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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                         ANNUAL REPORT ON FORM 10-KSB

           [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 2001

Commission File Number 0-6106

                          UNITED LEISURE CORPORATION
            (Exact name of registrant as specified in its charter)

            Delaware                                   13-2652243
(State or other jurisdiction of
 incorporation or organization)           (I.R.S. Employer Identification No.)

                      1990 Westwood Boulevard, Penthouse
                      Los Angeles, California 90025-4650
         (Address, including zip code, of principal executive offices)

                                (310) 441-0900
             (Registrant's telephone number, including area code)
          Securities registered under Section 12(b) of the Act: None

             Securities registered under Section 12(g) of the Act:
                    Common Stock, par value $.01 per share
                               (Title of Class)

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

The Issuer's revenues for the most recent fiscal year were $22,779_

The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March _21__, 2002, based on the closing
price of the Common Stock as quoted on the OTC Bulletin Board on such date, was
approximately $_4_ million.

The number of shares of the Registrant's Common Stock outstanding as of March
21, 2002 was __20,511,375_________ shares.

                      DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (Check one):  Yes [_]   No [X]
================================================================================
<PAGE>

                          UNITED LEISURE CORPORATION

                         ANNUAL REPORT ON FORM 10-KSB

                                     INDEX


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PART I.
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              ITEM 1.  Business............................................................................   3

              ITEM 2.  Description of Property.............................................................  10

              ITEM 3.  Legal Proceedings...................................................................  10

              ITEM 4.  Submission of Matters to a Vote of Security Holders.................................  11

PART II.
--------

              ITEM 5.  Market for Registrant's Common Equity and Related Stockholder Matters...............  11

              ITEM 6.  Management's Discussion and Analysis of Financial Condition
                       and Results of Operations...........................................................  11

              ITEM 7.  Financial Statements................................................................  18

              ITEM 8.  Changes in and Disagreements with Accountants on Accounting
                       and Financial Disclosure............................................................  18

PART III.
---------

              ITEM 9.  Directors, Executive Officers, Promoters and Control Persons of the Registrant;
                       Compliance with Section 16(a) of the Exchange Act...................................  18

              ITEM 10. Executive Compensation..............................................................  21

              ITEM 11. Security Ownership of Certain Beneficial Owners and Management......................  22

              ITEM 12. Certain Relationships and Related Transactions......................................  23

              ITEM 13. Exhibits and Reports on Form 8-K....................................................  24

Signatures.................................................................................................  26
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                                                                              ii
<PAGE>

PART I

This Annual Report on Form 10-KSB includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Exchange Act of 1934, as amended. These include, among others, the
statements about United Leisure's plans and strategies under the headings
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." When used in this document and the documents
incorporated herein by reference, the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates," or similar expressions are
intended to identify, in certain circumstances, forward looking statements.
Forward-looking statements are not guarantees of future performance and are
subject to certain risks, uncertainties, and other factors, some of which are
beyond the Company's control, are difficult to predict and could cause actual
results to differ materially from those expressed in forward-looking statements.
Although it is not possible to itemize all of the factors and specific events
that could affect the outlook of a technology company like ours operating in a
competitive environment, factors that could significantly impact expected
results include: the acceptance of our technology; the effect of national and
local economic conditions; the Company's outstanding indebtedness; the loss of
key employees; competition from technologies developed by other companies; the
ability to attract and retain employees; and the ability to identify and
consummate relationships with strategic partners, as well as risks set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That Could Impact Future Results." Although United Leisure
believes that its plans, intentions and expectations reflected in or suggested
by such forward looking statements are reasonable, it cannot assure that such
plans, intentions or expectations will be achieved. Actual results may differ
materially from the forward-looking statements made in this Annual Report on
Form 10-KSB.

ITEM 1. BUSINESS

Overview

Through our subsidiary, United Internet Technologies, Inc. ("UIT"), we are
engaged in the business of developing technologies that allow a wide range of
electronic devices, such as smart toys, medical devices, household and business
appliances, and consumer electronics, to communicate and be controlled locally,
when connected to a computer, or over the Internet and over other digital
systems, such as cable, television and wireless networks. We have developed
several proprietary technologies: (1) Intelligent Control Interactive Technology
(TM) ("I-C-IT(TM)") ("software"), (2) Digitally Integrated Video Overlay (TM)
("Divo(TM)") ("software"), and (3) Fiber Optic based bar code scanning
technology. We also have acquired technology from Andy Rifkin's company, JED
Development / Gorilla that enables our smart toys to be completely wireless from
the computer.

Our technologies enable businesses to transition their traditional product lines
into the interactive world. Our objective is to create solutions for specific
business sectors by customizing our I-C-IT platform, allowing our technologies
to be embedded in a wide range of electronic devices. Our strategy is to form
relationships with top tier companies to speed the delivery of our technologies
to the market. Through our technologies, we offer the opportunity to create
best-of-breed "smart" products on a proven technology platform. We have branded
our I-C-IT platform under the slogan "We Put the Smart in Smart Devices. "(TM)


Our Solutions

I-C-IT

I-C-IT is a proprietary platform of hardware and software for networking devices
through various digital delivery systems such as the Internet, cable, television
and wireless networks. Devices empowered with I-C-IT technology become
"networkable." This means that these devices can communicate with the user
and/or other I-C-IT enabled devices and be accessed and controlled by the user
or other devices from a remote location. I-C-IT enabled products are built to
function in low bandwidth environments suitable for consumer markets

                                                                               3
<PAGE>

I-C-IT enabled devices can communicate with the user and/or other I-C-IT enabled
devices and become accessible and controllable from any place in the world
through the Internet, wireless and broadcast networks. I-C-IT enabled devices
can receive commands, transmit data or even become a transmitter of human
communication. The following examples illustrate how I-C-IT technology may be
applied to enable devices:

       . Transmission of data: For example, a user can measure his or her blood
         pressure with an I-C-IT enabled medical monitoring device at home and
         transmit the results in real-time to a healthcare professional anywhere
         in the world. A healthcare professional can monitor and record a
         patient's blood pressure while the patient is at home and the doctor is
         at the office.
       . Transmission of human communication: I-C-IT enabled toys take on traits
         of Artificial Intelligence. Toys can communicate with other toys all
         over the world. Users can control I-C-IT enabled toys at home and also
         instruct other I-C-IT enabled toys to move and speak in real-time. The
         toys become transmitters of human communication and behavior.
       . Broadcast communication and control: Users can instruct and control
         home and office appliances remotely from anywhere in the world through
         the Internet, the personal digital assistant (PDA) or cell phone. For
         example, while watching your favorite cooking show on television,
         I-C-IT technology will send instructions, cooking time, and temperature
         to the oven.


Simple Interface for Complex Functionality
UIT creates user-friendly interfaces for devices as they become more complex.
The I-C-IT platform can be used in conjunction with a wide range of existing
products. By embedding the I-C-IT technology into existing devices a new, more
intelligent product generation is created. I-C-IT enabled products are designed
to function in both low and high bandwidth environments and are targeted at the
mass consumer market.

Interactive Entertainment Applications of I-C-IT

We have targeted the interactive entertainment market for the first application
of our I-C-IT platform. We have developed prototypes of interactive smart
devices which are able to connect, communicate and be controlled through the
Internet, game consoles, wireless devices, DVDs and CDs, cable, broadcast
signals and set top boxes. These devices can also be equipped with a web cam,
enabling the user to see the reaction of his or her friend, enhancing the
interactive experience. It is the Company's strategy to form relationships with
media companies to obtain the rights to characters to develop I-C-IT enabled
devices for the interactive entertainment space.

We are pursuing strategic relationships with companies in the media and Internet
sectors to exploit opportunities to create I-C-IT enabled devices based on well-
known characters, such as those from movies, cartoons, comic books and
television shows. By creating Internet enabled devices that can be controlled
and communicate through chat rooms, we believe we are offering a very strong
value proposition to companies looking to build communities on the Internet and
reduce overall churn rates, which is the rate at which people drop off from
visiting a particular site or stop subscribing to a particular online service.
We have chosen to apply our I-C-IT technology for the creation of smart toys and
corresponding interactive software because of the strong demand this market
exhibits for smart toys with a higher degree of Internet enabled functionality
and the demand by portals to attract and retain a younger demographic.

The company has the license for the Terminator 2 Endoskeleton. We unveiled the
device at the International Toy Fair in New York City in February 2001. The
product generated substantial interest from retailers; however, the product
price range was not commercially viable in mass quantities. During the balance
of 2001 we addressed that problem and have created products with substantially
the same features and additional features for significantly less cost.

In April of 2001 we entered into a license agreement with Warner Bros to create
a line of these smart toy products and prepare them for sale and distribution
for 2002. We are currently meeting with retailers and manufacturers in an effort
to bring these newer, less expensive products that are far less expensive than
the original technologies to the market.


Healthcare Applications of I-C-IT

We have also developed prototypes of I-C-IT enabled medical monitoring devices
that are able to record, monitor and transmit vital sign data online through a
healthcare portal. We are actively seeking strategic partners within the medical
device industry to bring to the market a line of I-C-IT enabled medical devices
for use in the home setting, such as blood pressure monitors and blood glucose
analyzers.

Divo(TM)

                                                                               4
<PAGE>

Digitally Integrated Video Overlay(TM) (Divo(TM)) is a technology that allows
high-quality video to be delivered over the Internet while connected with a
standard dial-up telephone line. Divo(TM) files are activated by a server that
can instruct any computer's CD-ROM or DVD-ROM drive and have it activate video
files that have been stored locally on a CD-ROM or DVD-ROM. This process
integrates video material into a website. Once the Divo(TM) software has been
downloaded to the personal computer, the video content can be updated by passive
download or through the distribution of additional CD-ROMs/DVDs. Divo(TM)
technology enhances the web presentation experience and we believe that it is
suitable for the entertainment, travel, shopping, corporate and educational
markets.

This Divo(TM) technology enhances our Parallel Addressing Video (see below)
technology by allowing video that is distributed and controlled through Parallel
Addressing Video technology to be integrated within a Web page. This integration
allows for special effects and an active video to be played and controlled
within a live web page using a combination of video and fixed Web design tools
and technologies. We believe combining these innovations with full motion 30
frame-per-second broadcast quality video results in a more multimedia enhanced
Web page than those using traditional static elements and streaming video. For
example, using Digitally Integrated Video Overlay technology, a host can appear
in full motion video on the Web page to educate or entertain the user. This
technology allows the host in the video to appear as an actual part of the web
site although two different sources are involved.

Digitally Integrated Video Overlay technology also provides functions that allow
video to be combined seamlessly within the user's own Web browser software. Like
Parallel Addressing Video, Digitally Integrated Video Overlay technology is
designed to work with popular browsers from both Netscape Communication
Corporation and Microsoft Corporation.

In the past, we have generally licensed the Divo(TM) technology to large
customers as part of turnkey projects custom-designed for each individual
customer. For instance, we licensed an application of the Divo(TM) technology
for television to NBC, an application of the technology for wrestling and
related activities to World Championship Wrestling, Inc. and travel-related
applications of the technology to Netcruise.com, Inc. (formerly known as Genisys
Reservation Systems, Inc.). We believe our solutions allow businesses to provide
superior video functionality in combination with the Internet, provide a unique
experience to consumers, help drive greater volumes of traffic to their Web
sites and ultimately create greater value.

Travel. We developed an application of our Parallel Addressing Video technology
called NetCruise (TM) that allows anyone to book travel, including cruises,
hotels, car rental and airline tickets from a one-stop shopping Web site at
netcruise.com. In July 1998, we licensed NetCruise, together with all other
travel-related applications of our Parallel Addressing Video technology, to a
wholly owned subsidiary of NetCruise, formerly Genisys Travel Reservations, Inc.

In June 1998, our wholly owned subsidiary, United Internet Technologies, Inc.,
granted to NetCruise Interactive, Inc., a wholly owned subsidiary of NetCruise,
an exclusive, worldwide and perpetual license for travel related applications of
certain interactive technology. In addition, we sold to NetCruise certain
intellectual property and computer equipment for certain consideration
consisting of stock and warrants of NetCruise.

On April 24, 2000, the Company and NetCruise restructured the agreements they
originally entered into in 1998 and which were subsequently amended in 1998 and
1999. In the restructuring, completed on April 24, 2000, UIT provided a revised
and updated PAV software and technology license to NetCruise. UIT sold 1,500,000
shares of NetCruise's common stock in a private transaction for a cash purchase
price of $600,000 to Mr. Joseph Perri, NetCruise's principal shareholder, and
agreed to the NetCruise's cancellation of warrants to purchase an aggregate of
1,600,000 shares. In this connection, NetCruise issued to UIT new privately
placed warrants to purchase up to 400,000 shares of common stock for a period of
five years at an initial purchase price of $1.00 per share. NetCruise has since
ceased operations.

In July 2000 we formed a subsidiary in Germany, Interactive Internet
Technologies GmbH (IIT). We have invested $192,859 in, and contributed a non-
exclusive license to market our technologies in Europe to IIT and we retained a
66.67% ownership interest. IIT raised total capital of $964,496 in July 2000.
IIT is primarily engaged in the marketing of our Divo technology in Europe.

Parallel Addressing Video

This technology, which is not a broadcast, downloaded or streaming technology,
uses pre-recorded audio and video that is distributed to the user on a CD-ROM or
DVD-ROM. The technology equips Websites with software that allows the Web site
to interact with a user's Internet browser and activate the CD-ROM or DVD-ROM.
The result is a 30 frame-per-second broadcast quality, full-motion, full-screen
video and audio on the user's computer, while the user is connected to the
Internet.

