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

                                  FORM 10-KSB

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

                    For the fiscal year ended September 30, 1997

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
     ACT OF 1934

                    For the transition period from _____ to_____
 
                    Commission File No. 001-12171

                        CAPITOL COMMUNITIES CORPORATION
          (Name of Small Business Issuer as specified in its charter)

           Nevada                              88-0361144
(State or other jurisdiction of            (I.R.S. Employer
incorporation or organization)            Identification No.)


25550 Hawthorne Boulevard
Suite 207
Torrance, CA                                       90505
(Address of principal executive offices)        (Zip Code)


Issuer's telephone number: (310) 375-2266

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

Securities registered under Section 12(g) of the Act:

                         Common Stock ($.01 Par Value)
                                (Title of Class)


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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
<PAGE>
 
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]


     State the issuer's revenues for its most recent fiscal year. $40,807.

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked price of such, as of a specified date within the past 60 days.
$1,313,108 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. ("NQB") on November 28, 1997.

     State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 7,351,000 as of December 15,
1997.


                      DOCUMENTS INCORPORATED BY REFERENCE
NONE

     Transitional Small Business Disclosure Format YES [ ] NO [X]

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<PAGE>
 
TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
FORWARD-LOOKING STATEMENTS ................................    4
--------------------------                                             
<S>           <C>                                             <C>
 
PART I
ITEM 1.       DESCRIPTION OF BUSINESS......................    4
 
ITEM 2.       DESCRIPTION OF PROPERTY......................   22
 
ITEM 3.       LEGAL PROCEEDINGS............................   36
 
ITEM 4.       SUBMISSION OF MATTERS TO VOTE OF
              SECURITY HOLDERS.............................   37
 
PART II.
 
ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS..........................   37
 
ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR
              PLAN OF OPERATION............................   39
 
ITEM 7.       FINANCIAL STATEMENTS.........................   50
 
ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE.......   50
 
PART III
 
ITEM 9.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
              AND CONTROL PERSONS; COMPLIANCE WITH
              SECTION 16(a)OF THE EXCHANGE ACT.............   51
 
ITEM 10.      EXECUTIVE COMPENSATION.......................   53
 
ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
              OWNERS AND MANAGEMENT........................   54
 
ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED
              TRANSACTIONS.................................   56
 
ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K.............   57
</TABLE>

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FORWARD-LOOKING STATEMENTS

     In addition to historical information, this Report contains forward-looking
statements.  Such forward-looking statements are generally accompanied by words
such as "intends," "projects," "strategies," "believes," "anticipates," "plans,"
and similar terms that convey the uncertainty of future events or outcomes.  The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements.  Factors that might cause such a
difference include, but are not limited to, those discussed in ITEM 6 of this
Report, the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION --Factors That May Affect Future Results and Market Price of Stock."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof and
are in all cases subject to the Company's ability to, (1) meet its current
short-term debt obligations if the Company cannot extend, replace, convert into
long-term debt, or retire such debt as it matures, which may give rise to doubts
as to the Company's ability to meet its current obligations, and (2) to raise
sufficient capital to commence and continue meaningful operations.  There can be
no assurance that the Company will be able to replace, extend, convert or retire
the current debt or raise sufficient capital.  Capitol Communities Corporation
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.  Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including without limitation those identified in the "Risk Factors" section of
the Company's Registration Statement filed with the Securities and Exchange
Commission (the "SEC") in September 1996 on Form 10-SB.

PART I.

ITEM 1.  DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT
 
     Capitol Communities Corporation, a Nevada corporation (the "Company"), was
formed on August 21, 1995.  It is the successor-by-merger to AWEC Resources,
Inc., a New York corporation (the "Predecessor Corporation").  Unless the
context otherwise requires, all references to the "Company" in this Report
include the Predecessor Corporation, and all references to the Company's
business and properties include the business and properties of Capitol
Communities Corporation and its wholly-owned subsidiaries discussed in more
detail below.

     The Predecessor Corporation was incorporated in the State of New York as
Century Cinema Corporation in November 1968.  In 1969, the Predecessor
Corporation conducted its initial public offering of common stock, pursuant to a
Form S-2 registration statement filed with the SEC.  From 1970 to 1971, the
Predecessor Corporation filed annual reports under the Securities Exchange Act

                                       4
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of 1934, as amended (the "Exchange Act").  From 1972 until the Company's filing
of its Registration Statement on Form 10-SB on September 16, 1996, neither the
Predecessor Corporation nor its successor, Capitol Communities Corporation,
complied with the reporting requirements under the Exchange Act.

     By 1983, current management of the Company believes that the Predecessor
Corporation had virtually no assets and was essentially dormant.  In April 1984,
the Predecessor Corporation acquired the business of Diagnostic Medical
Equipment Corporation ("DMEC") (the "DMEC Acquisition").  In June 1983, the
Predecessor Corporation changed its name to Diagnostic Medical Equipment Corp.
After the DMEC Acquisition, the Predecessor Corporation was in the
pharmaceutical, medical equipment and surgical supplies business.  In August
1987, the Predecessor Corporation filed a registration statement with the SEC on
Form S-18 for a proposed offering of securities.  The registration statement
never became effective and was deemed abandoned by the SEC, as of August 1991.
The Company's management believes that, by December 1992, the Predecessor
Corporation had virtually no assets.

