UNITED STATES
                       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, 1996
                                       OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to               .

                          Commission File Number 1-9496

                          BODDIE-NOELL PROPERTIES, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                        56-1574675
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

3710 One First Union Center, Charlotte, NC                      28202-6032
    (Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code  704/333-1367

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

Title of each class                   Name of each exchange on which registered:

Common Stock, Par Value $.01 per share               American Stock Exchange

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

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

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

         The aggregate  market value of the voting stock held by  non-affiliates
of the Registrant at March 14, 1997 was approximately $35,328,000.
         The number of shares of Registrant's  Common Stock outstanding on March
14, 1997 was 3,102,983.

                       DOCUMENTS INCORPORATED BY REFERENCE
         Portions  of the  1997  Proxy  Statement  for the  Registrant's  Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
within  120 days  after  the end of the year  covered  by this  Form  10-K,  are
incorporated  by  reference  in Part III,  Items 10, 11, 12 and 13, of this Form
10-K.

Index to Exhibits at Page 41                          Total number of Pages 44

Filed via EDGAR ___


                                       1
<PAGE>

                          BODDIE NOELL PROPERTIES, INC.
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

Item No.           FINANCIAL INFORMATION                                                 Page No.
    <S>           <C>                                                                        <C>
                   PART I
      1            Business                                                                    3
      2            Properties                                                                  5
      3            Legal Proceedings                                                           7
      4            Submission of Matters to a Vote of Security Holders                         7
      X            Executive Officers of the Registrant                                        7

                   PART II
      5            Market for Registrant's Common Equity and Related Stockholder               9
                   Matters
      6            Selected Financial Data                                                    10
      7            Management's Discussion and Analysis of Financial Condition                11
                   and Results of Operations
      8            Financial Statements and Supplementary Data                                17
      9            Changes in and Disagreements With Accountants on Accounting                17
                   and Financial Disclosure

                   PART III
     10            Directors and Executive Officers of the Registrant                         18
     11            Executive Compensation                                                     18
     12            Security Ownership of Certain Beneficial Owners and Management             18

     13            Certain Relationships and Related Transactions                             18

                   PART IV
     14            Exhibits, Financial Statement Schedules, and Reports on Form               19
                   8-K

</TABLE>

                                       2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

Company Profile

Boddie-Noell Properties, Inc. (the "Company") is a self-advised and self-managed
equity real estate  investment  trust ("REIT").  The Company,  formerly known as
Boddie-Noell  Restaurant Properties,  Inc., was formed in 1987 and currently has
3,102,983   shares  of  common  stock   outstanding  and   approximately   5,000
shareholders  (including  beneficial owners). The Company's shares are listed on
the American  Stock  Exchange,  trading  under the symbol  "BNP".  Its executive
offices are located at 3710 One First Union Center,  Charlotte,  North  Carolina
28202-6032 (704-333-1367).

History and Development of Boddie-Noell Properties, Inc.

From its inception through 1992 the Company's investment strategy was limited to
the  ownership  of 47  restaurant  properties  leased  on a triple  net basis to
Boddie-Noell Enterprises,  Inc. ("Enterprises"),  a Hardee's franchisee.  During
this  period  the  Company  operated  as an  externally  advised  REIT  with all
management  and  administrative  functions  being  performed  by an affiliate of
Enterprises  under  an  advisory  contract.  These  investments  provided  for a
relatively  stable  record  of  revenue  and cash  flow.  In  order  to  enhance
shareholder value and provide for growth in funds from operations  ("FFO"),  the
Company began in 1993 to diversify its investments into multi-family residential
properties.

In June 1993 the Company purchased its first apartment property,  Paces Commons,
a  336-unit  apartment  community  in  Matthews,  North  Carolina  (a  suburb of
Charlotte).  In June 1994 the Company acquired  Oakbrook,  a 162-unit  apartment
community in Charlotte,  North Carolina.  In October 1994 it acquired BT Venture
Corporation  ("BTVC"),  an integrated  real estate  management,  development and
acquisition company that owned one apartment  community  (Latitudes) and managed
12 additional  apartment  communities  (including  two owned by the Company) and
three  retail  shopping  centers.  Latitudes is a 448-unit  apartment  community
located in  Virginia  Beach,  Virginia.  In December  1994 the Company  acquired
Harris Hill, a 184-unit  apartment  community in Charlotte,  North Carolina.  In
April 1996 the Company acquired Paces Village, a 198-unit apartment community in
Greensboro, North Carolina.

Current Operations

The  Company now owns five  apartment  communities  containing  a total of 1,328
apartments and 47 restaurant properties.  Through its unconsolidated subsidiary,
BNP  Management,   Inc.,  the  Company  manages  an  additional  nine  apartment
communities  containing a total of 1,713  apartments  and two  shopping  centers
containing a total of 113,800 square feet. All of the properties presently owned
or managed by the  Company  are  located  in the  states of North  Carolina  and
Virginia, with multi-family  residential operations in the North Carolina cities
of Raleigh,  Durham,  Cary,  Chapel Hill,  Greensboro and Charlotte,  as well as
Virginia Beach, Virginia.

The Company has 86 employees, including administrative,  management, accounting,
legal, acquisitions,  development,  property management, leasing and maintenance
personnel, and operates as a self-advised and self-managed REIT.

Each  apartment  community is operated by an on-site  manager  assisted by staff
trained by the Company in sales, management,  accounting,  maintenance and other
procedures.  On-site  managers report directly to property  managers who operate
from the  Company's  corporate  offices.  This flat  organization  provides  for
efficient staffing levels,  reduces overhead expenses and enables the Company to
be responsive to the needs of residents and on-site employees.  Employees of the
Company  supervise all  renovation  and repair  activities,  which are generally
completed by outside contractors.

                                       3
<PAGE>

Restaurant  properties  are  leased  on a triple  net  basis to  Enterprises,  a
privately held company,  which is the second largest Hardee's  franchisee in the
United States with  approximately 360 stores. The Company's lease agreement with
Enterprises  (the "master  lease"),  as amended in December  1995, has a primary
term expiring December 2007, grants  Enterprises three five-year renewal options
and provides  for rent equal to 9.875  percent of  restaurant  sales as defined,
subject to a minimum annual rent of $4,500,000 per year.  Under the terms of the
master  lease,  Enterprises  is  responsible  for all aspects of the  operation,
maintenance and upkeep of the restaurant properties.

Business Strategy

Building upon the  acquisition of its five apartment  communities  and BTVC, the
Company intends to continue to invest in additional apartment communities in the
southeastern United States. The Company will selectively consider  opportunities
for   development  of  new  apartment   communities   and  the  acquisition  and
rehabilitation  of older  apartment  communities.  Management  believes that its
development  and  redevelopment  experience  will enable it to build  additional
apartment  communities and to rehabilitate  existing  communities  when economic
conditions and available capital make such opportunities attractive.

In evaluating potential properties for acquisition, the Company will consider
such factors as: 
- the current and  anticipated  cash flow of the  property, its adequacy to meet
operational needs and other obligations, and its impact on the Company's ability
to pay dividends;
- the geographic  area  and  demographic  profile;
- the  location,  construction quality, condition and design of the property;
- the potential for increasing cash flow by means of increasing rental rates and
reducing operating expenses;  
- the potential for capital  appreciation;
- the growth,  tax and regulatory  environment of the community in which the
property is located;  
- occupancy and demand for the property; 
- and prospects for eventual sale or refinancing.
Generally  an  apartment  property  will be  acquired  only where the  operating
history indicates that the property will contribute immediately to the cash flow
of the Company and there is a strong likelihood of increasing cash flow.

Prior  to  acquiring  its  first  apartment  community,  the  Company's  capital
requirements  were minimal as all capital  expenses  related to the  restaurants
were  borne by  Enterprises  under the terms of the  master  lease.  In order to
acquire  BTVC and its five  apartment  communities,  the  Company  has  incurred
additional debt and issued additional common stock. The additional debt consists
of mortgages secured by the acquired apartment communities and draws against the
Company's  credit  lines.  In order  for the  Company  to  continue  to  acquire
apartment properties,  it is essential that it obtain additional equity capital.
The Company is actively  exploring  available  sources of equity capital.  It is
likely  that the Company  will incur  additional  long-term  debt as part of any
apartment  acquisitions.  While  short-term  variable  rate  debt may be used to
facilitate an acquisition,  the preferred  permanent financing will be long-term
and fixed rate.

The Company has elected to be taxed as a REIT under  Sections 856 through 860 of
the Internal  Revenue Code of 1986,  as amended.  As such the Company  generally
will not be subject to federal or state  income  taxes on net income.  REITs are
subject to a number of organizational and operational requirements,  including a
requirement that they currently distribute at least 95 percent of their ordinary
taxable  income as dividends.  The Company  intends to pay dividends  quarterly,
expects that these  dividends will  substantially  exceed the 95 percent taxable
income test, and anticipates  that all dividends will be paid from current funds
from operations.

In addition to the 95 percent  taxable  income test, the Company is subject to a
"non-qualifying" income test which requires that no more than 5 percent of total
revenue come from sources deemed to be "non-qualifying."  Failure to comply with
this  requirement  may result in the loss of the Company's REIT status.  Revenue
from third-party  property  management  contracts  assumed at the acquisition of
BTVC  in  1994  is  considered  to be  non-qualifying  income.  To  ensure  that
non-qualifying income did not exceed 5 percent of its total revenue, in May 1995
the Company transferred the third-party  management  contracts to a newly formed
unconsolidated  taxable  subsidiary,  BNP  Management,  Inc.  This  structure is
currently being used by a number of other REITs.

                                       4
<PAGE>

The Company  generally  expects to meet its  short-term  liquidity  requirements
through net cash provided by operations and  utilization  of credit  facilities.
Management  believes that net cash provided by operations  is, and will continue
to be, adequate to meet both operating  requirements and payment of dividends by
the Company in accordance with REIT requirements in both the short- and the long
term.  The Company  anticipates  funding  its  acquisition  activities,  if any,
primarily by using short-term  credit  facilities or secured long-term debt. The
Company expects to meet certain of its long-term liquidity requirements, such as
scheduled  debt  maturities  and repayment of  short-term  financing of possible
property  acquisitions,  through long-term secured and unsecured  borrowings and
the issuance of debt securities or additional  equity securities of the Company.
The Company  believes  that it has  sufficient  resources to meet its short- and
long-term liquidity requirements.


ITEM 2.  PROPERTIES

The Company owns five apartment communities and 47 restaurant properties. All of
the  Company's  properties  are  located  in the  states of North  Carolina  and
Virginia.  The properties  are held subject to loans,  discussed in Notes to the
Financial Statements included in Item 14 of this Annual Report.

Apartment Properties

The Company owns five  apartment  properties  containing a total of 1,328 units.
Three properties  containing a total of 682 apartments are located in Charlotte,
North  Carolina;  one property with 448 apartments is located in Virginia Beach,
Virginia;  and one  property  with 198 units is  located  in  Greensboro,  North
Carolina. Summary information concerning each apartment property follows:

Paces Commons Apartments.  Located in Charlotte,  North Carolina,  Paces Commons
was constructed in 1988 on 24.8 acres. The property consists of 18 two and three
story masonry and wood frame  buildings  containing 336 garden type  apartments.
The community offers eight different one, two and three bedroom floor plans with
an average size of 862 square feet.  The property was acquired by the Company on
June 8, 1993, for a contract price of $14,250,000.

Oakbrook  Apartments.   Located  in  Charlotte,  North  Carolina,  Oakbrook  was
constructed in 1985 on a 16.4 acre site.  The property  consists of 17 two story
wood frame  buildings  with cedar siding and brick veneer  containing 162 garden
and townhouse  style apartment  units.  The property offers eight different one,
two and three bedroom floor plans  averaging 1,100 square feet. The property was
acquired by the Company on June 7, 1994, for a contract price of $9,250,000.

Latitudes  Apartments.  Located  in  Virginia  Beach,  Virginia,  Latitudes  was
constructed  in 1989 on a 24.9 acre site.  The  property  consists of 20 two and
three story wood frame  buildings with vinyl siding  containing 448 garden style
apartment  units.  The property  offers six different one, two and three bedroom
floor plans  averaging 800 square feet. The property was acquired by the Company
on  October  1, 1994,  as part of the  acquisition  of BTVC.  The  property  was
purchased by BTVC on December 3, 1992, for a contract price of $19,000,000.

Harris Hill Apartments.  Located in Charlotte,  North Carolina,  Harris Hill was
constructed  in 1988 on a 18.4 acre site.  The  property  consists of 19 two and
three story wood frame  buildings  with wood siding  containing 184 garden style
apartment  units.  The property  offers four different one and two bedroom floor
plans  averaging  912 square  feet.  The property was acquired by the Company on
December 28, 1994, at a contract price of $8,900,000.

Paces Village Apartments.  Located in Greensboro,  North Carolina, Paces Village
was constructed in 1988 on a 15.5 acre site. The property consists of 10 two and
three story masonry and wood frame buildings containing 198 apartment units. The
property  offers four  different one and two bedroom  floor plans  averaging 848
square feet.  The  property was acquired by the Company on April 29, 1996,  at a
contract price of $10,625,000.


                                       5
<PAGE>

                   APARTMENT OCCUPANCY AND REVENUE STATISTICS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                         Average Economic      Average Monthly
                                                            Occupancy*           Revenue per
                                                                                Occupied Unit
                                                       --------------------- ---------------------
<S>                                                           <C>                    <C>
Paces Commons:
     Year ended December 31, 1996                              95.4%                  $685
     Year ended December 31, 1995                              93.8%                  $655
     Year ended December 31, 1994                              94.7%                  $611

Oakbrook:
     Year ended December 31, 1996                              93.8%                  $780
     Year ended December 31, 1995                              97.6%                  $750
     June 7 thru December 31, 1994                             97.9%                  $711

Latitudes:
     Year ended December 31, 1996                              93.8%                  $637
     Year ended December 31, 1995                              95.3%                  $613
     Year ended December 31, 1994                              92.7%                  $606

Harris Hill:
     Year ended December 31, 1996                              93.4%                  $717
     Year ended December 31, 1995                              95.7%                  $683

Paces Village:
     April 29 thru December 31, 1996                           93.5%                  $693


<FN>
*Average  Economic  Occupancy  is defined as gross  potential  rent less vacancy
divided by gross potential rent.
</FN>
</TABLE>

Restaurant Properties

The locations of the Company's 47 restaurant  properties  are listed in Schedule
III included in Item 14 of this Annual  Report.  The  restaurant  properties are
leased on a triple net basis to  Enterprises  pursuant  to a master  lease.  The
master lease, as amended in December 1995,  provides for a primary term expiring
December 2007, grants Enterprises three five-year renewal options,  and provides
for rent equal to 9.875  percent of  restaurant  sales as defined,  subject to a
minimum  annual  rent of  $4,500,000.  The  average  price  for  the  restaurant
properties was approximately $920,000 per property.

