<PAGE>   1
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549

                           FORM 10-K/A

       [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
              OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 1996          Commission File Number 0-21566

   LS CAPITAL CORPORATION f/k/a "Lone Star Casino Corporation" (Exact name of
      registrant as specified in its charter)

                             Delaware
  (State or other jurisdiction of incorporation or organization)

                            84-1219819
               (I.R.S. Employer Identification No.)

15915 Katy Freeway, Suite 250, Houston, Texas 77094, (713) 398-5588
  (Address, including zip code, and telephone number, including
     area code, of registrant's principal executive offices)

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

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

                       Title of Each Class
                   Common Stock, $.01 Par Value

Indicate by check mark whether registrant (1) has filed all reports 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-K 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 in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 30, 1996 was $2,386,000. The number of shares outstanding of
the registrant's Common Stock, $.01 par value, as of June 30, 1996 was
1,721,000.
<PAGE>   2


                                    INDEX
<TABLE>
<CAPTION>
                                                                   Page Number
<S>                                                                <C>
------------------------------------------------------------------------------
                                   PART I.

Item 1.   Business.                                                     3

Item 2.   Properties.                                                  10

Item 3.   Legal Proceedings.                                           11

Item 4.   Submission of Matters to a Vote of Security Holders.         13


                                   PART II.

Item 5.   Market for the Registrant's Common Equity and                13
                    Related Stockholder Matters.                    

Item 6.   Selected Financial Data.                                     15

Item 7.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations.               15

Item 8.   Financial Statements and Supplementary Data.                 21

Item 9.   Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure.               45

                                  PART III.

Item 10. Directors and Executive Officers of the Registrant.           46

Item 11. Executive Compensation.                                       47

Item 12. Security Ownership of Certain Beneficial Owners and
                    Management.                                        50

Item 13. Certain Relationships and Related Transactions.               52

                                   PART IV.

Item 14. Exhibits, Financial Statement Schedules,
          and Reports on Form 8-K.                                     53

Signatures                                                             58

</TABLE>
                                        2

<PAGE>   3

                                     PART I

                                  INTRODUCTORY

       The Item numbers and letters appearing in this Annual Report correspond
with those used in Securities and Exchange Commission Form 10-K (and, to the
extent it is incorporated into Form 10-K, the letters used in the Commission's
Regulation S-K) as effective on the date hereof, which specifies the
information required to be included in Annual Reports to the Commission.
"EXECUTIVE OFFICERS OF THE COMPANY" has been included by the Company in
accordance with General Instruction G(3) of Form 10-K and Instruction 3 Item
401(b) of Regulation S-K.  The information contained in this Annual Report is,
unless indicated to be given as of a specified date or for a specified period,
given as of the date of this Report, which is September 30, 1996.

ITEM 1.  BUSINESS.

                                  INTRODUCTION

       LS Capital Corporation f/k/a "Lone Star Casino Corporation" ("Company")
was organized to develop, own and operate casinos and related resort
facilities.  The Company, through Papone's Palace Acquisition Corporation, owns
an indirect 75.5% interest in and operates "Papone's Palace" (referred to
hereinafter as the "Papone's Palace"), a 6,000 square foot limited stakes
casino in Central City, Colorado.  Currently, Papone's Palace is the only
gaming opportunity in which the Company owns an operating interest.  The
Company is also considering other business opportunities related directly and
indirectly to the gaming industry.  See "OTHER BUSINESS OPPORTUNITIES."

       The Company was formed under the laws of the State of Delaware on
December 30, 1992 under the name "Lone Star Casino Corporation."  Prior to May
3, 1993, the Company was a wholly-owned subsidiary of Viral Testing Systems
Corporation ("VTS"), a publicly traded company.  The Company became publicly-
held through the distribution of its common stock to the stockholders of VTS on
May 3, 1993.

       The principal executive offices of the Company are located at 15915 Katy
Freeway, Suite 250, Houston, Texas 77094, and its telephone number is (713)
398-5588.  The Company has three employees at its corporate headquarters, in
addition to those at Papone's Palace.  The term "Company" as used herein refers
to LS Capital Corporation and its subsidiaries  unless the context otherwise
requires.

                                   OPERATIONS

                             CENTRAL CITY, COLORADO

GENERAL

       In November 1990, the State of Colorado passed a constitutional
amendment allowing the





                                       3

<PAGE>   4
three Colorado cities of Central City, Black Hawk, and Cripple Creek to permit
"limited stakes gaming" within their city limits, subjects to the restrictions
of the constitutional amendment.  In October 1991, the city of Central City
approved limited stakes gaming subject to the foregoing restrictions.  By law,
limited stakes gaming is restricted to a $5.00 maximum bet and to facilities
located in commercially zoned districts of a city at which no more than
specified percentages of the total square footage of the facility and the
square footage of any single floor are used for gaming purposes.

       Papone's Palace Ltd. Liability Company (the "Limited Liability Company")
owns and operates Papone's Palace.  On November 30, 1992, VTS acquired the
right to purchase a 75.5% interest in the Limited Liability Company, subject to
the approval of Colorado gaming authorities.  VTS subsequently assigned to
Papone's Palace Acquisition Corporation, a wholly owned subsidiary of the
Company, VTS's rights to purchase the 75.5% interest in the Limited Liability
Company.  On June 10, 1993, the Colorado gaming authorities approved the
transfer of the foregoing interest to the Company, and the consummation of the
acquisition of such interest occurred shortly thereafter.

       Papone's Palace is a limited stakes gaming casino situated in a 6,000
square foot, two-story Victorian building, which opened for business on July 1,
1992.   Papone's Palace currently has 53 gaming devices and one blackjack table
game, all of which have a maximum $5.00 betting limit imposed by the Colorado
limited stakes gaming law.  Limited food and beverage service is also
available.  Papone's Palace has no separate parking facilities and access to
both Papone's Palace and Central City is limited.

       Since its acquisition in June 1993, Papone's Palace had failed to
operate at a profit and had experienced continuing losses.  In late 1995, the
Company took steps to reduce the costs and expenses relating to Papone's
Palace.  As a result of these steps, the losses of Papone's Palace were
curtailed, and the facility began to operate on a break-even basis.  However,
the weather in Central City, Colorado and surrounding areas was especially
severe during the 1995-1996 winter season, and the volume of patrons to
Papone's Palace declined significantly in January 1996.  Management believes
that this decline resulted from the perception created by the severe weather
that travel to Central City had become precarious.  In view of the decline in
the number of patrons, management decided to close Papone's Palace from
February 1, 1996 until such time as more favorable weather could be expected to
alleviate the circumstances leading to the decline in patronage.  Papone's
Palace was reopened on June 12, 1996.  No significant operational or staffing
problems were experienced in recommencing operations at Papone's Palace.  Since
reopening, week-to-week comparisons show 1996 revenues approximately 20% below
1995 revenues.

MARKETS AND MARKETING

       Central City is a historic mining town located on the eastern edge of
the Rocky Mountains, approximately 40 miles west of the Denver metropolitan
area.  Limited stakes gaming became the primary industry of Central City after
the city legalized gaming in October 1991.

       Papone's Palace targets its customers from the Denver metropolitan area
and surrounding communities.  Papone's Palace has experienced increased
competition from the neighboring





                                       4

<PAGE>   5
community of Black Hawk through which potential patrons must pass to reach
Central City.  Papone's Palace has also experienced a significant decrease in
the revenues during the winter months due to the hazards of winter travel in
the Colorado mountains.

       Management has attempted to somewhat mitigate the effects of Black Hawk
and winter travel by marketing bus charters to various groups in the Denver
Metropolitan area and intends to utilize these charters as the primary means
for delivering patrons to Papone's Palace.  While management expects an
increase in patron visits and revenues will result from the marketing of bus
charters, no assurance can be given that such marketing will increase patron
visits and revenues or make the operations of Papone's Palace profitable.

REGULATION AND LICENSING

       Because Papone's Palace is a limited stakes gaming facility in Colorado,
its ownership and operation are subject to extensive Colorado state and local
regulation.  Such regulation especially affects the licensing of gaming
facilities and their employees.  For example, the licenses held by the Company
are not transferable, and must be renewed on an annual basis.  The Company is
currently operating under a license that expires in June 1997.  A hearing
regarding the renewal of such license for one year is set for a few weeks
before the current license expires.  Management foresees no problem in having
the license renewed, but there can be no assurance that such licensed will be
renewed.  In addition to the licensing regulations, no interest in a licensee
may be alienated in any fashion without the prior approval of the Colorado
gaming authorities, except as provided below.  In addition, no person or entity
may have an interest in more than three retail gaming licenses.

       The Colorado gaming regulations also govern inspection of records and
facilities of licensees and persons associated with licensees; seizure of
gaming devices for regulatory violations; record retention; minimum operating,
security and payoff procedures; regulatory compliance audits; inclusion of
certain provisions in the chartering documents of a licensee; and reporting to
the Colorado gaming authorities upon the acquisition of certain percentage
ownership interests in a licensee by certain persons.  Finally, because the
Company is a public company, it must comply with specific rules relating to
public companies involved in limited gaming.

       As suggested above, the Colorado gaming authorities have the power and
authority to pass on the suitability of all persons, places and practices
connected with limited stakes gaming, especially licensees and any person
having a material relationship to or material involvement with a licensee, such
as persons owning an interest in a licensee, persons associated with or
employed by such licensees, and creditors of a licensee.  In this connection,
the burden of suitability is always on the person whose suitability is in
question to prove his suitability by clear and convincing evidence.  Some
persons are automatically deemed unsuitable because of prior violations and
convictions.  Any person found unsuitable by the Colorado gaming authorities
may not hold directly or indirectly the beneficial ownership of any voting
security of a publicly traded corporation, and must be removed immediately from
any position as a director, officer or employee of such publicly traded
corporation.

       Because of the regulations described above and similar regulations in
other states, the Twelfth Article of the Company's Certificate of Incorporation
contains provisions prohibiting the





                                       5

<PAGE>   6
issuance or transfer of stock except in accordance with applicable gaming laws
and regulations of each and every jurisdiction in which the Company engages in
the gaming business.  The Twelfth Article also requires stockholder determined
by a state gaming authority to be unsuitable to sell his stock in the Company
to the Company within 60 days after such determination for a purchase price
equal to the lesser of the actual purchase price paid by such stockholder or
the then current fair market value of the stock, except that if the related
stockholder fails to present reasonable proof of the actual purchase price paid
by him for his stock, the purchase price shall be the lowest bid price quoted
for the stock within the last 12 months (or $.10 per share if there has not
been such a bid price) unless the related stockholder transfers his stock to a
suitable person within 60 days after the unsuitability determination.
Moreover, the Twelfth Article bars a stockholder determined to be unsuitable
from the benefits of stock ownership in the Company, including voting and
dividend rights, pending such stockholder's sale of his stock.

       While the Company anticipates that the current language of the Twelfth
Article will be found to be acceptable in all jurisdictions in which the
Company engages in the gaming business, there can be no assurance that future
modifications may not be required.  Any amendments to the Company's Certificate
of Incorporation will require the approval of a majority of its stockholders at
that time, and it is uncertain whether such amendments would ultimately by
approved by the requisite number of stockholders.  The failure of the Company's
stockholders to adopt changes to its Certificate of Incorporation as may be
mandated by the gaming authorities of jurisdictions in which it transacts
business could have a material adverse effect on its business and operations.

       There are specific reporting procedures and approval requirements for
transfers of interests and other involvement with publicly traded corporations
directly or indirectly involved in limited gaming in the State of Colorado.
For example, each public company involved in the gaming business and proposing
a public offering of its securities is required to make full disclosure of all
material facts relating thereto to the Colorado gaming authorities.
Furthermore, each such public company is required to send to the Colorado
gaming authorities copies of all material documents filed with the Securities
and Exchange Commission as well as other corporate information, including the
disposition of the company's securities by an officer, director or controlling
person.

       The Colorado gaming authorities and local municipalities also have the
power to levy substantial taxes with respect to gaming revenues and with
respect to gaming devices.  The constitutional amendment legalizing gaming in
Colorado gave to the State the power to tax up to forty percent (40%) of the
adjusted gross proceeds ("AGP") received by a licensee from limited gaming.
The tax rates for the gaming year of October 1, 1995 to September 30, 1996
were, and for the gaming year of October 1, 1996 to September 30, 1997 will be,
2% for AGP up to $2,000,000, 8% for AGP between $2,000,001 to $4,000,000, 15%
for AGP between $4,000,001 to $5,000,000, and 18% for AGP $5,000,001 and over.
For the same gaming year, the state gaming device fee was $75 per gaming device
for the year.  In addition, local monthly device fees, currently at a rate of
$105.41 per device, are assessed by Central City.

COMPETITION

       Papone's Palace competes with other limited stakes gaming establishments
in Central City, neighboring Black Hawk, Cripple Creek and on Native American
reservations in the Southwest part of Colorado.  Competition for gaming revenue
in Colorado is intense.  As a result, the number of Colorado limited stakes
gaming establishments has decreased from a peak





                                       6

<PAGE>   7
of 75 in November 1992 to 58 in July 1996.  An additional increase in the
availability of other gaming opportunities such as local casinos, lotteries and
other forms of gaming, particularly in areas close to Papone's Palace, could
further adversely affect the financial performance of Papone's Palace.
Moreover, while gaming has become more accepted in the United States in recent
years, the gaming industry is subject to shifting consumer preferences and
perceptions.  A dramatic shift in consumer acceptance or interest in gaming
could further adversely affect Papone's Palace.  Management believes an
increasing level of competition will continue to adversely impact the casino's
operating results.

SEASONALITY

       Central City is accessible only via a narrow, winding mountain road.
Accordingly, inclement weather will have an adverse affect on revenues.
Because of unusually severe weather, the Company decided to close Papone's
Palace on February 1, 1996.  Papone's Palace reopened on June 12, 1996.  The
Company intends to operate Papone's Palace until September 30, 1996 and close
again for the winter of 1996-1997.  The Company anticipates that a
disproportionate amount of revenues from Papone's Palace will be received
during the summer months.

EMPLOYEES

       Papone's Palace employs 29 persons.  The employees at Papone's Palace
are not covered by a collective bargaining agreement and relations with them
are considered to be good.

                          OTHER BUSINESS OPPORTUNITIES

                               CLUTCH GAMES, INC.