                                                                               5
<PAGE>

Unlike traditional CD-ROM or DVD-ROM multimedia products, such as interactive
encyclopedias or magazines, which are completely controlled by the user from
their computer, with our technology the display of the content is completely
controlled from the Web site. Various security techniques allow the creator of
the pre-recorded material to control when and how much of the material is
available to the user. For example, a Web site administrator could pre-record
more video than would be available on the Web site at any one time, distribute
it on a CD-ROM or DVD-ROM and make it accessible by the user either in a time-
released fashion or with proprietary security codes. The user's video player
communicates with the Web server that creates a secure encryption key to unlock
the video. Security and time-control functions exist on both the Web site and
the distributed medium that allow the video to be delivered to the user in the
manner that the content provider desires. Encryption keys also allow the owners
of the Web sites to protect against unauthorized use or distribution of their
video content.

In addition, Parallel Addressing Video technology permits all information other
than the actual pre-recorded material to be changed on the Web site. This
results in a more diverse interactive experience that can change as frequently
as the Web site administrator desires. As a result, the Web site content remains
current and the context in which the material is viewed can be updated to
maintain the user's interest. This product has been married into the DIVO
product and now both products will be marketed as one.

Shopping Pal

Shopping Pal is a device that is about the same size as a woman's lipstick
container. It connects to almost any cell phone on the market. The consumer
doesn't need a special phone, not even a WAP phone. The only requirement for the
Shopping Pal is that the cell phone has a headset jack. The Shopping Pal does
the rest. It does not change the software in the phone.

With the Shopping Pal you can buy products advertised in magazines, newspapers,
catalogs or on billboards. The advertiser would only have to place their bar
code anywhere in the advertisement. The consumer can then aim the Shopping Pal
at a bar code in the magazine, and you get wirelessly connected to purchase the
product. In-Store shopping - Purchase products and Compare prices. Walk into any
retail store, for example, Wal Mart, or Best Buy, and find a product you are
interested in purchasing. Aim Shopping Pal at the bar code, and your cell phone
will autodial into a shopping portal and immediately tell you on your cell phone
how much the product would cost if you purchased the product on-line... if the
price is better than the retail price in the store, you may purchase the product
directly from your cell phone.

Pay your bills - Most bills contain bar coding. You can scan your bills using
Shopping Pal and your cell phone, connect to almost any banking system and
directly pay your bills simply and quickly by phone.

Walk into any record store and listen to music before purchasing. Choose a music
CD, grab your cell phone, aim Shopping Pal at the CD barcode, and listen to
audio samples from the CD on your cell phone. Our proprietary technology
converts bar codes into audio tones...enabling any cell phone to work with
Shopping Pal

The product will be marketed to cell phone manufacturers, cell phone service
providers and internet shopping portals.

Industry Background

Networked Home and Device Sector


The networked home will move from today's first generation products, such as
basic PC adapter cards and simple gateways, to tomorrow's, where connectivity
technology is embedded in recognizable devices with which non-technical users
are familiar and comfortable. New connectivity-based services, enabled through
home networking technology, will help drive growth in this market. Additional
voice lines, home management and monitoring, as well as new value added
entertainment services, are predicted to create a $3 billion connectivity
services market by 2004.

Interactive Gaming and Smart Toy Sector

Smart toys are physical toys that use-computing power to create an enhanced play
experience and include toys that:

     .  connect to the Internet, Personal Computer, and Television - Networked
        Toys
     .  contain electronics that enhance their play value - Interactive Toys

We believe that smart toys will be the significant growth engines of the toy
industry in the future. Manufacturers credit the decreasing cost of technology
and the increasingly sophisticated tastes of kids as major success drivers.

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<PAGE>

We believe our smart toys will be the most interactive toys created to date and
have the potential to be positioned as the market leader in the smart toy
industry segment. Toys currently introduced to the market with a significantly
reduced degree of interactive functionality have already generated impressive
sales, such as Furby, with over 40 million units sold worldwide to date, and
Poo-Chi, with over 25 million units sold worldwide. We believe this is a strong
indicator of how successful our toys will be.

We believe our toys that are Hollywood characters and have enhanced
functionality, connectivity and wireless communication capability have
significant market advantages over these non-connective interactive smart toys.
Additionally, our online, networked functionallity provides us with additional
online revenue streams such as downloads.

We intend to aggressively target the 30 million people age 18 and under in the
U.S. who are currently online and the 60 million people in the U.S. who use
instant messaging and chat. Our goal is to be a leader in the rapidly growing
smart toy segment of the toy industry.

Smart toys are the growth engine of the $22 billion toy industry. While total
toy sales decreased 1.4% in 2000, smart toy sales rose 98% in 2000 and are
rapidly approaching the $1 billion mark according to the NPD group, a leading
market intelligence provider. In its last report on the smart toy industry
Forrester Research reports the total market for networked smart toys is forecast
to grow rapidly, reaching $1.9 billion in sales by 2002. It is estimated that
16.5 million units will be shipped by 2002. This implies that almost every
second child in the US will have a networked toy by 2002.

In the top selling toys of 2000, in the $20.00 and over the category, ranked by
units sold, the top seller was the Poo-Chi Robotic Dog, manufactured by Tiger
Electronics. The fourth best seller was the Tekno Robot Dog, manufactured by
Manley Toy Quest. Both of these "interactive pets" had a limited degree of
interactive functionality compared to our smart toys.

A substantial part of the value proposition of networked toys is the promise of
renewable media content through web downloads and an online virtual environment.
This ensures that play activities are continually unique and valuable, adding to
the appeal of the toy. This also allows the toy to "develop" in conjunction with
the cognitive abilities of the child. Therefore, a PC, Internet, or TV-based
environment that captivates the imagination of a child is likely a key success
factor to a networked toy.

During the year we developed and added a line of smart toys that can be retailed
for approximately $19.99. These new smart toys include Licensed Characters from
Looney Tunes and three other products that we developed internally. One is
"Bradford the Bear", the second is "Rusty the Robot" and the third is a "Skater
Dude" These toys have multiple functions;

    1. When you are connected to an Instant Messaging environment (CHAT), the
    friend that you are chatting with on-line can control your toy, make it
    speak and make it move...(all in real time) so if I type...."how are you?"
    The toy in your house moves and says, "How are you"...these can work
    anywhere in the world.

    2. These smart toys play on-line and off-line games and can be upgraded to
    do many different functions. They can educate, read stories and sing songs.

    3. There are no wires, no cables that need to plug to the computer.

    4. The toys can also be remote controlled with cell phones.

We can manufacture these toys for about $6 in China. The technology is
proprietary and it is based on our proprietary technology as well as technology
we acquired from Andy Rifkin and JED Development / Gorilla.

Internet Video Delivery

Currently there are several technologies and methods to communicate and retrieve
various types of information from Internet resources. The format for retrieving
much of this information is satisfactory, but the length of time that it takes
to transfer some audio and video content is inconvenient or unacceptable to many
users.

Despite these improvements, there are significant limitations with streaming
technology, especially with respect to the quality of the video images.
Streaming technology is limited by available bandwidth. For example, a video
streaming at 28.8 kbps will produce a jumpy or choppy video that the viewer
perceives as less than full motion. In addition, streaming video is displayed in
a small window on the viewer's computer screen and enlarging the image further
reduces its quality. Internet congestion or losses in Internet connection may
also interrupt audio and video streams.

These factors can result in an unsatisfactory experience for users of streaming
technology. Increased transmission speeds will enhance the quality of the
technology, but industry analysts disagree as to the time frame in which
transmission speeds sufficient to overcome the current limitations will be in
use.

                                                                               7
<PAGE>

Marketing

In November 1999, we entered into an agreement with Teen People Magazine to
design and produce a 12-page "magalog" of Nordstrom fashions, accessories and
beauty products and an interactive CD-ROM. The mini-catalog served as a
self-mailer for the CD-ROM. In addition, we included Internet Service Provider
software as part of the package. Approximately 600,000 CD-ROMs were distributed
in March 2000. We received revenues of approximately $700,000 in the first
quarter of 2000 in connection with this agreement. This was the only source of
revenue for our Internet technology business in 2000.

In February 2000, we entered into an agreement with Liquid Audio, Inc. under
which Liquid Audio granted us a limited, non-exclusive, worldwide, royalty-free
license to reproduce, market and distribute Liquid Audio products along with the
distribution of our proprietary software. The agreement continues until
terminated upon 30 days written notice by either party. We have not received any
revenues from this agreement.

In March 2001, we entered into a joint marketing agreement with Kodak under
which both Kodak and us will jointly create a Divo / Programmable - CD Rom
demonstration CD and will dedicate creative marketing and management personnel
to the project. The demonstration CD and marketing material was completed in
2001 and Kodak is currently marketing the DIVO technology with it's technology
throughout the US.

Research and Development

During the first several years we devoted most of our internal research and
development resources to making advances in our interactive technology platform.
We were continuously involved in the refinement, enhancement, and expansion of
our operating and application capabilities. We have developed prototypes of all
our new proprietary devices for many different industry sectors. Research and
Development expenses were approximately $782,000 and $1,091,500 in the fiscal
years ended December 31, 1999 and December 31, 2000. In 2001 we spent
approximately $1,410,000 to complete the technology development stage and
prepare to shift from an R&D based company to a technology marketing and
licensing company.

Patents and Trademarks

Since inception the company has filed for patent protection on all of its
technologies. Particularly noteworthy are what we believe to be the three most
important technologies for the company which have been issued or approved for
issuance are: 1. The DIVO technology (issued) 2. The Medical Monitoring
Technology (issued) 3. The I-C-IT Technology (approved and Intellectual Property
rights, and the fact that such efforts have been highly successful.

With respect to the six applications remaining, we are still waiting for Office
Actions for all but one of these cases. However, given that they, for the most
part, depend upon the core technology of the company, we believe that most, if
not all, of the presently pending applications will support claims, which will
be allowed to proceed to issuance. Below is a comprehensive list of the
company's patent filings.

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   Matter       Title                                                    Status     Filed        Issued     Remarks
   ---------------------------------------------------------------------------------------------------------------------------------
   <S>          <C>                                                      <C>        <C>          <C>        <C>
   P002         METHOD AND APPARATUS FOR MERGING MULTIMEDIA DATA WITH    Issued     7/23/97      11/30/99
                TEXT INFORMATION
   ---------------------------------------------------------------------------------------------------------------------------------
   P003         METHOD AND APPARATUS FOR COMBINING VIDEO DATA WITH       Pending    5/14/99                 8/14/2001:Watch for
                STATIC WEB PAGE DATA                                                                        first office action
   ---------------------------------------------------------------------------------------------------------------------------------
   P005         METHOD AND APPARATUS FOR CONTROLLING ANIMATRONIC         Pending    8/12/99                 8/22/2002:Watch for
                DEVICES OVER THE INTERNET                                                                   next office action
   ---------------------------------------------------------------------------------------------------------------------------------
   P005x1       METHOD AND APPARATUS FOR CONTROLLING AN ANIMATRONIC      Pending    12/2/2000               6/2/2002:Watch for
                DEVICE IN AN INTERACTIVE GAME ENVIRONMENT                                                   first office action
   ---------------------------------------------------------------------------------------------------------------------------------
   P005x2       METHOD AND APPARATUS FOR CONTROLLING AN ANIMATRONIC      Pending    12/2/2000               6/2/2002:Watch for
                DEVICE USING A WEB ENABLED CELLULAR PHONE                                                   first office action
   ---------------------------------------------------------------------------------------------------------------------------------
   P005x3       METHOD AND APPARATUS FOR CONTROLLING AN ANIMATRONIC      Pending    12/2/2000               6/2/2002:Watch for
                DEVICE USING A WEB ENABLED PERSONAL DIGITAL ASSISTANT                                       first office action
   ---------------------------------------------------------------------------------------------------------------------------------
   P005x4       METHOD AND APPARATUS FOR CONTROLLING AN ANIMATRONIC      Pending    12/2/2000               6/2/2002:Watch for
                DEVICE FROM A WEB PAGE                                                                      first office action

   ---------------------------------------------------------------------------------------------------------------------------------
   P006         METHOD AND APPARATUS FOR CONTROLLING MEDICAL             Issued     8/12/99      10/16/01
                MONITORING DEVICES OVER THE INTERNET
   ---------------------------------------------------------------------------------------------------------------------------------
   P011         METHOD AND APPARATUS FOR REMOTE DATA                     Pending    1/16/2001               7/9/2003 watch for
                                                                                                            first
   ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                               8
<PAGE>

<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S>          <C>                                                      <C>        <C>                        <C>
             COLLECTION OF PRODUCT INFORMATION USING A COMMUNICATIONS                                       office action
             DEVICE
---------------------------------------------------------------------------------------------------------------------------------

P012z        METHOD AND APPARATUS FOR CONTROLLING ANIMATRONIC         Pending    6/12/2001                  6/12/2002:Deadline to
             DEVICES                                                                                        file utility
                                                                                                            application based on
                                                                                                            provisional
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Competition

There is significant competition in the development of technologies designed to
connect external devices. Sun Microsystems has developed Jini, which provides
simple mechanisms that enable devices to plug together to form an impromptu
community. Jini was launched in January 1999, when Sun demonstrated how a
laptop, printer and digital camera were able to communicate with one another.

Microsoft has developed UPnP Universal Plug and Play (UPnP), the next phase of
Microsoft's seven-year Plug and Play initiative. UPnP makes it easier for
consumers to install and configure their intelligent consumer appliances and
devices on a home or small-business network. UPnP also makes it easier for those
products to work together on a network and to share resources from any device in
the home or business. For example, a homeowner with two PCs and one high-speed
Internet connection can share Internet access across both PCs. Major companies
pledging to produce UPnP-compatible products include Intel, Hewlett-Packard Co.,
Compaq and AT&T Corp.

There is significant competition in the interactive gaming and smart toy area
from established toy companies, video game developers, video game console
developers and interactive software developers.

