<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-KSB

  [X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1997                      Commission file
                                                               No.  0-18866

                                       OR

  [  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
                             Exchange Act of 1934

                       FIRST NATIONAL ENTERTAINMENT CORP.
               (Exact name of small business issuer as specified in its charter)

<TABLE>
<S>                                                                         <C>
               Colorado                                                        93-1004651 
 -------------------------------                                           --------------------
(State or other jurisdiction of                                              (I.R.S. Employer
incorporation or organization)                                             Identification No.)
</TABLE>

          600 Enterprise Drive, Suite 109, Oak Brook, Illinois  60521
          -----------------------------------------------------------
                    (Address of principal executive offices)

           2443 Warrenville Road, Suite 600, Lisle, Illinois   60532
           ---------------------------------------------------------
                    (Address of previous executive offices)

                                (630)  573-8209
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

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

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

                          Common Stock $0.005 Par Value
                          -----------------------------
                                (Title of Class)

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

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

Registrant's revenues for the 1997 Fiscal Year: $ -0-.

As of August 31, 1997 the registrant had 16,898,458 shares of its $.005 par
value Common Stock outstanding. The aggregate market value of shares of Common
Stock held by non-affiliates was $3,232,092 as of this date.





<PAGE>   2





                                     INDEX


                                           
                                           

<TABLE>
<CAPTION>
                                                 Part I.
                                                 -------                                              Page

 <S>            <C>                                                                                   <C>
 Item 1.        Business...........................................................................

 Item 2.        Properties.........................................................................

 Item 3.        Legal Proceedings..................................................................

 Item 4.        Submission of Matters to a Vote of Security Holders................................


                                                       Part II
                                                       -------

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

 Item 6.        Management's Discussion and Analysis of Financial Conditions and results
                of operations......................................................................


 Item 7.        Financial Statements and Supplementary Data........................................

 Item 8.        Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosures..........................................................


                                                      Part III.
                                                      ---------

 Item 9         Directors and Executive Officers of the Registrant.................................

 Item 10        Executive Compensation.............................................................

 Item 11        Security Ownership of Certain Beneficial Owners and Management.....................

 Item 12        Certain Relationships and Related Transactions.....................................



                                                       Part IV
                                                       -------

 Item 13        Exhibits, Financial Statement Schedules and Reports on Form 8-K....................
</TABLE>





<PAGE>   3


                                     PART I

ITEM 1 - BUSINESS

GENERAL

         First National Entertainment Corp. (the "Company") was founded to
pursue the acquisition, distribution and marketing of high quality
entertainment properties targeted at the family market in all forms of media.
The Company was incorporated on January 10, 1985, under the name of Power
Capital Inc., a Colorado corporation.  In November of 1989, Power Capital
became a public company.  On October 26, 1990 Power Capital acquired 100% of
the stock of 1st National Film Corp., a California corporation (1st National
Film - California) in a tax-free, stock-for-stock exchange.  For financial
reporting purposes this acquisition was considered a reverse acquisition, in
which 1st National Film-California was deemed the acquiring or successor parent
corporation.  In December of 1990 the name of the Company was changed to 1st
National Film Corp. (the "Company"), and 1st National Film - California's
inception date of July 7, 1989 is considered the Company's inception date.  In
October of 1994, the Company changed its name to First National Entertainment
Corp.

         In December, 1991 the Company completed the acquisition of all U.S.
and Canadian distribution, merchandising and ancillary licensing rights to the
completed animated film property Happily Ever After for approximately $1.35
million.

         In 1993, the Company left the developmental stage and entered the
operational stage concurrent with the national theatrical release of Happily
Ever After. The revenue resulting from the release of the motion picture,
including other forms of media, was well below projections.  Resulting losses
were significant and the Company accumulated a substantial tax-loss
carry-forward.

         During fiscal year 1997, the Company pursued several potential
entertainment related opportunities, including continuing efforts to develop a
video store chain and efforts to produce motion pictures/video entertainment
and educational products.  The Company was unable to complete financing of such
interests. Also in fiscal 1997 the Company experienced a cash crisis.  The
income stream had completely stopped and certain expenses required payment.
Management, at this time, negotiated operating loans funding operating expenses
through June 30, 1997 on conditions a Turnaround Plan be put into effect.   

         The new business plan contemplates continuation and expansion of the
Company's activities in the entertainment industry while exploring new business
opportunities that can immediately utilize its other unique resources.

         The Company had been listed and traded on the NASDAQ since July, 1991,
until it was delisted July 3, 1997.  The Company is appealing the delisting to  
the NASD Board of Governors.  A decision is expected following  their December,
1997 meeting.  Currently the Company trades on the OTC Bulletin Board.

INDUSTRY OVERVIEW

         The Company competes with many other entertainment companies that have
greater industry experience, acceptance and financial resources than the
Company.  The Company faces significant competition from companies in the field
of acquiring, financing, developing, producing, marketing and distributing
quality entertainment products into related markets.

FIRST NATIONAL ENTERTAINMENT CORP.

         The Company maintains unrestricted distribution rights to a variety of
media and products for Canada and the United States relating to its full length
animated movie - Happily Ever After.  This movie is





<PAGE>   4


primarily aimed at the 3 to 7 year old market, films of this nature have
continuing value since the target age group turns over quickly and there is a
new market available every 3 to 5 years.  An added asset is the fact that the
movie has never been viewed on public or cable television.

         The Company is evaluating future endeavors in production and/or
distribution of animated and live action movies.  Further contractual activity
will be dependent upon advice from recognized experts in the field.  The
Company is currently negotiating with a consultant in this domain and expects
to conclude an agreement in fiscal 1998.

ENTERTAINMENT DIVERSIFICATION PLAN

In August 1995, the Company announced plans to begin a diversification plan
into the retail video store industry.  Several acquisition transactions were
closed during the first half of fiscal year 1996, however, these acquisitions
were later cancelled due to the unavailability of debt financing during the
second half of fiscal year 1996.  

In September 1996, the Company announced that it had exclusively optioned the
screenplay "Chicago Blues" from a local screenwriter.  Financing for this live
action feature was budgeted at $1,000,000 and was offered via the formation of
Windy City Pictures I, LLC.  The Company was to serve as executive producer of
this movie and intended to produce two to three such productions a year in
Chicago.  The project was cancelled when the Company failed to raise the
revenue required and the exclusive option expired during the fiscal year.


STYLUS RECORDS

         In April of 1994 the Company acquired an 80% ownership in Stylus
Records Inc. ("Stylus") from Lewin & Rosenthal and Frontline Records, which are
an entertainment law firm and music distributor, respectively.  Pursuant to the
Stylus Founder's Agreement, the Company agreed to capitalize Stylus with
160,000 shares of its Common Stock, assumed $105,000 of long-term liabilities
from Stylus and agreed to provide a line of credit for up to $500,000. Stylus
in turn issued these shares to Lewin & Rosenthal and Frontline, and agreed to
reimburse $105,000 to Lewin & Rosenthal and Frontline for their initial
contributions. The Company retains an 80% ownership in Stylus, with Lewin &
Rosenthal (15%) and Frontline (5%) as minority investment partners in Stylus.
Currently the Company is negotiating with both minority partners to acquire
their interests in Stylus.  Additionally, the Company has elected to write off
the remaining unamortized portion of goodwill and investment related to Stylus.

         In addition to its initial acquisition costs, Stylus has advanced over
$308,000 for the development and promotion of Ms. Della Miles, most of which is
contractually recoupable to Stylus from Ms. Miles' future royalties.  However,
there can be no assurance of any future royalties derived from Ms. Miles'
efforts, and thus, there can be no assurance of any recoupment of Stylus'
advances to date. Therefore, in accordance with the Statement of Financial
Accounting Standards No. 50, ("FAS 50") Financial Reporting in the Record and
Music Industry, the advance royalties have been expensed.  Currently Ms. Miles
continues to dispute the recoupment under her contract with the Company.  (See
Financial Statement, Note 9 "Stylus Records").


SEASONALITY

         The Company's entertainment businesses may be affected by industry
seasonal factors. Theatrical attendance generally increases during summer
months and Christmas holiday period. Home video and





                                        
<PAGE>   5


related merchandising sales are typically the strongest during the Christmas
selling season, from October through December.  Music and other entertainment
property sales are not as seasonal as theatrical and home video sales, but
generally experience their strongest sales during the Christmas selling season.

INSURANCE

         The Company maintains adequate insurance policies, including general
liability, workers compensation and employers' liability and officers and
directors.  There can be no assurance that any of the above coverages will be
adequate for the Company's needs.
         .
EMPLOYEES

         As of June 30, 1997  the Company had two permanent employees,
including one officer and one staff.  No employee of the Company is represented
by a labor union or is subject to a collective bargaining agreement. The
Company believes that its relationship with its employees is good.

RESEARCH AND DEVELOPMENT

         The Company did not incur any research and development (R&D) costs in
fiscal years 1997 and 1996. The Company does not expect to generate any
significant R&D costs in fiscal 1998.

REGULATION

         The Code and Ratings Administration of the Motion Picture Association
of America, an independent industry trade association, assigns ratings for age
suitability for viewing of motion pictures.  The Company has and will continue
to submit its films for ratings.

         United States television stations and networks, as well as foreign
governments, impose restrictions on the content of motion pictures and other
entertainment properties.  There can be no assurance that future restrictions
on entertainment properties released by the Company may not affect the
Company's ability to exhibit or sell such entertainment properties.


ITEM 2 - PROPERTIES

         The Company's principal executive offices are located at 600
Enterprise Drive, Suite 109, Oak Brook, Illinois  60521, telephone (630)
573-8209. The Company leases approximately 900 square feet of office space in
an executive office complex.  This lease commenced June 1, 1997 and expires May
31, 1998.

         The Company does not own production studios or warehouses, sound
stages, music studios or any other related production facilities. As such, the
Company does not have the fixed payroll, overhead and other operating costs
associated with ownership and operation of such production facilities.


ITEM 3 - LEGAL PROCEEDINGS

         In the ordinary course of its business, the Company is from time to
time threatened with or named as a defendent in various lawsuits.  The Company
is not currently involved in any material litigation.  (See Financial
Statement, Note 11 "Commitments and Contingencies").