       In June 1996, the Company formed Clutch Games, Inc. ("CGI") as a wholly-
owned subsidiary.  CGI acquired all the rights to a series of card and board
games called "Clutch Football", "Clutch Basketball", "Clutch Baseball", "Clutch
Soccer" and "Clutch Hockey" from their inventor.  CGI also acquired inventory
of about 45,000 Clutch Football games from an unaffiliated party.  CGI is
currently test marketing Clutch Football through direct response television
advertisements featuring Joe Theismann, former Notre Dame and Washington
Redskins quarterback, as the celebrity host.  Initial test results to date have
been inconclusive, as the Company buys so-called pre-emptible television time
at a very large discount from regular advertising rates, and many of its
scheduled appearances have been "pre-empted" by advertisers who pay higher
rates.  The Company currently intends to continue the tests and to attempt to
interest one or more of the shop-at-home networks to test the product.  At the
present time, it is impossible to predict the success of this venture.

                            COLLECTIBLE CASINO CHIPS

       Subsequent to the decision to close the Company's Tinian Casino, the
Company was advised by the manufacturer of the Company's chips or "cheques"
that such chips have a substantial value to collectors.  The Company and the
manufacturer have agreed to market the chips to collectors through the
Internet, magazine advertisements and collector shows.  As of this date, chip
sales have not been significant.  Magazine advertisements for the chips will
begin in





                                       7

<PAGE>   8
October 1996.  If the Tinian chip sales are successful, the Company may decide
to design and market additional chip designs based on historical events in the
western Pacific area.


                       DISCONTINUED GAMING OPPORTUNITIES

                                    GENERAL

       From its inception and until shortly after the start of fiscal 1996, the
Company had generally adhered to an aggressive policy of pursuing attractive
opportunities in the gaming industry.  As a consequence of this policy, the
Company acquired interests in or control over a number of such opportunities.
Early in fiscal 1996, the Company modified this policy, and adopted a policy of
focusing more exclusively on the development of the operations of Papone's
Palace (the Company's only current operation), while pursuing other gaming
opportunities to a much lesser extent.  As a result of this new policy, the
Company sold, relinquished or divested all of the gaming opportunities in which
it owned an interest or over which it had control, other than Papone's Palace.
The following is a discussion of the gaming opportunities that the Company has
sold, relinquished or divested in fiscal 1996.

                                     TINIAN

       On April 27, 1995, the Company opened its Lone Star Casino (the
"Company's Tinian Casino") on the Island of Tinian, in the United States
Commonwealth of the Northern Marianas Islands.  The Company's Tinian Casino was
closed in December 1995 for a variety of seasonal and operational reasons, but
was expected to reopen on January 5, 1996.  However, the casino's permit to
operate in its facility expired on December 31, 1995, and the Company was not
able to negotiate an extension of the permit by the time of its expiration.
While the casino was closed, the Company tried to renegotiate the terms and
requirements of the casino's license due to the burdensome fees that it has had
to pay pursuant to such license, which consumed over 80% of revenues during the
eight months it was open.  When these renegotiations proved unsuccessful, the
Company decided in April 1996 that the future prospects of the casino did not
warrant the financial risks the fees imposed on the Company and that the casino
should not be reopened.  The Company has written off its remaining investment
in the Tinian Casino as of June 30, 1996.

                               TROPICANA PROPERTY

       On March 3, 1994, a wholly-owned subsidiary of the Company entered into
a lease with SW Holding Corp. covering the former Granada Inn located on East
Tropicana Avenue, Las Vegas, Nevada (the "Tropicana Property").  Initially, the
Company operated a limited menu restaurant, with slot machines installed and
operated by a slot route operator, to preserve grandfathered gaming rights at
the site until Clark County, Nevada designated the site as a Resort-Hotel based
upon arrangements with the lessee of the 310-unit motel on the same parcel.
Following that designation, operations were terminated pending the Company's
receipt of final licensing approvals from the Nevada gaming authorities.
Subsequent to June 30, 1995, the Company sold its interest in a note receivable
secured by a third deed of trust on the Tropicana Property at a discount from
the outstanding principal amount of the note receivable.  The note receivable
had a principal balance of $1,250,000 and was sold for $500,000.  The Company
retained an option to repurchase the note receivable and sold this option to
the new purchaser of





                                       8

<PAGE>   9
the note receivable for $100,000 in March 1996.  Accordingly, the Company made
provision for the loss on the note receivable in the amount of $750,000.  The
$100,000 option payment was recorded as income in the third quarter of fiscal
1996.  In connection with its decision not to pursue gaming in this location,
the Company also wrote off its accumulated costs in the project amounting to
approximately $719,000.  Under the terms of the lease on the property, the
landlord was to repay the foregoing amount, and the Company has filed a lien on
the property in the amount of $719,000.

                    PROPOSED DESERT INN ROAD CASINO PROPERTY

       A wholly-owned subsidiary of the Company entered into a lease with TPM
Financial, Inc., a Nevada corporation ("TPM"), effective October 25, 1994,
regarding a building containing approximately 60,000 square feet of unimproved
space located on East Desert Inn Road, Las Vegas, Nevada (the "Desert Inn Road
Casino Property").  On December 29, 1994, the same wholly-owned subsidiary of
the Company entered into a 55-year lease with TPM regarding a 310-room hotel
(the "Desert Inn Road Hotel Property") adjacent to the Desert Inn Road Casino
Property.  Effective April 1, 1995, the Company entered into a short-term
sublease agreement with a company to sublease the Desert Inn Road Hotel
Property on substantially the same terms governing the Company's lease of such
property.  In September 1996, TPM was successful in terminating the two leases,
citing numerous defaults which resulted in the eviction from the property of
the Company and its subtenant.  The Company is currently pursuing legal
recourse against TPM in this connection.  See "LEGAL PROCEEDINGS."  The
Company's accumulated investment of approximately $522,000 was written off as
of June 30, 1995.  The wholly-owned subsidiary filed for liquidation pursuant
to Chapter 7 of the Bankruptcy Code on August 15, 1996.


                      EXECUTIVE OFFICERS OF THE REGISTRANT

       The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
              Name                 Age            Positions
              ----                 ---            ---------
       <S>                         <C>            <C>
       Paul J. Montle              49             Chairman of the Board and
                                                  Chief Executive Officer

       C. Thomas Cutter            56             Director

       Kent E. Lovelace, Jr.       60             Director

       Roger W. Cope               55             Director
</TABLE>

       Paul J. Montle has served as the Chairman of the Board and Chief
Executive Officer of the Company since 1992.  From 1991 to October 15, 1994,
Mr. Montle served as President and Chief Executive Officer of Viral Testing
Systems Corporation ("VTS"), a distributor of a FDA-licensed AIDS test and
other medical diagnostic products, and from 1991 to 1992, he also served as
Chairman of the Board of such company.  VTS filed for protection under Chapter
11 of the Bankruptcy Code on January 4, 1995.  On September 9, 1996, the case
was converted to a Chapter 7 proceeding.  Since 1987, Mr. Montle has been a
Managing Director of Montle





                                       9

<PAGE>   10
International Incorporated, a privately-held merchant banking firm.

       C. Thomas Cutter has served as a Director of the Company since December
1992.  Since 1968, he has served as President, Director and sole shareholder of
Cutter Fire Brick Co., Inc., which is engaged in the repair and maintenance of
industrial heat enclosures.  Since 1975, Mr. Cutter has served as President,
Director and sole shareholder of both Cutter Ceramics, Inc., a manufacturer and
distributor of art clay, and ADC Supply Corp., a distributor of industrial
insulation materials.  Since 1985, Mr. Cutter has served as President, Director
and sole shareholder of Cutter Northern Refractories, Inc., which is engaged in
the repair and maintenance of industrial heat enclosures.

       Kent E. Lovelace, Jr. has served as a Director of the Company since
August 1993.  Since 1975, he has served as President and Chief Executive
Officer of Equitrust Mortgage Corporation, formerly Hancock Mortgage
Corporation.

       Roger W. Cope has served as a Director of the Company since 1993. He now
serves as Vice President - Business Development of Lamb Technicon Machining
Systems.  From January 30, 1993 until January 16, 1996, Mr. Cope served as
President of the Company and Manager of Papone's Palace, Ltd. Liability Co.
During 1991 and 1992, he served as Director of Strategic Planning for the
Applied Technology Division of Litton Systems, Inc., a provider of electronic
warfare products to the defense industry.  From 1986 to 1991, Mr. Cope served
as President of Cope Development Corp., a privately-held consulting firm.  He
also serves as a Director of Waste Recovery, Inc., a publicly-held corporation
engaged in specialized resource recovery.

       Each officer holds office until the first meeting of the Board of
Directors following the annual meeting of stockholders and until his successor
shall have been duly elected and qualified, or until he shall have resigned or
been removed as provided by the By-Laws.  There are no understandings or
agreements relating to any person's service or prospective service as an
executive officer of the Company.  No family relationship exists between any of
the above listed executive officers or between any such executive officer and
any Director of the Company.

ITEM 2.       PROPERTIES

       The following table sets forth information regarding the Company's
properties:

<TABLE>
<CAPTION>
                                                                   Annual Rentals
                                                                     If Leased
Location             Use                   Own/Lease     Sq. Ft.     (In 000's)   
--------             ---                   ---------     -------   -------------
<S>                  <C>                   <C>           <C>            <C>
Central City, CO     Casino (Papone's)     Owned         6,000          N/A
Houston, TX          Executive Offices     Lease         1,600          $ 14
</TABLE>

       The Company's gaming operation in Central City, Colorado is owned by
Papone's Palace Ltd. Liability Company, which is a 75.5% owned subsidiary of
Papone's Palace Acquisition Corporation, a wholly owned subsidiary of the
Company.





                                       10

<PAGE>   11
ITEM 3. LEGAL PROCEEDINGS

       The Company currently is a plaintiff in litigation in the 281st Judicial
District of Harris County, Texas entitled Lone Star Casino Corporation and
Hallmark Trading Co. Ltd. v. Cambridge Financial Corporation, Leslie S.
Greyling, Daniel M. Boyar, Claude Kirk, Jose Esquivel, Thomas Mahood, Jorge
Galvez, Gregory Martini, Aspen Marine Group, Inc., Ella Boutwell Chestnut,
Steven T. Dorrough, George D. Fowler, Paul A. Herman, C. Randolph Coleman,
Robert J. Baker, Joseph C.F. Chow, and Corporate Stock Transfer, Inc.," (Civil
Action No. 93-041789), which seeks damages for the non-payment of a $500,000
promissory note and for the loss of profits arising out of the non-payment of
other consideration and for damages caused by fraud and other claims.  In
January 1994, the Company received a judgment in an amount exceeding $2.3
million plus post-judgment interest against Cambridge Financial Corporation,
Leslie S. Greyling and Daniel M. Boyar.  The Company is currently attempting to
collect this judgment.  The remaining defendants are Claude Kirk, Jose Esquivel
and Jorge Galvez, against whom the Company is trying to obtain a summary
judgment.

       Papone's Palace Ltd. Liability Company was named as one of the
defendants in an Amended Complaint filed in January 1994 on behalf of Earl
Neudecker, a 24.5% owner of the Company.  The case was filed in Jefferson
County, Colorado, Colorado District Court Case No. 93CV775, Division TW.  That
Amended Complaint was dismissed and the case was refiled a third time by the
plaintiff with a Second Amended Complaint.  The allegations primarily involve
acts or omissions of management and owners prior to June 10, 1993, the date the
Colorado Commission approved Papone's Palace Acquisition Corporation as a new
owner.  A trial for this case was originally set for December 2, 1996.
However, after receipt of the opinion of the Company's expert, counsel for the
plaintiff requested and was granted an indefinite continuance of the case on
the basis that he was not ready for the trial.

       The Company is a defendant in litigation in the Supreme Court of the
State of New York, County of New York, entitled Nemsa Establishment, S.A. v.
Viral Testing Systems Corporation et al." (Index No. 94112917), and in the U.S.
District Court for the District of Delaware, entitled Truman L. Susman v. Viral
Testing Systems Corporation, et al.  (C.A. No. 94-210).  Viral Testing Systems
Corporation ("VTS"), a company currently in a Chapter 7 proceeding under the
federal Bankruptcy Code, is the principal defendant in these proceedings.  VTS
recently received a favorable partial jury verdict in the Susman litigation.
The Company believes that it was named as a defendant in these proceedings
merely by virtue of its prior ownership by VTS.  Neither of the plaintiffs in
these proceedings has asserted any specific claim against the Company, and
neither has directed any discovery to the Company.  The Company believes these
suits to be without merit and intends to defend vigorously itself against these
lawsuits.

       On December 14, 1994, the Company filed a lawsuit in Harris County,
Texas against Full House Resorts, Inc. ("Full House"), Allen E. Paulson,
Donaldson, Lufkin & Jenrette Securities Corporation and My Dang to enforce the
terms of a preliminary agreement executed on September 8, 1994 between the
Company and Full House to jointly acquire and relocate the Palace Casino to the
Company's site in Biloxi, Mississippi.  On December 16, 1994, Full House filed
a lawsuit in Mississippi seeking a declaratory judgment against the Company
regarding the same preliminary agreement.  On January 24, 1995, the Company
counterclaimed in the Mississippi suit restating essentially all of the claims
against the defendants in the Texas suit.  By agreement of the parties, the
suit in Texas was non-suited so that the litigation would continue in
Mississippi.  Discovery was taken in late 1995, and the defendants filed
various motions for





                                       11

<PAGE>   12
summary judgement.  In February 1996, the Company allowed both of its counsel
to withdraw without substituting new counsel, pending entry of a new scheduling
order to accommodate the Company's new counsel.  The judge refused to issue a
new scheduling order to allow the Company's new counsel to prepare, thus
leaving the Company without the benefit of counsel.  The judge scheduled a
hearing on the defendants' motions for summary judgement on March 15, 1996, at
a time when the Company's only corporate officer who could appear pro se on
behalf of the Company was to be in Delaware attending another trial.  Despite
affidavits submitted to the judge affirming the foregoing absence, the judge
granted the defendants' motion because the Company was not represented at the
hearing.  The Company's new counsel immediately filed an appearance and notice
of appeal with the Mississippi Supreme Court, which will probably not be
decided until 1997.  The Company presently intends to continue to pursue this
litigation.  The Company has recently been advised by its attorneys in this
lawsuit that there was a great likelihood of a favorable outcome in the appeal,
although the Company is not now in a position to predict with certainty its
prevailing on appeal or any subsequent trial on the merits.