There is significant competition in the online healthcare monitoring market from
established healthcare companies, including Bayer and Johnson & Johnson as well
as from newer companies such as Stayhealthy.com, DiabetesWell and Life Chart.

There is significant competition in the evolving market for delivery of video
content on the Internet. We have approached the delivery of video content using
different technology than that of our competitors. Our competitors, however,
have substantially greater financial, marketing, personnel and other resources
than we do.

There is also significant competition for content development and broadcasting
on the Internet. Our largest competitors in this area are broadcast.com and
RealNetworks, Inc. These and other competitors in the content development and
broadcast area, also have greater resources than we do. We expect competition in
this area to remain strong and to increase further.

Government Regulation

It is likely that new laws and regulations will be enacted in the United States
and elsewhere covering a wide range of Internet-related issues. These could
include broadcast license fees, music licensing, copyrights, privacy, pricing,
sales tax and characteristics and quality of Internet services. It is also
possible that laws could be passed that would apply to us in the areas of
content, network security, encryption, privacy protection, electronic
authentication or digital signatures, illegal or harmful content, access charges
and re-transmission activities. If certain laws or regulations apply to the type
of service we provide, we could be exposed to significant liabilities in
connection with the content on our Web sites. We could also have liability for
the content on the Web sites of our licensees. If restrictive laws or
regulations are adopted, it could also slow Internet growth and increase our
cost of doing business.

There are also uncertainties about how existing laws in other areas apply to the
Internet. Some of these laws deal with issues like property ownership, libel,
taxation, defamation and personal privacy. The majority of these laws were
adopted before the widespread use of the Internet and do not address the unique
nature of the Internet and related technologies.

In 1996, Congress enacted the Communications Decency Act of 1996. Although the
Supreme Court ruled that sections of this legislation that would have imposed
criminal penalties for the distribution of indecent material to minors over the
Internet were unconstitutional, it is possible that similar legislation could be
adopted and upheld in the future. Even though we do not distribute content that
the Communications Decency Act would consider illegal, it is not possible to
predict how any future laws or regulations regarding indecency would be
interpreted. If Internet growth is slowed as a result of restrictive
legislation, the demand for our technology could be adversely impacted. We do
not require our licensees to indemnify us against these potential liabilities,
nor do we have insurance to cover such liabilities.

If we are considered to be a distributor of Internet content, we could face
potential liability for negligence, copyright, patent, trademark, defamation,
indecency and other claims. These types of lawsuits have been brought against
Internet content distributors. In addition, we could be liable for the broadcast
content or unauthorized duplication of broadcast

                                                                               9
<PAGE>

content. We do not require our licensees to indemnify us against these potential
liabilities, nor do we have insurance to cover such liabilities.

Employees

As of February 28, 2002, we had eight full-time employees and two employees
working on a consulting basis. None of our employees are covered by a collective
bargaining agreement.

Discontinued Operations

In October 2000, we determined to divest all of our remaining non-technology
businesses. We concluded that these operations were not strategically compatible
with our core internet-technology business. We believe that the opportunity in
our core business requires singular focus of management time and resources. As a
result, our board of directors decided to divest our non-core businesses. These
non-core businesses consist of the Planet Kids business and our investments in
Grand Havana, HEP II Limited Partnership and certain other investments. We have
closed all three children's recreational facilities two of them have been leased
and the company has no further lease obligations on those two. The company
expects to lease the remaining facility within the next 90 days. The company is
liable for the payments of that lease untill 2005.

Before February 1997, our primary business was to act as a developer and manager
of facilities for recreational and corporate activities. As part of our decision
to reorient our business to developing and licensing our technology, we closed
some of these facilities. In August 1999, we sold real property located in El
Cajon, California, which was previously used for some of our recreational and
corporate activities. In October 1999, we sold our 50% interest in real estate
holdings in Las Vegas, Nevada.

See Part II, Item 6, "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "Financial Statements - Note 2 to Notes
to Consolidated Financial Statements."

ITEM 2.  DESCRIPTION OF PROPERTY.

We maintain our principal executive offices in approximately 6,000 square feet
of leased office space in Los Angeles under a lease that expires in February
2005. The lease was entered into with 1990 Westwood Boulevard, Inc., which is
owned partially by Harry Shuster, the former Chairman of the Board, President,
Chief Executive Officer, Chief Financial Officer and a principal stockholder of
United Leisure. Harry Shuster is also the father of Brian Shuster, our Chairman
of the Board, President and Chief Executive Officer. United Leisure believes
that the rent and other terms of the lease are no more favorable to the lessor
than could have been obtained in a similar building in the same area from an
unrelated lessor. See Item 12, "Certain Relationships and Related Transactions."

We believe our existing leased properties are adequate for our current needs. We
also believe that all of the properties are adequately covered by insurance.

ITEM 3.  LEGAL PROCEEDINGS.

On January 17, 2001 we announced that all litigation with Broadbridge Media, LLC
and Hyperlock Technologies, Inc. had been settled, with all claims and
counterclaims voluntarily dismissed. The settlement specifically covered the
patent litigation between the parties under the jurisdiction of the United
States District Court for the Northern District of Illinois, Eastern Division.
Specifically, the cases voluntarily dismissed were Case No. 99C 3778, Hyperlock
Technologies, Inc. v. United Internet Technologies, Inc., and Case No. 00 C
2311, United Leisure and United Internet Technologies v. Broadbridge Media, LLC
and Hyperlock Technologies, Inc.

On or about February 16, 2001, we terminated the employment contracts of Sonja
Mikic and Chris Riley. It is the Company's position that no further compensation
or benefits are due under those contracts. On or about February 28, 2001, Sonja
Mikic and Christopher Riley (Plaintiffs) filed a lawsuit against us, UIT, and
Brian Shuster (collectively, Defendants) in the Superior Court of the State of
California for the County of Los Angeles, West District. Plaintiffs asserted
causes of action for breach of written employment, tortuous breach of contract,
and tortuous interference with contract. Plaintiffs seek compensatory damages in
an unspecified amount against Defendants, punitive damages, attorneys' fees,
costs of suit, and pre- and post- judgment interest as allowed by law.

Plaintiffs essentially allege that their contracts were terminated without cause
and that UIT and United Leisure are in breach of the employment agreements by
not providing the benefits that would accrue to each Plaintiff in the event his
or her employment was terminated without cause. Separately, Plaintiff's
purported rights with respect to their ownership of stock options in UIT also
may be at issue. We believe this lawsuit is without merit in that the employment
agreements were

                                                                              10
<PAGE>

terminated for cause, thereby eliminating Plaintiff's rights to additional
benefits under the agreements. The company is currently engaged in settlement
negotiations.

In the normal course of business, we are subject to various claims and legal
actions. We believe that we will not be adversely materially affected by the
ultimate outcome of any of these matters, either individually or in the
aggregate.

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

None.

PART II

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

Our common stock is traded on the Over the Counter Bulletin Board (the "OTC
Bulletin Board") under the symbol "UTDL." The following table sets forth the
high and low closing prices of the common stock for the quarters indicated as
quoted on the OTC Bulletin Board.

<TABLE>
<CAPTION>
                                                2000                                 2001
                                       High              Low                High              Low
<S>                                <C>              <C>                 <C>              <C>
First Quarter                      $13.50           $2.8438             $3.5937          $1.1875
Second Quarter                     $9.9375          $5.4375             $1.6875          $0.86
Third Quarter                      $10.00           $3.7812             $0.87            $0.27
Fourth Quarter                     $5.75            $2.125              $0.59            $0.25
</TABLE>

The above quotations represent prices between dealers without adjustments for
retail markups, markdowns or commissions and may not represent actual
transactions.

As of March 21st, 2002, there were approximately 2,303 active shareholders of
record of United Leisure common stock.

We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings to finance our operations
and fund the growth of our business. Any payment of future dividends will be at
the discretion of the Board of Directors of United Leisure and will depend upon,
among other things, our earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions in respect to the payment of
dividends and other factors that our Board of Directors deems relevant.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Introduction

Through our subsidiary, United Internet Technologies, Inc. ("UIT"), we are
engaged in the business of developing technologies that allow a wide range of
electronic devices, such as smart toys, medical devices, household and business
appliances, and consumer electronics, to communicate and be controlled locally,
when connected to a computer, or over the Internet and over other digital
systems, such as cable, television and wireless networks. We have developed
several proprietary technologies: (1) Intelligent Control Interactive Technology
TM ("I-C-IT/TM/") ("software"), (2) Digitally Integrated Video Overlay /TM/
("Divo/TM/") ("software"), and (3) Fiber Optic based bar code scanning
technology. We also have acquired technology from Andy Rifkin's company, JED
Development / Gorilla that enables our smart toys to be completely wireless from
the computer.

During the period ended December 31, 2001, we spent most of our time and
resources in developing and creating working, price competitive prototypes of
products utilizing our newer technologies. Toward the end of 2001 we concluded
building prototypes of its products and prepared supporting material to market
the technology to potential strategic partners. It is the hopes that we will be
able to generate revenues from the sale or licensing of its products and
proprietary technologies.

We focused our resources primarily integrating our technologies to the smart toy
business sector.

Critical Accounting Policies and Estimates

                                                                              11
<PAGE>

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to the useful life of the assets, reserve for discontinued operations
and reserve for litigation settlement. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in preparation of our consolidated
financial statements.

Revenue Recognition

Revenue is recognized upon delivery of the Technology. For arrangements to
deliver the Technology requiring significant modification or customization,
revenue is recognized on the percentage-of-completion method.

Earnings Per Share

Basic Earning Per Share (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 the denominator is
increased to include the number of additional common shares outstanding if the
dilutive potential common shares (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 would have an
antidilutive effect on EPS.

Results of Operations

Fiscal Year Ended December 31, 2001 Compared to Fiscal Year Ended December 31,
2000

Net Revenues. For the fiscal year ended December 31, 2001, we had revenues of
$22,779 compared to revenues of $712,942 for the fiscal year ended December 31,
2000, a decrease of $690,163 or approximately 97%. The revenues were greater in
fiscal 2000 primarily from revenues generated by licensing agreements in
connection with interactive CD-ROMs created for Teen People Magazine and
Nordstrom stores. In 2001 the company shifted it's focus to developing it's I-C-
IT toy technology and did not market the CD-ROM technology as aggressively as it
had in the prior year.

Operating Expenses. Total costs and expenses decreased to $5,428,139 for the
fiscal year ended December 31, 2001 from $ 14,438,430 for the fiscal year ended
December 31, 2000, a decrease of $ 9,010,291 or approximately 62%. The decrease
is composed of several components including a decrease in personnel, consultant
fees, legal, non-cash compensation associated with the issuance of options and
overhead.

Selling, general and administrative expenses were $1,522,873 for the year ended
December 31, 2001 compared to $1,616,832 for the year ended December 31, 2000, a
decrease of $ 93,959 or approximately 6%. Non-cash compensation from option
grants decreased by $6,147,921 from $6,102,943 to $(44,978) or approximately
101%. Depreciation and amortization for the year ended December 31, 2001 was
$202,646 compared to $122,316 for the year ended December 31, 2000, an increase
of $80,330 or approximately 66%.

For the year ended December 31, 2001, we had a net loss of $5,461,800, including
loss from discontinued operations of $465,000 or $(0.27) per share, compared
with a net loss of $13,414,554 or $(0. 68) per share for the year ended December
31, 2000. The net loss for the year ended December 31, 2001 is primarily
attributable to a decrease in direct operating expenses and stock compensation.

Discontinued Operations Fiscal Year Ended December 31, 2001 Compared to Fiscal
Year Ended December 31, 2000. Net Revenues associated with discontinued
operations. For the fiscal year ended December 31, 2001, we had revenues from
discontinued operations of $465,848 compared to revenues of $957,617 for the
fiscal year ended December 31, 2000, a decrease of $491,799 or approximately
_51_%. The decrease in revenues for fiscal 2001 compared to fiscal 2000 is
primarily due to the closing of the Planet Kids facilities.

                                                                              12
<PAGE>

Operating Expenses associated with discontinued operations. Total costs and
expenses associated with discontinued operations decreased to $1,167,390 for the
fiscal year ended December 31, 2001 from $1,343,825 for the fiscal year ended
December 31, 2000, a decrease of $176,435or approximately 13%. The decrease is
mainly due to decreased headcount and salaries due to the closing of our Planet
Kids facilities. Selling, general and administrative expenses were $37,924 for
the year ended December 31, 2001 compared to $53,202 for the year ended December
31, 2000, a decrease of $15,278or approximately 29%. Depreciation and
amortization for the year ended December 31, 2001 was $2,505compared to $4,505
for the year ended December 31, 2000, a decrease of $2,000 or approximately 44%.

Fiscal Year Ended December 31, 2000 Compared to Fiscal Year Ended December 31,
1999

Net Revenues. For the fiscal year ended December 31, 2000, we had revenues of
$712,942 compared to revenues of $240,000 for the fiscal year ended December 31,
1999, an increase of $472,942 or approximately 197%. The increase in revenues
for fiscal 2000 compared to fiscal 1999 increase resulted primarily from
revenues generated by licensing agreements in connection with interactive CD-
ROMs created for Teen People Magazine and Nordstrom stores.

Operating Expenses. Total costs and expenses increased to $14,438,430 for the
fiscal year ended December 31, 2000 from $3,009,529 for the fiscal year ended
December 31, 1999, an increase of $11,428,901 or approximately 380%. The
increase is composed of several components including increases in personnel,
consultant fees, legal, non-cash compensation associated with the issuance of
options and additional overhead . These increases in operating expenses were
primarily related to the development of UIT's technologies and prototypes of
devices embedded with UIT's technologies, as well as business activities to
promote our technologies.

