SECURITIES AND EXCHANGE COMMISSION

                            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, 1997

     [ ] Transition  Report pursuant to Section 13 or 15(d) of The Securities
         Exchange  Act of  1934  For the  transition  period  from  ___________
         to____________.

                       Commission File No. 0-23236-NY

                 MASTER GLAZIER'S KARATE INTERNATIONAL, INC.
            (Exact name of registrant as specified in its charter)

            Delaware   22-3234110   (State   of  or   o(IRS   Employer   ion  of
            incorporatiIdentification No.)

            377 Hoes Lane
            Piscataway, New Jersey                   08854
            (Address of Pr(Zip Code)ecutive Offices)

Registrant's telephone number, including area code: (732) 981-0077

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

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

                   Common Stock, Par Value $.0001 Per Share
                               (Title of Class)

              Class A Redeemable Common Stock Purchase Warrants
                               (Title of Class)

              Class B Redeemable Common Stock Purchase Warrants
                               (Title of Class)

     Check whether the Registrant (1) has filed all reports required to be filed
by  Sections  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  pursuant to Item 405
of the Regulation  S-B is not contained in this form, and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

     Issuer's revenues for its most recent fiscal year were $751,909.

     The aggregate  market value of the voting stock held by non-  affiliates of
the  Registrant,  computed by reference to the closing price of such stock as of
March 31, 1998, was approximately $4,070,002.

      Number of shares outstanding of the issuer's common stock, as of March 31,
1998, was 4,070,002.

                  DOCUMENTS INCORPORATED BY REFERENCE:  None.




<PAGE>



                                    PART I

Item 1.  BUSINESS.

General

      Master  Glazier's  Karate  International,  Inc.,  a  Delaware  corporation
incorporated  on March 22,  1993  (the"Company")  manages and  operates  two (2)
Master Glazier Karate Centers (the"Karate Centers") located in Pennsylvania. The
Company  was formed to acquire  and  operate  several  companies  engaged in the
martial arts instruction service business.

      Until March 1997,  the Company  operated  seven (7) Karate Centers one (1)
directly  and six (6) through  wholly  owned  subsidiaries.  During the two year
period  following the Company's  initial  public  offering in 1993,  the Company
pursued an  aggressive  expansion  program.  The Company long  believed  that by
increasing  the number of  students  and overall  revenues  it would  reduce its
overhead costs per student. This would enable the Company to operate profitably.
However,  after some time, it became  apparent to management that despite having
the necessary  capital,  the Company was incapable of training and  developing a
sufficient number of instructors  skilled in the Company's style of martial arts
in order to staff the opening of several new Karate Centers.

      The Company then  aggressively  pursued  acquiring  existing  martial arts
centers.  However,  because  of the  Company's  unique  style  of  martial  arts
instruction  and the  fragmented,  "mom  and pop"  nature  of the  martial  arts
industry,  it  was  difficult  to  identify  numerous  appropriate   acquisition
candidates.  The Company discussed potential  transactions with a limited number
of acquisition targets. After unsuccessful attempts at negotiating an acceptable
acquisition  transaction,  the Company  refocused its attention to divesting its
unprofitable  Karate  Centers.  During the past two fiscal years ending December
1996 and 1995,  the Company  recorded  net losses of  $1,252,790  and  $882,960,
respectively.  The Company  also  incurred a net loss of $1,676,235 for the year
ended December 31, 1997. See "Management's Discussion and Analysis."

      Since the Company has been unable to operate  profitably,  and because the
Company could neither expand its business internally (by training and developing
an  adequate   number  of  instructors)  or  by  acquiring  other  martial  arts
instruction  centers,  management  believed that the sale of unprofitable Karate
Centers was in the best interests of the Company's stockholders. Accordingly, on
December  17, 1996 and January 10, 1997,  the Company,  through its wholly owned
subsidiaries,  entered into five (5) separate  Asset  Purchase  Agreements  (the
"Purchase  Agreements")  for the  sale  of five  (5) of its  karate  centers  to
affiliates  of  Tiger  Schulmann's   Karate  (the   "Purchasers")   (the  "Sales
Transaction").  On March 28, 1997,  shortly after  receiving the approval of the
Company's stockholders,  the Sales Transaction closed. In light of the fact that
the Company closed the Sales  Transaction,  the Company is currently  seeking to
acquire alternative  businesses with which the Company can expand its operations
and enhance its profitability. See "The Sales Transaction."

      The Company's executive offices are located at 377 Hoes Lane,  Piscataway,
New Jersey, telephone number (732) 981-0077.

The Sales Transaction

      Upon the terms and subject to the  conditions of the Purchase  Agreements,
effective  as of March 28, 1997 (the  "Closing  Date"),  (i) the Company and the
Subsidiaries  sold and transferred,  and the Purchasers  purchased and acquired,
the Assets,  including  all of the right,  title and interest of the Company and
the  Subsidiaries  in and to (a)  all  Equipment  (as  defined  in the  Purchase
Agreements),

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<PAGE>



and  (b)  contracts,  agreements  and  commitments  specified  in  the  Purchase
Agreements,  including,  but not limited to, the lease agreements for the leased
five (5) Karate Centers' premises, including leasehold improvements,  subject to
the  approval  of  their  respective  lessors;  and  (ii)  the  Company  and the
Subsidiaries  transferred  and delegated to the  Purchasers,  and the Purchasers
assumed and agreed to pay, perform and discharge (the extent not paid, performed
or discharged prior to the Closing Date) the Assumed Liabilities,  including all
liabilities and obligations of the Subsidiaries and the Company which related to
the leases,  agreements contracts and commitments  transferred to the Purchasers
under the Purchase Agreements.

      In  consideration  for the purchase of the Assets,  the Purchasers paid to
the  Company an  aggregate  of  $505,000,  consisting  of  $225,000 in cash (the
"Cash") and an aggregate of $280,000 in three promissory notes (the "Notes"; the
Cash and  Notes  are  hereinafter  referred  to  collectively  as the  "Purchase
Price"), and assumed all of the Assumed Liabilities. The Purchase Price for each
school was $100,000,  except for the Great Neck location,  the purchase price of
which was $105,000. The Purchase Price was determined by negotiation between the
Company and the  Purchasers.  The Company did not utilize an  appraisal or other
independent  determination  of asset value nor did the Company obtain a fairness
opinion.

      The three Notes held by the Company are in the aggregate  principal amount
of  $280,000  and do not bear  interest.  The Notes are to be repaid in  monthly
installments  over a thirty (30) month period  following the Closing  Date.  The
Company  and the  Subsidiaries  received a security  interest  in all the Assets
transferred to the Purchasers  pursuant to the Purchase Agreements as collateral
for the  obligations  set forth in the  Notes.  The  Notes  are also  personally
guaranteed by Daniel Schulmann, President of UAK Management, Inc.

      In connection  with the sale of the Great Neck location and the Hicksville
location,  the Company  paid  $76,375 to two (2) of its  landlords to secure the
consent of such  landlords to the assignment of the leases by the Company to the
purchasers of such karate schools. In addition,  the Company remains a guarantor
of certain of the Purchaser's  obligations under the Hicksville lease and, for a
period of one (1) year  which  expired in March  1998,  the  Company  remained a
guarantor of certain of the Purchaser's obligations under the Ramsey lease.

      Prior to the Closing  Date,  the Assets were  operated  and managed by the
Purchasers,  pursuant to the terms of  individual  Operating  Agreements  by and
among the  Subsidiaries  and each of the  Purchasers  dated the same date of the
Purchase  Agreements  (the  "Operating  Agreements").  The operating  Agreements
provided that the Purchasers were to (i) continue to operate the business of the
Subsidiaries  in  accordance  with past  practice;  (ii)  provide all  necessary
accounting,  maintenance,  operational and administrative services; and (iii) be
entitled  to  collect  all gross  revenue  generated  by the  businesses  of the
Subsidiaries.  The  Operating  Agreements  expired upon the closing of the Sales
Transaction.

      The Company  anticipates  using the proceeds from the Sales Transaction to
acquire an alternative business. However, no definitive agreement or arrangement
has been made regarding  such a transaction.  The Company plans on divesting all
or a portion of its ownership  interest in the two (2) remaining  Karate Centers
in the future.

Courses; Payment Plans

      At the Karate Centers located in Bethlehem and Allentown, Pa., the Company
currently  offers a basic training  course, a black belt course, a second degree
black belt  course and master  training  course.  The basic  training  course is
divided into four (4) different achievement levels, the black belt

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<PAGE>



course is divided into twelve 12 different achievement levels (which encompasses
the basic training  program) and the second degree black belt course has one (1)
achievement  level.  The  introductory  level for the basic  training  course is
offered  approximately four (4) times each week. Students may therefore join the
program at any time by attending an introductory class or classes.

      There is  currently  no backlog  or  waiting  list to enroll in any of the
courses  at any of the  Karate  Centers;  however,  from time to time there is a
waiting list for the introductory level of the basic training course.

      Each of the Company's  instructors,  all of whom are black belts in Master
Glazier's  Karate,  have undergone a rigorous  training program conducted by Mr.
Glazier.  Each Karate Center conducts  approximately  35 classes each week, each
for a 45 minute period.  Each class is generally  comprised of 20 to 25 students
and taught by one to three  instructors.  Students are  initially  enrolled in a
basic training course.  However,  many students  eventually  convert to the more
intensive,  longer black belt program.  Classes are organized by skill level and
age group. The term of a basic training program is twelve months or 100 classes,
whichever occurs first.  Students may take up to two classes each week. However,
once students register for a full black belt program,  they are entitled to take
three  classes per week.  Fees,  if paid in advance,  are  generally  $1,100 and
$3,850  for the basic  training  and black  belt  programs,  respectively.  If a
student has graduated from the basic training program the cost to register for a
black belt program is $2,750. An installment payment plan is available at higher
rates.  At each Karate  Center,  the Company  houses a full proshop  which sells
martial  arts related  products,  such as  uniforms,  other  clothing and safety
equipment.

