RESORT INCOME INVESTORS INC, 10KSB, 1997-04-15

RESORT INCOME INVESTORS INC
10KSB, 1997-04-15
REAL ESTATE INVESTMENT TRUSTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-KSB

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

[ ] 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 1-10084

RESORT INCOME INVESTORS, INC.
----------------------------------------------
(Name of small business issuer in its charter)

Delaware 36-3593298
(State of other jurisdiction of (I.R.S. Employer Iden-
incorporation or organization) tification Number)

150 South Wacker Drive, Suite 2900, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (312) 683-3323

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

Title of each class Name of each exchange on which registered
Shares of Common Stock NASDAQ Electronic Bulletin Board

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

None
(Title of Class)

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

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

State the number of shares of common stock outstanding as of March 10,
1997: 4,156,000.

State issuer's revenues for its most recent fiscal year: $70,703.

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within
the past 60 days: $1,081,193.

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the prospectus of the Registrant dated October 24, 1988 (the
"Prospectus") and filed pursuant to Rule 424 under the Securities Act of
1933 is incorporated by reference into Parts II and III of this Annual
Report on Form 10-KSB.

TABLE OF CONTENTS

Page
----

PART I

ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . 1

ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . 4

ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 4

ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS. . . . . . . . . . . . 5

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . 6

ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION . . . . . . . . . 7

ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . 16

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 16

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT. . . . . 17

ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . 18

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . 19

ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS. . . . . . . . . . . . . . 20

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . 21

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 22

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Certain statements in this Annual Report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Discussions containing forward-
looking statements may be found in this section and in the section headed
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Without limiting the foregoing, words such as "anticipates,"
"expects," "intends," "plans" and similar expressions are intended to
identify forward-looking statements. These statements are subject to a
number of risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements. The Company
undertakes no obligation to update these forward-looking statements to
reflect future events or circumstances.

The Registrant, Resort Income Investors, Inc. (the "Company"), is a
Delaware corporation organized pursuant to a Certificate of Incorporation
filed on July 20, 1988. The Company commenced a public offering of up to
3,600,000 shares of common stock (subject to increase to 4,140,000 shares
to cover over-allotments) pursuant to a Registration Statement filed on
Form S-11 under the Securities Act of 1933, as amended, which was declared
effective by the Securities and Exchange Commission on October 24, 1988.
Pursuant to the public offering, the Company received gross proceeds of
$51,750,000 from the sale of 4,140,000 shares, plus an additional $200,000
from the sale of 16,000 shares to RC&H, Inc. ("RC&H"), the Company's
initial investment manager, at the public offering price of $12.50 per
share.

In late June 1995, Mr. Christopher B. Hemmeter ("CBH"), then the
Chairman of the Board, President and Chief Executive Officer of the
Company, informed the Company that interest and principal would not be paid
when due on demand loans made by the Company to him personally or to
entities affiliated with him (the "Affiliated Borrowers"). Further, he
informed the Company that he would not be able to make timely payments of
such interest and principal on behalf of the Affiliated Borrowers pursuant
to guarantees he had made in connection with the Affiliated Borrowers'
loans, thereby creating an event of default for each of the loans. The
affected loans constituted all of the demand loans to related parties held
by the Company, aggregating $36,605,000, of which CBH was personally the
borrower of $15,000,000 and the Affiliated Borrowers were the borrowers of
$21,605,000, as of the date of such announcement.

The Company announced on June 29, 1995, that it would commence an
orderly self-liquidation of its assets over an estimated 24- to 36-month
period. The Company also determined that it would take a charge to income
in the second quarter of 1995 in an amount that, in management's judgment,
would be adequate to absorb estimated losses related to the loan portfolio.

The amount of the charge was based on management's judgments regarding the
ability of CBH and the Affiliated Borrowers to repay such loans and also
reflected management's judgments concerning the extent that the estimated
realizable value of the Company's collateral would not provide for the
recovery of the Company's investment in the loans and accrued interest, in
light of CBH's inability to perform on his guarantees in a timely manner.
The Company reflected, for the second quarter of 1995, an allowance of
$10,367,903, consisting of $9,900,000 for the loan to CBH and $467,903 for
uncollectibility of interest accrued as of December 31, 1994 but unpaid as
of June 30, 1995. Further, interest of $2,043,017 accrued during 1995 but
unpaid as of June 30, 1995, was reversed by a charge against interest
income. Additionally, $1,250,000 was provided for amounts that management
estimated would be needed to advance to first lien holders and others to
protect the Company's collateral position while the plan of liquidation,
which includes negotiations with CBH and the Affiliated Borrowers, is
accomplished.

The Company also announced that Messrs. John R. Young and Daniel D.
Lane, the Company's then independent directors (the "Independent
Directors") would assume responsibility for negotiations with CBH and the
Affiliated Borrowers to maximize the Company's recovery of its investment
in loans and accrued interest. Based on information provided to the
Independent Directors by CBH and the Affiliated Borrowers, the Independent
Directors reviewed CBH's financial condition, the financial condition of
the Affiliated Borrowers, the terms of the Company's loans, the collateral
for certain of the loans (including the existence of senior liens on
certain of the collateral), appraisals of certain of such collateral and
other information concerning the value of the other collateral, and other
factors, to determine the amount of the charge and in reaching a decision
to proceed with the liquidation of the Company's assets.

The Company also decided to cease accruing interest on its current
loans for financial statement purposes only and convert each of its loans
to the Affiliated Borrowers maturing June 30, 1995 to demand loans, and
that periodic liquidating distributions be made to the stockholders of the
Company as loans are repaid, subject to allowances for necessary reserves
and working capital, to allow the Company to protect its remaining
collateral position and assets and, in that regard, that all quarterly
distributions be eliminated. Finally, the Company determined that no new
loans would be made by the Company and that any additional advances related
to existing loans to the Affiliated Borrowers would be made only in an
effort to protect the collateral position of the Company.

In addition, the Company, on June 29, 1995, also terminated its
advisory agreement with RII Advisors, Inc. ("RII Advisors"), the Company's
investment manager, which entity was controlled by affiliates of CBH.

On August 8, 1995, CBH resigned as Chairman of the Board, President
and Chief Executive Officer of the Company and Mr. Mark M. Hemmeter, the
son of CBH, resigned his positions with the Company as Executive Vice
President, Secretary, Treasurer and Director of the Company. On such date,
the resignations of CBH and Mark Hemmeter were accepted by the Independent
Directors. Also, the Company decided that Mr. John R. Young, an
Independent Director since the Company's inception in 1988, would become
the Chairman of the Board of Directors, President, Chief Executive Officer
and Chief Financial Officer of the Company immediately. Also, Mr. Daniel
D. Lane, an Independent Director of the Company since 1990, would remain an
Independent Director of the Company and also be designated as the Company's
Secretary, Treasurer and Chief Accounting Officer. At this time, the
Company also retained the consulting services of Mr. Neil D. Hansen to work
with the Company's Directors in connection with the Company's orderly self-
liquidation of its assets. From the inception of the Company through 1990,
Mr. Hansen was the Company's Executive Vice President, Secretary and
Treasurer. The Company also decided to relocate its headquarters to
Chicago, Illinois and establish banking relations with LaSalle National
Bank of Chicago.

The Company determined to suspend distribution payments to the
Stockholders in light of the pending litigation filed against the Company
and certain of its current and former officers and directors. See Item 3.

From inception of the Company until May 4, 1991, RC&H acted as the
Company's investment manager. On February 16, 1991, a majority of the then
independent directors of the Company authorized the termination of the
investment management agreement with RCH effective May 4, 1991. On such
date, RII Advisors became the Company's Investment Manager. Both advisors
were controlled by affiliates of CBH. As described earlier, on June 29,
1995, the Company terminated its investment management agreement with RII
Advisors and retained Mr. Hansen, an outside consultant, to assist the
Directors in the orderly self-liquidation of the Company. RC&H and RII
Advisors, when discussed in connection with their capacity as the former
investment managers to the Company, shall be referred to herein
collectively as the "Investment Manager."

The original business plan of the Company contemplated the Company
principally making mortgage loans primarily to affiliates of CBH ("Mortgage
Loans") which would generally be secured by either luxury destination
resorts or unimproved property anticipated to be developed into luxury
destination resorts. In light of the state of the real estate market in
general during the early 1990's, and the resort development market in
particular, the Company shifted its focus to making Mortgage Loans secured
by gaming related developments or unimproved property anticipated to be
developed into gaming related developments. The Mortgage Loans were to be
secured principally by junior and, to a lesser extent, senior mortgages on
real properties or by interests in other real estate investment trust-
qualifying assets. In addition, Hemmeter Guaranty Corporation (the
"Guarantor"), an affiliate of CBH, agreed to purchase defaulted Mortgage
Loans, if any, made to Affiliated Borrowers, in an aggregate amount of up
to 20% of the gross proceeds of the Company's public offering (the
"Mortgage Loan Purchase Guaranty"). Pursuant to the Mortgage Loan Purchase
Guaranty, the Guarantor was to pay the amount of any accrued but unpaid
base interest plus the amount of the outstanding principal and interest
reserve, subject to the Mortgage Loan Purchase Guaranty.

The Company's objectives in making investments in Mortgage Loans were
to: (i) distribute cash on a quarterly basis to stockholders (the
"Stockholders"); (ii) preserve and protect the Stockholders' capital; and
(iii) realize the benefit of capital appreciation in the value of the
assets collateralizing the Mortgage Loans through the receipt of bonus
interest.

The Company's objective was to structure its Mortgage Loan portfolio
to provide for the receipt of points, base interest and bonus interest at
combined rates sufficient to allow the Company to make distributions to the
Stockholders on a quarterly basis, at a rate equal to a 12% per annum, non-
compounded, cumulative return on the initial public offering price ($12.50
per share), or $1.50 per share annually. This return was guaranteed (the
"Cash Flow Guaranty") for the period from October 31, 1988 (initial closing
date) through October 31, 1991 (the "Cash Flow Guaranty Period").
Throughout such period, Affiliated Borrowers were obligated to pay
supplemental interest in amounts necessary to enable the Company to make
the specified distributions, which amounts were provided by the Guarantor
to the Affiliated Borrowers pursuant to the Cash Flow Guaranty. During the
Cash Flow Guaranty Period a total of $385,528 of supplemental interest was
required and subsequently paid in order that the Company meet its cash flow
requirements under the Cash Flow Guaranty. These amounts were credited
dollar-for-dollar against up to 50% of the amounts later remitted by the
Affiliated Borrowers as bonus interest, and all but $11,752 of the total
amount of supplemental interest was recaptured in this manner.

On July 25, 1995, the Company was informed that the Securities and
Exchange Commission (the "Commission") was conducting an informal inquiry
of matters related to the Company. The Company has and continues to
provide information to the Commission in response to the Commission's
document requests. On October 25, 1995, the Commission converted the
informal inquiry to a formal investigation.

In October 1995, the Company also decided to retain an independent
financial advisor to review the status of the Company's loans, the
financial position of the Affiliated Borrowers and the proposed work out
plans to be presented by the Affiliated Borrowers. It was determined that
an independent third party with extensive experience in real estate finance
related matters would provide the Directors with additional pertinent
information so as to assist the Directors as the Company proceeds with its

self-liquidation. The Company sought bids from various independent
financial advisors and retained the firm of Coopers & Lybrand L.L.P.
("C&L") on November 3, 1995. C&L analyzed certain assets securing the
Company's Waikiki, Outlaws, Canadian Pavilion, Sint Maarten and CBH Loans.
The scope of services included analysis of the current status of the loans,
alternative courses of action and C&L's recommendations with regards to an
appraisal estimating the value of one of the assets collateralizing one of
the Company's loans.

The Company also decided that it would seek to locate an additional
Director who would be considered independent under the terms of the
Company's Amended and Restated By-Laws. On January 26, 1996, Messrs. Young
and Lane appointed Mr. Thomas A. Ellsworth as an Independent Director of
the Company, as well as a member of its Audit Committee. See Item 9.