       The Company is a defendant in a lawsuit filed by TPM Financial, Inc.
("TPM"), the landlord of the Company's previously leased Desert Inn Road
properties from which the Company and its subtenant were evicted in September
1995 after the subtenant defaulted on its payments to the Company which in turn
defaulted on their payments to the TPM.  TPM is seeking a judgement against the
Company for rents owed of approximately $325,000.  Also, the subtenant filed a
counter-claim against the Company citing misrepresentation of certain facts
concerning the property, the Company's inability to perform as landlord, breach
of the sublease, breach of implied covenant of good faith and fair dealing, and
fraud.  The Company filed a counter-claim claiming that TPM conspired with
their subtenant to make reduced payments and eventually stop making payments
under the sublease thereby causing the Company to default under the lease with
TPM.  The litigation is in the discovery phase.  The Company is also seeking
damages from its subtenant.  The subtenant has offered to settle with TPM for
approximately $35,000.  The Company expects that a settlement is likely to be
reached with TPM and the subtenant.  The Company intends to aggressively pursue
its claims against both TPM and the subtenant if the Company is unable to reach
a settlement on terms satisfactory to it.

       The Company is a defendant in a lawsuit filed by Mississippi Ventures II
("MVII") on August 7, 1995 regarding a proposed joint venture between the
Company and MVII.  The Company had a lease on certain property located in
Mississippi and had intended on developing a casino site with MVII.  MVII had
required that the lease be amended in order to provide for a joint venture and
MVII agreed to place $100,000 in an escrow account to be used for rents owed.
Before the lease was amended and the escrow deposit released to the landlord,
the Mississippi Supreme Court declared the original leased site as not a legal
casino site.  The $100,000 has been released to the Company, and the Company is
retaining the $100,000 on the basis that MVII interfered with the negotiation
of the amended lease and its timely execution.  MVII has alleged breach of the
implied covenant of good faith and fair dealing, and breach of fiduciary duty.
The Company has denied all causes actions.  The Company is involved in
settlement discussions with MVII.  However, the outcome of these discussions
and the lawsuit is not now determinable.  The Company intends to defend
vigorously the case if the Company is unable to reach a settlement on terms
satisfactory to it.   Moreover, as a result of the Mississippi Supreme Court
decision, the Company abandoned the leased site during May, 1995.  As a
consequence of this, the related landlord may be viewed as having an unasserted
potential claim against the Company.  However, the Company believes that it has
a meritorious defense in that the purpose of the lease agreement was frustrated
because the site could no longer be used for its express intended purposes.
The





                                       12

<PAGE>   13
landlord has yet to assert any claim in this regard.

       The Company is a defendant in a lawsuit filed by GFL Ultra Fund, Ltd. on
February 14, 1996 regarding the Company's alleged refusal to convert certain
shares of preferred stock in the Company owned by Ultra into shares of Common
Stock.  The plaintiffs in this cause are seeking specific performance of the
Company's alleged obligation to convert such stock and a monetary recovery of
an unspecified amount representing any losses suffered by them as a result of
the alleged wrongful refusal to convert.  The Company has denied all causes
actions and believes that it has meritorious affirmative defenses.  The suit is
in preliminary stages and the final outcome is not determinable; however, the
Company intends to defend vigorously the case.  The Company has filed motions
to dismiss this lawsuit for lack of jurisdiction, improper venue and failure to
state a claim upon which relief can be granted.  After these motions were
filed, GFL Ultra Fund, Ltd. consented to move the venue of the lawsuit to
Texas.  The parties have agreed to mediate their dispute by April 1997.  The
outcome of the mediation is not determinable at this time.  The Company intends
to defend vigorously the case if the Company is unable to reach a settlement on
terms satisfactory to it during the course of the mediation or otherwise.

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

       On June 17, 1996, the Company held a special meeting of its stockholders
for purposes of considering and acting upon three proposals.  Each of the
proposals was approved by the Company's stockholders.  The first of these
proposals authorized the change of the Company's corporate name to "LS Capital
Corporation" (the "Name Change").  The second of these proposals authorized a
1-for-25 reverse stock split of the Company's common stock (the "Reverse Stock
Split").  The third of these proposals authorized issuances of the Company's
common stock, in the discretion of the Board of Directors of the Company, to
creditors of the Company (including officers and directors of the Company) in
satisfaction of amounts owed by the Company (the "Discretionary Issuances").
The following table sets forth certain information about the voting on the
three proposals.

<TABLE>
<CAPTION>
                            Votes          Votes         Votes                       Broker
                            For            Against       Withheld      Abstentions   Nonvotes
                            ---            -------       --------      -----------   --------
<S>                         <C>            <C>           <C>           <C>           <C>
Name Change                 35,878,159     1,501,608                    85,242

Reverse Stock Split         34,259,500     2,012,800                    65,962        1,126,740

Discretionary Issuances     11,363,958     2,418,262                   772,370       22,910,419
</TABLE>

                                    PART II.

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

       The Company's common stock is traded on the OTC Bulletin Board under the
symbol "LONE".  As of September 25, 1996, the Company had 1,668 holders of
record. Presented below





                                       13

<PAGE>   14
are the high and low closing bid prices of the Company's common stock for the
two years ended June 30, 1996.

<TABLE>
<CAPTION>
                                                  High                   Low
                                                  ----                   ---
<S>                                               <C>                  <C>
Fiscal year ended June 30, 1995:

       First Quarter                              $3.500               $1.250
       Second Quarter                              1.500                0.563
       Third Quarter                               1.113                0.406
       Fourth Quarter                              1.313                0.469

Fiscal year ended June 30, 1996:

       First Quarter                              $0.563               $0.250
       Second Quarter                              0.250                0.100
       Third Quarter                               0.150                0.015
       Fourth Quarter                              0.380                0.015
</TABLE>

       The Company has never paid cash dividends, and has no intentions of
paying cash dividends in the foreseeable future.  Certain of the Company's
agreements governing its debt restrict the ability of the Company to pay
dividends.




                                       14
<PAGE>   15
                                    PART II.


ITEM 6.   SELECTED FINANCIAL DATA

       The following consolidated selected financial data should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere herein: 

<TABLE>
<CAPTION>
                                                                                Years ended June 30
                                                                    1996               1995            1994
<S>                                                           <C>               <C>              <C>
     Revenues                                                    $1,340,000      $ 2,816,000     $1,831,000
     Loss before dividends on preferred stock                    (4,727,000)     (12,084,000)    (8,094,000)
     Net loss                                                    (4,759,000)     (12,172,000)    (8,143,000)
     Net loss per share                                               (4.00)          (17.16)        (17.73)
     Total assets                                                 2,809,000        7,239,000     16,501,000
     Long-term obligations                                                0          230,000        526,000
     Redeemable preferred stock                                           0          759,000      1,970,000
     Cash dividends declared per common share                     $       0        $       0    $         0
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

                             RESULTS OF OPERATIONS

          Years ended June 30, 1996 and 1995


The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations, and should be read
in conjunction with the selected financial data in Item 6 above and the
consolidated financial statements and related notes appearing elsewhere herein.



                                      15

<PAGE>   16
          OVERVIEW

Operations for fiscal 1996 are not entirely comparable to the operations for
fiscal 1995 because several projects were discontinued in fiscal 1995 with
attending charges for discontinued or abandoned sites. The Company incurred a
net loss of $4,759,000 for fiscal 1996 on revenues of $1,340,000 compared to a
net loss of $12,172,000 on revenues of $2,816,000 for fiscal 1995. The decrease
in net loss is largely attributable to a substantial decrease in write-downs
and write-offs and general and administrative expenses.

          OPERATING REVENUES

Gaming revenues decreased by approximately $300,000 in fiscal 1996 compared to
fiscal 1995. Food and beverage revenues decreased by approximately $284,000 or
about 69% due primarily to the closing of the Company's Tinian Casino in
December, 1995. Hotel and other revenues declined $891,000 due to the closing
of the Desert Inn Road Hotel Property in fiscal 1995. See "DISCONTINUED GAMING
OPPORTUNITIES".

          OPERATING EXPENSES

Gaming expenses increased approximately $ 593,000 or about 30% with the
Company's Tinian Casino experiencing an increase of approximately $852,000
offset by a decrease of approximately $259,000 in Papone's Palace gaming
expenses. The decreases in the cost of hotel and cost of food and beverage and
other expenses is directly attributable to the closing of the Desert Inn Road
Hotel Property as well as the Company's Tinian Casino. General and
administrative expenses in fiscal 1996 decreased approximately $ 3,460,000 or
about 65% compared to fiscal 1995. The decrease is mainly due to the closing of
the Las Vegas administrative office and the termination of a substantial number
of management positions in fiscal 1996, together with decreases in legal and
professional fees related to acquisition transactions, legal and professional
fees associated with project financing and decreases in corporate travel costs.
In fiscal 1995, the Company incurred non-recurring expenses approximating
$5,009,000, as a result of site development costs, the sale of certain of the
Company's properties and the write-down of certain receivables. In fiscal 1996,
the Company

                                      16
<PAGE>   17


incurred non-recurring expenses approximating $1,324,000 as result of closing
of the Company's Tinian casino, sale of slot machines by Papone's and
write-offs of other assets. Also in fiscal 1995, The Company's Tinian casino
incurred non-recurring pre-opening expenses of approximately $599,000. Also
included in operating expenses in fiscal 1995, is a write-off of approximately
$349,000 representing the remaining balance of the goodwill from the purchase
of the Papone's Palace Casino.

          OTHER INCOME (EXPENSE)

Interest expense in fiscal 1996 reflects an increase of approximately $238,000
due to the Company's recognition of interest at the rate of 46% resulting from
the Company's default condition on its Secured Convertible Senior Debenture.
Other income for fiscal 1995 included a one-time fee from a proposed joint
venture partner.

                       Years ended June 30, 1995 and 1994

          OVERVIEW

Operations for fiscal 1995 are not entirely comparable to operations for fiscal
1994 because several projects accounting for a large portion of the Company's
revenues and expenses in fiscal 1994 were discontinued in fiscal 1995 while the
Company's Tinian Casino, was commenced in fiscal 1995. Nonetheless, the Company
incurred a net loss of $12,172,000 for fiscal 1995 on revenues of $2,816,000
compared to a net loss of $8,143,000 on revenues of $1,831,000 for fiscal 1994.
This increase in the net loss is largely attributable to a large increase in
general and administrative expenses and a number of write-downs and write-offs
in fiscal 1995.

          OPERATING REVENUES

Gaming revenues did not change significantly in fiscal 1995 when compared with
fiscal 1994. However, gaming revenues would have decreased approximately
$410,000 or about 26.9% in fiscal 1995 compared with fiscal 1994 but for the
additional revenues from the Company's Tinian Casino. Food and beverage
revenues increased by approximately $104,000 or about 34.1% due primarily to
commencement of operations at the Company's Tinian Casino. Hotel and other
revenues of $891,000 consist mainly of revenues from the Desert Inn Road

                                      17
<PAGE>   18

Property. No revenues from this source will be realized in fiscal 1996. See
"DISCONTINUED GAMING OPPORTUNITIES - Desert Inn Road Casino Property."

          OPERATING EXPENSES

Gaming expenses increased approximately $295,000 or about 26.2%, composed of an
increase of approximately $643,000 due to the commencement of operations of the
Company's Tinian Casino, offset by a decrease of approximately $348,000 in
Papone's Palace gaming expenses. The increase in the cost of food and beverage
and other expenses is directly attributable to the Desert Inn Road Hotel
Property as well as the operations of the Company's Tinian Casino. General and
administrative expenses in fiscal 1995 increased approximately $3,554,000 or
about 200% over these expenses in fiscal 1994. The increase is mainly due to
increases in legal and professional fees associated with project financing,
increases in payroll expenses due to management's intent to build a corporate
infrastructure, and corporate travel expenses. The significant increases in
these particular expense items reflects management's strategy to accelerate
development and acquisition efforts, which, outside the Tinian facility, has
not produced new operations. Management has already taken drastic steps to
reduce general and administrative expenses, including the closing of its Las
Vegas administrative office and the termination of a substantial number of
management positions. In addition, in fiscal 1995, the Company realized
non-recurring expenses approximating $5,009,000, as a result of site
development costs, the sale of certain of the Company's properties, and the
write-down of certain receivables. For a discussion of the major components of
the expenses, see "DISCONTINUED GAMING OPPORTUNITIES." Also included in
operating expense is a write-off of approximately $349,000 representing the
remaining balance of the goodwill, as management has determined that the
amortization of the goodwill balance over its remaining useful life could not
be recovered through undiscounted cash flows.

As a result of the matters discussed in the preceding paragraph and under the
caption "DISCONTINUED GAMING OPPORTUNITIES", the Company recorded adjustments
totaling approximately $3,157,000 during the fourth quarter of fiscal 1995
compared to adjustments totaling approximately $3,988,000 during the fourth
quarter of fiscal 1994.

                                      18
<PAGE>   19

          OTHER INCOME (EXPENSE)

Interest income decreased $417,000 or about 93.9% during fiscal 1995 compared
with fiscal 1994 mainly due to extraordinary earnings in fiscal 1994 including
$320,000 relating to issuance of shares of a related company to which the
Company had made loans. During fiscal 1995, the Company stopped accruing
interest on its note receivables as a result of non-payment. The significant
decrease in cash reserves also added to the reduction in interest income. The
decrease in unrealized loss on marketable equity securities occurred as a
result of the Company providing for the reduction in market value of the stock
at June 30, 1994. Other, net income in fiscal 1995 includes a one-time fee from
one of the Company's proposed joint venture partners. Interest expense in
fiscal 1995 also reflects an increase due to the Company's recognition of
interest at the rate of 46% resulting from the Company's default on its Secured
Convertible Senior Debenture. See "LIQUIDITY AND CAPITAL RESOURCES." The
increase in interest expense was somewhat offset by the sale of the Company's
land and related debt in fiscal 1995 discussed above and also the reduction in
notes payable from the purchase of Papone's Palace.


                        LIQUIDITY AND CAPITAL RESOURCES

          OVERVIEW

As of June 30, 1996, the Company had a working capital deficiency of $
4,368,000 and cash and cash equivalents of $139,000. Throughout fiscal 1996,
the Company has been able to continue meeting cash requirements by
renegotiating its existing debt obligations, issuing new debt, selling certain
non-revenue producing assets, paying for services with stock and issuing common
stock through private placements and to foreign purchasers. The ability of the
Company to continue to pursue its business objectives throughout fiscal 1997
and beyond will depend on the Company's ability to continue to meet its cash
requirements by the means mentioned above and ultimately to achieve
profitability with respect to its business operations. There can be no
assurance that the Company will sustain this ability or achieve this goal.