The restaurant  properties  are operated by Enterprises as Hardee's  restaurants
pursuant to franchise  agreements.  These agreements require that the properties
conform  to  a  standard  design  specified  by  Hardee's  Food  Systems,   Inc.
("Hardee's").  The current design consists of a one-story brick,  stucco or wood
building that embodies a contemporary  style with substantial plate glass window
areas. The buildings  average 3,300 square feet and are located on sites ranging
from 1 to 1.3 acres.  The buildings  are suitable for  conversion to a number of
uses, but the interiors must be  substantially  modified prior to utilization in
non-restaurant  applications.  Hardee's owns a design patent on certain elements
of the building and requires franchisees to make certain exterior  modifications
if the location is discontinued as a Hardee's restaurant.

Under the terms of the master lease,  Enterprises is responsible for all aspects
of the  operation,  maintenance  and  upkeep of the  restaurant  properties.  In
addition, Enterprises is responsible for the cost of any improvement, expansion,
remodeling or  replacement  required to keep the  properties  competitive  or in
conformity with Hardee's building standards. The decision to modify a particular
restaurant  property is based on a number of factors,  including the date of its
last  modification  and  the  number,  age  and  design  features  of  competing
restaurants  located  in  the  market  area  of  the  particular  property.  All
renovations are made at Enterprises' expense.

                                       6
<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

The Company is a party to a variety of legal proceedings arising in the ordinary
course  of its  business.  In  addition,  the  Company  has  become a  successor
party-in-interest to certain legal proceedings as a result of its acquisition of
BTVC. These matters arose in the ordinary course of BTVC's business either as an
owner of an apartment  community  or as a property  management  company.  All of
these  matters,  individually  and in  aggregate,  are  not  expected  to have a
material adverse impact on the Company.

In the event a claim were successful, the Company believes that it is adequately
covered by insurance and indemnification  agreements.  The Company has insurance
coverage  on  each  of  its  apartment  properties.   The  Company's  restaurant
properties are subject to an indemnification agreement whereby Enterprises,  the
lessee,  is responsible  for all claims arising from a restaurant  property;  in
addition,  Enterprises  is  required  to provide  insurance  on each  restaurant
property  which  identifies  the  Company  as a named  insured.  Each  apartment
property  which is  managed,  but not  owned,  by the  Company  is covered by an
insurance  policy  under which the Company is a named  insured.  As to claims to
which the Company has become a successor  party-in-interest to BTVC, the Company
received, as part of the acquisition of BTVC, an indemnification  agreement from
the shareholders of BTVC whereby the Company is, subject to certain limitations,
indemnified from loss arising out of a claim against BTVC.


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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of fiscal year 1996.


ITEM X.  EXECUTIVE OFFICERS OF THE REGISTRANT

Set  forth  below is a  listing  and brief  biography  of each of the  executive
officers of the Company at March 14, 1997.
<TABLE>
<CAPTION>

             Name                 Age                           Position                            Officer Since
<S>                               <C>    <C>                                                    <C>
D. Scott Wilkerson                 39     President and Chief Executive Officer                  October, 1994
Philip S. Payne                    45     Executive Vice President, Treasurer and Chief          October, 1994
                                          Financial Officer
Douglas E. Anderson                49     Vice President, Secretary                              1987
W. Craig Worthy                    44     Vice President                                         1987
Pamela B. Novak                    43     Vice President, Controller                             October, 1994
</TABLE>


D. Scott Wilkerson - President and Chief Executive Officer. Mr. Wilkerson joined
BTVC in 1987 and served in  various  officer  level  positions,  including  vice
president of administration  and finance and vice president for acquisitions and
development  before  becoming  president  in January  1994.  He was named  Chief
Executive Officer of the Company in April 1995. From 1980 to 1986, Mr. Wilkerson
was with Arthur Andersen LLP, Charlotte,  North Carolina, serving as tax manager
from 1985 to 1986. His  specialization  was in the representation of real estate
syndicators,  developers and management  companies.  Mr. Wilkerson received a BS
degree in accounting from the University of North Carolina at Charlotte in 1980.
He is a licensed CPA and licensed  real estate  broker.  He is active in various
professional, civic and charitable activities.

Philip S.  Payne -  Executive  Vice  President,  Treasurer  and Chief  Financial
Officer.  Mr.  Payne  joined BTVC in 1990 as vice  president  of capital  market
activities and became  executive vice president and chief  financial  officer in
January 1993. He was named  Treasurer of the Company in April 1995. From 1987 to
1990 he was a principal in Payne Knowles  Investment Group, a financial planning
firm. From 1983 to 1987 he was a registered


                                       7
<PAGE>

representative  with  Legg  Mason  Wood  Walker.  From 1978 to 1983,  Mr.  Payne
practiced  law.  He received a BS degree from the College of William and Mary in
1973 and a JD degree in 1978 from the same institution.

Douglas E. Anderson - Vice President and Secretary.  Mr.  Anderson has served as
Vice  President and Secretary of the Company since its inception in 1987. He has
been with  Enterprises  since 1977 and is currently a director,  executive  vice
president and secretary of  Enterprises.  Mr.  Anderson is also president of BNE
Land  and  Development   Company,   the  real  estate  development  division  of
Enterprises.  He serves as a director of  Wachovia  Bank of Rocky  Mount,  North
Carolina,  and is a former  director of Golden  Corral  Realty  Corporation.  He
received a BS degree in finance  and  accounting  from the  University  of North
Carolina at Chapel Hill in 1970.

W. Craig Worthy - Vice President. Mr. Worthy has served as Vice President of the
Company  since its inception in 1987 and served as Treasurer of the Company from
its inception until April 1995. He is a licensed certified public accountant and
has been employed by Enterprises since 1979. Mr. Worthy is currently senior vice
president and chief financial officer of Enterprises. He serves as a director of
First Union Bank of Rocky Mount,  North  Carolina.  He received a BA degree from
the University of Virginia in 1974 and a Master of  Accountancy  and of Business
Administration from the University of South Carolina in 1977.

Pamela B. Novak - Vice President and  Controller.  A licensed  certified  public
accountant, Ms. Novak joined BTVC in 1993 as controller.  From 1984 to 1993, she
was  employed  by Ernst & Young  LLP and  served as an audit  manager  from 1987
through  1993.  She received a BS in  accounting  from the  University  of North
Carolina at Charlotte in 1984.


                                       8
<PAGE>

                                     PART II

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

Market Information and Dividends

The Company's  Common Stock is traded on the American  Stock  Exchange under the
symbol "BNP". There were approximately 1,700 shareholders of record at March 14,
1997. The table below sets forth, for the periods indicated,  the range of high,
low and  closing  sale prices of the Common  Stock as  reported by the  American
Stock Exchange.  As of March 14, 1997, the closing price of the Company's Common
Stock was $12.75 per share.
<TABLE>
<CAPTION>

                                                 Stock Price                                 Dividends
                              High                  Low                  Close            Paid Per Share
                       -------------------- --------------------- --------------------- --------------------
<S>                           <C>                  <C>                   <C>                   <C>
   1996
First quarter                  $13 3/4              $12 1/4               $13 1/4               $  .31
Second quarter                  13 3/8               11 1/2                12 5/8                  .31
Third quarter                   13 1/4               12 3/8                12 7/8                  .31
Fourth quarter                  13 1/4               12 1/8                12 1/2                  .31
                                                                                                ------
                                                                                                $ 1.24

   1995
First quarter                  $13 7/8              $12 1/8               $13 3/8               $  .31
Second quarter                  13 5/8               11 1/4                12 7/8                  .31
Third quarter                   13 5/8               12 1/4                12 7/8                  .31
Fourth quarter                  13 1/8               12 1/8                12 1/2                  .31
                                                                                                ------ 
                                                                                                $ 1.24
</TABLE>

The  Company  has a  dividend  reinvestment  plan  which  is  available  to  all
shareholders  of record.  Under  this plan as  amended  in July  1996,  the plan
administrator,  First Union National Bank of North Carolina, reinvests dividends
on behalf of plan  participants  through  issue of new  shares of the  Company's
common stock or by purchasing  shares of the Company's stock on the open market,
at the Company's option.  In addition,  shareholders who participate in the plan
may elect to make direct  cash  investments  or  supplement  their  reinvestment
program with additional  cash  investments of any amount from $25 to $10,000 per
quarter.

Sales of Unregistered Securities

The Company  issued  38,700  shares of common stock in 1996 pursuant to the BTVC
acquisition agreement, which provides for quarterly payments of stock or cash if
certain financial targets are attained. (See Item 7, Management's Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources.)

The shares  were  issued to the former  shareholders  of BT Venture  Corporation
("BTVC"),  B. Mayo Boddie and Nicholas B. Boddie,  who are also directors of the
Company.  The share were issued  pursuant to an exemption from the  registration
requirements of the Securities Act of 1933 set forth at Section 4(2) thereof.

                                       9
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                           For the years ended December 31
                                         1996            1995            1994            1993           1992
                                    ---------------- -------------- --------------- --------------- --------------
<S>                                    <C>            <C>              <C>             <C>            <C>  
Operating Data
Revenues                                $14,507,824    $13,725,638      $9,258,246      $6,425,852     $5,373,305
Net income (1)                            1,715,815      1,628,268       2,301,919       2,455,451      3,158,521

Net income per share                           $.57           $.54            $.80            $.86          $1.11
Weighted average number of shares
                                          3,026,901      3,005,809       2,885,248       2,850,000      2,850,000
Distributions per share:
     Ordinary income                           $.70         $  .60          $  .63           $1.09          $1.11
     Return of capital                          .54            .64             .61             .15            .13
          Total                               $1.24          $1.24           $1.24           $1.24          $1.24

Balance Sheet Data (at year end)
Total assets                           $103,435,982    $94,351,776     $95,954,214     $54,642,613    $40,465,345
Notes payable                            77,352,257     67,161,785      66,883,556      26,894,378     12,000,000
Shareholders' equity                     24,902,438     26,199,938      27,967,909      27,251,996     28,330,545

Other Data
Funds from operations (2)                $4,471,574     $4,449,671      $4,291,439      $4,028,885     $3,943,175
Net cash provided by (used in):
     Operating activities                 4,800,303      4,475,728       4,496,461       4,066,224      3,854,446
     Investing activities               (11,019,566)      (831,917)    (18,729,121)    (16,156,995)      (133,764)
     Financing activities                 6,361,004     (3,895,311)     15,063,493      11,151,689     (3,534,000)
</TABLE>


From its inception through 1992 the Company's investment strategy was limited to
the purchase and  ownership of 47 restaurant  properties  leased on a triple net
basis. In June 1993 the Company  acquired Paces Commons  Apartments,  a 336-unit
apartment community.  In June 1994 the Company acquired Oakbrook  Apartments,  a
162-unit apartment community.  In October 1994 the Company acquired by merger BT
Venture Corporation ("BTVC"),  including a fully integrated apartment management
and  development  operation  and  Latitudes  Apartments,  a  448-unit  apartment
community.  In December  1994 the Company  acquired  Harris Hill  Apartments,  a
184-unit apartment  community.  In April 1996 the Company acquired Paces Village
Apartments,  a 198-unit  apartment  community.  (See  discussion  of History and
Development of Boddie-Noell  Properties,  Inc. included in Item 1 of this Annual
Report.)

(1)  1995,  1994 and 1993 net  income  includes  a special  charge of  $321,000,
$377,000 and $600,000,  respectively,  to write off certain  acquisition  costs.
Significantly  all of these costs arose in 1992 and 1993 in conjunction with the
"roll-up"  transaction  the Company  began in 1993 and  ultimately  abandoned in
December 1995.

(2) Funds from operations ("FFO") is defined by the National Association of Real
Estate  Investment Trusts ("NAREIT") as "net income (computed in accordance with
generally accepted  accounting  principles),  excluding gains (losses) from debt
restructuring and sales of property,  plus  depreciation and  amortization,  and
after   adjustments  for   unconsolidated   partnerships  and  joint  ventures."
Management   considers  FFO  to  be  useful  in  evaluating  potential  property
acquisitions and measuring the operating  performance of an equity REIT because,
together  with net  income  and  cash  flows,  FFO  provides  investors  with an
additional  basis to evaluate  the ability of the REIT to incur and service debt
and to fund acquisitions and other capital expenditures.  FFO does not represent
net income or cash  flows from  operations  as  defined  by  generally  accepted
accounting  principles  ("GAAP"),  and  FFO  should  not  be  considered  as  an
alternative to net income as an indicator of the Company's operating performance
or as an  alternative  to cash  flows as a measure  of  liquidity.  FFO does not
measure whether cash flow


                                       10
<PAGE>

is  sufficient  to fund all of the  Company's  cash needs,  including  principal
amortization,  capital improvements and distributions to shareholders.  FFO does
not represent cash flows from  operating,  investing or financing  activities as
defined by GAAP. Further,  FFO as disclosed by other REITs may not be comparable
to the Company's calculation of FFO.

In 1995 NAREIT issued additional  guidance for  interpretation of the definition
of FFO which provides that only  depreciation  and  amortization  of real estate
assets  should be added back to net income in  calculating  FFO. At December 31,
1995,  the  Company  adopted  this   interpretation  and  restated  FFO  amounts
previously  reported.  The following table reflects the effect of this change in
definition and reconciles  FFO as previously  defined to FFO amounts  identified
above.
<TABLE>
<CAPTION>

               FFO, as                                           FFO, as
             previously                Effect of                currently
               defined                 revision                  defined
<S>          <C>                       <C>                      <C>
 1996                 -                        -                $4,471,574
 1995        $4,596,772                $(147,101)                4,449,671
 1994         4,468,055                 (176,616)                4,291,439
 1993         4,121,286                  (92,401)                4,028,885
 1992         3,957,023                  (13,848)                3,943,175

</TABLE>

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

The following discussion contains forward-looking  statements within the meaning
of federal  securities law. Although  management  believes that the expectations
reflected  in  such   forward-looking   statements   are  based  on   reasonable
assumptions,  there are certain  factors  such as general  economic  conditions,
local  real  estate  conditions,  or  weather  conditions  that  might  cause  a
difference  between actual results and those  forward-looking  statements.  This
discussion should be read in conjunction with the Balance Sheets,  Statements of
Operations  and  Statements  of Cash Flows  included  in Item 14 of this  Annual
Report.