As of December 31, 1996, the Company's investment in loans had a
carrying value of $4,127,891, which is net of a $14,267,000 allowance for
impairment of the loan to CBH and his wife, a $11,115,700 allowance for
impairment of the Company's loan to R.C.H. Investments, L.L.C., an
Affiliated Borrower, and a $1,686,200 allowance for impairment on the
Company's loans to the Outlaws Borrower, an Affiliated Borrower. At
December 31, 1996, all the loans are on non-accrual status. Additionally,
at December 31, 1996, the Company had advanced approximately $743,000 to
the Affiliated Borrowers in an effort to protect the Company's collateral
positions.

The Company qualified and will be treated as a real estate investment
trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986,
as amended, for the year ended December 31, 1996. Management of the Company
believes that the Company will not be required to make distributions to the
Stockholders in the near term to maintain its status as a REIT.

The Company did not directly employ any persons during 1996. The
Independent Directors were compensated for their services as directors and
the Company entered into consulting arrangements with Messrs. Young and
Hansen. See Items 9 and 10 for further details.

ITEM 2. DESCRIPTION OF PROPERTY

The Company was formed to make Mortgage Loans and Temporary
Investments collateralized by interests in non-operating real property or
other real estate investment trust qualifying assets and will not own any
properties unless it is a result of a foreclosure action against the
collateral of its Affiliated Borrowers. See Notes 4 and 5 of the Notes to
Financial Statements for information pertaining to the properties which
collateralize the Company's loans.

ITEM 3. LEGAL PROCEEDINGS

(a & b)

ITEM 3. LEGAL PROCEEDINGS (Continued)

Christopher R. Hemmeter ("CRH"), Gregory Hooper ("GH") and John R. Young
("JRY"). In November 1995, the two actions were consolidated. On November
27, 1995, the plaintiffs moved to have the consolidated actions certified
as a class action for investors who purchased or acquired stock in the
Company between March 1, 1993 and June 29, 1995. On December 6, 1995, the
plaintiffs filed a consolidated amended complaint containing similar
allegations or claims as asserted in the SARNOFF and CONTRACT class
actions. The consolidated amended complaint seeks an unspecified amount of
actual damages and reimbursement of costs and expenses. On January 16,
1996, the defendants moved to dismiss the consolidated amended complaint
for failure to state a claim. On February 29, 1996, the defendants filed
opposition papers to the plaintiffs' motion for class certification. On
October 25, 1996, the Court heard arguments on the defendants' motion to
dismiss and the plaintiffs' notice for class certification. No ruling has
been issued to date. The parties are currently engaged in discovery.

No assessment of the outcome of this action or the amount or range of
any loss that might be incurred by the Company can be made at this time.
However, the Company intends to defend against the charges as it believes
it did not violate the federal securities laws. Pursuant to the Company's
by-laws and Delaware law, the Company is advancing CBH's, MMH's, CRH's,
GH's, DDL's and JRY's costs of defense in this matter. CBH, MMH, CRH, GH,
DDL and JRY have executed undertakings to repay the Company for the
advances if it is ever determined that they were not entitled to receive
the advances. No estimates can reasonably be made at this time of the
costs of defense of the Company, CBH, MMH, CRH, GH, DDL and JRY.

In June 1995, two derivative actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County, "Alpert v.
Hemmeter et al., Doc. No. 14839," and "Frank, et al. v. Hemmeter et al.,"
Doc No. 14413. The Company is a nominal defendant in each of these cases.
The defendants in both cases are CBH, MMH, DDL and JRY. The complaints
purport to allege that the officers and directors breached their fiduciary
duties to the Company, wasted Company assets and that CBH stood in a
conflict of interest position. The complaints have now been consolidated.
The defendants have moved to dismiss the consolidated derivative action for
failure to comply with the requirements of Delaware law. Pursuant to the
Company's by-laws and Delaware law, the Company will advance to the
individual defendants their defense costs. CBH, MMH, CRH, GH, DDL and JRY
have agreed to repay the Company for the advances if it is ever determined
that they were not entitled to receive the advances. No estimate can
reasonably be made at this time of the costs of defense. Both complaints
pray for unspecified damages.

On October 25, 1995, the Commission issued a formal order of
investigation captioned In the Matter of Resort Income Investors, Inc.,
Case No. HO-5327. In connection with the investigation, the Company was
requested to produce certain documents and information. The Company has
complied with these requests. The Company has been advised that the
investigation should not be construed as an indication by the Commission or
its staff that any violation of law has occurred, nor as a reflection upon
any person, entity or security. The Company cannot, at this time, predict
the outcome of the investigation or the financial impact, if any, to the
Company.

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

(a - d) None

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) The Company's shares of common stock were listed and traded on
the American Stock Exchange (the "AMEX") under the symbol "RII" until the
Company's shares were delisted from the AMEX on April 26, 1996.
Subsequently, a market for the Company's common stock was established via
the electronic bulletin board system of the National Association of
Securities Dealers Automated Quotations ("NASDAQ EBB"), under the symbol
"RIIV." The high and low sales prices for the shares by quarter for the
two years ended December 31, 1996 were as follows:

Quarter Quarter's Quarter's
Ending High Low
------- --------- ---------

03/31/95 $10.375 $8.500
06/30/95 10.500 2.000
09/30/95 4.375 1.875
12/31/95 2.813 1.000

03/31/96 1.500 1.063
06/30/96 1.000 .400
09/30/96 .688 .375
12/31/96 .547 .156

(b) As of the date hereof, there are approximately 851 recordholders
of the Company's shares.

(c) The Company paid a distribution to the Stockholders in the
amount of $1,558,500, or $.375 per share, on May 10, 1995. The Company did
not pay any distributions to the Stockholders in 1996. For the years ended
December 31, 1995 and 1996, return of capital constituted $0.375 and $0 per
share; respectively. These distributions provided each Stockholder with a
cash return on the original issue price ($12.50 per share) equal to 3.0%
per annum for 1995 and 0% for 1996.

The Company intends to make distributions to Stockholders in a amount
equal to at least 95% of its taxable income in order to continue to qualify
as a REIT in accordance with the Code. The Company intends to make
liquidating distributions as cash receipts from loan recoveries are
received, less any amounts reserved to cover Company operating needs prior
to completion of the liquidation, including the cost of defending the
pending litigation. The Company continues in its determination to suspend
distribution payments to the Stockholders in light of the pending
litigation filed against the Company and certain of its current and former
officers and directors and to protect the Company's collateral position.
See Item 3.

On March 25, 1996, the Company announced that it will not appeal the
decision of the AMEX to remove its common stock from the AMEX and,
therefore, has consented to such removal. This action became necessary
since the Company decided to self-liquidate in an orderly fashion and no
longer satisfied the financial guidelines of the AMEX for continued
listing. Subsequent to the delisting from the AMEX on April 26, 1996, a
market for the Company's common stock was established via the NASDAQ EBB.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

Certain statements in this Annual Report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Discussions containing forward-
looking statements may be found in this section and in the section headed
"Description of Business." Without limiting the foregoing, words such as
"anticipates," "expects," "intends," "plans" and similar expressions are
intended to identify forward-looking statements. These statements are
subject to a number of risks and uncertainties. Actual results could
differ materially from those projected in the forward-looking statements.
The Company undertakes no obligation to update these forward-looking
statements to reflect future events or circumstances.

LIQUIDITY AND CAPITAL RESOURCES

PLAN OF OPERATION

As of December 31, 1996, the Company had four temporary investments
outstanding with carrying values totalling $4,127,891. Each of these
temporary mortgage loan investments, the status of which are described
below, were declared in default during 1995. Since June 30, 1995, the
Affiliated Borrower of the Waikiki and Waikiki II loans (collectively, the
Mideast and China Trading Company ("MCTC") Loans), with a combined
principal balance of $1,900,000, made interest payments in December 1995
of $45,125 and during the quarter ended March 31, 1996, in the amount of
$30,084. The Company has applied the $75,209 of interest payments received
against the carrying amount of the loan. The Company did not receive any
additional interest payments on the MCTC Loans during the quarter ended
December 31, 1996, nor has the Company received any additional interest
payments on any of the Company's other loans subsequent to the announcement
on June 29, 1995 of the Company's plan to commence an orderly self-
liquidation.

The Company will not make any new loans, however, the Company has
advanced and may continue to advance funds to the Affiliated Borrowers to
the extent deemed necessary to protect the Company's position in the
underlying collateral. As of December 31, 1996, the Company has advanced
approximately $743,000 to the Affiliated Borrowers in an effort to protect
the Company's collateral positions. The Company will consider making
distributions to Stockholders during the course of the liquidation process,
although the amount and timing of such distributions are not predictable.
However, as a result of the uncertainty caused by the lawsuits described in
Item 3, management of the Company is continuing in its decision that no
periodic liquidating distributions will be made to the Stockholders of the
Company. The Company reevaluates this position on an ongoing basis. The
Company believes that it will not be required to make distributions in the
near term to maintain its status as a REIT. Although reserves have been
established and expenses incurred regarding the protection of its loan
collateral, it is the Company's intent to pursue collection of these costs
as incurred. The statement of net assets reflects the Company's best
estimates of amounts expected to be realized by its efforts to collect its
investment in loans and accrued interest, as well as other estimates about
the recovery of assets and the amounts of liabilities. While the estimates
of the realizable amount of the loans and accrued interest are based on an
analysis of each loan by both the Directors, as well as valuations by
independent appraisers of certain of the collateral, there are few directly
comparable real estate properties that have been sold that can be
considered in preparing such estimates. The amounts the Company will
ultimately realize could differ materially from the amounts assumed in
arriving at the estimates reflected in the December 31, 1996 statement of
net assets.

The Company's near term capital requirements will be for ongoing
operating costs during the period of self-liquidation and the costs
incurred in connection with the defense of the pending litigation. The
Company believes that its existing cash, cash equivalents and investment
balances should be adequate to fund its near-term capital requirements.

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

The Company loaned $12,900,000 (the "Sint Maarten Loan") to R.C.H.
Investments, N.V., an affiliate of the Investment Manager (the "Sint
Maarten Borrower"), which was secured by a second mortgage on a 28-acre
site on the island of Sint Maarten in the Netherlands Antilles (the "Sint
Maarten Property"). This loan matured on May 7, 1992. On May 12, 1992,
the Company agreed to make a new loan to the Sint Maarten Borrower in the
amount of $12,900,000 (the "New Sint Maarten Loan") to replace the Sint
Maarten Loan. The New Sint Maarten Loan had an original term of
approximately 12 months, and was scheduled to mature on May 7, 1993. The
New Sint Maarten Loan was modified a number of times to increase the
interest rate and extend the maturity date. In December 1994, the New Sint
Maarten Borrower transferred its interests in the Sint Maarten Property and
the attendant obligation related to the New Sint Maarten Loan to R.C.H.
Investments, L.L.C., a Delaware limited liability company, whose
constituent members are the shareholders of the Sint Maarten Borrower (the
"New Sint Maarten Borrower"). On December 29, 1994, the New Sint Maarten
Borrower received an extension of the New Sint Maarten Loan to June 30,
1995 and the demand feature was withdrawn in consideration for which the
interest rate could be increased prior to maturity at the option of the
Company. Due to the inability of the Affiliated Borrower, as well as CBH
in his capacity as the guarantor of the New Sint Maarten Loan, to fulfill
their obligations under the terms of the New Sint Maarten Loan, the Company
converted the New Sint Maarten Loan to a demand loan on June 30, 1995, the
date the New Sint Maarten Loan was scheduled to mature.

The Sint Maarten Property also secured a first mortgage in the
principal amount of $4,000,000 in favor of a lender unaffiliated with the
Affiliated Borrowers. Interest payments due the senior lender subsequent
to June 30, 1995 and through December 31, 1995, in the amount of
approximately $354,000 were funded by the Company and charged against the
$1,250,000 provided for by the Company to protect the collateral positions
on the Company's various loans. The senior encumbrance matured on December
31, 1995. The Affiliated Borrower requested an extension of the loan from
the senior lender.

