<PAGE>   1
 
================================================================================
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                 FORM 10-KSB/A
                               (AMENDMENT NO. 1)

(MARK ONE)
 
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
      FOR THE TRANSITION PERIOD FROM                   TO
 
                         COMMISSION FILE NUMBER 0-6106
 
                           UNITED LEISURE CORPORATION
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
<TABLE>
<S>                                              <C>
                    DELAWARE                                        13-2652243
          (STATE OR OTHER JURISDICTION                           (I.R.S. EMPLOYER
       OF INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
 
                 18081 MAGNOLIA
          FOUNTAIN VALLEY, CALIFORNIA                                 92708
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)
</TABLE>
 
         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 837-1200
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)
 
                     CLASS A COMMON STOCK PURCHASE WARRANTS
                                (TITLE OF CLASS)
 
     Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
 
                               Yes [X]     No [ ]
 
     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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.  [ ]
 
     State Issuer's revenues for its most recent fiscal year: $2,889,141
 
     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
March 30, 1998: $2,673,160
 
     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
 
<TABLE>
<CAPTION>
                                                                  OUTSTANDING AT
                     CLASS                                        MARCH 30, 1998
                     -----                                        --------------
<S>                                              <C>
     Common Stock, par value $.01 per share                     12,718,849 shares
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   No documents are incorporated by reference into this Annual Report on Form
                                    10-KSB.
 
         Transitional Small Business Issuer Format: Yes [ ]     No [X]
================================================================================
 
                            Exhibit Index on Page 18
<PAGE>   2

                                EXPLANATORY NOTE

     This Annual Report on Form 10-KSB/A ("Form 10-KSB/A") is being filed
as Amendment No. 1 to the Registrant's Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on April 15, 1998, solely for
the purpose of revising the following items in their entirety.
 
                                     PART I
 
ITEM 1. DESCRIPTION OF BUSINESS
 
GENERAL
 
     Until February 28, 1997, when its Ground Lease with the Irvine Company (the
"Irvine Company"), as landlord (the "Ground Lease"), expired, the primary
business of United Leisure Corporation had been to act as a developer and
manager (rather than as an operator) of approximately 300 acres of real estate
in Irvine, California (the "Irvine Property"). Although litigation remains
pending with respect to various aspects of the Ground Lease covering the Irvine
Property, the Company does not anticipate that it will have any future income
from its Ground Lease operations. Income from the Company's Ground Lease
operations has been reduced as a percentage of its total income from operations
in the last three years, accounting for less than three percent of the Company's
revenues for the fiscal year ended December 31, 1997. The term the "Company" as
used herein includes United Leisure Corporation, a Delaware corporation, and its
subsidiaries.
 
     The Company owns and operates three "Camp Frasier" day camp locations,
three "Planet Kids," an indoor multimedia interactive play learning center for
children and one "Frasier's Frontier," an amusement park, all of which are
located in southern California. The Company has written off certain of its
Planet Kids assets in the amount of $3,862,554 and does not currently anticipate
that it will expand any of its children's educational and recreational
activities. See "Description of Business -- Planet Kids" and "Description of
Business -- Camp Frasier and Frasier's Frontier," "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and Note 5 to Notes to
Consolidated Financial Statements.
 
     On July 29, 1997, United Hotel & Casino, L.L.C., a Delaware limited
liability company ("UHC"), in which the Company currently owns a 50% membership
interest, acquired, in fee simple, approximately 8.5 acres of partially
developed land on the Las Vegas Strip in Las Vegas, Nevada (the "Las Vegas
Property"). The Las Vegas Property is located at 3025 Las Vegas Boulevard and
currently contains a shopping center consisting of approximately 20 retailers
and The Silver City Casino. Upon the acquisition of the Las Vegas Property, UHC
became the lessor of the shopping center and The Silver City Casino. The Silver
City Casino is owned and operated by Circus Circus Enterprises, Inc. ("Circus
Circus"). It is anticipated that Circus Circus will continue to operate this
casino on the Las Vegas Property. The lease to The Silver City Casino is due to
expire in October, 1999. UHC currently intends to continue to lease the existing
shopping center on the Las Vegas Property. The Company is evaluating various
alternatives with respect to its investment in UHC, including further
development of the Las Vegas Property. No assurance can be given that any
particular alternative will be pursued or that any agreement that may be entered
into will be entered into on terms favorable to the Company. See "Recent
Developments."
 
     The Company is also engaged in the development of certain proprietary
interactive multimedia products which it has conceived. See "United Leisure
Interactive."
 
     Since 1986 the Company has been engaged in protracted and expensive
litigation involving the Ground Lease with its former landlord, Irvine Company,
in Orange County Superior Court. The case is styled The Splash v. The Irvine
Company, et al. (Case No. 491202) (the "Irvine Company Litigation"). This
action, as well as several other actions between the Company and Irvine Company,
and actions between the Company and its subtenants under the Ground Lease, are
still pending. In the Irvine Company Litigation the Company was awarded a jury
verdict in the total approximate amount of $42 million in November 1993, and
Irvine Company was denied any recovery against the Company on its claims. In
April 1994, the Superior Court granted a new trial on post-verdict motions
brought by Irvine Company. The Company has appealed this order. The appeal was
argued on November 18, 1997, and it is anticipated that the judge's ruling will
be made in the near future. The Company and Irvine Company are currently
involved in settlement discussions with respect to the Irvine Company
Litigation; however, there can be no assurance that the parties will be able to
reach a settlement or, if a settlement is reached, if it will be on terms
favorable to the Company. If a new trial is ordered in connection with the
Irvine Company Litigation, the Company anticipates that it may have to incur
substantial additional legal fees. In view of the inherent uncertainties of
litigation, there can be no assurance of the outcome of the appeal or any
subsequent trial. See "Legal Proceedings."
 
                                        1
<PAGE>   3
 
     The Company was originally organized for the primary purpose of developing
and operating a chain of African wildlife preserve and theme amusement parks
known as "Lion Country Safari." The Company's last park operation, located in
Irvine, California, was closed in November, 1984. United Leisure Corporation is
the successor by change of name to Lion Country Safari, Inc., a Delaware
corporation, which was originally organized in May 1969. The Company has
operated and plans to continue to operate primarily as a holding company for its
operating subsidiaries.
 
     The Company's principal executive offices are located at 18081 Magnolia,
Fountain Valley, CA 92708. Its telephone number is (714) 837-1200.
 
RECENT DEVELOPMENTS
 
THE LAS VEGAS PROPERTY
 
     The Las Vegas Property is located at 3025 Las Vegas Boulevard and currently
contains a shopping center consisting of approximately 20 retailers and The
Silver City Casino, which is currently responsible for a substantial percentage
of the rental income received by UHC from the Las Vegas Property. The purchase
of the Las Vegas Property closed on July 29, 1997. Upon the acquisition of the
Las Vegas Property, UHC became the lessor of the shopping center and The Silver
City Casino. The Silver City Casino is owned and operated by Circus Circus and
it is anticipated that Circus Circus will continue to operate this casino. The
monthly income of the Las Vegas Property is approximately $182,000 and the
monthly expense is approximately $37,000. The lease to The Silver City Casino is
due to expire in October, 1999. The Company is evaluating various alternatives
with respect to its investment in UHC, including further development of the Las
Vegas Property. No assurance can be given that any particular alternative will
be pursued or that any agreement that may be entered into will be entered into
on terms favorable to the Company.
 
     The aggregate purchase price for the Las Vegas Property was approximately
$23,200,000, which was paid in the form of (i) cash in the amount of
approximately $5,590,000, (ii) a one-year note in the amount of $1,250,000 and
(iii) assumption of a first deed of trust on the Las Vegas Property in the
principal amount of approximately $16,360,000. The Company contributed
approximately $3,800,000 to the cash payment, which cash came in part from its
working capital and in part from two different loans as discussed below. The
Company owns a 50% membership interest in UHC, subject to (i) the right of
Westminster to convert the Westminster Loan into 50% of the Company's interest
in UHC and (ii) an agreement to transfer, on or prior to August 1, 1999, a
2 1/2% membership interest in UHC to Harvey Bibicoff in return for management
consulting services rendered by Mr. Bibicoff to the Company. See
"Business -- Recent Developments -- Las Vegas Property Acquisition" and "Certain
Relationships and Related Transactions."
 
     Concurrently with the closing of UHC's purchase of the Las Vegas Property,
Westminster Capital, Inc. ("Westminster") made a loan of $1,900,000 (the
"Westminster Loan") to the Company to enable it to meet a portion of its
additional capital contribution obligation to UHC. The loan was evidenced by a
Secured Convertible Promissory Note (the "Westminster Note") made by the
Company. The Westminster Loan bears interest at the rate of 15% per annum and is
due on the earlier to occur of (i) the demand of Westminster (which demand may
not be made until July 29, 1998 unless there is a sooner event of default) or
(ii) July 29, 1999 (the "Maturity Date"). The holder of the Westminster Note has
the right, at any time prior to the Maturity Date, to convert the entire
outstanding principal balance of the Westminster Note into one-half of the
Company's membership interest in UHC. The Westminster Note may be prepaid by the
Company at any time prior to conversion and after July 29, 1998. One-half of any
cash distributions which may be made by UHC to the Company prior to the
repayment of the Westminster Note are required to be paid to Westminster as a
prepayment on the Westminster Note.
 
     The Westminster Loan is secured by, among other things, a pledge of stock
pursuant to which the Company has pledged 408,333 of the 966,666 shares it owns
in Grand Havana Enterprises, Inc. ("GHEI"). As additional security, the Company
has granted a security interest to Westminster, pursuant to a Security Agreement
dated as of July 29, 1997, in the Company's 50% membership interest in UHC and
in the receivables and certain indebtedness due to the Company from GHEI. Harry
Shuster is the Chairman of the Board, President and Chief Executive Officer of
the Company; serves as a member of the Management
 
                                        2
<PAGE>   4
 
Committee of UHC; and also serves as the Chairman of the Board, President, and
Chief Executive Officer, and is a principal stockholder of, GHEI. In addition,
Harry Shuster and his spouse, Nita Shuster, provided certain other security
individually and jointly with respect to the Westminster Loan.
 
     As additional consideration for Westminster making the Westminster Loan,
the Company granted Westminster a three-year warrant to purchase 150,000 shares
of the common stock, par value $.01 per share, of the Company (the "Common
Stock") at a per share price equal to the lesser of $.40 or 75% of the average
of the last trade prices for the ten trading days immediately preceding the
exercise of the warrants. At the request of Westminster, the Company has filed a
registration statement to register the shares of Common Stock underlying the
warrants, which registration statement has been declared effective by the
Securities and Exchange Commission. The Company additionally arranged for GHEI
to grant to Westminster a three-year warrant to purchase 150,000 shares of the
common stock of GHEI exercisable at a per share price equal to the lesser of
$.75 or 75% of the average of the last trade prices for the ten trading days
immediately preceding the exercise of the warrants. See "Investments and
Financing Activities," and "Certain Relationships and Related Transactions."
 
     In connection with the Company's meeting its obligations to UHC relating to
the acquisition of the Las Vegas Property, on July 29, 1997, Harvey Bibicoff, a
director of GHEI, made a short-term loan to the Company in the amount of
$900,000 (the "Bibicoff Loan"). The Bibicoff Loan was evidenced by a promissory
note, and bore interest at the rate of 10% per annum. The Company repaid
$875,000, leaving a principal loan balance of $25,000 at December 31, 1997. See
"Certain Relationships and Related Transactions."
 
THE IRVINE PROPERTY
 
  GENERAL
 
     After closing the operation of the Company's African wildlife preserve and
theme amusement park in 1984, the Company developed the Irvine Property, with
emphasis on leisure-time use and attractions, primarily through subleases. Each
of the subleases, described below, expired in February 1997 upon expiration of
the Ground Lease. Pursuant to the terms of the Ground Lease, the Company had the
right to remove the leasehold improvements made to the Irvine Property at the
expiration of the Ground Lease. Two of the Company's sublessees, Irvine Meadows
Amphitheater ("Irvine Meadows") and The Splash, a California limited partnership
("The Splash"), the operator of Wild Rivers Park, brought actions against the
Company seeking injunctions against the Company from removing the improvements
on the subleased premises at the expiration of the term of the Ground Lease.
These actions are currently pending. See "Legal Proceedings."
 
  AMPHITHEATER SUBLEASE
 
     Pursuant to a Sublease Agreement entered into in 1980 (the "Amphitheater
Sublease"), with Irvine Meadows, the Company subleased approximately 20 acres of
the Irvine Property, plus the right to use the 4,000 vehicle parking lot on the
park property to Irvine Meadows for a term which was co-extensive with the
Ground Lease. Irvine Meadows operates a 15,000 seat amphitheater, where concerts
and other entertainment and cultural events are presented. Under the
Amphitheater Sublease, Irvine Meadows paid a base annual rental of $150,000,
against a percentage rental equal to 10% of all gross receipts from ticket
sales. In addition, rental equal to the sum of 2% of all gross receipts from
food sales, 5% of all gross receipts from the sale of beverages, and any
additional rental obligation that may be incurred by the Company as a result of
any activities of Irvine Meadows or others on the subleased premises other than
those set forth above was required to be paid. During the 1996 season, the
Amphitheater Sublease generated revenues of $355,389, and during the two months
prior to the termination of the Amphitheater Sublease on February 28, 1997, it
generated no revenues.
 
  WILD RIVERS WATER PARK
 
     The Company was a party to a Water Park Sublease with American Sportsworld,
Inc., pursuant to which the Company subleased approximately 15 acres of the
Irvine Property on which The Splash operates a theme
 
                                        3
<PAGE>   5
 
family water park (the "Water Park"). The Water Park Sublease was terminated on
February 28, 1997 upon the expiration of the Ground Lease. Additionally, the
Company holds a 3.12% limited partnership interest in The Splash.
 
     Under the terms of the Water Park Sublease, The Splash paid a minimum
annual rent of $475,000, payable $39,583 per month, against a percentage rent
equal to 10% of annual gross revenues. In addition, The Splash paid additional
rent to cover various increased expenses with respect to the subleased property
during the term of the Water Park Sublease, as well as all taxes related to such
property. The basis on which rental under this sublease was calculated is part
of the rent dispute with Irvine Company in the Irvine Company Litigation. In
1996, The Splash paid the Company rentals of $686,665 and a limited partner
distribution of $45,000 and during the two months prior to termination of the
Water Park Sublease in 1997, The Splash paid the Company rentals of $39,583 and
a limited partner distribution of $65,000.
 
     From the opening of its California animal park, the Company had an
exclusive concession arrangement with Africa Arts of California, Inc. ("Africa
Arts") related to the sale of souvenirs, gifts and similar merchandise on the
Irvine Property. In order to terminate this arrangement by reason of the closing
of the animal park operations in 1984, the parties entered into a new
arrangement pursuant to which Africa Arts receives 10% of the gross revenues
received by The Splash or any other party from the sale of such merchandise at
the Water Park, plus 15% of all gross revenues received by the Company from the
sale of such merchandise on the remainder of the Irvine Property. This agreement
terminated upon the termination of the Ground Lease.
 
  PICNICS AND OTHER SUBLEASES
 
     In 1982, the Company converted a portion of the Irvine Property formerly
used as part of the African wildlife preserve into a large park area which
provides two exclusive-use picnic areas for use by companies for their company
picnics and by other groups and organizations. Revenues from various rentals of
this space were $214,364 during 1996. No revenues were generated during the two
months of operations in 1997.
 