Results of Operations

Revenues.  The  Company's  revenues  come from two  primary  sources - apartment
rental income and restaurant rental income. Revenues in 1996 were $14.5 million,
an increase of 6 percent over 1995, primarily  attributable to the impact of the
acquisition of Paces Village  Apartments in April 1996. (Paces Village generated
apartment  rental  income of $1.0 million in eight months of 1996.)  Revenues in
1995 were $13.7 million,  an increase of 48 percent over 1994,  again  primarily
attributable  to  the  impact  of  1994  apartment  acquisitions  and  continued
improvements in apartment  operations.  Apartment rental income accounted for 67
percent of total  revenues in 1996 compared to 62 percent and 42 percent in 1995
and  1994,  respectively,  indicative  of the  Company's  focus  on  growth  and
improvement  in  apartment  operations.  Increases  in  income  attributable  to
apartment  operations  were offset  somewhat by  declines in  restaurant  rental
income in 1996 and 1995 and the creation of a property management  subsidiary in
May 1995.

Income from  Company-owned  apartments  increased 16 percent in 1996 compared to
1995.  While these  increases are primarily  attributable  to the acquisition of
Paces Village in April 1996, apartment operations reflect continued improvement.
Income from  apartments  owned for the full year in both 1996 and 1995 increased
by 3 percent in 1996,  reflecting  a 1 percent  decline in average  occupancy at
these  apartments  which was more than offset by a 4 percent increase in average
rental  revenue per  occupied  unit.  Average  economic  occupancy  for the four
properties owned for the full year in both 1996 and 1995 was 94 percent for 1996
and 95 percent for 1995;  average  rental  revenue per occupied unit was $684 in
1996 and $657 in 1995.  From its  acquisition  in April 1996  through  year end,
Paces Village had average  economic  occupancy of 93 percent and average revenue
per occupied unit of $693.


                                       11
<PAGE>

The 118 percent  increase in apartment rental income in 1995 compared to 1994 is
primarily  attributable  to  the  impact  of  acquisitions  of  three  apartment
properties (Harris Hill, Latitudes and Oakbrook) during 1994. (See discussion of
apartment properties included in Item 2 of this Annual Report.)

The Company owns apartment properties in Charlotte, North Carolina;  Greensboro,
North  Carolina;  and Virginia  Beach,  Virginia.  The Company's  apartments are
priced in the moderate to moderately high range for apartments  available within
these markets.  Despite a substantial amount of new construction,  especially in
Charlotte and Greensboro,  these markets have remained  relatively strong.  This
strength is primarily attributable to demand for apartments created by continued
population and job growth.  The Company has  experienced a nominal  reduction in
its average economic  occupancy,  but average monthly rent has continued to rise
at a moderate rate.  While the Company  expects some  continued  weakness in its
markets  through  1997,  management  does not  expect  this will have a material
adverse effect on the Company's operations.

Increases in apartment  rental income in 1996 and 1995 were partially  offset by
declines in restaurant  rental income in those same periods.  In 1996 restaurant
rental income declined by 3 percent  compared to 1995.  Related  restaurant food
sales declined by 4 percent in the same period.  All stores were open throughout
1996 and 1995. The difference in restaurant  rental revenue and related sales is
the result of the minimum rent  provision  of the  restaurant  lease.  Under the
lease, as modified in December 1995, restaurant rental is the greater of minimum
rent ($4.5 million per year) or 9.875 percent of food sales. For 1996 the rental
was the $4.5 million minimum rent.

Restaurant  sales and related  rental  income  have been in decline  since 1992,
attributed to an increasingly  competitive environment in the fast food industry
marked  by  widespread  price  discounting  and the lack of a  strong  hamburger
product on the Hardee's menu. Severe weather in January 1996 also contributed to
the decline.  Boddie-Noell  Enterprises,  Inc.  ("Enterprises"),  the restaurant
operator,  and Hardee's  Food Systems,  the  restaurant  franchisor,  are taking
aggressive steps to improve  restaurant  sales.  This includes a new advertising
campaign,  the  introduction  of  several  new food  items  and a return  to the
charbroil  cooking  method.  There are signs that these actions are beginning to
take effect.  During 1996 the quarterly sales comparisons to the same periods in
1995 were: first quarter - down 9.4 percent;  second quarter - down 7.5 percent;
third quarter - down 0.8 percent; and fourth quarter - down 0.4 percent.

In 1995  restaurant  rental  income  declined  by 8  percent  compared  to 1994.
"Same-store"  restaurant  sales for locations  open for the full periods in both
years  declined by 9 percent for the year.  The  difference in trends for rental
income and  "same-store"  sales can be attributed to 1994 closings for scheduled
remodeling (all stores were open throughout 1995).  Effective December 22, 1995,
the Company and  Enterprises  entered into a modified and restated  master lease
which  increased  the required  minimum rent from $3.46 million per year to $4.5
million per year and extended  the primary term from May 2002 to December  2007.
The percentage rent remained set at 9.875 percent of gross food sales.

Also  offsetting the increase in apartment  rental income was the elimination of
property  management  fee  income  in  1996,  reflecting  the  formation  of BNP
Management,  Inc. ("Management  Company") in May 1995. (The Company accounts for
its investment in the Management  Company using the equity method of accounting,
and 95 percent of the net income of the Management  Company flows through to the
Company's  financial  statements  as a single  line item.)  Throughout  1996 all
third-party  management  activities  were conducted by the  Management  Company,
which  currently  provides  property  management  services  for  nine  apartment
properties  and two shopping  centers.  Equity in the income of this  subsidiary
totaled  approximately  $149,000 for 1996 and $48,000 for 1995.  Management  fee
income earned prior to the formation of the Management  Company totaled $515,000
in eight months of 1995 and $276,000 in three  months of 1994.  Management  does
not  expect the  formation  or  operation  of the  Management  Company to have a
significant effect on the financial  position,  operating results, or cash flows
of the Company.

Expenses.  Increases  in  expenses  generally  reflect  the impact of  apartment
acquisitions in 1996 and 1994 along with acquisition of management operations in
1994.  Total expenses in 1996 were $12.8 million,  an increase of 6 percent over
1995,  primarily  attributable to the impact of the acquisition of Paces Village
Apartments in April


                                       12
<PAGE>

1996. Total expenses in 1995 were $12.1 million,  an increase of 74 percent over
1994,  reflecting a full year's  operations of four  apartment  communities  (of
which three were acquired in 1994) and administrative functions.

Increases  in  depreciation  and  amortization  over the  three-year  period are
directly  attributable to the impact of acquisitions of apartment  properties in
1996 and 1994 and an intangible  asset recorded in conjunction  with acquisition
of management  operations in October 1994.  Restaurant  rental  property  ($43.2
million) and related  depreciation  charges  ($778,000 per year) were  unchanged
throughout the three-year  period,  while  apartment  rental  property grew from
$14.4  million  at the end of 1993 to $66.6  million  by the end of  1996,  with
related  depreciation   increasing  from  approximately   $637,000  in  1994  to
approximately  $1,662,000 in 1996.  Amortization  of the  intangible  related to
management operations totaled $315,000 in 1996 and $258,000 in 1995. The balance
of amortization expense relates to loan costs.

Operating  expenses  were  generally  in line  with  management's  expectations.
Apartment  operations  expense  totaled 30.4  percent,  29.3  percent,  and 28.3
percent  of  apartment  rental  income  in 1996,  1995 and  1994,  respectively.
Increases  in  apartment  operating  expenses  are  primarily   attributable  to
increased  costs  associated  with  attracting  and  retaining  residents  in  a
softening  apartment  market as well as an  increased  emphasis on  preventative
maintenance.   Operating   expenses   relating  to  restaurant   properties  are
insignificant   because  of  the   restaurant   properties'   triple  net  lease
arrangement.

The 30 percent  decrease  in  administrative  expense in 1996  compared  to 1995
reflects the impact of transfer of third-party property management operations to
the  Management  Company in 1995.  These costs declined in the last half of 1995
($538,000  during the last six months  compared to $748,000 during the first six
months). The 106 percent increase in administrative  expense in 1995 compared to
1994 reflects the impact of assumption of management activities in October 1994.

Through third  quarter of 1994,  the Company paid  property  management  fees (5
percent of rental  revenues  collected) to BTVC for  management of its apartment
properties   and  advisory  fees  (4.65  percent  of  net  cash   available  for
distribution  as  defined  by  the  advisory   agreement)  to  an  affiliate  of
Enterprises.  With the acquisition of BTVC, the Company  terminated its advisory
contract and became  self-advised and self-managed,  thereby  eliminating future
property management and advisory fees.

Increases  in interest  expense  are  primarily  attributable  to  increases  in
outstanding  indebtedness  incurred in  connection  with  acquisitions  of Paces
Village in 1996 ($10.7  million)  and BTVC's  management  operations,  Oakbrook,
Latitudes,  and Harris Hill in 1994 ($40.0  million).  During fourth  quarter of
1994 and second  quarter of 1995 the Company  refinanced  all variable rate debt
related to apartment  properties  to fixed rate loans,  and in December 1995 the
Company  refinanced its variable rate credit facility to a fixed rate loan. With
the exception of  approximately  $10.0 million in debt related to the 1996 Paces
Village acquisition, all notes payable secured by rental properties are at fixed
rates.  (See further  discussion  below  included in discussion of Liquidity and
Capital Resources.)

During  the  fourth  quarters  of 1995 and 1994 the  Company  recorded  non-cash
write-offs  of  $321,000  and  $377,000,   respectively,   related  to  deferred
acquisition  costs.  Significantly  all of these costs arose in 1992 and 1993 in
conjunction  with  the  "roll-up"  transaction  the  Company  began  in 1993 and
ultimately abandoned in December 1995.



                                       13
<PAGE>

Liquidity and Capital Resources

Capitalization.  Prior to acquiring its first apartment community, the Company's
capital  requirements  were  minimal,  as all  capital  expenses  related to the
restaurants  were borne by Enterprises  under the terms of the master lease.  In
order to acquire Paces Commons, Oakbrook, BTVC, Latitudes, Harris Hill and Paces
Village,  the Company  incurred  additional  debt and issued  additional  common
stock.  The additional debt consists of first and second  mortgages,  secured by
the acquired  apartment  communities,  and draws  against the  Company's  credit
lines. As the Company  continues to acquire apartment  properties,  it is likely
that the Company will incur additional long-term debt and seek additional equity
capital.

From its  inception in 1987  through  September  1994 the Company had  2,850,000
shares of common stock  outstanding.  On October 1, 1994, an additional  140,990
shares were issued in conjunction with the acquisition of BTVC.  During 1995 and
1996 the Company  issued a total of 64,450  shares of common stock to the former
BTVC shareholders in conjunction with an earn-out  provision of that acquisition
agreement.  Under  the  terms of the  acquisition  agreement,  the  former  BTVC
shareholders are due additional  consideration  totaling 27,950 shares of common
stock valued at $356,000 as of December 31, 1996.  Assuming the full  contingent
purchase price is earned and paid in common stock,  it is  anticipated  that the
Company would issue  approximately  62,000  additional shares of common stock in
conjunction with the acquisition  (including  shares earned,  but not issued, at
December 31, 1996).

In July 1996 the Company's Dividend  Reinvestment and Stock Purchase Plan ("DRIP
Plan") was amended to allow the Company, at its option, to issue shares directly
to Plan  participants.  As amended,  the Plan  provides for optional  additional
investment by  participants of $25 to $10,000  (previously  $3,000) per quarter.
During 1996 the Company  issued 19,207 shares  through the DRIP Plan,  including
11,151 shares for reinvested  dividends and 8,056 shares for optional additional
investment.

Consistent with management's  plan to reduce the Company's  exposure to variable
rate debt,  during fourth quarter of 1994 and second quarter of 1995 the Company
refinanced  $37.6 million in variable rate debt related to apartment  properties
to fixed rate loans with maturities  ranging from 2000 through 2020. In December
1995 the Company  established a credit line with  SouthTrust  Bank of Alabama in
the amount of $25.5  million at a fixed rate of 8.0  percent for a term of three
years. The Company used an initial draw of $23.25 million to retire its existing
short-term  variable rate credit facility.  During 1996 the Company financed the
purchase of Paces  Village  Apartments  through  variable rate debt totaling $10
million  along with a draw of $650,000  from its existing  credit  facility.  In
addition,  deeds of trust related to two apartment  properties  were modified to
extend the terms of each note by five  years.  The balance of the credit line is
available for general corporate purposes.

A summary of long-term  debt as of December 31, 1996 and 1995 has been  included
in the Notes to the  Financial  Statements  included  in Item 14 of this  Annual
Report. At December 31, 1996, total long-term debt was $77.3 million,  including
$60.3 million notes payable at fixed interest rates ranging from 7.86 percent to
8.55 percent, and $17.0 million at variable rates. The weighted average interest
rate on debt  outstanding was 8.0 percent at December 31, 1996,  compared to 8.1
percent at December 31, 1995. A 1 percent  increase in variable  interest  rates
would  impact  the  Company by  increasing  interest  expense  by  approximately
$164,000  on an annual  basis;  conversely,  a 1 percent  decrease  in  variable
interest  rates  would  impact the  Company by  decreasing  interest  expense by
approximately $170,000 on an annual basis.

Cash Flow and Liquidity  Requirements.  Funds from operations ("FFO") is defined
by the National  Association of Real Estate Investment Trusts ("NAREIT") as "net
income (computed in accordance with generally accepted  accounting  principles),
excluding  gains (losses) from debt  restructuring  and sales of property,  plus
depreciation  and  amortization,   and  after  adjustments  for   unconsolidated
partnerships and joint ventures." In 1995 NAREIT issued additional  guidance for
interpretation  of this  definition  which provides that only  depreciation  and
amortization  of real  estate  assets  should  be added  back to net  income  in
calculating  FFO. At December 31, 1995, the Company adopted this  interpretation
and restated FFO amounts previously reported.