Based upon the results of an appraisal prepared by an independent
third party, the carrying value of the New Sint Maarten Loan was $7,900,000
as of December 31, 1995 after a $5,000,000 reserve for impairment of value
was recorded against the loan during the quarter ended December 31, 1995.
The Affiliated Borrower received a formal demand for payment from the
senior lender which demand stated that if payment was not received by June
13, 1996, the senior lender would institute legal proceedings against both
the Affiliated Borrower and CBH personally, as the guarantor of such loan.
Representatives of the Company met with the senior lender during the second
quarter of 1996 and were informed that the senior lender had commenced the
foreclosure process. In connection with the foreclosure process undertaken
by the senior lender, the Sint Maarten Property was put out to auction.
Pursuant to the terms of the auction, a minimum bid of $8,000,000 was
required and if a bid equal to or in excess of such amount was not
received, the auction process would be continued at a later date with a
lesser minimum bid. On September 26, 1996, the auction for the Sint
Maarten Property was held, however, the minimum bid was not received. In
this regard, the auction was rescheduled for November 14, 1996 and the
minimum bid was reduced to $7,000,000. Based on this new minimum auction
price, the Company took an additional reserve, as of September 30, 1996,
for $5,500,000. On November 14, 1996, the auction for the Sint Maarten

Property was continued, however, the minimum bid was not received and it
was rescheduled again until December 12, 1996. As had occurred in
September and November, no minimum bid was received. The auction then was
rescheduled for January 30, 1997. At the auction on January 30, 1997, a
bid was received in an amount sufficient to retire the amount of the
principal balance of the first mortgage plus all accrued and unpaid
interest and the related fees and costs of the senior lender and provide
the Company with approximately $1,784,300. On February 6, 1997, the
Company received the $1,784,300 of proceeds from the sale by public auction
of the Sint Maarten Property. As a condition to the sale, the Company
released its liens against the Sint Maarten Property. Thus, the Company no
longer maintains any interest in the Sint Maarten Property. For the
quarter ended December 31, 1996, the Company recorded a final loss reserve
in the amount of $615,700 to reflect the current carrying value of
$1,784,300.

On February 11, 1992, the Company made two demand loans to Outlaws
Casino, Ltd., an affiliate of the Investment Manager (the "Outlaws
Borrower") in the amounts of $1,200,000 (the "Crook Loan") and $500,000
(the "Hudspeth Loan") (collectively, the "Outlaws Loans"). The Outlaws
Borrower sought the loans in order to fund a portion of the acquisition of
two adjacent parcels of land in Black Hawk, Colorado, known as the Crook
Parcel (approximately 16,000 square feet) and the Hudspeth Parcel
(approximately 5,500 square feet). The Outlaws Borrower originally planned
to combine the Crook Parcel and the Hudspeth Parcel and construct a casino
of approximately 50,000 square feet containing approximately 800 slot
machines thereon. The Outlaws Loans are collateralized by an assignment of
a partnership interest in the Outlaws Borrower; the Crook Loan is also
secured by a second mortgage on the Crook Parcel which is subordinated to a
seller note with a principal balance at December 31, 1996 of $2,561,621.
The Hudspeth Loan is also secured by a first mortgage on the Hudspeth
parcel. There is no senior encumbrance on the Hudspeth Parcel.

On July 17, 1992, the Outlaws Borrower made draws of $500,000 and
$200,000 against the Crook Loan and Hudspeth Loan, respectively. On
September 2, 1992, the Outlaws Borrower paid the Company $95,000 in
principal towards the then outstanding principal balance of the Hudspeth
Loan. On October 30, 1992 and November 6, 1992, the Outlaws Borrower paid
the Company $150,000 and $50,000, respectively, in principal towards the
outstanding principal balance of the Crook Loan. On November 30, 1992, the
Company agreed to increase the Crook Loan by $100,000 to a total of
$1,600,000. The additional funds were used to cover expenses related to
the planned expansion and renovation of the Outlaws Casino, which plans
were abandoned by the Outlaws Borrower. Subsequent to funding the $100,000
increase, the aggregate principal amount of the Outlaws Loans was increased
to $2,205,000, consisting of $1,600,000 for the Crook Loan and $605,000 for
the Hudspeth Loan. The maturity of the Outlaws Loans was extended by the
Company to June 30, 1995. On such date, the Company ceased accruing
interest on the Outlaws Loans and converted them to demand loans.

In October 1995, representatives of the Outlaws Borrower informed the
Company that the Outlaws Casino had very little cash and that its bills
were approximately 45 days in arrears. Such representatives also told the
Company that it was an absolute necessity for the Outlaws Casino to build
up its working capital reserves to approximately $150,000 so as to be able
to fund the operating deficits which usually occur in the winter due to the
weather conditions which hinder ingress and egress to the casinos located
in Black Hawk, Colorado. The Company was also advised that the October
mortgage payment on the senior encumbrance secured by the Crook Parcel was
not made and that the Outlaws Borrower was in negotiations with the senior
lender to revise the terms of the loan. In addition, these representatives
informed the Company that they were developing a marketing plan for the
Outlaws Casino which would appeal to local patrons who do not desire to
game in a large casino and that a potential sale of the Outlaws Casino
would need to be deferred until spring of 1996.

Based on this information, the Company decided to modify the terms of
the Outlaws Loans to require the Outlaws Borrower to make monthly payments
of "net revenue" from the casino and real estate which the Outlaws Borrower
had mortgaged to the Company as security for the loans (the "Properties").
Net revenue is defined as all operating revenues from the Properties less:
(a) the ordinary and reasonable expenses of the operation of the
Properties; (b) the interest and principal payments required by the
existing senior lender on the property which secures the Crook Loan; and
(c) the funds necessary to maintain no less than $150,000 of working
capital. The Company also stated that in exchange for its forbearance from
foreclosing on the Outlaws Loans, the Outlaws Borrower must deliver to the
Company, on the first day of each month: (a) monthly operating reports
setting forth the current financial performance of the Properties; (b)
current balance sheets evidencing the financial condition of the
Properties; and (c) rolling three-month projections for the businesses
located on the Properties. In addition, the previous unpaid interest as of
October 31, 1995, in the amount of $105,598, was capitalized and added to
the outstanding balances of the Outlaws Loans. Simultaneously, due to
uncertainties about the financial wherewithal of the Outlaws borrower, a
loan loss reserve was taken in the same amount of $105,598. Despite the
revised marketing plan of the Outlaws Borrower, operations at the Outlaws
Casino have not resulted in the generation of funds necessary to allow for
sufficient working capital, therefore, the Company did not receive any
monthly payments of net revenue from the Outlaws Borrower during 1996.

As of December 31, 1996, the outstanding loan balances, were
$1,600,000 for the Crook Loan and $605,000 for the Hudspeth Loan. The
report prepared for the Company by Coopers & Lybrand LLP ("C&L") dated
January 15, 1996 concluded that the market value of the fee simple interest
in the Outlaws Casino was $2,500,000. As of December 31, 1996, the senior
encumbrance on the Crook Parcel was $2,561,621. Therefore, the Company set
up a reserve for the entire $1,600,000 of the Crook Loan. During the
fourth quarter of 1996, the Company set up a reserve for the Hudspeth Loan
in the amount of $86,200 based on the valuation from an appraisal
commissioned by the Company.

On May 12, 1992, the Company made a demand loan in the amount of
$900,000 (the "Waikiki Loan") to Hemmeter Investment Company, now known as
Mideast and China Trading Company, a Hawaii general partnership, an
affiliate of the Investment Manager (the "Waikiki Borrower"). The proceeds
of the Waikiki Loan were used to acquire options on various properties in
New Orleans, Louisiana, in connection with gaming-related developments
pursued by the Hemmeter organization. The Waikiki Loan is secured by a
sub-leasehold mortgage on the International Marketplace, a retail center in
Honolulu, Hawaii (the "Waikiki Property"), CBH's personal guaranty and a
collateral assignment of the Waikiki Borrower's interest as the sub-
sublessor of the Waikiki Property. This loan bore interest at the rate of
9.5% per annum, payable quarterly in arrears, and was due on the earlier of
demand or May 12, 1993. The Company agreed to extensions of the term of
the Waikiki Investment through September 30, 1994. On September 30, 1994,
the Waikiki Investment was further extended to March 31, 1995 in
consideration for which the interest rate was increased to 19.5%, 10% of
which accrued and was to be payable at the time the Waikiki Loan matured.
On March 16, 1995, the Company agreed to further extend the maturity of the
Waikiki Investment to June 30, 1995. On June 30, 1995 this loan went into
default. As a result, the Company ceased accruing interest on the Waikiki
Loan and converted it to a demand loan.

On April 8, 1994, the Company made a demand loan in the amount of
$1,000,000 (the "Waikiki II Loan") to the Waikiki Borrower. The proceeds
of the loan were used to fund working capital requirements of Grand Palais
Casino, Inc. ("GPCI"), an affiliate of the Company. The Waikiki II Loan is
also secured by the Waikiki Property, CBH's personal guaranty and a
collateral assignment of the Waikiki Borrower's interest as the sub-
sublessor of the Waikiki Property. This loan bore interest at the rate of

9.5% per annum payable quarterly in arrears, and was due on the earlier of
demand or October 8, 1994. On September 30, 1994, the Waikiki II Loan was
extended to the earlier of demand or March 31, 1995 in consideration for
which the interest rate was increased to 19.5%, 10% of which accrued and
was to be payable at the time the Waikiki II Loan matured. On March 16,
1995, the Company agreed to further extend the maturity of the Waikiki II
Loan to June 30, 1995. On June 30, 1995 this loan went into default.
Consequently, the Company ceased accruing interest on the Waikiki II Loan
for financial statement purposes only and converted it to a demand loan.

The Company modified the terms of the two Waikiki Loans on November 1,
1995 so as to require the Waikiki Borrower to make monthly payments of
$15,042 with interest accruing at a rate of 11% per annum. As of December
31, 1996, the combined outstanding principal balances were $1,824,791. C&L
appraised the subleasehold interest at International Marketplace at
$2,510,000 at December 31, 1995. In light of this valuation, the Company
has not set up a reserve for the principal amount of the Waikiki Loans.

The Company made a loan to Canadian Pavilion Limited Partnership, an
affiliate of the Investment Manager (the "Canadian Pavilion Borrower"), in
the amount of $2,600,000 (the "Canadian Pavilion Loan"), on or about
November 18, 1991. The proceeds of the Canadian Pavilion Loan were applied
as follows: $1,000,000 to purchase the $2,900,000 of defaulted mortgages
and notes encumbering the subleasehold interest in the Canadian Pavilion
and approximately $800,000 was advanced to an affiliate of the Canadian
Pavilion Borrower for it to purchase the subleasehold interest from a third
party. The remaining $800,000 was used to provide working capital to the
Canadian Pavilion Borrower. Immediately after the closing of the Canadian
Pavilion Loan, the interest of this third party was transferred to the
Canadian Pavilion Borrower. The Canadian Pavilion is a wharf-front
property on the Mississippi River in downtown New Orleans. It is part of
the International Pavilion which was erected as an exhibition hall for the
1984 World's Fair. The Canadian Pavilion Loan originally bore interest at
9-1/2% per annum, payable quarterly in arrears and was to mature on the
earlier of demand or November 19, 1992. The Company extended the maturity
of the Canadian Pavilion Loan on a number of occasions. On May 18, 1994,
the loan was again extended to the earlier of demand or December 31, 1994
and the interest rate was increased from 9.5% to 10.5% per annum, payable
quarterly in arrears. On December 7, 1994, the terms of the loan were
further modified to increase the interest rate to 22% per annum, 11.5% of
which accrued and was payable when the Canadian Pavilion Loan was retired.
In addition, this modification provided that the demand feature be removed
from the loan so that the loan could not be called prior to December 31,
1994. On December 16, 1994, the maturity date of the Canadian Pavilion
Loan was further extended by the Company to June 30, 1995. On May 1, 1995,
the interest rate on the loan was increased to 26%, the default rate, as a
result of a monetary default per the terms of the loan agreement. On June
30, 1995, the Company ceased accruing interest on the Canadian Pavilion
Loan and converted it to a demand loan. In addition, the Company made
additional advances to the Canadian Pavilion Borrower to preserve the
underlying collateral in the amount of approximately $113,000 subsequent to
June 30, 1995.