<PAGE>   6


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

TURNAROUND PLAN

         The Company presented shareholders a Turnaround Plan on May 30, 1997.
Included was a report on the current status of the Company and an expression of
approval which was to be mailed in. A "Shareholder Consent to Turnaround Plan"
was submitted by mail to shareholders of record of the Company and, to the
extent known and identifiable, beneficial owners as of the close of business on
Friday, May 23, 1997. The Company received an overwhelming response and
received written approvals from shareholders holding approximately 2/3 of the
outstanding shares of First National Entertainment Corp.

         The Company was reorganized with new management upon receiving
overwhelming approval from the majority of its shareholders.  Chairman and
President Charles E. Nootens heads the new management team.  Mr. Nootens has
had considerable success in building and marketing businesses and completing
financial transactions.  The Company considers its primary assets to be:

         -  It's full-length animated motion picture, Happily Ever After.

         -  The wide distribution of its publicly traded (OTC) stock with
            several market makers.

         -  It's tax-loss carry-forward exceeding $26 million that maybe used
            to offset income taxes from operations under certain circumstances.

         -  Management services in exchange for fees.

         Although the Company continues to view the entertainment industry as
important, and hopes to broaden its involvement in this sector of commerce, it
also intends to create value by pursuing opportunities that can immediately
utilize its other unique resources. (See Financial Statements, Note 12
"Continuing Operations and Subsequent Events").

EQUITY CONVERSION

         To fund its operations, the finance subsidiary will seek to raise
$1,000,000 in a private placement on the terms and conditions described below.
Mr. Nootens and NHI have agreed to exchange part or all of the Secured Demand
Promissory Notes issued to them in connection with their respective loans to
the Company during the Interim Period for the Units of Calls as described
below. (See Financial Statement, Note 5 "Notes Payable to Shareholders").

OFFER TO ALL SHAREHOLDERS

         Although the Units of Calls do not involve any immediate dilution, if
fully exercised, however, they could involve substantial dilution of voting
power and economic interest to the Company's existing shareholders.  As
explained in more detail below under the caption "Description of Securities To
Be Offered," each Call (which can be purchased for $.025 per share of the
Company covered by the Call) entitles the holder to acquire 10 Common Shares of
the Company for $.10 per share, or an aggregate price of $1.25, or $.125 per
Common Share, if all Common Shares covered by the Call are exercised.  On the
other hand, if a purchaser of a Unit of Calls (who must pay $10,000 for a Unit)
elects only to purchase one of the 400,000 shares covered by the Unit of Calls,
the price for that single Common Share would be $10,000.10.  It should be
assumed, therefor, that purchasers of the Calls presently intend to exercise
the right to purchase all of the Common Shares covered by the Call, thereby
spreading the price of the Call over the largest number of Common Shares
possible.  THUS, THE OFFER OF THESE UNITS OF CALLS IS BEING MADE IN ORDER TO BE
FAIR TO ALL OF THE COMPANY'S SHAREHOLDERS, AND TO GIVE ALL SHAREHOLDERS AN
OPPORTUNITY TO





<PAGE>   7


PARTICIPATE IN THE SECURITIES BEING OFFERED.  IT IS ANTICIPATED THAT CERTAIN OF
THE COMPANY'S OFFICERS AND DIRECTORS WILL PARTICIPATE IN THIS OFFERING.

DESCRIPTION OF SECURITIES TO BE OFFERED

         The Calls will be sold in Units entitling the holder of a Unit of
Calls to purchase from FNFC up to 400,000 Common Shares of the Company (or an
aggregate of 40,000,000 Common Shares of the Company should all 100 Units be
sold and all Calls exercised for the Company's Common Shares) for a purchase
price of $.10 per share or, in the event of the bankruptcy of the Company,
4,000 shares of FNFC's Common Shares (or an aggregate of 400,000 FNFC Common
Shares should all 100 Units be sold and all Calls exercised for FNFC shares)
for a purchase price of $1.00 per FNFC share.  The Calls will not be
exercisable for 12 months from the date of issuance and the exercise may be
postponed if, in the opinion of the Company, the exercise will jeopardize the
Company's net operating loss.  The Calls will lapse as to 20% of the shares
covered by each Unit on June 30 of each of 1999, 2001, 2003, 2005 and 2007,
respectively, and the Calls will be redeemable at the option of the Company
based on a formula.

         The purchase price for each Unit of Calls is $10,000 and the exercise
price for each Common Share of the Company is $.10.  Thus, a purchaser of the
Unit of Calls who decides to exercise the Call with respect to all shares
covered thereby (400,000 shares) would be $50,000 ($10,000 for the Call and
$40,000 upon exercise).  The mere purchase of a Call, without exercise, does
not entitle the purchaser to receive any shares of either the Company or FNFC.

FIRST NATIONAL FINANCE CORP. (FNFC)

         The Corporation which the Company has established to implement the
first phase of the Turnaround Plan is First National Finance Corp.  (FNFC), an
Illinois corporation.

         The Company will capitalize FNFC by contributing to FNFC 28 million
shares of its common stock in exchange for the issuance to the Company by FNFC
all its common shares.  These shares will represent 100% of its issued common
shares.  Thus, FNFC, will be a wholly owned consolidated subsidiary of the
Company.  The Company's Common Shares being contributed to FNFC will not be
deemed to be outstanding, and hence will not dilute the Company's primary
earnings per share and will not be entitled to any voting rights, so long as
these shares are held by FNFC.  The issuance of these shares to FNFC is not
expected to effect the Company's net operating loss.

         The Company obtained approximately $3.5 million dollars of assets
($2.9 million liquid short-term) with the issuance of preferred stock in FNFC
and Calls.  Included in the short term assets are loans receivable, interest
and cash.

INDUSTRY OVERVIEW

         Urban areas are experiencing significant demands for redevelopment of
single and multiple family dwellings.  Many qualified developers responding to
this demand require short term financing.  The Company provides this financing
generally in large metropolitan areas.

THE COMPANY'S FINANCING SERVICE OVERVIEW

         The Company is engaged in business of making relatively small, high
yield bridge loans.  These loans are typically in the range of $25,000 to
$100,000 to developers and redevelopers of real estate and to a lesser extent
tangible personal property and to producers, inventors, authors and syndicators
of media, software and other similar entertainment and intellectual properties.





<PAGE>   8


SALES AND MARKETING

         Through networking the Company has established by contacts in local
markets allowing the Company to capitalize on their expertise.  Guidelines have
been established to attact clients capable of fulfilling their loan obligations
on a timely basis. The Company's marketing strategy incorporates a continued
review of client's needs, areas which require its services and development of
long-term relationship with borrowers to more fully understand and anticipate
their needs.

COMPETITION

         The short term loan industry is very competitive and fragmented.
There are limited barriers to entry and new competitors frequently enter the
market.  Some may possess substantially greater resources. The Company believes
that the availability of quality loan candidates, level of service, effective
monitoring of loan and renovation performance and the price of service are the
principal elements of competition in the bridge loans.

EMPLOYEES

         As of September 15, 1997 FNFC has no employees and has a management
agreement for all services with First National Entertainment Corp.

PROPERTIES

         The Company shares space with its parent in a leased office which has
an annual lease ending June, 1998.

LEGAL PROCEEDINGS

         The Company is not currently involved in any litigation.


FIRST NATIONAL ENVIRONMENTAL TECHNOLOGIES, INC. (FNET)

BUSINESS

         Effective September, 1997 the Company established a subsidiary First
National Environmental Technologies, Inc. (FNET) which acquired a Swiss
Management Company, FNAT Franchising AG. The Company then obtained an 80%
interest in GMbH (a German Sales Company) as a subsidiary of FNAT Franchising
AG.

         The FNAT Franchising system uses a patented hardening process for
polyester or vinyl-resin triggered by ultra-violet light to reline cracked or
damaged underground pipes.  The system is an advancement on current systems in
capability, flexibility and substantially lower capital cost.  The FNAT system
has approximately 30% of the existing system equipment cost and may be
transported in a small van.

         With the Ultra Violet light curing system versus the cold-hardening
process our system can be cured with minimum impact on traffic or the
environment.  The UV light is instantaneous while the competitive hardening
process requires ecologically damaging on-site mixing and twenty four hours or
more of hardening time.

         Revenue is generated through franchise agreements.  Under these
agreements customers pay a license fee (franchise fee) and  commit to an
agreement to purchase lining material exclusively from the Company.  The
Company would establish objectives for material consumption.  If the customer
fails to meet the goals the Company has the right to cancel the franchise
agreement.





<PAGE>   9


         Potential customers upon signing an agreement will obtain the basic
equipment without any downpayment, and receive technical training and
assistance and marketing services. (See Financial Statement, Note 12
"Continuing Operations and Subsequent Events").

INDUSTRY OVERVIEW

         In the last ten years communities in northern and middle Europe began
investigating the extent of damaged underground sewage and waste water pipes.
In Germany at least 30% of underground pipes are damaged and need curing.
Under present German laws communities and owners of underground pipes have a
legal obligation to fix damaged sewer and waste water pipes.  It is believed
that there is an immediate market for over 100 systems in Germany and that it
could expand with further damage evaluation and customer education to several
hundred units.  In the future FNAT may qualify to be used on fresh water pipes
which could significantly expand the market.

ORGANIZATIONAL STRUCTURE

         Currently, FNET's President is also Managing Director of FNAT
Franchising AG located in Zurich, Switzerland.  The general management will be
located with financial and marketing services directed from the Swiss location.
Cash management will be located in Corporate at Oak Brook, Illinois.

         The subsidiary, GMbH has a Managing Partner responsible for operation.
The managing partner of GMbH will sign up and train the new customers.  The
Company will expand its sales and technical assistance organization by hiring
two regional managers working as independent contractors.

SALES AND MARKETING

         The Company's plan is to make the units available to customrs on a
franchise basis.  Prior industry experience should put the Company in contact
with several customers who have been using a prior system that is no longer
available.

         The Company will try to develop sales through three types of companies
(initially in Germany).  The potential customers are: (1) specialized pipe
curing companies owning the necessary equipment, including other systems
competing with FNAT Franchising AG, (2) pipe cleaning companies owning
inspection and cleaning equipment, but not owning competing pipe curing
systems, and (3) construction companies diversifying into pipe cleaning and
curing as an addition to their traditional business.