                                       14
<PAGE>

Management   considers  FFO  to  be  useful  in  evaluating  potential  property
acquisitions and measuring the operating  performance of an equity REIT because,
together  with net  income  and  cash  flows,  FFO  provides  investors  with an
additional  basis to evaluate  the ability of the REIT to incur and service debt
and to fund acquisitions and other capital expenditures.  FFO does not represent
net income or cash  flows from  operations  as  defined  by  generally  accepted
accounting  principles  ("GAAP"),  and  FFO  should  not  be  considered  as  an
alternative to net income as an indicator of the Company's operating performance
or as an  alternative  to cash  flows as a measure  of  liquidity.  FFO does not
measure whether cash flow is sufficient to fund all of the Company's cash needs,
including  principal  amortization,  capital  improvements and  distributions to
shareholders.  FFO does not represent  cash flows from  operating,  investing or
financing  activities  as defined by GAAP.  Further,  FFO as  disclosed by other
REITs may not be comparable to the Company's calculation of FFO.

A reconciliation of net income to FFO is as follows (all amounts in thousands):
<TABLE>
<CAPTION>

                                                                   1996            1995           1994
                                                               -------------- --------------- --------------
<S>                                                              <C>             <C>            <C>
Net income                                                        $    1,716      $    1,628     $    2,301
Depreciation                                                           2,440           2,204          1,415
Amortization of management intangible                                    315             258             56
Write-off of deferred costs                                                -             359            519
                                                               -------------- --------------- --------------
Funds from operations                                             $    4,472      $    4,450     $    4,291
                                                               ============== =============== ==============

</TABLE>

Funds available for  distribution  ("FAD") is defined by the Company as FFO plus
non-cash  expense for  amortization  of loan costs,  less payments for scheduled
amortization of debt principal and recurring capital expenditures.

A reconciliation of FFO to FAD, along with summary cash flow information,  is as
follows (all amounts in thousands):
<TABLE>
<CAPTION>

                                                                   1996            1995           1994
                                                               -------------- --------------- --------------
<S>                                                              <C>             <C>            <C>
Funds from operations                                             $    4,472      $    4,450     $    4,291
Amortization of loan costs                                               219             147            177
Scheduled debt principal payments                                       (460)           (397)          (167)
Recurring capital expenditures                                          (396)           (239)           (49)
                                                               -------------- --------------- --------------
Funds available for distribution                                  $    3,835      $    3,961     $    4,253
                                                               ============== =============== ==============

Net cash provided by (used in):
   Operating activities                                           $    4,800      $    4,476     $    4,496
   Investing activities                                              (11,020)           (832)       (18,729)
   Financing activities                                                6,361          (3,895)        15,063

Dividends and distributions paid to shareholders                  $    3,751      $    3,729     $    3,578

Nonrecurring capital expenditures:
   Acquisition improvements and replacements                      $      143      $      285     $      113
   Other apartment property improvements                                  22               2              -
</TABLE>

As discussed  above,  the addition of apartment  properties  and  improvement in
apartment  operations  have  offset the  decline in  restaurant  rental  income,
producing  increases in FFO of 0.5 percent in 1996 and 3.7 percent in 1995.  Net
income for 1996  increased  by 5.4 percent  compared to 1995.  This  increase is
attributable  to the fact  that  during  1995 the  Company  recorded  write-offs
totaling  $359,000--otherwise,  net income for 1996  compared to 1995


                                       15
<PAGE>

would have declined and reflected the effect of depreciation and amortization of
assets  related to apartment  property  acquisitions.  As  expected,  net income
declined  29.3  percent  in 1995  compared  to 1994,  reflecting  the  effect of
non-cash  charges  for  depreciation  and  amortization  of  assets  related  to
apartment  property  acquisitions in 1993 and 1994. As seen in the past,  future
additions to the apartment properties portfolio would likely result in a decline
in  net  income  due  to  significant  non-cash  charges  for  depreciation  and
amortization; however, management anticipates that such additions would generate
favorable increases in FFO.

The Company  capitalizes  those  expenditures  relating to acquiring new assets,
materially enhancing the value of an existing asset, or substantially  extending
the useful life of an existing asset.  In 1996 and 1995 the Company  capitalized
all carpet and vinyl  replacements  (including  $29,000 in 1996 and  $120,000 in
1995 included in acquisition  improvements and replacements).  In 1994 apartment
carpet and vinyl  replacements  were  generally  expensed as  incurred  ($23,000
expensed in 1994),  except when those replacements were made in conjunction with
a plan of acquisition ($91,000 in 1994 included in acquisition  improvements and
replacements). Additions to apartment properties were generally funded from cash
provided by operating activities.

In  1996  the  Company  applied  $10.7  million  proceeds  of  new  debt  to the
acquisition  of Paces Village  Apartments  and related loan costs totaling $10.8
million.  In 1994 the Company  applied  $18.6  million net proceeds of financing
transactions to $19.2 million in acquisition activities and related loan costs.

Dividends paid per share remained stable at $1.24 in 1996, 1995 and 1994,  while
weighted average number of common shares  outstanding  increased by 142,000,  or
4.9 percent,  over the three-year  period.  The Company's  dividend payout ratio
(the ratio of  dividends  paid to FFO on a per share  basis) was 83.8 percent in
1996 and  1995,  and 83.2  percent  in 1994.  REITs are  subject  to a number of
organizational and operational  requirements,  including a requirement that they
currently  distribute at least 95 percent of their  ordinary  taxable  income as
dividends.  The Company intends to pay dividends  quarterly,  expects that these
dividends  will  substantially  exceed the 95 percent  taxable  income test, and
anticipates that all dividends will be paid from current FFO.

A summary of scheduled  principal  payments on long-term debt is included in the
Notes to the  Financial  Statements  included in Item 14 of this Annual  Report.
Significant  scheduled  balloon  payments  include  maturities  of the Company's
credit line in December,  1998 ($23.9 million outstanding at December 31, 1996);
two loans  payable  to  affiliates  in May,  1999 ($7.1  million);  and the note
payable  secured by a deed of trust for Latitudes  Apartments  in January,  2000
(balloon of approximately $12.5 million).

The  Company  continues  to  produce  sufficient  cash flow to fund its  regular
dividend and has  positioned  itself for future  growth.  The Company  generally
expects to meet its short-term liquidity  requirements through net cash provided
by operations and utilization of credit facilities. Management believes that net
cash provided by operations  is, and will continue to be,  adequate to meet both
operating  requirements  and payment of dividends  by the Company in  accordance
with  REIT  requirements  in both the  short-  and the long  term.  The  Company
anticipates  funding its  acquisition  activities,  if any,  primarily  by using
short-term  credit  facilities or secured long-term debt. The Company expects to
meet certain of its long-term  liquidity  requirements,  such as scheduled  debt
maturities   and  repayment  of  short-term   financing  of  possible   property
acquisitions,  through  long-term  secured  and  unsecured  borrowings  and  the
issuance of debt securities or additional equity securities of the Company.  The
Company  believes  that it has  sufficient  resources  to meet  its  short-  and
long-term liquidity requirements.

Approximately  31  percent  of the  Company's  1996  revenue  was  derived  from
Enterprises' payment of rent for the use of the Company's restaurant properties.
In addition, Enterprises is responsible for all of the costs associated with the
maintenance and operations of these properties.  As a result, the financial well
being of the Company is, to a large extent, dependent on Enterprises' ability to
meet its  obligations  under the  terms of the  master  lease.  The  ability  of
Enterprises  to satisfy  the  requirements  of the master  lease  depends on its
liquidity and capital resources. Historically, Enterprises has been able to meet
its liquidity  needs through cash flow  generated  from  operations  and through
reliance on its credit facility.

Enterprises'  principal line of business is the operation of  approximately  360
Hardee's  restaurants,  47 of which  are  owned by the  Company.  The  continued
decline  in its  restaurant  sales  (see  "Revenues"  above)  has had a material

                                       16
<PAGE>

negative  impact  on  Enterprises'  operating  cash  flow.  Management  has  had
extensive   discussions   with   management  of  Enterprises  and  has  reviewed
Enterprises'  unaudited  financial  statements,  cash flow analysis,  restaurant
contribution analysis,  sales trend analysis and projections,  and believes that
Enterprises  will have  sufficient  liquidity and capital  resources to meet its
obligations  under the master  lease and credit  facility as well as its general
corporate operating needs.

The table below sets forth certain information with respect to the liquidity and
capital  resources of Enterprises.  The information is derived from Enterprises'
unaudited  financial  statements  for the fiscal year ended  December  31, 1996,
available as of March 14, 1997.  Enterprises is an S Corporation for federal and
state income tax purposes;  therefore,  its cash flow generated from  operations
does not include a deduction for corporate income tax payments.

    Current assets                                             $  10,298,000
    Total assets                                                 269,482,000
    Current liabilities                                           39,644,000
    Total debt, including current portion of $11,401,000         117,115,000
    Shareholders' equity                                          87,657,000
    Net cash provided by operating activities                     11,585,000

Inflation.  Management  does not believe that inflation poses a material risk to
the Company.  The leases at the Company's apartment properties are short-term in
nature,  generally  for  terms of one year or less,  with none  longer  than two
years. The restaurant  properties are leased on a triple-net basis, which places
the risk of rising operating and maintenance costs on the lessee.

Environmental  matters. Phase I environmental studies performed on the Company's
apartment  properties  did not identify any problems  that  management  believes
would have a material  adverse  effect on the Company's  results of  operations,
liquidity or capital resources.  Environmental  transaction screens obtained for
each of the  restaurant  properties  in 1995 did not  indicate  existence of any
environmental  problems that warranted  further  investigation.  Enterprises has
indemnified  the  Company  for  environmental   problems   associated  with  the
restaurant properties under its master lease with the Company.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial  statements and supplementary data are listed under Item 14(a) and
filed as part of this Annual Report on the pages indicated.


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

Not applicable.


                                       17
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The section under the heading "Election of Directors" of the Proxy Statement for
Annual Meeting of Shareholders to be held May 21, 1997, (the "Proxy  Statement")
is  incorporated  herein  by  reference  for  information  on  Directors  of the
Registrant. See Item X in Part I of this Annual Report for information regarding
Executive Officers of the Registrant.

ITEM 11.  EXECUTIVE COMPENSATION

The section under the heading "Election of Directors" entitled  "Compensation of
Directors"  of  the  Proxy  Statement  and  the  section   entitled   "Executive
Compensation" of the Proxy Statement are incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section under the heading "Security  Ownership of Certain  Beneficial Owners
and Management" of the Proxy Statement is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section entitled  "Certain  Relationships  and Related  Transactions" of the
Proxy Statement is incorporated herein by reference.

                                       18
<PAGE>


                                     PART IV

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

(a) 1. and 2.  Financial Statements and Schedules

The financial  statements  and schedules  listed below are filed as part of this
Annual Report on the pages indicated.

                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                 PAGE
<S>                                                                                             <C>
Financial Statements and Notes:
   Reports of Independent Auditors                                                                22
   Balance Sheets as of December 31, 1996 and 1995                                                24
   Statements of Operations for the Years Ended December 31, 1996, 1995, and 1994                 25
   Statements of Shareholders' Equity for the Years Ended                                         26
      December 31, 1996, 1995, and 1994
   Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994                 27
   Notes to Financial Statements                                                                  28
Schedules:
   Schedule III - Real Estate and Accumulated Depreciation                                        38

</TABLE>

The  financial  statements  and schedule  are filed as part of this report.  All
other  schedules  are omitted  because they are not  applicable  or the required
information is included in the financial statements or notes thereto.

(a) 3.  Exhibits

The Registrant  agrees to furnish a copy of all agreements  related to long-term
debt upon request of the Commission.

  Exhibit
    No.

    2*       Agreement and Plan of Merger between BT Venture Corporation and 
             Boddie-Noell Restaurant Properties, Inc. (filed as Exhibit (2)-2 to
             Boddie-Noell Properties, Inc. Current Report on Form 8-K dated 
             October 1, 1994, and incorporated herein by reference)
    3.1*     Articles of Incorporation (filed as Exhibit 3(a) to Registration 
             Statement No. 33-13155 on Form S-11 and incorporated herein by 
             reference)
    3.2*     By-Laws (filed as Exhibit 3.2 to Boddie-Noell Properties, Inc. 
             Annual Report on Form 10-K dated December 31, 1995, and 
             Incorporated herein by reference)
   10.1*     Amended and Restated Master Lease Agreement dated December 21, 
             1995, between Boddie-Noell Properties, Inc. and Boddie-Noell 
             Enterprises, Inc. (filed as Exhibit 10.1 to Boddie-Noell 
             Properties, Inc. Annual Report on Form 10-K dated December 31,
             1995, and incorporated herein by reference)
   10.2*     Loan Agreement dated December 27, 1995, between Boddie-Noell 
             Properties, Inc. and SouthTrust Bank of Alabama, N.A. (filed as 
             Exhibit 10.2 to Boddie-Noell Properties, Inc. Annual Report on Form
             10-K dated December 31, 1995, and incorporated herein by reference)
   10.3*     Acquisition   Agreement  by  and  among   Boddie-Noell   Restaurant
             Properties, Inc., BT Venture Corporation and Related Entities dated
             June  7,  1994  (filed  as an  exhibit  in  Schedule  14A of  Proxy
             Statement  dated  June  15,  1994,  and   incorporated   herein  by
             reference)
   10.4*     Boddie-Noell Restaurant Properties, Inc. 1994 Stock Option and
             Incentive Plan effective

                                       19
<PAGE>

             August 4, 1994 (filed as an exhibit in 
             Schedule 14A of Proxy Statement dated June 15, 1994 and 
             incorporated herein by reference)
   10.5*     Form and  description of Incentive  Stock Option  Agreements  dated
             October 17, 1994 between the Company and certain officers (filed as
             Exhibit 10.8 to Boddie-Noell Properties, Inc. Annual Report on Form
             10-K dated December 31, 1994 and incorporated herein by reference)
   10.6*     Form and description of Nonqualified  Stock Option Agreements dated
             October 17, 1994 between the Company and certain officers (filed as
             Exhibit 10.9 to Boddie-Noell Properties, Inc. Annual Report on Form
             10-K dated December 31, 1994 and incorporated herein by reference)
   10.7*     Form and description of Employment Agreements dated October 1, 1994
             between the Company and certain officers (filed as Exhibit 10.10 to
             Boddie-Noell  Properties,  Inc.  Annual  Report on Form 10-K  dated
             December 31, 1994 and incorporated herein by reference)
   21        Subsidiaries of the Registrant
   23.1      Consent of Ernst & Young LLP
   23.2      Consent of Arthur Andersen LLP
   27        Financial Data Schedule (electronic filing)


*  Incorporated herein by reference

Exhibits 10.4 through 10.7 are management contracts or compensatory plans.