During the third quarter of 1995, negotiations by and between various
governmental agencies, the former owner of the Canadian Pavilion and the
Canadian Pavilion Borrower proved unsuccessful and the Canadian Pavilion
Borrower received a termination letter regarding its lease from the New
Orleans Exhibition Hall Authority ("NOEHA"). After receipt of the NOEHA
letter, the Company had numerous discussions with representatives of the
Canadian Pavilion Borrower and its counsel in New Orleans and real estate
professionals located in New Orleans. After considering the input of these
various parties, as well as the lack of acceptance of riverboat gaming in
the downtown New Orleans area and the poor performance of the temporary
land-based casino in New Orleans, the Company concluded that the value of
the property securing the loan to the Canadian Pavilion Borrower had been

significantly reduced. Furthermore, certain ongoing financial obligations
of the Canadian Pavilion Borrower, including insurance, payments to
governmental agencies and maintenance expenses were continuing with no
assurance that such amounts, which had been advanced by the Company, would
be repaid to the Company nor was there any assurance that the Company would
receive any of the principal portion of the Canadian Pavilion Loan since,
after extensive marketing of the property securing the Canadian Pavilion
Loan, no significant interest in the acquisition of the property arose.
Based on these factors, the Company took a reserve, as of September 30,
1995, for the full $2,600,000 of the Canadian Pavilion Loan.

As previously reported, the Company was named as a defendant in two
lawsuits, one of which was brought by the entity which sold the property to
the Canadian Pavilion Borrower under a lender liability theory and the
second lawsuit was brought by the City of New Orleans and NOEHA demanding
that the Company's mortgages memorializing the Canadian Pavilion Loan be
removed. The Company completed a settlement with the plaintiffs in 1996
wherein it assigned its interest in the collateral for the Canadian
Pavilion Loan for $50,000 and a settlement and release from the litigation.

Thus, the Company no longer maintains any interest in the collateral. As
the Company had fully reserved against this loan, the settlement did not
require the Company to take any further reserves.

On January 4, 1994, the Company made a loan to CBH in the amount of
$12,900,000 (the "Hemmeter Loan"), the proceeds of which were used for
working capital purposes for CBH's various gaming affiliates and to retire
certain indebtedness secured by three of Mr. Hemmeter's residences, one in
Hawaii and two in California. This loan was originally secured by junior
mortgages on the aforementioned residences, bore interest at 12% per annum,
was payable quarterly in arrears, and was scheduled to mature on January 3,
1995. On September 14, 1994, the Hemmeter Loan was modified to provide for
an additional $1,100,000 ("Additional Principal") for a total principal
balance of the Loan of $14,000,000. The Additional Principal originally
bore interest at the rate of 22%, 12% of which was payable under the same
terms as the original loan, and the remaining 10% was accrued and was to be
payable upon the maturity or earlier prepayment of the Hemmeter Loan. In
addition, the interest rate on the original $12,900,000 in principal was
increased to 21.7% effective October 1, 1994, 12% of which was payable
under the same terms as the original loan, and the remaining 9.7% was
accrued and was to be payable upon the maturity or earlier prepayment of
the note. On December 16, 1994, CBH informed the Company that he was
selling his residence in Hawaii in late December 1994 and requested a
release of the Company's lien on the Hawaii residence and an extension of
the maturity date of the Hemmeter Loan, including the Additional Principal.

In response to CBH's request, the Company agreed that: (i) it would
release its lien on the Hawaii residence effective January 3, 1995; (ii)
the maturity date of the Hemmeter Loan, including the Additional Principal,
be extended to June 30, 1995; and (iii) the interest rate on the Hemmeter
Loan and the Additional Principal be increased to 22.7% and 23%,
respectively, assuming that the Company's lien on CBH's Hawaiian residence
is released. Thirteen percent of the interest on both the Hemmeter Loan
and the Additional Principal was to be paid under the same terms as
described above, and the remaining 9.7% of the Hemmeter Loan and the
remaining 10% of the Additional Principal would accrue and be payable upon
the maturity or earlier repayment of the Hemmeter Loan and the Additional
Principal. The lien on the Hawaii residence was released on January 3,
1995 and the new interest rates for the Hemmeter Loan and the Additional
Principal took effect on such date. On May 2, 1995, the Company agreed to
a further modification of the Hemmeter Loan to provide for an additional
$1,000,000 (the "Second Additional Principal") thereby increasing the
principal amount of the Hemmeter Loan to $15,000,000. The Second
Additional Principal bore interest at the rate of 23%, 10% of which was to
be payable upon the maturity or earlier prepayment of the Second Additional
Principal.

The carrying value of the Hemmeter Loan, including the Additional
Principal and the Second Additional Principal, was reduced by the Company
three times, once at June 30, 1995 by a $9,900,000 reserve, again at
September 30, 1995 by a $2,950,000 reserve and finally by $977,000 at the
time the California residences that served as collateral for the loan were
sold. Also, approximately $611,000 of the $1,250,000 collateral
preservation reserve made by the Company at June 30, 1995 was allocated to
the Hemmeter Loan. After paying the costs associated with the sale of
CBH's California residences, the Company received net proceeds of
approximately $733,000. CBH and his wife still have personal liability for
the remaining $14,267,000 balance of the loan. However, the current
carrying value of the Hemmeter Loan is zero.

On February 14, 1994, the Company made a loan to Grand Palais Casino,
Inc. ("GPCI"), an affiliate of CBH, in the amount of $4,000,000 (the "GPCI
Loan"). The proceeds of the GPCI Loan were used to cover certain expenses
of GPCI incurred in connection with the development of the single land-
based casino in New Orleans, Louisiana, of which GPCI was to be a one-third
owner. The GPCI Loan bore interest at a rate of 14% per annum, payable
quarterly in arrears, was secured by the personal guarantee of CBH and was
due to mature on September 30, 1994. On April 8, 1994, an additional loan
was made to GPCI in the amount of $2,250,000 under the same terms and
conditions as the GPCI Loan. On September 30, 1994, both of the loans to
GPCI, in the aggregate amount of $6,250,000, were extended to the earlier
of demand or March 31, 1995. On November 16, 1994, the Company agreed to
subordinate both GPCI loans to senior indebtedness of GPCI in the amount of
$34,000,000 and to extend the term of the loan to February 25, 1998, in
consideration for which the interest rates were increased to a rate equal
to 150 basis points above the coupon rate of the $34,000,000 senior debt
(then 19.75%) beginning January 1, 1995. On April 14, 1995, the Company
sold the two loans made to GPCI to an unaffiliated third party for the sum
of $6,250,000 plus all accrued and unpaid interest through the date of the
sale.

On April 25, 1995, the Company made a loan to Hemmeter Enterprises,
Inc., ("HEI"), an affiliate of CBH, in the amount of $1,000,000, bearing
interest at the rate of 12% per annum, payable quarterly in arrears, and
due on demand (the "HEI Loan"). HEI, either directly or through affiliated
entities, was in the business of developing, owning and operating gaming
and related entertainment facilities. HEI was a one-third partner in the
partnership attempting to develop the sole land-based casino in New
Orleans, Louisiana, and a 50% partner in a joint venture which developed
and operated a riverboat gaming project in New Orleans. In addition, HEI
developed, owned and operated two of the largest casinos in Colorado. The
proceeds of the HEI Loan were utilized by HEI for working capital purposes
and were secured by the guaranty of CBH.

On May 13, 1995, the Company agreed to provide HEI with a senior bank
facility in the amount of $4,000,000 (the "HEI Senior Bank Facility"). The
HEI Senior Bank Facility was secured pari passu by deeds of trust for real
properties known as the Bullwhackers Casinos in Central City and Black
Hawk, Colorado, a second mortgage on the Canadian Pavilion Property and a
second mortgage on the riverboat operated in New Orleans by Grand Palais
Riverboat, Inc. ("GPRI"), an affiliate of CBH, and a collateral assignment
of GPRI's interests in the riverboat joint venture which was operated in
New Orleans. The HEI Senior Bank Facility was also guaranteed jointly and
severally by various subsidiaries of HEI, certain other affiliated entities
and by CBH. The Company made an initial funding of $2,000,000 of the
$4,000,000 HEI Senior Bank Facility and $1,000,000 of the loan proceeds
were utilized to repay the HEI Loan. The HEI Senior Bank Facility bore
interest at the rate of 12% per annum and was scheduled to mature on
September 30, 1995. On June 30, 1995, the Company determined that it would
not advance any additional sums to HEI under the terms of the HEI Senior
Bank Facility. In October 1995, HEI and GPRI both filed for bankruptcy
protection. As of December 31, 1995, the Company recorded a $1,000,000

reserve against the carrying value of the HEI Senior Bank Facility. The
plans of reorganization of HEI and GPRI were approved by the bankruptcy
courts and in June 1996, in satisfaction of its interest, the Company
received the following in settlement of its claims: (i) a 12% senior
secured pay-in-kind note due 2003 in the principal amount of $601,702
issued by Colorado Gaming & Entertainment Co., the successor to HEI
("Colorado Gaming"); (ii) 60,170 shares of common stock of Colorado Gaming,
which entity is not publicly traded; and (iii) 27,089 shares of common
stock of Casino America, Inc., a publicly-held stock traded on the NASDAQ
National Stock Market under the symbol "CSNO." On December 1, 1996, the
Company received cash proceeds of $899 and an additional note in the
principal amount of $34,000 with terms consistent with the original
Colorado Gaming note representing the payment of interest due on the
original Colorado Gaming note through December 1, 1996. In addition, the
Company is also entitled to receive a small number of warrants of Casino
America, Inc., the exact number has not yet been determined. See Note 3,
"Note Receivable and Investment Securities", of the Notes to Financial
Statements for further details regarding the Company interest in these
instruments pursuant to the bankruptcy settlements.

As of December 31, 1996, the Company had $473,063 in cash and cash
equivalents and investment securities.

Management of the Company is continuing with its negotiations with the
Company's borrowers and is monitoring the activities of such entities with
a view towards maximizing the recovery of each of its loans, and in an
effort to enhance Stockholder value. Management of the Company currently
believes that negotiations with the Company's remaining Affiliated
Borrowers should be completed before the end of the second quarter of this
year.

As a result of the uncertainty caused by the class action and
derivative lawsuits filed against the Company, certain of its current and
former officers and directors, as well as the formal inquiry of the
Securities and Exchange Commission, management of the Company is
continuing in its decision that no periodic liquidating distributions will
be made to the stockholders of the Company at this time. Management of the
Company continues to reevaluate this position on an ongoing basis.

RESULTS OF OPERATIONS

As a result of the announcement by the Company on June 29, 1995 of its
intent to liquidate, the Company began reporting on the liquidation basis
of accounting. The 1996 results are presented on the liquidation basis.
The 1995 results are a combination of operations for the period January 1,
1995 through June 30, 1995 on a going concern basis as reported on the
Statement of Operations and the operations for the period July 1, 1995 to
December 31, 1995 are reported on a liquidation basis as reported in the
Statement of Changes in Net Assets in Liquidation. See Note 2, "Basis of
Presentation and Summary of Significant Accounting Policies" of the Notes
to Financial Statements for further information.