 Government Regulation

      The Company has been subject to various state and local laws affecting its
businesses.  Some of the Company's Karate Centers have been subject to licensing
requirements and other regulations by numerous  governmental  authorities.  Some
states require that health and other fitness clubs register with the appropriate
regulatory  authority  and post a bond in order to secure  payment of "unearned"
membership  fees (in the case where a club closes and as a result,  a member who
has paid his full membership fee is unable to utilize his membership through the
end of the term). The attorney general in the Commonwealth of Pennsylvania  (the
only state in which the Company currently operates Karate Centers) has taken the
position that Pennsylvania requires the posting of bonds by martial arts centers
in addition to health spas,  racquet and other fitness  clubs.  In January 1998,
the Bureau of Consumer  Protection in the Commonwealth of Pennsylvania  served a
subpoena on the Company in relation to five (5) consumer  complaints relating to
no more  than  $15,000  of  membership  fees  in the  aggregate  (the  "Consumer
Complaints") which the Bureau of Consumer Protection alleged the Company had not
responded  to  expeditiously.  In February  1998,  Company  counsel met with the
Attorney  General in the  Commonwealth of  Pennsylvania  and the Company and the
Attorney  General  reached  prospective  terms of an  agreement  relating to the
Consumer Complaints and the issue of the posting of bonds. In the event that the
terms are agreed to by the Company and the  Attorney  General,  the Company will
respond to the Consumer Complaints and, without admission of any liability, will
post a bond in an amount to be agreed with respect to future membership fees. In
addition,  the Company will pay the Attorney  General's costs in an amount of no
more than $5,000.  This agreement is not binding until the full terms are agreed
upon by the Company and the Attorney General.

Competition

      The martial  arts  instruction  industry is highly  competitive  with many
small  instruction  centers  located  in the  northeastern  United  States.  The
Company's competitors include small martial arts

                                      4

<PAGE>



centers, none of which has a significant percentage of the total market. Some of
these competitors have more than one location and may have greater financial and
other  resources  than the  Company.  The Company  does not  perceive its Karate
Centers to be in competition  with health or fitness  clubs,  gyms or YMCA's and
YWCA's.  Although such  facilities may offer some martial arts classes,  they do
not generally offer intensive martial arts programs  emphasizing  discipline and
the development of self-confidence.

      Businesses in the United  States which are for children are  characterized
by intense and substantial competition.

Marketing and Advertising

      The Company offers two introductory  classes at prices ranging from $10 to
$49 to acquaint  potential  students with the benefits of the Company's  martial
arts  programs.  These  introductory  programs and other  promotions,  including
print,  radio,  television and direct mail  advertising  are  coordinated by the
Company's  corporate  offices.  The  Company's  current  newspaper   advertising
campaign features  photographs of the Company's students and professional models
being  depicted  as  students.  Each  advertisement  is  targeted to a different
demographic  group and appears in major  newspapers  in the markets in which the
Company operates Karate Centers.  The Company also advertises its courses in the
Yellow Pages,  and through  direct mail flyers.  In 1995 the Company  directed a
significant  portion of its budget to radio advertising,  including the New York
based "Howard Stern Show." The Company believes that its marketing  strategy has
contributed  to its sales growth and greater  consumer  awareness of the Company
and its courses.

Other Products

      The Company  sells a variety of martial arts  products and clothing in pro
shops maintained at each of the Karate Centers.  The Company obtains all of such
products from suppliers which are  unaffiliated  with the company.  Some vendors
print on or emboss the "Master  Glazier's Karate" logo on many of such products.
While the sale of martial arts products does not  constitute a substantial  part
of revenues  earned by the Company,  management  believes  that the sale of such
products  bearing  the  Company's  logo helps  create name  recognition  for the
Company.

Computerized Systems

      The Company has invested  approximately  $100,000  since its  inception in
computer  equipment and programming that is designed to provide (i) receivables,
payables, purchasing,  receiving, inventory management, accounting and financial
reporting  and  (ii) the  Company  with  desktop  publishing  capabilities.  The
Company's  data  processing  system  is  capable  of (i)  monitoring  membership
retention and usage,  (ii)  assessing  the  effectiveness  of various  marketing
campaigns,  and (iii)  providing  current  inventory  reports  thereby  reducing
pilferage and theft. The Company believes its data processing systems will allow
it to continue to operate more efficiently.

      Nevertheless,  rapid  expansion of the  Company's  business  would require
enhancements to the Company's  current data processing system and/or upgrades to
more powerful systems.

Liability Insurance

      The  Company  has  purchased  liability  insurance  for each of its Karate
Centers  in the  amount of  $1,000,000  per  occurrence  and  $1,000,000  in the
aggregate.  In addition,  the Company purchased,  a general liability "umbrella"
policy covering claims up to $5,000,000. The Company believes that its

                                      5

<PAGE>



present  insurance  coverage is  sufficient  for its  current  level of business
operations.  A successful  claim  against the Company in excess of the liability
limits or relating to an injury  excluded under the policy could have a material
adverse effect on the Company.

 Employees

      As of March 31, 1998, the Company employs a total of 9 employees on a full
time basis and 5 employees on a part time basis. Each Karate Center employs four
full time staff,  consisting of an instructor,  assistant instructor,  an office
manager and a sales director, and part-time staff, including instructors.  Since
the  closing  of the Sales  Transaction  at the  Company's  principal  executive
offices, the Company employs Mark Glazier the President, Chief Financial Officer
and Secretary on a full time basis. The Company also employs a bookkeeper of the
Company headquarters.

Employee Cash Bonuses

      Instructors  at each of the  Karate  Centers  are  entitled  to receive an
aggregate  monthly  cash  bonus  equal  to  twenty-five  percent  (25%)  of that
particular Karate Center's net profit (actual gross revenue on a cash accounting
basis after deduction for selling and general and  administrative  expenses) for
the preceding month.

      It is important to note that because such cash bonuses are calculated on a
cash basis (while the Company  otherwise  recognizes income on an accrual basis)
and because such bonuses are calculated on a monthly  basis,  the Company may be
required  to pay during  periods in which the  Company  has  minimal (or no) net
income.

Investment In Limited Partnership

      On March 4,  1996,  the  Company  entered  into an  Agreement  of  Limited
Partnership  with HEP II,  L.P.  Pursuant  to the terms of such  agreement,  the
Company invested $1,500,000 in exchange for limited partnership  interests.  HEP
II, L.P. was organized to develop,  produce and distribute not less than two (2)
full  length  motion  pictures.  On  October  24,  1996 the  Company  received a
partnership  distribution  of $379,500  from HEP II, L.P. In 1996,  HEP II, L.P.
released Santa with Muscles starring Hulk Hogan and in April 1997, HBO showcased
the world premiere of HEP II's Skeletons starring Ron Silver and James Coburn.

     During the fourth quarter of 1997, the Company wrote down its investment of
$1,208,000 in HEP II, L.P. to their  estimated  realizable  value of $-0- due to
the  noncompliance  of the  general  partner  with  the  terms  of  the  limited
partnership agreement.  The absence of quarterly interest payments in accordance
with the  partnership  agreement  and  partnership  distributions  from revenues
generated from motion pictures raised  uncertainty to the  recoverability of its
investment.   As  a  result,  a  $1,208,000   impairment  was  recorded  in  the
consolidated statements of operations. Item 2. PROPERTIES

      The Company maintains its principal executive offices at 377 Hoes Lane, NJ
08854 and its telephone number is (732) 981-0077.

      The Company  operated  Karate Centers during 1997 at each of the following
locations, subject to the Sales Transaction:




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<PAGE>

  a.  Whitehall, Pennsylvania

      On February  12, 1990,  Allentown  Karate,  a  subsidiary  of the Company,
entered into a lease with Bernard J. Rosenshein for its Whitehall,  Pennsylvania
Karate  Center.  The lease is for 3,000  square  feet and has a term of five (5)
years with a fixed rent of $45,000 per year,  plus a  percentage  of gross sales
above a significant base amount.

      Such Karate Center's annual lease payments were  approximately  27% of the
Karate  Center's annual gross sales for the calendar year 1995. In January 1995,
a lease extension agreement was signed extending the period of the lease through
April 30, 2005,  with an annual rent schedule  starting at $45,000 for the first
year and escalating to $51,000 in the tenth year.

  b. Bethlehem, Pennsylvania

      On August 23,  1990,  Bethlehem  Karate,  a  predecessor  to the  Company,
entered into a lease with Bernard J. Rosenshein for its Bethlehem,  Pennsylvania
Karate Center.  The lease is for approximately  3,000 square feet and has a term
of ten (10) years with a fixed rent of $47,040 per year for the first five years
and $52,920 per year for the second five years, plus a percentage of gross sales
above a significant base amount. Such Karate Center's annual lease payments were
approximately  16% of the Karate  Center's  annual  gross sales for the calendar
year  1995.  As a result of the  merger of  Bethlehem  Karate  with and into the
Company,  the Company has assumed all of the  obligations  of  Bethlehem  Karate
under the lease with its landlord, Bernard J. Rosenshein.

c.  Hicksville, New York

      On April 12, 1995,  Hicksville Karate, a subsidiary of the Company entered
into a lease with Delco Development Co. of Hicksville,  L.P. for it's Hicksville
Karate  Center.  The lease is for 3000  square  feet and has a term of ten years
with an  annual  rent  schedule  starting  at  $57,000  for the  first  year and
escalating  to $77,685  for the tenth year.  The  Company  also has the right to
renew the lease  for an  additional  five year  period.  The  Company  commenced
operations of the Hicksville Karate Center in November,  1994. This location was
operated by Tiger Schulmann's  Karate since December 17, 1996 in accordance with
that  certain  Operating  Agreement  dated  December  17,  1996  by and  between
Hicksville Karate,  Inc. and Central Nassau Karate,  Inc. On March 28, 1997, the
Company assigned the lease to Central Nassau Karate, Inc.

d.  Ramsey, New Jersey

      On August 22, 1995,  Ramsey  Karate  Center,  a subsidiary  of the Company
entered into a lease with Gabrellian Associates,  for it's Ramsey Karate Center.
The lease is for  approximately  3626  square  feet and has a term of five years
with a rent  schedule  starting at $68,894 for the first year and  escalating to
$77,541  for the fifth year.  The Company  also has the right to renew the lease
for an additional two five year periods.  The Company commenced operation of the
Ramsey  Karate  Center in March,  1996.  This  location  was  operated  by Tiger
Schulmann's  Karate  since  December  17, 1996 in  accordance  with that certain
Operating Agreement dated December 17, 1996 by and between Ramsey Karate Center,
Inc. and Northern  Bergen Karate,  Inc. On March 28, 1997, the Company  assigned
the lease to Northern Bergen Karate, Inc.

Item 3. LEGAL PROCEEDINGS.

      There is no material litigation pending against the Company.

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

      No matters were  submitted to the Company's  security  holders  during the
last quarter of its fiscal year ended December 31, 1997.

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                                    PART II

Item 5.  PRICE RANGE OF COMMON STOCK AND WARRANTS

      The Company's  Common Stock has been listed on The Nasdaq Small Cap Market
since  October 15,  1993.  The  following  table sets forth the high and low bid
quotations for the Common Stock for the periods  indicated.  Such information is
compiled  from  various  sources  and is  believed  to be  accurate  although no
assurance can be given. These over-the-counter  market quotations reflect prices
between  dealers and do not include retail  mark-ups,  mark-downs or commissions
and may not necessarily  represent  actual  transactions.  In November 1996, the
Company's  Class A Warrants and Class B Warrants were  de-listed from the Nasdaq
SmallCap Market.