Selling, general and administrative expenses were $1,616,832 for the year ended
December 31, 2000 compared to $1,127,255 for the year ended December 31, 1999,
an increase of $489,577 or approximately 43%. Non-cash compensation from option
grants increased by $5,796,443 from $306,500 to $6,102,943 or approximately
1891%. Depreciation and amortization for the year ended December 31, 2000 was
$122,316 compared to $28,035 for the year ended December 31, 1999, an increase
of $94,281 or approximately 336%.

For the year ended December 31, 2000, we had a net loss of $13,414,554 including
loss from discontinued operations of $743,915, or $(0. 68) per share, compared
with a net loss of $4,118,914 or $(0.27) per share for the year ended December
31, 1999. The net loss for the year ended December 31, 2000 is primarily
attributable to an increase in expenses in connection with our Internet
technology business.

Discontinued Operations Fiscal Year Ended December 31, 2000 Compared to Fiscal
Year Ended December 31, 1999

Net Revenues associated with discontinued operations. For the fiscal year ended
December 31, 2000, we had revenues from discontinued operations of $957,617
compared to revenues of $1,145,679 for the fiscal year ended December 31, 1999,
a decrease of $188,062 or approximately 16%. The decrease in revenues for fiscal
2000 compared to fiscal 1999 is primarily due to the closing of one of the
Planet Kids facilities and restructuring the operations of the remaining
facilities.

Operating Expenses associated with discontinued operations. Total costs and
expenses associated with discontinued operations decreased to $ 1,343,825 for
the fiscal year ended December 31, 2000 from $ 1,539,997 for the fiscal year
ended December 31, 1999, a decrease of $ 196,172 or approximately 13%. The
decrease is mainly due to decreased headcount and salaries due to the scaling
back of operations at our Planet Kids facilities. Selling, general and
administrative expenses were $53,202 for the year ended December 31, 2000
compared to $ 64,400 for the year ended December 31, 1999, a decrease of $
11,198 or approximately 17%. Depreciation and amortization for the year ended
December 31, 2000 was $4,505 compared to $99,984 for the year ended December 31,
1999, a decrease of $95,479 or approximately 95%.

Liquidity and Capital Resources

We have experienced operating losses in recent years. For the year ended
December 31, 2001 we had cash and cash equivalents of $1,645,450 and an
accumulated deficit of $43,496,746.

     Our future capital requirements will depend on various factors including:

     1. The length of time that it takes us to restructure and dispose of our
        remaining children's recreational facilities and the manner of
        disposition.
     2. The length of time it takes us to get products to the market that
        generate revenues.
     3. The need to hire additional marketing staff and technical support staff.

                                                                              13
<PAGE>

We have significantly curtailed all activities that are not directly related to
the development and promotion of our core technology business. The result of
this management refocus is a substantially reduced expenditure levels budgeted
for the year 2002. We have budgeted minimum amounts for the purchase of needed
assets and reduced capital expenditures.

If we are unable to raise additional funds, when needed, through the private
placement of our securities, we may seek financing from affiliated or
unaffiliated third parties. Such financing, however, may not be available when
and if it is needed, or if available, it may not be available on acceptable
terms. If we are unable to sell our securities or obtain sufficient financing to
meet our working capital needs and to repay indebtedness as it becomes due, we
may have to consider such alternatives as selling or pledging portions of our
assets, among other possibilities, in order to meet such obligations.

We intend to stop further development of our technologies. The company is
transitioning from an R&D model with expensive technology staffing to a
technology marketing company. Our primary objective over the next year will be
to market the technologies that we developed and refined during the previous
years. This may require additional financing from either public or private
sources. To accomplish this, we may raise additional capital by borrowing money
or through a public or private sale of debt or equity securities. We may not be
able to acquire additional financing on favorable terms, or at all.

At December 31, 2001, minimum annual rentals under non-cancelable leases are as
follows:

                 Year Ending December 31               Leases
                 ---------------------------------------------

                 2002                               $ 180,659
                 2003                                  73,374
                 2004                                  58,238
                 2005                                   9,784
                 ---------------------------------------------
                 Total                              $ 322,055


Factors That Could Impact Future Results

We Have a History of Losses and May Not Be Profitable In the Future.

We have sustained operating losses for the last several years from our
traditional business of children's recreational activities. For the year ended
December 31, 2001, we had a net loss of $5,461,800 and an accumulated deficit of
$43,496,746. In addition, we have significant working capital and research and
development requirements and these needs are expected to continue to be
significant.

Our Business May Lack Sufficient Diversification and May Affect Our Ability to
Spread the Risk of Any Downturn in the Technology Sector.

Our primary business in 2001 was Research and Development of our hardware and
software. These activities are conducted through our wholly owned subsidiary,
United Internet Technologies, Inc. (UIT). Our interactive technology business
has been our primary business focus since 1998 and our operations from that
business are limited in scope and duration. In October 2000, our Board of
Directors decided to discontinue our other businesses of (i) children's
recreational activities and (ii) making investments in affiliated companies. We
intend to dispose of our remaining children's recreational facilities.
Therefore, our business is not sufficiently diversified to spread the risk of
any downturn in the growth of the Internet or in the development and licensing
of our interactive Internet technology.

Our Prospects in the Technology Sector Are Difficult to Forecast Because of
Limited Operating History in our Technology Business.

Our technology subsidiary, UIT, was formed to develop and market our proprietary
interactive Internet technology and related products. So far, UIT's operations
have been limited to developing, marketing and licensing a small number of
applications of our technology. Our success in 2002 depends upon licensing, or
selling the technologies developed. If our technologies are not successfully
licensed or sold, it would seriously harm our business, results of operations
and financial condition.

Future Revenues Are Uncertain.

                                                                              14
<PAGE>

We cannot forecast revenues from our technology business accurately. This is
because of the limited operating history of our technology business and the
rapidly developing nature of the Technology market. The market for our
technology is uncertain.

We Will Need Additional Financing

Through UIT, we intend to enter into additional license agreements for our
technology. We expect that these license agreements will generate revenue for
UIT. However, it is not known whether we will be successful in entering into
additional license agreements. If license agreements and other arrangements do
not generate enough revenue, we will need to raise money. Selling our stock,
stock of UIT, or other securities in public or private offerings would probably
do this. It is not known whether we would be successful in raising additional
money in the future.

Depending upon how much money we raise, UIT may have more or less ability to
expand the sale or licensing of our technology business rapidly. If we are
unable to generate revenue from our business operations or raise additional
funds when needed or on favorable terms, UIT may not be able to continue
developing our technology business. That would seriously harm our business,
results of operations and financial condition.

Future Strategic Alliances Involve Risk for Us.

To be successful, we will need to enter into strategic alliances and license
agreements with companies in the media, entertainment and Technology sectors.
However, we do not know if we will be able to enter into any such agreements or
if any agreements entered into will be favorable to us. If additional agreements
are not entered into, the cost of introducing new applications of our technology
in the marketplace may be prohibitive under our current business plan and
capitalization.

Unanticipated Technological Problems May Affect Our Ability to Meet Our Release
and Delivery Schedules and Adversely Affect our Overall Financial Condition.

All of our products undergo thorough quality assurance testing prior to release.
But, we cannot anticipate all of the technological and other issues that may
arise in connection with our future product development. We may be unable to
meet delivery commitments if technological or other development issues arise in
connection with our continued product development and enhancement. Our
reputation may suffer if we fail to meet our release and delivery schedules or
if our products upon release do not perform as expected. We cannot assure you
that we will be able to fix any new problems that arise in a timely or cost
effective manner, or at all. If unexpected problems continue to arise, and we
are unable to resolve them timely or at all, we may be unable meet our release
and delivery schedules, our reputation may suffer, it may become more difficult
forming strategic alliances with distribution and other partners, and our
results of operations and financial condition could be materially and adversely
affected.

Our Technology May Not Be Commercially Accepted, Which Will Adversely Affect Our
Revenues and Profitability.

Our ability to enter into the online entertainment and smart toy sectors, as
well as the healthcare and medical monitoring device sectors, establish brand
recognition, and compete effectively depend upon many factors, including broad
commercial acceptance of products embedded with our technology. The commercial
success of products embedded with our technology depends upon the quality and
acceptance of other competing products and technologies, capabilities of our
competitors to provide more widely accepted products and technologies, our
ability to secure licensing agreements with third parties, general economic
conditions and other tangible and intangible factors, all of which can change
and cannot be predicted with certainty. We cannot assure that new products
embedded with our technology will achieve significant market acceptance or will
generate significant revenue. If we are unable to license our technology to
third parties or the marketplace does not broadly accept our products embedded
with our technology, our results of operations and financial condition could be
materially and adversely affected.

Our Growth and Operating Results Will Be Impaired if the Internet and Online
Commerce Industries Do Not Continue to Grow.

Our ability to earn revenue from our Internet products depends in part upon
increased acceptance of the Internet as a medium for "e-commerce" by consumers.
The Internet may not develop into a viable commercial marketplace as quickly as
some industry estimates suggest. E-commerce on the Internet may not develop to
the extent anticipated. Rapid growth and interest in the Internet and other
online services is a recent development. We do not know if the use of the
Internet for e-commerce will continue to develop or that a large enough number
of consumers will use the Internet and other online services for e-commerce.
Because global commerce on the Internet is still new and evolving, we cannot
predict the extent to which the Internet will be a viable commercial
marketplace. In addition, there are several factors that could have an impact on
the growth of e-commerce. These include:

                                                                              15
<PAGE>

.. security
.. reliability of service
.. cost of Internet access
.. how easy it is to use the Internet or e-commerce features on the Internet
.. how easy it is to gain access to the Internet
.. quality of service
.. delays in developing new standards and protocols to handle increased Internet
  traffic
.. increased governmental regulation

Slow growth of e-commerce on the Internet for these or any other reasons could
have a material adverse effect on our business, results of operations and
financial condition.

We depend upon Web browsers, Internet Service Providers and Online Service
Providers to allow Internet users to access UIT's own Web sites and Web sites of
UIT's licensees. From time to time, users may experience difficulties accessing
or using Web sites due to system failures or delays, which are not related to
UIT's systems. These difficulties may negatively affect audio and video quality
or result in interruption of video delivery. Any significant delays or failure
of service could reduce the attractiveness of our technology and applications to
our licensees, users, advertisers and content providers. Any of these events
could seriously harm our business, results of operations and financial
condition.

Our Technology Business Faces Security Risks.

Even though we employ security measures, UIT's Web sites and the Web sites of
UIT's licensees may be vulnerable to unauthorized access, computer viruses,
Trojan horses, worms and other disruptions. A party who is able to circumvent
security measures could misappropriate proprietary information or cause
interruptions in UIT's or its licensees' Internet operations. Internet Service
Providers and Online Service Providers have experienced, and may in the future
experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, their own current and former employees or
others. We may be required to spend significant capital or other resources to
protect against the threat of security breaches or to solve problems caused by
these sorts of security breaches. Although UIT intends to continue to implement
industry-standard security measures, we do not know if the measures implemented
by UIT will be circumvented in the future. Eliminating computer viruses, Trojan
horses and worms and solving other security problems may require interruptions
or delays in service to users who access UIT's or its licensees' Web sites. Any
of these things could seriously harm our business, results of operations and
financial condition.

We Are Subject to Intense Competition.

There is significant competition in the evolving market for video delivery on
the Internet. Our primary competitors and we have each approached Internet video
delivery using different technologies. Many of our competitors have
substantially greater financial, marketing, personnel and other resources than
we have. Our management believes that the barriers to enter this market are
relatively high and there is significant lead-time required to market a
competitive Internet video delivery technology.

There is significant competition for content development and broadcasting on the
Internet. The largest competitors in the content development and broadcast area
are Broadcast.com, Inc. and RealNetworks, Inc. These, and many other competitors
in the content development and broadcast area, have substantially greater assets
then we do. We expect competition in this area to remain strong and to increase
further.

Failure to Adapt to Technological Change Could Adversely Affect Our Earnings.

The Internet, computer hardware and software markets, and the field of e-
commerce, all are undergoing rapid technological changes. Newer technologies,
techniques or products could be developed which might perform functions similar
to our technology and which operate as efficiently and easily, or which solve
the problem of long download times for multimedia files in other ways. For
example, a new technological advance that allows faster downloading of
information from computer networks, or the development of entirely new methods
of data transmission, could seriously harm our business, results of operations
and financial condition.

It is probable that existing broadband technology will eventually develop to
allow streaming video to provide television-quality video in direct competition
with our technology, as well as with other alternative video delivery systems.
While some industry estimates project that such developments may not occur for
the next six to eight years, we do not know if these technological developments
will occur sooner. In any event, over time we will need to respond to
technological innovation in a rapidly changing industry.

                                                                              16
<PAGE>

Burdensome Government Regulation and Legal Uncertainties Could Impair Our
Results of Operations.

It is likely that new laws and regulations will be adopted in the United States
and elsewhere covering a wide range of Internet-related issues. This could
include broadcast license fees, music licensing, copyrights, privacy, pricing,
sales taxes, and characteristics and quality of Internet services. It is also
possible that laws could be passed that may apply to us in the areas of content,
network security, encryption, privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and re-
transmission activities. If restrictive laws or regulations are adopted, it
could slow Internet growth. If certain laws or regulations apply to us and the
type of technology business or service we provide, it could expose us to
significant liabilities associated with the content on UIT's Web sites, and
possibly for the content on the Web sites of UIT's licensees. We do not know if
laws will be adopted that apply to our business on the Internet. If such laws
and regulations are adopted, we do not know if they will affect our business.
Any new legislation or regulation or enforcement of existing laws and
regulations could limit the growth of the Internet, increase our cost of doing
business or increase our legal exposure.