PLANET KIDS
 
     In June 1994, the Company entered into a joint venture with Master
Glazier's Karate International, Inc. ("MGK"), a public company engaged in the
operation of karate centers in New Jersey and Pennsylvania. The parties formed a
new company, Planet Kids, Inc. ("Planet Kids"), which initially was equally
owned. As of June 20, 1995, the Company bought out MGK's interest in the joint
venture, thus becoming the sole stockholder in exchange for the return of MGK's
initial investment of $500,000, plus accrued interest of approximately $40,500.
In addition, the Board of the Directors granted to MGK an option to acquire up
to 150,000 shares of the Company's Common Stock at an exercise price of $.01 per
share. This option was exercised in 1995.
 
     The Planet Kids concept is to operate state-of-the-art children's
play-learning centers to be operated out of leased premises and target children
ages 3 through 13. Each center provides children with interactive multimedia
educational games, exercise playgrounds, educational computers, party facilities
and other indoor activities.
 
     Planet Kids opened its first play-learning center in Laguna Hills,
California in July 1995 and its second play-learning center in Orange,
California in December 1995. A third center in Fountain Valley, California was
opened in September, 1996. In addition, Planet Kids has granted a license to PT
Planet Kidsindo, Jakarta, Indonesia, to construct and operate a Planet Kids
center at a location in the Orient to be determined, in return for a development
fee in the amount of $100,000, $54,000 of which has been paid. The Company has
written off certain of its Planet Kids assets in the amount of $3,862,554 and
does not currently anticipate that it will expand any of its children's
educational and recreational activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and Note 5 to Notes to
Consolidated Financial Statements.
 
                                        4
<PAGE>   6
 
CAMP FRASIER AND FRASIER'S FRONTIER
 
     The Camp Frasier program is offered to children between the ages of 3 and
13 and is designed to provide significant flexibility in attendance
requirements, with a minimum of ten days per camper during the summer. Campers
are provided with planned activity programs which include educational
activities, horseback riding, swimming, arts and crafts, fishing, and other
standard day camp fare. In recent years, the Company has added a rope challenge
course, go-carts and karate to the curriculum.
 
     Although due to the termination of the Ground Lease, the Company's Camp
Frasier in Irvine had its last summer season in 1996, the Company has opened
three additional Camp Frasier day camps in Southern California in which it is
following programs similar to those developed at the Irvine location.
 
     During 1996, the Company accommodated approximately 2,905 campers and had
revenues of $1,069,354. During 1997, the Company accommodated approximately
1,486 campers and had revenues of $542,102. The Company generally operates its
Camp Frasier locations for nine weeks during the summer to correspond with the
area school schedules.
 
     The Company opened its first Camp Frasier day camp on the Irvine Property
during the summer of 1982. During its years of operating, this camp experienced
a steadily increasing number of campers as well as increased revenues and
operated at a capacity level for its last several years, with 2,107 campers
participating in the Camp Frasier located on the Irvine Property in the summer
of 1996, its last summer of operations due to the termination of the Ground
Lease in February 1997.
 
     In April 1995, the Company obtained the right to operate a portion of
Featherly Regional Park as a Camp Frasier day camp. The park is located in Yorba
Linda in Orange County, California. During 1996, the Camp Frasier at Yorba Linda
accommodated approximately 409 campers and had revenues of $137,241 and during
1997 the Camp Frasier at Yorba Linda accommodated approximately 396 campers and
realized revenues of $137,685.
 
     In April 1995, the Company acquired certain real and personal property in
El Cajon, near San Diego, California. The property was subsequently renovated by
the Company and reopened as "Frasier's Frontier." The Camp Frasier location on
this property had its first full season of operations in the summer of 1996.
During 1996, its first full summer of operations, the Camp Frasier in El Cajon,
California accommodated approximately 200 campers and had revenues of $54,837.
During 1997 this Camp Frasier accommodated approximately 204 campers and had
revenues of $52,291. See "Description of Property."
 
     In March 1996, the Company entered into a lease with the County of Orange
to operate a Camp Frasier location in Foothill Ranch, Orange County, California.
The lease is for a term of 15 years and provides that the Company will pay as
annual rental the greater of the minimum annual rental or the percentage rental:
The minimum annual rental is $10,000 for the first year, $20,000 for the second
year and $30,000 for years three through five. The percentage rental is equal to
15% of the gross receipts of the Company from the day camp and any swimming
programs or lessons conducted by the Company. The Company operated its Foothill
Ranch Camp Frasier for the full summer season in 1996. During 1996 this Camp
Frasier accommodated approximately 189 campers and had revenues of $52,960 and
during 1997 this Camp Frasier accommodated approximately 886 campers and had
revenues of $352,126.
 
     The Company intends to continue to operate its existing Camp Frasier day
camp locations and its Frasier's Frontier amusement park, but has no plans to
continue to expand these operations at the current time.
 
UNITED LEISURE INTERACTIVE
 
     In exploring new avenues for the expansion of the Company's business,
management of the Company has conceived several ideas for proprietary
interactive multimedia products. Some of these ideas relate to games and
interactive educational products that could be utilized at the children's
play-learning centers operated by the Company, by other users, or marketed to
specific end users and/or to the general public.
 
                                        5
<PAGE>   7
 
     In pursuing these new products, the Company has utilized a portion of the
proceeds received from the public offering completed in 1994, developing new
products for the World Wide Web via the Internet. The first such product being
developed by the Company is called Netcruise and will allow users to book
cruises through the Internet. Brian Shuster, a director of the Company, renders
certain consulting services to the Company in connection with the development of
the Company's interactive multimedia products. Brian Shuster is the son of Harry
Shuster, Chairman of the Board, President and Chief Executive Officer of the
Company. See "Certain Relationships and Related Transactions."
 
INVESTMENTS AND FINANCING ACTIVITIES
 
     Investments in HEP II L.P. In April 1996, the Company acquired 50% of the
limited partnership interests in HEP II L.P., a California limited partnership
("HEP II"), formed in March 1996, for an initial capital contribution in the
amount of $1,500,000. HEP II is engaged in the motion picture production
business. Limited partners in HEP II are to receive 99% of all distributions
made by HEP II until they receive a 110% return of their investment and
thereafter they receive 50% of distributions until a 200% return is achieved, at
which time HEP II will terminate. The general partner of HEP II is United Film
Distributors, Inc., a California corporation (formerly known as Hit
Entertainment, Inc.) ("UFD"). Harry Shuster, the Chairman of the Board,
President and Chief Executive Officer of the Company is the Chairman of the
Board of UFD as well as one of its principal stockholders. Brian Shuster, a
director of the Company, is the President and a principal stockholder of UFD,
and the son of Harry Shuster. See "Certain Relationships and Related
Transactions."
 
     Investments in GHEI. In September 1996, the Company entered into a
financing agreement (the "GHEI Financing Agreement"), in which it agreed to
pledge the sum of $875,000 in order to support a letter of credit required to be
provided by GHEI in connection with a lease which GHEI had entered into. In
consideration for providing this pledge of collateral for GHEI's letter of
credit, GHEI agreed to pay the Company an amount equal to 10% per annum on the
amount of the pledged cash collateral as it exists from time to time. The cash
collateral was replaced by GHEI in full in October 1997. As additional
consideration, the Company received 100,000 shares of the common stock of GHEI
and a warrant to purchase an additional 100,000 shares of common stock of GHEI
at an exercise price of $.75 per share, which was exercised by the Company in
February 1997. On July 15, 1997, the Company and GHEI entered into an amendment
to the GHEI Financing Agreement pursuant to which (in consideration for the
Company's agreeing to forego the requirement that GHEI replace the collateral
pledged on an ongoing basis from certain operations) GHEI agreed to issue to the
Company or its designee a warrant to purchase 150,000 shares of the common stock
of GHEI at an exercise price of the lesser of $.75 per share or 75% of the
average of the last trade for the common stock of GHEI for the 10 day period
prior to the exercise of the warrant. The Company subsequently designated
Westminster, which provided financing to the Company in connection with the
acquisition of the Las Vegas Property, as the entity to receive this warrant.
See "Recent Developments -- Las Vegas Property Acquisition." Harry Shuster is
the Chairman of the Board, President, Chief Executive Officer and a principal
stockholder of GHEI. See "Certain Relationships and Related Transactions."
 
     In February 1997 the Company entered into an additional financing agreement
with GHEI pursuant to which the Company agreed to loan GHEI up to $1,250,000 in
order to fund the development of two private membership restaurant and cigar
clubs being developed by GHEI. The loan, which may be advanced in increments
from time to time as requested by GHEI, bears interest at the rate of 8% per
annum on the outstanding principal amount. As additional consideration for this
loan, the Company received 75,000 shares of the stock of GHEI. This loan was not
repaid when due on September 30, 1997. The related financing agreement provided
that if the loan was not repaid by September 30, 1997, it would become payable
on demand and the Company would then be entitled to receive an additional 25,000
shares of the common stock of GHEI. In February 1998, GHEI issued 25,000 shares
of its common stock to the Company pursuant to the terms of this financing
agreement. The parties have agreed to extend the maturity date of advances made
under this financing agreement to March 31, 1998, and are currently negotiating
an extension to September 30, 1998. During 1997, the Company advanced $775,000
and collected $125,000 from GHEI. At December 31, 1997, accrued interest
amounted to $32,643, and an aggregate of $650,000 in principal amount remained
payable by GHEI to the Company pursuant to this financing agreement. See
"Certain Relationships and Related Transactions."
 
                                        6
<PAGE>   8
 
BUSINESS SEGMENT INFORMATION
 
     The Company's operations for 1996 and 1997 consisted of two business
segments, both segments conducting operations in Southern California. The first
business segment consists of facility rentals, pursuant to which the Company
subleases or otherwise allows others to use the Irvine Property. This business
segment was terminated in February 1997 when the Ground Lease for the Irvine
Property was terminated. See "Legal Proceedings." The second business segment
consists of children's educational and recreational activities, which during
1997, included the operation of three Camp Frasiers, a day camp operated during
the summer months; three Planet Kids, the Company's play-learning center
operations; and one Frasier's Frontier, an amusement park. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, the Company has an investment in UHC. See "Recent Developments" above.
 
COMPETITION
 
     The Company is subject to significant competition in connection with its
Camp Frasier and Planet Kids operations and Frasiers' Frontier amusement park.
There are many day camp operations throughout the Southern California area which
compete with the Company's Camp Frasier locations, some of which are larger and
have greater financial resources than the Company. The Company believes the most
important competitive factors with respect to a day camp operation are location
and the reputation of the particular camp operation. The Company believes the
reputation of the Camp Frasier which it operated on the Irvine Property from
1982 through 1996 will allow its more recently opened Camp Frasier locations to
compete effectively. In the children's educational and play-center business,
there are already several large companies participating, including Discovery
Zone, as well as many small, local entrants. The Company believes that the most
important competitive elements with respect to its Planet Kids locations are
location and the imagination applied to the activities provided for the centers'
customers. The Company believes that its emphasis on high-tech interactive
activities will allow it to compete effectively in this market. The Company's
Frasiers' Frontier amusement park competes with other amusements parks, both
larger and smaller than Frasiers' Frontier, in the Southern California area as
well as with other children's recreational activities.
 
     The Company's Las Vegas Property receives rental income from a shopping
center consisting of approximately 20 retailers and The Silver City Casino. Both
the casino and the retailers at the Las Vegas Property compete with a large
number of other similar operations on the Las Vegas Strip, and are dependent on
tourism for a substantial percentage of their revenues. Many of the Company's
competitors have substantially greater financial, marketing, personnel and other
resources than the Company. Additionally, businesses catering to the tourist
trade are often affected by changes in consumer taste and discretionary spending
priorities, economic conditions, demographic trends, and employee availability.
Any change in any or all of these factors could have a material adverse effect
on the Company's business, financial condition and results of operations.
 
EMPLOYEES
 
     At March 1, 1998, the Company had 10 full-time employees and 133 part-time
employees. In addition, the Company retained approximately 141 seasonal
employees in 1997 who worked at the Company's Camp Frasier locations and at
Frasier's Frontier. In addition, Harry Shuster, Chairman of the Board, President
and Chief Executive Officer, is employed by the Company as a consultant. See
"Executive Compensation -- Consulting and Employment Agreements."
 
                                        7
<PAGE>   9
                                    PART II

 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION
 
     The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-KSB/A. Certain statements contained herein that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forwarding-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-KSB/A
are qualified in their entirety by this statement.
 
OVERVIEW
 
     Until February 1997, the primary business of the Company had been to act as
a developer and manager (rather than as an operator) under the Ground Lease with
Irvine Company on the Irvine Property. The Ground Lease terminated on February
28, 1997, and although litigation is pending with respect to various aspects of
the Ground Lease, the Company does not anticipate that it will have any future
income from its Ground Lease operations. The Company's income from its Ground
Lease operations has declined as a percentage of its total income from
operations in the last several years. In connection with The Irvine Company
Litigation, the Company was awarded a jury verdict in the total approximate
amount of $42 million in November 1993, and Irvine Company was denied any
recovery against the Company on its claims. If a new trial is ordered in
connection with The Irvine Company Litigation, the Company anticipates that it
may have to incur substantial additional legal fees. In view of the inherent
uncertainties of litigation, there can be no assurance of the outcome of the
appeal or any subsequent trial. See "Legal Proceedings."
 
     The Company has written off certain of its Planet Kids assets in the amount
of $3,862,554 and does not currently anticipate that it will expand any of its
children's educational and recreational activities. See Note 5 to Notes to
Consolidated Financial Statements below.
 
     During the fiscal year ended December 31, 1997, the Company's operations
consisted of two business segments: (i) facility rentals, pursuant to which the
Company subleased or otherwise allowed others to use the Irvine Property, which
activities ceased at the termination of the Ground Lease on February 28, 1997,
and (ii) children's recreational activities, which includes the operation of the
Company's Camp Frasier locations, Planet Kids locations and Frasier's Frontier,
all located in Southern California. The Company had total operating revenues
from its Ground Lease operations of $79,383 for the fiscal year ended December
31, 1997 as compared to $1,444,284 for the fiscal year ended December 31, 1996,
a decrease of $1,364,901, due to the fact that the Company's operations with
respect to the Ground Lease ceased on February 28, 1997. The Company had total
operating revenues from its children's recreational activities of $2,808,342 for
the fiscal year ended December 31, 1997 compared to $3,051,216 for the
comparable period in 1996.
 
     Investments In HEP II. On April 23, 1996, the Company made an initial
investment of $1,500,000 as a limited partner in HEP II, which is engaged in the
motion picture production business. The Company made an additional investment of
$250,000 in HEP II on July 9, 1996, which was repaid in October 1996 to Harry
Shuster on behalf of the Company. This repayment was included in advances to Mr.
Shuster (see Note 8 to Notes to Consolidated Financial Statements). On July 22,
1996, the Company advanced $500,000 to HEP II, which was repaid by HEP II on
July 25, 1996. The Company received capital distributions from HEP II of
$379,500 in 1996. The general partner of HEP II is UFD. Harry Shuster, the
Chairman of the Board, President and Chief Executive Officer of the Company, is
the Chairman of the Board and a principal stockholder of UFD. Brian Shuster, a
director of the Company, is the President and a principal stockholder of UFD. As
of December 31, 1997 and 1996, the balance of the Company's investment in HEP II
was $1,120,500. See "Certain Relationships and Related Transactions," below.
 