(b)  Reports on Form 8-K.

The Company filed a Current Report on Form 8-K dated October 15, 1996,  relating
to the change in its certifying accountant as of that date.

                                       20
<PAGE>


                                   SIGNATURES

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

                                                   BODDIE-NOELL PROPERTIES, INC.


Date:  March 26, 1997                              /s/ Philip S. Payne
                                                   Philip S. Payne
                                                   Executive Vice President 
                                                   and Chief Financial Officer

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

Signature:                          Title:                             Date:


/s/ D. Scott Wilkerson         President and                      March 26, 1997
D. Scott Wilkerson             Chief Executive Officer


/s/ Philip S. Payne            Executive Vice President and       March 26, 1997
Philip S. Payne                Chief Financial Officer


/s/ Pamela B. Novak            Vice President and Controller      March 26, 1997
Pamela B. Novak                (Chief Accounting Officer)


/s/ B. Mayo Boddie             Chairman of the Board              March 26, 1997
B. Mayo Boddie


/s/ Nicholas B. Boddie         Vice Chairman of the Board and     March 26, 1997
Nicholas B. Boddie             Director


/s/ Donald R. Pesta, Jr.       Director                           March 26, 1997
Donald R. Pesta, Jr.


/s/ William H. Stanley         Director                           March 26, 1997
William H. Stanley


/s/ Richard A. Urquhart, Jr.   Director                           March 26, 1997
Richard A. Urquhart, Jr.




                                       21
<PAGE>







                         Report of Independent Auditors



To the Shareholders of
Boddie-Noell Properties, Inc.


We have audited the accompanying balance sheet of Boddie-Noell Properties,  Inc.
(a Delaware  corporation) as of December 31, 1996, and the related statements of
operations,  shareholders'  equity,  and cash flows for the year then ended. Our
audit also includes the financial statement schedule listed in the Index at Item
14(a).  These financial  statements and schedule are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and schedule based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Boddie-Noell  Properties,  Inc.
at December 31, 1996,  and the results of its  operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.


                                               /s/ Ernst & Young LLP

                                               Ernst & Young LLP

Charlotte, North Carolina
January 9, 1997



                                       22
<PAGE>







Report of Independent Public Accountants



To the Shareholders of
Boddie-Noell Properties, Inc.:

We have audited the accompanying balance sheet of Boddie-Noell Properties,  Inc.
(a Delaware  corporation) as of December 31, 1995, and the related statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1995 and 1994. These financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule 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 Boddie-Noell  Properties,  Inc.
as of December 31, 1995,  and the results of its  operations  and its cash flows
for the years ended  December 31, 1995 and 1994,  in conformity  with  generally
accepted accounting principles.


                                                    /s/ Arthur Andersen LLP

                                                   Arthur Andersen LLP

Charlotte, North Carolina
   January 31, 1996.


                                       23
<PAGE>



BODDIE-NOELL PROPERTIES, INC.
-------------------------------------------------------------------------------
Balance Sheets
<TABLE>
<CAPTION>

                                                                                            December 31
                                                                                      1996               1995
                                                                               ------------------- ------------------
<S>                                                                              <C>                 <C>
Assets
Real estate investments at cost:
   Apartment properties                                                           $  66,610,048       $  55,315,686
   Restaurant properties                                                             43,205,075          43,205,075
                                                                               ------------------- ------------------
                                                                                    109,815,123          98,520,761
   Less accumulated depreciation                                                    (11,461,365)         (9,020,948)
                                                                               ------------------- ------------------
                                                                                     98,353,758          89,499,813
Cash and cash equivalents                                                               842,604             700,863
Rent and other receivables                                                               12,695             244,817
Prepaid expenses and other assets                                                       392,302             293,549
Investment in and advances to Management Company                                        261,598             326,767
Other assets, net of applicable amortization:
   Intangible related to acquisition of management operations                         2,744,912           2,560,254
   Deferred financing costs                                                             828,113             725,713
                                                                               ------------------- ------------------
Total assets                                                                      $ 103,435,982       $  94,351,776
                                                                               =================== ==================

Liabilities and Shareholders' Equity
Mortgage and other notes payable                                                  $  70,295,957       $  60,105,485
Notes payable to affiliates                                                           7,056,300           7,056,300
Accounts payable and accrued expenses                                                    15,549             129,908
Accrued interest on mortgage and other notes payable                                    335,871             269,373
Accrued interest on notes payable to affiliates                                         125,518             132,231
Additional consideration due to former BTVC shareholders                                355,570             283,334
Escrowed security deposits and deferred revenue                                         348,779             175,207
                                                                               ------------------- ------------------
                                                                                     78,533,544          68,151,838
Shareholders' equity:
Common stock,  $.01 par value,  10,000,000 shares  authorized,  3,074,647 shares
   issued and outstanding at December 31, 1996,
   3,016,740 shares issued and outstanding at December 31, 1995                          30,746              30,167
Additional paid-in capital                                                           34,522,816          33,785,335
Dividend distributions in excess of net income                                       (9,651,124)         (7,615,564)
                                                                               ------------------- ------------------
Total shareholders' equity                                                           24,902,438          26,199,938
                                                                               ------------------- ------------------
Total liabilities and shareholders' equity                                        $ 103,435,982       $  94,351,776
                                                                               =================== ==================
</TABLE>


See accompanying notes.


                                       24
<PAGE>


BODDIE-NOELL PROPERTIES, INC.
------------------------------------------------------------------------------
Statements of Operations
<TABLE>
<CAPTION>

                                                                               Years ended December 31
                                                                       1996             1995              1994
                                                                 ----------------- ---------------- -----------------
<S>                                                                <C>               <C>              <C>
Revenues
Apartment rental income                                             $  9,790,713      $  8,476,268     $  3,889,277
Restaurant rental income                                               4,500,000         4,649,250        5,046,837
Management fees                                                                -           514,872          276,157
Equity in income of Management Company                                   149,298            48,063                -
Interest and other income                                                 67,813            37,185           45,975
                                                                 ----------------- ---------------- -----------------
                                                                      14,507,824        13,725,638        9,258,246

Expenses
Depreciation                                                           2,440,417         2,204,199        1,414,800
Amortization                                                             534,663           405,182          232,856
Apartment operations                                                   2,976,876         2,480,920        1,101,370
Administrative                                                           894,360         1,285,509          622,605
Property management and advisory fees                                          -                 -          264,322
Interest on notes payable to affiliates                                  499,676           540,572          139,973
Interest - other                                                       5,446,017         4,821,865        2,661,921
Write-off of deferred loan costs upon refinancing                              -            37,723          141,582
Write-off of deferred acquisition costs                                        -           321,400          376,898
                                                                 ----------------- ---------------- -----------------
                                                                      12,792,009        12,097,370        6,956,327
                                                                 ----------------- ---------------- -----------------
Net income                                                          $  1,715,815      $  1,628,268     $  2,301,919
                                                                 ================= ================ =================

Per share data:
   Net income                                                              $0.57             $0.54            $0.80
                                                                 ================= ================ =================
   Dividends declared                                                      $1.24             $1.24            $1.24
                                                                 ================= ================ =================
   Weighted average shares outstanding                                 3,026,901         3,005,809        2,885,248
                                                                 ================= ================ =================

</TABLE>

See accompanying notes.


                                       25
<PAGE>


BODDIE-NOELL PROPERTIES, INC.
------------------------------------------------------------------------------
Statements of Shareholders' Equity
<TABLE>
<CAPTION>

                                                                                        Dividend
                                                                      Additional     distributions
                                             Common Stock               paid-in       in excess of
                                        Shares         Amount           capital        net income         Total
                                     ------------- ---------------- ---------------- --------------- ----------------
<S>                                     <C>             <C>          <C>              <C>             <C> 
Balance at December 31, 1993             2,850,000       $28,500      $31,462,322      $(4,238,826)    $27,251,996
Common stock issued                        140,990         1,410        1,990,289                -       1,991,699
Dividends paid                                   -             -                -       (3,577,705)     (3,577,705)
Net income                                       -             -                -        2,301,919       2,301,919
                                     ------------- ---------------- ---------------- --------------- ----------------
Balance at December 31, 1994             2,990,990        29,910       33,452,611       (5,514,612)     27,967,909
Common stock issued                         25,750           257          332,724                -         332,981
Dividends paid                                   -             -                -       (3,729,220)     (3,729,220)
Net income                                       -             -                -        1,628,268       1,628,268
                                     ------------- ---------------- ---------------- --------------- ----------------
Balance at December 31, 1995             3,016,740        30,167       33,785,335       (7,615,564)     26,199,938
Common stock issued                         57,907           579          737,481                -         738,060
Dividends paid                                   -             -                -       (3,751,375)     (3,751,375)
Net income                                       -             -                -        1,715,815       1,715,815
                                     ------------- ---------------- ---------------- --------------- ----------------
Balance at December 31, 1996             3,074,647       $30,746      $34,522,816      $(9,651,124)    $24,902,438
                                     ============= ================ ================ =============== ================
</TABLE>

See accompanying notes.



                                       26
<PAGE>


BODDIE-NOELL PROPERTIES, INC.
-------------------------------------------------------------------------------
Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                                Years ended December 31
                                                                        1996             1995              1994
                                                                   ---------------- ---------------- -----------------
<S>                                                               <C>                <C>              <C>
Operating activities
Net income                                                         $   1,715,815      $   1,628,268    $   2,301,919
Adjustments to reconcile net income to
   net cash provided by operating activities:
   Equity in income of Management Company                               (149,298)           (48,063)               -
   Depreciation and amortization                                       2,975,080          2,609,381        1,647,656
   Write-off of deferred costs                                                 -            359,123          518,480
   Changes in operating assets and liabilities:
      Rent and other receivables                                         232,122            248,489          (78,046)
      Prepaid expenses and other assets                                  (58,783)           (66,088)          (5,584)
      Accounts payable and accrued expenses                              (54,574)          (204,726)         150,443
      Security deposits and deferred revenue                             139,941            (50,656)         (38,407)
                                                                   ---------------- ---------------- -----------------
Net cash provided by operating activities                              4,800,303          4,475,728        4,496,461

Investing activities
Acquisitions of apartment properties                                 (10,666,580)                 -      (18,055,659)
Acquisition of BT Venture Corp., net of cash payment                           -                  -          164,838
Additions to apartment properties                                       (561,114)          (525,516)        (161,294)
Payment of deferred acquisition costs                                          -           (156,401)        (677,006)
Investment in Management Company                                            (165)                 -                -
Dividends received from Management Company                               158,293                  -                -
Repayment from (advances to) Management Company                           50,000           (150,000)               -
                                                                   ---------------- ---------------- -----------------
Net cash used in investing activities                                (11,019,566)          (831,917)     (18,729,121)

Financing activities
Proceeds from common stock issued through
   dividend reinvestment plan                                            243,628                  -                -
Payment of dividends                                                  (3,751,375)        (3,729,220)      (3,577,705)
Proceeds from notes payable                                           10,650,000         33,925,000       53,600,000
Principal payments on notes payable                                     (459,528)       (33,646,771)     (34,449,203)
Payment of deferred financing costs                                     (321,721)          (444,320)        (509,599)
                                                                   ---------------- ---------------- -----------------
Net cash provided by (used in) financing activities                    6,361,004         (3,895,311)      15,063,493
                                                                   ---------------- ---------------- -----------------

Net increase (decrease) in cash and cash equivalents                     141,741           (251,500)         830,833
Cash and cash equivalents at beginning of year                           700,863            952,363          121,530
                                                                   ---------------- ---------------- -----------------

Cash and cash equivalents at end of year                           $     842,604      $     700,863    $     952,363
                                                                   ================ ================ =================
</TABLE>

See accompanying notes.


                                       27
<PAGE>



BODDIE-NOELL PROPERTIES, INC.
-------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996


Note 1.  Organization  and  Summary  of  Significant  Accounting  and  Reporting
Policies

Organization  and  History.   Boddie-Noell  Restaurant  Properties,   Inc.  (the
"Company")  was  incorporated  on April 1, 1987. On October 1, 1994, the Company
changed its name to Boddie-Noell Properties, Inc.

In April 1987, the Company acquired 47 existing Hardee's  restaurant  properties
located in Virginia and North Carolina,  operated by  Boddie-Noell  Enterprises,
Inc. ("Enterprises") under franchise agreements with Hardee's Food Systems, Inc.
Simultaneously  with their  purchase,  the properties were leased to Enterprises
under a master lease agreement.

In June 1993 the Company acquired Paces Commons Apartments, a 336-unit apartment
property  in  Charlotte,  North  Carolina.  In June  1994 the  Company  acquired
Oakbrook Apartments, a 162-unit apartment property in Charlotte, North Carolina.
Effective October 1, 1994, the Company acquired by merger BT Venture Corporation
("BTVC"),  an integrated  real estate  management,  development  and acquisition
company and owner of the Latitudes Apartments,  a 448-unit apartment property in
Virginia Beach, Virginia. As of October 1, 1994, the Company succeeded to BTVC's
third-party  management  business,  terminated  its advisory  agreement with BNE
Advisory  Group,  Inc.,  and  began  operations  as  a   self-administered   and
self-managed real estate investment trust. In December 1994 the Company acquired
Harris  Hill  Apartments,  a 184-unit  apartment  property in  Charlotte,  North
Carolina. In June 1996 the Company acquired Paces Village Apartments, a 198-unit
apartment property in Greensboro, North Carolina.

In May 1995 the Company formed BNP Management,  Inc. (the "Management Company").
The Company has a 1 percent voting  interest and 95 percent  economic  interest.
This investment is recorded using the equity method of accounting.

Capital Stock. In June 1995 the Company's  shareholders  approved  amendments to
the Company's  bylaws and  certificate  of  incorporation  to allow the Board of
Directors to authorize the issuance of up to an additional  90,000,000 shares of
Common Stock and 10,000,000  shares of Preferred  Stock,  issuable in series the
characteristics of which would be set by the Board of Directors.  As of December
31, 1996, no such shares have been authorized or issued.

As of December 31, 1996, approximately 655,000 authorized shares of Common Stock
are reserved for future  issuance under the Company's Stock Option and Incentive
Plan, Dividend Reinvestment and Stock Purchase Plan, and for contingent purchase
price payments related to the acquisition of BTVC.

