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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

|X|   ANNUAL REPORT  PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934

      For the fiscal year ended December 31, 1997

                                       or

|_|   TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934

                         Commission file number 0-22930

                                   ----------

                                Allstar Inns Inc.
             (Exact name of registrant as specified in its charter)

                Delaware                                      77-0323962
      (State or other jurisdiction                         (I.R.S. Employer
    of incorporation or organization)                     Identification No.)

      200 E. Carrillo Street, #300
        Santa Barbara, California                                93101
(Address of Principal Executive Offices)                      (Zip Code)

       Registrant's telephone number, including area code: (805) 730-3383

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

           Securities registered pursuant to Section 12(g) of the Act:

                               Title of Each Class
                               -------------------
                                  Common Stock
                                 $.01 par value

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

                                   ----------

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

      As of March 13, 1998, the aggregate  market value of the Company's  common
stock held by nonaffiliates of the registrant was $2,094,886.

      As of March  13,  1998,  there  were  1,047,443  shares  of  common  stock
outstanding.

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<PAGE>

                                     PART I

ITEM 1. BUSINESS

General

      The  Private  Securities  Litigation  Reform Act of 1995  provides a "safe
harbor" for forward-looking  statements.  Certain  information  included in this
Annual Report contains information that is forward-looking. Such forward-looking
information  involves risks and uncertainties  that could  significantly  affect
expected results.

      Allstar  Inns  Inc.,  a  Delaware   corporation   (the   "Company"),   was
incorporated  on November 12, 1992 and was formed to succeed to the business and
operations of Allstar Inns, L.P., a Delaware limited partnership (the "Company's
predecessor").  The Company's  primary  objective was to own and receive  rental
income from  economy  motels or to sell the motels if Motel 6 Operating  L.P., a
Delaware  limited  partnership  (the  "Motel 6  Operator")  exercised  its lease
purchase option (the "Lease Purchase  Option").  At January 1, 1997, the Company
owned in fee or leased 71 motels with a total of 7,606 rooms.  Of these  motels,
44 were  located in  California,  and the  remainder  were  located in six other
western and southwestern states.

      Effective January 30, 1997 and pursuant to the Master Lease Agreement, all
of the Company's  motels were sold to the Motel 6 Operator and its assignees for
the  Lease  Purchase  Option  price of $40.0  million  plus  the  assumption  of
approximately  $206  million of debt  secured by the motels.  Since  January 30,
1997,  the Company has sold for $910,000  five parcels of vacant land which were
purchased for the construction of new motels.  The Company is currently  engaged
in the final  liquidation  process and has filed a final federal tax return with
the Internal Revenue Service (the "IRS") and final state tax returns with six of
the states in which it did business.

Background

      In July 1992, the  stockholders of the Company approved a plan that placed
the business and  operations  of the  Company's  motels under the  management of
Motel 6 Operating L.P., a Delaware limited partnership (the "Motel 6 Operator").
The Company  entered into a Management  Contract which provided that the Motel 6
Operator would operate and manage all the Company's  motels through December 31,
2011.  The Motel 6 Operator also had an option to purchase the Company's  motels
between  January 1, 1997 and December 31, 1998 at a price fixed by formula (zero
value to the Stockholders at December 31, 1994).

      In May  1995,  the  stockholders  of the  Company  approved  the  plan  to
terminate the Management  Contract effective January 1, 1995 and replace it with
a Master Lease  Agreement  under terms of which the Motel 6 Operator would lease
the  Company's  motels  through  December  31,  2009.  Under  the  Master  Lease
Agreement,  the  Motel 6  Operator  had an option  (the  "Purchase  Option")  to
purchase  the  Company's  motels  prior  to the end of 1998 at a price  of $40.0
million plus assumption by the Motel 6 Operator of all  indebtedness  secured by
the Company's motels.  The Purchase Option was exercised by the Motel 6 Operator
in January  1997.  Effective  January 30, 1997 and  pursuant to the Master Lease
Agreement, all of the Company's motels were sold to the Motel 6 Operator and its
assignees  for the  Lease  Purchase  Option  price  of  $40.0  million  plus the
assumption of approximately $206 million of debt secured by the motels.

Business Plan and Prospects for Future Operations

      Effective January 30, 1997 and pursuant to the Master Lease Agreement, all
of the Company's  motels were sold to the Motel 6 Operator and its assignees for
the  Lease  Purchase  Option  price of $40.0  million  plus  the  assumption  of
approximately  $206  million of debt  secured by the motels.  Since  January 30,
1997, the Company has sold for $910,000 five parcels of vacant land. The Company
is  currently  engaged in the final  liquidation  process  and has filed a final
federal  tax return  with the IRS and final  state tax  returns  with six of the
states in which it did business.


                                        2
<PAGE>

      As a consequence  of the sale of the motel assets,  the Board of Directors
approved and recommended on March 14, 1997, and the stockholders approved on May
8, 1997, a Plan of Complete  Liquidation  and  Dissolution  of Allstar Inns Inc.
which, among other items, provides that:

      The Company will be liquidated  by the sale of its remaining  assets after
      paying or providing for all its claims, obligations and expenses, and will
      distribute its cash to  stockholders  on a pro rata basis. An initial cash
      distribution to stockholders of $28.00 per share, or  approximately  $29.3
      million was paid on May 22, 1997 to stockholders of record on May 8, 1997.

      The Company was subject to substantial Federal and State taxes on the gain
realized by the sale of its motel assets and the  disposition  of the additional
parcels of vacant land.

      The Company's  business strategy in order to achieve complete  liquidation
and dissolution is as follows:

      o  Finalize all tax matters;

      o  Negotiate final  settlement of all unexpired  leases,  contracts and
         outstanding debt;

      o  Issue a press release notifying all parties of the Final Record Date
         (when the Company will close its transfer  books and its shares will
         no longer be traded);

      o  Distribute  remaining cash available in the  Contingency  Reserve to
         stockholders  according  to their  common  stock  holdings as of the
         Final Record Date;

      o  Withdraw the Company from all states in which it has been authorized
         to do business;

      o  Suspend the Company's  reporting  obligations under Section 15(d) of
         the Securities Act of 1933, as amended,  and terminate the Company's
         registration   statement  under  Section  12(g)  of  the  Securities
         Exchange Act of 1934, as amended; and

      o  Dissolve the Company under the General  Corporation Law of the State
         of Delaware.

Market Position and Pricing

      As a result  of the sale of all of the  Company's  motels  to the  Motel 6
Operator and its assignees and the planned  liquidation  and  dissolution of the
Company, the Company no longer has marketing and pricing plans or policies.

Operations

      The Company  began 1997  leasing its motels to the Motel 6 Operator  under
the terms of the Master Lease  Agreement,  however,  in January 1997 the Motel 6
Operator exercised its Purchase Option.  Effective January 30, 1997 and pursuant
to the Master  Lease  Agreement,  all of the  Company's  motels were sold to the
Motel 6 Operator and its assignees for the Lease Purchase  Option price of $40.0
million plus the assumption of approximately $206 million of debt secured by the
motels.  Since January 30, 1997,  the Company has sold for $910,000 five parcels
of vacant  land.  The  Company is  currently  engaged  in the final  liquidation
process  and has filed a final  federal  tax return with the IRS and final state
tax returns with six of the states in which it did business.

      Employees.  At  December  31,  1997 four  employees  were  employed by the
Company  to  manage  the  winding-up  and  liquidation  activities,  to  prepare
financial and tax reports of the Company and to make  required  filings with the
Securities and Exchange Commission and other governmental agencies and otherwise
to  carry  out  the  continuing  responsibilities  of the  Company.  None of the
Company's employees is currently covered by a collective  bargaining  agreement.
Management  believes  that  the  Company's  relations  with  its  employees  are
satisfactory.


                                        3
<PAGE>

Competition

      As a result of the sale of the Company  motels to the Motel 6 Operator and
its assignees and the planned  liquidation and  dissolution of the Company,  the
Company is no longer in competition with other lodging establishments.

ITEM 2. PROPERTIES

      At the  beginning  of 1997,  the Company  owned in fee or leased 71 motels
with a total of 7,606 rooms.  In addition to its motel  properties,  the Company
owned five  parcels of  unimproved  land  suitable for the  construction  of new
motels.  Effective  January 30, 1997 and pursuant to the Master Lease Agreement,
all of the Company's  motels were sold to the Motel 6 Operator and its assignees
for the Lease  Purchase  Option price of $40.0  million plus the  assumption  of
approximately  $206  million of debt  secured by the motels.  Since  January 30,
1997,  the Company has sold for $910,000  five parcels of vacant land which were
purchased for  construction of new motels.  The Company is currently  engaged in
the final liquidation  process and has filed a final federal tax return with the
IRS and final state tax returns with six of the states in which it did business.

      The Company's headquarters are located in Santa Barbara,  California.  The
Company  began  leasing  its office  space from an  independent  third  party in
October  1993.  The  original  term of the lease is for five years with  current
minimum rent payments of $75,145 per annum.

ITEM 3. LEGAL PROCEEDINGS

      From time to time,  the  Company  was a party to  lawsuits  arising in the
ordinary course of its business.  Substantially  all of the claims made in these
lawsuits are covered by the Company's  insurance  policies.  Management believes
that such  lawsuits  arising in the ordinary  course of business will not have a
material adverse effect on the financial statements of the Company.