     Investment in GHEI. In September 1996, the Company entered into the GHEI
Financing Agreement in which it agreed to pledge the sum of $875,000 in order to
support a letter of credit required to be provided by GHEI in connection with a
lease that GHEI had entered into. In consideration for providing this pledge of
collateral for GHEI's letter of credit, GHEI agreed to pay the Company an amount
equal to 10% per annum on the amount of the pledged cash collateral as it exists
from time to time. All of the cash collateral was replaced by October 1997 and
no amount is currently due under the GHEI Financing Agreement. As additional
consideration, the Company was issued 100,000 unregistered shares of the common
stock of GHEI
 
                                       8
<PAGE>   10
 
and a warrant to purchase an additional 100,000 shares of common stock of GHEI
at an exercise price of $.75 per share. Harry Shuster is the Chairman of the
Board, President, Chief Executive Officer and a principal stockholder of GHEI.
 
     In October 1996, the Company acquired in a private placement, 333,333
shares of GHEI's common stock and warrants to purchase 333,333 shares of GHEI's
common stock at an exercise price of $1.50 per share, for $250,000. In February
1997, the Company exercised its warrants to purchase 333,333 shares of common
stock of GHEI for a total exercise price of $575,000. In consideration for
making the loan to GHEI in February 1997, GHEI issued to the Company 75,000
shares of GHEI's common stock, valued at $137,750. In February 1998, GHEI issued
to the Company, as a late fee, an additional 25,000 shares of its common stock,
which was valued by the Company at $38,681.
 
     As of December 31, 1997 and 1996, the Company held 966,666 shares and
433,333 shares of GHEI's common stock, respectively. Management of the Company
estimated the fair value of the investment in GHEI using the discounted last
closing price of the stock at December 31, 1997 (approximately 75% of $.47, or
$.35 per share), resulting in an aggregate fair value of $340,025 at December
31, 1997. Unrealized loss on this investment included as a component of
stockholders' equity was $742,406.
 
     Investment in UHC. In January 1997, the Company and two California limited
liability companies formed UHC. On July 29, 1997, UHC acquired the Las Vegas
Property, which currently contains a shopping center consisting of approximately
20 retailers and The Silver City Casino, which is owned and operated by Circus
Circus. It is anticipated that Circus Circus will continue to operate this
casino on the Las Vegas Property. The lease for The Silver City Casino is due to
expire in October, 1999. The Company is evaluating various alternatives with
respect to its investment in UHC, including further development of the Las Vegas
Property. No assurance can be given that any particular alternative will be
pursued or that any agreement that may be entered into will be entered into on
terms favorable to the Company.
 
     The aggregate purchase price for the Las Vegas Property was approximately
$23,200,000, which was paid in the form of (i) cash in the amount of
approximately $5,590,000, (ii) a one-year note in the amount of $1,250,000 and
(iii) assumption of a first deed of trust on the Las Vegas Property in the
principal amount of approximately $16,360,000. The Company contributed
approximately $3,800,000 to the cash payment, which cash came in part from its
working capital and in part from the Westminster Loan and the Bibicoff Loan.
 
SUBLEASE ACTIVITIES
 
     Set forth below is a summary of the major projects which the Company
carried out on the Irvine Property through February 28, 1997, at which time all
sublease activity terminated, when the Ground Lease expired.
 
     The Company was a party to the Amphitheater Sublease, pursuant to which the
Company subleased approximately 20 acres of the Irvine Property to Irvine
Meadows Amphitheater. In 1996 and 1997, the Company received $335,389 and $0,
respectively, from the related Sublease Agreement.
 
     The Company had a sublease arrangement with James Productions, Inc.
("James"), since 1990 pursuant to which James had the right to conduct picnics
and other special events on the 27-acre picnic areas of the Irvine Property. The
Company received rentals under this arrangement of $214,364 in 1996 and $0 in
1997.
 
     The Company was a party to a sublease entered into in 1984 with American
Sportsworld, Inc. covering The Splash, a water park on 15 acres of the Irvine
Property opened to the public in July 1986. The Company has a 3.12% limited
partnership interest in The Splash. Under the terms of such sublease, The Splash
paid a minimum annual rent of $475,000, payable $39,583 per month, against a
percentage rent equal to 10% of annual gross revenues. In addition, The Splash
had agreed to pay additional rent to cover various increased expenses with
respect to the subleased property during the term of the Water Park Sublease, as
well as all taxes related to such property. In 1996 and 1997, American
Sportsworld, Inc. paid the Company $686,665 and $39,583, respectively, in
rentals. In addition, in 1996 and 1997, the Company received capital
distributions in the amount of $45,000, and $65,000, respectively.
 
                                       9
<PAGE>   11
 
     During 1997, the Company's operations consisted of two business segments:
(i) facility rentals, pursuant to which the Company subleased or otherwise
allows others to use the Irvine Property; and (ii) children's recreational
activities, which includes the operation of the Company's Camp Frasier
locations, Planet Kids locations and Frasier's Frontier. The Company had total
operating revenues from its Ground Lease operations of $1,444,284 in 1996 and of
$80,799 in 1997, and had total operating revenues from its children's
recreational activities of $3,051,216 in 1996 and $2,808,342 in 1997.
 
RESULTS OF OPERATIONS
 
  FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
 
     The Company had total revenues during the year ended December 31, 1996, in
the amount of $4,495,500 as compared to $2,889,141 for 1997, a decrease of
$1,606,359. The decrease is due primarily to the fact that the Company had
rental income from its Ground Lease operations of $80,799 for the fiscal year
ended December 31, 1997 compared to $1,444,284 for the fiscal year ended
December 31, 1996. The Company's revenues from its children's recreational
activities decreased from $3,051,216 for the fiscal year ended December 31, 1996
to $2,808,342 for the fiscal year ended December 31, 1997, a decrease of
$242,874. This decrease in revenues was due primarily to the fact that since the
Ground Lease terminated in February 1997, the Company had no revenues in 1997
from its Camp Frasier formerly located on the Irvine Property. This camp had
been the Company's largest summer day camp operation.
 
     Operating expenses, excluding impairment losses, decreased from $6,055,281
for the fiscal year ended December 31, 1996 to $5,825,624 for the fiscal year
ended December 31, 1997, or an aggregate decrease in operating expenses of
$229,657. This decrease was due primarily to decreases in occupancy expenses and
selling, general and administrative expenses associated with termination of the
Company's Ground Lease operations in February, 1997, offset by services rendered
in obtaining the Westminster Loan and the Bibicoff Loan. Impairment losses
recognized during 1997 of $3,862,554 were due to a write-off of certain property
and equipment of Planet Kids play-learning centers.
 
     For the fiscal year ended December 31, 1996, the Company had a net loss of
$403,275 or ($.03) per share compared with a net loss of $7,313,545 or ($0.59)
per share for the fiscal year ended December 31, 1997. The net loss in the
fiscal year ended December 31, 1996 included income from reversal of provision
of disputed contingent claims of approximately $1,100,000. The net loss in the
fiscal year ended December 31, 1997 was primarily attributable to impairment
loss in the amount of $3,862,554 relating to Planet Kids, additional legal
expenses relating to The Irvine Company litigation and the fact that the Company
had only two months of revenues from its Ground Lease operations for the fiscal
year ended December 31, 1997.
 
     Legal expenses incurred by the Company were $331,291 for 1996 as compared
to $716,291 for 1997. Interest income on the invested net proceeds of the 1994
public offering produced interest income of $382,028 in 1996, as compared to
$344,009 in 1997. This decrease is due primarily to the fact that the Company
expended substantially all of the net proceeds from its 1994 public offering by
December 31, 1996.
 
     In 1996 the Company wrote-off a previous provision for a disputed
contingency claim in the amount of $1,128,973 which it had previously
established with respect to the Irvine Company Litigation due to management's
belief that it was unlikely that any portion of this amount would ever have to
be paid.
 
LIQUIDITY AND FINANCIAL CONDITION
 
     The Company has experienced operating losses in recent years. For the years
ended December 31, 1997 and 1996, the Company experienced net losses of
$7,313,545, including impairment losses of $3,862,554, and $403,275,
respectively. The Company's working capital requirements have been and will
continue to be significant. As of December 31, 1997, the Company had cash and
cash equivalents of $152,770 and a working capital deficit of $3,153,983. In
addition, the Company does not currently meet the new listing requirements of
Nasdaq and it is possible that its Common Stock could be de-listed, which might
result in the Company's having difficulty in raising capital through the sale of
its securities.
 
                                       10
<PAGE>   12
 
     The Company's future capital requirements will depend on numerous factors.
If the $42 million judgment in the Irvine Company Litigation is not upheld and a
new trial is ordered, the Company anticipates that it will continue to expend
significant funds on legal expenses. There are numerous uncertainties associated
with the various aspects of the Irvine Company Litigation and the outcome of
these matters could have a material adverse impact on the Company's liquidity.
 
     On July 28, 1997 UHC acquired the Las Vegas Property. The Company was
required to make an additional capital contribution to UHC of approximately
$3,800,000 in connection with the acquisition of the Las Vegas Property and in
connection therewith obtained two loans, one for $1,900,000 from Westminster and
one for $900,000 from Harvey Bibicoff, the latter of which $825,000 has been
repaid. The loan from Westminster is secured by a significant amount of the
Company's assets, including its 50% membership interest in UHC and a significant
portion of GHEI's common stock which the Company owns. Although the Company
believes it will be able to meet this loan obligation as it matures, from
working capital and from repayment by GHEI of an outstanding loan made by the
Company to GHEI and/or from additional financing from affiliated or unaffiliated
sources, if the Company is unable to meet this loan obligation as becomes due,
the collateral pledged by the Company could be foreclosed upon.
 
     As of December 31, 1997, investments in and loans to affiliated companies,
GHEI and HEP II, totalled approximately $2,142,000 or 26% of total assets and
53% of the Company's stockholders' equity. Both affiliated companies have had
substantial losses and have working capital deficits creating liquidity risks to
the Company. If these losses continue, a substantial portion of the Company's
net worth would be impaired or at risk. Although management believes that it is
more likely than not that the investments and receivables with related companies
are not impaired, the cumulative losses and liquidity problems of the affiliated
companies creates an inherent risk in these assets.
 
     Although the Company believes that its current cash and income from
operations, distributions received by the Company as a result of its
investments, and repayment to the Company of amounts previously advanced by the
Company to GHEI will provide the Company sufficient funds to meet the Company's
anticipated need for working capital and capital expenditures for at least the
next 12 months, there can be no assurance that this will be the case, in
particular with regard to the various uncertainties surrounding the Irvine
Company Litigation and related legal proceedings. If the Company is in need of
additional financing, there can be no assurance that the Company will be able to
acquire additional financing, or that if such financing is available, it will be
available to the Company on favorable terms.
 
YEAR 2000 ISSUES
 
     The nature of the Company's business systems is such that the year 2000 is
expected to have a minimal impact on the Company's operations or financial
performance. However, there can be no assurance that the systems of other
parties upon which the Company's businesses also rely will address the year 2000
problem adequately.
 
ITEM 7. FINANCIAL STATEMENTS
 
     The Financial Statements of the Company are submitted as a separate section
of this Form 10-KSB/A commencing on page F-1 immediately following Part IV of 
this Form 10-KSB/A.
 
 
                                       11
<PAGE>   13
 
                                    PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The following table sets forth certain information concerning the directors
and executive officers of the Company:
 
<TABLE>
<CAPTION>
                                             ALL POSITIONS            POSITION HELD
           NAME             AGE            WITH THE COMPANY               SINCE
           ----             ---            ----------------           -------------
<S>                         <C>    <C>                                <C>
Harry Shuster               63     Chairman of the Board, President       1969
                                   and Chief Executive Officer,
                                   Chief Financial Officer, and
                                   Director
Alvin Cassel                84     Secretary, Treasurer and Director      1969
Alvin Alexander             69     Director                               1975
J. Brooke Johnston          58     Director                               1996
Brian Shuster               39     Director                               1996
</TABLE>
 
     Harry Shuster has been engaged in managing the affairs of the Company since
1967, serving in the capacity of Chairman of the Board, President and Chief
Executive Officer since April, 1975. Mr. Shuster is also the Chairman of the
Board, President and Chief Executive Officer of GHEI, a publicly-traded company
primarily engaged in the business of the ownership and operation of private
membership restaurants and cigar clubs whose offices are located in Los Angeles,
California. See "Certain Relationships and Related Transactions." Mr. Shuster is
also the Chairman of the Board of UFD, which is a privately-held independent
motion picture production company in Los Angeles, California and the general
partner of HEP II. Harry Shuster is the father of Brian Shuster. See "Legal
Proceedings," above, for a discussion of former bankruptcy proceedings involving
the Company's primary operating subsidiary, of which Mr. Shuster is an officer
and director.
 
     Alvin Cassel is of counsel to the law firm of Broad and Cassel, Miami,
Florida. He has been engaged in a general civil law practice for more than 60
years. Mr. Cassel is also Managing Director of Koorn N.V. See "Security
Ownership of Certain Beneficial Owners and Management." See "Legal Proceedings,"
above, for a discussion of former bankruptcy proceedings involving the Company's
primary operating subsidiary, of which Mr. Cassel is an officer and director.
 
     Mr. Alexander is and has been for more than five years President of Skip
Alexander Productions, a game show development company located in Los Angeles,
California, and has been a director of the Company since 1975.
 
     Brian Shuster has been the President of UFD since 1995. See "Certain
Relationships and Related Transactions." From 1993 through 1995, Brian Shuster
was President of Beverly Hills Producers Group, an independent motion picture
production company. From 1990 through 1993, Mr. Shuster was Vice President of
Worldwide Entertainment Group, an independent motion picture production company.
Brian Shuster is the son of Harry Shuster.
 
     J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel
for Med Partners, Birmingham, Alabama since April 1996. Prior to that Mr.
Johnston was a senior principal of the law firm of Haskell, Slaughter, Young &
Johnston, a professional association, in Birmingham, Alabama where he practiced
securities law for over 17 years.
 
     The present term of each Director will expire at the time of the next
Annual Meeting of Stockholders of the Company. Executive officers are elected at
the Annual Meeting of the Board of Directors held immediately following the
Annual Meeting of Stockholders and hold office until the next Annual Meeting of
the Board of Directors or until their successors are duly elected and qualified.
 
                                       12
<PAGE>   14
 
     There are no arrangements or understandings known to the Company between
any of the Directors or executive officers of the Company and any other person,
pursuant to which any of such persons was or is to be selected as a Director or
an executive officer, except the Amended and Restated Consulting Agreement
between the Company and Harry Shuster, which agreement is described below under
"Executive Compensation -- Consulting and Employment Agreements."
 
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
 
     Section 16(a) of the Securities Exchange Act requires the Company's
officers and Directors, and persons who beneficially own more than 10% of a
registered class of the Company's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership of the Company's
Securities with the Securities and Exchange Commission. Officers, Directors and
beneficial owners of more than 10% of the Company's Common Stock are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms that they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no reports on Form 5
were required, the Company believes that for the period from January 1, 1997
through December 31, 1997, all officers, Directors and greater-than-10%
beneficial owners complied with all Section 16(a) filing requirements applicable
to them, except that Harry Shuster was late in filing one Form 4 with respect to
the transfer of shares to certain trusts beneficially owned by his children, and
Brian Shuster was late in filing one Form 4 with respect to the transfer of
shares by Harry Shuster to a trust for his benefit, due to an administrative
oversight. In addition, each of Brian Shuster, Jay Brooke Johnston, Esq. and
Alvin Cassel was late in filing one Form 4 with regard to the grant of options
to each such person due to administrative oversight. All such filings have been
made as of the date hereof.
 