                                      19
<PAGE>   20


          CURRENT ASSETS AND CURRENT LIABILITIES

During fiscal 1996, current assets decreased approximately $871,000 due
primarily to the collection of notes receivable, sale of marketable securities
and decrease in prepaid expenses. Accounts payable and accrued expenses also
decreased by approximately $ 643,000 primarily as a result of interest accrued
on the Company's Secured Convertible Senior Debenture.

          LONG-TERM DEBT

The $1,000,000 Secured Convertible Senior Debenture was restructured on August
5, 1996. The related agreement sets forth, among other things, certain required
payments of approximately $129,000 in the fall of 1996. As of October 3, 1996,
the Company did not have sufficient funds to pay this balance. Such payment is
comprised of: (i) interest on the restructured balance of $1,133,000 at the
rate of 20% and (ii) repayment of principal of $50,000.

Under terms of the restructuring, the Company transferred a 7% interest in a
land and building partnership interest in Fowler, California to the holder
valued at $590,000 which is carried on the books at $0.

The 24.5% minority owner of the Company's remaining casino property located in
Colorado has challenged the authority of the Company to execute the
restructuring agreement. The Company is attempting to obtain a declaratory
judgment to allow the restructuring to proceed.

If such declaratory judgment is not obtained within the permitted time limits,
the Company may face default and the holder may pursue collection of the
restructured loan balance including default interest and expense advances of
$800,000, with credit of $590,000 being given for assignment of the partnership
interest mentioned above. If no events of default have occurred during the
two-year period ending August 5, 1998, the holder will forgive the accrued
default interest and expense advances of $800,000 reduced by the credit of
$590,000 described above. The debenture is secured by certain deeds of trust
and a pledge agreement. The debenture has a specified due date and was
convertible, at the option of the holder, into common stock of the Company at a
conversion price set forth in the Debenture. Moreover, 24,000 warrants to

                                      20
<PAGE>   21

purchase shares of the Company's common stock at a per-share price of $62.50
were issued in connection with the creation of the Debenture. As a result of
the Company's default for non-payment of principal and quarterly interest
payment due August 31, 1995, the original terms of the Debenture became
effective, resulting in a default rate of interest rate of 46% effective
February 1, 1995. Under terms of the restructuring, the rate of interest on the
debenture was reduced effective June 5, 1996 from 46% to 20%.

During April, 1995, the Company completed a financing agreement relating to the
Company's Tinian Casino whereby initial funding of $500,000 was received prior
to June 30, 1995 and subsequently repaid in fiscal 1996.

In January, 1995, certain stockholders and an officer of the Company loaned the
Company $250,000 to be used for payment of the Tinian Gaming License. The
promissory notes evidencing the loans bear interest at 10% per annum and became
due on July 19, 1995. During fiscal 1996, a note of $150,000 was paid in full
and an additional $100,000 was advanced. The remaining $100,000 advance from
fiscal 1995 is currently in default; however, no demands have been made for
repayment.

          STOCK SALES

During fiscal 1996 and 1995, the Company issued 2,494,500 and 4,725,340 shares,
respectively, of its common stock outside the United States at gross prices per
share of between $.32 and$.05 during fiscal 1996 and $1.86 and $0.40 during
fiscal year 1995. Such sales generated net proceeds to the Company of
approximately $560,000 during fiscal 1996 and $2,604,000 during fiscal 1995.
During fiscal 1995, the Company issued an additional 2,211,212 shares in
private placements, including 788,712 shares to officers and directors of the
Company, at gross prices per share of between $0.33 and $0.40 and generated net
proceeds to the Company of $883,500. The Company has issued 15,000,000 and
997,000 shares in fiscal 1996 and 1995, respectively, to certain consultants in
payment of approximately $ 1,038,000 and $598,667 in services rendered. The
Company has also issued 300,000 shares to a stockholder to retire fully amounts
due of $105,000 at April 23, 1995. Subsequent to June 30, 1996, the Company
issued an additional 300,000 shares of its common stock outside the 9 United
States. The shares were sold at a gross price per share of $.50 with the
Company receiving a note receivable having an unpaid balance of $114,500 as of
September 30, 1996 and net cash proceeds of $35,500.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

     The report of independent auditors and the Company's consolidated
financial statements follow:


                                      21
<PAGE>   22

October 3, 1996

                          Independent Auditors' Report

To the Board of Directors and Stockholders of
     LS Capital Corporation
     (formerly Lone Star Casino Corporation)
Houston, Texas

We have audited the accompanying consolidated balance sheet of LS Capital
Corporation as of June 30, 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the Index at Item
14(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. 

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LS Capital
Corporation as of June 30, 1996, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
        
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


MALONE & BAILEY, PLLC


                                      22
<PAGE>   23
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
LS Capital Corporation and Subsidiaries:


We have audited the accompanying consolidated balance sheet of LS Capital
Corporation and Subsidiaries as of June 30, 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
June 30, 1995 and 1994. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule for
the years ended June 30, 1995 and 1994 as listed in the Index at Item 14(a).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LS Capital
Corporation and Subsidiaries as of June 30, 1995, and the results of its
operations and its cash flows for the years ended June 30, 1995 and 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule for the years ended June 30, 1995 and
1994, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has a working capital deficiency that raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed in Note 18 to the consolidated financial statements, the Company
is a defendant in several lawsuits, the ultimate outcome of which cannot
presently be determined. Accordingly, no provision for any liability that may
result upon adjudication has been recognized in the accompanying consolidated
financial statements.

/s/ KPMG PEAT MARWICK LLP

KPMG PEAT MARWICK LLP

   
New Orleans, Louisiana
October 6, 1995


                                       23
<PAGE>   24

LS Capital Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                        1996         1995
<S>                                                                                   <C>           <C>

ASSETS

Current assets:
   Cash and cash equivalents                                                          $139,000       $337,000
   Investments in marketable equity securities                                                        148,000
   Receivable from affiliated party, less allowance for losses
      of $800,000                                                                      249,000
   Receivables from unaffiliated parties, less allowances for
      losses of $750,000 in 1995 - none in 1996                                        391,000        856,000
   Prepaid expenses and other                                                           25,000        334,000
                                             Total current assets                      804,000      1,675,000

Property and equipment, at cost:
   Land                                                                              1,200,000      1,200,000
   Buildings                                                                           651,000        736,000
   Gaming equipment                                                                    158,000      1,608,000
   Furniture, fixtures and equipment                                                   231,000        607,000
                                                                                     2,240,000      4,151,000
   Accumulated depreciation and amortization                                          (311,000)      (613,000)
                                          Net property, plant and equipment          1,929,000      3,538,000

Other assets:
   Receivable from affiliated party, less allowances for losses
      of $800,000 (1995)                                                                38,000        249,000
   Organization costs, net                                                              29,000        400,000
   Property held for sale                                                                             906,000
   Other non-current assets                                                              9,000        471,000
                                                                                        76,000      2,026,000
                                                                                    $2,809,000     $7,239,000
</TABLE>
See accompanying notes to consolidated financial statements


                                      24
<PAGE>   25

LS Capital Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                     1996             1995
<S>                                                                               <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current maturities of notes payable                                             $1,558,000      $1,836,000
   Notes and advances payable to related parties                                      397,000         250,000
   Accounts payable and accrued expenses                                            2,677,000       3,320,000
   Redemption payable - redeemable preferred stock                                    540,000
     Total current liabilities                                                      5,172,000       5,406,000

Long-term notes payable, less current maturities                                                      230,000

Minority interest                                                                                     203,000

Series 1994-1 redeemable convertible preferred stock, par value $.01 per share;
   liquidation and redemption preference $10,000 per share; authorized 220
   shares; issued and outstanding no shares (1996) and 80 shares (1995)                               759,000

Stockholders' equity:
   12% senior cumulative convertible preferred stock, par value $.01 per share;
      liquidation preference $10 per share; authorized 500,000 shares; no shares
      issued or outstanding
   Preferred stock, par value $.01 per share; authorized
      10,000,000 shares; no shares issued or outstanding
   Common stock, par value $.01 per share; authorized
      50,000,000 shares; issued and outstanding 1,721,000
      shares (1996) and 964,000 shares (1995)                                          17,000         241,000
   Additional paid-in capital                                                      23,141,000      21,194,000
   Accumulated deficit                                                            (25,521,000)    (20,794,000)
                                                                                   (2,363,000)        641,000
Commitments, contingencies and other matters
                                                                                   $2,809,000      $7,239,000
</TABLE>

See accompanying notes to consolidated financial statements


                                      25
<PAGE>   26

LS Capital Corporation and Subsidiaries 
CONSOLIDATED STATEMENTS OF INCOME 
Years ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                        1996           1995          1994
<S>                                                  <C>           <C>           <C>
Operating revenues:
   Gaming                                            $1,215,000     $1,516,000    $1,526,000
   Hotel                                                               891,000
   Food and beverage                                    125,000        409,000       305,000
                                                      1,340,000      2,816,000     1,831,000

Operating expenses:
   Gaming                                             2,012,000      1,419,000     1,124,000
   Hotel                                                               917,000
   Food and beverage                                    211,000        482,000       396,000
   General and administrative                         1,874,000      5,334,000     1,780,000
   Loss on sale of property and other site
      development costs                                 929,000      4,259,000     3,248,000
   Provision for loss on notes receivable                              750,000     1,300,000
   Adjustment to carrying value of cost in
      excess of net assets acquired                                    349,000     1,398,000
   Loss on sale of casino equipment                     320,000
   Pre-opening expenses                                                599,000
   Depreciation and amortization                        424,000        463,000       498,000
                                                      5,770,000     14,572,000     9,744,000
        Operating loss                               (4,505,000)   (11,756,000)   (7,913,000)

Other income (expense):
   Interest income                                                      27,000       444,000
   Loss on marketable equity securities                 (75,000)       (81,000)     (273,000)
   Forgiveness of debt income                           103,000
   Minority interest in net loss of consolidated 
         subsidiary                                     203,000
   Other, net                                           136,000        152,000
   Interest expense                                    (664,000)      (426,000)     (352,000)
                                                       (297,000)      (328,000)     (181,000)
        Loss before dividends on preferred stock     (4,727,000)   (12,084,000)   (8,094,000)
Dividends on preferred stock                             32,000         88,000        49,000
        Net loss                                    ($4,759,000)  ($12,172,000)  ($8,143,000)

       Net loss per common share                         ($4.00)       ($17.16)      ($17.73)

Weighted average common shares outstanding            1,183,000        710,000       459,000
</TABLE>
See accompanying notes to consolidated financial statements


                                      26
<PAGE>   27

LS Capital Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
(Dollars in thousands)

<TABLE>
<CAPTION>
                                      Total                                                                                  Subscr-
                                      Stock-                                                                       Accumu-   iptions
                                     holders'     Common Stock                    Preferred Stock       Paid-in     lated    Receiv-
                                     Equity     Shares           Dollars       Shares        Dollars    Capital    Deficit    able
<S>                                  <C>       <C>             <C>           <C>             <C>       <C>        <C>        <C>
Balances, July 1, 1993               $4,624      378,000           $ 94       151,000         $2       $5,240      ($567)    ($145)
Shares issued in connection                                              
   connection with conversion                                            
   of preferred stock                             14,000              4      (151,000)        (2)          (2) 
Sale of common stock for cash         8,436      116,000             29                                 8,407
Shares issued pursuant to                                                
   spin-off by affiliate                           2,000              6                                    (6)
Shares issued pursuant to                                                
   agreement to restructure debt        196        2,000              1                                   195
Shares issued upon exercise of                                           
   common stock purchase                                                 
   warrants by affiliate                484        6,000              1                                   483
Shares issued upon exercise                                              
   of common stock options               74        9,000              2                                    72
Shares issued for cash with                                              
   proceeds used to repay                                                
   indebtedness                       1,058        9,000              2                                 1,056
Dividends on preferred stock            (49)                                                                         (49)
Shares issued for cash with                                              
   proceeds used to purchase                                             
   assets                             1,368       11,000              3                                 1,365
Shares issued upon exercise                                              
   of common stock options by                                            
   affiliate                            150        6,000              2                                   148
Shares received in payment of                                            
   note receivable from affiliate    (1,021)     (12,000)            (3)                               (1,018)
Collection of subscription                                               
   receivable                           145                                                                                    145
Net loss                             (8,094)                                                                      (8,094)
                                                                         
Balance at June 30, 1994             $7,371     564,000            $141             0         $0      $15,940    ($8,710)       $0
</TABLE>
                    Continued


                                      27
<PAGE>   28

LS Capital Corporation and Subsidiaries 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 
Years ended June 30, 1996, 1995 and 1994
(Dollars in thousands)

<TABLE>
<CAPTION>

                                         Total                                                                             Subscr-
                                         Stock-                                                                   Accumu-   iptions
                                        holders'          Common Stock           Preferred Stock         Paid-in   lated    Receiv-
                                        Equity        Shares           Dollars   Shares        Dollars    Capital  Deficit   able
<S>                                   <C>            <C>             <C>         <C>            <C>       <C>      <C>       <C>


Balances, July 1, 1994                $7,371            564,000        $141          0            $0       $15,940  ($8,710)    $0

Shares issued in connection
   connection with conversion
   of preferred stock                  1,289             67,000          17                                  1,272

Sale of common stock for cash          3,509            289,000          72                                  3,437

Shares issued in payment of
   services                              599             40,000          10                                    589

Shares issued in connection
   with renegotiation of property
   lease agreement                        45              4,000           1                                     44

Dividends on preferred stock             (88)                                                                  (88)

Net loss                             (12,084)                                                                        (12,084)

Balance at June 30, 1995                $641            964,000        $241         $0            $0       $21,194  ($20,794)    $0
</TABLE>
                    Continued


                                      28
<PAGE>   29

LS Capital Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
(Dollars in thousands)

<TABLE>
<CAPTION>

                                         Total                                                                             Subscr-
                                         Stock-                                                                   Accumu-  iptions
                                        holders'          Common Stock           Preferred Stock       Paid-in    lated    Receiv-
                                        Equity        Shares           Dollars   Shares     Dollars    Capital   Deficit   able
<S>                                   <C>            <C>             <C>         <C>        <C>        <C>     <C>        <C>

Balances, July 1, 1995                  $641          964,000           $10         0         $0       $21,194 ($20,794)

Shares issued in connection
   connection with conversion
   of preferred stock                    249           44,000                                              238

Sale of common stock for cash
   (net of issuance costs of
   $15,000)                              404          100,000             1                                379

Shares issued in payment of
   services                              724          441,000             4                                614

Shares issued for prepaid
   expenses                              314          159,000             2                                274

Shares issued in connection
   with sale of rights to
   repurchase note                         9           13,000                                                6