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

      None.


                                        4
<PAGE>

                                     PART II

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

      The Common Stock of the Company  began  trading on the OTC Bulletin  Board
Service on November  26, 1993 and the high bid and low ask prices are  currently
reported under the symbol  "ALST".  The range of the high bid and low ask prices
of the Company's Common Stock for each of the quarters during 1997 are set forth
below:

                                                      1997
                                               -----------------
                                                High       Low
                                               ------     ------
              First Quarter..................      30     29-1/2
              Second Quarter.................  28-3/4      1-1/2
              Third Quarter..................       2      1-7/8
              Fourth Quarter.................       2      2-1/4

      As of February 27, 1998,  there were 610  shareholders  of record  holding
1,047,443 shares of Common Stock.

      At the Annual Meeting on May 8, 1997 the  stockholders  approved a Plan of
Complete  Liquidation and Dissolution  (the "Plan") of the Company.  (For a more
detailed  description of the Plan,  refer to the Company's 1997 Proxy  Statement
which was  mailed to the  Company's  stockholders  in April  1997.)  Immediately
thereafter,   the  Board  of  Directors  of  the  Company  approved  an  initial
liquidating  cash  distribution of $28.00 per common share which was paid on May
22, 1997 to stockholders of record on May 8, 1997.


                                        5
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

      The Company  assumed  operations of the Company's  predecessor on November
25, 1993 and retained December 31st as the end of its fiscal year. The Company's
motels were  operated  under a  Management  Contract  until  December  31, 1994.
Effective  January 1, 1997,  the  Management  Contract  was  terminated  and the
Company's  motels  were  leased to the Motel 6 Operator  pursuant  to the Master
Lease  Agreement.  Effective  January  30,  1997 the  Motel 6  Operator  and its
assignees  exercised the Master Lease Agreement  Purchase Option to purchase all
of the Company's motels.

SUMMARY FINANCIAL AND OPERATING DATA (1)

                 (in thousands except per share, motels, rooms,
                       rentals, occupancy and room rates)

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                             -------------------------------------------------------------------
                                                1993           1994           1995          1996          1997
                                             ----------     ----------     ----------    ----------    ---------
<S>                                           <C>            <C>           <C>             <C>          <C>
STATEMENT OF OPERATING DATA
  Revenues...............................   $ 52,034       $ 56,842      $ 52,424        $ 24,743     $  3,006
  Operating, administrative and
     lease expenses......................     28,182         30,800        22,921           1,227        4,117
  Motel 6 field overhead.................      1,323          1,468         1,006            --           --
  Motel 6 accounting and
     marketing fee.......................      2,084          2,277         1,809            --           --
  Motel 6 license fee....................      1,563          1,708         1,356            --           --
  Motel 6 incentive fee..................        832           --             897            --           --
  Interest expense.......................     15,920         17,132        20,064          19,061        1,508
  Depreciation and amortization..........      9,851          9,240         9,001           8,608          662
  Other expense..........................       --             --           4,953              12           62
  Write down and losses on sales
     of assets...........................       --              476         1,036(3)          123          487
  Gain from sale of assets...............       --             --            --              --      (116,408)
  Effect of Master Lease
     Agreement settlement................       --             --          (2,870)           --           --
  Provision (benefit) for income
     taxes...............................       --                2        (7,012)        (23,306)      45,937
  Net income (loss)......................     (7,721)        (6,261)         (737)         19,018       66,641
  Income (loss) per Share (2)............      (8.17)         (6.63)         (.77)          17.82        63.62
  Dividend per Common Share (2)..........       --             --            2.00            2.00        28.00 (5)
STATISTICAL DATA
  Motels at end of period................         73             72            72              71         --
  Average number of rooms
     available...........................      7,747          7,734         7,641           7,606         --
  Room rentals per available
     room (4)............................   $  6,717       $  7,350      $  7,671        $  8,007         --
  Occupancy percentage...................      61.6%          66.2%         67.1%            66.1%        --
  Average daily room rates...............   $  29.88       $  30.41      $  31.31        $  33.11         --
BALANCE SHEET DATA
  Total assets...........................   $172,757       $174,048      $160,290        $177,679     $  4,069
  Total debt and lease
     obligations.........................    202,472        199,086       206,967         204,189         --
  Shareholders' (deficit) equity.........    (45,522)       (51,784)      (54,470)        (37,173)       3,641
</TABLE>


                                        6
<PAGE>

----------
(1)   Amounts are set forth  accounting  for different time periods in which the
      Company's  motels were (i) operated by the Company;  (ii)  operated by the
      Motel 6 Operator under a management contract;  (iii) leased to the Motel 6
      Operator;  and (iv) sold to the Motel 6 Operator  and,  as a result,  such
      amounts are not comparable.

(2)   Amounts reflect the conversion to corporation and one-for-fifteen  reverse
      stock split.

(3)   The Company in 1995 wrote down the carrying  value of the vacant land held
      for sale by $1.0 million.

(4)   Room rentals per available  room  represents  room rentals  divided by the
      average number of rooms available during the period.

(5)   Represents the initial liquidating cash distribution approved by the Board
      of Directors May 8, 1997.

ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF RESULTS OF  OPERATIONS  AND
         FINANCIAL CONDITION

Results of Operations

      General

      At a closing held January 30, 1997 in Santa Barbara, California, the Motel
6 Operator  and its  assignees  purchased  the  Company's 71 motels at the Lease
Purchase  Option price of $40.0  million plus  assumption of the debt secured by
the  motels of  approximately  $206  million.  The sale of the motel  properties
constitutes  a sale of  substantially  all of the assets of the  Company.  Since
January 30, 1997,  the Company has sold for $910,000 five parcels of vacant land
which were purchased for the construction of new motels.

      The Company is subject to substantial  Federal and State taxes on the gain
realized by the sale of its assets.

      On March 14,  1997,  the Board of  Directors  of the Company  approved and
recommended, subject to stockholder approval, a Plan of Complete Liquidation and
Dissolution. At the Company's Annual Meeting of stockholders on May 8, 1997, the
stockholders  approved the Plan.  (For a more detailed  description of the Plan,
refer to the Company's  1997 Proxy  Statement  which was mailed to the Company's
stockholders  in April  1997.)  At a  meeting  of the  Board of  Directors  held
immediately  after the Annual  Meeting of  stockholders,  the Board of Directors
resolved that the Company would  promptly make an initial cash  distribution  to
stockholders of $29.3 million, or $28.00 per share. The distribution was paid on
May 22, 1997 to stockholders of record on May 8, 1997.

      As approved by the  stockholders,  the Plan provides for the Company to be
liquidated  (i) by the  sale of its  remaining  assets,  (ii)  after  paying  or
providing for all its claims,  obligations and expenses, by distributing cash to
its stockholders pro rata and, (iii) if required by the Plan or deemed necessary
by the Board of Directors,  by  distributions of its assets from time to time to
one or  more  liquidating  trusts  established  for  the  benefit  of  the  then
stockholders,  or by a final  distribution  of its then  remaining  assets  to a
liquidating trust established for the benefit of the then  stockholders.  Should
the  Board of  Directors  determine  that  one or more  liquidating  trusts  are
required  by the Plan or are  otherwise  necessary,  appropriate  or  desirable,
approval of the Plan constituted  stockholder approval of the appointment by the
Board of Directors of one or more  trustees to any such  liquidating  trusts and
the execution of liquidating  trust  agreements  with the trustees on such terms
and  conditions as the Board of  Directors,  in its absolute  discretion,  shall
determine.

Fiscal Year Ended December 31, 1997
vs. December 31, 1996

      Total  revenues for 1997 were $3.0 million  compared to $24.7  million for
1996.  The variance from 1996 occurs as a result of the Company's sale of all of
its motel assets on January 30, 1997 to the Motel 6 Operator and its assignees.


                                        7
<PAGE>

      Administrative and general expenses were $4.1 million for 1997 compared to
$1.2 million for 1996. As a result of the exercise of the Purchase  Option,  the
Company was  required  under FASB  Statement  123 - Accounting  for  Stock-Based
Compensation, to expense the fair market value of employee stock options of $2.4
million;  and  recognize as an expense  employee  severance  pay of $1.0 million
payable through December 31, 1998.

      Depreciation  and  amortization for 1997 were $.7 million compared to $8.6
million for 1996.  The  variance  from 1996 occurs as a result of the  Company's
sale of all of its motel assets on January 30, 1997.

      Write-down  and  losses  on sales of  assets  for  1997  were $.5  million
compared to $.1 million for 1996.  The loss for 1997 resulted from the reduction
of the  carrying  value  of land  based  on a sales  program  to  recognize  the
liquidation and dissolution of the Company.

      Gain from sale of assets of $116.4 million for 1997 reflects the gain from
the sale of the Company's motels.

      Interest  expense for 1997 was $1.5 million  compared to $19.1 million for
1996.  The variance from 1996 is the result of the Company's  sale of all of its
motel assets on January 30, 1997.

      Provision  (benefit)  for income  taxes for 1997  reflects a provision  of
$45.9  million for the Federal and State tax liability on the gain from the sale
of the  Company's  motels.  The  amount for 1996,  a benefit  of $23.3  million,
reflects  realizing all future deferred tax benefits as a result of the exercise
of the Master Lease  Agreement  Purchase  Option by the Motel 6 Operator and its
assignees.