 
                                       13
<PAGE>   15
 
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     In prior years, the Company's Chairman of the Board, President and Chief
Executive Officer, Harry Shuster, advanced working capital to the Company at the
prime rate plus 3%. Such advances were secured by the Company's rights under its
sublease arrangements. In June 1995, advances in the amount of $789,649,
excluding accrued interest of $649,800 were converted by Mr. Shuster into equity
by the exercise of options to purchase 755,550 shares of the Company's Common
Stock. Mr. Shuster has deferred payment of certain of the interest due to him
under the loan arrangement and certain of the amounts due him under the
Consulting Agreement. On July 29, 1995, the Company made an advance in the
amount of $100,000 to Mr. Shuster, for personal expenses. The advance bears
interest at 10% per annum. Advances, including accrued interest, to Mr. Shuster
at December 31, 1997 and 1996 amounted to $1,002,072 and $1,259,260,
respectively. As of December 31, 1997, the net receivable from Mr. Shuster
amounted to $12,567. See "Financial Statements -- Note 8 to Notes to
Consolidated Financial Statements."

     In 1997, at the request of Harry Shuster, UFD, an affiliated company, paid
an aggregate of $325,000 to the Company, which amount was applied to reduce
the Company's net receivable from him. Mr. Shuster is the Chairman of the Board,
President and Chief Executive Officer of the Company, and the Chairman of
the Board and a principal stockholder of UFD. UFD is the general partner of 
HEP II, in which the Company had an investment at December 31, 1997 in the
amount of $1,120,500. See "Financial Statements -- Note 4 and Note 8 to Notes to
Consolidated Financial Statements."
 
     The Company leases certain of its office space, on a month-to-month basis,
from a partnership in which Harry Shuster, is a partner. The Company paid rent
to this partnership in the amount of $30,870 in 1996 and $31,044 in 1997. In
addition, the Company also pays rent to Mr. Shuster on an apartment which he
uses for his overnight accommodations while on the East Coast. The Company
believes that the rental and other terms of these arrangements are no more
favorable to Mr. Shuster than could have been obtained in a similar location
from an independent, unrelated provider.
 
     Brian Shuster, a director of the Company, and the son of Harry Shuster,
provides consulting services to the Company with respect to the development of
the Company's product called Netcruise through its subsidiary, United Leisure
Interactive, Inc. Brian Shuster receives $5,000 per month in consulting fees.
The consulting arrangement is an oral arrangement, which may be terminated by
either party upon 30 days notice. During the years ended December 31, 1997 and
1996, the Company paid Brian Shuster or accrued consulting fees of $60,000 and
$60,000, respectively. See "Description of Business -- United Leisure
Interactive."
 
     On June 3, 1997, the Company exchanged options to purchase 25,000 shares of
Common Stock issued to Alvin Alexander, a director of the Company, for a note
receivable of $10,000.
 
     In April 1996, the Company acquired 50% of the limited partnership
interests in HEP II, for a capital contribution in the amount of $1,500,000. HEP
II is engaged in the motion picture production business. Its general partner is
UFD. Harry Shuster, the Chairman of the Board, President and Chief Executive
Officer of the Company is the Chairman of the Board of UFD as well as one of its
principal stockholders. Brian Shuster, a director of the Company and the son of
Harry Shuster, is the President of UFD.
 
                                       14
<PAGE>   16
 
     In September 1996, the Company entered into the GHEI Financing Agreement,
in which it agreed to pledge the sum of $875,000 in order to support a letter of
credit required to be provided by GHEI in connection with a lease that GHEI had
entered into. In consideration for providing this pledge of collateral for
GHEI's letter of credit, GHEI agreed to pay the Company an amount equal to 10%
per annum on the amount of the pledged cash collateral as it exists from time to
time. All of the cash collateral was replaced by October 1997 and no amount is
currently due under the GHEI Financing Agreement. As additional consideration,
the Company was issued 100,000 shares of the common stock of GHEI and a warrant
to purchase an additional 100,000 shares of common stock of GHEI at an exercise
price of $.75 per share. Harry Shuster is the Chairman of the Board, President,
Chief Executive Officer and a principal stockholder of GHEI.
 
     On July 15, 1997, the Company entered into an amendment to the GHEI
Financing Agreement. The amendment to the GHEI Financing Agreement permitted
GHEI to forego the requirement that it replace the collateral out of the initial
membership fees it received from certain of its Grand Havana Room private
membership cigar clubs, in consideration for which GHEI agreed to grant to the
Company or its designee a three-year warrant to purchase 150,000 shares of the
common stock of GHEI exercisable at the lesser of $.75 per share or 75% of the
average trading price of the common stock of GHEI for a ten-day period prior to
the exercise of the warrant. The Company subsequently designated Westminster to
receive this warrant from GHEI in connection with the financing obtained by the
Company related to the acquisition of UHC.
 
     In February 1997, the Company entered into an additional financing
agreement with GHEI pursuant to which the Company agreed to loan GHEI up to
$1,250,000 in order to fund the development of two private membership restaurant
and cigar clubs being developed by GHEI. The loan, which may be advanced in
increments from time to time as requested by GHEI, bears interest at the rate of
8% per annum on the outstanding principal amount. As additional consideration
for this loan, the Company received 75,000 shares of the common stock of GHEI.
This loan was not repaid when due on September 30, 1997. The related financing
agreement provided that if the loan was not repaid by September 30, 1997, it
would become payable on demand and the Company would then be entitled to receive
an additional 25,000 shares of the common stock of GHEI. In February 1998, GHEI
issued 25,000 shares of its common stock to the Company pursuant to the terms of
this financing agreement. The parties have agreed to extend the maturity date of
advances made under this financing agreement to March 31, 1998, and are
currently negotiating an extension to September 30, 1998. During 1997, the
Company advanced $775,000 and collected $125,000 from GHEI. At December 31,
1997, accrued interest amounted to $31,643, and an aggregate of $650,000 in
principal amount remained payable by GHEI to the Company pursuant to this
financing agreement.
 
     Concurrently with the closing of UHC's acquisition of the Las Vegas
Property, Westminster made The Westminster Loan of $1,900,000 to the Company to
enable the Company to meet a portion of its $3,800,000 capital contribution to
UHC. The Westminster Loan was evidenced by the Westminster Note, a secured
convertible promissory note made by the Company. The Westminster Loan bears
interest at 15% per annum and is due on the earlier to occur of (i) the demand
of the holder which demand may not be made until July 29, 1998 unless there is a
sooner event of default or (ii) July 29, 1999. The holder of the Westminster
Note has the right, at any time prior to maturity date, to convert the entire
outstanding principal balance of the note into a 25% membership interest in UHC,
which would leave the Company with a 25% membership interest in UHC after such
conversion (or a 22 1/2% membership interest at August 1, 1999, the date by
which the Company has agreed to transfer a 2 1/2% membership interest to Harvey
Bibicoff). The Westminster Note may be prepaid by the Company at any time after
July 29, 1998. One-half of any cash distributions which may be made by UHC to
the Company prior to the repayment of the Westminster Note are required to be
paid to Westminster as a prepayment on the Westminster Note. The Westminster
Loan is secured by, among other things, a stock pledge agreement pursuant to
which the Company has pledged 408,333 of the 966,666 shares of common stock it
owns in GHEI. As additional security, the Company has granted a security
interest to Westminster in the Company's 50% membership interest in UHC and in
the receivables and certain indebtedness due to the Company from GHEI
(approximately $650,000 in principal amount at December 31, 1997). In addition,
Harry Shuster and Nita Shuster provided certain other security individually and
jointly with respect to the loan.
 
                                       15
<PAGE>   17
 
     As additional consideration for Westminster making the Westminster Loan,
the Company granted Westminster a three-year warrant to purchase 150,000 shares
of Common Stock of the Company exercisable at a per share price equal to the
lesser of $.40 or 75% of the average of the last trade prices for the ten
trading days immediately preceding the exercise of the warrants. In addition,
GHEI, pursuant to the terms of an amendment to the GHEI Financing Agreement,
granted Westminster, as designee of the Company, a three-year warrant to
purchase 150,000 shares of common stock of GHEI exercisable at a per share price
equal to the lesser of $.75 or 75% of the average of the last trade prices for
the ten trading days immediately preceding the exercise of the warrants.
 
     On July 28, 1997, the Company and Harvey Bibicoff, a director of GHEI,
entered into an agreement pursuant to which the Company, in consideration for
management consulting services rendered by Mr. Bibicoff to the Company, agreed
to (i) transfer to Mr. Bibicoff, on or prior to August 1, 1999, a 2 1/2%
membership interest in UHC free and clear of any liens, claims, or encumbrances,
and (ii) issue 150,000 shares of Common Stock of the Company to Mr. Bibicoff.
The obligations of the Company under the agreement were guaranteed by Harry
Shuster and Nita Shuster, the spouse of Harry Shuster. During 1997, 150,000
shares of the Company's Common Stock, valued at $42,000, were issued to Mr.
Bibicoff. The Company valued the 2 1/2% membership interest at $187,500 which
was accrued as consulting fees in 1997.
 
     On July 29, 1997, in connection with obtaining the necessary financing
required for the acquisition of the Las Vegas Property, Harvey Bibicoff made a
loan to the Company in the amount of $900,000. The Bibicoff Loan was evidenced
by a promissory note, bore interest at 10% per annum and was due and payable on
September 28, 1997. The Company repaid $875,000, leaving a principal loan
balance of $25,000 at December 31, 1997.
 
                                    PART IV
 
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) 1. FINANCIAL STATEMENTS.
 
     The audited consolidated financial statements of United Leisure Corporation
and Subsidiaries filed as a part of this Form 10-KSB/A are listed in the "Index
to Consolidated Financial Statements" preceding the Company's Consolidated
Financial Statements contained in Item 7 of this Form 10-KSB/A, which "Index to
Consolidated Financial Statements" is hereby incorporated herein by reference.
 
     2. EXHIBITS.
 
     The Exhibit Index immediately following the signature page of this Form
10-KSB/A is incorporated herein.
 
     (b) Reports on Form 8-K. No Current Report on Form 8-K was filed during the
quarter ended December 31, 1997.
 


                                       16
<PAGE>   18
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this Amendment No. 1 on
Form 10-KSB/A to be signed on its behalf by the undersigned, thereunto duly 
authorized.
 
                                          UNITED LEISURE CORPORATION
 
                                          By:       /s/ HARRY SHUSTER
                                             -----------------------------------
                                                       Harry Shuster
                                                   Chairman of the Board,
                                                       President and
                                                  Chief Executive Officer
 
Date: May 14, 1998
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 on Form 10-KSB/A has been signed below by the following 
persons on behalf of the Registrant and in the capacities and on the dates 
indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                    CAPACITY                   DATE
                      ---------                                    --------                   ----
<C>                                                    <C>                                 <S>
                  /s/ HARRY SHUSTER                    Chairman of the Board, President    May 14, 1998
-----------------------------------------------------    and Chief Executive Officer
                    Harry Shuster                      (Principal Executive Officer and
                                                           Principal Accounting and
                                                              Financial Officer)
 
                  /s/ ALVIN CASSEL                                 Director                May 14, 1998
-----------------------------------------------------
                    Alvin Cassel
 
                 /s/ ALVIN ALEXANDER                               Director                May 14, 1998
-----------------------------------------------------
                   Alvin Alexander
 
                  /s/ BRIAN SHUSTER                                Director                May 14, 1998
-----------------------------------------------------
                    Brian Shuster
 
               /s/ J. BROOKE JOHNSTON                              Director                May 14, 1998
-----------------------------------------------------
                 J. Brooke Johnston
</TABLE>
 


                                       17
<PAGE>   19
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 
<S>       <C>
 3-1.     Restated Certificate of Incorporation of the Company, as
          filed in the office of the Secretary of State of the State
          of Delaware on June 27, 1988, filed as Exhibit 3-1 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
 3-2.     Bylaws of the Company, filed as Exhibit 3-2 to the Company's
          Registration Statement on Form SB-2 (Registration No.
          33-81074), are hereby incorporated herein by reference
 4-1.     Warrant Agreement, dated November 18, 1994, between the
          Company and OTR, Inc., filed as Exhibit 4-1 to the Company's
          Annual Report on Form 10-KSB for the fiscal year ended
          December 31, 1994, is hereby incorporated herein by
          reference
 4-2.     Form of Warrant to Purchase Common Stock used in connection
          with 12% Promissory Note unit private placement and
          Bankruptcy Court deposit, filed as Exhibit 4-3 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
 4-3.     Underwriter's Unit Purchase Option, dated November 18, 1994,
          issued to Stratton Oakmont, Inc., filed as Exhibit 4-3 to
          the Company's Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 1994, is hereby incorporated herein
          by reference
10-1.     Ground Lease, dated February 11, 1968, between The Irvine
          Company and National Leisure, Inc., a Florida corporation
          (the "Ground Lease"), Amendment No. 1 to the Ground Lease,
          dated July 13, 1970; Amendment No. 2 to the Ground Lease,
          dated March 8, 1971; Amendment No. 3 to Ground Lease, dated
          May 8, 1972; Amendment No. 4 to Ground Lease, dated January
          12, 1976; Amendment No. 5 to Ground Lease, dated April 1,
          1976; Amendment No. 6 to Ground Lease, dated August 11,
          1976; Amendment No. 7 to Ground Lease, dated March 7, 1977;
          Amendment No. 8 to Ground Lease, dated April 22, 1977;
          Amendment No. 9 to Ground Lease, dated March 23, 1983;
          Letter, dated June 4, 1984, from The Irvine Company
          addressed to Lion Country Safari, Inc.; Amendment to Ground
          Lease (unnumbered), dated November 15, 1984; Amendment No.
          10 to Ground Lease, dated January 20, 1986; Consent to
          Sublease; Nondisturbance Agreement: Amendment to Sublease,
          dated as of December 26, 1985; Consent to and Agreement
          Concerning Encumbrance of Sublease, dated January 22, 1986
          among The Irvine Company and Lion Country Safari, Inc.-The
          Irvine Company and Lion Country Safari, Inc.-California;
          Assignment and Purchase Agreement, dated March 23, 1983,
          between The Irvine Company and Lion Country Safari,
          Inc.-California; Partial Assignment of Sublessor's Interest
          in Sublease, dated March 23, 1983, by Lion Country Safari,
          Inc. to The Irvine Company, filed as Exhibit 10-1 to the
          Company's Registration Statement on Form SB-2 (Registration
          No.33-81074), is hereby incorporated herein by reference
10-2.     Sublease Agreement, dated August 7, 1980, between Lion
          Country Safari, Inc.-California and Feyline Presents, Inc.;
          Assignment of Sublease Agreement, dated August 19, 1980,
          between Feyline Presents, Inc. and Irvine Meadows
          Amphitheater; Amendment to Sublease, dated September 16,
          1980, between Lion Country Safari, Inc.-California and
          Irvine Meadows Amphitheater; Agreement, dated September 12,
          1980, among The Irvine Company, Lion Country Safari, Inc.
          and Lion Country Safari, Inc.-California; Letter Agreement,
          between The Irvine Company and Lion Country Safari,
          Inc.-California; Amendment to Sublease, dated January 1,
          1981, between Lion Country Safari, Inc. and Irvine Meadows
          Amphitheater; Letter, dated July 28, 1981, of Irvine Meadows
          Amphitheater addressed to the Company, filed as Exhibit 10-2
          to the Company's Registration Statement on Form SB-2
          (Registration No. 33-81074), is hereby incorporated herein
          by reference
</TABLE>
 