Dividends on preferred stock             (32)                                                              (32)

Preferred dividend adjustment             55                                                                55

Reverse split of common stock                                          (413)                               413        

Net loss                              (4,727)                                                                    (4,727)

Balance at June 30, 1996             ($2,363)       1,721,000           $17         0           $0     $23,141 ($25,521)   $0
</TABLE>


See accompanying notes to consolidated financial statements


                                      29
<PAGE>   30

LS Capital Corporation and Subsidiaries 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                                      1996           1995           1994
<S>                                                               <C>            <C>            <C>
Cash flows from operating activities:
   Net loss                                                       ($4,727,000)   ($12,084,000)   ($8,094,000)
   Adjustments to reconcile net loss to cash
      used by operating activities:
         Loss applicable to minority interest                        (203,000)                       (46,000)
         Preferred stock accretion                                     30,000
         Net gain from reduction in total dividend payable             23,000
         Depreciation and amortization                                424,000         463,000        498,000
         Amortization of loan fee income                                                            (320,000)
         Provision for loss on note receivable                                        750,000      1,300,000
         Loss on marketable securities                                 75,000          81,000        273,000
         Proceeds from sale of marketable securities                   73,000
         Marketable securities transferred in
            settlement of litigation                                                   44,000
         Loss on sale of equipment                                    320,000         129,000
         Loss on sale of property and site development
          costs                                                                     4,259,000      1,790,000
         Writeoff of Tinian investment                                656,000
         Increase in Alexander note payable                            36,000
         Other current asset writeoffs                                171,000
         Other asset writeoffs                                        235,000
         Writedown of goodwill                                                        349,000      1,398,000
         Common stock issued for services                             420,000
         Changes in:
            Accounts receivable                                                      (171,000)       (90,000)
            Prepaid expenses                                          308,000        (175,000)       (14,000)
            Accounts payable                                          223,000       1,843,000      1,223,000
                        Cash used in operating activities         ($1,936,000)    ($4,512,000)   ($2,082,000)
</TABLE>

               (Continued)


                                      30
<PAGE>   31

LS Capital Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS  Continued 
Years ended June 30, 1996, 1995 and 1994 

<TABLE> 
<CAPTION>

                                                                      1996           1995           1994
<S>                                                               <C>            <C>            <C>
Cash flows from investing activities:
   Note receivable from unaffiliated parties:
      Acquisition cost                                                                           ($1,313,000)
      Loans                                                                                         (400,000)
      Proceeds from repayments                                                                       374,000
      Sale of note receivable to Castle Rock                        $500,000 
   Notes receivable from affiliates:
      Proceeds from asset sales                                                                    1,250,000
      Loans                                                                                         (850,000)
   Deposits on agreements to purchase land                                        ($325,000)        (582,000)
   Sale of Cotton Exchange property                                  906,000        239,000
   Capital expenditures                                              (21,000)      (750,000)      (4,748,000)
   Organization costs and other assets                                           (1,133,000)        (783,000)
                         Cash used by investing activities         1,385,000     (1,969,000)      (7,052,000)

Cash flow from financing activities:
   Proceeds from issuance of preferred stock                                                       1,970,000
   Proceeds from issuance of notes payable                           121,000      1,500,000
   Repayments of notes payable                                      (417,000)      (750,000)      (1,429,000)
   Proceeds from (repayments on) notes
      payable to affiliates - net                                     87,000        250,000
   Proceeds from sale of common stock                                597,000      3,508,000       11,008,000
   Proceeds from exercise of common
      stock purchase warrants                                                                        484,000
   Proceeds from exercise of stock options                                                            74,000
   Dividends paid                                                                                    (49,000)
   Repayment of capital lease obligations                            (35,000)      (381,000)        (550,000)
                  Cash provided by financing activities              353,000      4,127,000       11,508,000

Cash and cash equivalents:
   Net increase (decrease)                                          (198,000)    (2,354,000)       2,374,000
   Beginning of period                                               337,000      2,691,000          317,000
   End of period                                                    $139,000     $  337,000       $2,691,000
</TABLE>
               (Continued)


                                      31
<PAGE>   32

LS Capital Corporation and Subsidiaries 
CONSOLIDATED STATEMENTS OF CASH FLOWS  Continued
Years ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                                      1996           1995           1994
<S>                                                               <C>            <C>            <C>

Supplemental cash flows information:
   Redeemable preferred stock:
      Conversion into common stock                                $238,000      $1,299,000
      Overdue portion required cash conversion
         reclassified into current liabilities                     540,000
   Common stock issued for:
      Prepaid legal services                                       245,000
      Reduction of accounts payable                                189,000         643,000
   Assumption of a portion of equipment lease
      obligations by secured debenture creditor                     51,000
   Purchase (sale) of land through assumption
      (retirement) of debt                                                      (3,525,000)      $3,525,000
   Reduction in purchase price of 75.5% subsidiary                                                1,132,000
   Note receivable from affiliate received in exchange
      for common stock issued to directors of affiliate                                             150,000
   Note receivable retired through cancellation
      of common stock owned by affiliate                                                          1,021,000
   Common stock issued in connection
      with restructuring of note payable                                                            196,000
   Marketable equity securities received
      as a loan fee for note receivable                                                             170,000
   Interest paid                                                    54,000         251,000          345,000
</TABLE>


           See accompanying notes to consolidated financial statements


                                      32
<PAGE>   33

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994

1.   Description of Business and Summary of Significant Accounting Policies

     Business

     LS Capital Corporation, formerly Lone Star Casino Corporation, (the
     "Company" or "Registrant), a Delaware corporation formed on December 30,
     1992, was organized to develop, own and operate casinos and related resort
     facilities. During the year ended June 30, 1996, the Company began
     exploring opportunities outside its original line of business, involving
     the marketing of sports games and casino poker chips. The Company, through
     its wholly-owned subsidiary, Papone's Palace Acquisition Corporation, owns
     a 75.5% interest in and operates Papone's Palace, a 6,000 square foot
     limited stakes casino in Central City, Colorado.

     Basis of Presentation

     The accompanying consolidated financial statements include the accounts of
     the Company and its wholly-owned subsidiaries. Significant intercompany
     accounts and transactions have been eliminated.

     Cash and Cash Equivalents

     Cash consists of demand deposit accounts and vault cash used in casino
     operations. It is the policy of the Company to classify all highly liquid
     interest-bearing deposits with original maturities of 90 days or less as
     cash.

     Marketable Equity Securities

     Marketable equity securities are carried at fair market value, which is
     lower than cost. In management's opinion, such losses represent a
     permanent impairment and are reflected as an charge in the statement of
     income.


                                      33
<PAGE>   34


LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994

1.   Description of Business and Summary of Significant Accounting Policies
     (Continued)

     Receivables

     The Company provides an allowance for losses on receivables when in
     management's opinion, the receivable is deemed uncollectible on a specific
     account basis.

     Property and Equipment

     Acquisitions of property and equipment are recorded at cost. Depreciation
     of property and equipment is calculated using the straight-line method
     over their estimated useful lives summarized below:

                    Building and improvements          30 years
                    Gaming equipment                   2-7 years
                    Other property and equipment       2-5 years

     Goodwill

     Cost in excess of net assets acquired, or goodwill, resulted from the
     Company's acquisition of Papone's was originally amortized using the
     straight-line method over a 12 year life. The Company assesses the
     recoverability of this intangible asset whenever events or changes in
     circumstances indicate that the carrying value may not be recoverable. The
     amount of goodwill impairment, if any, is measured by determining whether
     the amortization of the goodwill balance over its remaining useful life
     can be recovered through undiscounted future operating cash flows and
     reflected in operations. The Company accelerated the write-down of this
     intangible asset based on subsequent operations in the amount of $0,
     $349,000 and $1,398,000 in fiscal years 1996, 1995 and 1994, respectively.

     Income taxes

     The Company has adopted the provisions of Statement 109 of the Financial
     Accounting Standards Board, "Accounting for Income Taxes", which requires,
     among other things, that deferred tax assets and liabilities be recorded
     using the liability method, and that deferred assets be recognized,
     subject to appropriate reserves for realization. The Company had not had
     taxable income to date and no provision for federal and state income taxes
     have been made.

                                      34
<PAGE>   35

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994

1.   Description of Business and Summary of Significant Accounting Policies
     (Continued)

     Net loss per share

     Net loss per share is determined by dividing net loss applicable to common
     stock by the weighted average number of shares of common stock outstanding
     during the year. No effect was given to stock options, warrants or other
     potentially issuable shares, as their effect was anti-dilutive. All share
     and per-share amounts have been restated for the 1 for 25 reverse stock
     split effective on June 25, 1996.

     Reclassifications

     Certain reclassifications were made to prior year financial statements to
     conform to current year presentations.

2.   Going-Concern Liquidity

     As shown in the accompanying financial statements, the Company has
     incurred recurring losses from operations resulting in cash flow problems.
     In addition, the Company is in default on its $1,136,000 Secured
     Convertible Senior Debenture as of June 30, 1996, which was restructured
     in August, 1996, and is still in default. These factors raise substantial
     doubt about the Company's ability to continue as a going concern. During
     the year ended June 30, 1996, the Company instituted several cost
     reduction measures designed to substantially reduce corporate overhead,
     including closing its administrative offices in Las Vegas and reducing
     management personnel.

     The Company plans to raise needed working capital through stock sales
     outside the United States and from cash flow generated in new activities.
     There can be no assurance that the proceeds from stock sales and cash flow
     from new operations will be sufficient to support working capital needs in
     the future. The financial statements do not include any adjustments that
     might be necessary if the Company is unable to continue as a going
     concern.

                                      35
<PAGE>   36

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994


3.   Receivables from Affiliated Parties

     Receivable from affiliated parties consist of the following:

<TABLE>
<CAPTION>
                                                       1996             1995
<S>                                                <C>               <C>
     Note receivable from 24.5% minority
              partner of Papone's                    $1,049,000      $1,049,000

     Less allowance for losses                          800,000         800,000
                                                        249,000         249,000
     Less current amounts                               249,000               0
     Long-term portion                               $        0      $  249,000
</TABLE>

     The Company acquired a promissory note receivable from the 24.5% minority
     interest owner of Papone's in the amount of $1,049,000. The promissory
     note is due in January, 1997 and is secured by a deed of trust on
     Papone's. A reserve of $800,000 has been established, pending collection.

4.   Receivables from Unaffiliated Parties

     Receivables from unaffiliated parties consist of the following:

<TABLE>
<CAPTION>
                                                                   1996            1995
<S>                                                             <C>              <C>

     Note receivable, due September, 1996, with interest 
         payable monthly, secured by third deed of trust on
         real estate (a)                                                         $1,250,000
     Note receivable, RMS Titanic, Inc. (b)                       $185,000          185,000
     Other                                                         244,000          171,000
                                                                   429,000        1,606,000
     Less allowance for losses                                           0          750,000
                                                                   429,000          856,000
     Less current amounts                                          391,000          856,000
     Long-term portion                                          $   38,000       $        0
</TABLE>

     (a) During fiscal 1996, the Company sold this note receivable for $500,000.
The terms of the sale provide an option for the Company's repurchase of the
note. As a result of the sale, the value of the note was reduced by $750,000 as
of June 30, 1995 to the proceeds received. The Company sold its option plus
315,000 common shares for $100,000 cash, thereby recognizing a corresponding 
gain during fiscal 1996.

     (b) The note was secured by a security interest granted to the Company in
certain gold, silver and bronze coins recovered from the sunken ship, RMS
Titanic. Subsequent to the balance sheet date, litigation concerning this note
was settled whereby the Company will receive monthly payments of $12,856
beginning in October, 1996. 



                                      36
<PAGE>   37
LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994

5.   Prepaid Expenses and Other Current Assets

     Prepaid expenses and other current assets at June 30, 1995 include
     approximately $151,000 relating to the Company's gaming license and
     initial employee licensing fees for its Tinian Casino. These amounts were
     written off when the casino was closed in December, 1995.

6.   Goodwill

     Since its acquisition of Papone's Palace in June of 1993, Papone's has not
     achieved the level of revenues and operating results expected at the time
     of acquisition. In the 1994 fiscal year, the Company determined, based on
     an increasing level of competition in the Colorado gaming market, which it
     believes has and will continue to adversely impact Papone's results, that
     its projected results would not support the future amortization of the
     Company's remaining goodwill balance of $1,798,000. The methodology used
     by management to assess the recoverability of goodwill was to project
     results of operations for the remaining life of the goodwill as of June
     30, 1994, 11 years, based on its actual results for fiscal 1994 and its
     best estimate of expected future results. Based on the projected amount
     and trend of losses throughout the period, the Company reduced the
     carrying value of its goodwill to $400,000 through a charge to operations
     in the fourth quarter of fiscal 1994. In the 1995 fiscal year, the Company
     determined that the future cash flows of Papone's would not support the
     future amortization of the remaining goodwill, thereby resulting in the
     write-off of the remaining unamortized balance of approximately $349,000.

     Goodwill consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                        Accumulated
                                                             Gross      Amortization       Net
<S>                                                          <C>       <C>                <C>
     Balance at June 30, 1993                               $ 3,094                        $ 3,094
     Reduction in purchase price                             (1,132)                        (1,132)
     Amortization                                                          $(164)             (164)
     Writedown of goodwill                                   (1,398)                        (1,398)
     Balance at June 30, 1994                                   564         (164)              400
     Amortization                                                           ( 51)           (   51)
     Writedown of goodwill                                   (  564)         215            (  349)
     Balance at June 30, 1995                               $     0        $   0           $     0
</TABLE>


                                      37
<PAGE>   38

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994


7.   Property Held for Sale

     In connection with the Company's previously planned development of a
     proposed casino in Biloxi, Mississippi, two barges were purchased in
     fiscal year 1994 for an original price of $1,560,000. During the 1994
     fiscal year, the Company changed development plans in Biloxi, and as a
     result, no longer required the barges. During the fourth quarter of fiscal
     1994, the Company reduced the carrying value of the barges to management's
     estimate of their net realizable value of $1,035,000 as of June 30, 1994.
     Subsequent to June 30, 1995, the Company sold the barges for approximately
     $926,000. The additional loss was recorded in fiscal 1995.

8.   Capitalized Lease Obligations

     Papone's leased 140 gaming devices at June 30, 1995 under two separate
     capital lease obligations which are included in the accompanying balance
     sheet as gaming equipment in the amount of approximately $1,100,000, net
     of accumulated depreciation of approximately $545,000.