                                       Common Stock
Fiscal Year 1996                     High      Low
----------------                     ----      ---
First Quarter                       $1- 1/8   $   3/8
Second Quarter                      $ 15/16   $   7/16
Third Quarter                       $ 13/16   $   3/16
Fourth Quarter                      $  3/4    $   3/8

Fiscal Year 1997                     High      Low
First Quarter                       $ 15/32   $   7/16
Second Quarter                      $2        $  13/16
Third Quarter                       $1-13/16  $1- 3/4
Fourth Quarter                      $     2   $1

      The Class A and Class B Warrants were listed on The Nasdaq SmallCap Market
on October 15, 1993 until November 1996 and, since then, have been traded on the
OTC  Bulletin  Board.  The high and low prices as reported by the NASDAQ  System
were as follows:

                                  Class A WarrantsClass B Warrant
                                High     Low  High      Low
Fiscal Year 1996

First Quarter                  $*       $*     $*     $*
Second Quarter                 $*       $*     $*     $*
Third Quarter                  $1/16    $1/16  $1/16  $1/16
Fourth Quarter                 $0       $0     $*     $*

Fiscal Year 1997
First Quarter                  $*       $*     $*     $*
Second Quarter                 $*       $*     $*     $*
Third Quarter                  $*       $*     $*     $*
Fourth Quarter                 $*       $*     $*     $*
-----------------
*Indicates security was not traded during this quarter.

      On March 31, 1998,  the closing  price as reported by The Nasdaq  SmallCap
Market was $1.00 per share. As of March 31, 1998 there were 4,070,002  shares of
post-split Common Stock  outstanding,  held of record by approximately 36 record
holders and 584 beneficial owners.



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<PAGE>



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

For the Years Ended December 31, 1997 and December 31, 1996

The Company had sales for the year ended December 31, 1997 and December 31, 1996
of $751,909 and $1,474,629,  respectively.  Sales of $695,980 and $1,282,920 for
1997 and 1996, respectively,  were derived predominantly from membership tuition
sold in two of the Company's  karate  centers in 1997 and seven centers in 1996.
The  amount of other  goods sold was  $55,929  and  $191,709  for 1997 and 1996,
respectively.

The 49% decrease in sales of $722,720 was primarily  attributable to the sale of
the Hackensack, Ramsey, Paramus, Great Neck and Hicksville karate centers. Total
sales for the two remaining  centers remained  relatively  constant from 1996 to
1997.

The net [loss] for the years ended  December 31, 1997 and December 31, 1996 were
$1,676,235 and $1,252,790,  respectively.  The increase in the net [loss] can be
attributed  mainly to the $1,208,000 write down of the investment in the limited
partnership  offset by the decrease in the net operating losses of the five sold
karate centers, which were not operating at a profit.

The major components of the General and Administrative Expenses are as follows:

                                               December 31,
                                          1 9 9 7        1 9 9 6

Professional Fees                        $  102,774    $   153,390
Salaries and Payroll Taxes                  681,165      1,042,500
Rent                                        157,844        593,142
Advertising and Promotional                  45,074        177,346
Utilities                                    13,353         62,522
Office Expense and Other Expenses           274,964        721,206
                                         ----------    -----------

  Totals                                 $1,275,174    $ 2,750,106
  ------                                 ==========    ===========

The following  decreases in the above  components are primarily  attributable to
the sale of the five  karate  centers:  advertising  and  promotional  expenses,
$132,272, 75%; rent, $435,298, 73%; utilities,  $49,169, 79%; office expense and
other expenses $446,242, 62%.

Professional  fees decreased $50,616 due to additional legal and accounting fees
incurred  in 1996  associated  with  the  sale of the  Company's  assets  and in
connection with the preparation of the Company's annual meeting and proxy.

The  decrease in salaries  and payroll of $361,335  taxes  during the year ended
December  31, 1997  resulted  from the decrease of staff due to the sale of five
karate centers and was offset by the increase in officer's compensation pursuant
to the employment agreement.

On December 17, 1996 and January 10, 1997,  the Company  entered into five Asset
Purchase Agreements, whereby the Company sold substantially all of the assets of
its Hackensack,  Ramsey,  Paramus,  Great Neck and Hicksville karate centers. In
consideration  for the purchase of the assets,  the purchasers  paid the Company
$225,000 in cash, and an aggregate of $280,000 in three  promissory  notes.  The
purchasers  also assumed the Company's  liabilities  in relation to certain real
estate leases and student contracts for which tuition was collected but services
were not rendered.  The Company  recognized an approximate  $383,000 loss on the
sale of assets pertaining to this transaction. The $383,000 loss consists of the
purchase  price of $505,000  plus the  $190,000 in deferred  income less the net
book value of the assets.  The net book value of the assets sold was  $1,078,000
which

                                      9

<PAGE>



consists almost  entirely of leasehold  improvements  for the five centers.  The
sale of the assets were  approved  by the  Company's  stockholders  on March 25,
1997. All five subsidiaries were operating in a loss position and had a negative
cash flow at the time of the sale.

On March 4, 1996, the Company entered into a limited partnership  agreement with
HEP II, L.P. a limited  partnership,  to license  ancillary rights to two Motion
Pictures  which have since been produced.  The Company has a 49.50%  interest in
HEP  II and  does  not  have  any  personal  liability  to any of the  partners,
creditors or debt of the partnership.  The Company contributed $1,500,000 to the
capital of the  partnership  and will  receive  interest at the rate of 7% to be
paid  quarterly.  During  1996,  the Company  earned  interest of $87,500 on its
capital contribution and received a partnership distribution of $292,000. During
1997, there were no partnership distributions received.

During the fourth  quarter of 1997,  the Company  wrote down its  investment  of
$1,208,000 in HEP II, L.P. to their  estimated  realizable  value of $-0- due to
the  noncompliance  of the  general  partner  with  the  terms  of  the  limited
partnership agreement.  The absence of quarterly interest payments in accordance
with the  partnership  agreement  and  partnership  distributions  from revenues
generated from motion pictures raised  uncertainty to the  recoverability of its
investment.   As  a  result,  a  $1,208,000   impairment  was  recorded  in  the
consolidated statements of operations.

On June 1, 1995 pursuant to a termination agreement,  the Company terminated its
joint venture  agreement with Planet Kids Learning  Centers.  In connection with
such termination, the Company received its $500,000 investment and $500,000 loan
plus  accrued  interest.  In  addition,  the  Company  was  granted an option to
purchase up to 150,000 shares of common stock of United  Leisure  Corporation at
$.01 per share.  In return for the  option,  the  Company  performed  consulting
services  from June 1, 1995  through May 31, 1996.  During  November  1995,  the
Company  fully  exercised  its options and  purchased  150,000  shares of United
Leisure Corporation for $1,500. In February of 1996, the Company sold its shares
resulting in a gain of $448,359.

On October 18,  1996,  the Company  entered  into  convertible  preferred  stock
subscription  agreement with the President of the Company and others subscribers
pursuant to which an  aggregate  of 750,000  shares of the  Company's  preferred
stock was purchased for $1.20 per share. The Company realized proceeds from this
transaction of $900,000.

On June 20,  1997,  the  Company  issued  10,000,000  shares  [2,000,000  shares
subsequent to a 1 for 5 Reverse Stock Split] of common stock to the President of
the Company and other subscribers for $1,000 and recorded cash in escrow of $933
and a stock subscription receivable of $67.

Liquidity and Capital Resources

Cash and cash  equivalents  increased  $476,390 for the year ended  December 31,
1997 and decreased  $1,394,885  for the year ended  December 31, 1996.  Cash and
cash equivalents recognized from operations for the year ended December 31, 1997
was $662,426.  For the year ended December 31, 1996,  approximately  $919,000 of
cash and cash equivalents were utilized from operations.

Net cash and cash equivalents  applied to investing  activities was $142,247 and
$468,349 for December 31, 1997 and 1996, respectively.  During 1997, the Company
purchased  property  and  equipment  of  approximately  $13,000  and  marketable
securities of approximately $398,500. Also during the year, the Company received
proceeds from the sale of marketable  securities of $201,518.  During 1996,  the
Company invested  $1,500,000 in a limited partnership and purchased property and
equipment of approximately  $302,000 and marketable  securities of approximately
$427,000.  Also,  during the year, the Company  received  proceeds of $1,478,000
from the sale of securities and a partnership distribution of $292,000.





                                      10

<PAGE>

The Company anticipates using the proceeds from the Asset Purchase Agreements to
acquire an alternative business. However, no definitive agreement or arrangement
has been made regarding  such a transaction.  The Company plans on divesting all
or a portion of its ownership  interest in the two remaining  karate  centers in
the future.

Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    See Index to Financial Statements on page F-1 for a listing of the financial
statements.


Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE.

          None.


                                      11

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------



                                                                 Page to Page


Item 7:  Financial Statements

Independent Auditor's Report.................................    F-2....

Consolidated Balance Sheet as of December 31, 1997...........    F-3....  F-4

Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996...................................    F-5....

Consolidated Statements of Stockholders' Equity for the years 
ended December 31, 1997 and 1996.............................    F-6....

Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 ..................................    F-7....  F-8

Notes to Consolidated Financial Statements...................    F-9....  F-18






                      .   .   .   .   .   .   .   .   .   .

                                       F-1

<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


To the Stockholders and Board of Directors of
  Master Glazier's Karate International, Inc.
  Piscataway, New Jersey


            We have  audited  the  accompanying  consolidated  balance  sheet of
Master Glazier's Karate International,  Inc. and its subsidiaries as of December
31, 1997, and the related consolidated  statements of operations,  stockholders'
equity,  and cash flows for each of the two years in the period  ended  December
31, 1997. 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  generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to  obtain  reasonable  assurance  about  whether  the  consolidated   financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall  consolidated  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 Master Glazier's Karate International,  Inc. and its subsidiaries as
of December 31, 1997, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended  December 31, 1997,  in
conformity with generally accepted accounting principles.







                                          MOORE STEPHENS, P. C.
                                          Certified Public Accountants.