1996 vs 1995

Net assets in liquidation decreased from a balance of $13,057,684 at
December 31, 1995 to a balance of $4,801,590 at December 31, 1996. The
decrease resulted from the Company's payment of its operating expenses as
well as the recognition of an allowance for impairment of investment in
loans and accrued interest in the amount of $6,201,900.

Total revenue for the year ended December 31, 1996 was $70,703
compared to $1,723,711 for the same period in 1995. This decrease is
primarily due to a termination of interest payments on the Company's
mortgage and demand loans by its Affiliated Borrowers during the second
quarter of 1995, as discussed above.

Operating expenses for the year ended December 31, 1996 were
$1,912,678 compared to $2,482,132 for the same period in 1995. This
decrease was due to decreased legal fees and liquidation costs related to
the litigation as discussed in Part I, Item 3 and the announcement of the
Company's self-liquidation. During the year ended December 31, 1996, the
Company recognized allowances for impairment on loans and accrued interest
in the amount of $6,115,700 on its New Sint Maarten Loan based upon the
proceeds received on February 6, 1997 from the sale by public auction of
the Sint Maarten Property and $86,200 on the Hudspeth Loan based on the
valuation from an appraisal commissioned by the Company. During the year
ended December 31, 1995, the Company recognized allowances for impairment
in loans and accrued interest and provisions for collateral protection
costs of $25,745,356 as a result of the initial defaults on its mortgage
and demand loans receivable as discussed above in "Liquidity and Capital
Resources above".

ITEM 7. FINANCIAL STATEMENTS

See Index to Financial Statements on Page F-1 of this Annual Report on
Form 10-KSB for the financial statements and financial statements
schedules, where applicable.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

On December 9, 1996, the Company dismissed Deloitte & Touche LLP
("D&T") as its independent auditing firm. D&T's report on the financial
statements for the past two years did not contain an adverse opinion or a
disclaimer of opinion, nor was the report qualified or modified as to the
audit scope. The audit report for 1995 was modified to include explanatory
paragraphs with respect to: (1) a change in accounting principles related
to the Company's change to the liquidation basis of accounting, effective
June 30, 1995; (2) uncertainties related to the realization of assets and
satisfaction of liabilities in conjunction with the Company's liquidation;
and (3) the emphasis of a matter related to: (a) the formal investigation
of the Company by the Commission; (b) two purported class actions; and (c)
three other actions then pending against the Company. During 1994 and 1995
and the subsequent interim period preceding such dismissal, there were no
disagreements with D&T on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. The
decision to change accountants was recommended and approved by the Audit
Committee of the Company's Board of Directors.

On December 9, 1996, the Company engaged BDO Seidman, LLP ("BDO") as
the new independent accountants to audit the Company's financial
statements. During 1994 and 1995, and the subsequent interim period prior
to engaging BDO, the Company had not consulted BDO regarding: (i) either:
the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered
on the Company's financial statements, and no written report was provided
to the Company and no oral advice was provided that BDO concluded was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that
was either the subject of a disagreement (as defined in paragraph
304(a)(l)(iv) of Regulation S-K) or a reportable event (as described in
paragraph 304(a)(l)(v) of Regulation S-K).

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

(a, b, c, d & e) The directors and executive officers of the Company
are:

John R. Young Chairman of the Board of Directors,
President, Chief Executive Officer and Chief Financial Officer

Daniel D. Lane Director, Secretary, Treasurer and Chief
Accounting Officer+

Thomas A. Ellsworth Director+

John R. Young (63) - Chairman of the Board of Directors and President.

From 1988 through August 1995, Mr. Young was an Independent Director of the
Company. On August 8, 1995, Mr. Young was appointed Chairman of the Board,
President, Chief Executive Officer and Chief Financial Officer of the
Company replacing CBH who had resigned his positions with the Company as of
such date. Since May 1988, Mr. Young has been a consultant to the hotel
industry and since 1990 he has also been a director and senior vice
president-real estate and development of Horizon Hotels, Ltd. Mr. Young
was Senior Vice President and Treasurer of ITT Sheraton Corporation, and
Executive Vice President of ITT Sheraton Realty Corporation, which
positions he had held from 1980 until May 1988. Mr. Young was responsible
for directing all domestic and international treasury and corporate finance
activities regarding corporate financing requirements, cash management,
bank relationships and corporate insurance requirements and risk
management. As Executive Vice President of ITT Sheraton Realty
Corporation, Mr. Young participated and consulted in the acquisition,
disposal and development of hotel properties and he has continued to
perform similar services for Horizon Hotels, Ltd. since 1990. Mr. Young
had been employed by ITT Sheraton Corporation and its predecessors since
1967. Mr. Young is a member of the American Hotel and Motel Association
and the Urban Land Institute, and is a past treasurer and founding member
of the Citizens Housing and Planning Association of Greater Boston. Mr.
Young has a Bachelor of Arts Degree from Middlebury College and received a
certificate from the National Mortgage School of the American Bankers
Association at Ohio State University.

Daniel D. Lane (62) - Director of the Company and member of the Audit
Committee. Mr. Lane has been an Independent Director of the Company since
1990 and, on August 8, 1995, was appointed to be the Company's Secretary,
Treasurer and Chief Accounting Officer, while also retaining his
Independent Directorship. Mr. Lane is one of two founding principals and
serves as Chairman and Chief Executive Officer of Newport Beach-based
Lane/Kuhn Pacific, Inc. The company's business operations have included
several originally formulated master-plan community development and home-
building partnerships, including East Lake Development Company, Lane/Kuhn
Pacific Communities and Lane/Kuhn Pacific Homes. In 1960, Mr. Lane founded
Lan Ron Enterprises and its related entities. These companies engaged in
the development of thousands of single-family homes. Mr. Lane also served
as managing partner of Cadillac Fairview Homes West from 1977 to 1983. Mr.
Lane has been a member of the Board of Directors of Fidelity National
Financial, Inc. since 1992 and a member of the University of Southern
California Board of Trustees since 1987. He received his Bachelors Degree
in Real Estate from University of Southern California.

Thomas A. Ellsworth (58) - Director of the Company and Chairman of the
Audit Committee since January 26, 1996. Mr. Ellsworth is a principal of
PKF Investments, a hotel real estate consulting and brokerage company which
is a subsidiary of PKF Consulting, an international hotel consulting firm.
Prior to joining PKF Investments in 1992, Mr. Ellsworth was a Senior Vice
President and Director of Real Estate of ITT Sheraton Corporation. Mr.
Ellsworth had been employed by ITT Sheraton Corporation and its
predecessors since 1965. Mr. Ellsworth is a board member of the Ipswich
Savings Bank, the Trustees of Reservations, the Massachusetts Farmland
Conservation Trust and the Essex County Greenbelt. Mr. Ellsworth has a
Bachelor of Science Degree in Hotel Administration from Cornell University.

- ----------------------

+ Member of the Audit Committee which is responsible for reviewing the
Company's annual financial statements and other matters relating to the
Company's financial affairs.

ITEM 10. EXECUTIVE COMPENSATION

(a, b) Not applicable.

(c, d & e) Not applicable.

(f) The Company pays each Independent Director: (i) a fee of
$20,000 per year (which amount may be increased or decreased at the
discretion of the Directors); and (ii) reimbursements for travel expenses
and other out-of-pocket disbursements incurred in connection with attending
any meetings of the Board of Directors. Mr. Lane received a fee of $20,000
for serving as an Independent Director for the entire year and Mr.
Ellsworth received a fee of $18,333 for serving as an independent director
for eleven months. The Company entered into a consulting arrangement with
Mr. Young when he became the Company's President and Chief Executive
Officer, effective July 1995, pursuant to which Mr. Young receives a fee of
$10,000 per month. During the year ended December 31, 1996, the Company
also paid the Independent Directors reimbursements aggregating
approximately $29,000.

(g) The Company does not have any employment contracts with any of
its executive officers. In addition, the Company has no compensatory plan
or arrangement with any of its executive officers which would be triggered
by the retirement, resignation or any other termination of such executive
officer's employment with the Company or a change in such executive
officer's responsibilities following a change-in-control of the Company.

(h) Not applicable.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) The following entity is known by the Company to be the beneficial
owner or more than 5% of the outstanding shares of beneficial interest as
of March 10, 1997.

Amount and Nature
Title Name and Address of of Beneficial Percentage
of Class Beneficial Owners Ownership of Class
- -------- ------------------- ----------------- ----------

Common Stock Gotham Partners, L.P. 216,966 5.2%
237 Park Avenue,
9th Floor
New York, NY 10017

(b) The following table sets forth the ownership of shares owned
directly or indirectly by the Directors individually and by the Directors
and officers of the Company as a group as of March 10, 1997.

Amount and Nature
Title Name and Address of of Beneficial Percentage
of Class Beneficial Owners Ownership of Class
- -------- ------------------- ----------------- ----------

Common Stock John R. Young 500 shares less than 1%
155 Walpole Street
Dover, Massachu-
setts 02030

Common Stock Daniel D. Lane 13,000 shares less than 1%
Lane/Kuhn Pacific, Inc.
14 Corporate Plaza
Newport Beach,
California 92660

Common Stock Thomas A. Ellsworth None None
PKF Investments
105 Belcher
Essex, Massachu-
setts 01920

All Directors and 13,500 shares less than 1%
executive officers
of the Company
as a group

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(a & b) The Company entered into an investment management agreement
with RC&H, on October 28, 1988, pursuant to which RC&H was to act as
investment advisor, manager and administrator of the Company until October
1991. However, on February 16, 1991, a majority of the then independent
directors of the Company authorized the termination of the investment
management agreement with RC&H. Consequently, all rights and
responsibilities of RC&H to the Company as its investment manager
terminated on May 4, 1991. On such date, RII Advisors, an entity
controlled by affiliates of CBH, became the Company's new investment
manager. RII Advisors was subject to the same terms and conditions, as
investment manager to the Company, as RC&H was previously.

The Investment Manager was responsible for recommending investments
and supervising the day-to-day operations of the Company. The investment
management agreement directed the Investment Manager to make investment
recommendations to the Directors, subject to the final approval of the
Directors, and to monitor the Company's assets and operations so that the
Company would continue to comply with the requirements of the Code for the
activities of a REIT. The investment management agreement by and between
the Company and RII Advisors was terminated by the Company as of June 30,
1995. The Investment Manager did not receive any compensation from the
Company during 1995 or 1996.

In August 1995, the Company retained Mr. Neil D. Hansen as a
consultant to assist the Company in connection with overseeing its loans
and their related collateral, investor relations, administrative services
and accounting and bookkeeping functions. See Item 1.

Reference is made to Notes 4 and 5 of Notes to Financial Statements
for a description of various loans made to related parties in accordance
with the terms of the Prospectus.

(c) At December 31, 1996, the Company had four demand loans
outstanding that were not fully reserved. See Item 6, "Management's
Discussion and Analysis or Plan of Operation" for a detailed description of
each of the outstanding loans.

(d) There have been no other significant transactions with
promoters.

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Report:

(1)(2) The financial statements indicated in Part II, Item 7
"Financial Statements." Financial Statement Schedules are omitted as the
required information is included in the financial statements or the notes
thereto or is not applicable.

The following exhibits are incorporated by reference from the
Registrant's Registration Statement on Form S-11 (File No. 33-23521),
referencing the exhibit numbers used in such Registration Statement.

Exhibit
Number Description
------- -----------

3(a) Restated Certificate of Incorporation
3(b) Amended and Restated By-laws
10(a) Form of Investment Management Agreement
10(b) Form of Cash Flow Guaranty Agreement
10(c) Form of Mortgage Loan Purchase Guaranty Agreement

(b) The following report on Form 8-K was filed during the quarter
ended December 31, 1996:

A Current Report on Form 8-K was filed on December 16, 1996
wherein Item 4. Change in Registrant's Certifying Accountants and Item 7.
Financial Statements and Exhibits disclosed that the Company had dismissed
Deloitte & Touche LLP as the Company's independent accountant and that the
Company had engaged BDO Seidman, LLP as its new independent accountants.