There are also uncertainties about how existing laws in other areas apply to the
Internet. Some of these laws deal with such issues as property ownership, libel,
taxation, defamation and personal privacy. The majority of these laws were
adopted before the widespread use of the Internet. Therefore, they do not
address the unique issues of the Internet and related technologies. There are
very few cases about the interpretation of these types of law on Internet use.
If such laws apply to the Internet, it could limit growth of the Internet and
could seriously harm our business, results of operations and financial
condition.

Congress enacted the Communications Decency Act in 1996. The U.S. Supreme Court
ruled that certain sections of that Act which would have imposed criminal
penalties on anyone distributing "indecent" material to minors over the Internet
were unconstitutional. We do not know if similar laws will be adopted and
upheld. Even though we do not currently distribute the types of materials on the
Internet that the Act may have considered illegal, we do not know how any future
laws or regulations regarding decency might be interpreted. In addition to the
potential for liability, these types of laws could also damage the growth of the
Internet generally, which would have the effect of decreasing the demand for our
technology and its applications. Any of these developments could seriously harm
our business, results of operations and financial condition. So far, we have not
required our licensees to indemnify us for this type of liability and we do not
have insurance for this type of liability.

If we are considered to be a distributor of Internet content, we face potential
liability for negligence, copyright, patent, trademark, defamation, indecency
and other claims. These types of lawsuits have been brought against Internet
content distributors. In addition, we could be liable for the broadcast content,
or unauthorized duplication of broadcast content. So far, we have not required
our licensees to indemnify us for this type of liability. Any liability that is
not covered by insurance or an indemnification by a licensee could seriously
harm our business, results of operations and financial condition. At present, we
do not have insurance for this type of liability.

Patent Protection

Our Technology Business Relies on the Enforcement of Our Intellectual Property
Rights.

We have been issued or approved for issuance on the following patents.

1. The DIVO technology (issued)
2. The Medical Monitoring Technology (issued)
3. The I-C-IT Technology (approved and issue fee paid)

The Company believes that this is a very positive indication of the efforts,
which the Company has made to protect its Intellectual Property rights, and the
fact that such efforts have been highly successful.

With respect to the six applications remaining, we are still waiting for Office
Actions for all but one of these cases. However, given that they, for the most
part, depend upon the core technology of the company, the Company believes that
most, if not all, of the presently pending applications will support claims,
which will be allowed to proceed to issuance.

Our copyrights, trademarks, trade secrets and other intellectual property rights
are critical to our success. We rely on copyright and trademark laws, trade
secret protection, and confidentiality and non-disclosure agreements with our
employees and third parties to protect our proprietary rights. We do not know if
these steps will be adequate. We do not know if we will be able to obtain
trademark registrations for our marks in the United States or other countries.
We do not know if third parties will infringe upon or misappropriate our
copyrights, trademarks, service marks and other intellectual proprietary rights.
None of our marks or rights are registered at present. In addition, meaningful
copyright and trademark

                                                                              17
<PAGE>

protection may be unenforceable or limited in certain countries. In the future,
it is possible that we would have to sue to protect our copyrights, trademarks,
trade secrets and other intellectual property rights. We cannot give any
assurance as to our ability to enforce our rights or the outcome of any suits to
protect those rights.

UIT generally enters into nondisclosure agreements with its employees and
consultants. UIT also limits access to and distribution of its software,
sensitive documents and other proprietary information. We do not know if the
steps taken by UIT to prevent misappropriation of its proprietary information
will be successful. If these agreements are breached we do not know if we will
have adequate remedies available, or if the agreements themselves would be
enforceable. Even with the precautions taken by UIT, it might be possible for a
third party to copy, obtain and use, our proprietary information without
authorization. It is also possible that our trade secrets will be independently
developed by competitors.

We Depend on Certain Personnel

An important part of our performance depends upon the services of our senior
management, certain other key personnel, and technical and business consultants.
The loss of their services could have a material adverse effect on our business,
results of operations and financial condition.

Sales of Additional Shares of Our Common Stock Into the Public Market May Cause
Our Stock Price to Fall and Dilute Our Stockholders' Interests.

If we raise additional funds by selling common stock or other equity securities,
the interests of current stockholders would be diluted. We may also issue common
stock, options or warrants to purchase our common stock to provide incentives to
officers, employees, consultants, advisors and other people who perform services
for us. Stock, which is issued when options and warrants are exercised, will
dilute our present stockholders' ownership percentage in our Company.

Control of Our Company by Certain Stockholders

Brian Shuster - Chairman of the Board, President, and Chief Executive Officer of
our Company - and certain of his relatives are principal stockholders of our
Company. Harry Shuster, the father of Brian Shuster, owns 25.28% of our common
stock, including options exercisable within 60 days, and Brian Shuster owns
4.99%of our common stock, including options exercisable within 60 days.
Therefore, Brian Shuster and members of his family have the ability to control
the outcome of Company actions requiring the approval of our stockholders. These
matters include:

.. election of directors
.. mergers, sales of all or most of our assets; or
.. other change of control of our Company.

We Have Never Paid Dividends on our Common Stock.

We have not paid dividends on our common stock in the past and we do not expect
to declare dividends on our common stock in the foreseeable future. We intend to
continue to retain earnings for use in the operation and expansion of our
business. Dividend policy in the future is at the discretion of our Board of
Directors and will depend upon our financial condition, results of operations,
capital requirements and other factors that the Board of Directors considers
relevant. We are not a party to any agreement restricting the payment of
dividends.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplemental data required by this Item 7 appear in
a separate section of this Form 10-KSB following Part III.

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

None

PART III

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

Directors and Executive Officers

                                                                              18
<PAGE>

Set forth in the table below is the names, ages and positions of the current
directors and executive officers of United Leisure. Ages are shown as of
December 31, 2001. Directors hold office until the next annual meeting of
stockholders and until their successors are elected and qualified. Executive
officers are elected by and serve at the discretion of the United Leisure Board.
None of the executive officers has any family relationship to any director or
any other executive officer of United Leisure, except that Brian Shuster is both
an executive officer and director.

                                                                              19
<PAGE>

<TABLE>
<CAPTION>
                                                 Positions Currently Held
Name                                Age            With United Leisure                  Director Since
-----                               ---          ------------------------               --------------
<S>                                <C>     <C>                                          <C>
Brian Shuster                       43     Chief Executive Officer, President,                    1996
                                           Chairman of the Board and Director
J. Brooke Johnston, Jr.             61     Director                                               1996
Victor A. Hollander                 69     Director                                               2001
Gerald M. Chizever                  58     Director                                               2001
</TABLE>

Set forth below is a brief description of the business experience for the
previous five years of all current directors and executive officers of United
Leisure.

Brian Shuster has served as a director of United Leisure since May 1996 and as
Chief Executive Officer and President of United Leisure since May 1999. Brian
Shuster is also chairman, chief executive officer and president of UIT. From
March 1997 to May 1999, he also served as Executive Vice President of United
Leisure. From 1993 through 1995, Mr. Shuster served as President of Beverly
Hills Producers Group, an independent motion picture production company.

J. Brooke Johnston, Jr. has served as a director of United Leisure since May
1996. Since 1998, Mr. Johnston has been a partner of the law firm of Baker,
Johnston & Wilson, LLP, in Birmingham, Alabama. He was Senior Vice President and
General Counsel for Med Partners, Birmingham, Alabama from April 1996 until July
1998. 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 19 years. Mr. Johnston is
also a director of Grand Havana Enterprises, Inc., a publicly held company that
owns and operates cigar clubs in Beverly Hills and New York City.

Victor A. Hollander has served as a director of United Leisure since February
2001. He was licensed to practice public accounting in California as a certified
public accountant in 1958. In 1965 he established and was partner in charge of
the Los Angeles office of a large New York certified public accounting firm
where he specialized in audit and securities matters. In 1978 he formed the
accounting firm of Hollander, Gilbert & Co., the predecessor to Hollander, Lumer
& Co. LLP and in February 2001 he merged his firm with the Los Angeles
accounting firm Good Swartz Brown & Berns, LLP where he manages the firms
Securities Group.

Gerald M. Chizever has served as a director of the Company since February 2001.
Mr. Chizever presently is, and has been since 1990, a partner of the law firm of
Richman, Mann, Chizever, Phillips & Duboff in Beverly Hills, California. Mr.
Chizever's primary area of practice is corporate and business law.

Significant Employees

The following individual is a significant employee of our subsidiary, United
Internet Technologies:


Andy Rifkin has served as Chief Technology Officer of UIT since December 2000.
Andy Rifkin oversees the development and commercialization of UIT's interactive
technologies. The development of the companies technologies have been completed
and January of 2002 Mr. Rifkin began his severance package, the company will now
focus on marketing these technologies. Mr. Rifkin will continue to earn
royalties based on certain technologies acquired by the company that were
developed by Mr. Rifkin and one of his companies.


Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our 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 ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
beneficial owners of more than 10% of our Common Stock are required by SEC
regulations to furnish us with copies of all Section 16(a) forms that they file.
Based solely on review of the copies of such forms furnished to us, or written
representations that no reports on Form 5 were required, we believe that for the
period through December 31, 2000, all officers, directors and greater-than-10%
beneficial owners complied with all Section 16(a) filing requirements applicable
to them.

                                                                              20
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

The following table sets forth all compensation received for services rendered
to United Leisure in all capacities for the three fiscal years ended December
31, 2001 by our Chief Executive Officer during fiscal 2001 and the most highly
compensated executive officers at the end of fiscal 2001.

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                            Annual
                                                         Compensation                Long Term Compensation
                                                         ------------                ----------------------
Name and Principal Positions                           Year      Salary          Securities and Underlying Options
----------------------------                           ----      ------          ---------------------------------
<S>                                                    <C>       <C>             <C>
Brian Shuster (1)
       Chairman of the Board                            2001     $290,400
       President, Chief Executive Officer
                                                        2000     $263,660        1,750,000 (2)

                                                        1999     $240,000          300,000

Rifkin                                                  2001     $311,400 (3)      300,000 (4)
        Chief Technology Officer, UIT
</TABLE>

(1) Effective May 24, 1999, Brian Shuster was appointed to serve as Chairman of
the Board, Chief Executive Officer, President and Chief Financial Officer.
(2) Consists of UIT Options.
(3) We acquire certain technology from Andy Rifkin and his associated companies
Jed Development/Gorilla in the amount of $115,000 and relocation expenses of
$65,720.
(4) Consists of UIT options.


Commencing January 2002, the Directors will receive $1,000 per month cash
compensation for their services to the Company as directors, and are reimbursed
for expenses actually incurred in connection with attending meetings of the
Board of Directors. Directors receive periodic stock option grants.

Stock Option Grants
No stock options were granted to Executive Officers during the fiscal year ended
December 31, 2001.


This table shows information regarding unexercised options held by our Named
Executive Officers. No options were exercised by Executive Officers during the
fiscal year ended December 31, 2001.


                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                  Number of Unexercised Options at            Value of Unexercised In The Money Options at
                                         December 31, 2001                                December 31, 2001 (1)

Name                            Exercisable             Unexercisable              Exercisable              Unexercisable
                                -----------             -------------              -----------              -------------
<S>                             <C>                     <C>                        <C>                      <C>
Brian Shuster                   2,400,000 (2)           ---                        $3,000 (4)               ---

Andy Rifkin                     300,000 (3)             ---                        $0.00                    ---
</TABLE>

                                                                              21
<PAGE>

(1) Represents the difference between the market price of our common stock and
the respective exercise prices of the options at December 31, 2000. Actual
values which may be realized, if any, upon any exercise of these options will be
based on the market price of our common stock at the time of any exercise and
are therefore dependent upon future performance of our common stock.

(2) Includes 1,750,000 UIT options.

(3) Consists of 300,000 UIT options.

(4) Based on the assumption that UIT options can be converted on a one to one
basis to United Leisure options.

Consulting and Employment Agreements

United Internet Technologies and Brian Shuster are parties to five-year
employment agreement dated as of January 1, 1999, which was amended in Feb 2001.
Under this employment agreement, Mr. Shuster is employed as the President of
United Internet Technologies at an initial base salary of $240,000 per year The
Executive shall be entitled to an increase in Base Salary of 10% per annum,
effective on January 1 of each year of the term of this Agreement Mr. Shuster
was paid $263,660 in 2000 and $290,400 in 2001 pursuant to this agreement. The
employment agreement also provides that any inventions developed by Mr. Shuster
during his employment by United Internet Technologies that relate to the
business of United Internet Technologies, will remain United Internet
Technologies' property. The employment agreement also contains a confidentiality
provision. Mr. Shuster is permitted to engage in outside business activities to
the extent that these obligations do not interfere with his duties to United
Internet Technologies.

Prior to becoming President and Chief Executive Officer of our Company in May
1999, Brian Shuster provided certain consulting services to us and received
$6,000 per month in consulting fees. During 2001 Mr. Shuster's consulting fees
were increased by 10% and he received $6,600 per month.

Stock Options

On December 31, 2001, there were outstanding presently exercisable non-qualified
stock options to purchase a total of 2,800,000 shares of UIT and United Leisure
common stock held by our officers and director. Of this amount, 2,400,000 were
held by Brian Shuster, our Chairman of the Board, President and Chief Executive
Officer, 1,750,000 of which are options to purchase shares in UIT. The balance
was held by the current director and officer of our Company, at option prices
ranging from $.23 to $3.00 per share. See "Security Ownership of Certain
Beneficial Owners and Management." All non-qualified stock options that we have
issued to our directors and executive officers are in substantially the same
form. All options have a term ranging from five years to ten years from the date
of grant and are immediately exercisable as to all of the shares of our common
stock covered by the option. The option price is the fair market value of our
common stock as of the date of grant.