Fiscal Year Ended December 31, 1996
vs. December 31, 1995

      Total  revenues for 1996 were $24.7 million  compared to $52.4 million for
1995 and comprised:  rent income, resulting from leasing the Company's motels to
the Motel 6 Operator,  of $24.0  million for twelve  months of 1996  compared to
$6.1 million for three months of 1995;  interest  income of $.7 million for 1996
versus  $1.2  million  for  1995,  earned  from  short-term  investments  of the
Company's  cash  balances;  and room rentals of $-0- for 1996  compared to $45.2
million for 1995.

      Operating expenses,  lease, Motel 6 field overhead, Motel 6 accounting and
marketing  fee,  Motel 6 license  fee and Motel 6  incentive  fee were  expenses
pertaining  to the  operating  of the  Company's  motels by the Motel 6 Operator
under  the  Management  Contract,  which  was  replaced  with the  Master  Lease
Agreement in the fourth  quarter of 1995. As a result,  for 1996,  there were no
expenses for these items;  this compares to $26.2 million of these  expenses for
nine months of 1995.

      Administrative and general expenses were $1.2 million for 1996 compared to
$1.8 million for 1995.

      Depreciation  and  amortization  was $8.6 million in 1996 compared to $9.0
million in 1995.  The decrease  was due to lower  overall  depreciation  charges
resulting from fully depreciated assets.

      Other  expense for 1996 was $12.0  thousand  compared to $5.0  million for
1995. 1995's expense included $1.6 million in legal costs in connection with the
Master Lease  Agreement,  $2.6 million in litigation  settlement costs and a $.7
million write-off of prepaid loan fees.

      Write-down and losses on sales of assets for 1996 was $.1 million,  due to
a loss on a sale of an additional  land parcel  adjacent to one of the Company's
motels,  compared to $1.0 million for 1995,  which reflected a write-down in the
realizable carrying value of the remaining vacant land parcels held for sale.

      Effect of Master Lease  Agreement  settlement was not applicable for 1996,
but was $(2.9) million for 1995 and  represented the write-off of accrued assets
and liabilities in connection with the termination of the Management Contract.


                                        8
<PAGE>

      Interest  expense in 1996  amounted  to $19.1  million,  compared to $20.1
million in 1995,  all of which was paid by the Motel 6 Operator on the Company's
behalf to the Company's  lenders.  The amount of this interest is also reflected
in the Company's total revenues.  The lower interest  expense for 1996 primarily
reflects no tax deficiency interest incurred during 1996 compared to $.9 million
in 1995. The Company  concluded its tax deficiency  matter on October 3, 1995 by
paying  taxes and  interest to the IRS and  California  Franchise  Tax Board the
aggregate amount of $9.0 million.

      Provision (benefit) for income taxes for 1996 was $(23.3) million compared
to $(7.0)  million for 1995.  The amount for 1996 reflects  realizing all future
deferred tax  benefits.  The amount for 1995  reflects  the future  deferred tax
benefits for the cumulative net operating  losses for 1993,  1994 and 1995. As a
result of the  exercise of the Purchase  Option,  subsequent  to  year-end,  the
Company will use all net deferred tax assets to offset future  Federal and State
tax liabilities.

Liquidity and Capital Resources

      At December 31, 1997,  the Company had $4.1 million of cash as compared to
$15.1 million at December 31, 1996. As of December 31, 1997,  the Company had no
borrowing capacity.

      EBITDA was $114.7  million for 1997  compared  to $23.4  million for 1996.
EBITDA,  as used above, is defined as earnings before interest  expense,  income
taxes, depreciation and amortization.  The increase was the result of the $116.4
million  gain from sale of assets  resulting  from the Motel 6 Operator  and its
assignees exercising the Master Lease Agreement Purchase Option.

      Net  cash  used in  operating  activities  for 1997  was  $(18.4)  million
compared to $6.0 million provided by operating activities for 1996. 1997 results
reflects no Basic Rent receipts  from the Motel 6 Operator,  whereas last year's
results  included $7.0 million,  1997 results also include Federal and State tax
payments of $15.6 million and severance  payments  payable through  December 31,
1998 of $1.0 million.

      Net cash  provided  by  investing  activities  was $36.5  million for 1997
versus $.3 million  provided by investing  activities  for 1996.  1997 favorable
variance was due to the receipt of $35.8  million of net proceeds  from the sale
of the Company's motels to the Motel 6 Operator.

      Net cash used in financing  activities was $(29.2) million for 1997 versus
$(4.7)  million used in financing  activities for 1996.  1997 results  include a
$28.00 per share initial  liquidating  cash  distribution to stockholders  which
totalled $29.3 million.

      As approved by the Board of Directors and the stockholders of the Company,
the Plan of Complete Liquidation and Dissolution of the Company provides for the
Company to distribute pro rata to the Company's  stockholders  all its remaining
cash except such cash or assets as are required for paying or making  provisions
for the claims and obligations of the Company.  The Board of Directors  resolved
that the Company  would make an initial cash  distribution  to  stockholders  of
$29.3  million,  or  $28.00  per  share,  which  was  paid  on May  22,  1997 to
stockholders  of record on May 8, 1997. A more detailed  description of the Plan
is  provided  in the  Company's  1997  Proxy  Statement  which was mailed to the
Company's stockholders in April 1997.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The  financial  statements  required by this Item are included in response
and incorporated by reference to Item 14 of this Report.


                                        9
<PAGE>

                                ALLSTAR INNS INC.

     STATEMENT OF NET ASSETS IN LIQUIDATION (1997) AND BALANCE SHEET (1996)
                            (in thousands of dollars)
--------------------------------------------------------------------------------

                                                               December 31,
                                                          ---------------------
                                                          1997             1996
                                                          ----             ----
ASSETS
Current assets:
    Cash and cash equivalents (Note 1) .............     $  4,069     $  15,131
    Receivable from Motel 6 (Note 1) ...............         --           3,620
    Other current assets ...........................         --              29
    Deferred tax assets (Note 3) ...................         --          30,320
                                                         --------     ---------
          Total current assets .....................        4,069        49,100
Net property and equipment (Note 1) ................         --         127,436
Land held for sale (Notes 1 and 7) .................         --           1,107
Other assets including leased property
  under capital lease, less accumulated
  amortization of $222 (1996) ......................         --              36
                                                         --------     ---------
                                                         $  4,069     $ 177,679
                                                         ========     =========

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities:
    Accounts payable and accrued liabilities .......     $    428     $   5,215
    Deferred Basic Rent (Note 1) ...................         --           3,500
    Accrued interest ...............................         --           2,032
                                                         --------     ---------
          Total current liabilities ................          428        10,747
Long-term debt (Note 2) ............................         --         204,105
Commitments and contingencies (Notes 4) ............         --            --
Stockholders' equity (deficit):
    Preferred stock, $.01 par value,
       authorized 1,000,000 shares; no
       shares issued and outstanding
       at December 31, 1997 and 1996 ...............         --            --
    Common stock, $.01 par value,
       authorized 10,000,000 shares;
       1,047,443 shares and 985,710
       shares issued and outstanding
       at December 31, 1997
       and 1996, respectively ......................           10            10
    Additional paid-in capital .....................         --          21,360
    Accumulated equity (deficit) ...................        3,631       (58,543)
                                                         --------     ---------
Total stockholders' equity (deficit) ...............        3,641       (37,173)
                                                         --------     ---------
                                                         $  4,069     $ 177,679
                                                         ========     =========

                             See accompanying notes.
--------------------------------------------------------------------------------


                                       10
<PAGE>

                                ALLSTAR INNS INC.

            STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (1997)
                  AND STATEMENTS OF OPERATIONS (1996 AND 1995)
                      (in thousands, except per share data)
--------------------------------------------------------------------------------

                                                   Years Ended December 31,
                                                -----------------------------
                                                1997        1996         1995
                                                ----        ----         ----
Revenues:
    Rent income ........................    $   1,839     $ 23,999     $  6,108
    Interest income ....................        1,167          744        1,164
    Room rentals .......................         --           --         45,152
                                            ---------     --------     --------
          Total Revenues ...............        3,006       24,743       52,424
                                            ---------     --------     --------
Expenses:
    Operating ..........................         --           --         20,850
    Lease ..............................         --           --            271
    Administrative and general .........        4,117        1,227        1,800
    Motel 6 field overhead .............         --           --          1,006
    Motel 6 accounting and
      marketing fee ....................         --           --          1,809
    Motel 6 license fee ................         --           --          1,356
    Motel 6 incentive fee ..............         --           --            897
    Depreciation and amortization ......          662        8,608        9,001
    Other expense ......................           62           12        4,953
    Write-down and losses on
      sales of assets ..................          487          123        1,036
    Effect of Master Lease
      Agreement settlement .............         --           --         (2,870)
    Gain from sale of assets ...........     (116,408)        --           --
                                            ---------     --------     --------
          Total (income) expense .......     (111,080)       9,970       40,109
                                            ---------     --------     --------
Operating income .......................      114,086       14,773       12,315

Interest expense .......................        1,508       19,061       20,064
                                            ---------     --------     --------
Net income (loss) before
  provision for income taxes ...........      112,578       (4,288)      (7,749)