     During fiscal 1996, the Company sold these leased gaming devices to two
     creditors of the Company and an unrelated third party in three separate
     transactions, whereby the remaining balance of these capital leases were
     paid in full by these purchasers. As a result of the above sale, the
     Company recorded a loss of $320,000 which is included in operations in
     fiscal 1996.


                                      38
<PAGE>   39
    
LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994


9.   Notes Payable

     Notes payable consists of the following:

                                                      1996              1995
    Note payable to a former 24.5% owner
     of Papone's.  In September, 1996, the
     creditor agreed to restructure the note
     and no terms have been agreed upon.            $410,000          $410,000
    Secured Convertible Senior debenture dated
     10/5/94, due 1/31/95, in default, interest
     rate is maximum allowed under the laws of
    State of Colorado, or 46%, secured by
     substantially all the assets
     of Papone's (see (1) below)                   1,136,000         1,000,000
    Promissory note payable, interest payable
     monthly at 10%, monthly principal payments
     equal to 12.5% of the net cash flow of the
     Company's Tinian operation or $83,333,
     whichever is greater (see (2) below)                             417,000
    Other                                             12,000          239,000
                                                   1,558,000        2,066,000
    Less current portion                           1,558,000        1,836,000
    Long-term portion                             $     0            $230,000

      (1)  The Secured Convertible Senior debenture, which was in default at
           June 30, 1995 and June 30, 1996, was restructured on August 5, 1996.
           The related agreement sets forth, among other things, certain 
           required payments of  approximately $129,000 in the fall of 1996.  
           As of October 3, 1996, the Company did not have sufficient funds to 
           pay this balance. Such payment is comprised of: (i) interest on the
           restructured balance of  $1,136,000  at a rate of 20% and (ii)
           repayment of principal of $50,000. The restructuring also involves 
           the transfer of a 7% interest in a land and building lease in 
           Fowler, California currently valued at $590,000 and carried on the
           books at $0.

                                      39
<PAGE>   40

LS CAPITAL CORPORATION AND SUBSIDIARIES 
Notes to Consolidated Financial Statements 
Years ended June 30, 1996, 1995 and 1994

9.   Notes Payable (continued)

     The 24.5% minority owner of the Company's remaining casino property located
     in Colorado has challenged the authority of the Company to execute the
     restructuring agreement. The Company is attempting to obtain a declaratory
     judgment to allow the Company to proceed. If no events of default have
     occurred during the two-year period ending August 5, 1998, the holder has
     agreed to forgive the remaining accrued default interest of $131,000, plus
     reduce the interest rate on the remaining balance from 46% to 20%,
     beginning August 5, 1996.

(2)  During fiscal 1996, this promissory note was paid in full.

10.   Notes and Advances Payable to Related Parties

     Notes payable to officers and directors at June 30, 1996 totaled $397,000,
     including accrued salaries to officers of $137,000, notes payable to
     officers and directors of $200,000 and advances by the 24.5% minority owner
     of Papone's of $60,000.

11.  Accounts payable and accrued expenses

     The following is a summary of accounts payable and accrued
     expenses at June 30, 1996 and 1995:

<TABLE>
<CAPTION>
                                              1996              1995
<S>                                         <C>            <C>
     Architectural fees                     $306,000           $306,000
     Legal fees                              246,000            546,000
     Equipment purchases                                        672,000
     Gaming license - Tinian                 270,000            270,000
     Accrued interest                        788,000            183,000
     Trade payables                        1,067,000          1,343,000
                                          $2,677,000         $3,320,000
</TABLE>

          At June 30, 1996, the Company was delinquent with respect to most of
     these liabilities.

                                      40
<PAGE>   41

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements 
Years ended June 30, 1996, 1995 and 1994

12.  Income Taxes

     Net operating losses of approximately $25,000,000 to date are expected to
     be sharply restricted per Internal Revenue Code Section 382, due to the
     significant change in ownership in October, 1996.  A valuation allowance
     has been recorded for the full amount of all deferred tax assets.  See 
     Note 20.

13.  Redeemable Preferred Stock

     In June, 1994, the Company issued 220 shares of Series 1994-1 Convertible
     Preferred Stock for $1,970,000. During the 1996 and 1995 fiscal years, the
     preferred stock was converted into 26 and 140 shares, respectively, of
     preferred stock into the Company's common stock.  As a result of these
     conversions, the Company issued approximately 18,000 and 67,000 shares
     of common stock of the Company, valued at $1,400,000 and $200,000,
     respectively, The 54 remaining shares of preferred stock subject to
     mandatory cash redemption as of June 28, 1996 in the amount of $540,000
     have been classified as a current liability in the consolidated financial
     statements.  As of October 3, 1996, this amount was still unpaid.

14.  Stockholders' Equity

     Stockholders of the Company voting at a special meeting held June 17, 1996
     authorized a 1-for-25 reverse split of the Company's common stock.

15.  Stock Options and Warrants

     The Lone Star 1993 and 1995 Stock Option Plans provides for the grant of
     incentive stock options qualifying under the Internal Revenue Code to
     officers and other employees  of the Company, the grant of non-qualified
     options to directors, employees and consultants of the Company, and
     opportunities for directors, officers and employees and consultants of the
     Company to make purchases of stock in the Company. The plan is administered
     by a committee of the Board of Directors of the Company. The committee has
     substantial discretion pursuant to the plan to determine 


                                      41
<PAGE>   42

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements 
Years ended June 30, 1996, 1995 and 1994

 
15.  Stock Options and Warrants (continued)

     the persons to whom options may be granted and also to determine the
     amounts, time, price, exercise terms, and the restrictions imposed in
     connection therewith. Options are non-assignable and carry certain
     anti-dilution provisions concerning stock dividends, stock splits,
     consolidations, mergers, recapitalization and reorganizations. Up to
     160,000 shares of common stock of the Company has been authorized for
     issuance pursuant to the plan.

     Information about grants pursuant to the plan and warrants granted is as
     follows: 

<TABLE>
<CAPTION>
                                               Options  Warrants   per share 
<S>                                           <C>       <C>       <C>
            Outstanding at June 30, 1993        28,100             $1.45 - 137.50 
            Granted                             40,000   41,200    81.25 - 150.00 
            Forfeited                          ( 6,520)            78.12 - 125.00
            Exercised                          ( 8,800)             1.45 -  78.13
            Outstanding at June 30, 1994        52,780   41,200    78.13 - 137.50

            Granted                             48,160   76,800    28.00 -   96.88
            Forfeited or expired               (21,220) (12,000)   15.63 -  121.88
            Outstanding at June 30, 1995        79,720  106,000    15.63 -  137.50

            Forfeited or expired               (45,320)            15.63 -  137.50
            Outstanding at June 30, 1996        34,400  106,000    15.63 -  150.00

</TABLE>

          At June 30, 1996, 18,420 of the 34,400 options outstanding are
     currently exercisable, and all outstanding options expire by the year
     2006. In August, 1996, an additional 76,000 warrants to purchase common
     stock were granted at prices ranging from $.40 to $5.00 per share.


                                      42
<PAGE>   43

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements 
Years ended June 30, 1996, 1995 and 1994


16.  Related Party Transactions

     In addition to transactions described elsewhere, the Company loaned
     $1,000,000 to two officers on a short-term basis during fiscal 1994. The
     promissory notes and accrued interest at 10% and were due and payable on
     June 30, 1995. By mutual agreement during fiscal 1994, the two officers
     repaid the promissory notes by exchanging 291,000 shares of common stock of
     the Company which it owned, with the value of such shares having been based
     upon the market value of the Company's common stock on the date tendered
     for cancellation.

17.  Site Development Costs

     From its inception, the Company has acquired interests in or control over a
     number of opportunities in the gaming industry. Due to lack of funding,
     zoning, and other problems, investments in the following properties failed,
     and the related purchased properties were sold and options to acquire, if
     any, have expired. A summary of the related sale losses and costs written
     off are as follows:

<TABLE>
<CAPTION>
                                          1996             1995          1994
<S>                                       <C>              <C>          <C>
       Las Vegas sites:
         Chaparral Hotel                                   $519,000
         Former Granada Inn and
         Malibu restaurant                                  288,000
       Mississippi sites:
         Biloxi                                           2,618,000       1,790,000
         Pine Hills and Bay St. Louis                       485,000
       Tinian casino                      $ 656,000
       Related consulting and travel
           expense                                                        1,458,000
       Other                                273,000
                                         $  929,000      $4,259,000      $3,248,000
</TABLE>


                                      43
<PAGE>   44

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements 
Years ended June 30, 1996, 1995 and 1994



18.  Commitments and Contingencies

     As a result of the failed investment attempts described above, and other
     business investment transactions, the Company has been sued by a number of
     entities during the past few years. Several of the lawsuits have been
     settled without significant cost to the Company in fiscal 1996. A summary
     of the outstanding litigation that has a reasonably possible adverse effect
     on the Company, and has not been settled as of October 3, 1996 is as
     follows:

                    Chaparral Hotel (Las Vegas) - a lawsuit filed by 
                         TPM Financial, Inc.
                    Mississippi Pine Hills casino site - a lawsuit
                         filed by Mississippi Ventures, II

     The TPM Financial, Inc. suit is for unpaid rent on the hotel lease of
     $125,000 (see Note  19) and the Mississippi Ventures, II,  lawsuit is for
     the return of a $100,000 deposit they gave the Company, pending the
     successful development of the Pine Hills casino site, which never happened.
     The Company has accrued no losses on these lawsuits.

     Various subsidiaries of the Company are also parties to several other
     lawsuits resulting from the various failed ventures from the past three 
     years. Management believes that the likelihood of significant losses on the
     above lawsuits is remote, and that any reasonably possible future losses in
     aggregate are not significant.

19.  Foreign Operations

     Revenue from the Company's Tinian casino located in the Mariana Islands,
     totaled approximately $784,000 and $508,000 in fiscal 1996 and 1995,
     respectively. Net operating losses from this operation totaled $2,098,000
     and $1,316,000 in fiscal 1996 and 1995, respectively. The casino was closed
     permanently in December, 1995.

                                      44
<PAGE>   45

LS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements 
Years ended June 30, 1996, 1995 and 1994


20.  Subsequent Events

     (a) Subsidiary Bankruptcy - The Company filed a Chapter 7 liquidation
         federal bankruptcy on August 30, 1996, of its Lone Star Casino
         Corporation of Nevada, Inc. subsidiary, which operated the Las Vegas
         hotel restaurant operation.  This wholly-owned subsidiary has no
         current operations, $150,000 in assets and $400,000 in uncontested
         third-party liabilities.  The Company expects no creditor objections
         significant to the Company as a whole.

     (b) Relocation of Corporate Offices - The Company relocated its corporate
         offices to west Houston, Texas on October 1, 1996 into office space
         being leased for a two-year period at an annual rental of $13,000.

     (c) Ownership Change - On October 1, 1996, under a plan approved by
         stockholders in the annual meeting held June 17, 1996, the Company 
         authorized the issuance of 6,068,796 shares of common stock to the 
         Company's three officers and directors to satisfy $289,000 in various
         debts.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

        On September 3, 1996, the Company engaged Malone & Bailey, PLLC,
independent certified public accountants, Houston, Texas, as its auditors for
the fiscal year ended June 30, 1996.





                                      45
<PAGE>   46

                                    PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

          The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
        Name                     Age                Positions
<S>                             <C>              <C>
  Paul J. Montle                  48             Chairman of the Board,
                                                 President and Chief Executive
                                                 Officer

  C. Thomas Cutter                56             Director

  Kent E. Lovelace, Jr.           60             Director

  Roger W. Cope                   55             Director
</TABLE>

          Paul J. Montle has served as the Chairman of the Board and Chief
     Executive Officer of the Company since 1992. From 1991 to October 15,
     1994, Mr. Montle served as President and Chief Executive Officer of Viral
     Testing Systems Corporation, a distributor of a FDA-licensed AIDS test and
     other medical diagnostic products, and from 1991 to 1992, he also served
     as Chairman of the Board of such company. Since 1987, Mr. Montle has been
     a Managing Director of Montle International Incorporated, a privately-held
     merchant banking firm.

          C. Thomas Cutter has served as a Director of the Company since
     December 1992. Since 1968, he has served as President, Director and sole
     shareholder of Cutter Fire Brick Co., Inc., which is engaged in the repair
     and maintenance of industrial heat enclosures. Since 1975, Mr. Cutter has
     served as President, Director and sole shareholder of both Cutter
     Ceramics, Inc, a manufacturer and distributor of art clay, and ADC Supply
     Corp., a distributor of industrial insulation materials. Since 1985, Mr.
     Cutter has served as President, Director and sole shareholder of Cutter
     Northern Refractories, Inc., which is engaged in the repair and
     maintenance of industrial heat enclosures.

          Kent E. Lovelace, Jr. has served as a Director of the Company since
     August 1993. Since 1975, he has served as President and Chief Executive
     Officer of Equitrust Mortgage Corporation, formerly Hancock Mortgage
     Corporation.

          Roger W. Cope has served as a Director of the Company since 1993. He
     now serves as Vice President Business Development with Lamb Technicon
     Machining Systems. From June 30, 1993 until January 16, 1996, Mr. Cope
     served as President of the Company and Manager of Papone's Palace, Ltd.
     Liability Co. During 1991 and 1992, he served as Director of Strategic
     Planning for the Applied Technology Division of Litton Systems, Inc., a
     provider of electronic warfare products to the defense industry. From 1986
     to 1991, Mr. Cope served as President of Cope Development Corp., a
     privately-held consulting firm. He also serves as a Director of Waste
     Recovery, Inc., a publicly-held corporation engaged in specialized
     resource recovery.

          Each Director holds office until the Annual Meeting of Stockholders
     following his election and until his successor has been duly elected and
     qualified or until he has resigned or been removed as provided for in the
     By-Laws. There are no understandings or arrangements relating to any
     person's service or prospective service as a Director of the Company. No
     family relationships exist between any of the above named Directors or
     between any such Director and any Executive Officer of the Company.

          Section 16(a) of the Securities Exchange Act of 1934, as amended (the
     "Exchange Act"), requires that the Company's officers and directors, and
     person who own more than ten percent of a registered class of the
     Company's equity securities, file reports of ownership and changes in
     ownership with the Securities and Exchange Commission and furnish the
     Company with copies of all such Section 16(a) forms. Based solely on its
     review of the copies of such forms received by it and written
     representations from certain reporting person, the Company believes that,
     during the period of July 1, 1995 through June 30, 1996, each of its
     officers or directors and greater than ten percent stockholders complied
     with all such applicable filing requirements.




                                      46
<PAGE>   47

ITEM 11. EXECUTIVE COMPENSATION.