(c) An Annual Report will be sent to Stockholders subsequent to this
filing and the Company will furnish copies of such report to the Commission
at that time.

(d) Not applicable.

SIGNATURES

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

RESORT INCOME INVESTORS, INC.
(Registrant)

By: /s/ John R. Young
John R. Young
Chairman of the Board of Directors,
Chief Executive Officer, President and Chief
Financial Officer

Date: April 15, 1997

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

By: /s/ John R. Young By: /s/ Daniel D. Lane
John R. Young Daniel D. Lane
Chairman of the Board of Director, Secretary,
Directors, Chief Executive Treasurer and Chief
Officer, President and Accounting Officer
Chief Financial Officer

Date: April 15, 1997 Date: April 15, 1997

By: /s/ Thomas A. Ellsworth
Thomas A. Ellsworth
Director

Date: April 15, 1997

FINANCIAL STATEMENT INDEX

Independent Auditors' Reports. . . . . . . . . . . . . . . . . . F-2 to F-3

Statements of Net Assets in
Liquidation at December 31, 1996 and 1995. . . . . . . . . . . . . . .F-4

Statements of Changes in Net Assets in
Liquidation (Liquidation Basis) for the Year Ended
December 31, 1996 and the Six Months
Ended December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . .F-5

Statement of Operations (Historical
Cost Basis) for the Period from January 1, 1995
to June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .F-6

Statement of Shareholders' Equity
(Historical Cost Basis) for the Period
January 1, 1995 to June 30, 1995 . . . . . . . . . . . . . . . . . . .F-7

Statement of Cash Flows (Historical
Cost Basis) for the Period January 1, 1995
to June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .F-8

Notes to Financial Statements. . . . . . . . . . . . . . . . . .F-9 to F-19

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Resort Income Investors, Inc.
Chicago, Illinois

We have audited the accompanying statement of net assets in liquidation of
Resort Income Investors, Inc. (the "Company") as of December 31, 1996 and
the related statement of changes in net assets in liquidation for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

As described in Note 1 to the financial statements, on June 29, 1995, the
Board of Directors of the Company announced that it would commence an
orderly self-liquidation of its assets. As a result, the Company has
changed its basis of accounting from the going concern basis to the
liquidation basis effective June 30, 1995. Accordingly, the carrying
values of the remaining assets as of December 31, 1996 are presented at
estimated realizable values and all liabilities are presented at estimated
settlement amounts. Actual amounts will depend upon a number of factors,
as a result, actual amounts are likely to differ from the amounts presented
in the accompanying financial statements, and the differences could be
material.

In our opinion, such financial statements present fairly, in all material
respects, the net assets in liquidation of Resort Income Investors, Inc. as
of December 31, 1996 and the changes in its net assets in liquidation for
the year then ended in conformity with generally accepted accounting
principles on the basis described in the preceding paragraph.

BDO Seidman, LLP

Chicago, Illinois
March 4, 1997

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Resort Income Investors, Inc.
Chicago, Illinois

We have audited the accompanying statement of net assets in liquidation of
Resort Income Investors, Inc. (the Company) as of December 31, 1995 and the
related statement of changes in net assets in liquidation for the period
from July 1, 1995 to December 31, 1995. In addition, we have audited the
accompanying statements of operations, shareholders' equity and cash flows
for the period from January 1, 1995 to June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

As described in Note 1 to the financial statements, on June 29, 1995 the
Board of Directors of the Company announced that it would commence an
orderly self-liquidation of its assets. As a result, the Company has
changed its basis of accounting from the going-concern basis to the
liquidation basis effective June 30, 1995. Accordingly, the carrying
values of the remaining assets as of December 31, 1995, are presented at
estimated realizable values and all liabilities are presented at estimated
settlement amounts. Actual amounts will depend upon a number of factors,
and as a result, actual amounts are likely to differ from the amounts
presented in the accompanying financial statements.

In our opinion, such financial statements present fairly, in all material
respects, (1) the net assets in liquidation of Resort Income Investors,
Inc. as of December 31, 1995, (2) the changes in its net assets in
liquidation for the period from July 1, 1995 to December 31, 1995, and (3)
the results of its operations and its cash flows for the period from
January 1, 1995 to June 30, 1995 in conformity with generally accepted
accounting principles on the bases described in the preceding paragraph.

DELOITTE & TOUCHE LLP

Denver, Colorado
May 16, 1996

RESORT INCOME INVESTORS, INC.

STATEMENTS OF NET ASSETS IN LIQUIDATION (NOTE 1)
(LIQUIDATION BASIS)

DECEMBER 31, 1996 AND 1995

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

ASSETS

Demand loans to related parties,
net of allowances. . . . . . . . . . . $ 4,127,891 12,092,875
Notes receivable . . . . . . . . . . . . 577,634 --
Cash and cash equivalents. . . . . . . . 146,037 846,768
Investment securities at
market value . . . . . . . . . . . . . 327,026 805,834
----------- ----------

Total Assets . . . . . . . . . . . . . . 5,178,588 13,745,477
----------- -----------

LIABILITIES

Accounts payable and accrued expenses. . 376,998 687,793
----------- -----------

NET ASSETS IN LIQUIDATION. . . . . . . . $ 4,801,590 $13,057,684
=========== ===========

The accompanying notes are an integral part of the financial statements.

RESORT INCOME INVESTORS, INC.

STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)

Six Months
Year Ended Ended
December 31, December 31,
1996 1995
------------ -----------

NET ASSETS IN LIQUIDATION
AT DECEMBER 31, 1995 AND
JULY 1, 1995, RESPECTIVELY . . . . . . $ 13,057,684 $28,853,152

Interest income on cash and
cash equivalents . . . . . . . . . . . 69,804 94,093

Interest income on
notes receivable . . . . . . . . . . . 899 --

Allowance for impairment of invest-
ment in loans and accrued interest
and provision for collateral
protection costs . . . . . . . . . . . (6,201,900) (14,127,453)

(Loss) Gain on investment
securities . . . . . . . . . . . . . . (212,219) 110,001

Operating Expenses . . . . . . . . . . . (1,912,678) (1,872,109)
----------- -----------

NET ASSETS IN LIQUIDATION
AT December 31, 1996 and 1995,
respectively . . . . . . . . . . . . . $ 4,801,590 $13,057,684
=========== ===========

The accompanying notes are an integral part of the financial statements.

RESORT INCOME INVESTORS, INC.

STATEMENT OF OPERATIONS (HISTORICAL COST BASIS)

Six Months
Ended
June 30,
1995
------------
REVENUE

Interest and net fee income on mortgage and
demand loans to related parties. . . . . . . . . . . . $ 1,543,635

Interest income from cash and cash equivalents
and investments. . . . . . . . . . . . . . . . . . . . 85,983
------------

Total Revenue. . . . . . . . . . . . . . . . . . . . . . 1,629,618
------------

EXPENSES

Allowance for impairment of investment in loans and
accrued interest and provision for collateral
protection costs . . . . . . . . . . . . . . . . . . . 11,617,903
Operating expenses . . . . . . . . . . . . . . . . . . . 610,023
Loss on investment securities. . . . . . . . . . . . . . 251,250
------------

Total Expenses . . . . . . . . . . . . . . . . . . . . . 12,479,176
------------

NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . $(10,849,558)
============

NET LOSS PER SHARE . . . . . . . . . . . . . . . . . . . $ (2.61)
============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . 4,156,000
============

The accompanying notes are an integral part of the financial statements.

<TABLE>
RESORT INCOME INVESTORS, INC.

STATEMENT OF SHAREHOLDERS' EQUITY
(HISTORICAL COST BASIS)

FOR THE PERIOD JANUARY 1, 1995 TO JUNE 30, 1995

Additional Paid-In Capital
-------------------------------
Common Stock Distributions Reserve for
------------------------ Issuance of in Excess of Unrealized
Shares Amount Common Stock Income Losses
--------- --------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>

BALANCE, DECEMBER 31,
1994 . . . . . . . . . . . 4,156,000 $ 41,560 $46,703,781 $ (5,484,131) $ (378,750)
Net loss . . . . . . . . . . -- -- -- (10,849,558) --
Distributions to share-
holders ($.375 per
share) classified
as return of capital . . . -- -- -- (1,558,500) --
Realized Losses. . . . . . . -- -- -- -- 378,750
--------- ---------- ----------- ------------ ----------
BALANCE, JUNE 30,
1995 . . . . . . . . . . . 4,156,000 $ 41,560 $46,703,781 $(17,892,189) $ --
========== ========== =========== ============ ==========

<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>

RESORT INCOME INVESTORS, INC.
STATEMENT OF CASH FLOWS
(HISTORICAL COST BASIS)

Six Months
Ended
June 30,
1995
------------

RECONCILIATION OF NET (LOSS) INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:

Net (loss) income . . . . . . . . . . . . . . . . . . . $(10,849,558)
Allowance for impairment of investment in loans
and accrued interest and provision for
collateral protection costs. . . . . . . . . . . . . . 11,617,903
Loss on investment securities. . . . . . . . . . . . . . 251,250
Changes in operating assets and liabilities:
Interest receivable from related parties . . . . . . . 765,171
Prepaid expenses and other . . . . . . . . . . . . . . (3,793)
Accounts payable and accrued expenses. . . . . . . . . 48,583
-----------

Net cash provided by operating activities . . . . . . . 1,829,556
-----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds of loan sale. . . . . . . . . . . . . . . . . . 6,250,000
Demand loans funded. . . . . . . . . . . . . . . . . . . (3,000,000)
-----------
Net cash provided by investing activities. . . . . . . . 3,250,000
-----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to shareholders . . . . . . . . . . . (3,117,000)
-----------

NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . 1,962,556

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . 779,298
-----------

CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . $ 2,741,854
===========

The accompanying notes are an integral part of the financial statements.

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS

1. OPERATIONS OF THE COMPANY

Resort Income Investors, Inc. (the "Company") was organized on July
20, 1988 as a twelve year, self-liquidating real estate investment trust
("REIT"), as defined under the Internal Revenue Code. The Company was
organized for the purpose of enabling stockholders to participate in
mortgage loans primarily to affiliates of Christopher B. Hemmeter ("CBH"),
secured by real property or other qualifying assets owned or to be acquired
for the development of luxury destination resorts. During 1991, the Board
of Directors amended the Company's general investment strategy such that
the Company would primarily make loans secured by real and personal
property for the development of gaming related enterprises. As of December
31, 1996, all of the Company's loans had been made to affiliates of the
Company or RII Advisors, the Company's investment manager, also an
affiliate of the Company.

In late June 1995, CBH, then a director and officer of the Company,
informed the Company that interest and principal would not be paid when due
on demand loans made by the Company to him personally or to entities
affiliated with him (the "Affiliated Borrowers"). Further, he informed the
Company that he would not be able to make timely payment of such interest
and principal on behalf of the Affiliated Borrowers pursuant to guarantees
he had made in connection with the Affiliated Borrowers' loans, thereby
creating an event of default for each of the loans. The affected loans
constituted all of the Company's demand loans, each of which was to a
related party, aggregating $36,605,000, of which CBH and his wife, Patricia
Hemmeter, were personally the borrowers of $15,000,000, and Affiliated
Borrowers were the borrowers of $21,605,000.