Provision (benefit) for
  income taxes .........................       45,937      (23,306)      (7,012)
                                            ---------     --------     --------
Net income (loss) ......................    $  66,641     $ 19,018     $   (737)
                                            =========     ========     ========
Net income (loss) per
  common share (Note 1) ................    $   63.62     $  19.28     $   (.77)
                                            =========     ========     ========
Net income (loss) per common
  share assuming dilution (Note 1) .....    $   63.62     $  17.82     $   (.71)
                                            =========     ========     ========
Weighted average common
  shares outstanding ...................        1,047          986          954
                                            =========     ========     ========
Weighted average common
    shares outstanding plus
    employee stock options .............        1,047        1,067        1,036
                                            =========     ========     ========

                             See accompanying notes.
--------------------------------------------------------------------------------


                                       11
<PAGE>

                                ALLSTAR INNS INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)
--------------------------------------------------------------------------------

                   For the Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
                                                     Common Stock        Additional   Accumulated
                                                     ------------         Paid-in        Equity
                                                   Shares    Amount       Capital       (Deficit)
                                                   ------    ------       -------       ---------
<S>                                                <C>         <C>       <C>             <C>
Balance, December 31, 1994 .................         945       $ 9       $ 25,031        $(76,824)
    Net loss ...............................        --          --           --              (737)
    Dividends ($2.00 per common share) .....        --          --         (1,950)           --
    Common stock grant .....................          40         1           --              --
                                                   -----       ---       --------        --------
Balance, December 31, 1995 .................         985        10         23,081         (77,561)
                                                   =====       ===       ========        ========
    Net income .............................        --          --           --            19,018
    Dividends ($2.00 per common share) .....        --          --         (1,956)           --
    Employee stock options .................           1        --             22            --
    Amortization of 1995's
       Restricted Stock Plan ...............        --          --            213            --
                                                   -----       ---       --------        --------
Balance, December 31, 1996 .................         986        10         21,360         (58,543)
                                                   =====       ===       ========        ========
    Net income .............................        --          --           --            66,641
    Liquidating Distribution
       ($28.00 per common share) ...........        --          --        (29,343)           --
    Employee stock options .................          61        --          1,740            --
    Vesting of 1995's Restricted Stock Plan         --          --            913            --
    Reserve payments to retained earnings ..        --          --           --               863
    Adjustment to Paid-in-Capital to reflect
       Liquidating Distributions ...........        --          --          5,330          (5,330)
                                                   -----       ---       --------        --------
Balance, December 31, 1997 .................       1,047       $10       $   --          $  3,631
                                                   =====       ===       ========        ========
</TABLE>

                             See accompanying notes.
--------------------------------------------------------------------------------


                                       12
<PAGE>

                                ALLSTAR INNS INC.

                            STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)
--------------------------------------------------------------------------------

                                                   Years Ended December 31,
                                                 ----------------------------
                                                 1997        1996        1995
                                                 ----        ----        ----
Cash flows from operating activities:
    Cash received .........................   $   2,748    $ 28,317    $ 50,326
    Cash paid to suppliers and employees ..      (3,996)     (3,195)    (35,448)
    Interest paid .........................      (1,508)    (19,119)    (18,730)
    Federal and state taxes paid ..........     (15,617)       --          --
    Tax deficiency payment ................        --          --        (9,002)
                                              ---------    --------    --------
       Net cash provided by (used in)
          operating activities ............     (18,373)      6,003     (12,854)

Cash flows from investing activities:
    Capital expenditures ..................        --           (23)       --
    Total proceeds from sale of motels
       to the Motel 6 Operator ............     243,028        --          --
    Payment of long-term debt from proceeds
       from the sale of motels ............    (204,062)       --          --
    Refund of deferred Basic Rent .........      (3,212)       --          --
    Proceeds from sale of assets ..........         728         336         139
    Other .................................        --          --           (19)
                                              ---------    --------    --------
       Net cash provided by (used in)
          investing activities ............      36,482         313         120

Cash flows from financing activities:
    Borrowing under credit agreements .....        --          --         8,996
    Payments under credit agreements ......        --        (1,439)       (189)
    Principal payments - mortgages and
       capital lease obligation ...........         (44)     (1,310)       (926)
    Dividends paid to stockholders ........     (29,343)     (1,956)     (1,950)
    Proceeds from exercise of stock options         216           2        --
    Proceeds from common stock grant ......        --          --             1
                                              ---------    --------    --------
       Net cash provided by (used in)
          financing activities ............     (29,171)     (4,703)      5,932
                                              ---------    --------    --------
Net increase (decrease) in cash and
    cash equivalents ......................     (11,062)      1,613      (6,802)
Cash and cash equivalents at
    beginning of period ...................      15,131      13,518      20,320
                                              ---------    --------    --------
Cash and cash equivalents at
    end of period .........................   $   4,069    $ 15,131    $ 13,518
                                              =========    ========    ========

                            (Continued on next page)
--------------------------------------------------------------------------------


                                       13
<PAGE>

                                ALLSTAR INNS INC.

                            STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)
--------------------------------------------------------------------------------

                                                   Years Ended December 31,
                                                 ----------------------------
                                                 1997        1996        1995
                                                 ----        ----        ----
Reconciliation  of net income (loss)
 to net cash provided by (used in)
 operating activities:
   Net income (loss) ......................   $  66,641    $ 19,018    $   (737)
   Adjustments to reconcile net income
    (loss) to net cash provided by
    (used in) operating activities:
      Depreciation and amortization .......         662       8,608       9,001
      Write-down of assets ................         487        --         1,000
      Refund of deferred Basic Rent .......       3,212        --          --
      (Gain) loss on sale of assets .......    (116,408)        123          36
      Amortization of restricted stock
       and exercise of employee
       stock options ......................        --           234        --
      Tax benefit resulting from the
       exercise of employee stock
       options and the vesting of
       restricted stock ...................       2,436        --          --
      Write-off obligation under
       capital lease ......................          84        --          --
      Changes in assets and liabilities:
         Decrease in restricted cash ......        --          --         2,500
         Decrease (increase) in receivable
           from Motel 6 ...................       3,620      (1,531)       (108)
         Decrease in other current assets..          29          17         119
         Decrease in property and equipment        --          --           567
         Decrease in other assets .........        --          --           734
         Decrease (increase) in deferred
           tax assets .....................      30,320     (23,307)     (7,013)
         Decrease in accounts payable
           and accrued liabilities ........      (4,787)       (602)    (11,284)
         Increase  (decrease) in deferred
           Basic Rent .....................      (3,500)      3,500        --
         Increase (decrease) in accrued
           interest .......................      (2,032)        (57)        469
         Increase (decrease) in accrued
           tax litigation liabilities .....        --          --        (8,138)
         Increase in accumulated equity
           (deficit) ......................         863        --          --
                                              ---------    --------    --------
Net cash provided by (used in)
 operating activities .....................   $ (18,373)   $  6,003    $(12,854)
                                              =========    ========    ========

                             See accompanying notes.
--------------------------------------------------------------------------------


                                       14
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

      The  Company at  January  1, 1997 owned in fee or leased 71 motels  with a
total of 7,606  rooms.  Effective  January 30,  1997 and  pursuant to the Master
Lease  Agreement,  all of the Company's motels were sold to the Motel 6 Operator
and its assignees for the Lease Purchase  Option price of $40.0 million plus the
assumption of  approximately  $206 million of debt secured by the motels.  Since
January 30, 1997,  the Company has sold for $910,000 five parcels of vacant land
which  were  purchased  for the  construction  of new  motels.  The  Company  is
currently engaged in the final liquidation process and has filed a final federal
tax return with the IRS and final  state tax  returns  with six of the states in
which it did business.  In 1996 and 1995 the Company's business was to lease the
motels to the Motel 6  Operator  to  operate  under the "Motel 6" logo under the
terms of the Master  Lease  Agreement.  In 1994 the Company  engaged the Motel 6
Operator  to  operate  its  motels  under  terms  of  a   Management   Contract.
Accordingly,  the  accompanying  financial  statements  reflects the business as
conducted in each period.

      In March 1995,  the FASB issued  Statement  No.  121,  Accounting  for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
statement,  which is effective  for fiscal years  beginning  after  December 15,
1995,  requires  that an entity  evaluate  long-lived  assets and certain  other
identifiable  intangible  assets for  impairment  whenever  events or changes in
circumstances  indicate  that  the  carrying  amounts  of the  asset  may not be
recoverable.  An  impairment  loss  meeting  the  recognition  criteria is to be
measured  as the amount by which the  carrying  amount for  financial  reporting
purposes exceeds the fair value of the asset. The Company adopted this statement
in 1996 and the  adoption of the  statement  has had no effect on the  Company's
financial position or results of operations.

      As of the date of  adoption  of  dissolution,  May 8,  1997,  the  Company
changed its method of accounting from the going concern basis to the liquidation
basis. Under the liquidation basis of accounting assets are presented at amounts
expected to be realized in liquidation and liabilities at amounts expected to be
paid to creditors.

Master Lease Agreement

      In 1992, the security  holders of the Company  approved a plan that placed
the business and  operations  of the  Company's  motels under the  management of
Motel 6 Operating L.P., a Delaware limited partnership (the "Motel 6 Operator").
The Company  entered into a management  contract which provided that the Motel 6
Operator would operate and manage all the Company's  motels through December 31,
2011.  In  September  1995 the Company and the Motel 6 Operator  terminated  the
Management  Contract and entered into a new Master Lease  Agreement (the "Master
Lease  Agreement")  relating to the Company's  motels.  For a description of the
events  leading  up to the  Master  Lease  Agreement,  see the  Company's  Proxy
Statement relating to its 1995 Annual Meeting of Stockholders.