COMPETITION

         Traditional systems of digging up the old pipes and completely
replacing them.  Also, in many countries, mainly in the UK and USA not only the
traditional methods have a firm grip on the market, but also the cold-hardening
method.  These are competing systems.

         The Company believes that with the new advances in its equipment,
ecological improvement and cost effectiveness it competes favorably with
respect to these factors.  It expects competition to increase and there can be
no assurance the Company will remain competitive.



                                    PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS





<PAGE>   10


         The Company's $.005 par value Common Stock shares was traded on the
NASDAQ 'Small Cap' Market System under the symbol "FNAT" through July 3, 1997.
The following table shows the range of reported high and low bid quotations for
the Company's Common shares, for the fiscal periods indicated, as reported on
the NASDAQ Regular Market System through the National Quotation Bureau and
NASDAQ Monthly Reports.


<TABLE>
<CAPTION>
                                               
                                               
                                           High             Low
                                           ----             ---
Fiscal 1997:

<S>                                        <C>             <C>      
         July - September                  $0.06            $0.09
         October - December                $0.25            $0.03
         January - March                   $0.16            $0.06
         March - June                      $0.13            $0.03
</TABLE>


         As of September 1, 1997, the Company had 2,308 shareholders of record.
The Company has never paid a cash dividend on its Common Stock and does not
expect to pay a cash dividend on its Common Stock in the foreseeable future.

         On October 6, 1996 the Company's Board of Directors approved and
issued an Extension and Optional New Pricing Offer to the holders of Warrants
from its Private Placement of 1,260,000 of the Company's common stock in
December 1995.  These 1,260,000 Warrants originally entitled the holders to
purchase an additional share each of the Company's common stock at a price of
$1.00 through an expiration date of December 15, 1997.  The Extension and
Optional New Pricing Offer allows an extension at the same price until December
31, 1998 for no additional consideration OR an extension until December 31,
1999 at a share price of $.15 for additional consideration of $.05 per Warrant
OR an extension until December 31, 2000 at a share price of $.05 for additional
consideration of $.10 per Warrant.

         In an agreement dated September 22, 1997 the Company has agreed to
acquire the options for 800,000 shares of Company stock held by Mr.  Stephen J.
Denari for $17,000.00.


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

OVERVIEW

         In recent years, substantially all of the Company's revenue has come
from its film property, Happily Ever After.  The film continues to have value
for video, television, merchandising DVD rights fees and other rights fees.

         The Company's unamortized film costs associated with Happily Ever
After totaled $500,000 at June 30, 1997.  On June 30, 1997 the Company acquired
the short term loan business under a subsidiary, First National Finance Corp.,
its initial step in a turnaround plan intended to diversify into additional
revenue streams beyond the film.

         The Company has ended its venture into the music industry and has
written off its investment (See Financial Statements, Note 9 "Stylus Records").

FORWARD LOOKING STATEMENTS

         The form 10-K includes certain "forward looking" statements, which
reflect the Company's current expectations regarding the future results of
operations, performance, and achievements.  First Ntional Entertainment Corp.
has tried, whereever possible, to identify these statements by having words
such as





<PAGE>   11


"believe", "anticipate", "expect" and similar expressions.  Accordingly, these
statements are subject to risks and uncertainties.  The risks and uncertainties
include the following: economic activity in the United States, continued strong
building rehabilitation market with available mortgage funds; the Company to
attract new businesses to its plan of diversification; the retention of key
personnel; exposure to liability risk and changes in tax or regulatory
requirements.

REVENUE

         The Company's revenues for fiscal year 1996 were comprised of producer
participation royalties accrued from its former video distribution partner,
Republic Pictures, for home video sales of the Company's animated motion
picture property Happily Ever After.  With the expiration of the agreement,
revenue was nil in 1997 owing to the fact that revenue through June 1997 all
revenue was obtained from Happily Ever After.

GROSS PROFIT

         Gross profits dropped from $13,542 in 1996 to zero in 1997.

OPERATING EXPENSES

         Operating expenses decreased 41.7% to $2.8 million from $4.8 million.
The decrease was primarily a result of significant cost reduction in General
and Administrative costs and elimination of litigation costs with settlement in
the SEC investigation and shareholder class action suit.  Included in operating
expenses is a write down of film inventory of $2,200,000 to the estimated net
realizable value.

OPERATING LOSS

         Operating loss decreased 40.4% to $2.8 million from $4.7 million.

OTHER (INCOME) EXPENSE

         Other (income) expense was $173,000 of expenses in 1997, as compared
to $21,000 of expenses in 1996.

INCOME TAXES

         There was no income tax effect for 1997 and 1996, respectively.  The
Company is limited in its annual utilization of loss carryforwards under IRC
Section 382, "Limitation of Net Operating Loss Carryforwards", based on certain
changes in ownership. (See Financial Statement, Note 7 "Income Taxes").

NET LOSS

         Net loss decreased to $2.9 million in 1997 from $4.7 million in 1996,
as a result of the factors described above


LIQUIDITY AND CAPITAL RESOURCES

         Historically, the Company has financed its operations through cash
generated by operating activities and through external financing, including
capital leases, private placement lines of credit and sale of warrants.





<PAGE>   12


         As the Company's Turnaround Plan is initiated there will be increasing
requirements for cash resources to fund operations, acquisitions and capital
expenditures.  During 1997 capital expenditures were primarily for computers
and office furniture and fixtures.

         With the exception of possible acquisitions, the Company believes that
its cash balance, funds from operations and planned line of credit will be
sufficient to fund the operation of corporate management to continue the
turnaround plan at least through the next six months.


MANAGEMENT REPORT

         The accompanying financial statements of First National Entertainment
Corp. and Subsidiaries (the "Company") are the responsibility of and have been
prepared by the Company in conformity with generally accepted accounting
principles.  It is necessary to include some amounts that are based on best
judgement and estimates. The Company seeks to assure the objectivity and
integrity of its financial records by careful selection of its employees and by
insuring that its policies and methods are understood. The Board of Directors
pursue oversight of financial reporting and internal control on a regular
basis.It is believed by management as stated earlier it has sufficient funding
to continue as a going conern.


ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





<PAGE>   13




                       FIRST NATIONAL ENTERTAINMENT CORP.
                                AND SUBSIDIARIES
                              Oak Brook, Illinois

                       CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996



<PAGE>   14





                         REPORT OF INDEPENDENT AUDITORS


Board of Directors
First National Entertainment Corp.
  and Subsidiaries
Oak Brook, Illinois


We have audited the accompanying consolidated balance sheets of First National
Entertainment Corp. and Subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, cash flows, and shareholders'
equity for the years then ended.  These consolidated financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with 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 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 financial position of First National
Entertainment Corp. and Subsidiaries at June 30, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in Note 12 to
the consolidated financial statements, the Company has suffered recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern.  Management's plan in regard to these matters is
also described in Note 12.  The consolidated financial statements do not
include any adjustments that might arise from the outcome of this uncertainty.




                                              Crowe, Chizek and Company LLP

Oak Brook, Illinois
September 17, 1997









                                                                       1.
<PAGE>   15

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             June 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                                              1997               1996
                                                                              ----               ----
<S>                                                                     <C>                <C>
ASSETS
Current assets
    Cash                                                                $        52,272    $       156,993
    Cash escrow account                                                         500,000                  -
    Loans receivable, less allowance for loan losses of $25,000               2,186,315                  -
    Accounts receivable                                                               -             26,945
    Interest receivable                                                          52,653                  -
    Prepaid expenses                                                              4,883              9,514
                                                                        ---------------    ---------------
         Total current assets                                                 2,796,123            193,452

Real estate held for development                                                550,000                  -

Other assets
    Property and equipment, net                                                  12,607             42,064
    Film inventory, net of accumulated amortization of
      $10,062,101 in 1997 and $7,862,101 in 1996                                500,000          2,700,000
    Organization costs, net of accumulated amortization of
      $252,078 in 1997 and $106,904 in 1996                                           -            145,174
                                                                        ---------------    ---------------
         Total other assets                                                     512,607          2,887,238
                                                                        ---------------    ---------------

                                                                        $     3,858,730    $     3,080,690
                                                                        ===============    ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Notes payable to shareholders                                       $       200,000    $             -
    Accounts payable                                                            361,747            273,285
    Accrued expenses                                                            370,444            225,041
    Obligations under capital leases                                                  -             21,081
                                                                        ---------------    ---------------
         Total current liabilities                                              932,191            519,407

Minority interest in consolidated subsidiary                                  2,788,968                  -

Shareholders' equity
    Preferred stock, $.0001 par value, authorized 10,000,000
      shares, no shares issued and outstanding                                        -                  -
    Common stock, $.005 par value; authorized, 100,000,000
      shares; issued and outstanding, 16,898,458 shares                          84,495             84,495
    Paid-in capital                                                          26,650,608         26,090,608
    Accumulated deficit                                                     (26,597,532)       (23,613,820)
                                                                        ---------------    --------------- 
         Total shareholders' equity                                             137,571          2,561,283
                                                                        ---------------    ---------------

                                                                        $     3,858,730    $     3,080,690
                                                                        ===============    ===============
</TABLE>



         See accompanying notes to consolidated financial statements.









                                                                        2.
<PAGE>   16

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                       Years ended June 30, 1997 and 1996



<TABLE>
<CAPTION>
                                                                              1997               1996
                                                                              ----               ----

<S>                                                                     <C>                <C>
Total revenues                                                          $             -    $     1,153,542

Cost of revenues
    Amortization of film costs                                                        -          1,140,000
                                                                        ---------------    ---------------


GROSS PROFIT                                                                          -             13,542

Operating expenses
    Marketing, selling and royalties                                            103,542            253,158
    General and administrative                                                  361,693          2,219,111
    Gain on sale of furniture and equipment                                           -           (427,860)
    Settlement of litigation                                                          -          2,081,040
    Write-off film inventory costs                                            2,200,000            405,987
    Write-off goodwill and organization costs                                   145,174            225,000
                                                                        ---------------    ---------------
         Total operating expenses                                             2,810,409          4,756,436
                                                                        ---------------    ---------------


OPERATING LOSS                                                               (2,810,409)        (4,742,894)

Other expense                                                                   173,303             21,040
                                                                        ---------------    ---------------


NET LOSS                                                                $    (2,983,712)    $   (4,763,934)
                                                                        ===============     ============== 

Net loss per share                                                      $          (.18)   $          (.33)
                                                                        ===============    =============== 

Weighted average shares outstanding                                          16,898,458         14,314,317
                                                                        ===============    ===============
</TABLE>






         See accompanying notes to consolidated financial statements.