Real Estate  Investments.  Apartment  properties  are carried at cost.  Ordinary
repairs  and  maintenance  costs are  expensed  as  incurred  while  significant
improvements,  renovations and  replacements  are  capitalized.  Depreciation is
computed using the  straight-line  method over the estimated useful lives of the
related  assets,   which  are  40  years  for  buildings,   20  years  for  land
improvements,  10 years for fixtures and  equipment,  and five years for carpet,
vinyl, and wallpaper  replacements.  Restaurant  properties,  which include only
real property,  are carried at cost. Cost of repairs and maintenance and capital
improvements are borne by Enterprises. Depreciation of the buildings is computed
using the straight-line method over the estimated useful lives (40 years) of the
respective properties.

Cash and Cash Equivalents.  The Company considers all highly liquid  investments
with maturities of three months or less when purchased to be cash equivalents.

                                       28
<PAGE>

Deferred  Costs.  The intangible  asset related to the acquisition of management
operations acquired by merger is amortized using the straight-line method over a
period of ten years. Accumulated amortization on this asset totaled $630,000 and
$314,000 at December 31, 1996 and 1995, respectively.

Deferred  acquisition  costs  represent  costs  incurred in connection  with the
proposed acquisition of properties and the associated offering costs. Such costs
are deferred  until the  acquisition  is  consummated.  Upon  completion  of the
acquisition,  the costs will be  capitalized  to the  underlying  assets  and/or
charged to shareholders' equity.
When an acquisition is deemed not probable, the costs are charged to expense.

Financing costs are deferred and amortized using the  straight-line  method over
the terms of the related notes. Accumulated amortization on these assets totaled
$280,000 and $61,000 at December 31, 1996 and 1995, respectively.

Income  Taxes.  The Company  operates as and elects to be taxed as a Real Estate
Investment  Trust ("REIT")  under the Internal  Revenue Code.  Accordingly,  the
Company  will not be  subject  to  federal  or  state  income  taxes on  amounts
distributed to shareholders,  provided it distributes at least 95 percent of its
REIT taxable  income and meets certain other  requirements  for  qualifying as a
REIT. Accordingly, no provision has been made for federal or state income taxes.

Net Income Per Share.  Net income per share is calculated  based on the weighted
average number of shares  outstanding  during each year. The potential  dilutive
effect  of  stock  options  in the  computation  of  earnings  per  share is not
material.

Fair Values of Financial Instruments.  The following methods and assumptions are
used by the  Company in  estimating  its fair value  disclosures  for  financial
instruments.

Cash and cash equivalents: The carrying amount reported on the balance sheet for
cash and cash equivalents approximates fair value.

Notes  payable:  The fair value of the Company's  fixed rate mortgage  notes and
variable rate notes payable is estimated  using  discounted  cash flow analysis,
based on the Company's current incremental borrowing rates. The carrying amounts
of the Company's borrowings under notes payable approximate fair value.

Use of Estimates.  The  preparation of financial  statements in accordance  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.  Depreciation amounts included in these financial statements
reflect  management's  estimate of the life and related  depreciation  rates for
rental  properties.  In addition,  the carrying  amount of the intangible  asset
related to acquisition of management operations reflects management's evaluation
of the  continuing  value and useful life of this asset.  Actual  results  could
differ from these estimates.

Reclassifications.  Certain  amounts in the 1995 and 1994  financial  statements
have  been   reclassified   to   conform   to  the  1996   presentation.   These
reclassifications  had no  effect  on net  income  or  shareholders'  equity  as
previously reported.


                                       29
<PAGE>

Note 2.  Real Estate Investments

Real estate investments consist of the following:
<TABLE>
<CAPTION>

                                                                               1996              1995
                                                                         ----------------- -----------------
<S>                                                                       <C>               <C>
Apartment properties
   Land                                                                    $  7,892,291      $  6,642,291
   Buildings and land improvements                                           56,152,512        46,517,150
   Fixtures, equipment and other personal property                            2,565,245         2,156,245
   less accumulated depreciation                                             (3,904,353)       (2,242,344)
                                                                         ----------------- -----------------
                                                                             62,705,695        53,073,342
Restaurant properties
   Land                                                                      12,068,737        12,068,737
   Buildings and land improvements                                           31,136,338        31,136,338
   less accumulated depreciation                                             (7,557,012)       (6,778,604)
                                                                         ----------------- -----------------
                                                                             35,648,063        36,426,471
                                                                         ----------------- -----------------
                                                                           $ 98,353,758      $ 89,499,813
                                                                         ================= =================
</TABLE>

The Company's policy is to capitalize those  expenditures  relating to acquiring
new  assets,   materially   enhancing  the  value  of  an  existing   asset,  or
substantially  extending  the  useful  life of an  existing  asset.  Capitalized
apartment  property  additions,  replacements and improvements are summarized as
follows:
<TABLE>
<CAPTION>

                                                             1996              1995              1994
                                                       ----------------- ----------------- ---------------
<S>                                                     <C>              <C>               <C>
Property acquisitions through purchase                   $10,666,580       $        -       $18,243,374
Property acquisitions through merger                               -                -        21,950,000
Allocation of additional consideration for property
   acquisitions through merger                                66,668           66,668            16,667
Capitalized carpet, vinyl and wallpaper                      201,776          210,430            91,434
Other property additions and improvements                    359,338          315,085            53,193
                                                       ----------------- ----------------- ---------------
                                                         $11,294,362       $  592,183       $40,354,668
                                                       ================= ================= ===============
</TABLE>


Note 3.  Investment in and Advances to Management Company

In May 1995 the Management Company was formed to provide management  services to
non-Company owned properties.  The Company contributed  approximately  $119,000,
primarily in office equipment,  to the formation of the Management Company,  and
transferred the rights to certain  third-party  property  leasing and management
contracts  to the  Management  Company for a 1 percent  voting  interest  and 95
percent economic  interest.  The remaining interest in the Management Company is
held  by  certain  officers  of  the  Company.  Because  the  Company  exercises
significant  influence  over,  but does not control the  financial and operating
policies of, the  Management  Company,  the  investment  and related  income are
reflected in the accompanying  financial  statements using the equity method. At
December  31,  1996,  the  Management  Company  provides  leasing  and  property
management services to nine apartment  properties and two shopping centers owned
by  limited  partnerships  of which  Boddie  Investment  Company  ("BIC") is the
general partner.

During 1995 the Company advanced a total of $150,000 to the Management  Company,
of which  $50,000  was repaid in 1996.  These  advances  accrue  interest  at 12
percent. Interest on these advances totaled $16,900 and $9,700 in 1996 and 1995,
respectively.

                                       30
<PAGE>

Summary financial  information of the Management  Company at December 31 and for
the  twelve  months  and  eight  months  ended   December  31,  1996  and  1995,
respectively, is as follows:
<TABLE>
<CAPTION>


                                                                               1996              1995
                                                                         ----------------- -----------------
<S>                                                                          <C>               <C>
Current assets                                                                $181,583          $221,758
Property and equipment, net                                                     98,139           122,430
Other assets                                                                     5,432             7,028
                                                                         ----------------- -----------------
Total assets                                                                  $285,154          $351,216
                                                                         ================= =================

Current liabilities                                                           $ 13,168          $ 21,919
Advances and accrued interest due to the Company                               103,397           159,736
Shareholders' equity                                                           168,589           169,561
                                                                         ----------------- -----------------
Total liabilities and shareholders' equity                                    $285,154          $351,216
                                                                         ================= =================

Revenues                                                                      $862,368          $327,488
Operating expenses                                                            (588,815)         (254,659)
Interest                                                                       (16,897)           (9,736)
                                                                         ----------------- -----------------
Net income before income taxes                                                 256,656            63,093
Provision for income taxes                                                     (99,500)          (12,500)
                                                                         ----------------- -----------------
Net income                                                                    $157,156          $ 50,593
                                                                         ================= =================

</TABLE>

Note 4.  Notes Payable

Notes payable consist of the following:
<TABLE>
<CAPTION>

                                                                                                   1996              1995
                                                                                           ----------------- -----------------
<S>                                                                                           <C>               <C>  
Note payable to a bank in the  principal sum of up to  $25,500,000  due December
1998,  interest  on the  outstanding  principal  balance  payable  monthly at an
effective rate of 8.11%,  secured by deeds of trust on 47 restaurant  properties
and  assignment of rents under the Amended and Restated  Master Lease  Agreement
for those  restaurants.  The  principal  balance of the loan may be prepaid,  in
whole or part, subject to
certain restrictions and penalties.                                                            $23,900,000       $23,250,000

Fixed  rate  notes  payable   comprised  of  four  loans,   payable  in  monthly
installments totaling approximately $287,000 including principal and interest at
rates  ranging  from  7.86%  to  8.55%,  with  maturities  in 2000  (balloon  of
approximately $12,500,000) through 2025. The notes are secured by deeds of trust
and assignments of rents of four apartment
properties.                                                                                     36,441,534        36,855,485

Variable rate notes payable  comprised of two loans  ($8,600,000 and $1,400,000,
respectively),  payable  in  monthly  installments  of  $6,511  applied  to  the
principal balance of the $8,600,000 loan and interest at 30-day LIBOR plus 1.75%
and 2.25% (7.3% and 7.8% at December 31, 1996), respectively, with maturities in
2002 and  1999,  respectively.  The  notes  are  secured  by deeds of trust  and
assignment of rents of
three apartment properties.                                                                      9,954,423                 -

                                       31
<PAGE>

Variable rate notes  payable to affiliates  comprised of two loans due May 1999,
interest at the lower of 30-day  LIBOR plus 1.5% (7.1% at December  31, 1996) or
8%, payable quarterly. Liability for these
notes was assumed at the acquisition of BTVC.                                                    7,056,300         7,056,300
                                                                                               -----------       ----------- 
                                                                                               $77,352,257       $67,161,785
                                                                                               ===========       ===========

</TABLE>

As of December 31, 1996,  scheduled  principal  payments  are  approximately  as
follows:  1997  -  $495,000;  1998 -  $24,431,000;  1999  -  $9,026,000;  2000 -
$12,858,000; 2001 - $389,000; thereafter - $30,153,000.

The loan agreement  related to the  $25,500,000  note payable to a bank includes
covenants and restrictions relating to, among other things,  specified levels of
debt service coverage, leverage and net worth.

During 1996 the  Company  financed  the  purchase  of Paces  Village  Apartments
through first and second deed of trust loans totaling  $10,000,000  along with a
draw of $650,000 from the Company's existing credit facility. In addition, deeds
of trust  related to Paces  Commons  Apartments  and  Oakbrook  Apartments  were
modified to extend the terms of each note by five  years.  In  conjunction  with
these transactions the Company paid and recorded $139,000 in deferred loan costs
in 1996.

During December,  1995, the Company applied $29,425,000 proceeds from fixed rate
loans to retire a fixed  rate  mortgage  note and pay off  variable  rate  notes
payable and a variable  rate  revolving  line of credit  totaling  approximately
$29,250,000.  In conjunction with these  refinancing  transactions,  unamortized
loan costs of approximately $38,000 were charged to expense. In conjunction with
these  transactions  the Company  paid and  recorded  $183,000  and  $266,000 in
deferred loan costs in 1996 and 1995, respectively.

Interest payments were as follows:
<TABLE>
<CAPTION>

                                          1996              1995              1994
                                    ----------------- ----------------- -----------------
<S>                                  <C>               <C>              <C> 
Payments to affiliates                 $  506,389        $  530,733        $   17,581
Payments to other lenders               5,379,519         4,810,067         2,539,445
                                    ----------------- ----------------- -----------------
                                       $5,885,908        $5,340,800        $2,557,026
                                    ================= ================= =================

</TABLE>

Note 5.  Dividend Distributions

Dividend  distributions totaling $1.24 per share were paid during 1996, 1995 and
1994. The allocation between  non-taxable return of capital and taxable ordinary
dividend income to shareholders was as follows.

                                            1996          1995            1994
                                          ---------     --------        --------

Non-taxable return of capital               43.7%         51.8%           49.3%
Taxable ordinary dividend income            56.3%         48.2%           50.7%
 
A regular  quarterly  dividend  of $.31 per share was  declared  by the Board of
Directors on January 14, 1997,  payable on February 14, 1997, to shareholders of
record on January 31, 1997.

                                       32
<PAGE>


Note 6.  Rental Operations

Apartment  Properties.  The  Company  leases its  residential  apartments  under
operating  leases with  monthly  payments  due in advance.  The  majority of the
apartment  leases are for terms of one year or less,  with none  longer than two
years. Rental and other revenues are recorded as earned.

Restaurant  Properties  -  Master  Lease  Agreement.  In  conjunction  with  the
$25,500,000  loan  agreement  with a bank, in December 1995 the Company  entered
into an Amended and  Restated  Master Lease  Agreement  with  Enterprises  which
extended  the term of the  original  lease to an initial term ending in December
2007 and increased  minimum annual rent to $4,500,000.  Prior to amendment,  the
master  lease  required  the  lessee  to pay  minimum  annual  rent  equal to an
annualized rate of 8.0 percent of the aggregate purchase price of the properties
($3,459,433  in 1995  and  1994,  respectively),  and  percentage  rent of 9.875
percent of the quarterly  aggregate net sales from restaurant  operations on the
properties less the aggregate minimum rent payable for such calendar quarter.

As  amended,  the lease  requires  Enterprises  to pay monthly  installments  of
minimum annual rent equal to $4,500,000 and percentage  rent at 9.875 percent of
quarterly aggregate net sales from restaurant  operations on the properties less
minimum rent paid for such calendar quarter, subject to an annual calculation of
the  greater  of  minimum  or  percentage  rent.  In 1996 the  Company  received
approximately  $122,000 of excess rental  payments,  which have been recorded as
deferred revenue at December 31, 1996.

Enterprises is responsible for all taxes, utilities, renovations,  insurance and
maintenance expenses relating to the operation of the restaurant properties. The
lessee  may extend the lease for a maximum  of three  five-year  renewal  terms.
Under  certain  conditions  as defined  in the  agreement,  Enterprises  and the
Company  each have the right to  substitute  another  restaurant  property for a
property covered by the lease. The master lease provides that after December 31,
2007 (the beginning of the first renewal  period),  Enterprises has the right to
terminate the lease on up to five restaurant  properties per year by offering to
purchase them under specified  terms.  In addition,  the Company and Enterprises
have entered into a separate  agreement which,  after December 31, 1997,  allows
Enterprises to purchase under specified terms up to seven restaurant  properties
deemed to be uneconomic.