                                       18
<PAGE>   20
 
<TABLE>
<CAPTION>
 
<S>       <C>
10-3.     Amended and Restated Consulting Agreement, dated as of June
          1, 1994, between the Company and Harry Shuster, filed as
          Exhibit 10-3 to the Company's Registration Statement on Form
          SB-2 (Registration No.33-81074), is hereby incorporated
          herein by reference
10-5.     Stock Option Agreement, dated December 7, 1990, between the
          Company and Haskell Slaughter Young & Johnston, Professional
          Association, covering 50,000 shares of Common Stock, par
          value $.01 per share, of the Company, filed as Exhibit 10-5
          to the Company's Registration Statement on Form SB-2
          (Registration No. 33-81074), is hereby incorporated herein
          by reference
10-6.     Stock Option Agreement, dated December 7, 1990, between the
          Company and Alvin Cassel covering 10,000 shares of Common
          Stock, par value $.01 per share, of the Company, filed as
          Exhibit 10-6 to the Company's Registration Statement on Form
          SB-2 (Registration No. 33-81074), is hereby incorporated
          herein by reference
10-7.     Stock Option Agreement, dated December 7, 1990, between the
          Company and Renate Graf covering 10,000 shares of Common
          Stock, par value $.01 per share, of the Company, filed as
          Exhibit 10-7 to the Company's Registration Statement on Form
          SB-2 (Registration No. 33-81074), is hereby incorporated
          herein by reference
10-8.     Stock Option Agreement, dated April 22, 1988, between the
          Company and Renate Graf covering 25,000 shares of Common
          Stock, par value $.01 per share, of the Company; Extension
          of Option Agreement, dated April 20, 1993, between the
          Company and Renate Graf, filed as Exhibit 10-9 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
10-9.     Stock Option Agreement, dated April 22, 1988, between the
          Company and Alvin Cassel covering 10,000 shares of Common
          Stock, par value $.01 per share, of United Leisure
          Corporation; Extension of Option Agreement, dated April 20,
          1993, between the Company and Alvin Cassel, filed as Exhibit
          10-10 to the Company's Registration Statement on Form SB-2
          (Registration No. 33-81074), is hereby incorporated herein
          by reference
10-10.    Stock Option Agreement, dated October 7, 1988, between the
          Company and Harry Shuster covering 37,500 shares of Common
          Stock, par value $.01 per share, of the Company; Extension
          of Option Agreement, dated April 20, 1993, between the
          Company and Harry Shuster, filed as Exhibit 10-12 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
10-11.    Stock Option Agreement, dated November 17, 1988, between the
          Company and Harry Shuster covering 75,000 shares of Common
          Stock, par value $.01 per share, of the Company; Extension
          of Option Agreement, dated April 20,1993, between the
          Company and Harry Shuster, filed as Exhibit 10-13 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
10-12.    Stock Option Agreement, dated December 5, 1988, between the
          Company and Harry Shuster covering 37,500 shares of Common
          Stock, par value $.01 per share, of the Company; Extension
          of Option Agreement, dated April 20, 1993, between the
          Company and Harry Shuster, filed as Exhibit 10-14 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
10-14.    Stock Option Agreement, dated July 24, 1987, between the
          Company and Harry Shuster; Extension of Option Agreement,
          dated April 20, 1993, between the Company and Harry Shuster,
          covering 750,000 shares of Common Stock, par value $.01 per
          share, of the Company, filed as Exhibit 10-16 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
</TABLE>
 
                                       19
<PAGE>   21
 
<TABLE>
<CAPTION>
 
<S>       <C>
10-15.    Option Agreement dated as of April 22, 1988, between the
          Company and Haskell Slaughter Young & Johnston, Professional
          Association, covering 50,000 shares of Common Stock, par
          value $.01 per share, of the Company; Extension of Option
          Agreement, dated April 20, 1993, between the Company and
          Haskell Slaughter Young & Johnston, Professional
          Association, filed as Exhibit 10-17 to the Company's
          Registration Statement on Form SB-2 (Registration No. 33-
          81074), is hereby incorporated herein by reference
10-16.    Option to Sublease, dated as of September 25, 1984, between
          Lion Country Safari, Inc.-California and American
          Sportsworld, Inc., including the proposed Lease and
          Agreement to be entered into upon exercise thereof, filed as
          Exhibit 10-19 to the Company's Registration Statement on
          Form SB-2 (Registration No. 33-81074), is hereby
          incorporated herein by reference
10-17.    Letter, dated February 22, 1985, from Lion Country Safari,
          Inc.-California addressed to American Sportsworld, Inc.;
          Lease, dated as of May 14, 1985,between Lion Country Safari,
          Inc.-California and American Sportsworld, Inc.; Amendment to
          Lease, dated December 2, 1985, between Lion Country
          Safari,Inc. and American Sportsworld, Inc.; Letter Contract,
          dated June 27, 1985,between the Company and The Splash;
          Assignment of Sublease, dated as of December 26, 1985,
          between Lion Country Safari, Inc.-California, American
          Sportsworld, Inc. and The Splash; Bill of Sale, dated
          January 10, 1986, between Lion Country Safari, Inc.-
          California and The Splash; Agreement of Limited Partnership
          (undated) of The Splash; Letter Agreement, dated October 16,
          1986, between Lion Country Safari, Inc.-California and The
          Splash; Letter Agreement, dated November 21, 1986, between
          Lion Country Safari, Inc.-California and The Splash; Letter
          Agreement, dated November 25, 1986, between Lion Country
          Safari, Inc.-California and The Splash, filed as Exhibit
          10-20 to the Company's Registration Statement on Form SB-2
          (Registration No. 33-81074), is hereby incorporated herein
          by reference
10-18.    Letter Agreement, dated January 31, 1986, between Africa
          Arts of California, Inc. and the Company, filed as Exhibit
          10-21 to the Company's Registration Statement on Form SB-2
          (Registration No. 33-81074), is hereby incorporated herein
          by
          reference
10-19.    Option Agreement, dated as of February 1, 1986, between the
          Company and Africa Arts of California, Inc. covering 35,000
          shares of Common Stock, par value $.01 per share, of the
          Company, filed as Exhibit 10-22 to the Company's
          Registration Statement on Form SB-2 (Registration No.
          33-81074), is hereby incorporated herein by reference
10-20.    Promissory Note, dated June 1, 1985, of Lion Country Safari,
          Inc.-California in the principal amount of $973,927 drawn to
          the order of Harry Shuster, filed as Exhibit 10-23 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by reference
10-21.    Deed of Trust, Assignment of Rents and Security Agreement,
          dated June 1, 1985, between Lion Country Safari,
          Inc.-California, Brian H. Kay, Trustee, and Harry Shuster,
          filed as Exhibit 10-24 to the Company's Registration
          Statement on Form SB-2 (Registration No. 33-81074), is
          hereby incorporated herein by
          reference
10-22.    Collateral Assignment of Leases and Rents, dated June 1,
          1985, between Lion Country Safari, Inc.-California and Harry
          Shuster, filed as Exhibit 10-25 to the Company's
          Registration Statement on Form SB-2 (Registration
          No.33-81074), is hereby incorporated herein by reference
</TABLE>
 
                                       20
<PAGE>   22
 
<TABLE>
<CAPTION>
 
<S>       <C>
10-23.    Commercial Lease (General Form), dated July 21, 1986,
          between Lion Country Safari, Inc.-California and Orange
          County Transit District; Amendment No. 3 to Lease Agreement,
          dated April 17, 1989, between Lion Country Safari,
          Inc.-California and Orange County Transit District filed as
          Exhibit 10-26 to the Company's Registration Statement on
          Form SB-2(Registration No. 33-81074), is hereby incorporated
          herein by reference
10-24.    Stock Option Agreement, dated as of February 22, 1989,
          covering 67,500 shares of the Common Stock, par value $.01
          per share, of the Company in favor of Tactron Liquidating
          Trust, filed as Exhibit 10-27 to the Company's Registration
          Statement on Form SB-2 (Registration No. 33-81074), is
          hereby incorporated herein
          by reference
10-25.    Stock Option Agreement, dated as of February 22, 1989,
          covering 7,500 shares of the Common Sock, par value $.01 per
          share, of the Company in favor of Lindsey & Associates,
          Inc., filed as Exhibit 10-28 to the Company's Registration
          Statement on Form SB-2 (Registration No. 33-81074), is
          hereby incorporated herein by
          reference
10-26.    Memorandum of Agreement, dated March 7, 1990, between Lion
          Country Safari, Inc.,-California and James Productions,
          Inc., filed as Exhibit 10-34 to the Company's Registration
          Statement on Form SB-2 (Registration No. 33-81074), is
          hereby incorporated herein by reference
10-27.    Form of Indemnity Agreement entered into by the Company with
          each of its Directors, filed as Exhibit 10-35 to the
          Company's Registration Statement on Form SB-2 (Registration
          No. 33-81074), is hereby incorporated herein by
          reference
10-28.    Stock Option Agreement, dated September 23, 1993, between
          the Company and Renate Graf, covering 50,000 shares of
          Common Stock, par value $.01 per share, of the Company,
          filed as Exhibit 10-40 to the Company's Registration
          Statement on Form SB-2 (Registration No. 33-81074), is
          hereby incorporated herein
          by reference
10-29.    Stock Option Agreement, dated September 23, 1993, between
          the Company and Alvin Cassel, covering 5,000 shares of
          Common Stock, par value $.01 per share, of the Company,
          filed as Exhibit 10-41 to the Company's Registration
          Statement on Form SB-2 (Registration No. 33-81074), is
          hereby incorporated herein by
          reference
10-30.    Agreement for Purchase and Sale and Joint Escrow
          Instructions, dated April 5, 1995, between PLC Properties,
          Inc. and United Leisure Corporation, filed as Exhibit 10-30
          to Amendment No. 1 to the Company's Annual Report on Form
          10-KSB for the fiscal year ended December 31, 1995, is
          hereby incorporated by reference
10-31.    Sub-Operating Agreement, dated April 11, 1995, between
          Canyon R.V. Park and Camp Frasier, Inc., together with
          related Operating Agreements, filed as Exhibit 10-31 to
          Amendment No. 1 to the Company's Annual Report on Form
          10-KSB for the fiscal year ended December 31, 1995, is
          hereby incorporated by reference
10-32.    Standard Retail/Office Complex Lease, dated October 12,
          1994, between PSA Properties and Planet Kids, Inc., filed as
          Exhibit 10-32 to Amendment No. 1 to the Company's Annual
          Report on Form 10-KSB for the fiscal year ended December 31,
          1995, is hereby incorporated by reference
10-33.    Commercial Lease, between Eastrich Multiple Investor Fund
          L.P., Midland Loan Services, L.P et al., and Planet Kids,
          Inc., effective August 9, 1995 and Rider thereto filed as
          Exhibit 10-33 to Amendment No. 1 to the Company's Annual
          Report on Form 10-KSB for the fiscal year ended December 31,
          1995, is hereby incorporated by reference
</TABLE>
 
                                       21
<PAGE>   23
 
<TABLE>
<CAPTION>
 
<S>       <C>
10-34.    Lease, dated June 29, 1995, between Magnolia Square and
          Planet Kids, Inc. and Addendum thereto, filed as Exhibit
          10-34 to Amendment No. 1 to the Company's Annual Report on
          Form 10-KSB for the fiscal year ended December 31, 1995, is
          hereby incorporated by reference
10-35.    Territory Rights Agreement, between Planet Kids, Inc. and PT
          Planet Kidsindo, filed as Exhibit 10-35 to Amendment No. 1
          to the Company's Annual Report on Form 10-KSB for the fiscal
          year ended December 31, 1995, is hereby incorporated by
          reference
10-36.    Financing Agreement dated as of February 12, 1997 between
          the Company and Grand Havana Restaurants, Inc., filed as
          Exhibit 10-36 to the Company's Annual Report on Form 10-KSB
          for the fiscal year ended December 31, 1996, is hereby
          incorporated by reference
10-37.    Financing Agreement dated as of September 10, 1996 between
          the Company and Grand Havana Enterprises, Inc., filed as
          Exhibit 10-37 to the Company's Annual Report on Form 10-KSB
          for the fiscal year ended December 31, 1996, is hereby
          incorporated by reference
10-38.    Operating Agreement for United Hotel & Casino, LLC., dated
          as of January 22, 1997, filed as Exhibit 10-38 to the
          Company's Annual Report on Form 10-KSB for the fiscal year
          ended December 31, 1996, is hereby incorporated by reference
10-39.    Lease dated March 7, 1996 between County of Orange and Camp
          Frasier, Inc., filed as Exhibit 10-39 to the Company's
          Annual Report on Form 10-KSB for the fiscal year ended
          December 31, 1996, is hereby incorporated by reference
10-40.    Secured Convertible Promissory Note dated July 29, 1997 for
          $1,900,000 made by the Company and Harry and Nita Shuster to
          Westminster Capital, Inc., filed as Exhibit 10.2 to the
          Company's current Report on Form 8-K/A dated July 29, 1997,
          is hereby incorporated by reference
10-41.    Security Agreement dated July 29, 1997 by and between the
          Company and Westminster Capital, Inc., filed as Exhibit 10.3
          to the Company's current Report on Form 8-K/A dated July 29,
          1997, is hereby incrporated by reference
10-42.    Security Promissory Note dated July 28, 1997 in the
          principal amount of $900,000 made by the Company to Harvey
          Bibicoff, filed as Exhibit 10.4 to the Company's current
          Report on Form 8-K/A dated July 29, 1997, is hereby
          incorporated by reference
10-43.    Pledge Agreement dated July 28, 1997 by and between the
          Company and Harvey Bibicoff, filed as Exhibit 10.5 to the
          Company's current Report on Form 8-K/A dated July 29, 1997,
          is hereby incorporated by reference
10-44.    Pledge Agreement dated July 29, 1997 by and between the
          Company and Westminster Capital, Inc., filed as Exhibit 10.6
          to the Company's current Report on Form 8-K/A dated July 29,
          1997, is hereby incorporated by reference
21.       Subsidiaries of the Company, filed as Exhibit 21 to the Company's
          Annual Report on Form 10-K for the fiscal year ended December 31,
          1997, which was filed with the Securities and Exchange Commission
          on April 15, 1998
23.       Consent of Hollander, Gilbert & Co.
27.       Financial Data Schedule, filed as Exhibit 27 to the Company's
          Annual Report on Form 10-K for the fiscal year ended December 31,
          1997, which was filed with the Securities and Exchange Commission
          on April 15, 1998
</TABLE>
 
                                       22
<PAGE>   24
 
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Auditors..............................  F-1
 
Consolidated Balance Sheets at December 31, 1997 and 1996...  F-2
 
Consolidated Statements of Operations for the years ended     F-3
  December 31, 1997 and 1996................................
 
Consolidated Statement of Stockholders' Equity for the years  F-4
  ended December 31, 1997 and 1996..........................
 
Consolidated Statements of Cash Flows for the years ended     F-5
  December 31, 1997 and 1996................................
 
Notes to Consolidated Financial Statements..................  F-6
</TABLE>
 




                                       23
<PAGE>   25
 
                         REPORT OF INDEPENDENT AUDITORS
 
To the Board of Directors and Stockholders
United Leisure Corporation
 
     We have audited the accompanying consolidated financial statements of
United Leisure Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
United Leisure Corporation and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
 
     The accompanying financial statements have been prepared assuming that the
Company will continue as going concern. As discussed in Note 2 to the
consolidated financial statements, under existing circumstances, there is a
substantial doubt about the ability of the Company to continue as a going
concern at December 31, 1997. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
 
                                          HOLLANDER, GILBERT & CO.
 
