - as reported            $0.42                    $0.27
Earnings per share - pro forma              $0.29                    $0.19


For 1996 and 1995, no compensation expense has been recognized for stock
options under the intrinsic value based method under APB No. 25.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the respective year of grant:


                                            1996                      1995

Dividend yield                              0%                         0%
Expected volatility                         50%                        50%
Risk-free interest rate                     5.4%                       6.2%
Expected life of option                     5 years                    5 years


The following table summarizes information about fixed stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>

                                     Options Outstanding                           Options Exercisable
                       ----------------------------------------------        --------------------------------
                                         Weighted
Range of                Number            Average           Weighted            Number              Weighted
Exercise              Outstanding        Remaining          Average          Exercisable at          Average
Prices                at 12/31/96    Contractual Life    Exercise Price       12/31/96           Exercise Price
                      -------------------------------------------------      ----------------------------------

<C>                     <C>              <C>                 <C>               <C>                    <C>
$4.50-$5.50             453,300          6.9 years           $4.84             323,600                $4.77
$5.78-$8.00             212,000          5.9 years           $6.85             164,000                $6.78
                      ----------------------------------------------         ----------------------------------
                        665,300          6.6 years           $5.48             487,600                $5.45
                      ============================================           ==================================
</TABLE>















<PAGE>


Item 8.   Changes in and Disagreements with Accountants 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 answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.
See Part I for certain information regarding the Company's executive officers.


Item 10. Executive Compensation.

         The answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.


Item 11. Security Ownership of Certain Beneficial Owners and Management.

         The answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.


Item 12. Certain Relationships and Related Transactions.

         The answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.



<PAGE>



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

         (a)   Financial Statements and exhibits filed:

               (1)  Financial Statements included in Item 7 of this Form 10-KSB
                    Report.

                                                                         Page

         Report of Independent Accountants                                12

         Consolidated Balance Sheets as of December 31, 1996 and 1995     13

         Consolidated Statements of Operations for the two years
           ended December 31, 1996 and 1995                               14

         Consolidated Statements of  Changes in Shareholders' Equity
           for the years ended December 31, 1996 and 1995                 15

         Consolidated Statements of Cash Flows for the
            years ended December 31, 1996 and 1995                        16

         Notes to the Consolidated Financial Statements                   17


                  (2) Exhibits

Exhibit No.   Description of Exhibit

(3.2)*        Amended and Restated Articles of Incorporation of the Registrant

(3.3)**       By-laws of Registrant

(10.1)***     Reinsurance Treaty with Transatlantic Reinsurance Company dated
              March 1, 1995

              Management Contracts and Compensatory Plans or Arrangements

(10.2)***     Amended and Restated Employment Agreement between the Company and
              Kenneth L. Brier dated March 8, 1996

(10.3)***     Amended and Restated Employment Agreement between the Company and
              Ted A. Drauschak dated March 8, 1996

(10.4)        Amended and Restated Employment Agreement between the Company and
              Stephen C. Fletcher dated September 26, 1996

(10.5)        Amended and Restated Employment Agreement between the Company and
              Joel D. Cooperman dated June 14, 1996

(10.6)**      1993 Non-Qualified Stock Option Plan and Form of 1993 Non-
              Qualified Stock Option Agreement


                                       14
<PAGE>

Item 13. (continued)   Exhibits and Reports on Form 8-k

(10.7)**       1993 Incentive Stock Option Plan and Form of 1993 Incentive
                  Stock Option Agreement

(10.8)****     1995 Equity Incentive Plan for Key Employees

(10.9)*****    1995 Equity Incentive Plan for Outside Directors

               Other Material Contracts

(10.10)***     Amended and Restated Services Agreement dated December 31, 1995
               between the Company and The Surety Company

(10.11)***     Summary of First, Second, Third, and Fourth Surety Excess of
               Loss Reinsurance Agreement dated November 1, 1995

(10.12)        Summary of First, Second, Third, and Fourth Surety Excess of
               Loss Reinsurance Agreement dated November 1, 1996

(20)           Proxy Statement relating to the 1997 Annual Meeting
               of Shareholders (to be filed with the Commission pursuant
               to Rule 14a-6(b) under the Exchange Act)

(21)           Subsidiaries of the Company

(23)           Consent of Independent Public Accountants

(27)           Financial Data Schedule

         (b)   Reports on Form 8-K:

         During the quarter ended December 31, 1996, the Registrant did not
file any reports on Form 8-K.


*     Such exhibit is hereby incorporated by reference to the like-described
      exhibit in the Registrant's Form 10-QSB quarterly report for the period
      ended March 31, 1996.

**    Such exhibit is hereby incorporated by reference to the like-described
      exhibit in the Registrant's SB-2 Registration Statement No. 33-78336
      declared effective September 1, 1994.