      The Lease was a "net,  net, net" lease for a 15-year term commencing as of
January 1, 1995.  Annual rent was an amount  sufficient to cover debt service on
the  indebtedness  secured by the Company's  motels plus (i) through 1998,  $3.5
million,  (ii) in 1999,  satisfaction  of the Company's  indebtedness  to the an
affiliate of the Motel 6 Operator  (the "Motel 6 Lender")  (approximately  $37.0
million at December 31, 1996),  plus (iii)  annually in 1999 through 2009,  $5.0
million  (plus cost of living  increases  from  1995).  Under the  Master  Lease
Agreement,  the  Motel 6  Operator  had an option  (the  "Purchase  Option")  to
purchase  the  Company's  motels  prior  to the end of 1998 at a price  of $40.0
million plus assumption by the Motel 6 Operator of the  indebtedness,  including
the Motel 6 Lender  indebtedness,  secured by the  Company's  motels.  Upon such
purchase,  the Motel 6  Operator  would  receive  $3.0  million  representing  a
furniture,  fixture  and  equipment  reserve.  The Master  Lease  Agreement  was
assignable


                                       15
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

to an assignee  with a net worth of at least $350 million.  The Purchase  Option
was  assignable  so long as the Motel 6 Operator  or its parent  guarantees  the
performance of the assignee.

      On  January  30,  1997 the Motel 6  Operator  and its  assignees  formally
exercised the Purchase  Option.  The closing of the sale of the Company's motels
took place on January 30, 1997.

      At a closing  held in Santa  Barbara,  California,  the  Motel 6  Operator
purchased  the Company's 71 motels at the Lease  Purchase  Option price of $40.0
million plus assumption of the debt secured by the motels of approximately  $206
million.  The sale of the motel  properties  constituted a sale of substantially
all of the assets of the  Company.  The Company also sold five parcels of vacant
land constituting the balance of the Company's real estate holdings.

      The Company was subject to substantial Federal and State taxes on the gain
realized by the sale of its motel assets.

      At the Annual Meeting on May 8, 1997 the  stockholders  approved a Plan of
Complete  Liquidation and  Dissolution of the Company (the "Plan").  (For a more
detailed  description of the Plan,  refer to the Company's 1997 Proxy  Statement
which was  mailed to the  Company's  stockholders  in April  1997.)  Immediately
thereafter,   the  Board  of  Directors  of  the  Company  approved  an  initial
liquidating  cash  distribution of $28.00 per common share which was paid on May
22, 1997 to stockholders of record on May 8, 1997.

The Company's  business  strategy in order to achieve  complete  liquidation and
dissolution is as follows:

      o  Finalize all tax matters;

      o  Negotiate final  settlement of all unexpired  leases,  contracts and
         outstanding debt;

      o  Issue a press release notifying all parties of the Final Record Date
         (when the Company will close its transfer  books and its shares will
         no longer be traded);

      o  Distribute  remaining cash available in the  Contingency  Reserve to
         stockholders  according  to their  common  stock  holdings as of the
         Final Record Date;

      o  Withdraw the Company from all states in which it has been authorized
         to do business;

      o  Suspend the Company's  reporting  obligations under Section 15(d) of
         the Securities Act of 1933, as amended,  and terminate the Company's
         registration   statement  under  Section  12(g)  of  the  Securities
         Exchange Act of 1934, as amended; and

      o  Dissolve the Company under the General  Corporation Law of the State
         of Delaware.

Reclassifications

      Certain amounts as previously  reported have been  reclassified to conform
to the December 31, 1996 presentation.


                                       16
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Estimates and Assumptions

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

Property and Equipment

      Depreciation  and  amortization  of  property  and  equipment,   leasehold
interests  and  leased   property   under  capital  lease  is  computed  on  the
straight-line basis over the estimated useful lives of the assets as follows:

      Property and equipment:
          Buildings........................................    30  - 40  years
          Improvements.....................................     3  - 22  years
          Furniture and equipment..........................     3  - 11  years

      Leasehold interests..................................    Lease term

      Leased property under capital lease..................    16 years

      Property and  equipment is stated at cost and consists of the following at
December 31:

                                                          (in thousands)
                                                      1997              1996
                                                      ----              ----
      Land  .....................................   $  --            $  30,843
      Buildings and improvements.................      --              166,199
      Furniture and equipment....................      --               42,477
      Leasehold interests........................      --                2,498
                                                    --------         ---------
                                                       --              242,017
      Less accumulated depreciation
         and amortization........................      --              114,581
                                                    --------         ---------
      Net property and equipment.................   $  --            $ 127,436
                                                    ========         =========

      All of the  Company's  assets  were sold to the Motel 6  Operator  and its
assignees on January 30, 1997.

Cash Equivalents

      The Company has no  investments;  its liquid assets consist of cash in its
Contingency Reserve bank account.

Net Income (Loss) Per Common Share

      For the year ended  December 31, 1997,  the Company has calculated the net
income per share under  standards  and  procedures  in FASB  Statement  No. 128,
Earnings  Per Share.  The new  standards  require the  earnings  per share to be
calculated  under two methods.  The first method,  Earnings per common share, is
calculated using only outstanding  stock.  This method is new and is required to
be  reported on for the  current  year 1997 and prior  years 1996 and 1995.  The
second  method,  Earnings  per  common  share  assuming  dilution,  incorporates
potential dilution from all potentially dilutive  securities.  There has been no
change to the calculation of this method.


                                       17
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Accounting for Stock Based Compensation

      The Company accounts for its stock based  compensation  arrangements under
the  provisions of APB 25,  Accounting  for Stock Issued to  Employees,  and the
Company has adopted the  disclosure  only  provisions of Statement of Accounting
Financial Standards No. 123, Accounting for Stock Based Compensation.

Receivable from Motel 6

      Receivable from Motel 6 was comprised of the following:

                                                         (in thousands)
                                                        1997        1996
                                                        ----        ----
      Amount owed to the Company....................   $ --        $1,588
      Interest owed to the Company's lenders........     --         2,032
                                                       ------      ------
         Receivable from Motel 6....................   $ --        $3,620
                                                       ======      ======

Deferred Basic Rent

      Deferred  Basic Rent reflected  1997's annual Basic Rent payment  received
from the Motel 6 Operator on December 31, 1996.

Land Held for Sale

      Land  held for  sale is  stated  at the  lower  of cost or  estimated  net
realizable  value. In 1995 the Company wrote down the carrying value of the land
held for sale by $1.0 million.

(2) LONG-TERM DEBT

                                                             (in thousands)
                                                                December
                                                           ------------------
                                                           1997          1996
                                                           ----          ----
WFB mortgage loans maturing 1998 ..................     $   --        $102,105

Coast Federal Bank mortgage loans maturing 1998....         --          44,643

Great Western Bank and WHC-One Investors, L.P.
    mortgage loans maturing 2005 and 2006 .........         --          20,317

Motel 6 Lender secured subordinated loans
    maturing 1998 .................................         --          37,040
                                                        --------      --------
       Total long-term debt .......................     $   --        $204,105
                                                        ========      ========

      As a  result  of  the  sale  of the  Company's  motel  assets,  all of the
Company's  lenders were  paid-in-full  by the Motel 6 Operator and its assignees
pursuant to the terms of the Purchase Option.

      During 1997, 1996 and 1995 interest  expense  totaled $1.5 million,  $19.1
million and $20.1 million, respectively.


                                       18
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(3) INCOME TAXES

      Pursuant  to SFAS  109,  the  Company  had no  deferred  tax  assets as of
December 31, 1997  compared to $30.3  million as of December 31, 1996.  Deferred
income taxes  reflect the net tax effects of temporary  differences  between the
carrying amounts of assets and liabilities for financial  reporting purposes and
the  amounts  used  for  income  tax  purposes.  Significant  components  of the
Company's deferred tax assets and liabilities are as follows:

                                                                (in thousands)
                                                               1997        1996
                                                               ----        ----
Deferred tax assets:
    Prior years' bases differences ......................    $   --      $21,038
    Contingent liability provision ......................        --        1,107
    Deferred loan fees ..................................        --        1,008
    Write-down of land held for sale ....................        --        1,058
    Net operating loss carry-forward ....................        --        8,493
    Deferred Basic Rent .................................        --        1,400
    Other ...............................................        --           72
                                                             --------    -------
       Total deferred tax assets ........................        --       34,176

Deferred tax liabilities:
    Tax depreciation in excess of book depreciation .....        --        3,490
    Tax loss over book loss on asset sale ...............        --           44
    Capitalized interest ................................        --          322
                                                             --------    -------
       Total deferred tax liabilities ...................        --        3,856

Net deferred tax assets .................................    $   --      $30,320
                                                             ========    =======

      As a result  of the sale of the  Company's  motel  assets  to the  Motel 6
Operator and its assignees,  the Company incurred  significant federal and state
tax liabilities that were paid during 1997.  After  recognizing net deferred tax
assets, the federal and state taxes paid during 1997 were $12.0 million and $3.6
million, respectively.