Cranford, New Jersey
April 10, 1998

                                       F-2

<PAGE>

<TABLE>


MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
------------------------------------------------------------------------------





Assets:
Current Assets:
<S>                                                                     <C>        
  Cash and Cash Equivalents                                             $ 1,809,166
  Cash Held in Escrow                                                           933
  Marketable Securities                                                     191,000
  Accounts Receivable - Net                                                  14,497
  Inventory                                                                  12,330
  Prepaid Expenses and Miscellaneous Receivables                              8,240
  Notes Receivable - Current Portion                                        112,000
  Accrued Interest                                                            7,703
                                                                        -----------

  Total Current Assets                                                    2,155,869
                                                                        -----------
Property and Equipment:
  Office Equipment                                                           63,567
  Furniture and Fixtures                                                     84,254
  Leasehold Improvements                                                    100,210
  Vehicles                                                                   32,558
                                                                        -----------

  Total - At Cost                                                           280,589
  Less: Accumulated Depreciation                                            172,133

  Property and Equipment - Net                                              108,456
                                                                        -----------

Other Assets:
  Security Deposits                                                          53,456
  Notes Receivable - Long-Term                                               93,334
                                                                        -----------

  Total Other Assets                                                        146,790
                                                                        -----------
  Total Assets                                                          $ 2,411,115
                                                                        ===========




The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

</TABLE>

                                        F-3

<PAGE>


<TABLE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
------------------------------------------------------------------------------






Liabilities and Stockholders' Equity:
Current Liabilities:
<S>                                                                     <C>        
  Accounts Payable and Accrued Expenses                                 $   157,126
  Deferred Revenue                                                          194,034
                                                                        -----------

  Total Current Liabilities                                                 351,160
                                                                        -----------
Deferred Revenue                                                             68,559
                                                                        -----------
Commitments and Contingencies                                                    --
                                                                        -----------
Stockholders' Equity:
  Preferred Stock, No Par Value; 1,000,000 Shares Authorized                     --

  Common Stock, $.0001 Par Value 40,000,000 Shares
   Authorized, 4,070,002 Issued and Outstanding                                 407

  Paid-in Capital                                                         8,237,831

  Unrealized Holding Loss                                                    (7,500)

  Accumulated Deficit                                                    (6,239,342)
                                                                        -----------
  Total Stockholders' Equity                                              1,991,396
                                                                        -----------
  Total Liabilities and Stockholders' Equity                            $ 2,411,115
                                                                        ===========



The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>

                                        F-4

<PAGE>

<TABLE>


MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------



                                                                 Years ended
                                                                 December 31,
                                                             1 9 9 7       1 9 9 6
                                                             -------       -------

<S>                                                        <C>          <C>        
Net Sales                                                  $   751,909  $ 1,474,629
                                                           -----------  -----------

Costs and Expenses:
  Costs of Accessories Sold                                     65,455      158,365
  Salaries and Payroll Taxes                                   681,165    1,042,500
  Rent Expense                                                 157,844      593,142
  Other General and Administrative Expenses                    436,165    1,114,464
                                                           -----------  -----------

  Total Costs and Expenses                                   1,340,629    2,908,471
                                                           -----------  -----------

  Loss from Operations                                        (588,720)  (1,433,842)
                                                           -----------  -----------

Other Income [Expense]:
  Interest Income                                               95,873      167,521
  Gain on Sale of Securities                                     1,518      438,527
  Loss on Sale of Assets                                        23,094     (424,996)
  Loss on Investment in Limited Partnership                 (1,208,000)          --
                                                           -----------  -----------

  Other [Expense] Income - Net                              (1,087,515)     181,052
                                                           -----------  -----------

  Net Loss                                                 $(1,676,235) $(1,252,790)
                                                           ===========  ===========

  Net Loss Per Share                                       $     (0.54) $     (1.16)
                                                           ===========  ===========

  Weighted Average Shares Outstanding                        3,133,014    1,083,699
                                                           ===========  ===========



The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>

                                        F-5

<PAGE>

<TABLE>


MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------




                                        Preferred Stock          Common Stock                               Unrealized    Total
                                       Number of             Number of              Paid-in    Accumulated   Holding   Stockholders'
                                        Shares   Amount        Shares     Amount    Capital      Deficit    Gain [Loss]   Equity

<S>                                   <C>        <C>         <C>         <C>      <C>          <C>           <C>       <C>        
  Balance - December 31, 1995               --   $      --   1,070,000   $  107   $7,388,420   $(3,310,317)   345,507  $ 4,423,717

Issuance of Preferred Stock - Net
  of Stock Issuance Costs              750,000     900,000          --       --       (7,500)           --         --      892,500

Stock Exchange Agreement              (750,000)   (900,000)  1,000,000      100      299,900            --         --     (600,000)

Paid-in Capital from Anticipated
  Exercise of Stock Options                 --          --          --       --      600,000            --         --      600,000

Net Loss for the year ended
  December 31, 1996                         --          --          --       --           --    (1,252,790)        --   (1,252,790)

Realized Gain on Marketable
  Securities                                --          --          --       --           --            --   (345,507)    (345,507)
                                        ------     -------    --------   ------      -------      --------   --------  -----------

  Balance - December 31, 1996               --          --   2,070,000      207    8,280,820    (4,563,107)        --    3,717,920

Exercise of Stock Options                   --          --   2,000,002      200          800            --         --        1,000

Stock Issuance Costs                        --          --          --       --      (43,789)           --         --      (43,789)

Net Loss for the year ended
  December 31, 1997                         --          --          --       --           --    (1,676,235)        --   (1,676,235)

Unrealized Holding Loss on
  Marketable Securities                     --          --          --       --           --            --     (7,500)      (7,500)
                                        ------     -------   ---------   ------      -------      --------   --------  -----------

  Balance - December 31, 1997               --     $    --   4,070,002   $  407   $8,237,831   $(6,239,342)  $(7,500)  $(1,991,396)
                                        ======     =======   =========   ======   ==========   ===========   =======   ===========



The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>

                                             F-6

<PAGE>

<TABLE>


MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------


                                                                 Years ended
                                                                 December 31,
                                                             1 9 9 7       1 9 9 6
                                                             -------       -------
Operating Activities:
<S>                                                        <C>          <C>         
  Net Loss                                                 $(1,676,235) $(1,252,790)
                                                           -----------  -----------
  Adjustments to Reconcile Net Loss to Net
   Cash Used for Operating Activities:
   Depreciation and Amortization                                29,176      145,998
   Provision For Doubtful Accounts                             (12,455)      10,140
   Gain on Sale of Securities Available for Sale                (1,518)    (438,527)
   [Gain] Loss on Sale of Assets                                (1,835)     424,996
   Loss on Investment in Limited Partnership                 1,208,000           --

  Changes in Assets and Liabilities:
   [Increase] Decrease in:
     Accounts Receivable                                        75,741      (28,640)
     Accrued Interest Receivable                                (7,703)          --
     Inventory                                                  29,258       15,439
     Prepaid Expenses                                            8,001       22,546
     Miscellaneous Receivable                                       --       17,299
     Cash Held in Escrow                                     1,125,000           --

  [Decrease] Increase in:
   Accounts Payable and Accrued Expenses                       (18,817)     (62,428)
   Deferred Revenue                                            (94,187)     227,021
                                                           -----------  -----------

   Total Adjustments                                         2,338,661      333,844
                                                           -----------  -----------

  Net Cash - Operating Activities                              662,426     (918,946)
                                                           -----------  -----------

Investing Activities:
  Purchase of Property and Equipment                           (12,568)    (302,286)
  Proceeds from Sale of Property and Equipment                   7,000           --
  Payments Received on Notes Receivable                         74,666           --
  Investment in Limited Partnership                                 --   (1,500,000)
  Security Deposits                                            (14,363)     (11,940)
  Start-Up Costs                                                    --        2,955
  Purchase of Securities Available for Sale                   (398,500)    (426,750)
  Proceeds From Sales of Securities Available for Sale         201,518    1,477,582
  Partnership Distribution                                          --      292,000
                                                           -----------  -----------

  Net Cash - Investing Activities                             (142,247)    (468,439)
                                                           -----------  -----------

Financing Activities:
  Stock Issuance Costs                                         (43,789)      (7,500)
                                                           -----------  -----------

  Net Increase [Decrease] in Cash and Cash Equivalents         476,390   (1,394,885)

Cash and Cash Equivalents - Beginning of Years               1,332,776    2,727,661
                                                           -----------  -----------

  Cash and Cash Equivalents - End of Years                 $ 1,809,166  $ 1,332,776
                                                           ===========  ===========


The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

</TABLE>
                                        F-7

<PAGE>


<TABLE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------


                                                                 Years ended
                                                                 December 31,
                                                             1 9 9 7       1 9 9 6
                                                             -------       -------
Supplemental Disclosures of Cash Flow Information:
<S>                                                        <C>          <C>    
  Cash paid during the years for:
   Taxes                                                   $       --   $        --
   Interest                                                $       --   $        --
</TABLE>

Supplemental Schedule of Non-Cash Investing Activities:
  During October 1996,  the Company sold 750,000  shares of its preferred  stock
for $1.20 per share.  The proceeds were held in an  attorney's  trust account at
December 31, 1996 and subsequently released to the Company in January 1997.

  During  December  1996, the Company  entered into Asset  Purchase  Agreements,
whereby the Company sold  substantially  all of the assets of five of its karate
centers and received $225,000 in cash [which was held in escrow] and $280,000 in
notes receivable. The $225,000 was released to the Company in April 1997.

  During June 1997,  the Company  issued  10,000,000  shares  [2,000,000  shares
subsequent  to a 1 for 5 Reverse  Stock  Split] of common  stock for  $1,000 and
recorded cash in escrow of $933 and a stock subscription receivable of $67.


The Accompanying Notes are an integral Part of These Consolidated Financial 
Statements.

                                        F-8

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------



[1] Nature of Operations

Master  Glazier's  Karate  International,   Inc.  a  Delaware  corporation  [the
"Company"],  incorporated on March 22, 1993, manages and operates Master Glazier
Karate  Centers  located  in  Pennsylvania   through  its  several  wholly-owned
subsidiaries.  At December 31, 1997, the Company presently owns and operates two
karate centers.

During  December  1996,  the Company  entered  into Asset  Purchase  Agreements,
whereby,  the Company sold substantially all of the assets of five of its karate
centers in New York and New Jersey [See Note 16].

The  Company is engaged  in the  martial  arts  instruction  service  and offers
various courses on a membership basis. The Company's sales result primarily from
memberships sold at each center.

[2] Summary of Significant Accounting Policies

[A] Consolidated  Financial  Statements - The Company's financial statements are
consolidated based on the controlling  financial  interests of the Company.  All
material intercompany transactions have been eliminated.

[B] Revenue  Recognition - Revenue is recognized by the Company over the term of
the customer  contracts.  The average length of the customers  contract for most
belt courses is primarily 10-20 months.

[C] Accounts  Receivable  - The Company  establishes  an allowance  for doubtful
accounts  based on historical  bad debt  experience.  The allowance for doubtful
accounts at December 31, 1997 was $6,509.

[D] Inventory - Inventory  consists of martial arts products and clothing and is
valued at the lower of the cost [determined on the first-in, first-out basis] or
market.