                                                                        3.
<PAGE>   17

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                       Years ended June 30, 1997 and 1996



<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES                                             1997             1996
                                                                                 ----             ----
<S>                                                                       <C>               <C>
    Net loss                                                              $   (2,983,712)    $  (4,763,934)
    Adjustments to reconcile net loss to net cash used in
      operating activities
         Gain on sale of furniture and equipment                                       -          (427,860)
         Loss on disposition of capital leases                                     9,022                 -
         Write down of film inventory to net realizable value                  2,200,000                 -
         Amortization of film costs                                                    -         1,140,000
         Stock issued for services and compensation, net                               -             3,667
         Provision for doubtful accounts                                               -         1,126,097
         Other amortization and depreciation                                     148,070           279,880
         Issuance of common stock in settlement of
           class action lawsuit                                                        -         2,000,000
    Increase (decrease) in cash caused by change in assets
      and liabilities
         Accounts receivable                                                      26,945        (1,153,042)
         Accounts payable                                                         88,462            57,103
         Other assets and liabilities, net                                       150,034           472,633
                                                                          --------------    --------------
             Net cash used in operating activities                              (361,179)       (1,265,456)

CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sale of equipment                                                    -           531,387
    Acquisition of property and equipment                                         (3,542)          (14,186)
                                                                          --------------     ------------- 
         Net cash provided by (used in) investing activities                      (3,542)          517,201

CASH FLOWS FROM FINANCING ACTIVITIES
    Issuance of warrants                                                          60,000                 -
    Loans from shareholders                                                      200,000                 -
    Issuance of common stock                                                           -           830,000
                                                                          --------------    --------------
         Net cash provided by financing activities                               260,000           830,000
                                                                          --------------    --------------

Increase (decrease) in cash                                                     (104,721)           81,745

Cash and cash equivalents at beginning of year                                   156,993            75,248
                                                                          --------------    --------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                  $       52,272    $      156,993
                                                                          ==============    ==============
</TABLE>







                                 (Continued)









                                                                        4.
<PAGE>   18

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                       Years ended June 30, 1997 and 1996



<TABLE>
<CAPTION>
                                                                                 1997             1996
                                                                                 ----             ----
<S>                                                                          <C>                  <C>
Supplemental schedule of noncash investing and
  financing activities
    During 1997, First National Finance Corp. (FNFC)
      acquired certain assets from corporations owned
      by the Chairman of the Board of Directors in exchange for
      $3,500,000, principal amount,  of FNFC preferred stock
      and warrants to acquire 20,000,000 shares of First National
      Entertainment Corp. common stock
         Loans receivable                                                    $  2,186,315
         Interest receivable                                                       52,653
         Real estate held for development                                         550,000
         Cash escrow account                                                      500,000
         Preferred stock                                                       (2,788,968)
         Additional paid-in capital                                              (500,000)
                                                                             ------------ 

                                                                             $          -
                                                                             ============
</TABLE>






                See accompanying notes to financial statments.









                                                                        
                                                                        5.
<PAGE>   19

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                       Years ended June 30, 1997 and 1996



<TABLE>
<CAPTION>
                                   Common Stock   
                                   ------------      
                               Number                        Additional
                                 of                           Paid-in         Accumulated
                               Shares         Amount          Capital           Deficit           Total
                               ------         ------          -------           -------           -----
<S>                           <C>             <C>             <C>               <C>             <C>
Balance at
  July 1, 1995                11,293,631     $ 56,468          $  23,285,049     $ (18,849,886)   $4,491,631

Issuance of common
  stock for employee
  compensation,
  services, and
  professional                     
  fees, net                        4,365           22                  3,645                 -         3,667              

Issuance of
  common stock                 1,617,143        8,086                821,914                 -       830,000

Issuance of
  common stock
  in settlement of
  class action lawsuit         4,000,000       20,000              1,980,000                 -     2,000,000

Cancellation of
  common stock
  pursuant to return
  by former Chairman             (16,681)         (81)                     -                 -           (81)

Net loss                               -            -                      -        (4,763,934)   (4,763,934)
                            ------------     --------              ---------       -----------    ----------   

Balance at
  June 30, 1996               16,898,458       84,495             26,090,608       (23,613,820)    2,561,283

Issuance of
  Warrants                             -            -                560,000                 -       560,000

Net loss                               -            -                      -        (2,983,712)   (2,983,712)
                            ------------     --------              ---------       -----------    ----------              


Balance at
  June 30, 1997               16,898,458     $ 84,495          $  26,650,608      $(26,597,532)    $ 137,571
                            ============     ========          =============      ============     ========= 
</TABLE>






               See accompanying notes to financial statements.






                                                                        6.
<PAGE>   20

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The consolidated financial statements include the
accounts of First National Entertainment Corp. (a Colorado corporation) and its
subsidiaries, First National Film Corp. - California, Stylus Records, and First
National Finance Corp. (collectively referred to as the "Company").  As of June
30, 1997, there were nominal assets and liabilities in the Company's First
National Film Corp. - California subsidiary.  All significant intercompany
accounts and transactions have been eliminated in consolidation.

The Company's primary business activity, through June 30, 1997, has been the
acquisition, distribution, and marketing of high-quality entertainment
properties targeted at the family market in film and other media.

First National Finance Corp. is engaged in the business of extending credit
primarily to developers and redevelopers of real estate and to producers,
inventors, authors, and syndicators of media software and similar entertainment
and intellectual properties in the form of short-term, high yield bridge loans
(typically in the range of $25,000 to $100,000) (see Notes 12 and 14).

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

Revenue Recognition:  Revenues from the exhibition and sale of the Company's
film entertainment properties are recorded when earned, based on the Company's
rights under various exhibition/distribution agreements.  Revenues from
theatrical properties are recorded when exhibited, based on a percentage of box
office receipts.  Revenues from home video producer royalties are recorded
based on reported sales and collections by the Company's distributor(s).
Revenues from television, merchandising, and other related markets for the
Company's film entertainment properties are recorded when the properties are
released for sale in these media, subject to acceptance, collectibility, and
other criteria.

The Company's revenues for fiscal year 1996 were comprised of producer
participation royalties accrued from its former video distribution partner,
Republic Pictures, for home video sales of the Company's animated motion
picture property Happily Ever After.




                                 (Continued)






                                                                        7. 
<PAGE>   21

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cost Recognition:  Costs associated with the Company's entertainment properties
are generally recognized consistent with associated revenues.  Under Statement
of Financial Accounting Standards (SFAS) No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films", the Company amortizes film
costs for each period in proportion to the revenue recognized in the current
period, relative to management's estimate of the total revenue to be realized
from all markets for a given film property over its commercial life.  Amortized
film costs include acquisition, distribution, print, advertising, marketing,
and certain other costs that benefit a property over its entire
revenue-producing life.  (Certain local advertising, marketing costs, and
direct theatrical costs for a property are immediately expensed in the period
of theatrical exhibition.)

Management reviews its revenue projections for film properties on a regular
basis, which may result in changes of projected film revenues, costs, and rate
of cost amortization, which can have a material effect on income for any
current and/or future period.  Estimated losses from a property, if any, are
provided for currently.

Income Taxes:  The Company accounts for income taxes using the deferred asset
and liability method as required by SFAS No. 109, "Accounting for Income
Taxes".  Deferred income taxes are provided as temporary differences arise
between the basis of asset and liabilities for financial reporting and income
tax reporting.

Earnings/(Loss) Per Share:  Earnings/(loss) per common share is computed by
dividing the net income/(loss) for the period by the weighted average number of
common shares outstanding during the period.  Since the Company has experienced
net operating losses, the outstanding options and warrants to purchase common
stock have an anti-dilutive effect.  Therefore, options and warrants were not
included in the earnings/(loss) per share calculation.

Cash and Cash Equivalents:  For purposes of the statement of cash flows, the
Company considers all investments with maturities of three months or less, when
purchased, to be cash equivalents.

Film Inventory:  Film inventory consists of certain capitalized costs for the
acquisition, production, and exploitation of entertainment properties.
Inventory is stated at the lower of unamortized cost or estimated net
realizable value for each property.  In accordance with SFAS No. 53, "Financial
Reporting by Producers and Distributors of Motion Picture Films", the Company
amortizes its film costs using the "individual film forecast method" which
requires that cost amortization relate film costs to the estimated total gross
revenues from all lifetime sources on an individual film basis.  Amortization 
of film costs begins when a film property is released into its primary market 
and revenue generation has begun.  Unamortized costs remain



                                 (Continued)




                                                                             8. 
<PAGE>   22

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

as inventory on the balance sheet, with capitalized costs for the property's
initial (primary) market recorded as current inventory, and capitalized costs
associated with secondary markets recorded as non-current inventory.

Loans Receivable:  Loans are stated net of the allowance for loan losses and
unearned discount.  Interest on loans is included in interest income over the
term of the loan based upon the principal balance outstanding.  Where serious
doubt exists as to the collectibility of a loan, the accrual of interest is
discontinued.  Loan fees and direct loan origination costs are deferred and
amortized over the term of the loan as a yield adjustment.

Allowance for Loan Losses:  An allowance for loan losses has been established
to provide for those loans which may not be repaid in their entirety.  The
allowance is increased by provisions for loan losses charged to expense and
decreased by charge-offs, net of recoveries.  Although a loan is charged off by
management when deemed uncollectible, collection efforts may continue and
future recoveries may occur.

The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
(including their financial position and collateral values) and other factors
and estimates which are subject to change over time.  Estimating the risk of
loss and the amount of loss on any loan is necessarily subjective and ultimate
losses may vary from current estimates.  These estimates are reviewed
periodically and as adjustments become necessary they are reported in earnings
in the periods in which they become known.