(4) COMMITMENTS AND CONTINGENCIES

Leases

      As a result of the sale of the  Company's  motels to the Motel 6  Operator
and its assignees,  the Motel 6 Operator and its assignees assumed the Company's
eight  lease  agreements  involving  motel land and  buildings.  The  Company is
currently only a party to the lease agreement  involving its  headquarters.  The
following  is a schedule by years of future  minimum  rental  payments  required
under the headquarters' office lease:


                                       19
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                       (in thousands)
                                                         Operating
                                                           Leases
                                                           ------
           1998 .....................................     $   59
           1999......................................         --
           2000......................................         --
           2001......................................         --
           2002......................................         --
           Thereafter................................         --
                                                          ------
           Total minimum lease payments..............     $   59
                                                          ======

      The Company's headquarters are located in Santa Barbara,  California.  The
Company  began  leasing  its office  space from an  independent  third  party in
October  1993.  The  original  term of the lease is for five years with  current
minimum rent payments of $75,145 per annum.

Employment Agreements

      Mr.  Shaughnessy  is employed  to manage the Company on a part-time  basis
pursuant to an Executive  Employment  Agreement (the  "Shaughnessy  Agreement").
During  October  1992,  Mr.  Shaughnessy's  salary was reduced from  $518,000 to
$200,000 annually,  but he continues to receive  substantially the same employee
benefits as he previously received and is entitled to receive all other benefits
which have generally been granted to senior executives of the Company.

      Mr. Shaughnessy was granted Options and related Stock Appreciation Rights,
which were fully vested at April 30, 1993, to purchase 19,000 common shares. The
options were  exercisable  for a period of ten years.  The option price of $7.50
per  share was the fair  market  value of a share on the date of the  grant.  On
February 10, 1997 Mr. Shaughnessy  exercised his stock  appreciation  rights for
these  options.  The market value on the  exercise  date was $29.50 per share of
common stock.

      The Company has three other Company employees  managing the winding-up and
liquidation  activities.  The Company  will pay these  employees  their  current
salaries through December 31, 1999.

(5) EMPLOYEE STOCK OPTION PLAN

      Under the  Company's  employee  stock  option  plan,  options to acquire a
maximum of 63,333  common  shares were granted to employees of the Company at an
exercise  price  not less than the fair  market  value of a Share on the date of
grant.  During  1997,  as a result of the sale of the  Company's  motels and the
result of agreements  entered into with the Company's  employees  (regarding the
early vesting of all stock options if the Master Lease  Agreement Lease Purchase
Option  was  exercised),  all  employee  stock  options  were  fully  vested and
exercised.  The market  value of the stock  options when  exercised  ranged from
$27.875 to $29.50 per share.  At  December  31,  1997,  1996 and 1995 there were
outstanding  options  for  the  purchase  of  -0-,  62,333  and  63,333  shares,
respectively, at prices ranging from $2.25 to $22.50 per share.


                                       20
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                                 Employee
                                                               Stock Options
                                                               -------------
       Outstanding, December 31, 1996........................      62,333
          Granted............................................        --
          Cancelled..........................................        --
          Exercised, at prices ranging from
              $2.25 to $22.50................................      62,333
                                                                   ------
       Outstanding, December 31, 1997........................        --
                                                                   ======
       Exercisable, December 31, 1997........................        --
                                                                   ======

      The 62,333  outstanding  options  included 22,600 with stock  appreciation
rights.  One  thousand  options  were  exercised  in 1996  and no  options  were
exercised during 1995.

(6) RESTRICTED STOCK PLAN

      Restricted  Stock  awards  of a total of 40,000  shares  of the  Company's
Common  Stock were  granted by the Board of Directors on October 11, 1995 to the
Company's  employees.  During  1997,  as a result  of the sale of the  Company's
motels,  all  restrictions  were removed from the restricted stock and the stock
was issued to the Company's employees.  The market value of the restricted stock
when the restrictions were removed was $27.875 per share.  During 1997, 1996 and
1995,  $913,000,  $213,000  and $-0-,  respectively,  was  deducted  as  expense
relating to the plan.

(7) VACANT LAND

      Since  January  30,  1997  the  Company  has sold  for  $910,000  its five
unimproved land parcels which were purchased for the construction of new motels.

(8) LEGAL PROCEEDINGS

      From  time to time the  Company  is a party  to  lawsuits  arising  in the
ordinary course of its business.  Substantially  all of the claims made in these
lawsuits  (other than any claims for punitive  damages made in certain  actions)
are covered by the Company's insurance  policies.  Management believes that such
lawsuits  arising in the  ordinary  course of business  will not have a material
adverse effect on the financial statements of the Company.

(9) FAIR VALUE OF FINANCIAL INSTRUMENTS

      The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate the
value:

      Cash. The carrying amount is actual cash value.

      The fair values of the Company's  financial  instruments are summarized as
follows:


                                       21
<PAGE>

                                ALLSTAR INNS INC.

                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                               (in thousands)
                                 December 31, 1997          December 31, 1996
                               ---------------------      ---------------------
                              Carrying    Estimated      Carrying    Estimated
                               Amount     Fair Value      Amount     Fair Value
                               ------     ----------      ------     ----------
Cash and cash equivalents     $  4,069    $  4,069       $ 15,131     $ 15,131
Receivable from Motel 6           --          --            3,620        3,620
Long-term debt                    --          --          204,105      200,252


                                       22
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Allstar Inns Inc.

We have audited the statement of net assets in  liquidation of Allstar Inns Inc.
as of December 31, 1997, and the related  statements of changes in net assets in
liquidation,  stockholders' equity and cash flows for the year then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

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

As described in Note 1 to the financial statements,  the stockholders of Allstar
Inns Inc.  approved a plan of  liquidation on May 8, 1997, and the Company began
liquidation  shortly  thereafter.  As a result, the Company changed its basis of
accounting  for periods  after May 8, 1997,  from the going concern basis to the
liquidation basis.

In our opinion,  the financial  statements referred to above presents fairly, in
all material respects,  the net assets in liquidation of Allstar Inns Inc. as of
December 31, 1997, and the changes in net assets in  liquidation  and cash flows
for the period then ended,  in conformity  with  generally  accepted  accounting
principles.

                                                MCGOWAN GUNTERMANN

March 17, 1998
Santa Barbara, CA


                                       23
<PAGE>

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We have  audited  the  accompanying  balance  sheet of Allstar  Inns Inc.  as of
December 31,  1996,  and the related  statements  of  operations,  shareholders'
deficit  and cash flows for each of the two years in the period  ended  December
31, 1996.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Allstar Inns Inc. at December
31, 1996,  and the results of its  operations and its cash flows for each of the
two years in the period ended  December 31, 1996, in conformity  with  generally
accepted accounting principles.

                                                     ERNST & YOUNG LLP

Woodland Hills, California
January 24, 1997


                                       24
<PAGE>

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

      In light of the fact that the  Company  is  presently  in the  process  of
liquidating  and  dissolving,  the  Company  determined  to replace  its ongoing
accounting  firm,  Ernst & Young  LLP,  with a local  accounting  firm,  McGowan
Guntermann,  to conduct  the  Company's  final  audit for the fiscal  year ended
December 31, 1997,  on the basis that it would be more  economically  prudent to
engage  a  local   accountant  for  such  audit  under  the  Company's   present
circumstances.  The new  accountant was engaged on March 10, 1998 to conduct the
Company's  audit for the fiscal year ended December 31, 1997.  Reference is also
made to the current  report on Form 8-K filed with the  Securities  and Exchange
Commission on March 18, 1998, which report is hereby incorporated by reference.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

      The Directors and  Executive  Officers of the Company,  as of December 31,
1997,  are as set forth below.  Brief  summaries of the  Directors and Officers'
respective  business  experience and certain other  information are as set forth
following the table.

               Name               Age                    Position(s)
               ----               ---                    -----------
      Daniel R. Shaughnessy       70            Director, Chairman of the Board
                                                and Chief Executive Officer

      Edward J. Gallagher         61            Director, Vice Chairman and
                                                Principal Accounting Officer

      Edward A. Paul              56            Vice President and Principal
                                                Financial Officer

      Joseph Martin, Jr.          82            Director

      Mr. Shaughnessy has been Chairman of the Board and Chief Executive Officer
of the Company's predecessors since April 1983.

      Mr.  Gallagher  has been Vice Chairman and  Principal  Accounting  Officer
since  April 1994 and a Director  since June 4, 1997.  During the period  August
1992 to April 1994 he  participated  in the  transition  of Allstar  Inns to the
Motel 6 Management Contract.  From May 1983 thru July 1992, he was President and
Chief Operating Officer of the Company's predecessors.

      Mr. Paul has been Vice President, Treasurer and Assistant Secretary of the
Company's predecessors since April 1983 and has held the additional positions of
Secretary and Principal Financial Officer of the Company since August 1992.

      Mr.  Martin  served  as a  Director  of  the  Company  and  the  Company's
predecessors since 1983, resigned in 1993 and rejoined the Company as a Director
on June 4, 1997.

ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Summary of Compensation

      The  following  Summary  Compensation  Table  sets  forth the  annual  and
long-term  compensation  for services in all  capacities to the Company paid (or
accrued) by the Company  during each of the last three fiscal years to the Chief
Executive  Officer,  Vice  Chairman  and the  Vice  President  -  Secretary  and
Treasurer,  who were the only officers  whose annual  salary and bonus  exceeded
$100,000 during 1997 (the "Named Executive Officers").