[E] Net [Loss] Per Share - The net [loss] per share has been computed based upon
the weighted  average  number of shares  outstanding.  No dual  presentation  of
earnings  [loss]  per share is  presented  because  inclusion  of the  Company's
warrants and options as potential common stock would be anti-dilutive.

The  Financial  Accounting  Standards  Board has issued  Statement  of Financial
Accounting  Standards ("SFAS") No. 128, "Earnings per Share"; which is effective
for  financial  statements  issued for periods  ending after  December 15, 1997.
Accordingly,  earnings per share data in the financial  statements  for the year
ended December 31, 1997,  have been  calculated in accordance with SFAS No. 128.
Prior  periods  earnings per share data have been  recalculated  as necessary to
conform prior years data to SFAS No.
128.

SFAS No. 128 supersedes  Accounting  Principles  Board Opinion No. 15, "Earnings
per  Share,"  and  replaces  its  primary  earnings  per share  with a new basic
earnings per share  representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period.  SFAS No.
128 also requires a dual presentation of basic and diluted earnings per share on
the face of the statement of operations for all companies  with complex  capital
structures.  Diluted  earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding  during the reporting
period,  while giving effect to all dilutive  potential  common shares that were
outstanding during the period,  such as common shares that could result from the
potential exercise or conversion of securities into common stock.


                                       F-9

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
------------------------------------------------------------------------------



[2] Summary of Significant Accounting Policies [Continued]

[E] Net [Loss] Per Share  [Continued]  -The  computation of diluted earnings per
share does not assume conversion, exercise, or contingent issuance of securities
that would have an antidilutive  effect on earnings per share (i.e.,  increasing
earnings  per  share or  reducing  loss  per  share).  The  dilutive  effect  of
outstanding options and warrants and their equivalents are reflected in dilutive
earnings  per  share by the  application  of the  treasury  stock  method  which
recognizes  the use of proceeds  that could be obtained upon exercise of options
and  warrants in  computing  diluted  earnings  per share.  It assumes  that any
proceeds  would be used to purchase  common  stock at the average  market  price
during the period.  Options and warrants  will have a dilutive  effect only when
the  average  market  price of the common  stock  during the period  exceeds the
exercise  price of the  options or  warrants.  The  Company's  options  were not
included in the computation of diluted earnings per share because to do so would
have been antidilutive for the periods  presented;  however,  such options could
potentially dilute basic earnings per share in the future.

[F] Property and Equipment and Depreciation - Property and equipment are carried
at cost, less accumulated depreciation and amortization. Expenditures for normal
repairs and maintenance are charged against income as incurred. Depreciation and
amortization are provided over the estimated  useful lives of the assets,  using
the straight-line and double declining methods as follows:

Vehicles                                     5 years
Furniture, Fixture and Office Equipment      7 years
Leasehold Improvements                       Shorter of Useful Life of Assets or
                                             Length of Lease Term

All expenditures for betterments and additions are capitalized.

Depreciation  expense for the years ended December 31, 1997 and 1996 was $29,176
and $145,998, respectively.

[G] Cash and Cash  Equivalents  - The Company  considers  certain  highly liquid
instruments  purchased  with  original  maturities of three months or less to be
cash equivalents.  The Company had approximately  $1,797,000 of cash equivalents
at December 31, 1997.

[H] 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.
Actual results could differ from those estimates.

[I] Advertising Costs - Advertising costs are expensed as incurred.  Advertising
expense  amounted to $45,074 and $171,121 for the years ended  December 31, 1997
and 1996, respectively.

[J]  Concentrations  of Credit Risk - Financial  instruments  which  potentially
subject  the  company  to  concentrations  of  credit  risk  are  cash  and cash
equivalents   and  accounts   receivable,   arising  from  its  normal  business
activities. The Company establishes an allowance for uncollectible accounts and,
as a  consequence,  believes that its accounts  receivable  credit risk exposure
beyond  such  allowances  is  limited.  The  Company  places  its  cash and cash
equivalents  with high  credit  quality  financial  institutions.  The amount on
deposit in any one institution that exceeds  federally insured limits is subject
to credit risk.  At December  31, 1997,  the Company had no cash subject to such
risk.  The Company  does not  require  collateral  or other  security to support
financial instruments subject to credit risk.

[K] Sales  Returns - Under  Pennsylvania  State law,  the Company is required to
return  the  unearned  portion of  membership  fees to karate  members  upon the
occurrence of certain events.  The Company does not currently maintain a reserve
account for the return of  membership  fees  because it  believes  that any such
reserve would be insignificant.


                                      F-10

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
------------------------------------------------------------------------------


[2] Summary of Significant Accounting Policies [Continued]

[L] Stock  Options - On January 1, 1996,  the  Company  adopted  the  disclosure
requirements of Statement of Financial  Accounting  Standards  ["SFAS"] No. 123,
"Accounting for Stock-Based  Compensation," for stock options and similar equity
instruments [collectively,  "Options"] issued to employees, however, the Company
will  continue to apply the  intrinsic  value  based  method of  accounting  for
options issued to employees  prescribed by Accounting  Principles  Board ["APB"]
Opinion No. 25,  "Accounting for Stock Issued to Employees" rather than the fair
value based method of  accounting  prescribed by SFAS No. 123. SFAS No. 123 also
applies to  transactions  in which an entity  issues its equity  instruments  to
acquire  goods  or  services  from  non-employees.  Those  transactions  must be
accounted for based on the fair value of the consideration  received or the fair
value of the equity instruments issued, whichever is more reliably measurable.

[3] Marketable Securities

The  Company  has  classified  its  investments  in  marketable   securities  as
"Available  for Sale"  pursuant to Statement of Financial  Accounting  Standards
["SFAS"]  No.  115,  "Accounting  For  Certain  Investments  in Debt and  Equity
Securities".  Such  investments are required to be reported at fair value,  with
unrealized  gains and  losses  shown as a  separate  component  of  stockholders
equity.

Realized gains and losses are determined on the basis of sales price compared to
original  cost.  Cost is determined  under the specific  identification  method.
During the years ended  December  31, 1997 and 1996,  sales  proceeds  and gross
realized gains and losses on securities classified as available for sale were:

                                               1 9 9 7      1 9 9 6
                                               -------      -------

Sales Proceeds                               $ 201,518   $1,477,582
Gross Realized Losses                        $      --   $    9,832
Gross Realized Gains                         $   1,518   $  448,359

The net realized  gains of $1,518 and $438,527  are shown on the  Statements  of
Operations for the years ended December 31, 1997 and 1996, respectively.

During 1997, there was a $7,500 decrease in the unrealized holding loss which is
reflected on the Statements of Stockholders' Equity.

[4] Notes Receivable

Notes  receivable  at December 31, 1997 amount to $205,334 of which  $112,000 is
classified  as current and  $93,334 as  noncurrent.  The notes  consist of three
promissory  notes  that the  Company  received  pursuant  to the Asset  Purchase
Agreements  [See Note 15] in the aggregate  principal  amount of $280,000 and do
not bear interest.  The notes are to be repaid in monthly installments over a 30
month period beginning May 1, 1997. The notes are  collateralized  by the assets
transferred to the purchasers and are personally  guaranteed by the President of
the  purchasers.  Management  believes that if such repayment  should not occur,
that the pledged  collateral  and personal  guarantee  provided  will enable the
Company to receive the full principal amount. During the year ended December 31,
1997, the Company received eight payments aggregating $74,667.

[5] Deferred Revenue

Deferred revenue consists of prepaid memberships.



                                      F-11

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
------------------------------------------------------------------------------


[6] Commitments

The Company occupies certain stores and office facilities under lease agreements
expiring in 2009 which are classified as operating  leases.  Management  expects
that in the normal  course of  business,  leases  that expire will be renewed or
replaced by other leases. The leases contain clauses which permit adjustments of
lease payments based upon changes in the "Consumer  Price Index," and additional
payments  for a  proportionate  share  of real  estate  taxes  and  common  area
operating expenses. Rent expense,  including real estate taxes, was $157,844 and
$593,142  for the years  ended  December  31, 1997 and 1996,  respectively.  The
Company also leases an automobile  which expires in 2000 and is classified as an
operating lease.

The following is an analysis of operating lease commitments assuming all renewal
options are exercised.

December 31,
   1998                                $ 160,765
   1999                                  136,226
   2000                                  113,201
   2001                                  100,920
   2002                                   72,050
   Thereafter                            119,000
                                      ----------

   Total Minimum Payments Required    $  702,162

In 1997, pursuant to the Asset Purchase Agreements,  the Company paid $76,375 to
two of its landlords to secure the consent of the landlords to the assignment of
the leases by the Company to the purchasers [See Note 15].

[7] Fair Value of Financial Instruments

Effective  December  31,  1995,  the  Company  adopted  Statement  of  Financial
Accounting Standards ["SFAS"] No. 107, "Disclosure about Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial  instruments disclosed herein is not necessarily
representative  of the amount that could be  realized  or settled,  nor does the
fair value amount  consider the tax  consequences  of realization or settlement.
The  following  table   summarizes   financial   instruments  by  balance  sheet
classifications as of December 31, 1997:

                                       Carrying      Fair
                                        Amount       Value

Notes Receivable                       $ 205,334  $  188,195
                                       =========  ==========

In assessing the fair value of financial  instruments,  the Company was required
to make assumptions, which were based on estimates of market conditions and risk
existing  at that  time.  For  certain  instruments,  including  cash  and  cash
equivalents,  trade  receivables,  and payables,  management  estimates that the
carrying amount  approximated  fair value for the majority of these  instruments
because of their short maturities.



                                      F-12

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
------------------------------------------------------------------------------




[8] Income Taxes

Income  taxes have been  recorded  under SFAS No.  109,  "Accounting  for Income
Taxes."  Deferred  income  taxes  reflect  the  net  effects  of  (a)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  and (b)
operating loss carryforwards.

The tax effects of significant  items  comprising the Company's net deferred tax
assets as of December 31, 1997 are as follows:

Deferred Tax Assets:
  Net Operating Loss Carryforwards                      $1,330,536

Valuation Allowance for Deferred Tax Asset               1,330,536
                                                        ----------

  Net                                                   $       --
  ---                                                   ==========

The valuation  allowance of  $1,330,536  represents an increase of $134,113 over
the preceding  year. Net operating loss  carryforwards  of $3,913,342  expire as
follows:

Years ended
  2005                                                  $    2,350
  2006                                                       2,730
  2007                                                     243,485
  2008                                                   1,307,938
  2009                                                     963,377
  2010                                                     999,011
  2011                                                     394,451
                                                        ----------

  Total                                                 $3,913,342

A reconciliation  between statutory federal income tax and the effective rate of
income tax expense for each of the two years  during the period  ended  December
31, 1997 follows:

                                                   1 9 9 7     1 9 9 6
                                                   -------     -------

Statutory Federal Income Tax Rate                      (34)%       (34)%
Change in Valuation Allowance                           34%         34%
                                                   -------     -------

  Effective Income Tax Rate                             --          --
  -------------------------                        =======     =======

[9] Related Parties

Commencing  April,  1, 1993, the Company  entered into a lease  agreement with a
company  affiliated with an officer of the Company.  The lease was terminated as
of April 30, 1996.  Rent expense  amounted to $8,000 for the year ended December
31, 1996.