Los Angeles, California
March 11, 1998
 
                                       F-1
<PAGE>   26
 
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  1997           1996
                                                              ------------    -----------
<S>                                                           <C>             <C>
CURRENT ASSETS
  Cash and cash equivalents.................................  $    152,770    $ 3,845,653
  Receivables...............................................        21,732        128,843
  Prepaid expenses and other current assets.................        59,690        121,266
                                                              ------------    -----------
          TOTAL CURRENT ASSETS..............................       234,192      4,095,762
PROPERTY AND EQUIPMENT, Net (Notes 5 and 6).................     2,172,569      6,578,586
INVESTMENT IN UNITED HOTEL (Notes 4 and 8)..................     3,633,800             --
INVESTMENT IN HEP II -- RELATED PARTY (Note 4)..............     1,120,500      1,120,500
INVESTMENT IN GRAND HAVANA -- RELATED PARTY
  (Notes 4 and 8)...........................................       340,025        511,766
LOANS RECEIVABLE FROM GRAND HAVANA -- RELATED PARTY (Note
  8)........................................................       681,643         25,411
DUE FROM OFFICER AND DIRECTOR (Note 8)......................        12,567        305,706
RESTRICTED CASH -- RELATED PARTY (Note 4)...................            --        875,000
DEPOSITS AND OTHER ASSETS...................................        82,043        242,155
                                                              ------------    -----------
                                                              $  8,277,339    $13,754,886
                                                              ============    ===========
 
                          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Notes payable (Notes 6 and 8).............................  $  1,925,000    $        --
  Accounts payable and accrued expenses.....................     1,387,039        623,015
  Deferred revenues.........................................        32,710        143,945
  Deposits and other........................................        43,426        124,275
                                                              ------------    -----------
          TOTAL CURRENT LIABILITIES.........................     3,388,175        891,235
LONG-TERM DEBT (Note 7).....................................       842,000        842,000
STOCKHOLDERS' EQUITY (Notes 4 and 11)
  Preferred stock, $100 par value; authorized -- 100,000
  shares; issued and outstanding -- none....................            --             --
  Common stock, $.01 par value; authorized -- 30,000,000
     shares; issued and outstanding -- 12,618,849 shares in
     1997 and 12,368,849 shares in 1996.....................       126,188        123,688
  Capital in excess of par value............................    24,587,188     24,326,458
  Accumulated deficit.......................................   (19,923,806)   (12,610,261)
  Unrealized gain (loss) on investment......................      (742,406)       181,766
                                                              ------------    -----------
          TOTAL STOCKHOLDERS' EQUITY........................     4,047,164     12,021,651
                                                              ------------    -----------
                                                              $  8,277,339    $13,754,886
                                                              ============    ===========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-2
<PAGE>   27
 
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                 1997           1996
                                                              -----------    -----------
<S>                                                           <C>            <C>
REVENUE
  Rentals...................................................  $    80,799    $ 1,444,284
  Children's recreational activities........................    2,808,342      3,051,216
                                                              -----------    -----------
          TOTAL REVENUE.....................................    2,889,141      4,495,500
DIRECT OPERATING EXPENSES...................................    3,971,056      4,486,098
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................    1,107,286      1,045,521
DEPRECIATION AND AMORTIZATION...............................      747,282        523,662
IMPAIRMENT LOSSES (Note 5)..................................    3,862,554
                                                              -----------    -----------
LOSS BEFORE OTHER INCOME (EXPENSE)..........................   (6,799,037)    (1,559,781)
OTHER INCOME (EXPENSE)
  Reversal of provision for disputed contingent claim (Note
     3).....................................................           --      1,128,973
  Legal costs (Note 3)......................................     (716,291)      (331,291)
  Equity in net loss of United Hotel (Note 4)...............     (117,700)
  Interest income...........................................      344,009        382,028
  Interest expense..........................................     (303,823)       (91,223)
  Other, net................................................      279,297         68,019
                                                              -----------    -----------
          TOTAL OTHER INCOME (EXPENSE)......................     (514,508)     1,156,506
                                                              -----------    -----------
NET LOSS....................................................  $(7,313,545)   $  (403,275)
                                                              ===========    ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........   12,493,849     12,368,849
                                                              ===========    ===========
BASIC AND DILUTED LOSS PER SHARE............................  $     (0.59)   $     (0.03)
                                                              ===========    ===========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-3
<PAGE>   28
 
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
                            COMMON STOCK
                        ---------------------   CAPITAL IN                     UNREALIZED
                        NUMBER OF                EXCESS OF    ACCUMULATED    GAIN (LOSS) ON
                          SHARES      AMOUNT     PAR VALUE      DEFICIT        INVESTMENT        TOTAL
                        ----------   --------   -----------   ------------   --------------   -----------
<S>                     <C>          <C>        <C>           <C>            <C>              <C>
Balance, December 31,
  1995................  12,368,849   $123,688   $24,326,458   $(12,206,986)    $      --      $12,243,160
Unrealized gain on
  investment..........                                                           181,766          181,766
Net loss..............                                            (403,275)                      (403,275)
                        ----------   --------   -----------   ------------     ---------      -----------
Balance, December 31,
  1996................  12,368,849    123,688    24,326,458    (12,610,261)      181,766       12,021,651
Issuance of common
  stock for
  services............     250,000      2,500        67,500                                        70,000
Fair value of options
  and warrants issued
  to non-employees....                              193,230                                       193,230
Unrealized gain on
  investment..........                                                          (924,172)        (924,172)
Net loss..............                                          (7,313,545)                    (7,313,545)
                        ----------   --------   -----------   ------------     ---------      -----------
Balance, December 31,
  1997................  12,618,849   $126,188   $24,587,188   $(19,923,806)    $(742,406)     $ 4,047,164
                        ==========   ========   ===========   ============     =========      ===========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-4
<PAGE>   29
 
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                 1997           1996
                                                              -----------    -----------
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss..................................................  $(7,313,545)   $  (403,275)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization..........................      741,642        523,662
     Impairment losses......................................    3,862,554
     Issuance of common stock for services..................       70,000
     Fair value of options and warrants issued to
      non-employees.........................................      193,230
     Reversal of provision for disputed contingent claim....                  (1,128,973)
     Accrual of interest from related parties...............      (99,044)       (25,411)
     Write-off of loan from director........................       10,000
     Equity in net loss of United Hotel.....................      117,700
     Receipt of common stock of Grand Havana as loan fees...     (177,431)
     Changes in operating assets and liabilities:
       Receivables..........................................      107,111        288,525
       Prepaid expenses and other current assets............       61,576         49,993
       Pre-opening costs....................................           --         87,051
       Deposits.............................................      160,112            405
       Accounts payable and accrued expenses................      764,024         28,703
       Accrued expenses due to related party................       25,951        113,756
       Deferred revenues....................................     (111,235)      (948,971)
       Other current liabilities............................      (80,849)        32,625
                                                              -----------    -----------
          NET CASH USED IN OPERATING ACTIVITIES.............   (1,668,204)    (1,381,910)
                                                              -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment.......................     (198,179)    (2,221,722)
  Restricted cash...........................................      875,000       (875,000)
  Investment in limited partnership.........................                  (1,500,000)
  Distributions from limited partnerships...................                     394,500
  Advances to limited partnership...........................                    (500,000)
  Collection of advances to limited partnership.............                     500,000
  Investment in Grand Havana................................     (575,000)      (250,000)
  Advances to related party.................................                    (250,000)
  Investment in United Hotel................................   (3,751,500)
  Collection of advances due from officer...................      350,000
  Loan receivable from Grand Havana.........................     (775,000)
  Collection of loan receivable from Grand Havana...........      125,000
                                                              -----------    -----------
          NET CASH USED IN INVESTING ACTIVITIES.............   (3,949,679)    (4,702,222)
                                                              -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from notes payable...............................    2,800,000
  Repayments of notes payable...............................     (875,000)
                                                              -----------    -----------
          NET CASH PROVIDED BY FINANCING ACTIVITIES.........    1,925,000             --
                                                              -----------    -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................   (3,692,883)    (6,084,132)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............    3,845,653      9,929,785
                                                              -----------    -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................  $   152,770    $ 3,845,653
                                                              ===========    ===========
CASH PAID FOR:
  Interest..................................................  $   159,850    $    91,223
                                                              ===========    ===========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-5
<PAGE>   30
 
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996
 
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Description of Business -- The Company operates a summer day camp and an
amusement park in San Diego County, California, summer day camps in two other
locations in Southern California, and children's play-learning centers known as
Planet Kids in three locations in Southern California. The Planet Kids centers
operate out of leased premises and service children ages 3 through 13. Each
center provides children with interactive multimedia educational games, exercise
playgrounds, educational computers, party facilities and other activities. The
Company is also developing a product called Netcruise that will allow for
booking cruises through the Internet.
 
     In prior years, the Company's primary business had been to develop a ground
lease and related improvements in Irvine, California, through sub-leases, so as
to convert the leased asset into a revenue producing property. The Company's
ground lease expired on February 28, 1997 (see Note 3 -- Legal Proceedings).
 
     Principles of Consolidation -- The consolidated financial statements
include the accounts of United Leisure Corporation and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
 
     Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
 
     Stock-Based Compensation -- Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), encourages, but
does not require a fair value based method of accounting for stock options. The
Company elected to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations and to
comply with the pro forma disclosure requirements of SFAS No. 123.
 
     Cash and cash equivalents -- The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
 
     Concentration of Risk -- The Company invests its excess cash in
certificates of deposit and money market funds, which, at times, may exceed
federally insured limits. The Company maintains its accounts with financial
institutions with high credit ratings.
 
     Property and Equipment -- Property and equipment is recorded at cost and
depreciation is computed on the straight-line method based upon the estimated
useful life of the related asset as follows:
 
<TABLE>
<S>                                                           <C>
Buildings and improvements..................................  3-27 years
Machinery, equipment and vehicles...........................  4-10 years
Furniture, fixtures and office equipment....................  5-10 years
Computers...................................................     6 years
Signs.......................................................    10 years
</TABLE>
 
     Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. The Company measures an impairment
loss by comparing the fair value of the asset to its carrying amount. Fair value
of an asset is calculated as the present value of expected future cash flows.
 
                                       F-6
<PAGE>   31
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     Investments in Limited Partnerships and Limited Liability
Company -- Investments in 20 percent to 50 percent owned limited partnership and
limited liability company are carried at equity. Investment in less than 20%
owned partnership is carried at cost less distributions.
 
     Earnings per Share -- The FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" which was required to be adopted by the
Company for its fiscal year ended December 31, 1997 and also required
restatement of the earnings per share ("EPS") data for the fiscal year ended
December 31, 1996. The restatement did not have an effect on the basic loss per
share in 1996. Basic EPS is calculated by dividing income available to common
stockholders (the "numerator") by the weighted-average number of common shares
outstanding (the "denominator" ) during the period. The computation of diluted
EPS is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares (that is, securities such as
options, warrants, convertible securities, or contingent stock agreements) had
been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back (a) any convertible preferred
dividends and (b) the after-tax amount of interest recognized in the period
associated with any convertible debt. The computation of diluted EPS shall not
assume conversion, exercise, or contingent issuance of securities that would
have an antidilutive effect on EPS.
 
     Impact of Recently Issued Accounting Standard -- In June 1997, the FASB
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which is effective for financial statements for fiscal
years beginning after December 15, 1997. Earlier application is permitted. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. The Company
will adopt this statement on its financial statements for the year ended
December 31, 1998. Had the Company adopted this statement during the year ended
December 31, 1997, the Company's statement of comprehensive income would show a
comprehensive loss of $8,237,717, which include other comprehensive loss from
unrealized loss on investment during 1997 of $924,172.
 
     Reclassifications -- Certain 1996 balances have been reclassified to
conform with current years presentation.
 
     Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
<TABLE>
<CAPTION>
                                                           1997        1996
                                                         --------    --------
<S>                                                      <C>         <C>
Notes payable issued in acquisition of property........              $842,000
Issuance of common stock for services..................  $ 70,000
Fair value of options and warrants to non-employees....  $193,230
</TABLE>
 
 2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
 
     Going Concern -- The Company has experienced operating losses in recent
years. For the years ended December 31, 1996 and 1997, the Company experienced
net losses of $403,275 and $7,313,545, which latter amount includes impairment
losses of $3,862,554, respectively. The Company's working capital requirements
have been and will continue to be significant. As of December 31, 1997, the
Company had cash and cash equivalents of $152,770 and a working capital deficit
of $3,153,983. In addition, the Company does not currently meet the new listing
requirements for continued listing on the Nasdaq's SmallCap Market and it is
possible that its securities could be de-listed, which might result in the
Company having difficulty in raising capital through the sale of its securities.
 
     The Company has written off certain of its Planet Kids assets in the amount
of $3,862,554 and does not currently anticipate that it will expand any of its
childrens' educational and recreational activities.
 
                                       F-7
<PAGE>   32
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
Liquidity -- As of December 31, 1997, investments and loans to Grand Havana
Enterprises, Inc. and HEP II, L.P. totaled approximately $2,142,000 or 26% of
total assets and 53% of the Company's stockholders' equity. Both affiliated
companies had substantial losses and had working capital deficits creating
liquidity risks to the Company. If these losses continue, a substantial portion
of the Company's net worth would be impaired or at risk. Even though Management
believes that it is more likely than not that the investments and loans with
affiliated companies are not impaired, the cumulative losses and liquidity
problems of the affiliated companies create an inherent risk in these assets.
 
     The Company's significant operating losses and significant capital
requirements raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability of the recorded assets or
the classification of the liabilities that might be necessary should the Company
be unable to continue as a going concern.
 
 3. LEGAL PROCEEDINGS
 
     In June 1986, The Splash, the sublessee of the Company on the Company's
leased premises which operates a Water Park on the subleased premises, filed a
complaint against The Irvine Company ("Irvine") in Orange County Superior Court.
The lawsuit initially involved The Splash's allegation that Irvine's imposition
of an unreasonably high liability insurance requirement acted to keep the water
park from operating. In its complaint, The Splash sued Irvine for declaratory
relief, interference with contract, intentional misrepresentation, negligent
misrepresentation, bad faith repudiation of contract, breach of the implied
covenant of good faith and fair dealing and breach of third-party beneficiary
contract.
 
     In January 1987, Irvine filed a cross-complaint against The Splash and also
against the Company, which cross-complaint was subsequently amended several
times. In its Third Amended cross-complaint, Irvine sued the Company for breach
of contract, intentional misrepresentation, negligent misrepresentation,
declaratory relief, indemnity and bad faith denial of contract, and the Company
for breach of lease, indemnity, declaratory relief, and bad faith denial of
contract. The Company answered Irvine's cross-complaint (also amended several
times) and filed a cross-complaint against Irvine for a range of wrongful
conduct against the Company over the past years. In general, the Company alleges
that Irvine has wrongfully attempted to frustrate the Company in its efforts
over the years to establish new uses on its leasehold and to derive profit from
its Ground Lease. The Company's cross-complaint includes causes of action for
breach of lease, interference with prospective economic advantage, declaratory
relief and restitution after rescission.
 