The components of restaurant rental income were as follows:

                               1996              1995              1994
                         ----------------- ----------------- -----------------

Minimum rent                $4,500,000        $3,459,433        $3,459,433
Percentage rent                      -         1,189,817         1,587,404
                         ----------------- ----------------- -----------------
                            $4,500,000        $4,649,250        $5,046,837
                         ================= ================= =================

Future  minimum  rental  payments to be received by the Company under the master
lease  agreement are $4,500,000  per year through 2007.  This annual amount does
not include percentage rent which may be earned in addition to minimum rent.

Approximately  31 percent of the  Company's  revenue  in 1996 was  derived  from
Enterprises' payment of rent for the use of the Company's restaurant properties.
In addition, Enterprises is responsible for all of the costs associated with the
maintenance and operation of these properties.  As a result,  the financial well
being of the Company is, to a large extent, dependent on Enterprises' ability to
meet its  obligations  under the  terms of the  master  lease.  The  ability  of
Enterprises  to satisfy  the  requirements  of the master  lease  depends on its
liquidity and capital resources. Historically, Enterprises has been able to meet
its liquidity  needs through cash flow  generated  from  operations  and through
reliance on its credit facility.

Enterprises'  principal line of business is the operation of  approximately  360
Hardee's  restaurants,  47 of which  are  owned by the  Company.  The  continued
decline  in  its  restaurant  sales  has  had  a  material  negative  impact  on
Enterprises' operating cash flow. Management has reviewed Enterprises' unaudited
financial  statements,  cash


                                       33
<PAGE>

flow  analysis,  restaurant  contribution  analysis,  sales trend  analysis  and
projections,  and believes that Enterprises  will have sufficient  liquidity and
capital  resources  to meet its  obligations  under the master  lease and credit
facility as well as its general corporate operating needs.


Note 7.  Related Party Transactions

Certain  directors  and  officers of the Company  hold  similar  positions  with
Enterprises and BNE Advisory Group, Inc. (an affiliate of Enterprises), and held
similar positions with BTVC.

The Company  purchased  the 47 Hardee's  restaurant  properties  from BNE Realty
Partners,  Limited  Partnership (an affiliate of Enterprises) for $43,243,000 in
1987.

The  Company  had an  agreement  through  September  30,  1994,  under which BNE
Advisory Group,  Inc. provided all  administrative  services and was responsible
for the  day-to-day  operations  of the  Company.  The  agreement  provided  for
compensation to BNE Advisory Group,  Inc. at an annual fee equal to 4.65 percent
of the  Company's  net  cash  available  for  distribution  (as  defined  in the
agreement)  before the advisory fee.  Advisory fee expense  totaled  $153,000 in
1994.  Effective  with the merger of BTVC on October 1, 1994, the agreement with
BNE Advisory Group, Inc. was terminated.

Prior to the Company's  acquisition  of BTVC, the Company paid BTVC $112,000 for
property management services in 1994.

Enterprises had extended to the Company an unsecured revolving line of credit up
to  $2,000,000.  Draws totaling  $1,100,000  were made and repaid in full during
1994. At December 31, 1994, there was no obligation outstanding.  In conjunction
with  modification  of the master  lease  agreement  (see Note 6),  this line of
credit was terminated in December 1995.


Note 8.  Acquisitions

On June 7,  1994,  the  Company  acquired  Oakbrook  Apartments,  a  residential
apartment  community  located in Charlotte,  North Carolina for a total purchase
cost of  $9,372,000.  The  purchase  was  financed  primarily  through  bank and
mortgage  borrowings.  The results of operations of Oakbrook are included in the
financial statements from June 7, 1994.

On October 1, 1994,  the Company  acquired by merger BTVC,  including  Latitudes
Apartments, for an initial purchase price including $91,000 in cash, $21,251,000
through  assumption of liabilities,  and 134,610 shares of the Company's  common
stock valued at $1,899,000.  The acquisition  agreement  provides for contingent
purchase  price  payments  ("additional  consideration")  of up to $1,700,000 if
certain future financial targets are attained.  The additional  consideration is
payable in shares of common stock or cash,  at the option of the  Company,  on a
quarterly  basis over a period of up to 14 quarters  commencing with the quarter
ended  December 31, 1994.  The  acquisition  was  accounted  for by the purchase
method of accounting,  and the total  acquisition cost of $26,326,000  (assuming
full earn-out of additional consideration and including approximately $1,385,000
in  acquisition   costs)   approximates  the  fair  value  of  assets  acquired.
Significant  assets acquired include the Latitudes  Apartments and an intangible
related  to  management  operations,   initially  recorded  at  $21,950,000  and
$2,250,000,  respectively.  Additional  consideration payments will be allocated
primarily to the intangible related to management  operations and amortized over
ten years. The results of operations of Latitudes and management  operations are
included in the financial statements from October 1, 1994.

On December 28, 1994, the Company acquired Harris Hill Apartments, a residential
apartment  community  located in Charlotte,  North Carolina for a total purchase
cost of  $8,871,000.  The  purchase  was  financed  primarily  through

                                       34
<PAGE>

bank and  mortgage  borrowings.  The  results of  operations  of Harris Hill are
included in the financial statements from December 28, 1994.

On April 29, 1996, the Company acquired Paces Village Apartments,  a residential
apartment  community located in Greensboro,  North Carolina for a total purchase
cost of  $10,667,000.  The  purchase  was  financed  primarily  through bank and
mortgage borrowings.  The results of operations of Paces Village are included in
the financial statements from April 29, 1996.

In conjunction with the BTVC acquisition and based on an earlier  estimate,  the
Company  issued  140,990  shares,  including  6,380 "excess  shares" to the BTVC
shareholders  in October  1994.  During  the fourth  quarter of 1994 and in each
quarter of 1995 and 1996 the financial targets for additional consideration were
met;  the  Company  recorded  additional  consideration  totaling  approximately
$1,275,000,  paid in part by  issuance  of 81,129  shares of  common  stock.  At
December  31,  1996,  the BTVC  shareholders  are due  additional  consideration
totaling approximately $356,000.

At December 31, 1996,  assuming the full contingent purchase price is earned and
paid  in  common  stock,  it  is  anticipated   that  the  Company  would  issue
approximately  62,000  additional shares of common stock in conjunction with the
acquisition.

The following  unaudited pro forma summary presents the results of operations as
if the  acquisition  of Paces  Village  Apartments  in 1996 had  occurred at the
beginning of periods  presented  and does not purport to be  indicative  of what
would  have  occurred  had the  acquisitions  been made as of those  dates or of
results which may occur in the future.

                                                  1996              1995
                                           ----------------- -----------------

Total revenue                                   $15,006,000       $15,193,000
Net income                                        1,690,000         1,489,000
Net income per common share                            0.56              0.50


Note 9.  Profit Sharing Plan

The employees of the Company are  participants in a profit sharing plan pursuant
to Section 401 of the Internal  Revenue Code. The Company makes limited matching
contributions based on the level of employee participation as defined.


Note 10.  Stock Option and Incentive Plan

In 1994 the Company  established  an employee  Stock Option and  Incentive  Plan
("Stock Option Plan") under which 280,000  shares of the Company's  common stock
are reserved for  issuance.  On October 17,  1994,  options to purchase  160,000
shares were granted to certain eligible  employees at $13.75 per share, the fair
value of the Company's  stock on the date the options were granted.  The options
vest and are  exercisable  one-fourth per year  beginning  October 17, 1995, and
expire October 17, 2004.  During 1996 options for 10,000 shares were  forfeited.
In January  1996 the  options  were  repriced  at $12.50,  the fair value of the
Company's common stock on the date of repricing.  At December 31, 1996,  options
for 75,000 shares have vested, and no options have been exercised. The remaining
contractual life of all options outstanding is 8.75 years.

In October 1995, the Financial  Accounting  Standards Board issued SFAS No. 123,
"Accounting  for  Stock-Based   Compensation"  ("FAS  123"),  which  establishes
financial accounting and reporting standards for stock-based compensation plans.
FAS 123 defines a fair value based method of  accounting  for an employee  stock
option or similar  equity  instrument and encourages the adoption of that method
of accounting.  However, FAS 123 also


                                       35
<PAGE>

allows  entities  to  continue  to  account  for  such  plans  under  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB 25").  Entities electing to remain with the accounting in APB 25 must make
pro forma  disclosures of net income and earnings per share as if the fair value
based method of accounting defined in FAS 123 had been applied.

The  Company  has  elected  to  follow  APB 25 and  related  Interpretations  in
accounting  for its employee  stock options  because,  as discussed  below,  the
alternative  fair value  accounting  provided  for under FAS 123 requires use of
option  valuation  models that were not  developed  for use in valuing  employee
stock  options.  Under  APB 25,  because  the  exercise  price of the  Company's
employee stock options  equals the market price of the  underlying  stock on the
date of repricing, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
FAS  123,  and has been  determined  as if the  Company  had  accounted  for its
employee stock options under the fair value method of that  Statement.  The fair
value  of  these  options  was  estimated  at the  date  of  repricing  using  a
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions for 1996: risk-free interest rate of 6.5 percent;  dividend yield of
9.9 percent;  volatility  factor of the expected  market price of the  Company's
common stock of .09; and a weighted-average  expected life of the option of 8.75
years.  The weighted average fair value of options as repriced in 1996 was $.06.
No options were granted in 1995.

The  effect  of  applying  the  FAS  123  fair  value  method  to the  Company's
stock-based  compensation results in net income and net income per share that is
not materially different from the amounts reported.


Note 11.  Dividend Reinvestment and Stock Purchase Plan

In July 1996 the Company's Dividend  Reinvestment and Stock Purchase Plan ("DRIP
Plan") was amended to allow the Company, at its option, to issue shares directly
to Plan  participants.  During 1996 the Company issued 19,207 shares through the
DRIP Plan.


Note 12.  Commitments and Contingencies

The Company has agreements with two of its executive  officers which provide for
cash  compensation  and other  benefits in the event that a change in control of
the Company occurs.

The Company is a party to a variety of legal proceedings arising in the ordinary
course of its  business.  Management  believes that such matters will not have a
material effect on the financial position of the Company.

On December 29, 1996, the Company experienced a fire which destroyed 20 units at
the Latitudes  Apartments.  The Company believes that it has adequate  insurance
coverage and does not expect this event to have a material adverse effect on the
Company's financial condition, results of operations, or cash flows.

                                       36
<PAGE>


Note 13.  Quarterly Financial Data (Unaudited)

Set forth  below is  selected  financial  data  (unaudited)  for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                                                   Net income  
                                Revenues         Net income        per share
                            ----------------- ----------------- ---------------
<S>                         <C>                <C>                    <C> 
1996
First quarter                 $ 3,307,505        $  379,174            $0.13
Second quarter                  3,623,992           435,338             0.14
Third quarter                   3,813,211           463,018             0.15
Fourth quarter                  3,763,116           438,285             0.14
                            ----------------- ----------------- ---------------
                              $14,507,824        $1,715,815            $0.57
                            ================= ================= ===============

1995
First quarter                 $ 3,353,182        $  388,106            $0.13
Second quarter                  3,528,028           526,125             0.18
Third quarter                   3,530,374           467,140             0.16
Fourth quarter (1)              3,314,054           246,897             0.08
                            ----------------- ----------------- ---------------
                              $13,725,638        $1,628,268            $0.54
                            ================= ================= ===============
<FN>
(1) Net  income  includes  a special  charge of  $321,000  to write off  certain
deferred acquisition costs and an adjustment to capitalize approximately $85,000
of expenditures for carpet, vinyl and wallpaper previously charged to expense in
the first three quarters.
</FN>
</TABLE>

                                       37
<PAGE>

BODDIE-NOELL PROPERTIES, INC.
----------------------------------------------------------------------------- 
Schedule III - Real Estate and Accumulated Depreciation
Year Ended December 31, 1996
<TABLE>
<CAPTION>
                                                                              Costs                        Gross Amount at Which
           Description             Encumb.           Initial Costs         Capitalized                Carried at Close of Period (2)
           -----------             -------           -------------                                    ------------------------------
                                                             Buildings &    Subsequent                  Buildings &                 
                                                  Land       Improvem'ts  to Acquisition     Land       Improvem'ts       Total     
<S>                             <C>           <C>           <C>             <C>           <C>         <C>             <C>
Apartment Properties:
North Carolina:
Paces Commons, Charlotte         $ 10,717,740  $  1,430,157  $ 12,871,424    $   435,611   $1,430,157  $ 13,307,035    $ 14,737,192 
Oakbrook, Charlotte                 6,496,448       848,835     8,523,384        262,909      848,835     8,786,293       9,635,128 
Harris Hill, Charlotte              6,104,161     1,003,298     7,867,857        291,284    1,003,298     8,159,141       9,162,439 
Paces Village, Greensboro           9,954,423     1,250,000     9,416,580         56,408    1,250,000     9,472,988      10,722,988 
                                              --------------------------------------------------------------------------------------
                                                  4,532,290    38,679,245      1,046,212    4,532,290    39,725,457      44,257,747 
Virginia:
Latitudes, Virginia Beach          13,123,185     3,360,000    18,606,667        385,634    3,360,000    18,992,301      22,352,301 
                                ----------------------------------------------------------------------------------------------------
Total Apartment Properties         46,395,957     7,892,290    57,285,912      1,431,846    7,892,290    58,717,758      66,610,048 

Hardee's Restaurant Properties:
North Carolina:
Bessemer City                        (1)            152,079       391,060              -      152,079       391,060         543,139 
Burlington                           (1)            162,411       417,629              -      162,411       417,629         580,040 
Chapel Hill                          (1)            273,556       703,430              -      273,556       703,430         976,986 
Denver                               (1)            275,484       708,387              -      275,484       708,387         983,871 
Eden                                 (1)            253,282       651,296              -      253,282       651,296         904,578 
Fayetteville (Ramsey)                (1)            260,135       668,919              -      260,135       668,919         929,054 
Fayetteville (N.Eastern)             (1)            308,271       792,696              -      308,271       792,696       1,100,967 
Fayetteville (Bragg)                 (1)            235,951       606,730              -      235,951       606,730         842,681 
Gastonia (E. Franklin)               (1)            230,421       592,511              -      230,421       592,511         822,932 
Gastonia (N. Chester)                (1)            199,133       512,055              -      199,133       512,055         711,188 
Hillsborough                         (1)            290,868       747,948              -      290,868       747,948       1,038,816 
Kinston (W. Vernon)                  (1)            237,135       609,777              -      237,135       609,777         846,912 
Kinston (Richlands)                  (1)            231,678       595,743              -      231,678       595,743         827,421 
Mt. Airy                             (1)            272,205       699,955              -      272,205       699,955         972,160 
Newton                               (1)            223,453       574,594              -      223,453       574,594         798,047 
Siler City                           (1)            268,312       689,945              -      268,312       689,945         958,257 
Spring Lake                          (1)            218,925       562,949              -      218,925       562,949         781,874 
Thomasville (E. Main)                (1)            253,716       652,411              -      253,716       652,411         906,127 
Thomasville (Randolph)               (1)            327,727       842,726              -      327,727       842,726       1,170,453 
                                              --------------------------------------------------------------------------------------
                                                  4,674,742    12,020,761              -    4,674,742    12,020,761      16,695,503 