                                      F-13

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
------------------------------------------------------------------------------



[9] Related Parties [Continued]

In December 1996, the Company transferred ownership of training equipment to the
President  of the Company in lieu of  compensation  pursuant  to the  employment
agreement. The training equipment had a net book value of $29,342.

Accrued  expenses  includes  approximately  $35,000 of accrued salary due to the
President of the Company.

[10] Employment Agreement

On March 30, 1993, the Company  entered into an employment  agreement for a five
[5] year term with Mark  Glazier,  President  of the  Company.  Pursuant  to the
employment agreement, Mr. Glazier,  received annual compensation of $380,666 and
$330,395 for the years ended December 31, 1997 and 1996, respectively.

In addition,  Mr.  Glazier will have the option  during the  employment  term to
purchase up to 20% of the  Company's  common stock at $ .50 per share as long as
the Company achieves  certain pretax earnings  commencing at $500,000 during any
fiscal year.

[11] Joint Venture

On June 1, 1995 pursuant to a termination agreement, the Company terminated it's
joint venture  agreement with Planet Kids Learning  Centers.  In connection with
such  termination,  the Company received it's original  $500,000  investment and
$500,000  loan plus accrued  interest.  In addition,  the Company was granted an
option to  purchase  up to  150,000  shares of  common  stock of United  Leisure
Corporation  [the parent  company of Planet Kids  Learning  Centers] at $.01 per
share,  during any time until May 31, 2000. In return for the option the Company
agreed to perform  consulting  services  from June 1, 1995 through May 31, 1996.
During  November  1995,  the Company fully  exercised  it's option and purchased
150,000 shares of United Leisure  Corporation for $1,500.  In February 1996, the
Company sold the shares resulting in a realized gain of $448,359.

[12] Investment in Limited Partnership

On March 4, 1996, the Company entered into a limited partnership  agreement with
HEP II,  L.P.  a limited  partnership,  to  license  ancillary  rights to motion
pictures.  The  Company  has a 49.50%  interest  in HEP II and does not have any
personal  liability  to  any  of  the  partners,   creditors  or  debts  of  the
partnership.   The  Company  contributed   $1,500,000  to  the  capital  of  the
partnership and will receive  interest at 7% to be paid quarterly.  During 1996,
the  Company  earned  interest  of $87,500  on their  capital  contribution  and
received a partnership distribution of $292,000.

During the fourth  quarter of 1997,  the Company  wrote down its  investment  of
$1,208,000 in HEP II, L.P. to their  estimated  realizable  value of $-0- due to
the  noncompliance  of the  general  partner  with  the  terms  of  the  limited
partnership agreement.  The absence of quarterly interest payments in accordance
with the  partnership  agreement  and  partnership  distributions  from revenues
generated from motion pictures raised  uncertainty to the  recoverability of its
investment.   As  a  result,  a  $1,208,000   impairment  was  recorded  in  the
consolidated statements of operations.

                                      F-14

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
------------------------------------------------------------------------------


[12] Investment in Limited Partnership [Continued]

The following is an unaudited summary of HEP II, L.P. financial statements as of
July 31, 1997 [latest available information] and December 31, 1996:

                                          July 31,    December 31,
                                          1 9 9 7       1 9 9 6

Current Assets                           $       --  $   10,839
Other Assets                              2,527,055   4,451,263
                                         ----------  ----------

  Total Assets                           $2,527,055  $4,462,102
  ------------                           ==========  ==========

Total Liabilities                        $  286,096  $  545,360
Partners' Capital                         2,240,959    3,916,742
                                         ----------  -----------

  Totals Liabilities and Partners' Capita$2,527,055  $4,462,102

  Film Revenue                           $1,416,540  $1,818,000
  ------------                           ==========  ==========

  Net Loss                               $ (548,639) $ (474,123)
  --------                               ==========  ==========

  Master Glazier's Karate International, Inc.
  -------------------------------------------
   Share of Partnership Loss             $       --  $       --
   -------------------------             ==========  ==========

For the years ended December  31,1997 and 1996,  the general  partner waived the
allocation of the net loss to the limited  partners and agreed to absorb HEP II,
L.P.'s entire loss incurred for both periods.

[13] Stockholders' Equity

[A] Preferred Stock  Subscription  Agreements - On October 18, 1996, the Company
entered  into  convertible  preferred  stock  subscription  agreements  with the
President of the Company and other subscribers pursuant to which an aggregate of
750,000  shares of the Company's  preferred  stock was sold for $1.20 per share.
The shares of preferred stock were  convertible at any time after April 18, 1997
into 20 shares of the  Company's  common stock  [15,000,000  shares in total] so
long as the Company  amended its  Certificate  of  Incorporation  to authorize a
sufficient  number of shares of common stock.  Each share of preferred stock had
10 votes per share on matters presented to the shareholders for a vote.

[B] Stock Exchange  Agreement - On December 26, 1996, the Company entered into a
Stock Exchange Agreement with the President of the Company and other subscribers
pursuant to which the preferred  stockholders  exchanged an aggregate of 750,000
shares of the Company's  preferred stock for 5,000,000 shares of common stock of
the Company,  par value $.0001 per share and 10,000,000 options each exercisable
to purchase one share of common stock.  The options become  exercisable on April
17,  1997 at an  exercise  price of  $.0001  per  share so long as not less than
30,000,000 shares of common stock are authorized for issuance.  The options were
exercised on June 20, 1997.

[C] Reverse Stock Split - On March 25, 1997, the Company's stockholders approved
a one for five reverse stock split of its common stock. All share data have been
retroactively adjusted.

[D] Authorized Shares - On March 25, 1997, the Company's  stockholders  approved
an amendment to the Company's  articles of  incorporation to increase the number
of authorized shares of the Company's common stock from 15,000,000 to 40,000,000
shares.



                                      F-15

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
------------------------------------------------------------------------------


[14] Stock Options and Warrants

In  1995,  the  Company  adopted,  by  action  of the  Board  of  Directors  and
Stockholders,  the 1995  Stock Plan [the  "Plan"].  The Plan will  terminate  on
November 15, 2009.

The Plan is authorized to grant  options,  or other equity based  incentives for
1,000,000  shares of common stock. If shares subject to an option under the Plan
cease to be subject to such  options,  or if shares  awarded  under the Plan are
forfeited  or  otherwise  terminated,  such shares will again be  available  for
future issuance under the Plan.

Awards under the Plan may be made to key employees,  executive officers, and its
subsidiaries  and  affiliates.  During any calendar year, no participant  may be
granted  more than  75,000  shares.  The Plan  imposes no limit on the number of
executive officers and other employees to whom awards may be made.

The  following  types of awards  can be  granted  under the Plan:  incentive  or
non-qualified  stock  options;  stock  appreciation  rights;  restricted  stock;
deferred stock, stock purchase rights and/or other stock-based awards.

The stock options issued in 1996 became fully vested at issuance and were issued
at the fair market value of the underlying stock on the grant date.

As  of  December  31,  1996,  approximately  2,250,000  Class  A  Warrants  were
outstanding,  which  entitle  the holders to acquire  shares of common  stock at
$4.75 per share for a period expiring in October 1998.
The warrants were issued in 1993 as part of the initial public offering.

As  of  December  31,  1996,  approximately  2,250,000  Class  B  Warrants  were
outstanding,  which  entitle  the holders to acquire  shares of common  stock at
$5.50 per share for a period expiring in October 1998.
The warrants were issued in 1993 as part of the initial public offering.

Information pertaining to stock options as of December 31, 1997 and 1996 for the
years then ended is as follows:
                                                                     Weighted
                                               Weighted               Average
                                                Average   ExercisableRemaining
                                      CommonExercise Prices  Stock  Contractual
                                      Shares   Per Share    Options    Life

Options Outstanding - 
  December 31, 1995                 1,010,000   $   .30 $1,000,000     4 Years

Options Granted                         2,000       .84      2,000     9 Years
Options Granted                       130,000       .44    130,000     5 Years
Options Exercised                          --        --         --          --
Options Canceled                      (10,000)      .26         --          --
                                      -------   -------  ---------

Options Outstanding -
  December 31, 1996                 1,132,000       .32  1,132,000     4 Years

Options Granted                            --        --         --
Options Exercised                          --        --         --          --
Options Canceled                           --        --         --          --
                                      -------   -------  ---------

Options Outstanding -
  December 31, 1997                 1,132,000  $    .32  $1,132,000    3 Years
--------------------------------    =========  ========  ==========

The  exercise  prices of the  options  outstanding  at  December  31, 1997 range
between $.30 and $.84.

No  compensation  cost was  recognized in income during the years ended December
31, 1997 and 1996.


                                      F-16

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
------------------------------------------------------------------------------



[14] Stock Plan [Continued]

Had  compensation  cost been  determined on the basis of fair value  pursuant to
SFAS No. 123, net income and earnings per share would have been as follows:
                                                    Years ended
                                                   December 31,
                                             1 9 9 7           1 9 9 6
                                             -------           -------
Net Loss Income:
  As Reported                               $ (383,675)     $(1,252,790)
                                            ==========      ===========

  Pro Forma                                 $ (383,675)     $(1,298,193)
                                            ==========      ===========

Loss Per Share:
  As Reported                               $     (.12)     $     (1.16)
                                            ==========      ===========

  Pro Forma                                 $     (.12)     $     (1.20)
                                            ==========      ===========

At the grant dates,  the weighted  average fair value of the above  options were
$.45 during 1996.

The fair  value  used in the pro  forma  data was  estimated  by using an option
pricing model which took into account as of the grant date,  the exercise  price
and the expected life of the option,  the current price of the underlying  stock
and its expected  volatility,  expected dividends on the stock and the risk-free
interest rate for the expected term of the option.  The following is the average
of the data used for the following items.

               Risk-Free      Expected       Expected         Expected
             Interest Rate      Life        Volatility        Dividends

1997              --             --             --               N/A
1996             6.31%         5 Years         125%              N/A

[15] Asset Purchase Agreements

During  December  1996,  the Company  entered  into Asset  Purchase  Agreements,
whereby the Company sold  substantially  all of the assets of five of its karate
centers  located in New Jersey and New York to Tiger  Shulmann's  Karate ["TSK"]
subject to certain conditions.  In consideration for the purchase of the assets,
TSK paid the Company an aggregate of $505,000 at closing, consisting of $225,000
in cash,  and an aggregate of $280,000 in three  promissory  notes.  The Company
recognized an approximate $383,000 loss on the sale of assets pertaining to this
transaction.