The Board of Directors of the Company announced on June 29, 1995, that
it would commence an orderly self-liquidation of the Company's assets over
an estimated 24- to 36-month period. The Company also announced a charge
to income would be made in the second quarter of 1995 in an amount that, in
management's judgment, based upon then available information, would
reflect the impaired value. The charge included allowances for losses on
loans, interest receivable and the reversal of certain accrued interest.
The amount of the charge was based on management's judgments regarding the
ability of CBH and the Affiliated Borrowers to repay such loans, and also
reflected management's judgments concerning the extent that the estimated
realizable value of the Company's collateral would not provide for the
recovery of the Company's investment in the loans and accrued interest, in
light of CBH's inability to perform on his guarantees in a timely manner.
In the third and fourth quarter of 1995, the Company continued to evaluate
the ability of CBH to perform on his guarantees and the value of collateral
underlying the Company's loans and recorded additional charges for
estimated losses. The Company's independent directors have assumed
responsibility for negotiations with CBH and the Affiliated Borrowers to
maximize the Company's recovery of its investment in loans and accrued
interest. Based on information provided to the independent directors by
CBH and the Affiliated Borrowers, the independent directors reviewed CBH's
financial condition, the financial condition of the Affiliated Borrowers,
the terms of the Company's loans, the collateral for certain of the loans
(including the existence of senior liens on certain of the collateral),
appraisals of certain of such collateral and other information concerning
the value of the other collateral, and other factors, to determine the
amount of the charges and in reaching the decision to proceed with the
liquidation of the Company's assets.

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. OPERATIONS OF THE COMPANY (Continued)

On August 8, 1995, CBH and Mark M. Hemmeter ("MMH") resigned their
positions as executive officers and directors of the Company. The
Company's directors are continuing their negotiations with CBH and the
Affiliated Borrowers to recover the Company's investment in loans and
accrued interest. There is no assurance that the outcome of the
negotiations will result in actual liquidation proceeds consistent with the
estimated liquidation value of the Company's assets.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Effective with the announcement of an intention to liquidate the
Company, the accounting basis used by the Company in preparing its
financial statements changed from historical cost to the liquidation basis
of accounting. Therefore, the December 31, 1996 and 1995 statements of net
assets in liquidation and the statement of changes in net assets in
liquidation for the periods from January 1, 1996 to December 31, 1996 and
July 1, 1995 to December 31, 1995 have been presented on the liquidation
basis. The December 31, 1995 and December 31, 1996 statements of net
assets in liquidation reflect the Company's estimates in management's
judgement, based upon then available information, of amounts expected to be
realized by its efforts to collect its investment in loans and accrued
interest, as well as other estimates about the recovery of assets and the
amounts of liabilities. While the estimates of the realizable amount of
the loans and accrued interest were based on an analysis of each loan,
including valuations by independent appraisers of certain of the
collateral, there are few directly comparable real estate properties that
have been sold that can be considered in preparing such estimates. The
amounts the Company will ultimately realize from liquidation of its assets
could differ materially from the amounts assumed in arriving at the
estimates reflected in the December 31, 1996 statement of net assets.
Changes in estimates are reflected in the period in which additional
information becomes available.

The amount ultimately available for distribution to stockholders will
depend on a variety of factors in addition to the amounts realized from the
liquidation of assets, including the timing of the liquidation process and
the resolution of contingent liabilities. The amount distributed will
likely differ from the amount of net assets in process of liquidation
presented in the December 31, 1996 statement of net assets, and the
difference could be material.

The financial statements of the Company for the period ended June 30,
1995 were prepared on the historical cost (going concern) basis. June 30,
1995 is used as the adoption date for liquidation-basis accounting because
there was no material activity that affected either the historical cost or
liquidation basis financial statements from June 29, 1995 to June 30, 1995.

The impairment and other charges discussed in Note 5 were recorded pursuant
to historical cost accounting.

Cash and Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments with a
maturity of three months or less at the time of purchase to be cash
equivalents.

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)

Investments - Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires fair
value accounting for certain investments and securities. The Company's
portfolio of debt securities are classified as available for sale. The
Company determines realized gains or losses on sales of available-for-sale
securities using the specific identification method.

Demand Loans to Related Parties - Effective January 1, 1995, the
Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." There was no financial statement
effect at the date of adoption of these standards. On June 29, 1995, the
Company recognized a charge of $10,367,903 in accordance with the
provisions of these accounting standards prior to the adoption of the
liquidation basis of accounting (See Notes 4 and 5).

Financial Instruments - SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," requires the disclosure of fair value for certain
of the Company's financial instrument assets and liabilities. It defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.

At December 31, 1996 and December 31, 1995, the Company's financial
instruments consist of demand loans to related parties, a note receivable,
cash and cash equivalents, investment securities, and accounts payable and
accrued expenses. These instruments are included in the accompanying
statement of net assets in liquidation at their estimated net realizable
values. Management believes that the estimated net realizable value of
these financial instruments approximates their fair value. The bases for
determining these amounts for demand loans and the note receivable is
described in footnotes 1 through 5 of these financial statements.
Investment securities fair values are based on market quotes. Based on the
nature and terms of accounts payable and accrued expenses, face amounts
represent fair value.

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

3. NOTE RECEIVABLE AND INVESTMENT SECURITIES

On May 13, 1995, the Company agreed to provide Hemmeter Enterprises,
Inc. ("HEI") with a senior bank facility in the amount of $4,000,000 (the
"HEI Senior Bank Facility"). The HEI Senior Bank Facility was
collateralized pari passu by deeds of trust for real properties located in
Central City and Black Hawk, Colorado, a second mortgage on the property
securing the Company's Canadian Pavilion Senior Bank Facility and a second
mortgage on the riverboat operated in New Orleans by Grand Palais
Riverboat, Inc. ("GPRI"), an affiliate of HEI. The HEI Senior Bank
Facility was also guaranteed jointly and severally by various subsidiaries
of HEI, certain other affiliated entities and CBH. Prior to June 30, 1995,
the Company had advanced $2,000,000 under the HEI Senior Bank Facility. On

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. NOTE RECEIVABLE AND INVESTMENT SECURITIES (Continued)

June 30, 1995, the Company determined that it would not advance any
additional sums to HEI under the terms of the HEI Senior Bank Facility.
During the fourth quarter of 1995, HEI and GPRI both filed for protection
under Chapter 11 of the United States Bankruptcy Code. As of December 31,
1995, the Company had recorded a valuation allowance in the amount of
$1,000,000 against the carrying value of the HEI Senior Bank Facility. The
plans of reorganization of HEI and GPRI were approved by the bankruptcy
courts in June 1996 and in satisfaction of the HEI Senior Bank Facility,
the Company received the following in settlement of its claims: (i) a 12%
senior secured pay-in-kind note due 2003 in the principal amount of
$601,702 issued by Colorado Gaming & Entertainment Co., the successor to
HEI ("Colorado Gaming"); (ii) 60,170 shares of common stock of Colorado
Gaming, which entity is not publicly traded; and (iii) 27,089 shares of
common stock of Casino America, Inc., a publicly-held stock traded on the
NASDAQ National Stock Market under the symbol "CSNO." The Company is also
entitled to receive a small number of warrants of Casino America, Inc., the
exact number has not yet been determined. The Company has accorded no value
to the warrants as of December 31, 1996.

On June 7, 1996, the Company received 60,170 shares of common stock of
Colorado Gaming pursuant to the bankruptcy settlement. Based upon
information received from an independent third party market specialist in
non-publicly traded stock such as Colorado Gaming, its market value at
December 31, 1996 is estimated to be approximately $4.00 per share
providing a value of the Company's shares of $240,680. The Company
originally recorded its ownership interest in these shares as investment
securities valued at $180,510 as of June 30, 1996. At December 31, 1996,
the Company recorded a mark to market adjustment of $60,170 representing a
gain on investment securities as a result of an increase in the Colorado
Gaming share price from $3.00 to $4.00 per share. In addition, the Company
received 27,089 shares of common stock of Casino America, Inc. which was
initially quoted at $9.375 per share and recorded as investment securities
in the amount of $253,824. At December 31, 1996, the Company recorded a
market adjustment for a loss on investment securities in the amount of
$167,478 regarding the Casino America, Inc. stock as a result of a decrease
in its share price to $3.1875. As of December 31, 1996, the Company had
estimated the net realizable value of the note receivable from Colorado
Gaming to be $577,634. On December 1, 1996, the Company received cash
proceeds of $899 and an additional note in the principal amount of $34,000
with terms consistent with the original Colorado Gaming note representing
the payment of interest due on the original Colorado Gaming note through
December 1, 1996. The additional note was reflected in the increase in net
realizable value on the primary note. The Company did not record
additional interest on the note due to various uncertainties regarding the
financial wherewithal of Colorado Gaming. As a result of the HEI
bankruptcy settlement and the subsequent valuation of the above instruments
received, the Company recorded an allowance for losses on demand loans in
the amount of $66 as of December 31, 1996, which was included in other
operating expenses of the Company.

<TABLE>

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. DEMAND LOANS TO RELATED PARTIES

Demand loans to related parties at December 31, 1996 and 1995 consist of the following:

Interest Rate/ Carrying Face Carrying Face
Borrower Maturity Amount 1996 Amount 1996 Amount 1995 Amount 1995
- ---------- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CPLP (a) . . . . . . . . . . . . . . 26.00%
Demand $ -- $ -- $ -- $ 2,600,000

Outlaws (b). . . . . . . . . . . . . 11.00%
Demand 518,800 2,205,000 605,000 2,205,000

MCTC (c) . . . . . . . . . . . . . . 11.00%
Demand 1,824,791 1,824,791 1,854,875 1,854,875

RCH Investments (d). . . . . . . . . 18.50%
Demand 1,784,300 12,900,000 7,900,000 12,900,000

CBH and Patricia Hemmeter (e). . . . 27.00%
Demand -- 14,267,000 733,000 15,000,000

HEI (f). . . . . . . . . . . . . . . 16.00%
Demand -- -- 1,000,000 2,000,000
---------- ----------- ----------- -----------
4,127,891 31,196,791 12,092,875 36,559,875

Reserve for Impairment of Loans. . . -- 27,068,900 -- 24,467,000
---------- ----------- ----------- -----------

$4,127,891 $ 4,127,891 $12,092,875 $12,092,875
========== =========== =========== ===========

<FN>

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. DEMAND LOANS TO RELATED PARTIES (Continued)

- ----------

(a) On November 18, 1991, the Company made a demand loan to Canadian
Pavilion Limited Partnership (CPLP), an affiliate of the Company. The loan
was collateralized by a subleasehold interest in the Canadian Pavilion,
located in New Orleans, Louisiana, and was personally guaranteed by CBH.
The loan was modified in 1994 to increase the interest rate. On May 1,
1995, the interest rate on the loan was increased to 26%, the default rate,
as a result of a monetary default per the terms of the loan agreement. The
balance of the loan as of September 30, 1996 was fully reserved and in
default. The loan was on non-accrual status as of September 30, 1996. In
October 1996, the Company completed a settlement regarding the loan wherein
it assigned its interest in the CPLP collateral for $50,000 as
consideration for settlement and release from pending litigation associated
with the loan. Thus, the Company has no further interest in the CPLP
collateral.

(b) On February 11, 1992, the Company made two demand loans to
borrowers collectively known as the Outlaws, an affiliate of the Company.
The original amount of the borrowings aggregated $2,205,000. The loans are
collateralized by an assignment of the borrowers' partnership interest and
a mortgage of the underlying collateral subordinated by a first mortgage in
the amount of approximately $2,560,000, and are personally guaranteed by
CBH. The note was modified effective November 1, 1995 increasing the
principal balance of the loan in the amount of $105,598, the interest rate
to 11% and extending the maturity date to February 29, 1996. A charge for
impairment of $105,598 was simultaneously recorded by the Company due to
uncertainty regarding its collectibility. A charge for impairment in the
amount of $1,600,000 was recorded during the fourth quarter of 1995 against
the outstanding carrying balance on one of the loans. In addition, a
charge for impairment in the amount of $86,200 was recorded during the
fourth quarter of 1996 against the outstanding carrying balance of the
Hudspeth Loan. The loans are on non-accrual status as of December 31,
1996. As of December 31, 1996, no payments have been made by the borrower
pursuant to the terms of the notes modified on November 1, 1995.