In addition to the non-qualified stock options held by our directors and
executive officers on December 31, 2001, there were outstanding non-qualified
options to purchase a total of 4,657,450 shares of United Leisure and UIT common
stock held by third parties. All of these non-qualified options are in
substantially the same form as those issued to our directors and executive
officers, except that generally they are not terminable until they expire. These
options have exercise prices ranging from $.23 to $6.71 and expire from December
31, 2002 through September 29, 2003.

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

The following table sets forth certain information regarding beneficial
ownership of United Leisure common stock as of December 31, 2001: (a) by each
person who is known by United Leisure to own beneficially more than 5% of its
common stock; (b) by each of United Leisure's directors; (c) by each of the
named executive officers; and (d) by all officers and directors of United
Leisure as a group.

                                                                              22
<PAGE>

<TABLE>
<CAPTION>
Name and Address                     Number of ULC        Percentage        Number of UIT       Percentage
                                        Shares            Ownership             Shares           Ownership
Of Beneficial Owner (1)              Beneficially        Of Class (3)        Beneficially        Of Class
                                     Owned (2) (3)                          Owned (2) (3)           (3)
-------------------------------    ------------------    -------------     -----------------    ------------
<S>                                <C>                   <C>               <C>                  <C>
Brian Shuster                      1,050,000 (4)         4.99%             1,750,000            5.11%
J. Brooke Johnston                 151,400 (5)           *                 0                    0
Victor A. Hollander                0                     0                 0                    0
Gerald M. Chizever                 25,000                *                 0                    0
Harry Shuster                      5,879,993 (6)         25.28%            0                    0
All officers and directors         1,242,600             5.87%             4,250,000            12.40%
   as a group ( 5 people)
</TABLE>
*1ess than 1%

   (1) Each person's address is c/o United Leisure, 1990 Westwood Boulevard, Los
Angeles, California 90025, unless otherwise noted.

   (2) Unless otherwise indicated, United Leisure believes that all persons
named in the table have sole voting and investment power with respect to the
shares of common stock beneficially owned by them.

   (3) A person is deemed to be the beneficial owner of Common stock that can be
acquired by such person within 60 days of the date hereof upon the exercise of
warrants or stock options. Except as otherwise specified, each beneficial
owner's percentage ownership is determined by assuming that warrants and stock
options that are held by such person (but not those held by any other person)
and that are exercisable within 60 days from the date hereof, have been
exercised. Figures include options in UIT and United Leisure.

   (4) Includes options to purchase 650,000 shares of United Leisure common
stock. Includes 80,000 shares held by Brian Shuster as trustee of each of
Bennett Shuster Trust, Bentley Shuster Trust and Blake Shuster Trust and 300
shares held by Nita Shuster and Brian Shuster.
   (5) Includes options to purchase 100,000 shares.
   (6) Includes 111,000 shares of common stock held by Koorn N.V., all of whose
capital stock is owned by Harry Shuster. Also includes 125,000 shares of common
stock held by the Harry and Nita Shuster Charitable Foundation and 300 shares
owned by Nita Shuster, the spouse of Harry Shuster. Does not include 10,000
shares owned by Bardene Shuster, 300 shares owned by Nita Shuster and Bardene
Anne Shuster, 300 shares owned by Nita Shuster and Brian Shuster, and 300 shares
owned by Nita Shuster and Stanley Shuster, of which Mr. Shuster disclaims
beneficial ownership. Also includes options to purchase 2,606,950 shares of our
common stock and 3,037,583 shares of our common stock owned directly by Harry
Shuster. Does not include an aggregate of 480,000 shares of our common stock
owned by trusts of which Harry Shuster's adult children are the beneficial
owners. Until May 24, 1999, Harry Shuster served as Chairman of the Board,
President, Chief Executive Officer and a director of United Leisure.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Transactions with Harry Shuster.

In January 2001 we entered into a termination of the consulting services
agreement with Mr. Harry Shuster The termination agreement effective November
2000, allowed us to buy out the consulting agreement of Mr. Shuster, which had a
remaining duration of five years at an annual consulting fee of approximately
$270,000. The terms of the agreement consisted of a one-time payment of $250,000
and the transfer of assets with a book value of $740,246 from United Leisure to
Harry Shuster. The assets consisted of a loan receivable of $686,790 and
accounts receivable of $53,456 owed to United Leisure by Grand Havana, an
affiliated company.

                                                                              23
<PAGE>

Lease of Office Premises.

On January 1, 1999, we entered into a five-year lease with 1990 Westwood
Boulevard, Inc. This agreement was amended on May 1, 1999 and covers
approximately 6,000 square feet of office space for our principal executive
offices. The lease provides for rent of $10,500 per month. 1990 Westwood
Boulevard, Inc. is presently owned more than 50 % by Harry Shuster, our former
Chairman of the Board, President, Chief Executive Officer, Chief Financial
Officer, and a principal stockholder of United Leisure. We believe that the rent
and other terms of the lease are no more favorable to the lessor than could have
been obtained in a similar building in the same area from an unrelated lessor.

Grand Havana's Common Stock.

As of December 31, 2001, we held 966,666 shares of Grand Havana's common stock.
The Chief Executive Officer of Grand Havana is Stanley Shuster, the brother of
Brian Shuster.

Advanced transaction with Andy Rifkin.

We acquired technology rights of certain products from Andy Rifkin, our Chief
Technology Officer. In accordance with the agreement, we are obligated to pay
the employee an advance royalty of $230,000 and 125,000 shares of United
Leisure's common stock, payable when certain licensing criteria have been meet,
and then a continuing royalty based upon the sale of any products using this
technology. As of December 31, 2001, $115,000 of this advance royalty has been
paid and is reflected in other assets in the accompanying balance sheet.

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

(a) Exhibits.

<TABLE>
<CAPTION>

EXHIBIT
NUMBER    DESCRIPTION
------    -----------
<S>       <C>
3.1       Restated Certificate of Incorporation of United Leisure (incorporated
          by reference to Exhibit 3.1 of United Leisure's Form SB-2 (File
          No. 33-81074 (the "SB-2")).

3.2       Bylaws of United Leisure (incorporated by reference to Exhibit 3.2 of
          the SB-2).

4.1       Warrant Agreement, dated November 18, 1994 between United Leisure and
          OTR, Inc. (incorporated by reference to Exhibit 4.1 of the SB-2).

4.2       Form of Warrant to Purchase Common Stock in connection with 12%
          Promissory Note unit private placement and Bankruptcy Court deposit
          (incorporated by reference to Exhibit 4.3 of the SB-2).

10.2      Stock Option Agreement dated October 7, 1988, between United Leisure
          and Harry Shuster as extended by Extension of Option Agreement, dated
          April 20, 1993 between United Leisure and Harry Shuster (incorporated
          by reference to Exhibit 10.12 of the SB-2).

10.3      Stock Option Agreement dated November 17, 1988, between United Leisure
          and Harry Shuster as extended by Extension of Option Agreement, dated
          April 20, 1993 between United Leisure and Harry Shuster (incorporated
          by reference to Exhibit 10.13 of the SB-2).

10.4      Stock Option Agreement dated December 5, 1988, between United Leisure
          and Harry Shuster as extended by Extension of Option Agreement, dated
          April 20, 1993 between United Leisure and Harry Shuster (incorporated
          by reference to Exhibit 10.14 of the SB-2).

10.5      Stock Option Agreement dated July 24, 1987, between United Leisure and
          Harry Shuster as extended by Extension of Option Agreement, dated
          April 20, 1993 between United Leisure and Harry Shuster (incorporated
          by reference to Exhibit 10.16 of the SB-2).

10.7      Form of Indemnity Agreement entered into by United Leisure with each
          of its directors (incorporated by reference to Exhibit 10.35 of the
          SB-2).

10.10     Lease dated June 29, 1995, between Magnolia Square and Planet Kids,
          Inc. and Addendum thereto (incorporated by reference to Exhibit 10.34
          of the 1995 10-KSB).
</TABLE>

                                                                              24
<PAGE>

<TABLE>
<S>       <C>
10.12     Option Agreement dated as of September 22, 1998, between United
          Leisure and Brian Shuster (incorporated by reference to Exhibit 10.45
          of the United Leisure's Quarterly Report on Form 10-QSB for the
          quarter ended September 30, 1998 (the "September 30, 1998 10-QSB")).

10.13     Option Agreement dated as of September 30, 1998, by and between United
          Leisure Brian Shuster (incorporated by reference to Exhibit 10.46 of
          the September 30, 1998 10-QSB).

10.14     Option Agreement dated as of January 4, 1999 between United Leisure
          and Brian Shuster (incorporated by reference to Exhibit 10.49 of
          United Leisure's Quarterly Report on Form 10-QSB for the period ended
          June 30, 1999 (the "June 30, 1999 10-QSB")).

10.15     Option Agreement dated as of January 4, 1999 between United Leisure
          and J. Brooke Johnston, Jr. (incorporated by reference to Exhibit
          10.51 of the June 30, 1999 10-QSB).

10.16     Option Agreement dated as of February 1, 1999, between United Leisure
          and Brian Shuster (incorporated by reference to Exhibit 10.52 of the
          June 30, 1999 10-QSB).

10.17     Employment Agreement dated as of January 1, 1999 between United
          Leisure and Brian Shuster, as amended February 2001, United Internet
          Technologies, Inc. and Brian Shuster (incorporated by reference to
          Exhibit 10.53 of the June 30, 1999 10-QSB).

10.18     Agreement dated as of July 21, 1999 between United Leisure and Media
          Group, Inc. (incorporated by reference to Exhibit 10.55 of the June
          30, 1999 10-QSB).

10.19     Purchase Agreement and Escrow Instructions dated as of June 10, 1999,
          between United Leisure and Shih Ching Chiang, as amended on August 7,
          1999 (incorporated by reference to Exhibit 10.1 of United Leisure's
          Current Report on Form 8-K dated August 23, 1999).

10.22     Letter Agreement dated November 19, 1999 between United Internet
          Technologies and Teen People Magazine (incorporated by reference to
          Exhibit 10.33 of the 1999 10-KSB).

10.23     Distribution Agreement dated February 2, 2000 between United Internet
          Technologies and Liquid Audio, Inc. (incorporated by reference to
          Exhibit 10.34 of the 1999 10-KSB).

10.24*    Termination Agreement and General Release dated January 31, 2001
          between United Leisure Corporation and Harry Shuster

10.25*    Option Agreement dated as of February 27, 2002 between United Leisure
          and Brian Shuster

10.26*    Option Agreement dated February 27, 2002 between United Leisure and
          J.Brooke Johnston

10.27*    Option Agreement dated February 27, 2002 between United Leisure and
          Victor A. Hollander

10.28*    Option Agreement dated February 27, 2002 between United Leisure and
          Gerald M. Chizever

21.1      Subsidiaries of United Leisure (incorporated by reference to Exhibit
          21.1 of the 1999 10-KSB)

23.1*     Consent of Ernst and Young, LLP

*         Filed herewith.

+         Management contract or compensatory plan required to be filed as an
          exhibit pursuant to applicable rules of the Securities and Exchange
          Commission.
</TABLE>

(b) Reports on Form 8-K.
------------------------

No reports on Form 8-K were filed by us during the quarter ended December 31,
2001.

                                                                              25
<PAGE>

SIGNATURES

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

UNITED LEISURE CORPORATION


By:/s/BRIAN SHUSTER
-------------------
Brian Shuster
President, Chief Executive Officer and Director

Date: March 29, 2002

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

<TABLE>
<CAPTION>

SIGNATURE                               TITLE
---------                               -----
<S>                                     <C>
/s/   BRIAN SHUSTER                     Chairman of the Board, President, Chief Executive Officer
-------------------
Brian Shuster                           and Chief Financial Officer

                                        (Chief Executive Officer; Principal Financial and Accounting
                                        Officer)



/s/   J. BROOKE JOHNSTON, JR.
-----------------------------

J. Brooke Johnston, Jr.                 Director


/s/   VICTOR A. HOLLANDER
-------------------------
Victor A. Hollander                     Director


/s/   GERALD M.CHIZEVER
-----------------------
Gerald M. Chizever                      Director
</TABLE>

                                      26
<PAGE>

                       Consolidated Financial Statements
                  United Leisure Corporation and Subsidiaries
                    Years ended December 31, 2001 and 2000
                      with Report of Independent Auditors



                                                                              27
<PAGE>

                  United Leisure Corporation and Subsidiaries
                       Consolidated Financial Statements
                    Years ended December 31, 2001 and 2000

                                   Contents
<TABLE>
<S>                                                                         <C>
Report of Independent Auditors.............................................. 29

Audited Consolidated Financial Statements

Consolidated Balance Sheets................................................. 30

Consolidated Statements of Operations and Comprehensive Income (Loss)....... 31

Consolidated Statements of Stockholders' Equity............................. 32

Consolidated Statements of Cash Flows....................................... 33

Notes to Consolidated Financial Statements.................................. 35
</TABLE>

                                                                             28
<PAGE>

                        Report of Independent Auditors


The Board of Directors and Stockholders
United Leisure Corporation

We have audited the accompanying consolidated balance sheets of United Leisure
Corporation and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for the years then ended. These
consolidated 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Leisure Corporation and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with auditing standards generally accepted in the United
States.

As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. Management's plans as to these matters are also described in
Note 1. The 2001 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.