     A trial of The Irvine Company Litigation was commenced in early October
1993, and in November 1993 the Company was awarded a jury verdict in the total
approximate amount of $42 million, and Irvine was denied any recovery against
the Company. The jury found that Irvine had breached the covenant of good faith
and fair dealing in the Ground Lease and awarded the Company approximately $37
million in compensatory damages for those breaches. The jury also found that
Irvine acted with "fraud and malice" in interfering with the Company's
relationship with the Water Park and therefore awarded an additional $5 million
to the Company in punitive damages. In the rent dispute between Irvine and the
Company, the jury found that the Company owed no rent whatsoever because of
Irvine's own unexcused material breaches of the lease. The jury also found that
Amendment No. 9 to the Ground Lease had been entered into by the Company under
duress and without consideration.
 
                                       F-8
<PAGE>   33
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     In April 1994, after a hearing on post-verdict motions brought by Irvine
for a new trial and/or judgment notwithstanding the verdict, the court granted a
new trial on all issues and denied Irvine's motion for a judgment
notwithstanding the verdict on the basis that the evidence was not sufficient to
justify the verdict reached by the jury. The Company appealed this order and
oral arguments on this appeal were heard in November 1997. No decision has yet
been handed down in this matter. In The Irvine Company Litigation, the primary
claim against the Company is a claim for rent due in the approximate amount of
$1,128,973. In addition, Irvine raised certain other issues as to the
calculation of rent and claims legal costs. These claims are disputed by the
Company and the Company's management believes that it is unlikely that any
portion of this amount would ever have to be paid. There can be no assurance as
to the ultimate outcome of The Irvine Company Litigation. Should the Court of
Appeals uphold the trial judge's new trial order, the Company intends to
aggressively litigate its damage claims against Irvine. However, given the
inherent uncertainties of litigation, there can be no assurance of the outcome
of the appeal or any subsequent trial.
 
     On March 3, 1995, the Company filed a complaint in the Superior Court of
the State of California against Irvine praying for declaratory relief and
damages and for unjust enrichment. The Irvine Ground Lease contains a provision
which gives the Company the right to remove all improvements at the termination
of the Lease on February 28, 1997, and return the property to its original
unimproved condition; however, Irvine has unilaterally granted extensions to the
Company's sublessees, Irvine Meadows Amphitheater and Wild Rivers, without any
participation or obtaining the consent to such extensions by the Company. The
Company had requested from the Court a declaration that it had the right to
remove all improvements on the premises at the termination of the Ground Lease
in accordance with its terms or, in the alternative, that the Company be
compensated for the value of these improvements. The Company also contended that
Irvine had been unjustly enriched by its actions.
 
     On October 31, 1995 the Court dismissed the Company's cause of action for
unjust enrichment on the grounds that the cause of action was premature. As for
the cause of action for declaratory relief, on March 5, 1996, the Court ruled
that the Company had the right to remove all improvements from the leasehold at
the termination of the Ground Lease if the Company was not in default at that
time. The Court stated that it would issue no further declarations. The trial
court also declared Irvine to be the prevailing party in the case even though
the Company had won the primary declaration it had sought. Since the lease
between the Company and Irvine entitles the prevailing party in any lease
litigation to attorney's fees and certain costs, the trial court awarded Irvine
$175,000 in attorney's fees and $10,738 in costs. The Company has filed an
appeal with the Fourth District Court of Appeal. The Company is appealing only
that part of the trial court's judgment awarding to Irvine attorneys' fees and
costs. The matter has been fully briefed and awaiting oral argument. In view of
the inherent uncertainties of litigation, the outcome of the litigation cannot
be predicted.
 
     On November 12, 1996, Irvine Meadows, one of the Company's sublessees and
the operator of the Irvine Meadows Amphitheater, sued the Company and Harry
Shuster. The suit sought an injunction against those parties preventing them
from removing the Amphitheater pursuant to a provision in the Ground Lease that
gives the Company the right to remove leasehold improvements at the expiration
of the lease. On January 3, 1997, Irvine Meadows filed a first amended complaint
in that action. As against the Company, the first amended complaint sought an
injunction and declaratory relief but no money damages. On February 19, 1997,
the trial judge granted Irvine Meadows' request for an injunction against the
Company barring it from removing the Amphitheater. Trial is now set for July 6,
1998. In view of the inherent uncertainties of litigation, the outcome of the
litigation cannot be predicted.
 
     On or about November 18, 1996, Wild Rivers, one of the Company's sublessees
and the operator of Wild Rivers Water Park brought an action against the Company
and Harry Shuster. The suit sought a preliminary injunction against those
parties preventing them from removing the improvements to the leased premises
made by The Splash pursuant to a provision in the Ground Lease that gives the
Company the right to remove
 
                                       F-9
<PAGE>   34
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
the improvements at the expiration of the Ground Lease. The request for
preliminary injunction was denied by the court on February 6, 1997. The denial
of Wild River's request for preliminary injunction has been appealed by Wild
Rivers. The action by Wild Rivers also seeks damages in an unspecified amount
against the Company for, among other things, intentional and negligent
interference with prospective economic advantage, as well as punitive damages.
The Company has filed a cross-complaint against Wild Rivers seeking declaratory
relief with respect to the Company's rights to remove the improvements on the
property. Trial in this action is set for April 27, 1998. In view of the
inherent uncertainties of litigation, the outcome of the litigation cannot be
predicted.
 
     On February 27, 1997, the Company brought an action against Irvine for
declaratory relief. In the lawsuit, the Company alleges that, although the
initial term of the Ground Lease expired on February 28, 1997, it has the right,
and has exercised the right, to extend the tenancy for an additional 26 years.
The Company is asking the court for a declaration that it has the right to such
a lease extension. In addition, the Company is seeking damages for the value of
the improvements in place at the time of The Irvine Company's alleged
conversion, in the amount of approximately $17,000,000. The Irvine Company moved
for judgment on the pleadings in this action and to stay one of the causes of
action. Both motions were denied. The trial has been scheduled for April 20,
1998. In view of the inherent uncertainties of litigation, no prediction can be
made as to the outcome of this matter.
 
     On or about March 5, 1997, Irvine sued the Company for unlawful detainer.
Essentially, Irvine alleges that its lease with the Company expired on February
28, 1997 and that Irvine is therefore entitled to immediate possession of the
leasehold premises. Management of the Company intends to vigorously defend this
lawsuit, arguing that it has the right, and has exercised the right, to extend
the initial term of the Ground Lease for another 26 years. Irvine made an oral
motion for a judgment on the pleadings on April 18, 1997, which was granted by
the Court. Judgment was entered granting Irvine possession of the Irvine
Property on April 25, 1997. The Company filed a Notice of Appeal of this
judgment on May 1, 1997, which appeal is pending. The Company was evicted from
the Irvine Property on May 6, 1997. On May 5, 1997, Irvine filed a motion to
recover attorneys' fees and costs in the amount of $397,778. The Court granted
Irvine $125,000 in fees and $25,000 in costs. The Company intends to continue
its appeal of the judgment in this unlawful detainer action. In view of the
inherent uncertainties of litigation, no prediction can be made as to the
outcome of these matters.
 
4. INVESTMENTS
 
     Investment in The Splash -- The Company has a 3.12% interest in The Splash,
a California limited partnership organized for the purpose of developing and
operating a water park on a parcel of property subleased from the Company. The
Company acquired its interest in The Splash in 1985 through a transaction
wherein the Company conveyed to the limited partnership leasehold improvements
to a certain portion of the Company's amusement area, comprising approximately
one-third of the Company's total amusement area, for $150,000 cash and the
partnership interest then valued at $200,000. In 1997 and 1996, the Company
received capital distributions of $65,000 and $45,000, respectively.
 
     Investment in HEP II -- On April 23, 1996, the Company made an initial
investment as a limited partner of $1,500,000 in HEP II, L.P., a California
limited partnership ("HEP II"), engaged in the motion picture production
business. The Company made additional investment of $250,000 in HEP II on July
9, 1996 which was repaid in October 1996 to Mr. Harry Shuster on behalf of the
Company. This repayment was included in advances to Mr. Shuster (see Note 8). On
July 22, 1996, the Company advanced $500,000 to HEP II which was repaid by HEP
II on July 25, 1996. The Company received capital distributions of $379,500 from
HEP II in 1996. The general partner of HEP II is United Film Distributors, Inc.,
a California corporation (formerly known as Hit Entertainment, Inc.) ("UFD"), of
which Harry Shuster, the Chairman of the Board, President and Chief

 
                                      F-10
<PAGE>   35
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
Executive Officer of the Company, is the Chairman of the Board and a principal
stockholder. Brian Shuster, a director of the Company, is the President of UFD.
As of December 31, 1997 and 1996, the balance of the Company's investment in HEP
II was $1,120,500.
 
     Investment in Grand Havana Enterprises, Inc. -- In September 1996, the
Company put up a certificate of deposit in the amount of $875,000 as collateral
for a letter of credit for Grand Havana Enterprises, Inc. ("Grand Havana"). This
certificate of deposit is shown as Restricted Cash in the accompanying Balance
Sheet. Grand Havana was required to provide such letter of credit in connection
with one of its leases. Grand Havana has agreed to replace the collateral in
full by March 1, 1998. In October 1997, Grand Havana replaced the collateral. In
consideration for providing such collateral, Grand Havana agreed to pay an
amount to the Company equal to 10% per annum on the amount of the pledged cash
collateral as it exists from time to time. As additional consideration, Grand
Havana issued to the Company 100,000 shares of its restricted common stock and
warrants to purchase 100,000 shares of common stock at an exercise price of $.75
per share. The Company valued the shares in the aggregate amount of $80,000
based on the discounted trading price of the stock at that time. The Chairman of
the Board, President and Chief Executive Officer of the Company is the Chairman
of the Board, President and Chief Executive Officer of Grand Havana.
 
     In October 1996, the Company acquired in private placement 333,333 shares
of common stock and warrants to purchase 333,333 shares of common stock at an
exercise price of $1.50 per share of Grand Havana for $250,000. In February
1997, the Company exercised its warrants to purchase 433,333 shares of common
stock of Grand Havana for a total exercise price of $575,000. In consideration
for making the loan to Grand Havana in February 1997, Grand Havana issued to the
Company 75,000 shares of Grand Havana's common stock (see Note 8) valued at
$138,750. In February, 1998, Grand Havana also issued to the Company, as a late
fee, an additional 25,000 shares of common stock valued at $38,681, which was
accrued by the Company at December 31, 1997.
 
     As of December 31, 1997 and 1996, the Company had 966,666 shares and
433,333 shares of Grand Havana's restricted common stock, respectively.
Management of the Company estimated the fair value of the investment in Grand
Havana using the discounted last closing price of the stock at December 31, 1997
(approximately 75% of $.47 or $.35 per share), resulting to an aggregate fair
value of $340,025 at December 31, 1997. Unrealized loss on this investment
included as a component of stockholders' equity was $742,406.
 
                                      F-11
<PAGE>   36
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     Investment in United Hotel & Casino -- In January 1997, the Company and two
unrelated California limited liability companies formed United Hotel & Casino
("United Hotel"), a limited liability company organized under the laws of the
State of Delaware. On July 29, 1997, United Hotel acquired the a real property
commonly known as The Silver City/Las Vegas Plaza Shopping Center ("Las Vegas
Property") in Las Vegas, Nevada. The aggregate purchase price was approximately
$23,200,000, which was paid by a cash payment of approximately $5,590,000, a
one-year note being carried by the seller of the property in the amount of
$1,250,000 and the assumption of a first deed of trust in the amount of
approximately $16,360,000. The Company contributed $3,751,500 to the cash
payment. The Company holds a 50% membership interest in United Hotel & Casino
which is being accounted for under the equity method. Equity in net loss of
United Hotel for the year ended December 31, 1997 was $117,700.
 
     The following is the financial summary of United Hotel as of December 31,
1997:
 
<TABLE>
<S>                                                           <C>
Balance Sheet:
Current Assets
  Cash......................................................  $   141,689
  Rents receivable..........................................        4,593
  Prepaid Insurance.........................................        5,512
                                                              -----------
          Total Current Assets..............................      151,794
Property and equipment, net.................................   22,852,056
                                                              -----------
          Total Assets......................................  $23,003,850
                                                              ===========
Current Liabilities
  Accounts payable and accrued expenses.....................  $    30,729
  Accrued interest..........................................      148,423
  Note payable..............................................    1,250,000
  Current maturities of long-term debt......................      160,199
  Tenant security deposits..................................       40,943
  Tenant prepaid rent.......................................      174,254
                                                              -----------
          Total Current Liabilities.........................    1,804,548
Long-Term Debt, net.........................................   16,044,291
Members' Capital............................................    5,155,011
                                                              -----------
          Total Liabilities and Members' Capital............  $23,003,850
                                                              ===========
Statement of Operations:
Rental Income...............................................  $ 1,089,107
Operating Expenses..........................................      219,752
Depreciation and amortization...............................      372,308
Interest expense............................................      744,836
                                                              -----------
Net loss....................................................  $  (247,789)
                                                              ===========
</TABLE>
 
     United Hotel's statement of operations included the results of operations
of the Las Vegas Property for the period from July 29, 1997 (the acquisition
date) to December 31, 1997.
 
                                      F-12
<PAGE>   37
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
 5. PROPERTY AND EQUIPMENT
 
     Property and equipment consisted of the following at December 31, 1997 and
1996:
 
<TABLE>
<CAPTION>
                                                                 1997          1996
                                                              ----------    ----------
<S>                                                           <C>           <C>
Land........................................................  $1,247,003    $1,247,003
Buildings and improvements..................................     752,554     7,324,785
Machinery, equipment and vehicles...........................     242,006     1,365,396
Furniture, fixtures and office equipment....................     139,690       389,019
Computers...................................................     139,325       408,046
Signs and other.............................................         296        97,039
                                                              ----------    ----------
                                                               2,520,874    10,831,288
Less accumulated depreciation and amortization..............    (348,305)   (4,252,702)
                                                              ----------    ----------
                                                              $2,172,569    $6,578,586
                                                              ==========    ==========
</TABLE>
 
     The Company's Planet Kids play-learning centers generated increasing
operating cash flow losses during 1996 and 1997. These circumstances indicated
that the carrying amounts related to these play-learning centers may not be
recoverable. Accordingly, management reviewed the property and equipment related
to these play-learning centers for recoverability in accordance with SFAS No.
121 and determined that these assets were impaired. For each play-learning
center, the Company determined impairment by computing the sum of the estimated
future operating cash flows (undiscounted and without interest charges) and
comparing that result to its carrying value. If such sum was less than the
carrying value of the play-learning center's assets, an impairment condition was
considered to exist and an impairment loss was recognized. The impairment loss
was measured as the amount by which the carrying amount exceeded the fair value
of the play-learning center's assets.
 
     The estimate of fair value was determined using the present values of each
play-learning center's estimated future operating cash flows. The Company
recognized impairment losses in the fourth quarter of 1997 of $3,862,554.
Management's judgment is necessary to estimate future operating cash flows.
Accordingly, actual results could vary from such estimates.
 