Property and Equipment:  Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 3 to 7 years.  Leasehold improvements are
amortized over the useful lives of the improvements or the term of the lease,
whichever is shorter.

Financial Instruments:  The Company's financial instruments consist principally
of loans receivable and are carried at amounts which approximate fair value.




                                 (Continued)




                                                                             9. 
<PAGE>   23

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Standards:  On October 23, 1995, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").  SFAS No.
123 encourages, but does not require, the recognition of compensation expense
for grants of stock, stock options and other equity instruments to employees
based on a fair value method of accounting.  Companies are permitted to
continue to apply the existing accounting rules contained in Accounting
Principles Board Opinion No.  25, "Accounting for Stock Issued to Employees"
("APB 25"); however, companies that choose to retain this method of accounting
are required to provide expanded disclosures of pro forma net income and
earnings per share in the notes to financial statements as if the new fair
value method of accounting had been adopted.  The provisions of SFAS No. 123
are effective for fiscal years beginning after December 15, 1995.  The Company
has elected to continue to apply the accounting rules contained in APB 25.  No
additional disclosure requirements are necessary as there were no options
issued for fiscal years subsequent to December 15, 1995.


NOTE 2 - ACCOUNTS RECEIVABLE

On August 16, 1994, the Company received an accounting statement from Republic
Pictures (Republic), its former film distributor, that reported video sales and
collection results for Happily Ever After through June 30, 1994.  This
statement reflected a lower producer royalty payment than the Company had
anticipated because of certain assumptions used by Republic in the accounting
statement that the Company believes were inconsistent with its distribution
agreement with Republic.  The Company communicated these issues to Republic and
conducted a comprehensive third-party special audit of all reported video
results.  Republic subsequently agreed to revise the August 16, 1994 accounting
statement for the number of videos shipped and, on September 26, 1994,
delivered payment to the Company for this revised accounting statement, plus
interest.  However, according to the special auditor's report, Republic owes
the Company a producer's bonus of 5% of the first one million units sold, which
approximates $256,000, in addition to amounts owed the Company for foreign
currency adjustments and excess units held in reserve of $184,000.  In 1996,
Republic reported units sold of 389,000 units, but because of certain cost
assumptions used by Republic in submitting its accounting for these sold units,
informed the Company that they have no liability for producer royalty payments.
The Company maintains that under the terms of the Distributor Agreement, they
are entitled to a specific amount for each unit sold or approximately
$1,150,000 for 1996.  The Company intends to vigorously pursue collection
efforts with respect to these receivables, however, due to the uncertainty of
the results of the collection efforts, the Company has charged off all of these
outstanding receivables in 1996 and prior years.




                                 (Continued)



                                                                            10. 
                                                                        
<PAGE>   24

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 3 - FILM INVENTORY

The Company's film inventory is summarized as follows:

<TABLE>
<CAPTION>

                                                                           1997            1996 
                                                                         --------        --------
<S>                                                                      <C>            <C>             
Unamortized film costs for Happily Ever After allocated
to the secondary market and recorded as a noncurrent asset                $500,000       $2,700,000
                                                                          

</TABLE>
             

Amortization of capitalized film property costs is computed using the
individual-film-forecast computation method as promulgated under SFAS No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films".
At June 30, 1996, the Company intended to amortize the remaining unamortized
film costs for its Happily Ever After property over the next five years,
subject to future market conditions altering this accounting estimate.  The
Company's computation of net realizable value as of June 30, 1997, has resulted
in a significant change in the amount of unamortized costs permitted to be
charged to future operations.  Accordingly, a charge of $2,200,000 is reflected
in the 1997 statement of operations to reflect the writedown of film property
costs to their estimated net realizable value.

During fiscal year 1996, the Company evaluated the potential future
marketability of its film version of the Nigel Miles-Thomas stage production of
Cinderella.  Based upon difficulties in securing satisfactory songwriting and
financing, as well as the production of competitive properties by major
Hollywood studios, the Company has decided to abandon its effort to produce
this version of Cinderella.  Accordingly, the previously deferred development
and preproduction costs, in the amount of $405,987,  were charged against 1996
income.


NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment at June 30, 1997 and 1996, consisted of the following:

<TABLE>
<CAPTION>
                                                                                  1997             1996
                                                                                  ----             ----

    <S>                                                                        <C>             <C>
    Office equipment                                                           $    14,350     $    12,610
    Furniture and fixtures                                                           3,377           1,575
    Capital leases                                                                       -          41,994
                                                                               -----------     -----------
                                                                                    17,727          56,179
    Less accumulated depreciation                                                    5,120          14,115
                                                                               -----------     -----------

         Net property and equipment                                            $    12,607     $    42,064
                                                                               ===========     ===========
</TABLE>




                                 (Continued)


                                                                            11. 

                                                                
<PAGE>   25

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 5 - NOTES PAYABLE TO SHAREHOLDERS

The notes payable to shareholders are payable on demand, bear interest at 10%
per annum, and are collateralized by substantially all of the Company's assets.


NOTE 6 - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY

The minority interest in consolidated subsidiary includes shares of $1 par
value, variable rate, cumulative, preferred stock issued by First National
Finance Corp.  At June 30, 1997, 3,500,000 shares had been issued at
approximately $.80 a share.  The liquidation preference of these shares is
$3,500,000.


NOTE 7 - INCOME TAXES

The Company had cumulative net operating loss carryforwards of approximately
$23.4 million at June 30, 1997, for federal tax reporting purposes.  The net
operating loss carryforwards expire in varying amounts beginning in the year
2000.

Due to changes in the Company's ownership, the annual utilization of the net
operating loss carryforwards arising prior to the ownership changes may be
limited.  Generally, the amount of those carryforwards available for annual
utilization is based on the value of the Company at the time of the ownership
change, multiplied by a rate specified by the Internal Revenue Service.

Significant components of deferred tax assets and liabilities at June 30, 1997
and 1996, are as follows:

<TABLE>
<CAPTION>
                                                                                1997             1996
                                                                                ----             ----
    <S>                                                                   <C>               <C>
    Deferred tax assets
         Net operating loss carryforwards                                 $    7,950,000    $    7,000,000
         Reserves and allowances                                                 100,000           375,000
                                                                          --------------    --------------
                                                                               8,050,000         7,375,000
    Valuation allowance                                                        8,050,000         7,375,000
                                                                          --------------    --------------

         Net deferred taxes                                               $            -    $            -
                                                                          ==============    ==============
</TABLE>




                                 (Continued)


                                                                            12. 

                
<PAGE>   26

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 7 - INCOME TAXES (Continued)

A valuation allowance has been established by the Company due to the
uncertainties of the realization of deferred tax assets based on the Company's
prior history of tax losses.  The valuation allowance increased approximately
$675,000 in 1997 due to the increase in net deferred tax assets.  Management
will continue to re-evaluate the appropriateness of the valuation allowance in
future years.

There were no income tax payments in the years ended 1997 and 1996.


NOTE 8 - SHAREHOLDERS' EQUITY

Preferred Stock:  The Company has authorized the issuance of 10,000,000 shares
of $.0001 par value preferred stock.  At June 30, 1997, the Company had not
issued any preferred shares.

Common Stock:  In 1996, the Company issued 4,365 shares for employee
compensation, contractual services, and professional fees valued at $3,667.

In the second quarter of 1996, the Company initiated an equity restructuring
program in which the Company issued 1,260,000 shares of its common stock (par
value $.005) along with warrants to purchase an additional 1,260,000 shares of
its common stock (par value $.005) at $1/share.  Total proceeds from the
offering amounted to $830,000.  On October 6, 1996, the Company's Board of
Directors approved and issued an Extension and Optional New Pricing Offer to
the holders of these warrants.  These 1,260,000 warrants originally entitled
the holders to purchase an additional share each of the Company's common stock
at a price of $1 through an expiration date of December 15, 1997.  The
Extension and Optional New Pricing Offer allows an extension at the same price
until December 31, 1998, for no additional consideration or an extension until
December 31, 1999, at a share price of $.15 for additional consideration of
$.05 per warrant or an extension until December 31, 2000, at a share price of
$.05 for additional consideration of $.10 per warrant.  During the year ended
June 30, 1997, warrants for 800,000 shares were extended to December 31, 1999,
and warrants for 200,000 shares were extended to December 31, 2000.  Additional
paid-in capital of $60,000 was received from these transactions.

Rentrak, Inc. of Portland, Oregon is a large distributor of video cassettes on
a pay per view basis nationally.  On December 22, 1995, the Company and Rentrak
entered into a ten-year agreement whereby Rentrak purchased 357,143 shares of
common stock for $200,000.  Rentrak has also agreed to acquire an additional
$10,000 of common stock for each new non-Rentrak video store acquired by the
Company.

On December 28, 1995, the Company issued 4,000,000 shares of common stock as
part of the settlement of a class action lawsuit (see Note 10 - Settlement of
Legal Matters).





                                 (Continued)


                                                                            13. 

<PAGE>   27

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 8 - SHAREHOLDERS' EQUITY (Continued)

Stock Options:  On May 21, 1993, shareholders approved an incentive stock plan
which reserved 3,500,000 shares of the Company's common stock for issuance
under the 1993 Incentive Stock Option Plan ("ISO") and the 1993 Non-Qualified
Stock Option Plan ("NQSO") (collectively referred to as the "1993 Plan").  The
1993 Plan provides incentives to officers, directors, employees, consultants,
and advisors in the form of stock options, subject to certain restrictions.
The Company's Board of Directors determines the granting of options under the
1993 Plan, including the exercise period, contingencies, vesting periods, and
employee qualifications.  Options to be issued under the ISO are intended to
qualify as "incentive stock options" under Section 422 of the 1986 Internal
Revenue Code (the "Code"), as amended.  Options granted under the NQSO are
subject to fewer restrictions than the ISO and are considered "Non-Statutory
Stock Options" as defined in the Code.  As of June 30, 1997, 25,000 options had
been issued under the 1993 Plan.  The 25,000 options were issued in August 1993
at the exercise price of $1.53 per share.  All of the outstanding options were
exercisable at June 30, 1997.  No options were exercised during the fiscal
years ended June 30, 1997 and 1996.