                                                           /s/ ERNST & YOUNG LLP





February 15, 2002
Los Angeles, California


                                                                              29
<PAGE>

                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                        --------------------------------
                                                                            2001                2000
                                                                        ------------        ------------
<S>                                                                    <C>                  <C>
Assets
Current assets:
 Cash and cash equivalents                                              $  1,645,450        $  7,416,966
 Receivables                                                                  19,769              27,925
 Due from related parties                                                      5,995                  --
 Prepaid expense and other current assets                                    117,829             144,562
                                                                        ------------        ------------
 Total current assets                                                      1,789,043           7,589,453

Property and equipment - net                                                 731,611             987,521

Net assets of discontinued operations                                         38,540              98,880

Investment in Grand Havana at fair value - related party                       5,800             105,753

Other assets:
 Capitalized cost                                                            128,184                  --
 Deposits and other assets                                                    68,960              45,493

                                                                        ------------        ------------
Total                                                                   $  2,762,138        $  8,827,100
                                                                        ============        ============

Liabilities and stockholders' equity
Current liabilities:
 Accounts payable and accrued expenses                                  $    495,793        $    366,811
 Reserve for discontinued operations                                          84,885             300,000
 Reserve for litigation                                                       45,000                  --
 Due to related parties                                                           --             285,059
                                                                        ------------        ------------
 Total current liabilities                                                   625,678             951,870

Minority interest                                                              4,413             114,546

Stockholders' equity
 Preferred stock, $100 par value; authorized - 100,000 shares;
     issued and outstanding - none                                                --                  --
 Common stock, $0.01 par value; authorized - 30,000,000 shares;
      issued and outstanding, 20,511,375 shares in 2001 and
      20,363,222 shares in 2000                                              204,304             202,822
 Additional paid-in capital                                               45,514,075          45,525,722
 Accumulated deficit                                                     (43,496,746)        (38,034,946)
 Accumulated other comprehensive income (loss)                               (89,586)             67,086
                                                                        ------------        ------------
 Total stockholders' equity                                                2,132,047           7,760,684

                                                                        ------------        ------------
 Total                                                                  $  2,762,138        $  8,827,100
                                                                        ============        ============
</TABLE>

 See accompanying notes.

                                                                              30
<PAGE>

                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                            2001            2000
                                                            ----            ----
<S>                                                    <C>             <C>
Revenue - licensing fees                               $     22,779    $    712,942

Cost and expenses:
 Direct operating expense                                 3,747,598       6,596,339
 Selling, general and administrative                      1,522,873       1,616,832
 Stock compensation                                         (44,978)      6,102,943
 Depreciation and amortization                              202,646         122,316
                                                       ------------    ------------
                                                          5,428,139      14,438,430
                                                       ------------    ------------
Other income (loss):
 Interest income                                            172,020         501,751
 Interest expense                                            (3,721)        (71,930)
 Gain on sale of Genisys                                         --         600,000
 Realized loss from write-down of investment in
    HEP II                                                       --        (100,000)
 Other, net                                                 129,881          17,189
 Minority interest in loss                                  110,380         107,839
                                                       ------------    ------------
 Total other income (loss)                                  408,560       1,054,849
                                                       ------------    ------------

Loss from continuing operations                          (4,996,800)    (12,670,639)
Loss from discontinued operations                          (465,000)       (743,915)
                                                       ------------    ------------

Net loss                                                 (5,461,800)    (13,414,554)
                                                       ------------    ------------

Other comprehensive loss:
 Unrealized holding gain (loss) on securities
    available for sale                                      (99,953)          4,253
 Foreign currency translation loss                          (56,719)             --
                                                       ------------    ------------

Comprehensive loss                                     $ (5,618,472)   $(13,410,301)
                                                       ------------    ------------

Weighted average number of common shares outstanding     20,437,156      19,583,516
Basic loss per share:
 Loss per share from continuing operations             $      (0.24)   $      (0.65)
 Loss per share from discontinuing operations                 (0.02)          (0.04)
 Total loss per share                                  $      (0.27)   $      (0.68)
</TABLE>

 See accompanying notes.

                                                                              31
<PAGE>

                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                Accumulated
                                           Common Stock           Additional                    Other
                                     Number of                    Paid-in        Accumulated    Comprehensive
                                      Shares          Amount      Capital        Deficit        Income (Loss)        Total
                                      ------          ------      -------        -------        -------------        -----
                                  -------------------------------------------------------------------------------------------
<S>                                <C>               <C>         <C>            <C>             <C>              <C>
Balance at December 31, 1999        16,230,868       $161,468    $26,892,688    $(24,620,392)     $  62,833      $  2,496,597
Sale of common stock                 2,240,000         22,400      5,577,600                                        5,600,000
Exercise of stock options              195,000          1,950         76,250                                           78,200
Exercise of warrants                 1,697,354         17,004      6,622,412                                        6,639,416
Fair value of options issued
  to non-employees                                                 6,102,943                                        6,102,943
Change in capital of subsidiary                                      253,829                                          253,829
Unrealized gain on investment                                                                         4,253             4,253
Net loss                                                                         (13,414,554)                     (13,414,554)
                                  -------------------------------------------------------------------------------------------
Balance at December 31, 2000        20,363,322        202,822     45,525,722     (38,034,946)        67,086         7,760,684
Exercise of stock options              148,153          1,482         33,331                                           34,813
Fair value of options issued
  to non-employees                                                   (44,978)                                         (44,978)
Unrealized loss on investment                                                                       (99,953)          (99,953)
Foreign currency translation
  loss                                                                                              (56,719)          (56,719)
Net loss                                                                          (5,461,800)                      (5,461,800)
                                  -------------------------------------------------------------------------------------------
Balance at December 31, 2001        20,511,375       $204,304    $45,514,075    $(43,496,746)     $ (89,586)     $  2,132,047
                                  -------------------------------------------------------------------------------------------
</TABLE>

   See accompanying notes.

                                                                              32
<PAGE>

                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                           Years ended December 31,
                                                      ----------------------------------
                                                          2001                  2000
                                                      ------------          ------------
<S>                                                   <C>                   <C>
Operating activities
Net loss                                              $ (5,461,800)         $(13,414,554)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Loss from discontinued operations                        465,000               743,915
  Depreciation and amortization                            202,646               122,316
  Loss on disposal of assets                               110,538                    --
  Gain on sale of investment in Genisys                         --              (600,000)
  Minority share of loss                                  (110,380)             (107,839)
  Settlement of consulting agreement                            --               845,403
  Fair value of options granted to non-employees           (44,978)            6,102,943
  Write-down of investment in HEP II                            --               100,000
  Other                                                         --                20,000
Changes in operating assets and liabilities:
  Receivables                                                8,156                59,772
  Receivables - related party                               (5,995)
  Deferred productions costs                                    --               115,027
  Prepaid expenses and other current assets                 26,733              (154,791)
  Deposits and other assets                                     --                14,920
  Accounts payable and accrued expenses                    128,982              (336,176)
  Reserve for litigation                                    45,000                    --
  Due to related parties                                        --               189,672
  Deposits and other liabilities                                --                    --
  Deferred revenues                                             --              (210,133)
                                                      ------------          ------------
Net cash used in continuing operations                  (4,636,098)           (6,509,525)
Net cash used in discontinued operations                  (619,775)             (465,721)
                                                      ------------          ------------
Net cash used in operating activities                   (5,255,873)           (6,975,246)
Investing activities
  Purchases of property and equipment                      (57,274)             (949,471)
  Increase in deposits and other assets                    (23,467)                   --
  Investment in capitalized costs                         (128,184)                   --
  Proceeds from sale of investment in Genisys                   --               600,000
  Loans receivable from Grand Havana                            --               (65,723)
  Advances to related party                               (285,059)               61,027
                                                      ------------          ------------
Net cash used in investing activities                     (493,984)             (354,167)
</TABLE>

                                                                              33
<PAGE>

                  UNITED LEISURE CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<S>                                                                         <C>                  <C>
Financing activities
  Sale of common stock                                                       $        --         $ 5,600,000
  Proceeds from minority shareholders                                                 --             476,639
  Common stock issued for warrants and options exercised                          34,813           6,717,616
                                                                             -----------         -----------
Net cash provided by financing activities                                         34,813          12,794,255
                                                                             -----------         -----------

Effect of currency rate changes                                                  (56,472)                 --

Net increase in cash and cash equivalents                                     (5,771,516)          5,464,842
Cash and cash equivalents at beginning of year                                 7,416,966           1,952,124
                                                                             -----------         -----------
Cash and cash equivalents at end of year                                     $ 1,645,450         $ 7,416,966
                                                                             ===========         ===========

Cash paid for:
  Interest                                                                   $     3,721         $    71,930
                                                                             -----------         -----------

Supplemental disclosures of non-cash investing and financing activities
  Fair value of options and warrants to non-employees                        $   (44,978)        $ 6,102,943
                                                                             -----------         -----------
</TABLE>

See accompanying notes.

                                                                              34
<PAGE>

                  United Leisure Corporation and Subsidiaries
                  Notes to Consolidated Financial Statements
                               December 31, 2001



1. Summary of Significant Accounting Policies

Description of Business

Through its subsidiary, United Internet Technologies, Inc. (UIT"), the Company
is engaged in the business of developing technologies that allow a wide range of
electronic devices, such as smart toys, medical devices, household and business
appliances and consumer electronics, to communicate and be controlled over the
Internet and over other digital systems, such as cable, television and wireless
networks. The Company has developed two proprietary technologies: (1)
Intelligent Control Interactive Technology ("I-C-It") ("software") and (2)
Digitally Integrated Video Overlay ("Divo") ("software"). These technologies
enable businesses to transition their traditional product liens into the
interactive world. The Company's objective is to create solutions for specific
business sectors by customizing our I-C-IT platform, allowing these technologies
to be embedded in a wide range of electronic devices.

Principles of Consolidation

The consolidated financial statements include the accounts of United Leisure
Corporation and its majority-owned subsidiaries. During 2000 the Company created
a subsidiary in Germany to license its technology in Europe. At December 31,
2001 the German subsidiary is 67% owned and has total assets of $50,369.
Intercompany transactions and balances have been eliminated.

Current Developments

The Company has experienced operating losses. For the year ended December 31,
2001 the Company had cash and cash equivalents of $1,645,450 and an accumulated
deficit of $43,496,746. To conserve its resources, the Company has significantly
curtailed all activities are not directly related to its core technology
business, reduced its staff to a minimum, and reduced capital expenditure. The
Company intends to stop further development of its technologies. The primary
objective over the next year will be to market the technologies that were
developed and refined during the previous years. This may require additional
financing. To accomplish this, the Company may raise additional funding by
borrowing money or through a public or private sale of debt or equity
securities. Such financing, however, may not be available when and if it is
needed, or if available, it may not be available on acceptable terms. If the
Company is unable to sell its securities or obtain sufficient financing to meet
its working capital needs and to repay indebtedness as it becomes due, the
Company may have to consider such alternatives as selling or pledging portions
of the assets, among other possibilities, in order to meet such obligations. If
the company doesn't continue as an ongoing concern the amounts shown in the
financial statements may not be realized at their stated value. The financial
statements have no adjustments recorded for such an event.

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.

                                                                              35
<PAGE>

Investments

The Company accounts for ownership investments in affiliates using the equity
method of accounting when the Company's voting control in the affiliate is
between 20% and 50%. Investments in companies owned less than 20%, are accounted
for at cost subject to annual impairment reviews, unless the ownership allows
for significant influence in which case the investments are accounted for by the
equity method. Investments in available for sale securities are carried at fair
value, with the unrealized gains and losses reported as a separate component of
stockholders' equity.

Sale of Stock by Subsidiary

At the time a subsidiary or affiliate issues its stock to unrelated parties at a
price more than or less than its book value, the Company's net investment in the
subsidiary or affiliate increases or decreases, respectively. The increase or
decrease is reflected in "Changes in capital of investee" (a component of
additional paid-in capital) in the Company's consolidated statement of
stockholders' equity. In 2000, the Company's German subsidiary sold shares where
the Company recorded its share of this change in capital of subsidiary in its
Stockholder's equity accounts.

Cash and Cash Equivalents

The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The cash balance as of
December 31, 2001 and 2000 includes $8,271 and $305,388, respectively, of cash
held in the German subsidiary and is expected to be restricted to only offshore
uses.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash equivalents, receivables and
accounts payable, accrued expenses, notes payable and due to related parties.
The fair values of the Company's financial instruments approximate the carrying
value of the instruments.

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:

     Buildings and improvements                             3 - 27 years
     Machinery, equipment and vehicles                      4 - 10 years
     Furniture, fixtures and office equipment               5 - 10 years
     Computers                                                   6 years

Long-Lived Assets

Long-lived assets 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.

                                                                              36
<PAGE>

Revenue Recognition

The Company is engaged as a provider of consultancy services and as a licensor
of its technology. Generally, revenue is recognized upon delivery of the
technology. For arrangements to deliver the technology requiring significant
modification or customization, revenue is recognized on the percentage-of-
completion method. Licensing revenue arises from the preparation of programs
using the Company's interactive technology for marketing purposes to principally
two unrelated parties.

Stock-Based Compensation

The Company and its subsidiaries account for employee and director's stock
option grants using the intrinsic method. Generally, the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant and no compensation expense is recognized.
If the option price is less than fair value, the Company records compensation
expense over the vesting period of the option. The Company accounts for equity
instruments issued to non-employees in exchange for goods or services using the
fair value method and records expense based on the values determined using an
option pricing model. The Company discloses the pro forma effects of using the
fair value method for all option plans in its consolidated financial statements,
if material.

Income Taxes

The Company utilizes the asset and liability method for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period including the enactment date.

Earnings Per Share

Basic Earning Per Share (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 the denominator is
increased to include the number of additional common shares outstanding if the
dilutive potential common shares (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 would have an
antidilutive effect on EPS.

                                                                              37
<PAGE>

Reclassifications

Certain 2000 accounts have been reclassified to conform to 2001 presentation.