(c) On May 12, 1992, the Company made a demand loan in the amount of
$900,000 to Mideast and China Trading Co. (MCTC) (formerly known as
Hemmeter Investment Company), an affiliate of the Company. The loan is
collateralized by a subleasehold mortgage in the International Marketplace,
located in Honolulu, Hawaii, a collateral assignment in the borrower's
interest as sub-sublessor, and is personally guaranteed by CBH. On
April 8, 1994, the Company funded an additional $1,000,000 demand loan.
Both loans were modified in 1994 to increase the interest rate by
"Additional Interest". The note was modified on November 1, 1995 by
restating the interest rate to 11%, extending the maturity date to February
29, 1996 and eliminating the Additional Interest. Interest payments
received by the Company during the quarter ended December 31, 1995 and the
quarter ended March 31, 1996, of $45,125 and $30,084, respectively, were
applied against the carrying amount of the loans. However, the borrower
did not make any payment under the terms of the modified loan agreement
during the nine months ended December 31, 1996.

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. DEMAND LOANS TO RELATED PARTIES (Continued)

(d) The loan is collateralized by a second mortgage on a 28-acre parcel
of land bordering Simpson Bay Lagoon and the Caribbean Sea on the island of
Sint Maarten, Netherlands Antilles (the Property) and is personally
guaranteed for $5,900,000 by CBH. The borrower is an affiliate of the
Company. As a result of a monetary default under the terms of the
agreement, effective July 1, 1995, the Company exercised its right to
increase the interest rate on the loan and any subsequent advances, at the
default interest rate of 18.5% per annum. A loss reserve in the amount of
$5,000,000 was recorded during the fourth quarter 1995 against the
outstanding carrying balance. During the quarter ended September 30, 1996,
the Company recorded an additional loss reserve in the amount of $5,500,000
based upon the minimum sales price of $7,000,000 established for the
auction of the Property pursuant to the foreclosure sale implemented by the
senior lender and scheduled for November 14, 1996. On November 14, 1996,
the auction for the Sint Maarten Property was continued, however, the
minimum bid was not received and it was rescheduled again until December
12, 1996. As had occurred in September and November, no minimum bid was
received. The auction then was rescheduled for January 30, 1997. At the
auction on January 30, 1997, a bid was received in an amount sufficient to
retire the amount of the principal balance of the first mortgage plus all
accrued and unpaid interest and the related fees and costs of the senior
lender and provide the Company with approximately $1,784,300. On February
6, 1997, the Company received the $1,784,300 of proceeds from the sale by
public auction of the Property. As a condition to this sale, the Company
released its liens against the Property. Thus, the Company no longer
maintains any interest in the Property. For the quarter ended December 31,
1996, the Company recorded a final loss reserve in the amount of $615,700
to reflect the current carrying value of $1,784,300.

(e) On January 4, 1994, the Company made a demand loan to CBH, in the
amount of $12,900,000. In September 1994, an additional $1,100,000 was
extended under the loan. The loan was collateralized by junior mortgages
on certain residential properties in Hawaii and California. The loan was
modified in 1994 to release the Hawaii residence as collateral effective
January 3, 1995 and to increase the interest rate. On May 2, 1995, the
Company advanced an additional $1,000,000 to CBH. The interest rate on the
additional $1,000,000 is 23% per annum, 10% per annum of which is to be
payable upon maturity or earlier prepayment of the additional $1,000,000
loan. During 1995, a total allowance of approximately $14,267,000 was
recorded against the carrying value of the loan. During February 1996, the
Company received approximately $733,000 as a partial repayment of the loan
from the sale of the California residences that were collateral of the
loan. CBH continues to be liable for the uncollected portion of this loan
plus interest at the default rate of 27% per annum. The loan is on non-
accrual status at December 31, 1996.

(f) During the second quarter of 1995, the Company funded a loan to HEI
in the amount of $2,000,000. The HEI loan bore interest at the
rate of 12% per annum and was secured by, among other things, interests in
and liens upon certain real and personal property owned by HEI and its
affiliates and the personal guaranty of CBH. Upon default by the borrower
under the loan terms, the interest rate was increased to 16% per annum, the
default rate. On November 7, 1995, HEI filed for protection under Chapter
11 of the United States Bankruptcy Code. The plans of reorganization of
HEI and its affiliated entity were approved by the bankruptcy courts and in
June 1996 in satisfaction of its loan the Company received the following in
settlement of its claims: (i) a 12% senior secured

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. DEMAND LOANS TO RELATED PARTIES (Continued)

pay-in-kind note due 2003 in the principal amount of $601,702
issued by Colorado Gaming & Entertainment Co., the successor to HEI
("Colorado Gaming"); (ii) 60,170 shares of common stock of Colorado Gaming,
which entity is not publicly traded; and (iii) 27,089 shares of common
stock of Casino America, Inc., a publicly-held stock traded on the NASDAQ
National Stock Market under the symbol "CSNO." In addition, the Company is
also entitled to receive a small number of warrants of Casino America,
Inc., the exact number has not yet been determined.

</TABLE>

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. IMPAIRMENT OF LOANS, ACCRUED INTEREST AND REVENUE RECOGNITION

In June 1995, the Company charged operations with an allowance of
$11,617,903, consisting of $9,900,000 for the loan to CBH and $467,903 for
interest accrued as of December 31, 1994 but unpaid as of December 31, 1995
which was determined to be uncollectible and $1,250,000 to establish an
estimated liability for collateral protection costs, including amounts that
the Company may need to advance to first-lien holders and others to protect
the Company's collateral position while the plan of liquidation is
accomplished, which includes negotiations with CBH and the Affiliated
Borrowers. For the period July 1, 1995 through December 31, 1995, the
Company recorded an additional allowance of $14,567,000 consisting of
$5,000,000 for the RCH Investments loan reflecting an apparent reduction in
market value of the Sint Maarten parcel which serves as collateral,
$2,600,000 for the loan to Canadian Pavilion Limited Partnership reflecting
uncertainty regarding the enforceability of the lease serving as collateral
for the Canadian Pavilion loan, $4,367,000 for the loan to CBH reflecting
an apparent reduction in market value of the real property serving as
collateral for the loan to CBH, based on offers received during 1995 to buy
such collateral for amounts less than were estimated as the net realizable
value at June 30, 1995, $1,600,000 for the loan to Outlaws reflecting
market value of the substituted property serving as collateral and
$1,000,000 for the loan to Hemmeter Enterprises, Inc. reflecting a market
value of the substituted property serving as collateral. See Note 4 for
further details regarding these loans and the related collateral. During
the quarter ended December 31, 1995, the reserve was reduced by $439,547
associated with the Company's interest in the CBH loan as no further costs
are required to protect the Company's collateral position on this loan.

For the year ended December 31, 1996, the Company recorded additional
allowances of $6,201,900 consisting of $6,115,700 for the RCH Investments
loan to reflect the proceeds received from the sale of the collateral by
public auction in February 1997 and $86,200 for the Hudspeth Loan based on
the valuation from an appraisal commissioned by the Company. During 1996,
$743,123 had been recorded against the $1,250,000 reserve for expenses
associated with the protection of the Company's collateral. The balance of
this reserve at December 31, 1996, $67,330, is included in accounts payable
and accrued expenses in the accompanying statement of net assets in
liquidation and represents the Company's estimate of the remaining costs
expected to be incurred in protecting the Company's collateral position.

The accrual of interest on the Company's demand loans was discontinued
effective June 29, 1995 and all accrued but unpaid interest was reserved
when it announced that the Company would commence an orderly self-
liquidation as a result of CBH's acknowledgement that interest and
principal would not be paid when due on demand loans made by the Company to
him personally or to the Affiliated Borrowers. Once a demand loan has been
placed in a non-accrual status, cash collections are applied to the
carrying amount of the loan. However, the Company is pursuing its
collection of all the principal and interest contractually due from the
Affiliated Borrowers.

6. INCOME TAXES

The Company believes it has qualified in 1996 and 1995 as a Real
Estate Investment Trust ("REIT"), as defined, under Sections 856 through
860 of the Internal Revenue Code. In order to continue to qualify, the
Company is required to distribute at least 95% of its taxable income to
stockholders and meet certain other requirements. Under the Internal
Revenue Code, qualifying REITs are relieved of income taxes on earnings
distributed to stockholders.

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES (Continued)

The Company anticipates that it will qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
Code), for the year ended December 31, 1995. However, the Company did not
follow a procedural requirement of the Code and regulations thereunder
regarding requesting and retaining certain information from large
shareholders. As a result, the status of the Company as a real estate
investment trust for 1995 is uncertain, even though the Company believes
that the substantive requirements of the Code were satisfied. The Company
incurred a loss for income tax reporting purposes for the year ended
December 31, 1995; accordingly, the Company does not believe that there
will be any adverse effect on its net assets or changes in net assets in
liquidation.

At December 31, 1996 the Company's tax basis in its demand loans was
$31,196,791 compared to its book basis of $4,214,091 and its tax basis
interest receivable related to demand loans was $467,903 compared to its
book basis of $0. Also, at December 31, 1996, the Company has a book
reserve for collateral protection costs in the amount of $67,330, the tax
basis in this liability was $0. These differences are related to reserves
recorded during 1996 and 1995 which are not currently deductible for tax
purposes.

7. LITIGATION

On July 3, 1995, a class action complaint captioned "Sarnoff v. Resort
Income Investors, Inc., et al., Doc. No. 95 B 1665" was filed against the
Company, CBH, Mark M. Hemmeter ("MMH") and Deloitte & Touche LLP, the
Company's independent auditors at that time, in U.S. District Court for the
District of Colorado alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and other provisions of the federal
securities laws and the rules promulgated by the Securities and Exchange
Commission (the "Commission"). On August 24, 1995, a second class action
suit captioned "Contract v. Resort Income Investors, Inc., et al., Doc. No.
95 B 2184," alleging similar violations of the federal securities laws, was
filed in the U.S. District Court for the District of Colorado against each
of the defendants in the Sarnoff lawsuit and Daniel D. Lane ("DDL"),
Christopher R. Hemmeter ("CRH"), Gregory Hooper ("GH") and John R. Young
("JRY"). In November 1995, the two actions were consolidated. On November
27, 1995, the plaintiffs moved to have the consolidated actions certified
as a class action for investors who purchased or acquired stock in the
Company between March 1, 1993 and June 29, 1995. On December 6, 1995, the
plaintiffs filed a consolidated amended complaint containing similar
allegations or claims as asserted in the SARNOFF and CONTRACT class
actions. The consolidated amended complaint seeks an unspecified amount of
actual damages and reimbursement of costs and expenses. On January 16,
1996, the defendants moved to dismiss the consolidated amended complaint
for failure to state a claim. On February 29, 1996, the defendants filed
opposition papers to the plaintiffs' motion for class certification. On
October 25, 1996, the Court heard arguments on the defendants' motion to
dismiss and the plaintiffs' notice for class certification. No ruling has
been issued to date. The parties are currently engaged in discovery.

RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. LITIGATION (Continued)

<ARTICLE> 5

<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RESORT
INCOME INVESTORS, INC.'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996

<CASH> 146,037
<SECURITIES> 327,026
<RECEIVABLES> 31,774,425
<ALLOWANCES> 27,068,900
<INVENTORY> 0
<CURRENT-ASSETS> 5,178,588
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,178,588
<CURRENT-LIABILITIES> 376,998
<BONDS> 0
<COMMON> 4,801,590
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,178,588
<SALES> 0
<TOTAL-REVENUES> 70,703
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,124,897
<LOSS-PROVISION> 6,201,900
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,256,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,256,094)
<EPS-PRIMARY> (1.99)
<EPS-DILUTED> (1.99)

<FN>

NOTE: The above captions are specified in Exhibit 27, and contemplate that
the entity is a going concern. As discussed in Note 1 to the Company's
financial statements, the Company is in the process of liquidation as of
December 31, 1996. The amounts above are presented with the caption that,
in management's judgment, most closely correlates to respective financial
statement captions used in the Company's financial statements.
</FN>

</TABLE>