On May 10, 1995, the Company hired Stephen J. Denari as President and Director
and promoted Eugene E. Denari, Jr. (father of Stephen) to the position of
Senior Vice President and Director.  On June 28, 1995, Eugene Denari, Jr.
replaced Milton Verret as Chief Executive Officer.  On June 26, 1995, the Board
approved a stock option grant for 800,000 and 500,000 shares of the Company's
common stock at an option price of $.40 per share (the then current market
value) to Stephen Denari and Eugene Denari, Jr., respectively.  These options
may be exercised in accordance with a vesting schedule which extends over a
five-quarter period.  One-fifth of the options are exercisable each quarter
beginning July 1, 1995, until July 1, 1996, at which time all options are
vested and exercisable.  During fiscal year 1996, Eugene Denari resigned from
the Company and its Board; as a part of his resignation settlement, the stock
option grant covering 500,000 shares previously granted was entirely canceled.
No options were exercised during the fiscal year ended June 30, 1997 and 1996.

Employee Stock Purchase Plan:  The Company implemented an Employee Stock
Purchase Plan in 1994 which permits substantially all employees to acquire
Company common stock.  Participating employees may acquire stock at the end of
each six-month period (June 30 and December 31 of each year) at a purchase
price of 85% of the lower of fair market value at the beginning or end of the
period.  Employees may designate up to 10% of their base compensation for the
purchase of stock under this plan.  There are no charges to income in
connection with this plan.





                                 (Continued)


                                                                            14. 
                                                
<PAGE>   28


              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 9 - STYLUS RECORDS

In April 1994, the Company acquired a majority ownership in Stylus Records, a
Delaware Corporation, for 160,000 shares of common stock and the assumption of
$105,000 in liabilities.  The Founders' Agreement calls for the Company to
guarantee certain stock values for 60,000 of these issued shares relative to
their market price as of March 31, 1996.  The Company has the option to issue
additional shares to the extent of any difference between the market price and
the guarantee price.  The shares issued for this acquisition, including the
price guarantees, were valued at $375,000.  The Company maintains an 80%
ownership in Stylus, with its investment partners Lewin & Rosenthal and
Frontline Records maintaining 15% and 5% ownership interests, respectively.
The purchase method of accounting was used to record this acquisition.  The
initial investment included $300,000 of goodwill and $252,078 of organizational
costs.  At June 30, 1996, the Company evaluated the underlying value of
goodwill and the appropriateness of amortizing this asset over future periods.
Based upon this evaluation, the Company determined that the original basis for
carrying goodwill had diminished and therefore there is no basis for carrying
this asset forward to future years.  Accordingly, the unamortized balance of
$225,000 was charged against 1996 income.  Similarly, the Company charged off
the unamortized amount of organization costs as of June 30, 1997.


NOTE 10 - SETTLEMENT OF LEGAL MATTERS

On June 27, 1995, the Securities and Exchange Commission Division of
Enforcement filed a complaint against the Company, its former CEO, and several
of its former officers and employees.  The suit was the result of an informal
investigation which commenced in fiscal year 1994 and alleged, among other
things, that between the fall of 1992 and June 1993, First National and certain
individual members then in management disseminated materially false and
misleading information to the public regarding projections of revenue that the
Company would earn from the release of the animated film Happily Ever After.

The Company entered into an agreement with the SEC to settle the suit on June
27, 1995.  As part of the settlement, Milton J. Verret agreed to resign as the
Company's Chief Executive Officer, Chief Financial Officer, and Chairman of the
Board and is prohibited from attempting to influence First National's
management or shareholders in the nomination of directors or other corporate
matters during the pendency of the litigation against him.  In addition, Mr.
Verret agreed to vote his First National Entertainment Corp. common stock in
proportion to the votes cast by the Company's other shareholders.  As a result
of the SEC investigation which began in November 1994, Jeffrey Schwaber
resigned as President (even though he was not implicated by the SEC) and Rick
D. Busby and Michael Swingler resigned as officers and directors.  On May 10,
1995, the Company hired Stephen J. Denari as President and Director and
promoted Eugene E. Denari, Jr. (father of Stephen) to the position of Senior
Vice President and Director, and on June 27, 1995, Eugene E. Denari, Jr.
replaced Mr. Verret as Chief Executive Officer, who resigned as an officer and
director.





                                 (Continued)

                                                                            15. 
                                                                        
                                                        
<PAGE>   29

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 10 - SETTLEMENT OF LEGAL MATTERS (Continued)

Pursuant to the terms of the settlement, the Company, without admitting or
denying the allegations of the complaint, consented to the entry by the court
of a final judgment of permanent injunction against it for the securities law
violations alleged in the complaint.  The Company also agreed to cooperate with
the SEC in connection with any discovery request made by the SEC in its ongoing
litigation against the individual defendants.

Class Action Lawsuit:  The Company and its former executive officers and
directors were defendants in a class action lawsuit which commenced in the
United States District Court for the Eastern District of Pennsylvania.  The
action was commenced on July 8, 1993, certified as a class action on September
8, 1994, and alleged fraud and various violations of securities laws in
connection with the Company's public disclosures during the period preceding
and through the theatrical release of the film Happily Ever After.  The
Company's motion for a change of venue from Philadelphia to the Western
District of Texas was granted on January 31, 1995.  The class incorporates all
persons who acquired the Company's common stock between March 9, 1993, and June
2, 1993, inclusive.  On June 30, 1995, a second shareholder lawsuit was filed
in the United States District Court for the Western District of Texas (seeking
to be certified as a class action) covering the same facts as the previous
shareholder suit.  On December 28, 1995, the Company settled the first suit for
$50,000 in cash and 4,000,000 shares of common stock, valued at $.50 per share.
These amounts, plus legal costs, have been recorded in the 1996 statement of
operations as settlement of litigation.  The second class action lawsuit filed
on June 30, 1995, was dismissed by the plaintiffs based on the settlement of
the previous suit.


NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Company received notice from the Screen Actors Guild that supplemental
residuals of 4.5% of the first $1,000,000 and 5.4% of all remaining gross
producer receipts are due them.  The Company's entertainment counsel is
researching the matter to determine if the Company has a liability related to
this matter.  As of June 30, 1997, there has been no determination of liability
and the Company believes that if any residuals are due, they are the
responsibility of Lou Scheimer and Filmation (the original producer of the
film) or its successor in interest.

Contingent Liabilities Against Future Revenues:  The Company has agreed to pay
compensation to various parties based on gross revenues from the film Happily
Ever After as follows:

    Mr. Lou Scheimer, creator and original owner of Happily Ever After:

         Home Video           -   Forty cents ($.40) for each video cassette
                                  unit sold, up to two million units;
                                  thereafter, twenty-five cents ($.25) for each
                                  additional home video unit sold in excess of
                                  two million units;

         Video Disc           -   15% of producer's gross;

         Merchandising        -   45% of gross revenue received by the Company
                                  after deductions of licensing commissions 
                                  and fees.





                                 (Continued)

                                                                            16. 
                                                                
<PAGE>   30

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)

    Technovision Industries, Inc., marketing consultant for Happily Ever After:

         Home Video           -   5% of net Company collection proceeds from
                                  Republic, after partial deductions for 
                                  Scheimer royalties.

    American Softworks Corp. for Happily Ever After:

         Video Games          -   50% of net proceeds to the Company after
                                  deductions for manufacturing, marketing, and
                                  distribution by the distributor.


NOTE 12 - CONTINUING OPERATIONS AND SUBSEQUENT EVENTS

The Company has historically incurred operating losses and at June 30, 1997,
has an accumulated deficit of approximately $26.6 million.  Since new
management was installed at the end of fiscal year 1995, the Company has
substantially reduced its operating overhead by reducing full-time staff from
14 permanent and 15 temporary employees to 2 full-time professional staff at
the end of fiscal year 1997.

The Company's distribution agreement with Republic Pictures covering Happily
Ever After expired in October 1996.  The television distribution agreement of
Happily Ever After previously reported with Seagull Entertainment was canceled
as of June 30, 1996, for lack of performance.  The Company is currently in
negotiations with another distributor for both television and video rights of
this property.

Effective June 30, 1997, the Company acquired certain assets from corporations
owned by Mr. Charles E. Nootens, Chairman of the Company's Board of Directors,
through First National Finance Corp. (FNFC), a newly-formed wholly owned
subsidiary of the Company.  The new venture is an active business, previously
operated by Mr. Nootens, to extend credit to real estate developers and others
at rates substantially higher than conventional real estate and commercial
loans.  See Notes 1 and 14.  FNFC issued $3,500,000, principal amount, of
preferred stock and 50 call pack options, at $10,000 each, to purchase
20,000,000 shares of FNEC at 10 cents a share.





                                 (Continued)

                                                                            17. 
                                
<PAGE>   31

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





NOTE 12 - CONTINUING OPERATIONS AND SUBSEQUENT EVENTS (Continued)

In the future, FNFC expects to continue making real estate bridge loans and
also to make bridge loans for completion of theatrical and movie productions,
acquisition of distribution rights for entertainment products, completion of
interactive games, and acquisition or financing of various forms of
intellectual media and software entertainment.

In September 1997, the Company acquired a Swiss management company having the
rights to certain ultraviolet light technology in exchange for 1,500,000 shares
of common stock, and self-liquidating note in the amount of $5,000,000.  This
note will be liquidated by application of certain future tax benefits earned by
a U.S. Subsidiary.  An additional $1,000,000 shares were issued as a broker's
commission, warrants to acquire an additional 20,000,000 shares of common stock
at 12-1/2 cents a share, preferred stock in the principal amount of $1,862,000.
This patented technology is used in the repair of underground pipes using
light-curing glass fibre reinforced plastic liners.  Initially, this product
will be marketed in Germany, Austria, and Switzerland.

As of June 30, 1997, FNFC had issued additional call pack options to purchase
an aggregate of 8,000,000 of the Company's common shares.  These calls were
issued for a consideration of 2-1/2 cents per share and entitle the holder to
purchase shares at 10 cents per share or an aggregate of $800,000.


NOTE 13 - FOURTH QUARTER ADJUSTMENT

During the fourth quarter of fiscal year 1997, amortization of film inventory
costs was adjusted to reflect changes in total estimated revenue from Happily
Ever After.  Based on the change in revenue estimates and the related costs
associated with those revenues, net film inventory cost was reduced by
approximately $2,200,000.  No other significant quarter-to-quarter fluctuations
were noted.  The changes in estimates made during the fourth quarter were based
on management's plans and estimates for the film.