***   Such exhibit is hereby incorporated by reference to the like-described
      exhibit in the Registrant's Form 10-KSB Annual Report for the year ended
      December 31, 1996.

****  Such exhibit is hereby incorporated by reference to the like-described
      exhibit in the Registrant's Form S-8 Registration Statement No. 333-23055
      filed on March 10, 1997.

***** Such exhibit is hereby incorporated by reference to the like-described
      exhibit in the Registrant's Form S-8 Registration Statement No. 333-23057
      filed on March 10, 1997.


<PAGE>


                                   SIGNATURES

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


March 27,1997                     MOUNTBATTEN, INC.



                                  By      /s/ Kenneth L. Brier
                                  -------------------------------
                                          Kenneth L. Brier
                                          President and Chief Executive Officer
                                          (principal executive officer)



                                  By       /s/ Joel D. Cooperman
                                  -------------------------------
                                           Joel D. Cooperman
                                           Vice President, Finance, Treasurer,
                                           and Chief Financial Officer
                                           (principal financial and
                                            accounting officer)


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


    SIGNATURE                     TITLE                         DATE



    /s/ Kenneth L. Brier       President, Chief                 March 27, 1997
--------------------------     Executive Officer,
    Kenneth L. Brier           and Director (principal
                               executive officer)


    /s/ Ted Drauschak          Executive Vice President,        March 27, 1997
--------------------------     Secretary, and Director
    Ted Drauschak


    /s/ Joel D. Cooperman      Vice President, Finance,         March 27, 1997
--------------------------     Treasurer, and Chief Financial
    Joel D. Cooperman          Officer (principal financial
                               and accounting officer)


   /s/ J. Michael Adams        Director                         March 27, 1997
--------------------------
   J. Michael Adams


   /s/ Thomas P. Garry        Director                          March 27, 1997
--------------------------
   Thomas P. Garry


<PAGE>



                                 Exhibit Index

(3.2)*        Amended and Restated Articles of Incorporation of the Registrant

(3.3)**       By-laws of Registrant

(10.1)***     Reinsurance Treaty with Transatlantic Reinsurance Company dated
                March 1, 1995

              Management Contracts and Compensatory Plans or Arrangements

(10.2)***     Amended and Restated Employment Agreement between the Company and
                Kenneth L. Brier dated March 8, 1996

(10.3)***     Amended and Restated Employment Agreement between the Company and
                Ted A. Drauschak dated March 8, 1996

(10.4)        Amended and Restated Employment Agreement between the Company and
                Stephen C. Fletcher dated September 26, 1996

(10.5)        Amended and Restated Employment Agreement between the Company and
                Joel D. Cooperman dated June 14, 1996

(10.6)**      1993 Non-Qualified Stock Option Plan and Form of 1993 Non-
                Qualified Stock Option Agreement

(10.7)**      1993 Incentive Stock Option Plan and Form of 1993 Incentive
                Stock Option Agreement

(10.8)****    1995 Equity Incentive Plan for Key Employees

(10.9)*****   1995 Equity Incentive Plan for Outside Directors

              Other Material Contracts

(10.10)***    Amended and Restated Services Agreement dated December 31, 1995
                 between the Company and The Surety Company

(10.11)***    Summary of  First, Second, Third, and Fourth Surety Excess of
                Loss Reinsurance Agreement dated November 1, 1995

(10.12)       Summary of First, Second, Third, and Fourth Surety Excess of Loss
                Reinsurance Agreement dated November 1, 1996

(20)          Proxy Statement relating to the 1997 Annual Meeting
                of Shareholders (to be filed with the Commission pursuant
                to Rule 14a-6(b) under the Exchange Act)

(21)          Subsidiaries of the Company

(23)          Consent of Independent Public Accountants

(27)          Financial Data Schedule


                                       15
<PAGE>

                           Exhibit Index (continued)


*      Such exhibit is hereby incorporated by reference to the like-described
       exhibit in the Registrant's Form 10-QSB quarterly report for the period
       ended March 31,1996.

**     Such exhibit is hereby incorporated by reference to the like-described
       exhibit in the Registrant's SB-2 Registration Statement No. 33-78336
       declared effective September 1, 1994.

***    Such exhibit is hereby incorporated by reference to the like-described
       exhibit in the Registrant's Form 10-KSB Annual Report for the year ended
       December 31, 1996.

****   Such exhibit is hereby incorporated by reference to the like-described
       exhibit in the Registrant's Form S-8 Registration Statement No.
       333-23055 filed on March 10, 1997.

*****  Such exhibit is hereby incorporated by reference to the like-described
       exhibit in the Registrant's Form S-8 Registration Statement No.
       33-23057 filed on March 10, 1997.