2. Discontinued Operations

In prior years, the Company's engaged in a business related to children's
recreational activities. On October 30, 2000, the Company determined to divest
its remaining non-technology businesses. The Company concluded that these
operations were not strategically compatible with its core Internet technology
businesses. These non-core businesses consist of its Planet Kids activity.
Management anticipates the complete disposal of the Planet Kids business to
occur during 2001 by the assumption of leased facilities by outside parties. The
assets and liabilities of Planet Kids as of December 31, 2001 and 2000 are as
follows:

<TABLE>
<CAPTION>
                                                                           2001              2000
                                                                     ----------------------------------
<S>                                                                  <C>                       <C>
Net assets of discontinued operations
Assets
   Cash and cash equivalents                                           $      946          $  31,136
   Prepaid expenses and other assets                                       22,110             78,876
   Property, plant and equipment, net                                      15,484             16,894
                                                                     ----------------------------------
Total assets                                                               38,540            126,906

Liabilities:
   Accounts payable and accrued expenses                                        -             18,599
   Deferred revenues                                                            -              4,595
   Deposits and other                                                           -              4,832
                                                                     ----------------------------------
Total liabilities                                                               -             28,026

                                                                     ----------------------------------
Net assets of discontinued operations                                  $   38,540          $  98,880
                                                                     ==================================
</TABLE>

The Planet Kids business incurred an operating loss of $68,417 for the period
from November 1, 2000 through December 31, 2000 and $728,717 for the year 2001.
The operating results of discontinued operations for the years ended December
31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                  December 31
                                                                            2001              2000
                                                                     --------------------------------------
<S>                                                                   <C>                <C>
Revenue                                                                $     465,818       $     957,617
Direct operating expenses                                                 (1,167,390)         (1,343,825)
Provision for operating losses during phase-out period                             -            (300,000)
Selling, general and administrative expenses                                 (37,924)            (53,202)
Depreciation and amortization                                                 (2,505)             (4,505)
Gain (loss) on sale of assets                                                 13,284                   -
                                                                     --------------------------------------
Loss from discontinued operations                                      $    (728,717)      $    (743,915)
                                                                     ======================================
</TABLE>

                                                                              38
<PAGE>

The Company estimated a reserve amount for the shut down cost of the
discontinued operations of $300,000 at December 31, 2000. During the year ended
December 31, 2001, the Company increased the reserve by $465,000 to account for
additional operating costs and costs to terminate existing leases. As of
December 31, 2001, the Company closed down all remaining operations, and
assigned all but one of the outstanding leases. The remaining reserve of $84,885
reflects the estimated cost of terminating the remaining lease, however the
amount may be subject to adjustment in the future.
3. Properties and Equipment

Property and equipment consisted of the following at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                          2001               2000
                                                                     --------------------------------
  <S>                                                                <C>                 <C>
  Buildings and improvements                                         $  107,506          $  130,386
  Machinery, equipment and vehicles                                     320,886             301,529
  Furniture, fixtures and office equipment                              147,847             229,984
  Computers                                                             497,293             479,100
  Signs and other                                                           297              34,464
                                                                     --------------------------------
                                                                      1,073,829           1,175,463
  Less accumulated depreciation and amortization                       (342,218)           (187,942)
                                                                     --------------------------------
                                                                     $  731,611          $  987,521
                                                                     ================================
</TABLE>

4.   Stockholders' Equity

The following table summarizes the activity of common shares under stock options
for the years ended December 31, 2000 and 2001:

<TABLE>
<CAPTION>
                                                                                             Weighted
                                                               Number of      Price per       Average
                                                                Shares          Share        Exercised
                                                                                               Price
                                                            ----------------------------------------------
  <S>                                                       <C>             <C>              <C>
  Shares outstanding under options at December 31, 1999        4,297,950    $ .23 - $1.75    $  1.13
  Granted                                                      6,924,500    $1.50 - $6.71    $  2.67
  Exercised                                                     (195,000)   $ .23 - $1.00    $   .42
  Cancelled                                                        -              -
  Shares outstanding under options at December 31, 2000       11,027,450    $ .23 - $6.71    $  2.08
  Granted                                                        158,000    $1.04 - $6.70    $  1.69
  Exercised                                                     (100,000)   $ .23 - $1.00    $   .35
  Cancelled                                                   (3,628,000)   $ .23 - $6.71    $  1.98
  Shares outstanding under options at December 31, 2001        7,457,450    $ .23 - $6.71    $  1.85
</TABLE>

                                                                              39
<PAGE>

The following tables summarize information concerning outstanding and
exercisable options at December 31, 2001.

<TABLE>
<CAPTION>
                                    Options Outstanding                            Options Exercisable
                    ----------------------------------------------------   ----------------------------------
                                           Weighted
                                            Average         Weighted                            Weighted
                                           Remaining        Average                              Average
   Range of                               Contractual       Exercise                          Exercise Price
   Exercise              Number         Life (in Years)     Price per           Number          per Share
    Prices             Outstanding                           Share           Exercisable
------------------------------------------------------------------------   ----------------------------------
<S>                    <C>              <C>                 <C>            <C>                <C>
$0.01-$1.00             3,402,950            2.0               $0.59          3,402,950          $ 0.59
$1.01-$3.00             3,098,000            3.4                1.95          3,080,000            1.95
$3.01-$6.71               956,500            4.0                6.02            946,500            5.95
                    ----------------------------------------------------   ----------------------------------
Total                   7,457,450            2.8                1.77          7,429,450          $ 1.75
                    ==============                                         ==============
</TABLE>


Stock options granted to non-employees during 2001 and 2000 were valued using
the fair value at the grant date adjusted for changes in market prices until
vesting. Compensation expense (income) recognized amounted to ($44,978) and
$6,102,943 in 2001 and 2000, respectively. The fair value of the options granted
during 2001 and 2000 is estimated on the date of the grant using the Black-
Scholes pricing model with the following assumptions.

<TABLE>
<CAPTION>
                                                  2001          2000
                                             ----------------------------
               <S>                           <C>             <C>
               Risk-free interest rate            5.03%         6.00%
               Dividend yield                        0%            0%
               Volatility factor                   126%          144%
               Expected life                   5 years       5 years
</TABLE>

The Company applied the intrinsic value method to account for its stock options
to employees. There were a minimal stock options granted to employees during
2001 and most of the options granted in 2000 were cancelled. Had compensation
cost for the Company's stock options issued to employees been determined based
upon the fair value at the grant date, using the Black-Scholes pricing, there
would be an immaterial impact in the Company's net loss and loss per share in
2001.

Option valuation models require the input of highly subjective assumptions.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its stock options.

At December 31, 2001 and 2000, the following warrants were outstanding:

<TABLE>
<CAPTION>
                                                          2001           2000
                                                    -----------------------------
          <S>                                       <C>               <C>
          Balance at beginning of year                 3,297,646       4,995,000
          Granted                                              -               -
          Exercised                                            -      (1,697,354)
          Cancelled                                            -               -
                                                    ----------------------------
          Balance at end of year                       3,297,646       3,297,646
                                                    ============================
</TABLE>

At December 31, 2001 the 3,297,646 warrants outstanding had an exercise price of
$4.00 per share and expire May 9, 2002.

Outstanding options and warrants to purchase shares at December 31, 2001 and
2000 were not included in the computation of diluted loss per common share
because the effect would be antidilutive.

                                                                              40
<PAGE>

5.   Commitments and Contingencies

On or about February 16, 2001, UIT terminated the employment contracts of its
Chief Executive Officer and Chief Financial Officer, Sonja Mikic and Chris
Riley. It is the Company position that no further compensation or benefits are
due under those contracts. On or about February 28, 2001, Sonja Mikic and Chris
Riley (Plaintiffs) filed a lawsuit against the Company, UIT, and Brian Shuster
(collectively, Defendants) in the Superior Court of the State of California for
the County of Los Angeles, West District. Plaintiffs asserted causes of action
for breach of written employment, tortuous breach of contracts, and tortuous
interference with contract.

On or about April 26, 2001, Plaintiffs filed a first amended complaint wherein
they withdrew their causes of action for tortuous breach of contract, but
asserted new claims of fraud against both corporate entities. Plaintiffs seek
compensatory damages in an unspecified amount against Defendants, punitive
damages, attorneys' fees, costs of suit, and judgment interest as allowed by
law.

Plaintiffs essentially allege that their contracts were terminated without cause
and that UIT and the Company are in breach of the employment agreements by not
providing the benefits that would accrue to each Plaintiff in the event his or
her employment was terminated without cause. Separately, Plaintiffs' purported
rights with respect to their ownership of stock options in UIT also may be at
issue. The Company believes this lawsuit is without merit in that the employment
agreements were terminated by UIT for cause, thereby eliminating Plaintiffs'
rights to additional benefits under the agreements.

The Company has answered the complaint, denying the allegations and asserting
various affirmative defenses. The Company also has interposed a cross-complaint
against the Plaintiffs asserting claims for breach of contract and related
causes of action. The directors' and officers' liability insurance policy is
covering the defense of the claims against Mr. Shuster in excess of the
self-insured retention.

In the normal course of business, the Company is subject to various claims and
legal actions. The Company believes that the ultimate outcomes of any of these
matters, either individually or in the aggregate, will not materially adverse
affect the Company.

The Company acquired technology rights of certain products from its employees.
In accordance with the agreement, the Company is obligated to pay the employee
and advance royalty of $230,000 and 125,000 shares of its common stock, payable
when certain licensing criteria have been meet, and then a continuing royalty
based upon the sale of any products using this technology. As of December 31,
2001, $115,000 of this advance royalty has been paid and is reflected in other
assets in the accompanying balance sheet.

In April 2001, the Company entered into a licensing agreement with Warner Bros.
to embed its I-C-IT technology into toys embodying certain of the Warner Bros.
characters, creating Looney Tunes Chat Pals. The Company also obtained a license
to utilize the specific sound/voice tracks relating to the licensed characters.
The license period extends until December 31, 2003, and requires a payment to
Warner Bros. a royalty based upon the net sales of the licensed products. The
Company also granted Warner Bros. a first priority lien and security interest in
the inventory, contract rights, and accounts receivable, if any, with respect to
the licensed products. There are no amounts due under these licensing agreements
as of December 31, 2001. Warner Bros. may terminate these agreements for various
reasons, including but not limited to, any material breaches of the Company's
obligation under the agreements.

                                                                              41
<PAGE>

Lease Arrangements

At December 31, 2001, minimum annual rentals under non-cancelable leases and
minimum sub-lease income are as follows:

<TABLE>
<CAPTION>
          Year Ending December 31                                Leases
          ----------------------------------------------------------------
          <S>                                                   <C>
          2002                                                  $ 180,659
          2003                                                     73,374
          2004                                                     58,238
          2005                                                      9,784
          Total                                                 $ 322,055
</TABLE>

Rent expense was $370,983 in 2001 and $870,685 in 2000.

6.   Income Taxes

No provision for income taxes will be recorded for the year 2001. The Company
has deferred tax assets of approximately $12.3 million and deferred tax
liabilities of approximately $.2 million for the year 2001. The deferred tax
assets are comprised in major part of net operating loss carryforwards. Due to
the uncertainty surrounding the timing of realizing the benefits of favorable
tax attributes in future tax returns, the Company has placed a full valuation
allowance against its otherwise recognizable net deferred tax asset.

<TABLE>
<CAPTION>
                                                      2001             2000
                                             ----------------------------------
<S>                                          <C>                   <C>
Deferred Tax Assets
Net Operating Losses                               10,477,264        7,851,193
Impairment Losses                                      73,954          160,000
Deferred Compensation                               1,496,279        1,514,270
Other                                                 249,849          471,589
                                             ----------------------------------
      Deferred Tax Assets                          12,297,346        9,997,052

Valuation Allowance                               (12,067,503)      (9,882,131)
Deferred Tax Liabilities

Depreciation                                         (229,842)        (114,921)
                                             ----------------------------------
   Deferred Tax Liabilities                          (229,842)        (114,921)

                                             ----------------------------------
  Net Deferred Tax Assets (Liabilities)                    (0)              (0)
</TABLE>

The Company has cumulative net operating losses of $26.2 million for federal tax
purposes. Pursuant to Internal Revenue Code Section 382, the utilization of the
net operating loss carryforwards may be limited based upon changes in the
percentage of ownership of the Company.

                                                                              42
<PAGE>

7.   Related Party Transactions


Due to (from) related parties at December 31, 2001 and 2000 consisted of the
following:

<TABLE>
<CAPTION>
                                                        2001          2000
                                                    --------------------------
<S>                                                 <C>            <C>
                                                    $        -     $  250,000
Due to Harry Shuster
Due to Grand Havana                                          -         35,059
                                                    --------------------------
                                                             -        285,059
Less:
   Due from Grand Havana                                 5,995              -
                                                    --------------------------
                                                    $   (5,995)    $  285,059
                                                    ==========================
</TABLE>

The Company leases certain of its office space from a corporation of which Harry
Shuster, is an officer and a principal stockholder. The Company incurred rent
expense under this lease of $ 297,800 in 2001 and $441,574 in 2000.

In January 2001, the Company agreed to terminate a consulting services agreement
with Harry Shuster. The termination agreement effective December 31, 2000,
allowed the Company to terminate the consulting agreement for Mr. Shuster, which
had a remaining duration of five years. The terms of the agreement required a
one-time payment of $250,000 and the transfer of certain amounts owed to the
Company by Grand Havana (an affiliated company). The amounts included a loan
receivable from Grand Havana, including accrued interest, of $682,156 and other
balances due from Grand Havana aggregating, which after deducting amounts owed
to Grand Havana, amounted to $58,090. These amounts were expensed in 2000 and
are included in selling, general and administrative expense.

As of December 31, 2001 the Company held 966,666 shares of Grand Havana's common
stock. The Chief Executive Officer of Grand Havana is Stanley Shuster, the
brother of Brian Shuster.

As of December 31, 2001, the Company has paid $115,000 advance royalty to an
employee in connection with the acquisition of technology rights of certain
products. (See Note 5).

                                                                              43