[16] New Authoritative Pronouncements

     The FASB has issued SFAS No. 130,  "Reporting  Comprehensive  Income." SFAS
No. 130 establishes  standards for reporting and display of comprehensive income
and its  components in the financial  statements.  SFAS No. 130 is effective for
fiscal  years  beginning  after  December  15,  1997.  Earlier   application  is
permitted. Reclassification of financial statements for earlier periods provided
for  comparative  purposes  is  required.   Management  is  in  the  process  of
determining  its  preferred  format.  The  adoption of SFAS No. 130 will have no
impact on the Company's  consolidated results of operations,  financial position
or cash flows.

                                      F-17

<PAGE>



MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
------------------------------------------------------------------------------




[16] New Authoritative Pronouncements [Continued]

     The FASB has  issued  SFAS  No.  131,  "Disclosures  About  Segments  of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are  reported in annual  financial  statements  and  requires  the  reporting of
selected  information  about  operating  segments in interim  financial  reports
issued to  shareholders.  SFAS No. 131 is effective for periods  beginning after
December  15,  1997,  and  comparative  information  for earlier  years is to be
restated.  SFAS No. 131 need not be applied to interim  financial  statements in
the initial year of its application.  Management is in the process of evaluating
the  disclosure  requirements.  SFAS No. 131 is not  expected to have a material
impact on the Company.

In February  1998,  the FASB issued SFAS No. 132,  "Employers  Disclosure  about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure  requirements are not
expected  to have a material  impact on the  Company's  results  of  operations,
financial position or cash flows.


              .   .   .   .   .   .   .   .   .   .   .   .   .   .



                                      F-18

<PAGE>



                                    PART III


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

      The following persons are the current executive officers and directors.

    Name                       Age                       Position

Mark Glazier                   34          Chairman of the Board, President, 
                                           Chief Financial Officer and Director

Richard A. Schechtman          35          Director

Marc Zwetchenbaum              40          Director

Lawrence D. Bruch              35          Director

Joseph Drapkin                 36          Director
----------------------

BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS

    MARK  GLAZIER has been  President  and  Chairman of the Board of the Company
since its inception. He attended the American University in Washington, D.C. and
also served as the Business  Manager and Instructor at the Jhoon Rhee Institute,
a karate school located in Kensington,  MD, from 1981--1983.  From 1984 to 1986,
Mr. Glazier was a partner in, and Business  Manager and Head  Instructor of, USA
Karate  Institute,  Inc.  located in Bethesda and  Gaithursburg  MD. Mr. Glazier
subsequently opened USA Karate and Fitness, Inc. in 1986 and provided management
to a number of martial art companies,  including Tiger Schulmann, Korean Martial
Art Centers (located in New Jersey) and Pan American Tae Kwon Do (located in New
Jersey).  Mr. Glazier then opened the Company's  Hasbrouck  Heights  location in
1987, its Whitehall and Bethlehem  locations in 1990, the Hackensack location in
1992 and the Paramus  location in 1993.  Mr.  Glazier is a master in both karate
and tae kwon do.

     RICHARD  A.  SCHECHTMAN,  has been a  Director  of the  Company  since  its
inception.  Mr.  Schechtman  has since  September 1988 been the store manager of
Dinette Gallery/All America Oak Furniture, a furniture store located in Yonkers,
New York.  From July 1986 to  September  1988,  Mr.  Schechtman  was a top sales
representative of such store. Mr.  Schechtman  graduated in 1983 from University
of Michigan with a Bachelors of Arts degree in Psychology.

     MARC  ZWETCHENBAUM,  has served as a Director  of the  Company  since March
1997.  Mr.   Zwetchenbaum   has  been  general  counsel  since  1983  to  Retail
Recruiters/Spectra  Professional  Search  International,  Inc., a franchiser  of
personnel placement firms. Additionally,  Mr. Zwetchenbaum has served as outside
counsel for  Jan-Pro,  a national  commercial  cleaning  franchisor,  as well as
outside  counsel  for two  major  fitness  corporations.  He is a member  of the
Massachusetts,   Rhode  Island  and  Washington,  D.C.  bar  associations.  Marc
Zwentchenbaum,  received his B.A., cum laude, from American  University in 1979,
and received his J.D. from the University of Miami School of Law in 1982.

     LAWRENCE  D.  BRUCH  has  been  a  director  of  Master   Glazier's  Karate
International,  Inc. (the "Company") since February 1998. Mr. Bruch is currently
the  President of Scene Saver USA,  Inc.,  a computer  company  specializing  in
scenic screen  savers.  From 1987 until 1992,  Mr. Bruch was the Chairman of the
Board and President of Infopro  Incorporated,  a management  information systems
(MIS) consulting firm. Mr. Bruch graduated from Syracuse University in 1985, and
thereafter, worked for the Micro Computer Resource Center of American Express.

     JOSEPH   DRAPKIN   has  been  a  director   of  Master   Glazier's   Karate
International, Inc. (the "Company") since February 1998. Since 1994, Mr. Drapkin
has been the President of A.M.A

                                       12

<PAGE>



     Management,  Inc.,  a company  involved  in the  business  and real  estate
management in the Bethesda, MD area.  Additionally,  in October 1994 Mr. Drapkin
co-founded  the Bethesda  Martial Arts  Academy.  From 1991  through  1994,  Mr.
Drapkin  represented  various Fortune 500  corporations in Kuwait  following the
Gulf War. Mr. Drapkin attended American University from 1979 until 1983.

     There are no family relationship among the directors and executive officers
of the Company, except that Mr. Glazier is the brother-in-law of Mr. Schechtman.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

    Section 16(a) of the Securities  Exchange Act of 1934 requires the Company's
directors  and  executive  officers,  and  persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file with the
Securities and Exchange  Commission  initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the Company.
Officers,  directors and greater than ten percent  shareholders  are required by
SEC  regulation  to furnish the Company  with copies of all Section  16(a) forms
they file.

    Except as provided  below, to the Company's  knowledge,  based solely on its
review of the copies of such reports  furnished  to the Company  during the year
ended December 31, 1997, all Section 16(a)filing  requirement  applicable to its
officers,  directors  and  greater  than  ten  percent  beneficial  owners  were
satisfied.

Item 10.    EXECUTIVE COMPENSATION.

     The  following  table sets forth for each of the last  three  fiscal  years
ended December 31, the  remuneration  paid by the Company to its Chief Executive
officer and the Company's four most highly paid executive  officers who received
aggregate  remuneration  in  excess  of  $100,000  during  such  year and to all
executive officers as a group.


<TABLE>

                           SUMMARY COMPENSATION TABLE


                                    Annual Compensation Long-Term Compensation

                                                            Awards              Payouts

                                                            Securities
                                                            Underlying          All Other
Name and Principal Position   Year   Salary ($)     Bonus   Options/SARs (#)   Compensation
           (a)                (b)      (c)           (d)         (g)               (i)

Mark Glazier, President
<S>                       <C>      <C>                     <C>      
and Chairman of the Board 1997     $ 380,666
                          1996     $ 330,395

                          1995     $ 284,549               1,000,000

All Executive Officers
 as a Group (1 person)    1997
                          1996     $ 330,395
                          1995     $ 284,549               1,000,000
</TABLE>

Employment Agreement

     On March 30, 1993, the Company  entered into an employment  agreement for a
five (5) year term (the  "Employment  Term") with Mark  Glazier,  President  and
Chairman of the Board of the Company. Pursuant to such employment agreement, Mr.
Glazier  will  receive  an  annual  salary  of  $260,000  per annum for the 1993
calendar year with annual ten percent (10%) increases effective January 1, 1994.
In  addition,  Mr.  Glazier  will have the  option  (the  "Option")  during  the
Employment

                                      13

<PAGE>



Term to purchase up to twenty  percent (20%) of the Company's  Common Stock,  so
long as the Company achieves certain pre-tax  earnings  targets.  If the Company
achieves earnings before interest, amortization, depreciation and the payment of
taxes during the  Employment  Term,  of not less than  $500,000,  $1,000,000  or
$2,000,000  during any fiscal  year,  then Mr.  Glazier  shall have the right to
purchase  from the  Company  shares of  Common  Stock  equal to 5%,  10% and 20%
respectively,  of the Company's  Outstanding Common Stock, which shall be issued
to him by the Company.  "Outstanding Common Stock" means, as of the December 31,
1993 of the relevant  fiscal  year,  the number of shares of Common Stock issued
and outstanding,  excluding all shares of Common Stock issuable upon exercise of
warrants,  options or any other  security  exercisable or  exchangeable  for, or
convertible  into,  shares of Common Stock. For purposes of calculating  whether
Mr.  Glazier is  entitled  to receive  shares of Common  Stock  pursuant  to the
Option,  the Company's  earnings  shall be calculated at the  conclusion of each
fiscal year during the Employment  Term (as hereinafter  defined).  The purchase
price for the shares of Common Stock purchasable pursuant to the Option shall be
equal to $.50 per share.

     The Company does not  anticipate  that such shares will be registered  when
issued nor have any rights with respect to the registration thereof been granted
by the  Company to Mr.  Glazier.  Such  shares  will be  considered  "restricted
securities"  under Rule 144, but other  restrictions  on transfer will not limit
the transfer thereof by Mr. Glazier.  The employment agreement also provides for
the use by Mr.  Glazier of a Company  car and for  bonuses  and other  incentive
compensation  as the  Board  of  Directors  deems  appropriate,  based  upon the
Company's operating performance or other reasonable criteria. The criteria to be
used to  determine  the  amount of Mr.  Glazier's  bonuses  and other  incentive
compensation has not yet been set by the Board of Directors.  It should be noted
that Mr.  Glazier  will be involved in  determining  the bonus  policies for the
Company's  employees.  Although he will not directly  participate in determining
the  amount  of his own  bonus,  the  policies  instituted  by the  Company  may
influence his bonus. Such bonuses and other compensation may be substantial.

     On May 16, 1995, the Company granted Mark Glazier, President of the Company
an option to  purchase  from the  company  at any time  commencing  on this date
through May 16, 2000,  1,000,00  shares of common stock at an exercise  price of
$.30 per share.

     On October  21,  1996,  the  Company  granted to a director  of the Company
options to purchase  75,000  shares of common stock at an exercise  price o $.38
per share, commencing April 21, 1997 through April 21, 2006.

     On October 28, 1996,  the Company  granted  incentive  stock  options to an
employee to purchase at any time  commencing on April 28, 1997 through April 28,
2002, 50,000 shares of common stock at an exercise price of $.53 per share.