 6. NOTES PAYABLE
 
     Notes payable consisted of the following at December 31, 1997:
 
<TABLE>
<S>                                                           <C>
Westminster Capital, Inc. (see Note 8)......................  $1,900,000
Harvey Bibicoff (see Note 8)................................      25,000
                                                              ----------
                                                              $1,925,000
                                                              ==========
</TABLE>
 
 7. LONG-TERM DEBT
 
     Long-term debt consisted of the following at December 31, 1997 and 1996:
 
<TABLE>
<S>                                                           <C>
Note payable dated April 5, 1995, secured by first deed of
  trust, payable interest only at 12%, principal due April
  1, 2000, secured by real property located in San Diego
  County, California........................................  $120,000
Purchase money loan dated April 5, 1995, payable interest
  only at 9.67%, principal due March 1, 2000, secured by a
  second deed of trust on real property located in San Diego
  County, California........................................   722,000
                                                              --------
                                                              $842,000
                                                              ========
</TABLE>
 
                                      F-13
<PAGE>   38
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
 8. RELATED PARTY TRANSACTIONS
 
     In February 1997, the Company entered into an additional financing
agreement with Grand Havana whereby the Company agreed to loan Grand Havana,
from time to time, during a period of six months, of up to $1,250,000. The loan,
which may be advanced in such increments as shall be requested by Grand Havana
from time to time, bears interest at the rate of 8% per annum on the outstanding
principal amount. As additional consideration for this loan, the Company
received 75,000 shares of Grand Havana's common stock. This loan was not repaid
when due on September 30, 1997. The financing agreement provided that if the
loan was not repaid by such date, it would become payable on demand and the
Company would then be entitled to receive an additional 25,000 shares of the
common stock of Grand Havana. In February 1998, Grand Havana issued 25,000
shares of its common stock to the Company pursuant to the terms of this
agreement. The parties agreed to extend the maturity date of advances made under
this financing agreement to March 31, 1998. The parties are currently
negotiating an extension to September 30, 1998. During 1997, the Company
advanced $775,000 and collected $125,000 from Grand Havana. As of December 31,
1997, outstanding borrowing under the financing agreement amounted to $650,000.
Accrued interest at December 31, 1997 amounted to $31,643.
 
     On July 28, 1997, the Company and Harvey Bibicoff, a director of Grand
Havana, entered into an agreement pursuant to which the Company, in
consideration for management consulting services rendered by Mr. Bibicoff to the
Company, agreed (i) to transfer to Mr. Bibicoff, on or prior to August 1, 1999,
a 2 1/2% membership interest in United Hotel free and clear of any liens,
claims, or encumbrances and (ii) to issue 150,000 shares of common stock of the
Company to Mr. Bibicoff. The obligations of the Company under the agreement were
guaranteed by Harry Shuster and Nita Shuster, the spouse of Harry Shuster.
During 1997, 150,000 shares valued at $42,000 were issued to Mr. Bibicoff. The
Company valued the 2 1/2% membership interest at $187,500 which was accrued as
consulting fees in 1997.
 
     On July 15, 1997, the Company entered into an amendment to a financing
agreement dated as of September 10, 1996 between the Company and Grand Havana,
pursuant to which agreement the Company had agreed to provide collateral for a
letter of credit for $875,000 on behalf of Grand Havana. The amendment to the
financing agreement permitted Grand Havana to forego the requirement that it
replace the collateral out of the initial membership fees it received from
certain of its Grand Havana Room private membership cigar clubs, in
consideration for which Grand Havana agreed to grant to the Company or its
designee a three-year warrant to purchase 150,000 shares of the common stock of
Grand Havana exercisable at the lesser of $.75 per share or 75% of the average
trading price of the common stock of Grand Havana for a ten day period prior to
the exercise of the warrant. The Company subsequently designated Westminster
Capital, Inc. to receive this warrant from Grand Havana in connection with the
financing obtained by the Company related to the acquisition of United Hotel.
 
     Concurrently with the closing of United Hotel's acquisition of the Las
Vegas Property, Westminster Capital, Inc. made a loan of $1,900,000 to the
Company to enable it to meet its $3,800,000 capital contribution. The loan was
evidenced by a secured convertible promissory note made by the Company. The loan
bears interest at 15% per annum and is due on the earlier to occur of (i) the
demand of the holder which demand may not be made until July 29, 1998 unless
there is a sooner event of default or (ii) July 29, 1999. The holder of the note
has the right, at any time prior to maturity date, to convert the entire
outstanding principal balance of the note into a 25% membership interest in
United Hotel, which would leave the Company with a 25% membership interest in
United Hotel after such conversion (or a 22 1/2% membership interest at August
1, 1999, the date by which the Company has agreed to transfer a 2 1/2%
membership interest to Harvey Bibicoff). The note may be prepaid by the Company
at any time after July 29, 1998. One-half of any cash distributions which may be
made by United Hotel to the Company prior to the repayment of the Note are
required to be paid to Westminster as a prepayment on the note. The loan is
secured by, among other things, a stock pledge agreement pursuant to which the
Company has pledged 408,333 of the 966,666 shares of
 
                                      F-14
<PAGE>   39
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
common stock it owns in Grand Havana. As additional security, the Company has
granted a security interest to Westminster, in the Company's 50% membership
interest in United Hotel and in the receivables and certain indebtedness due to
the Company from Grand Havana (approximately $650,000 in principal amount at
December 31, 1997). In addition, Harry Shuster and Nita Shuster provided certain
other security individually with respect to the loan.
 
     As additional consideration for Westminster making the loan, the Company
granted Westminster a three-year warrant to purchase 150,000 shares of common
stock of the Company exercisable at a per share price equal to the lesser of
$.40 or 75% of the average of the last trade prices for the ten trading days
immediately preceding the exercise of the warrants. In addition, Grand Havana,
pursuant to the terms of an amendment dated July 15, 1997, to a financing
agreement dated September 10, 1996, between Grand Havana and the Company,
granted Westminster, as designee of the Company, a three-year warrant to
purchase 150,000 shares of common stock of Grand Havana exercisable at a per
share price equal to the lesser of $.75 or 75% of the average of the last trade
prices for the ten trading days immediately preceding the exercise of the
warrants.
 
     In connection with obtaining the necessary financing required for the
acquisition of the Las Vegas Property, on July 29, 1997, Harvey Bibicoff made a
loan to the Company of $900,000. The loan was evidenced by a promissory note,
bore interest at 10% per annum and was due and payable on September 28, 1997.
The Company repaid $875,000, leaving a principal loan balance of $25,000 at
December 31, 1997.
 
     Loans receivable from officer and director consisted of the following at
December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                 1997          1996
                                                              ----------    ----------
<S>                                                           <C>           <C>
A $10,000 note from a Company's director, dated November 29,
  1995, bore interest at the prime rate, secured by 10,000
  shares of the Company's common stock which the director
  may purchase pursuant to stock option agreements with the
  Company. During 1997, the debt was extinguished, and as a
  result, no options were granted to the director for his
  services in 1997. The Company recognized a compensation
  expense of $10,000 in 1997 for the write-off..............  $       --    $   10,000
Harry Shuster, Chairman of the Board, President and Chief
  Executive Officer of the Company
  Advances, including accrued interest, to Mr. Shuster(A)...   1,002,072     1,259,260
  Accrued interest payable..................................    (789,649)     (789,649)
  Accrued consulting fee (Note 10)..........................    (199,856)     (173,905)
                                                              ----------    ----------
  Net receivable from Mr. Shuster...........................      12,567       295,706
                                                              ----------    ----------
                                                              $   12,567    $  305,706
                                                              ==========    ==========
</TABLE>

(A) In 1997, at the request of Harry Shuster, UFD, an affiliated company, paid
an aggregate of $325,000 to the Company, which amount was applied to reduce
the Company's net receivable from him. Mr. Shuster is the Chairman of the 
Board, President and Chief Executive Officer of the Company, and the Chairman
of the Board and a principal stockholder of UFD. UFD is the general partner
of HEP II, in which the Company had an investment at December 31, 1997
in the amount of $1,120,500.
 
     The Company leases certain of its office space on a month-to-month basis
from a partnership of which the Company's President and Executive Officer, Mr.
Harry Shuster, is a partner. The Company paid this partnership rent of $31,044
in 1997 and $30,870 in 1996.
 
     Brian Shuster, a director of the Company, provides consulting services to
the Company with respect to the development of the Company's product called
Netcruise through its subsidiary, United Leisure Interactive, Inc. Brian Shuster
receives $5,000 per month consulting fees. The consulting arrangement is an
ongoing oral arrangement, which may be terminated by either party upon 30 days
notice. During the years ended December 31, 1997 and 1996, the Company paid or
accrued Brian Shuster consulting fees of $60,000 and $60,000, respectively.
Brian Shuster is the son of Harry Shuster.
 
                                      F-15
<PAGE>   40
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
 9. INCOME TAXES
 
     At December 31, 1997, the Company had net operating loss carryforwards for
federal tax purposes expiring as follows:
 
<TABLE>
<CAPTION>
                      YEAR EXPIRES                           AMOUNT
                      ------------                         ----------
<S>                                                        <C>
1998.....................................................  $  136,000
1999.....................................................   1,739,000
2000.....................................................   1,435,000
2001.....................................................     781,000
2002.....................................................     140,000
2008.....................................................     523,000
2010.....................................................     899,000
2011.....................................................     467,000
2012.....................................................   3,261,000
                                                           ----------
                                                           $9,381,000
                                                           ==========
</TABLE>
 
     The components of deferred taxes were as follows at December 31, 1997 and
1996:
 
<TABLE>
<CAPTION>
                                                       1997           1996
                                                    -----------    -----------
<S>                                                 <C>            <C>
Deferred tax assets:
  Net operating loss carryforwards................  $ 3,402,000    $ 2,181,000
  Accrued expenses to a related party.............      428,000        417,000
  Impairment losses...............................    1,672,000
  Non-cash compensation...........................       84,000
  Other accruals..................................       81,000         81,000
  State income taxes..............................        2,000          2,000
  Partnership interests...........................       27,000         39,000
  Valuation allowance.............................   (5,675,000)    (2,719,000)
                                                    -----------    -----------
  Total deferred tax assets.......................       21,000          1,000
Deferred tax liability:
  Depreciation....................................       21,000          1,000
                                                    -----------    -----------
     Net deferred taxes...........................  $        --    $        --
                                                    ===========    ===========
</TABLE>
 
10. COMMITMENTS AND CONTINGENCIES
 
     Contingent Financing Fees -- The Company is obligated to the payment of a
contingent financing fee based on any recovery obtained from the litigation
described in Note 3 relating to notes payable in the amount of $900,000 and
$120,000 repaid in December 1993 and April 1994, respectively. The contingent
financing fee is determined as an amount equal to 10% of the gross proceeds
received by the Company, either as a settlement of, or as damages from, The
Irvine Company Litigation not to exceed the amount of the loans made to the
Company by such lenders. Such amount is to be prorated among the lenders based
on the amount of their loans and thus the total liability of the Company for
this contingent financing fee is the total amount of the loans ($1,020,000) made
to the Company pursuant to these transactions. Such contingent financing fee is
only payable in the event that the Company receives payments in settlement or,
or damages from, The Irvine Company Litigation and is not payable unless the
Company is successful.
 
                                      F-16
<PAGE>   41
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     Consulting Agreement -- As of June 1, 1994, the Company and Mr. Shuster
entered into an amended and restated consulting agreement updating an
arrangement originally effective as of September 1, 1984. The consulting
agreement provides that Mr. Shuster will act as the President and Chief
Executive Officer and a Director of the Company throughout the rolling five-year
term of the agreement for annual compensation set at $208,984 per annum for
1994, to be increased 10% during each successive year of the agreement. Mr.
Shuster is also to be provided with either the use of a company car in carrying
out his duties for the Company or $300 per month car allowance. The consulting
agreement provides for certain disability benefits for a period of up to three
years. The consulting agreement provides that, so long as Mr. Shuster spends as
much time as is necessary to properly carry out his duties as President and
Chief Executive Officer of the Company, he will be otherwise permitted to spend
a reasonable amount of time pursuing his own outside interests. The consulting
agreement provides for automatic one year renewals for each contract year that
ends without termination of the consulting agreement by either party. During
1997 and 1996, the Company incurred consulting fees pursuant to this agreement
in the amount of $273,330 and $248,482, respectively.
 
     Lease Arrangements -- At December 31, 1997, minimum annual rentals under
noncancellable leases relating to the Company's Planet Kids play-learning
centers and summer camps, were as follows:
 
<TABLE>
<CAPTION>
                YEAR ENDING DECEMBER 31,
                ------------------------
<S>                                                        <C>
1998.....................................................  $  397,152
1999.....................................................     397,152
2000.....................................................     417,249
2001.....................................................     447,858
Thereafter...............................................   1,845,391
                                                           ----------
Total....................................................  $3,504,802
                                                           ==========
</TABLE>
 
     During the years ended December 31, 1997 and 1996, rent expense was
$635,034 and $507,786, respectively.
 
11. STOCKHOLDERS' EQUITY
 
     The following non-qualified stock options granted by the Company were
outstanding at December 31, 1997:
 
<TABLE>
<CAPTION>
            EXERCISE
NUMBER OF   PRICEPER
 SHARES       SHARE        DATE OF GRANT      DATE OF EXPIRATION
---------   ---------   -------------------   ------------------
<C>         <C>         <S>                   <C>
15,000..      $ .68     January 20, 1987      December 31, 2002
356,950..      1.00     July 24, 1987         December 31, 2002
90,000..        .30     April 22, 1988        December 31, 2002
37,500..       1.33     October 7, 1988       December 31, 2002
75,000..       1.25     November 17, 1988     December 31, 2002
37,500..       1.38     December 5, 1988      December 31, 2002
70,000..        .75     December 7, 1990      December 31, 2002
60,000..       1.00     September 23, 1993    December 31, 2002
125,000..       .31     July 3, 1997          December 31, 2002
 -------
 866,950
 =======
</TABLE>
 
                                      F-17
<PAGE>   42
                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996
 
     The following table summarizes the activity of common shares under stock
options for the years ended December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                            1997       1996
                                                          --------    -------
<S>                                                       <C>         <C>
Balance -- beginning of year............................   851,950    851,950
Options granted.........................................   125,000
Options expired.........................................  (110,000)
                                                          --------    -------
Balance -- end of year..................................   866,950    851,950
                                                          ========    =======
</TABLE>
 
     The non-qualified stock options of 125,000 granted to non-employee
directors during 1997 were valued using the fair value at the grant date
consistent with the methodology prescribed under SFAS No. 123, "Accounting for
Stock-Based Compensation". Compensation expense recognized amounted to $31,250
in 1997. The fair value of the options granted during 1997 is estimated on the
date of the grant using the Black-Scholes pricing model with the following
weighted average assumptions: dividend yield of 0%, volatility of 107% ,
risk-free interest rate of 6.7% and an expected life of 5 years.
 
     At December 31, 1997, the following warrants were outstanding:
 
<TABLE>
<CAPTION>
           EXERCISE
NUMBER OF    PRICE
 SHARES    PER SHARE     DATE OF GRANT     DATE OF EXPIRATION
---------  ---------   -----------------   ------------------
<C>        <C>         <S>                 <C>
4,945,000    $4.00     November 10, 1994   November 10, 1999
  430,000     6.60     November 10, 1994   November 10, 1999
  150,000         (i),(ii) July 29, 1997   July 29, 2000
  200,000      .75(ii) October 15, 1997    October 15, 2002
---------
5,725,000
=========
</TABLE>
 
---------------
(i) The exercise price is the lesser of $.40 per share or 75% of the average
    price for the ten trading days prior to exercise.
 
(ii) The warrants granted to non-employees during 1997 were valued using the
     fair value at the grant date consistent with the methodology prescribed
     under SFAS No. 123, "Accounting for Stock-Based Compensation". Compensation
     expense recognized amounted to $161,980 in 1997. The fair value of the
     options granted during 1997 is estimated on the date of the grant using the
     Black-Scholes pricing model with the following weighted average
     assumptions: dividend yield of 0%, volatility of 107%, risk-free interest
     rate of 6.7% and an expected life of 4 years.
 
                                      F-18