<FN>
(1)  Indicates  the 47  restaurants  encumbered  by the bank  term loan of up to
$25,500,000;  $23,900,000 outstanding at 12/31/96 

(2)  Aggregate  cost at December 31, 1996,  for Federal  income tax purposes was
$106,878,323
</FN>
</TABLE>


<TABLE>
<CAPTION>


           Description          
           -----------                      
                                              Accumulated  Date of   Date    Life       
                                             Depreciation  Constr. Acquired (Years)                                     
<S>                                           <C>           <C>     <C>        <C>
Apartment Properties:                                                                    
North Carolina:                                                                         
Paces Commons, Charlotte                       $1,285,494    1988   Jun-93      40      
Oakbrook, Charlotte                               614,332    1985   Jun-94      40      
Harris Hill, Charlotte                            499,924    1988   Dec-94      40      
Paces Village, Greensboro                         193,187    1988   Apr-96      40      
                                            ---------------                             
                                                2,592,937                               
Virginia:                                                                               
Latitudes, Virginia Beach                       1,311,416    1989   Oct-94      38      
                                            ---------------                             
Total Apartment Properties                      3,904,353                               
                                                                                        
Hardee's Restaurant Properties:                                                         
North Carolina:                                                                         
Bessemer City                                      94,914  Nov-77   Apr-87      40      
Burlington                                        101,361  Oct-85   Apr-87      40      
Chapel Hill                                       170,728  Aug-64   Apr-87      40      
Denver                                            171,931  Jul-83   Apr-87      40      
Eden                                              158,074  Jun-73   Apr-87      40      
Fayetteville (Ramsey)                             162,352  Oct-73   Apr-87      40      
Fayetteville (N.Eastern)                          192,393  Sep-83   Apr-87      40      
Fayetteville (Bragg)                              147,258  Jan-85   Apr-87      40      
Gastonia (E. Franklin)                            143,807  Apr-63   Apr-87      40      
Gastonia (N. Chester)                             124,279  Jan-78   Apr-87      40      
Hillsborough                                      181,532  Mar-78   Apr-87      40      
Kinston (W. Vernon)                               147,997  Jul-62   Apr-87      40      
Kinston (Richlands)                               144,591  Dec-81   Apr-87      40      
Mt. Airy                                          169,884  May-73   Apr-87      40      
Newton                                            139,459  Mar-76   Apr-87      40      
Siler City                                        167,455  May-79   Apr-87      40      
Spring Lake                                       136,632  Mar-76   Apr-87      40      
Thomasville (E. Main)                             158,345  Feb-66   Apr-87      40      
Thomasville (Randolph)                            204,535  Apr-74   Apr-87      40      
                                            --------------                              
                                                2,917,526                               
                                                                                        
</TABLE>


                                       38
<PAGE>
        
BODDIE-NOELL PROPERTIES, INC.
----------------------------------------------------------------------------- 
Schedule III - Real Estate and Accumulated Depreciation
Year Ended December 31, 1996
<TABLE>
<CAPTION>

                                                                               Costs                  Gross Amount at Which
           Description             Encumb.           Initial Costs         Capitalized           Carried at Close of Period (2)
           -----------             -------           -------------                              ------------------------------
                                                             Buildings &    Subsequent                  Buildings &                 
                                                  Land       Improvem'ts  to Acquisition     Land       Improvem'ts       Total     
<S>                                 <C>        <C>           <C>            <C>           <C>           <C>            <C>
Virginia:
Ashland                              (1)            296,509       762,452              -       296,509       762,452       1,058,961
Blackstone                           (1)            275,565       708,596              -       275,565       708,596         984,161
Bluefield                            (1)            205,700       528,947              -       205,700       528,947         734,647
Chester                              (1)            300,165       771,852              -       300,165       771,852       1,072,017
Clarksville                          (1)            211,545       543,972              -       211,545       543,972         755,517
Clintwood                            (1)            222,673       572,588              -       222,673       572,588         795,261
Dublin                               (1)            364,065       936,168              -       364,065       936,168       1,300,233
Franklin                             (1)            287,867       740,230              -       287,867       740,230       1,028,097
Galax                                (1)            309,578       796,057              -       309,578       796,057       1,105,635
Hopewell                             (1)            263,939       678,701              -       263,939       678,701         942,640
Lebanon                              (1)            266,340       684,876              -       266,340       684,876         951,216
Lynchburg (Langhorne)                (1)            249,865       642,509              -       249,865       642,509         892,374
Lynchburg (Timberlake)               (1)            276,153       710,107              -       276,153       710,107         986,260
Norfolk                              (1)            325,822       837,829              -       325,822       837,829       1,163,651
Orange                               (1)            244,883       629,699              -       244,883       629,699         874,582
Petersburg                           (1)            357,984       920,531              -       357,984       920,531       1,278,515
Richmond (Forest Hill)               (1)            196,084       504,216              -       196,084       504,216         700,300
Richmond (Midlothian)                (1)            270,736       696,179              -       270,736       696,179         966,915
Richmond (Myers)                     (1)            321,946       827,861              -       321,946       827,861       1,149,807
Roanoke (Hollins)                    (1)            257,863       663,076              -       257,863       663,076         920,939
Roanoke (Abenham)                    (1)            235,864       606,507              -       235,864       606,507         842,371
Rocky Mount                          (1)            248,434       638,829              -       248,434       638,829         887,263
Smithfield                           (1)            223,070       573,608              -       223,070       573,608         796,678
Staunton                             (1)            260,569       670,035              -       260,569       670,035         930,604
Verona                               (1)            191,631       492,765              -       191,631       492,765         684,396
Virginia Beach (Lynnhaven)           (1)            271,570       698,322              -       231,731       698,322         930,053
Virginia Beach (Holland)             (1)            277,943       714,710              -       277,943       714,710         992,653
Wise                                 (1)            219,471       564,355              -       219,471       564,355         783,826
                                              --------------------------------------------------------------------------------------
                                                  7,433,834    19,115,577              -     7,393,995    19,115,577      26,509,572
                                ----------------------------------------------------------------------------------------------------
Total Restaurant Properties        23,900,000    12,108,576    31,136,338              -    12,068,737    31,136,338      43,205,075
                                ----------------------------------------------------------------------------------------------------
 Total Real Estate               $ 70,295,957  $ 20,000,866  $ 88,422,250    $ 1,431,846  $ 19,961,027  $ 89,854,096   $ 109,815,123
                                ====================================================================================================

<FN>
(1)  Indicates  the 47  restaurants  encumbered  by the bank  term loan of up to
$25,500,000;  $23,900,000 outstanding at 12/31/96 

(2)  Aggregate  cost at December 31, 1996,  for Federal  income tax purposes was
$106,878,323
</FN>
</TABLE>



<TABLE>
<CAPTION>


           Description             
           -----------             
                                     Accumulated  Date of   Date    Life        
                                    Depreciation  Constr. Acquired (Years)      
<S>                                  <C>           <C>      <C>        <C>   
Virginia:                                                                       
Ashland                                   185,053  Apr-87   Apr-87      40      
Blackstone                                171,982  Sep-79   Apr-87      40      
Bluefield                                 128,379  Feb-85   Apr-87      40      
Chester                                   187,334  May-73   Apr-87      40      
Clarksville                               132,026  Oct-85   Apr-87      40      
Clintwood                                 138,971  Jan-81   Apr-87      40      
Dublin                                    227,214  Jul-83   Apr-87      40      
Franklin                                  179,660  Feb-75   Apr-87      40      
Galax                                     193,208  Jun-74   Apr-87      40      
Hopewell                                  164,726  Jun-78   Apr-87      40      
Lebanon                                   166,225  Jun-83   Apr-87      40      
Lynchburg (Langhorne)                     155,941  Sep-82   Apr-87      40      
Lynchburg (Timberlake)                    172,348  Aug-83   Apr-87      40      
Norfolk                                   203,347  Aug-84   Apr-87      40      
Orange                                    152,832  Aug-74   Apr-87      40      
Petersburg                                223,420  Mar-74   Apr-87      40      
Richmond (Forest Hill)                    122,377  Nov-74   Apr-87      40      
Richmond (Midlothian)                     168,967  Jan-74   Apr-87      40      
Richmond (Myers)                          200,928  Apr-83   Apr-87      40      
Roanoke (Hollins)                         160,934  Feb-73   Apr-87      40      
Roanoke (Abenham)                         147,204  Nov-82   Apr-87      40      
Rocky Mount                               155,048  May-80   Apr-87      40      
Smithfield                                139,218  Apr-77   Apr-87      40      
Staunton                                  162,623  Sep-83   Apr-87      40      
Verona                                    119,597  Jan-85   Apr-87      40      
Virginia Beach (Lynnhaven)                169,488  Jun-80   Apr-87      40      
Virginia Beach (Holland)                  173,466  Aug-83   Apr-87      40      
Wise                                      136,971  Jun-80   Apr-87      40      
                                   ---------------                              
                                        4,639,486                               
                                   ---------------                              
Total Restaurant Properties             7,557,012                               
                                   ---------------                              
 Total Real Estate                   $ 11,461,365                               
                                   ===============                              
                                                                                
                                                                       
</TABLE>


                                       39
<PAGE>

BODDIE-NOELL PROPERTIES, INC.
-----------------------------------------------------------------------------
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>

                                                                      Years ended December 31
                                                       1996                 1995                     1994
                                                 -------------------  ---------------------  ---------------------
<S>                                                 <C>                 <C>                   <C>
Real estate investments:
     Balance at beginning of year                    $   98,520,761      $     97,928,578      $    57,557,243
     Additions during year
        Acquisitions by merger                                    -                     -           21,966,667
        Other acquisitions                               10,666,580                     -           18,243,374
        Improvements, etc.                                  627,782               592,183              161,294
     Deductions during year                                       -                     -                    -
                                                 -------------------  ---------------------  ---------------------
     Balance at close of year                        $  109,815,123      $     98,520,761      $    97,928,578
                                                 ===================  =====================  =====================


Accumulated depreciation:
     Balance at beginning of year                    $    9,020,948      $       6,827,337     $     5,416,818
     Provision for depreciation                           2,440,417              2,193,611           1,410,519
     Deductions during year                                       -                      -                   -
                                                 -------------------  ---------------------  ---------------------
     Balance at close of year                        $   11,461,365      $       9,020,948     $     6,827,337
                                                 ===================  =====================  =====================


</TABLE>

                                       40
<PAGE>



                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>

  Exhibit
    No.                                                                                                Page
  <S>       <C>                                                                                         <C>
    2*       Agreement and Plan of Merger between BT Venture Corporation and
             Boddie-Noell Restaurant Properties, Inc. (filed as Exhibit (2)-2 to
             Boddie-Noell Properties, Inc. Current Report on Form 8-K dated 
             October 1, 1994, and incorporated herein by reference)
    3.1*     Articles of Incorporation (filed as Exhibit 3(a) to Registration 
             Statement No. 33-13155 on Form S-11 and incorporated herein by
             reference)
    3.2*     By-Laws (filed as Exhibit 3.2 to Boddie-Noell Properties, Inc. 
             Annual Report on Form 10-K dated December 31, 1995, and 
             incorporated herein by reference)
   10.1*     Amended and Restated Master Lease Agreement dated December 21,
             1995, between Boddie-Noell Properties, Inc. and Boddie-Noell
             Enterprises, Inc. (filed as Exhibit 10.1 to Boddie-Noell 
             Properties, Inc. Annual Report on Form 10-K dated December 31,
             1995, and incorporated herein by reference)
   10.2*     Loan Agreement dated December 27, 1995, between Boddie-Noell 
             Properties, Inc. and SouthTrust Bank of Alabama, N.A. (filed as 
             Exhibit 10.2 to Boddie-Noell Properties, Inc. Annual Report on 
             Form 10-K dated December 31, 1995, and incorporated herein by
             reference)
   10.3*     Acquisition   Agreement  by  and  among   Boddie-Noell   Restaurant
             Properties, Inc., BT Venture Corporation and Related Entities dated
             June  7,  1994  (filed  as an  exhibit  in  Schedule  14A of  Proxy
             Statement  dated  June  15,  1994,  and   incorporated   herein  by
             reference)
   10.4*     Boddie-Noell Restaurant Properties, Inc. 1994 Stock Option and
             Incentive Plan effective August 4, 1994 (filed as an exhibit in
             Schedule 14A of Proxy Statement dated June 15, 1994, and 
             incorporated herein by reference)
   10.5*     Form and  description of Incentive  Stock Option  Agreements  dated
             October 17, 1994 between the Company and certain officers (filed as
             Exhibit 10.8 to Boddie-Noell Properties, Inc. Annual Report on Form
             10-K dated December 31, 1994, and incorporated herein by reference)
   10.6*     Form and description of Nonqualified  Stock Option Agreements dated
             October 17, 1994 between the Company and certain officers (filed as
             Exhibit 10.9 to Boddie-Noell Properties, Inc. Annual Report on Form
             10-K dated December 31, 1994, and incorporated herein by reference)
   10.7*     Form and description of Employment Agreements dated October 1, 1994
             between the Company and certain officers (filed as Exhibit 10.10 to
             Boddie-Noell  Properties,  Inc.  Annual  Report on Form 10-K  dated
             December 31, 1994, and incorporated herein by reference)
   21        Subsidiaries of the Registrant                                                             42
   23.1      Consent of Ernst & Young LLP                                                               43
   23.2      Consent of Arthur Andersen LLP                                                             44
   27        Financial Data Schedule (electronic filing)

</TABLE>

*  Incorporated herein by reference


                                       41
<PAGE>