                                       25
<PAGE>

                                     TABLE I

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                 ANNUAL COMPENSATION                       LONG-TERM COMPENSATION (3)
                                     --------------------------------------------     ------------------------------------
                                                                   Other Annual      Restricted Stock  Securities Underlying
Name & Principal Position   Year     Salary($)(4)    Bonus($)     Compensation(1)     Grant(s)($)(2)       Options/SARs(#)
-------------------------   ----     ------------    --------     ---------------     --------------       ---------------
<S>                         <C>        <C>          <C>                <C>               <C>                     <C>
Daniel R. Shaughnessy       1997       200,000           --            67,038               --                    --
Chief Executive Officer     1996       200,000           --            76,701               --                    --
                            1995       200,000      1,000,000          70,450            400,000                  --

Edward J. Gallagher         1997       140,000           --            18,613               --                    --
Vice Chairman               1996       140,000           --            18,241               --                    --
                            1995       140,000        100,000          15,723            100,000                 6,733

Edward A. Paul              1997        87,000           --             1,125               --                    --
Vice President -            1996        87,000           --             1,069               --                    --
Secretary & Treasurer       1995        79,833         50,000           2,162             60,000                 3,000
</TABLE>

----------
(1)   For Mr.  Shaughnessy,  Other Annual  Compensation  includes the value of a
      company  automobile and life insurance in the amounts of $625 and $66,413,
      respectively, for the year 1997.

      For Mr.  Gallagher,  Other  Annual  Compensation  includes  the value of a
      company  automobile and life insurance in the amounts of $625 and $17,988,
      respectively, for the year 1997.

      For Mr. Paul, Other Annual Compensation is life insurance in the amount of
      $1,125 for the year 1997.

(2)   The  number of shares  and value of the  restricted  stock  granted to all
      Company employees on the date of grant, as determined by the closing price
      on the OTC Bulletin Board,  was 40,000 and $800,000.  The number of shares
      and value of restricted  stock  holdings of each of the named  officers on
      the date of grant, and May 8, 1997, the date the employees  received their
      unrestricted stock, were 20,000,  $400,000 and $557,500 (Mr. Shaughnessy);
      5,000,  $100,000  and $139,375  (Mr.  Gallagher);  and 3,000,  $60,000 and
      $83,625 (Mr. Paul).

(3)   On January 30, 1997 the Motel 6 Operator and its  assignees  purchased all
      the  Company's  motels  under  the  terms of the  Master  Lease  Agreement
      Purchase  Option.  As  a  result  of  this  transaction,   the  forfeiture
      conditions of the Restricted Stock were waived.

(4)   Does not include severance payments for 1998.

Option Grants in Last Fiscal Year

      No stock option grants were made during fiscal 1997. No Stock Appreciation
Rights ("SARs") were granted in fiscal 1997.

Option Exercises

      Table II sets forth  information  regarding stock options exercised during
fiscal year 1997 by each of the Named Executive Officers.


                                       26
<PAGE>

                                    TABLE II

               Aggregated Option/SAR Exercises in Last Fiscal Year
                      and Fiscal Year-End Option/SAR Values

<TABLE>
<CAPTION>
                                                                 NUMBER OF SECURITIES           VALUE OF UNEXERCISED
                                                                UNDERLYING UNEXERCISED          IN-THE-MONEY OPTIONS
                                                                 OPTIONS AT FY-END (1)               AT FY-END (1)
                                                             ----------------------------    ---------------------------
                                                  Value
                             Shares Acquired    Realized     Exercisable   Unexercisable     Exercisable   Unexercisable
        Name                on Exercise(#)(1)    ($) (3)         (#)            (#)              ($)            ($)
---------------------       -----------------   --------     -----------   -------------     -----------   -------------
<S>                             <C>              <C>               <C>           <C>              <C>            <C>
Daniel R. Shaughnessy             --                --             --            --               --             --

Edward J. Gallagher             19,333 (2)       555,632           --            --               --             --

Edward A. Paul                  10,400 (2)       289,900           --            --               --             --
</TABLE>

----------
(1)   On January 30, 1997 the Motel Operator and its assignees  purchased all of
      the  Company's  motels  under  the  terms of the  Master  Lease  Agreement
      Purchase Option. As a result of this transaction,  all Stock Option grants
      became fully vested.

(2)   On May 8, 1997 Mr.  Gallagher  and Mr. Paul  exercised  all of their stock
      option grants which were fully vested and fully paid.

(3)   The value realized equals the market value of the common stock acquired on
      the date of exercise.

The table  below  sets forth the SAR  Exercise  position  of the named  officers
during fiscal year 1997:

<TABLE>
<CAPTION>
                                                SAR EXERCISES IN FISCAL YEAR 1997
                          ---------------------------------------------------------------------------------
                                                              Number of             Value of Unexercised
                                                         Unexercised Options        In-The-Money Options
                          Option/                    --------------------------  --------------------------
                            SAR           Value
                          Exercise       Realized    Exercisable  Unexercisable  Exercisable  Unexercisable
         Name               (#)            ($)           (#)           (#)           ($)           ($)
---------------------     --------       --------    -----------  -------------  ------------ -------------
<S>                       <C>            <C>              <C>          <C>             <C>         <C>
Daniel R. Shaughnessy     19,000 (4)     418,000          --           --              --          --

Edward J. Gallagher          --             --            --           --              --          --

Edward A. Paul               --             --            --           --              --          --
</TABLE>

(4)   On February  10, 1997 Mr.  Shaughnessy  exercised  his SAR with respect to
      19,000  shares  pursuant  to terms of his  stock  option  agreement  dated
      October 6, 1992.  The  exercise  was at the average of the closing bid and
      asked price  ($29.50) as furnished by NASDAQ Over-  The-Counter  Market on
      February 10, 1997.  The SAR exercise  resulted in a payment of $418,000 to
      Mr. Shaughnessy.

Compensation of Directors

      During 1997,  Director Joseph Martin, Jr. received $14,000 of compensation
for his services rendered which included cost of attending Board meetings.


                                       27
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information as to (i) those persons
known to the Company to be beneficial  owners of more than 5% of the outstanding
Common  Stock  and (ii) each of the  Company's  directors,  the Named  Executive
Officers and all directors and executive  officers as a group as of December 31,
1997. The percentage  ownership figures set forth in the table are calculated on
the basis of the number of shares of Common Stock outstanding as of December 31,
1997.  As of  December  31,  1997  there  were 609  stockholders  of record  and
1,047,443  shares of common stock  outstanding.  Beneficial  ownership  has been
calculated  in  accordance  with Rule  13d-3  promulgated  under the  Securities
Exchange  Act of  1934,  as  amended  (the  "Exchange  Act").  Unless  otherwise
indicated,  all  shares  are owned  directly  and the owner has sole  voting and
investment power with respect thereto.


                                       28
<PAGE>

                                                   Common Stock of Company
                                               -------------------------------
                                                Number                Percent
Name and Address of Beneficial Owner           of Shares              of Class
------------------------------------           ---------              --------
SHI Partners, L.P.                             128,058 (1)              12.2%
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue, 10th Floor
New York, New York 10017

Gotham Partners, L.P.                          149,363                  14.3%
110 E. 42nd Street, 18th Floor
New York, New York  10017

First Chicago Investment Corporation            79,646                   7.6%
c/o:  Madison Dearborn Partners, Inc.
Three First National Plaza, Suite 1330
Chicago, Illinois 60670

Meridian Properties, No. Five                   68,267                   6.5%
(USA) Ltd.
c/o Enpro International, Inc.
152 W. 57th Street, 58th Floor
New York, New York 10019

SHI, Inc.                                       57,255 (1)               5.5%
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue, 10th Floor
New York, New York 10017

The Rainbow Fund, L.P.                          54,019                   5.2%
888 West Sixth Street, 10th Floor
Los Angeles, California  90017

Daniel R. Shaughnessy                           58,861                   5.6%
200 East Carrillo Street, Suite 300
Santa Barbara, California 93101

Edward J. Gallagher                             27,506                   2.6%
200 East Carrillo Street, Suite 300
Santa Barbara, California 93101

Edward A. Paul                                  13,818                   1.3%
200 East Carrillo Street, Suite 300
Santa Barbara, California 93101

All directors and executive officers           100,185                   9.6%
as a group (3 persons)

----------
(1)   Warburg,  Pincus & Co.  ("WP & Co.")  owns all of the  outstanding  voting
      stock of SHI, Inc. and is the sole general  partner of SHI Partners,  L.P.
      WP & Co., as the sole general partner of Warburg, Pincus Associates,  L.P.
      ("Associates"),   has  a  21%  interest  in  the  profits  of  Associates.
      Associates owns 7,631 shares of Common Stock  (approximately  0.7%) of the
      Company.


                                       29
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      None.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(a)   1. Financial Statements

      The  financial  statements  of the  Company as set forth  under Item 8 are
filed as part of this Report.

      2.    Financial Statement Schedules

      All  financial   statement   schedules  are  omitted  since  the  required
information  is not present or is not present in amounts  sufficient  to require
submission of the schedule,  or because the information  required is included in
the consolidated financial statements and notes thereto.