     On October 28, 1996,  the Company  granted  incentive  stock  options to an
employee to purchase at any time  commencing on April 28, 1997 through April 28,
2002, 5,000 shares of common stock at an exercise price of $.53 per share.




                                      14

<PAGE>



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

     The  following  table  sets  forth  information  as of March 31,  1998 with
respect to the beneficial  ownership of the outstanding  shares of the Company's
Common Stock by (i) any holder of more than five (5%) percent of the outstanding
shares; and (ii) the Company's  officers and directors;  and (iii) the directors
and officers of the Company as a group.

                            Number of Shares           Percentage (%)
Name and Address             of Common Stock              of Class
of Beneficial Owner       Beneficially Owned(1)       Outstanding (2)

Mark Glazier (3)                    2,050,200 (4)            48.0
c/o Master Glazier's
  Karate International, Inc.
377 Hoes Lane
Piscataway, NJ  08854

Fair Lane, LLC                       900,000                 22.1
6900 N. Andrews Avenue
Suite 500
Fort Lauderdale, FL 33309

Richard A. Schectman(5)             15,000(6)                  *
c/o Master Glazier's
  Karate International, Inc.
377 Hoes Lane
Piscataway, NJ  08854

Marc Zwetchenbaum(5)                    0                     0.0
c/o Master Glazier's
  Karate International, Inc.
377 Hoes Lane
Piscataway, NJ  08854

Lawrence D. Bruch(5)                   0                      0.0
c/o Master Glazier's
  Karate International, Inc.
377 Hoes Lane
Piscataway, NJ  08854

Joseph Drapkin(5)                       0                     0.0
c/o Master Glazier's
  Karate International, Inc.
377 Hoes Lane
Piscataway, NJ  08854

Directors and Officers              2,065,200(4)(6)          48.2
 as a Group (5 persons)

* Indicates beneficial ownership of less than 1%.
(1)  Beneficial  ownership as reported in the table above has been determined in
     accordance  with  Instruction  (4) to  Item  403 of  Regulation  S-B of the
     Securities Exchange Act.
(2) Percentage of Class based upon 4,070,002 shares of Common Stock  outstanding
on the Record Date. (3) Mr. Glazier is the Chairman of the Board,  President and
Chief Financial  Officer of the Company.  (4) Includes  200,000 shares of Common
Stock issuable to Mr. Glazier upon the exercise of an option held by him
     at an exercise price of $.30 per  share.  See "Certain Transactions".
(5)  Director.
(6)  Includes 15,000 shares of Common Stock issuable to Mr.  Schechtman upon the
     exercise of an option held by him at an exercise price of $0.38 per share.


                                      15

<PAGE>



Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     On October 18, 1996, the Company entered into  convertible  preferred stock
subscription  agreements  (the  "Agreements")  with  each of Mark  Glazier  (the
Registrant's  President and Chairman of the Board),  Fair Lane,  LLC.,  Cristine
Cowan,  Euro  Translation  Limited and CRC  Partners,  Ltd.  (collectively,  the
"Subscribers")  pursuant to which the  Subscribers  purchased  an  aggregate  of
750,000  shares of the  Registrant's  Series A Preferred  Stock (the  "Preferred
Stock") for $1.20 per share.  The shares of Preferred Stock were  convertible at
any time after April 18, 1997 into twenty (20) shares of the Registrant's Common
Stock  so long as the  Company  amended  its  Certificate  of  Incorporation  to
authorize a sufficient number of shares of Common Stock. Each share of Preferred
Stock had ten (10) votes per share on matters  presented to the shareholders for
a vote.

     On December 26, 1996, the Company  entered into a Stock Exchange  Agreement
(the "Stock Exchange  Agreement")  with Mark Glazier,  Fair Lane, LLC,  Cristine
Cowan,  Euro  Translation  Limited and CRC  Partners,  Ltd.  (collectively,  the
"Preferred Stockholders") pursuant to which the Preferred Stockholders exchanged
an aggregate of 750,000  shares of the Company's  Series A Preferred  Stock (the
"Preferred Stock") for 5,000,000 shares (the "Common Shares") of common stock of
the Company,  par value $.0001 per share (the "Common  Stock"),  and  10,000,000
options (the "Investor  Options") each  exercisable to purchase one (1) share of
Common Stock.  The Investor  Options become  exercisable on April 17, 1997 at an
exercise price of $.0001 per share so long as not less than 30,000,000 shares of
Common Stock are authorized for issuance. As a result of the transaction,  there
are currently no shares of Series A Preferred Stock issued and outstanding.

     On June 30, 1997, the Preferred  Stockholders exercised all of the Investor
Options,  resulting in the  issuance of an  aggregate of 2,000,000  post-reverse
split shares of Common Stock for the aggregate exercise price of $1,000.

                                      16

<PAGE>



                                    PART IV

Item 13. EXHIBITS AND REPORTS ON FORM 10-KSB

(a)(1)  Financial Statements.

     The following Financial Statements are included in Part II, Item 7:

Independent Auditor's Report                                      F-2

Consolidated Balance Sheet as of December 31, 1997                F-3 - F-4

Consolidated Statements of Operations for the years ended
  December 31, 1997 and 1996                                      F-5

Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 1997 and 1996                                       F-6

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997 and 1996                                      F-7 - F-8

Notes to Financial Statements                                     F-9 - F-18


(a) (2)   Financial Statement Schedules

     All  schedules  are  omitted   because  they  are  not  applicable  or  the
information required is included in the financial statements and notes thereto.

(a) (3)   Exhibits

   1.01*    Revised Form of Underwriting Agreement.

   1.02*    Revised Form of Selected Dealers Agreement.

   3.01*    Certificate of Incorporation of the Company.

   3.02*    Amended By-Laws of the Company.

   3.03*    Certificate of Incorporation of Body Motion Women's Aerobics, Inc.

   3.04*    Certificate of Incorporation of Allentown Karate Associates, Inc.

   3.05*    Certificate of Incorporation of Bethlehem Karate, Inc.

   3.06*    Certificate of Incorporation of Hackensack Karate, Inc.

   3.07*    Certificate of Incorporation of Master Glazier's Karate 
            International, Inc.

   3.08*    Certificate of Incorporation of Paramus Karate, Inc.

   3.09*    Plan  and  Agreement  of  Merger  of  Bethlehem   Karate,   Inc.,  a
            Pennsylvania  corporation,  Master Glazier's  Karate  International,
            Inc.,  a New  Jersey  corporation,  with and into  Master  Glazier's
            Karate International, Inc., a Delaware corporation.

   4.01*    Specimen Certificate for shares of Common Stock.

   4.02*    Specimen Certificate for Class A Redeemable Common Stock Purchase 
            Warrant.

   4.03*    Specimen Certificate for Class B Redeemable Common Stock Purchase 
            Warrant.

                                      17

<PAGE>



   4.04*    Form of Warrant Agreement by and among the Company,  the Underwriter
            and American Stock Transfer & Trust Company.

   4.05*    Revised Form of Underwriter's Unit Purchase Option.

   4.06     [Intentionally Left Blank]

   5.01*    Opinion of Bernstein & Wasserman, as counsel to the Company.

   5.02     [Intentionally Left Blank]

   10.01*   Employment Agreement between the Company and Mark Glazier.

   10.02*   Voting Trust Agreement between Mark Glazier and Jordan Belfort dated
            as of December 1, 1992.

   10.03*   Retainer Agreement with Bonomo, Inc.

   10.04*   Subscription Agreement between Jordan Belfort and Bethlehem Karate, 
            Inc. dated as of August 30, 1990.

   10.05*   Lease for Whitehall, Pennsylvania Karate Center.

   10.06*   Lease for Bethlehem, Pennsylvania Karate Center.

   10.07*   Lease for Hasbrouck Heights, New Jersey Aerobics Center.

   10.08*   Lease for Paramus, New Jersey Karate Center.

   10.09*   Lease for Hackensack, New Jersey Karate Center.

   10.10*   Lease for Elizabeth, New Jersey facility.

   10.11*   Form of Bridge Loan Documents.

   10.12*   Purchase Agreement between Bethlehem Karate, Inc. and Scott Van
            Dine.

   10.13*   Stock Purchase Agreement dated as of September 20, 1993, by and 
            between MG Holdings, Inc. and Jordan Belfort.

   10.14*   Amendment to Bridge Loan Agreement between the Company and Don 
            Jen, Inc.

   10.15*   Promissory Note dated January 1, 1993 issued by MGKI-NJ to Mark 
            Glazier

   10.16*   Lease for Great Neck, New York Karate Center.

   10.17**  Lease for Hicksville, New York Karate Center.

   10.18**  Lease for Ramsey, New Jersey Karate Center.

   10.19*** Asset Purchase Agreement, dated December 17, 1996 by and between 
            Paramus Karate, Inc. and Central Bergen Karate, Inc.

   10.20*** Asset Purchase Agreement, dated December 17, 1996 by and between
            Hackensack Karate, Inc. and Southern Bergen Karate, Inc.

   10.21*** Asset Purchase Agreement, dated December 17, 1996 by and between 
            Hicksville Karate, Inc. and Central Nassau Karate, Inc.


                                      18

<PAGE>



   10.22*** Asset Purchase Agreement, dated December 17, 1996 by and between 
            Ramsey Karate Center, Inc. and Northern Bergen Karate, Inc.

   10.23*** Asset Purchase Agreement, dated January 10, 1997 by and between 
            Great Neck Karate, Inc. and Northern Nassau Karate, Inc.

-----

   *        Incorporated by Reference to the Company's Registration Statement on
            Form SB-2, File No. 33-63008--NY.
  **        Incorporated by Reference to the Company's Form 10-KSB for the year 
            ended December 31, 1995.
 ***        Incorporated  by  Reference  to  the  Company's   definitive   proxy
            statement  filed pursuant to Section 14A of the Securities  Exchange
            Act of 1934, filed with the Commission on February 19, 1997.


                                      19

<PAGE>


                                   SIGNATURE

      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.

Dated:Piscataway, New Jersey
      April 15, 1998
                            MASTER GLAZIER'S KARATE INTERNATIONAL, INC.


                            By:/s/ Mark Glazier
                               ----------------------------------------
                          Name: Mark Glazier
                         Title: President and Chief Financial Officer


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

      Signature                  Title                         Date


/s/ Mark Glazier                 President, Chief Financial    April 15, 1998
---------------------------      Officer and Director
Mark Glazier                     


/s/ Richard Schechtman           Director                      April 15, 1998
---------------------------
Richard Schechtman


/s/ Marc Zwetchenbaum            Director                      April 15, 1998
---------------------------
Marc Zwetchenbaum


/s/ Joseph Drapkin               Director                      April 15, 1998
---------------------------
Joseph Drapkin


/s/ Lawrence Bruch               Director                      April 15, 1998
----------------------------
Lawrence Bruch