Report for Compensation Committee on Executive
     Compensation

The Compensation Committee of the Board of Directors is responsible for
reviewing and approving the Company's compensation policies and the
compensation paid to its executive officers (including the executive officers
named below). The Company's compensation program for its executive officers
(including the Chief Executive Officer) is designed to provide levels of
compensation required to assist the Company in attracting and retaining
qualified executive officers. The Compensation Committee attempts to set an
executive officer's compensation at a level which is similar to such officer's
peers in the Company's industry. Generally, executive officer compensation
(including the Chief Executive Officer) is not directly related to the
Company's performance. Instead, the Compensation Committee has a philosophy
which recognizes individual initiative and achievement which can significantly
influence an officer's compensation level. The executive compensation program
is comprised of salary, annual cash incentives and stock options. The following
is a discussion of each of the elements of the executive compensation program.

     Salary. Generally, base salary for each executive officer is similar to
levels within the industry and comparable to the level which could be attained
for equal positions elsewhere. Also taken into account are benefits, years of
service, responsibilities, Company growth, future plans and the Company's
current ability to pay.

     Annual Cash Incentives. The annual cash incentive plan is a cash bonus
program designed to reward significant corporate accomplishments and individual
initiatives demonstrated by executive officers during the prior fiscal year.
The amount of each cash bonus is determined by the Compensation Committee at
the end of the fiscal year and is paid in cash in a single payment.

     Stock Options. The 1993 and 1995 Stock Option Plans were adopted for the
purpose of promoting the interests of the Company and its stockholders by
attracting and retaining executive officers and other key employees of
outstanding ability. Options are granted to eligible participants based upon
their potential impact on corporate results and on their individual
performance. Generally, options are granted at market value, vest over a number
of years, and are dependent upon continued employment. The Committee believes
that the grant of time-vested options provides an incentive that focuses the
executive officers' attention on managing the business from the perspective of
owners with an equity stake in the Company. It further motivates executive
officers to maximize long-term growth and profitability because value is
created in the options only as the Company's stock price increases after the
option is granted.

The Compensation Committee:
Kent E. Lovelace, Jr.
C. Thomas Cutter




                                      47
<PAGE>   48

Summary Compensation Table

The following table sets forth the compensation paid by the Company and its
subsidiaries to the Chief Executive Officer and the other four most highly
compensated executive officers whose total annual salary and bonus for the
fiscal year ended June 30, 1996, 1995 or 1994 exceeded $100,000 for services in
all capacities to the Company and its subsidiaries.

                         Summary Compensation Table (1)
<TABLE>
<CAPTION>
                                               Annual                     Long-Term
                                             Compensation                 Compensation

          (a)            (b)        (c)        (d)           (e)              (g)
                                                             Other         Securities
       Name and       Fiscal                                 Annual        Underlying
        Principal      Year                                  Compen-       Stock Options
        Position      Ended      Salary       Bonus          sation        (no.of shares)
<S>     <C>         <C>         <C>          <C>           <C>             <C>

Paul J. Montle      6/30/96     $169,062
Chairman and        6/30/95      375,000                       (2)            225,000
Chief Executive     6/30/94      182,500                       (2)            100,000
Officer 

Roger W. Cope       6/30/96       22,833(7)
Former President    6/30/95      250,000      50,000           (2)            225,000
and Chief           6/30/94      150,000                       (2)            400,000
Operating
Officer

Paul V. Culotta     6/30/96        7,500(6)
Former              6/30/95       75,000      50,000           (2)
Executive Vice      6/30/94       85,000      50,000           (2)             50,000
President and
Chief Financial
Officer

Robert L. Kelley    6/30/95       20,000(5)   25,000
Former Vice         6/30/94      100,000      25,000           (2)             50,000
President,
Operations

Othon I. Herrera    6/30/96        2,500(4)
Former Vice         6/30/95      120,000      25,000           (2)            100,000
President of        6/30/94       25,000(3)                    (2)            100,000
Marketing
</TABLE>

(1)  The columns designated by the SEC for the reporting of certain long-term
     compensation, including awards of restricted stock, long term incentive
     plan payouts, and all other compensation, have been eliminated as no such
     awards, payouts or compensation were awarded to, earned by or paid to any
     specified person during any fiscal year covered by the table.
(2)  Nominal perquisites not meeting the applicable disclosure threshold.
(3)  Salary paid for the fiscal year is for the period from employment date to
     June 30.
(4)  Resigned effective July 31, 1995.
(5)  Resigned effective August 31, 1994.
(6)  Resigned effective November 15, 1994.
(7)  Effective August 1, 1995 voluntarily accepted a 50% reduction in annual
     salary, and resigned effective January 16, 1996.




                                      48
<PAGE>   49

          Stock Option Grants

The Company did not grant any stock options during the fiscal year ended June
30, 1996. The Company has not granted stock appreciation rights ("SAR's") of
any kind.

          Option Exercises/Value of Unexercised Options

The following table sets forth the number of securities underlying options
exercised during the fiscal year ended June 30, 1996 and the value realized
upon such exercise, the number of securities underlying options exercisable and
unexercisable at June 30, 1996, and the value at June 30, 1996 of exercisable
and unexercisable in-the-money options remaining outstanding as to each
executive officer named in the Summary Compensation Table. No named executive
officer has been granted any SAR's. The "Value Realized" column reflects the
difference between the market price on the date of exercise and the exercise
price for the option for all options exercised. Thus, the "Value Realized" does
not necessarily reflect what the executive officer might receive, should he
choose to sell the shares acquired by the option exercise, because the market
price of the shares so acquired may at any time be higher or lower than that
price on the exercise date of the option.

               Aggregated Option Exercises in Last Fiscal Year and
                         Fiscal Year End Option Values
<TABLE>
<CAPTION>

     (a)              (b)            ( c)                    (d)                    (e)
                                                 Number of Securities
                   Number of                    Underlying Unexercised      Value of Unexercised
                    Shares                      Options at June 30, 1996      In-the-Money Options
                   Acquired          Value        (Number of Shares)        at June 30, 1996 ($)(2)
     Name         On Exercise       Realized    Exercisable Unexercisable  Exercisable Unexercisable
                                      (1)
<S>              <C>               <C>           <C>         <C>            <C>         <C> 
Paul J. Montle     None                0           4,200         8,800          (2)         (2)
Roger W. Cope      None(3)             0           9,600         6,400          (2)         (2)
Paul Culotta       None(4)             0
Roger Kelley       None(5)
Othon I.Herrera    None(6)
</TABLE>

(1)  Based upon the difference between the closing bid price of the Common Stock
     on the NASDAQ Stock Market on the date of exercise and the exercise price 
     of the options. 
(2)  The closing bid price of the Common Stock on June 28, 1996 on the NASDAQ 
     Stock Market was $1.50 per share which was less than the exercise price of 
     all options reported in the table.
(3)  Mr. Cope resigned effective January 16, 1996.
(4)  Mr. Culotta resigned effective November 15, 1994.
(5)  Mr. Kelley resigned effective August 15, 1994.
(6)  Mr. Herrera resigned effective July 31, 1995.




                                      49
<PAGE>   50

          Other Plans

The Company has no other deferred compensation, pension or retirement plans in
which executive officers participate.

          Performance Graph

The following graph compares the Company's cumulative total shareholder return
for the period commencing May 3, 1993 (the date on which the Company's Common
Stock first was registered under Section 12 of the Securities Exchange Act of
1934, as amended) and ending on June 28, 1996 to the returns for all companies
in the NASDAQ Composite Index and the GAX Gaming Index. The return values are
based on an assumed investment of $100, as of the close of business on May 3,
1993, in the Company's Common Stock and in each of the comparator groups, with
all dividends treated as reinvested. The comparisons in this table are set
forth in response to disclosure requirements of the Securities and Exchange
Commission and therefore are not intended to forecast or to be indicative of
future performance of the Company's Common Stock.

                                    [GRAPH]

<TABLE>
<CAPTION>
                 LS Capital Corporation   NASDAQ Composite Index   GAX Gaming Index
           <S>               <C>                       <C>                <C>
           5/93              100                       100                100
           6/93              137                       103                106
           6/94               63                       103                 71
           6/95               17                       136                106
           6/96                2                       173                132
</TABLE>

          Compensation Agreement with Officers

The Company currently has no employment contracts or other compensation
agreements with any of its current officers. The Company previously entered
into an agreement with Paul V. Culotta in connection with the termination of
Mr. Culotta's employment with the Company. The term of this agreement has been
completed, and the Company and Mr. Culotta have no further obligations under
the agreement except for the Company's payment of approximately $10,000 to Mr.
Culotta.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The Company had outstanding 1,721,000 shares of Common Stock at the close of
business on June 30, 1996. The following table sets forth certain information
as of the Record Date concerning the beneficial ownership of the Common Stock
(i) by each stockholder who is known by the Company to own beneficially in
excess of 5% of the outstanding Common Stock; (ii) by each director; (iii) by
each executive officer named in the Summary Compensation Table under "Executive
Compensation," below; and (iv) by all executive officers and directors as a
group. Except as otherwise indicated, all persons listed below have (i) sole
voting power and investment power with respect to their shares of Common Stock,
except to the extent that authority is shared by spouses under applicable law,
and (ii) record and beneficial ownership with respect to their shares of Common
Stock.




                                      50
<PAGE>   51

<TABLE>
<CAPTION>
                                                         Shares of
                                                       Common Stock
                                                   Beneficially Owned (1)
Name and Address of Beneficial Owner             Number             Percent
<S>                                             <C>                 <C>
Richard D. Corley                                88,100              5.1%
1101 Main
Peoria, Illinois 61606

Paul J. Montle                                   68,980(2)           4.0%
15915 Katy Freeway, Suite 250
Houston, Texas 77094

Roger W. Cope                                    17,640(3)           1.0%
5663 East Nine Mule Rd.
Warren, Michigan 48901

Kent E. Lovelace, Jr.                            37,700(4)           2.1%
3300 West Beach Street
Gulfport, Mississippi

C. Thomas Cutter                                  6,848(5)           (6)
54 Emerson Road
Waltham, Massachusetts 02254-151

All directors and officers 
as a group (six persons)                        130,171(7)           7.6%
</TABLE>

(1)  Includes shares of Common Stock beneficially owned pursuant to options and
     warrants exercisable on the Record Date or within 60 days thereafter.

(2)  Includes 33,581 shares of Common Stock held by Travis Partners, G.P. in
     which Mr. Montle has a 51.67% interest and the trust for the benefit of
     Mr. Montle's children which has a 15% interest, 3,802 shares of Common
     Stock directly owned; 1,600 shares of Common Stock beneficially owned
     pursuant to non-qualified stock options currently exercisable and 30,000
     shares beneficially owned pursuant to warrants currently exercisable by a
     limited partnership having Mr. Montle's children as limited partners.

(3)  Includes 7,240 shares directly owned; 4,000 shares owned by Mr. Cope's
     wife; and 6,400 shares beneficially owned pursuant to stock options
     immediately exercisable.

(4)  Includes 10,700 shares directly owned; 12,000 shares owned by Mr.
     Lovelace's wife; 12,000 shares beneficially owned pursuant to warrants
     currently exercisable; and 2,000 shares beneficially owned pursuant to
     stock options immediately exercisable.

(5)  Includes 200 shares directly owned; 4,648 shares owned by Mr. Cutter's
     wife; and 2,000 shares beneficially owned pursuant to stock options
     immediately exercisable.

(6)  Less than 1%

(7)  Includes 82,371 shares directly owned; 38,000 shares beneficially owned
     pursuant to warrants currently exercisable; and 14,400 shares beneficially
     owned pursuant to stock options immediately exercisable.






                                      51
<PAGE>   52

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On May 4, 1993, the Company loaned $500,000 to RMS Titanic, Inc. ("Titanic").
This loan was evidenced by a secured promissory note. In November 1993, the
Company assigned to Glenville Properties Incorporated ("Glenville") all of its
rights in, to and under the Titanic promissory note, which at the time of the
assignment had an outstanding balance, including accrued interest, of $145,000.
In exchange for the assignment of the Titanic promissory note and other items,
Glenville issued a promissory to the Company in the amount of $185,000 which
was due and payable on November 15, 1994. Glenville is an entity controlled by
Paul J. Montle, the Chairman of the Board and Chief Executive Officer of the
Company, who guaranteed repayment of the Glenville promissory note. The Company
wanted to assign the Titanic promissory note because it appeared that
litigation would arise out of such note and the Company did not want to be
involved in any litigation as it was applying for a Nevada gaming license at
the time of the assignment and would have had to report any such litigation to
the Nevada gaming authorities. Glenville agreed to purchase the Titanic
promissory note as an accommodation to the Company.

The assignment of the Titanic promissory note was rescinded on October 19,
1995. The effect of the rescission was (a) to revest in the Company full right,
title and interest in the Titanic promissory note and other items assigned, as
if the original assignment of these items to Glenville had never occurred, and
(b) to cancel the Glenville promissory note and related personal guarantee. The
Company and Glenville decided to rescind the transaction because Titanic was
contesting the collectibility of the Titanic promissory note on the basis that
it was not assignable. The rescission was viewed as essential in order to
pursue the collection of the Titanic promissory note without the possibility of
being hampered by a possibly dispositive affirmative defense. When the
assignment of the Titanic promissory note was rescinded, Mr. Montle was owed by
the Company accrued salary in an approximate amount of $26,000. The amount owed
to Mr. Montle by the Company was not offset by the amount guaranteed by Mr.
Montle because under Texas law regarding the payment of employee compensation,
the Company was legally prohibited from offsetting the accrued salary, and with
the entire transaction being rescinded, Mr. Montle's guarantee was no longer in
effect or relevant. Glenville received no interest under the Titanic promissory
note, and the Company did not require Glenville to pay any of the interest on
the Glenville promissory note that otherwise had become due and payable.
Moreover, while principal amount of the Glenville promissory note became due on
November 15, 1994, the Company did not seek to enforce the payment of the
Glenville promissory note because by the time such note became due it already
appeared that the original assignment of the Titanic promissory note might have
to be rescinded for the reasons stated above.






                                      52
<PAGE>   53

                                    PART IV.

  ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

           (a) Documents filed as part of this report:

               1.   Consolidated Financial Statements:

                    Report of Independent Auditors ......................  22

                    Consolidated Balance Sheets as of June 30,
                    1996 and 1995 .......................................  24

                    Consolidated Statements of Income for the
                    years ended June 30, 1996, 1995 and
                    1994 ................................................. 26

                    Consolidated Statements of Stockholders'
                    Equity for the years ended June 30, 1996, 1995
                    and 1994 ............................................. 27

                    Consolidated Statements of Cash Flow for the
                    years ended June 30, 1996, 1995 and
                    1994 ................................................. 30

                    Notes to Consolidated Financial Statements ........... 33

               2.   Financial Statement Schedules:

                    Schedule II - Valuation and Qualifying
                    Accounts ............................................. 59








                                      53
<PAGE>   54

3.     Exhibits:

       The following exhibits are filed with this Annual Report or are
       incorporated herein by reference:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION
------        -----------
<S>    <C>
4.01   Certificate of Incorporation of the Company filed December 30, 1992 is
       incorporated herein by reference from the Company's (SEC File No.
       33-57998-D) Form SB-2 Registration Statement filed April 29, 1993, Item
       27(a), Exhibit 3.1.

4.02   Bylaws of the Company are incorporated herein by reference from the
       Company's (SEC File No. 33-57998-D) Form SB-2 Registration Statement
       filed April 29, 1993, Item 27(a), Exhibit 3.2.

4.03   Certificate of Amendment of Certificate of Incorporation of the Company
       is incorporated herein by reference from the Company's (SEC File No.
       33-57998-D) Form SB-2 Registration Statement filed April 29, 1993, Item
       27(a), Exhibit 3.5.

4.04   Amendment to Certificate of Incorporation filed February 2, 1995 is
       incorporated herein by reference from the Company's (SEC File No.
       0-21566) Report on Form 10-Q for the period ended December 31, 1994,
       Item 6, Exhibit 3.01

4.05   Certificate of Designation, Preferences, Rights and Limitations of 12%
       Senior Convertible Preferred Stock of the Company filed January 25,
       1993, is incorporated herein by reference from the Company's (SEC File
       No. 33-57998-D) Form SB-2 Registration Statement filed April 29,  Item
       27(a), Exhibit 4.1.

4.06   Certificate of Amendment of Certificate of Incorporation of the Company
       filed June 26, 1996.

10.01  Assignment Agreement dated as of December 31, 1992 between Papone's
       Palace Acquisition Corporation and the Company is incorporated herein by
       reference from the Company's (SEC File No. 33-57998-D) Form SB-2
       Registration Statement filed April 29, 1993, Item 27(a), Exhibit 10.1.

10.02  Purchase Agreement dated effective November 30, 1992 between American
       Pacific Management Corporation and George B. Hill and Dolores J. Hill,
       Trustees of the Hill Family Trust and Papone's Palace Ltd. Liability
       Company is incorporated herein by reference from the Company's (SEC File
       No. 33-57998-D) Form SB-2 Registration Statement filed April 29, 1993,
       Item 27(a), Exhibit 10.4.

10.03  Letter Agreement dated November 30, 1992 between American Pacific
       Management Corporation and Randall Gose is incorporated herein by
       reference from the Company's (SEC File No. 33-57998-D) Form SB-2
       Registration Statement filed April 29, 1993, Item 27(a), Exhibit 10.5.

10.04  Lease and Option dated November 30, 1992 between George B. Hill and
       Dolores J. Hill and American Pacific Management Corporation is
       incorporated herein by reference from the Company's (SEC File No.
       33-57998-D) Form SB-2 Registration Statement filed April 29, 1993, Item
       27(a), Exhibit 10.6.

10.05  The Company's 1993 Stock Option Plan is incorporated herein by reference
       from the Company's (SEC File No. 33-57998-D ) Form SB-2 Registration
       Statement filed April 29, 1993, Item 27(a), Exhibit 10.8.
</TABLE>


                                      54
<PAGE>   55

<TABLE>
<S>    <C>
10.06  Amendment to the Company 1993 Stock Option Plan is incorporated herein
       by reference from the Company's (SEC File No. 0-21566) Report on Form
       10-Q for the period ended September 30, 1994, Item 6, Exhibit 10.8.

10.07  Operating Agreement of Papone's Palace is incorporated herein by
       reference from the Company's (SEC File No. 33-57998-D ) Form SB-2
       Registration Statement filed April 29, 1993, Item 27(a), Exhibit 10.9.

10.08  Settlement Agreement dated March 15, 1993 by and among the Hill Family
       Trust, George B. Hill and Dolores J. Hill, Co-Trustess, George B. Hill,
       individually, Timothy B. Hill, individually, American Pacific Management
       Corporation, Papone's Palace Acquisition Corporation, Viral Testing
       Systems Corporation, the Company, Paul J. Montle and Paul V. Culotta is
       incorporated herein by reference from the Company's (SEC File No.
       33-57998-D) Form SB-2 Registration Statement filed April 29, 1993, Item
       27(a), Exhibit 10.10.

10.09  Assignment Agreement dated as of December 31, 1992 between Papone's
       Palace Acquisition Corporation and the Company is incorporated herein by
       reference from the Company's (SEC File No. 33-57998-D ) Form SB-2
       Registration Statement filed April 29, 1993, Item 27(a), Exhibit 10.12.

10.10  Letter from the State of Colorado regarding the transfer of ownership to
       Papone's Palace Acquisition Corporation is incorporated herein by
       reference from the Company's (SEC File No. 0-21566) Current Report on
       Form 8-K dated June 10, 1993, Item 7, Exhibit (a).

10.11  Promissory Note in the principal amount of $500,000 dated as of June 10,
       1993 in favor of Randal Gose is incorporated herein by reference from
       the Company's (SEC File No. 0-21566) Annual Report on Form 10-K for the
       year ended June 30, 1993, Part IV, Item 14(c), Exhibit 10.16.

10.12  Promissory Note in the principal amount $500,000 executed by First
       Response Medical, Inc. in favor of the Company is incorporated herein by
       reference from the Company's (SEC File No. 0-21566) Current Report on
       Form 8-K dated June 3, 1993, Item 7, Exhibit 10.1.

10.13  Pledge Agreement made and entered into as of May 4, 1993 between First
       Response Medical, Inc. and the Company is incorporated herein by
       reference from the Company's (SEC File No. 0-21566) Current Report on
       Form 8-K dated June 3, 1993, Item 7, Exhibit 10.2.

10.14  Bailment and Agency Agreement entered into as of May 4, 1993 between
       First Response Medical, Inc., the Company, Pullman & Comley & Allan H.
       Carlin is incorporated herein by reference from the Company's (SEC File
       No. 0-21566) Current Report on Form 8-K dated June 3, 1993, Item 7,
       Exhibit 10.3.

10.15  Restructuring and Amendment Agreement dated September 9, 1993 by and
       among the Hill Family Trust, George B. Hill, Trustee, American Pacific
       Management Corporation and the Company is incorporated herein by
       reference from the Company's (SEC File No. 0-21566) Annual Report on
       Form 10-K for year ended June 30, 1993, Part IV, Item 14(c), Exhibit
       10.22.

10.16  Agreement dated November 24, 1993 by Coronet Company, Inc. to the
       Company is incorporated herein by reference from the Company's (SEC File
       No. 0-21566) Annual Report on Form 10-K for the year ended June 30,
       1994, Part IV, Item 14(c), Exhibit 10.30.

10.17  Lease dated October 20, 1994 between Lone Star Casino Corporation of
       Nevada, a
</TABLE>


                                      55
<PAGE>   56

<TABLE>
<S>    <C>
       Nevada corporation, and TPM Financial, Inc. is incorporated herein by
       reference from the Company's (SEC File No. 0-21566) Report on Form 10-Q
       for the period ended September 30, 1994, Item 6, Exhibit 10.34.

10.18  Amendment Number One to Casino Lease dated February 3, 1995, between TPM
       Financial, Inc. and Lone Star Corporation of Nevada is incorporated
       herein by reference from the Company's (SEC File No. 0-21566) Report on
       Form 10-Q for the period ended December 31, 1994, Item 6, Exhibit 10.01.

10.19  Amendment No. 2 to the the Company 1993 Stock Option Plan is
       incorporated herein by reference from the Company's (SEC File No.
       0-21566) Report on Form 10-Q for the period ended December 31, 1994,
       Item 6, Exhibit 10.02.

10.20  Amendment No. 3 to the the Company 1993 Stock Option Plan is
       incorporated herein by reference from the Company's (SEC File No.
       0-21566) Report on Form 10-Q for the period ended December 31, 1994,
       Item 6, Exhibit 10.03.

10.21  Amendment Number One to Lease Agreement dated February 3, 1995, between
       TPM Financial, Inc. and Lone Star Casino Corporation of Nevada is
       incorporated herein by reference from the Company's (SEC File No.
       0-21566) Report on Form 10-Q for the period ended December 31, 1994,
       Item 6, Exhibit 10.04.

10.22  The Company, Papone's Palace Acquisition Corporation and Papone's Palace
       Ltd. Liability Company Secured Convertible Senior Debenture Due January
       1, 1995 Debenture No. 1 dated October 5, 1994 in the original principal
       amount of $1,000,000 is incorporated herein by reference from the
       Company's (SEC File No. 0-21566) Report on Form 10-Q for the period
       ended December 3, 1994, Item 6, Exhibit 10.05.

10.23  The Company's 1994 Employee Stock Purchase Plan is incorporated herein
       by reference from the Company's (SEC File No. 0-21566) Report on Form
       10-Q for the period ended December 3, 1994, Item 6, Exhibit 10.06.

10.24  The Company's Capital Accumulation Plan is incorporated herein by
       reference from the Company's (SEC File No. 0-21566) Report on Form 10-Q
       for the period ended December 31, 1994, Item 6, Exhibit 10.07.

10.25  The Company's 1994 Stock Option Plan for Non-Employee Directors is
       incorporated herein by reference from the Company's (SEC File No.
       0-21566) Report on Form 10-Q for the period ended December 31, 1994,
       Item 6, Exhibit 10.08.

10.26  The Company's 1994 Consultant Compensation Plan is incorporated herein
       by reference from the Company's (SEC File No. 0-21566) Report on Form
       10-Q for the period ended December 31, 1994, Item 6, Exhibit 10.09.

10.27  Amendment Number Two to Lease Agreement dated December 29, 1994 between
       Lone Star Casino Corporation of Nevada and TPM Financial, Inc. is
       incorporated herein by reference from the Company's (SEC File No.
       0-21566) Report on Form 10-Q for the period ended March 31, 1995, Item
       6, Exhibit 10.01.

10.28  Amendment Number One to the Company Papone's Palace Acquisition
       Corporation and Papone's Palace Ltd. Liability Company Secured
       Convertible Senior Debenture Due January 1, 1995 Debenture No. 1 is
       incorporated herein by reference from the Company's (SEC File No.
       0-21566) Report on Form 10-Q for the period ended March 31, 1995, Item
       6, Exhibit 10.02.

10.29  Sub-Lease Agreement dated March 21, 1995 between the Company and AirTel,
       Ltd. is incorporated herein by reference from the Company's (SEC File
       No. 0-21566) Report on Form 10-Q for the period ended March 31, 1995,
       Item 6, Exhibit 10.03.
</TABLE>


                                      56
<PAGE>   57

<TABLE>
<S>    <C>
10.30  The Company's 1996 Consultant Compensation Plan is incorporated herein
       by reference from the Company's (SEC File No. 333-01158) Registration
       Statement on Form S-8 filed February 8, 1996, Exhibit 4.2.

10.31  Settlement Agreement dated August 5, 1996 by and among the Company, Les
       Alexander, Papone's Palace Acquisition Corporation and Papone's Palace
       Ltd., Liability Co. is incorporated herein by reference from the
       Company's (SEC File No. 0-21566) Report on Form 10-K for the year ended
       June 30, 1996, Exhibit 10.31

10.32  Absolute Assignment of Membership Interest dated August 20, 1996
       executed by the Company in favor of Les Alexander is incorporated herein 
       by reference from the Company's (SEC File No. 0-21566) Report on Form 
       10-K for the year ended June 30, 1996, Exhibit 10.32

21.01  Subsidiaries of Registrant is incorporated herein by reference from the
       Company's (SEC File No. 0-21566) Report on Form 10-K for the year ended
       June 30, 1996, Exhibit 21.01

27.01  Financial Data Schedule
</TABLE>

           (b)      Reports on Form 8-K.

                    The Registrant filed a report on Form 8-K dated February 5,
                    1996, reporting on the closing of Registrant's casinos in
                    Central City, Colorado and on the Island of Tinian, the
                    Commonwealth of the Northern Marianas Islands.

                    The Registrant filed a report on Form 8-K dated April 4,
                    1996, amended April 18, 1996, reporting on the resignation
                    of KPMG Peat Marwick LLP, as the Registrant's independent
                    accountants.

                    The Registrant filed a report on Form 8-K dated September
                    8, 1996, reporting on the change of the Registrant's
                    corporate name and recent reverse stock split, the
                    discontinuance of operations at the Registrant's Tinian
                    casino, the restructuring of certain of the Registrant's
                    debt, the bankruptcy filing of a certain subsidiary of the
                    Registrant, and the engagement of Malone & Bailey, PLLC, as
                    the Registrant's independent accountants.

                                      57
<PAGE>   58


                                 SIGNATURES

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

                                         LS CAPITAL CORPORATION
                                                (Registrant)


                                         By: /s/ Paul J. Montle
                                            -----------------------------
                                             Paul J. Montle,
                                             Chief Executive Officer

Dated:      December 5, 1996


                                      58
<PAGE>   59

                                   SCHEDULE II

LS CAPITAL CORPORATION AND SUBSIDIARIES 
Years ended June 30, 1996, 1995, and 1994

Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                         Additions
                                     Balance at         charged to                       Balance at
                                    at beginning        costs and        Deductions        end of
                                      of period          expenses         describe         period
<S>                                <C>                  <C>              <C>            <C>

1996 Fiscal Year

Note receivable from 24.5%
  minority shareholder of
  Papone's                           $800,000                                              $800,000

Note receivable from landlord
  of proposed site                    750,000                             $750,000(1)
                                    1,550,000                              750,000          800,000
1995 Fiscal year

Note receivable from 24.5%
  minority shareholder of
  Papone's                           $800,000                                              $800,000

Note receivable from landlord
  of proposed site                                       750,000                            750,000
                                      800,000            750,000                          1,550,000

1994 Fiscal Year

Note receivable from 24.5%
  minority shareholder of
  Papone's                                              $800,000                           $800,000

Note receivable from
 Cambridge Financial
 Corporation                                             500,000           500,000(1)
                                                       1,300,000           500,000          800,000
</TABLE>

(1)  Amounts were written off during the year



                                      59
<PAGE>   60
                                 EXHIBIT INDEX


27  --  Financial Data Schedule