      3.    Exhibits

      See the Exhibit Index included in paragraph (c) below.

(b)   Reports on Form 8-K

      None.

(c)   Exhibits

      The exhibits listed below are filed with this Report.

 (7)    3.1       Certificate of Incorporation of Allstar Inns Inc.

 (7)    3.2       By Laws of Allstar Inns Inc.

 (8)    3.3       Certificate of Merger dated November 11, 1993.

 (8)    4.1       Form  of  certificate  representing  the  Registrant's  Common
                  Stock.

 (2)   10.1       Executive  Employment  Agreement,  dated April 26, 1983 by and
                  between Shaughnessy Holdings, Inc. and Daniel R. Shaughnessy.

 (1)   10.2       Form of  Indemnification  Agreement  by and among  Shaughnessy
                  Holdings, Inc. and its officers.

 (1)   10.3       Form of  Indemnification  Agreement  by and among  Shaughnessy
                  Holdings, Inc. and its directors.

 (3)   10.4       Form of Deed of Trust, Financing Statement, Security Agreement
                  and Fixture  Filing (with  Assignment  of Rents and Leases) by
                  and among Allstar Inns Operating  L.P., as Trustor,  Coast Fed
                  Services,  as Trustee, and Coast Savings and Loan Association,
                  as Beneficiary.

 (3)   10.5       First  Amendment  to  Promissory  Note,  Deed  of  Trust,  and
                  Assignment  of  Lessor's  Interest  in  Leases,  dated  as  of
                  December 21, 1987, by and among Allstar Inns  Operating  L.P.,
                  and Coast Savings and Loan Association.


                                       30
<PAGE>

 (3)   10.6       Form  of  Security  Agreement  by  and  between  Allstar  Inns
                  Operating L.P. and Coast Savings and Loan Association.

 (3)   10.7       License of Tradename and Logo,  dated as of December 21, 1987,
                  by and  between  Allstar  Inns  Operating  L.P.  and Coast Fed
                  Mortgage Corporation.

 (4)   10.8       Form of Mortgage, Deed of Trust, Assignment of Rents, Security
                  Agreement, Financing Statement and Fixture Filing by and among
                  Allstar Inns Operating L.P., as Trustor, Ticor Title Insurance
                  Company of  California,  as  Trustee,  and Wells  Fargo  Bank,
                  National Association, as Beneficiary.

 (4)   10.9       Form of Deed of Trust, Financing Statement, Security Agreement
                  and Fixture  Filing (with  Assignment  of Rents and Leases) by
                  and among Allstar Inns Operating L.P., as Trustor, Ticor Title
                  Insurance  Company of  California,  as Trustee,  and Coast Fed
                  Mortgage Corporation, as Beneficiary.

 (4)  10.10       Form  of  Security  Agreement  by  and  between  Allstar  Inns
                  Operating L.P. and Coast Fed Mortgage Corporation.

 (4)  10.11       First  Amendment to Security  Agreement and First Amendment to
                  Assignment  of  Operating  Agreements  and  Warranties  by and
                  between Allstar Inns Operating L.P. and Coast Savings and Loan
                  Association.

 (4)  10.12       Form of Consent of  Guarantor  and  Agreement  by and  between
                  Allstar Inns, L.P. and Coast Savings and Loan Association.

 (2)  10.13       Allstar  Inns Inc.  Employee  Stock  Option  Plan  (1990),  as
                  amended.

 (2)  10.14       Form  of  Allstar   Inns  Inc.   Non-Qualified   Stock  Option
                  Agreement.

 (6)  10.15       Amended and Restated  Credit  Agreement,  dated as of July 27,
                  1992, by and among Allstar Inns, L.P.,  Allstar Inns Operating
                  L.P., and Wells Fargo Bank, N.A.

 (6)  10.16       Loan Modification Agreement, dated as of July 28, 1992, by and
                  among Allstar Inns  Operating  L.P.,  Allstar  Inns,  L.P. and
                  Coast Federal Bank.

 (6)  10.17       Texas Loan Modification  Agreement,  dated as of May 28, 1992,
                  by and between  Allstar Inns  Operating L.P. and Great Western
                  Bank.

 (6)  10.18       California Loan  Modification  Agreement,  dated as of May 28,
                  1992,  by and between  Allstar Inns  Operating  L.P. and Great
                  Western Bank.

 (6)  10.19       Credit  Agreement,  dated as of August 3,  1992,  by and among
                  Allstar Inns,  L.P.,  Allstar Inns  Operating L.P. and Motel 6
                  Financial Services, L.P.

 (2)  10.20       Executive  Employment  Agreement  dated  August  6,  1992,  as
                  amended, granted to Daniel R. Shaughnessy.

 (2)  10.21       Allstar Inns Inc. Restricted Stock Plan.

 (2)  10.22       Form of Allstar  Inns Inc.  Restricted  Stock Plan  Restricted
                  Stock Award Agreement.

 (9)  10.23       Master  Lease  Agreement  dated as of  January  1, 1995  among
                  Allstar Inns Inc.,  Motel 6 Operating L.P.,  Motel 6 G.P. Inc.
                  and IBL Limited, Inc.


                                       31
<PAGE>

(10)  10.24       Loan Modification Agreement, dated as of September 29, 1995 by
                  and between Allstar Inns Inc. and Wells Fargo Bank, N.A.

(10)  10.25       Amendment to Credit  Agreement,  dated  September 28, 1995, by
                  and between Motel 6 Financial Services,  L.P. and Allstar Inns
                  Inc.

(11)  10.26       Plan of Complete  Liquidation  and Dissolution of Allstar Inns
                  Inc.

(12)   16.1       Letter  from Ernst & Young LLP to the  Commission  dated March
                  12, 1998.

       23.1       Consent of Independent Accountants.

       27.1       Financial Data Schedule.

----------
(1)   Incorporated  herein by reference to an exhibit  previously filed with the
      Registration  Statement on Form S-1 (Registration No. 33-12223) filed with
      the  Securities  and Exchange  Commission  on February 25, 1987 by Allstar
      Inns, L.P.

(2)   Incorporated  herein by reference to an exhibit  previously filed with the
      Registration  Statement  on Form S-8 (File No.  333-00432)  filed with the
      Securities and Exchange Commission on January 9, 1996 by Allstar Inns Inc.

(3)   Incorporated  herein by reference to an exhibit  previously filed with the
      Form  10-K  (File No.  1-9415)  filed  with the  Securities  and  Exchange
      Commission for the period ended December 31, 1987 by Allstar Inns, L.P.

(4)   Incorporated  herein by reference to an exhibit  previously filed with the
      Form  10-K  (File No.  1-9415)  filed  with the  Securities  and  Exchange
      Commission  for the fiscal year ended  December 31, 1988 by Allstar  Inns,
      L.P.

(5)   Incorporated  herein by reference to an exhibit  previously filed with the
      Form  10-K  (File No.  1-9415)  filed  with the  Securities  and  Exchange
      Commission  for the fiscal year ended  December 31, 1989 by Allstar  Inns,
      L.P.

(6)   Incorporated  herein by reference to an exhibit  previously filed with the
      Registration  Statement on Form S-1 (Registration No. 33-43509) filed with
      the Securities and Exchange Commission on July 17, 1992.

(7)   Incorporated  herein by reference to an exhibit  previously filed with the
      Registration  Statement on Form S-4 (Registration No. 33-53654) filed with
      the Securities and Exchange Commission on September 2, 1993.

(8)   Incorporated  herein by reference to an exhibit  previously filed with the
      Form 10-K  (File No.  0-22930)  filed  with the  Securities  and  Exchange
      Commission on March 18, 1994.

(9)   Incorporated  herein by reference to an exhibit  previously filed with the
      Form 10-K  (File No.  0-22930)  filed  with the  Securities  and  Exchange
      Commission on March 30, 1995.

(10)  Incorporated  herein by reference to an exhibit  previously filed with the
      Form 10-K  (File No.  0-22930)  filed  with the  Securities  and  Exchange
      Commission on March 18, 1996.

(11)  Incorporated  herein by reference  to Exhibit A previously  filed with the
      1997 Proxy Statement filed with the Securities and Exchange  Commission on
      March 19, 1997.

(12)  Incorporated  herein by reference to an exhibit  previously filed with the
      Form 8-K  (File  No.  0-22930)  filed  with the  Securities  and  Exchange
      Commission on March 18, 1998.


                                       32
<PAGE>

                                   SIGNATURES

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

                                        ALLSTAR INNS INC.
                                        (Registrant)

                                        By:   /s/ Daniel R. Shaughnessy
                                              -------------------------------
                                              Daniel R. Shaughnessy
                                              Chairman of the Board and
                                              Chief Executive Officer

Date:  March 18, 1998

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

         Signature                                     Title
         ---------                                     -----
 /s/ Daniel R. Shaughnessy                   Chairman of the Board and
----------------------------                 Chief Executive Officer
   Daniel R. Shaughnessy

  /s/ Edward J. Gallagher                    Director, Vice Chairman and
----------------------------                 Principal Accounting Officer
   Edward J. Gallagher

    /s/ Edward A. Paul                       Vice President and Principal
----------------------------                 Financial Officer
      Edward A. Paul

 /s/ Joseph Martin, Jr.                      Director
----------------------------
    Joseph Martin, Jr.

Date:  March 18, 1998


                                       33