NOTE 14 - ACQUISITION

Effective June 30, 1997, the Company formed a wholly owned subsidiary to
acquire certain assets from corporations owned by Mr. Charles E.  Nootens,
Chairman of the Board of Directors, in exchange for $3,500,000 of face value
First National Acceptance Corp. cumulative, variable rate, preferred stock and
call pack options to purchase 20,000,000 shares of First National Entertainment
Corp. common stock.  These assets included real estate, a cash escrow account,
and finance company type loans.  The acquisition was treated as a purchase and
recorded at the fair market of the assets received.



                                                                            18. 


<PAGE>   32

              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                              Oak Brook, Illinois

                       CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996





                                    CONTENTS





<TABLE>
<S>                                                                                                          <C> 
REPORT OF INDEPENDENT AUDITORS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1


FINANCIAL STATEMENTS

    CONSOLIDATED BALANCE SHEETS   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    2

    CONSOLIDATED STATEMENTS OF OPERATIONS   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    3

    CONSOLIDATED STATEMENTS OF CASH FLOWS   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    4

    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY   . . . . . . . . . . . . . . . . . . . . . . . . . .    6

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    7
</TABLE>







<PAGE>   33







ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

         None.


                                    PART III

ITEM 9 - DIRECTORS AND  EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the Executive Officers and Directors of the
Board for the Company, their ages, positions held with the Company and term of
service as Director of the Company, as of June 30, 1997.

<TABLE>
<CAPTION>
             NAME              AGE      POSITIONS HELD WITH COMPANY             PERIODS OF SERVICE AS COMPANY DIRECTOR
-----------------------------------------------------------------------------------------------------------------------------------
  <S>                          <C>      <C>                                     <C>
  Charles E. Nootens           56       Chairman of the Board of Directors          April 1997 to Present
                                        President                                    June 1997 to Present

  Geoffrey W. McGrath          24       Secretary and Director                      March 1997 to Present


  Kenneth E. Scipta            56       Director                                     June 1997 to Present


  James S. Yerbic              58       Director                                     June 1997 to Present
</TABLE>


         Joanne K. Fabere, age 40, served as Controller, Secretary and Director
until her resignation on December 31, 1996.

         Stephen J. Denari, age 44, served as President, Acting Chief Financial
Officer, Chief Operating Officer and Director tendered his resignation on June
27, 1997.

         Kenneth E. Scipta was appointed CEO by the Board effective August 1,
1997.  On September 10, 1997 Mr. Scipta replaced Mr. McGrath as Secretary.

         All Directors serve until the next annual meeting of stockholders and
the concurrent election of directors.  All officers serve at the pleasure of
the Board of Directors.  No Director holds directorships in other reporting
companies.
<PAGE>   34





BUSINESS EXPERIENCE OF NOMINEES AND EXECUTIVE OFFICERS

CHARLES E. NOOTENS - Mr. Nootens (age 56) is the Chairman of the Board,
President and a Director of FNAT.  He is also President and sole director of
FNFC and a director of FNET.  Prior to joining the Company, he was President
and primary stockholder of Shiloh Inc., which was engaged in a business similar
to FNFC.  Prior thereto, he was President of American Energy Management, Inc.,
which he founded in 1987 and sold in 1995.  Mr. Nootens is a graduate of the
University of Chicago (A.B. 1963 and MBA 1964).  He majored in accounting and
worked as an auditor for Arthur Andersen & Co. prior to founding American
Energy Management, Inc.

KENNETH E. SCIPTA - Mr. Scipta (age 56) is the CEO and a Director of FNAT.
Prior to joining the Company, he was President and Board Member of Mid-West
Spring Manufacturing Company, one of the five largest spring companies in the
USA.  During his twenty years with the company he served as Vice President of
Finance and Vice President of Sales & Marketing.  Mr. Scipta is a CPA and
initially worked as an auditor with Ernst & Young.  He is a graduate of St.
Joseph's College, Indiana (BA - 1966).

JAMES S. YERBIC - Mr. Yerbic (age 58) is a Director of FNAT.  He currently is
an independent business consultant.  For many years he was a senior financial
officer and business development officer for several companies, including
Duchossois Industries (1992 to 1996), Eagle Industries (1989 to 1991), Jepson
Industries (1985 to 1989) and McGraw-Edison Company (1973 to 1985).  Prior to
that he was with Arthur Andersen & Co.  He is a graduate of Bradley University
(BS  - 1967).

GEOFFREY W. MCGRATH - Mr. McGrath (age 24) is a Director and Secretary of FNAT.
He is also a Vice President and Director of NHI, where he is responsible for
NHI's investment in FNAT as well as certain other investments in the NHI
portfolio.  He is a graduate of the University of Illinois, Champaign-Urbana
(BA - 1997).

ITEM 10 - EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation paid during the last three
fiscal years to the Company's executive officers and directors.

<TABLE>
<CAPTION>
                    Annual Compensation                        Long-Term Compensation
                    -------------------                        ----------------------
                                         Other        Restricted          Securities
Name and            Fiscal                Annual           Stock            Underlying         All Other
Principal Position   Year      Salary    Compensation     Awards           Options/SARs(#)    Compensation
------------------   ----      ------    ------------     ------           ---------------    ------------

<S>                 <C>      <C>                         <C>                 <C>                 <C>
Stephen J. Denari    1996     $103,846                    $     0             800,000(b)           0

President, Chief
Operating Officer &  1997     $ 82,692(a)
Acting CFO

Joanne K. Fabere     1996     $ 29,230                    $     0                   0              0

Controller
Company Secretary    1997     $ 12,308(c)
</TABLE>

NOTES:
(a)  Mr. Denari tendered his resignation effective June 27, 1997.



                                                                             30 

<PAGE>   35

(b)  Mr. Stephen J. Denari received an option to purchase 800,000 shares of
Company stock in June 1995 at the exercise price of $0.40 per share which
vested over a period from July 1, 1995 through July 1, 1996.  Mr. Denari has
agreed to cancel the option for $17,000.  

(c) Ms. Fabere resigned effective December 31, 1996.


ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL STOCKHOLDERS AND STOCK HOLDINGS OF MANAGEMENT

The following table sets forth as of August 31, 1997 all persons known by the   
Company to be a beneficial owner of more than five percent of any class of the
Company's voting securities and the security ownership in the Company or its
affiliates, directly or indirectly by all directors and nominees, executive
officers and all directors and officers of the Company as a group. Unless
otherwise stated, the nature of beneficial ownership is that of sole voting
power and sole investment power.

      NAME AND ADDRESS OF          AMOUNT AND NATURE OF           PERCENT 
       BENEFICIAL OWNER            BENEFICIAL OWNERSHIP           OF CLASS(1)
    
                                                                           
                                                                    
 STEPHEN J. DENARI                       800,000(2)                4.4%
 600 ENTERPRISE DRIVE, STE
 109, OAK BROOK, IL  60523

 CHARLES E. NOOTENS                      416,000(3)                2.3%
 600 ENTERPRISE DRIVE, STE
 109, OAK BROOK, IL  60523

 KENNETH E. SCIPTA                        12,000                    .07%
 600 ENTERPRISE DRIVE, STE
 109, OAK BROOK, IL  60523

 GEOFFRY MCGRATH                       1,110,000                   6.1%
 NIMBUS HOLDINGS, INC.
 943 EDGEMERE CT.
 EVANSTON, IL 60202


(1)    Calculated based upon 16,898,458 shares of Common Stock issued and
outstanding as of the Record Date of August 31, 1997.  In addition to its
Common Stock, the Company had outstanding as of August 31, 1997, 1,260,000
Warrants to purchase one share of common stock, $0.005 par value each.  None of
the holders of the Warrants are entitled to vote, receive dividends, receive
notices of meetings or to any other shareholder rights on account of the
Warrants prior to exercise thereof.

(2)    Mr. Stephen J. Denari received an option to purchase 800,000 shares of
Company stock in June 1995 at the exercise price of $0.40 per share which vest
over a period from July 1, 1995 through July 1, 1996. This table includes the
underlying securities for options vesting within 60 days of the Company's
fiscal year end (June 30, 1996.). Mr. Denari has agreed to cancel the option.

(3)    Of the shares beneficially owned, 200,000 of these shares represent
shares that may be purchased on existing warrants at $.05 per share.  (See
Financial Statements, Note 8 "Shareholders' Equity").


(4)    Geoffry McGrath owns 6.1% of the shares and serves as Vice President and
Director of Nimbus Holdings.  Accordingly, Mr. McGrath may be deemed to
beneficially own the shares of Common Stock held by Nimbus Holdings.

(5)    Of the shares beneficially owned, 600,000 of these shares represent
shares that may be purchased upon exercise of warrants at $.15 per share.  (See
Financial Statements, Note 8 "Shareholders' Equity").




                                                                             32 


<PAGE>   36
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         None
            

COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT

         The Securities Exchange Act of 1934 requires all executive officers,
directors and 10% or greater shareholders to report any changes in their
ownership of Company common stock to the Securities and Exchange Commission,
NASDAQ and the Company.


PART IV

ITEM 13 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements and Schedules:

         See Table of Contents at the beginning of attached financial
statements.

Exhibits required by Item 601 of Regulation S-B.


 EXHIBIT NO.     DESCRIPTION

 3.1 *           Articles of Incorporation as Amended on 7/1/93 approved by
                 shareholders on May 21, 1993 (Restated as Amended).
                 (Incorporated by reference to Exhibit 3.1 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1993,
                 Commission File No. 0-18866)

 3.1.1           Amendment of Articles of Incorporation approved on October 28,
                 1994.

 3.2 *           By-laws approved and adopted March 30, 1989. (Incorporated by
                 reference to Exhibit 3.2 of the Company's Annual Report of
                 Form 10-K for the year ended June 30, 1993, Commission File
                 No. 0-18866)

 4.1 *           Instruments Defining Rights of Security Holders, Class A and
                 Class B Common Stock Purchase Warrants. (Incorporated by
                 reference to the Registration Statement on Form S-18, declared
                 effective on 9/19/89, SEC Reg. No. 33-30153-B)

 10.1 *          1993 Non-Statutory Stock Option Plan, April 1, 1993.
                 (Incorporated by reference to Exhibit 10.1 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1993,
                 Commission File No. 0-18866)

 10.2 *          1993 Incentive Stock Option Plan, April 1, 1993. (Incorporated
                 by reference to Exhibit 10.2 of the Company's Annual Report of
                 Form 10-K for the year ended June 30, 1993, Commission File
                 No. 0-18866)

 10.3 *          Employment Agreement with Jeffrey S. Schwaber dated March 26,
                 1993. (Incorporated by reference to Exhibit 10.3 of the
                 Company's Annual Report of Form 10-K for the year ended June
                 30, 1993, Commission File No. 0-18866)

 10.4 *          Employment Agreement and option with Rick D. Busby dated
                 January 15, 1993. (Incorporated by reference to Exhibit 10.4
                 of the Company's Annual Report of Form 10-K for the year ended
                 June 30, 1993, Commission File No. 0-18866)

 10.5 *          Milton Verret Stock Purchase Arrangement of December 1, 1991
                 (Written Summary).  (Incorporated by reference to Exhibit 10.5
                 of the Company's Annual Report of Form 10-K for the year ended
                 June 30, 1993, Commission File No. 0-18866)

 10.6 *          Continental Capital & Equity Corp. Advertising Consulting
                 Agreement dated March 5, 1993 and Agenda of May 11, 1993
                 (Incorporated by reference to Exhibit 10.6 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1993,
                 Commission File No. 0-18866)
<PAGE>   37

 10.7 *          Television Distribution Agreement with Technovision
                 Industries, Inc. dated  March 16, 1993 (Incorporated by
                 reference to Exhibit 10.7 of the Company's Annual Report of
                 Form 10-K for the year ended June 30, 1993, Commission File
                 No. 0-18866)

 10.8 *          Letter Agreement and Amendment Agreement with Entertainment
                 Marketing & Communications International dated February 3,
                 1992 and June 15, 1993, respectively (Incorporated by
                 reference to Exhibit 10.8 of the Company's Annual Report of
                 Form 10-K for the year ended June 30, 1993, Commission File
                 No. 0-18866)

 10.9 *          Agreement with American Softworks Corporation dated June 17,
                 1993. (Incorporated by reference to Exhibit 10.9 of the
                 Company's Annual Report of Form 10-K for the year ended June
                 30, 1993, Commission File No. 0-18866)

 10.10 *         Agreement with Worldvision Enterprises Inc. dated July 16,
                 1993. (Incorporated by reference to Exhibit 10.10 of the
                 Company's Annual Report of Form 10-K for the year ended June
                 30, 1993, Commission File No. 0-18866)

 10.11*+         1994 Employee Stock Purchase Plan, dated January 22, 1994
                 (Incorporated by reference to Exhibit 10.11 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1994,
                 Commission File No. 0-18866)

 10.12*          Amendments to Worldvision Enterprises Inc. Agreement, dated
                 April 13, 1994 and May 23, 1994 (Incorporated by reference to
                 Exhibit 10.12 of the Company's Annual Report of Form 10-K for
                 the year ended June 30, 1994, Commission File No. 0-18866)

 10.13*          Stylus Records Inc. subsidiary Founder's Agreement dated April
                 15, 1994  (Incorporated by reference to Exhibit 10.13 of the
                 Company's Annual Report of Form 10-K for the year ended June
                 30, 1994, Commission File No. 0-18866)

 10.14*          Replacement Television Program Distribution Agreement with
                 Technovision Industries, Inc.  dated June 10, 1994
                 (Incorporated by reference to Exhibit 10.14 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1994,
                 Commission File No. 0-18866)

 10.15*+         Employment Agreement with Stephen J. Denari dated May 10,
                 1995. (Incorporated by reference to Exhibit 10.15 of the
                 Company's Annual Report of Form 10-K for the year ended June
                 30, 1995, Commission File No. 0-18866)

 10.16*+         Non-Qualified Stock Option Grant Agreement with Eugene E.
                 Denari, Jr. dated June 26, 1995.  (Incorporated by reference 
                 to Exhibit 10.16 of the Company's Annual Report of Form 10-K 
                 for the year ended June 30, 1995, Commission File No. 0-18866)

 10.17*+         Non-Qualified Stock Option Grant Agreement with Stephen J.
                 Denari dated June 26, 1995.  (Incorporated by reference to
                 Exhibit 10.17 of the Company's Annual Report of Form 10-K for
                 the year ended June 30, 1995, Commission File No. 0-18866)

 10.18*          Promissory Note from Milton J. Verret dated July 14, 1995.
                 (Incorporated by reference to Exhibit 10.18 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1995,
                 Commission File No. 0-18866)

 10.19*          Distribution Agreement with SeaGull Entertainment , Inc. dated
                 October 4, 1995.  (Incorporated by reference to Exhibit 10.19
                 of the Company's Annual Report of Form 10-K for the year ended
                 June 30, 1995, Commission File No. 0-18866)

 10.20*          Amendment to Promissory Note and Collateral Agreement with
                 Milton Verret, dated July 14, 1995. (Incorporated by reference
                 to Exhibit 10.20 of the Company's Annual Report of Form 10-K
                 for the year ended June 30, 1995, Commission File No. 0-18866)

<PAGE>   38

 10.21           Option Agreement with Vivienne Crowe dated September 14, 1996.

 16.1*           Letter from former accountant regarding concurrence with
                 registrant's statements in report regarding dismissal as
                 registrant's principal accountant, dated June 30, 1994
                 (Incorporated by reference to Exhibit 16.1 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1994,
                 Commission File No. 0-18866)

 21.1*           Subsidiaries of the Registrant, as amended on April 15, 1994
                 (Incorporated by reference to Exhibit 21.1 of the Company's
                 Annual Report of Form 10-K for the year ended June 30, 1994,
                 Commission File No. 0-18866)

* Previously filed with the Commission.
+ Constitutes agreement or plan relating to employment or employee benefits.

REPORTS ON FORM 8-K DURING THE LAST QUARTER

         On May 27, 1997, the Company filed on Form 8-K, that for its first
venture company it will invest in First National Finance Corp.  (FNFC) a
company engaged in making relatively small bridge loans.  FNFC will be
capitalized with FNAT stock which it will offer in Calls.  The Calls will be
sold in Units of 400,000 entitling the holder to purchase Common Shares at $.10
per share.  The Calls lapse as to 20% of the shares on June 30, 1999, 2001,
2003, 2005 and 2007 respectively.  The purchase price of each unit is $10,000.
The offering is made to shareholders as of the close of business May 23, 1997.





<PAGE>   39





                                   SIGNATURES

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

Dated:  __________, 1997

                                        FIRST NATIONAL ENTERTAINMENT CORP.



                                        By:  ________________________
                                             Charles E. Nootens
                                             President





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



SIGNATURE                    TITLE                                   DATE


____________________      CHAIRMAN, PRESIDENT,               __________, 1997 
CHARLES E. NOOTENS

_____________________     CHIEF EXECUTIVE OFFICER, DIRECTOR  __________, 1997 
Kenneth E. Scipta                                            

<PAGE>   40

                                 EXHIBIT INDEX





<TABLE>
<CAPTION>


 Exhibit No.   Description                                                  Comment
 -----------   -----------                                                  -------
 <S>           <C>                                                          <C>
 3.1 *         Articles of Incorporation, as amended                        Restated as Amended
 3.1.1         Articles of Amendment to the Articles of Incorporation       Adopted October 28, 1994 (Filed
 3.2 *          By-laws                                                     concurrently)
                                                                            By-laws see Note 1
 4.1 ***       Instruments Defining Rights of Security Holders              Class A & B Warrants
 10.1 *        Non-Statutory Stock Option Plan                              April 1, 1993
 10.2 *        Incentive Stock Option Plan                                  April 1, 1993
 10.3 *        Employment Agreement with Jeffrey Schwaber                   March 26, 1993
 10.4 *        Employment Agreement with Rick Busby                         January 15, 1993
 10.5 *        Stock Purchase Agreement with Milton Verret                  December 1, 1991
 10.6 *        Continental Capital & Equity Agreement                       March 5, 1993 and Addenda May 11, 1993
 10.7 *        Technovision Agreement                                       March 16, 1993
 10.8 *        Entertainment Marketing & Communications Agreement           February 3, 1992 and June 15, 1993
 10.9 *        American Softworks Agreement                                 June 17, 1993
 10.10 *       Worldvision Agreement                                        July 16, 1993
 10.11**       Employee Stock Purchase Plan                                 January 22, 1994
 10.12**       Worldvision Agreement, as amended                            April 13, 1994 and May 23, 1994
 10.13**       Stylus Records Founder's Agreement                           April 15, 1994
 10.14**       Technovision Agreement, as amended                           June 10, 1994
 10.15 ****    Employment Agreement with Stephen J. Denari                  May 10, 1995 (Filed concurrently)
 10.16****     Non-Qualified Stock Option Grant Agreement with              June 26, 1995 (Filed concurrently)
                     Eugene E. Denari, Jr.
 10.17****     Non-Qualified Stock Option Grant Agreement with              June 26, 1995 (Filed concurrently)
                    Stephen J. Denari
 10.18****     Promissory Note from Milton J. Verret                        July 14, 1995 (Filed concurrently)
 10.19****     Distribution Agreement with SeaGull Entertainment , Inc.     October 4, 1995 (Filed concurrently)
 10.20****     Amendment to Promissory Note and Collateral Agreement        July 14, 1995
               with Milton Verret
 10.21         Option agreement with Viviene Crowe                          September 14, 1996
 16.1**        Letter from previous auditor                                 June 30, 1994
 21.1**        Subsidiaries of the Registrant, as amended                   Restated as Amended
</TABLE>

* Incorporated by reference to Annual Report on Form 10-KSB-A1 filed on
November 18, 1993.

**Incorporated by reference to Annual Report on Form 10-KSB-A1 filed on
September 27, 1994.

***Incorporated by reference to the Registration Statement on Form S-18,
declared effective on 9/19/89, SEC Reg. No. 33-30153-B

**** Incorporated by reference to Annual Report on Form 10-KSB filed on October
28, 1995.