     In February 1993, Charles L. Silengo Sr. and certain affiliates and related
persons (the "Silengo Group") sold all of the outstanding shares of Lion Coal
Co. ("Lion Coal") to the Predecessor Corporation in return for the issuance of
shares of common stock representing a majority interest in the Predecessor
Corporation.  In August 1993, the Silengo Group sold most of its Predecessor
Corporation common stock to Joe Vick ("Vick"), thereby transferring control of
the Predecessor Corporation to Vick.  The Predecessor Corporation transferred
its interest in Lion Coal to Charles L. Silengo, for nominal consideration, in
connection with the Silengo Group's sale of its Predecessor Corporation common
stock to Vick.

     In October 1993, the Predecessor Corporation formed a wholly-owned
subsidiary, Resource Equity Corporation, a Texas corporation ("Resource
Equity"), to hold options on oil and gas properties purchased by the Predecessor
Corporation from PetroSource Energy Corporation ("PetroSource"), a company
controlled by Vick.  The Predecessor Corporation issued shares of common stock
representing a controlling interest in the corporation to PetroSource as
consideration for the options.  Although, at the time of the purchase, the board
of directors of the Predecessor Corporation valued the options at $1,395,356,
the amount of cash that PetroSource paid for the options, the options were later
discovered to be worthless.  Resource Equity was subsequently dissolved on
February 13, 1996, by the State of Texas for failure to pay State franchise
taxes.

     On November 29, 1993, the Predecessor Corporation filed a Form 10
registration statement with the SEC to register its common stock pursuant to
Section 12(g) of the Exchange Act.  The Predecessor Corporation later withdrew
the registration statement, for reasons which are unknown to current management
of the Company.

     On December 20, 1993, the Predecessor Corporation changed its name to AWEC
Resources, Inc.  On February 11, 1994, the Predecessor Corporation formed a
wholly-owned subsidiary, AWEC Development Corporation, an Arkansas

                                       5
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corporation, which later changed its name on January 29, 1996, to Capitol
Development of Arkansas Inc. (the "Operating Subsidiary").

     In February 1994, PetroSource transferred the majority of its shares of
Predecessor Corporation common stock to Prescott Investments Limited
Partnership, a Nevada limited partnership   ("Prescott LP"), and Charlie
Corporation, a Nevada corporation ("Charlie Corporation"), both of which were
then, and currently are, affiliates of Michael G. Todd, Herbert E. Russell and
John W. DeHaven.  See ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.  The shares were transferred as payment for public relations
services provided by Prescott LP and Charlie Corporation to the Predecessor
Corporation.

     On February 15, 1994, the Operating Subsidiary purchased approximately
2,041 acres of land in Maumelle, Arkansas (the "Maumelle Property") from Century
Realty, Inc. ("Century") for an aggregate purchase price of $8,430,000.  The
purchase price was comprised of $1,693,000 paid in cash at the closing of the
sale and a promissory note payable to Century in the original principal amount
of $6,737,000, secured by a first priority security interest in a portion of the
Maumelle Property.  The cash paid at the closing was obtained from the proceeds
of Maumelle Property lot sales to third parties that occurred concurrently with
the Operating Subsidiary's acquisition of the Maumelle Property.  Since
purchasing the Maumelle Property, the Operating Subsidiary has sold, as of
September 30, 1997, approximately 305 acres of the Maumelle Property, for
aggregate gross sales proceeds of $6,279,786.  This includes property deeded to
Century as part of a settlement agreement to retire debt and resolve a pending
legal action. See ITEM 2, "DESCRIPTION OF PROPERTY," and ITEM 3, "LEGAL
PROCEEDINGS."

     The Maumelle Property was previously owned by Michael G. Todd and John W.
DeHaven, through a general partnership known as DeHaven, Todd & Company ("DTC"),
for approximately five years, from 1988 to 1993.  In an uncontested foreclosure
action, DTC transferred the Maumelle Property to Century, successor to the
Resolution Trust Corporation (the "RTC"), which then was receiver for San
Jacinto Savings Association, the holder of a DTC promissory note secured by the
Maumelle Property.  Century acquired rights to its claims on the Maumelle
Property from the RTC in February, 1993.

     On February 17, 1994, the Predecessor Corporation filed another Form 10
registration statement with the SEC, but later withdrew it because of
significant comments from the SEC and the Predecessor Corporation's lack of
sufficient resources to satisfactorily respond to the SEC's comments. There has
been no reports or registration statements filed with the SEC since the
aforementioned Form 10 registration statement.

     In May 1994, the Predecessor Corporation formed a wholly-owned subsidiary,
AWEC Homes, Inc., an Arkansas corporation (the "Home Construction Subsidiary"),
for the purpose of building single family homes on lots owned by the Predecessor
Corporation.  The Home Construction Subsidiary, which later changed its name to
Capitol Homes, Inc. on January 29, 1996, has had no construction operations.

                                       6
<PAGE>
 
     In November 1994, Vick and PetroSource sold their remaining shares of the
Predecessor Corporation common stock to Charlie Corporation and Prescott LP in
consideration of strategic planning services.

     The Operating Subsidiary refinanced its $6,737,000 Century promissory note
in September 1995 by (a) borrowing $3,500,000 from Resure, Inc., an Illinois
Insurance Exchange member syndicate ("Resure"), to make a cash payment of
$2,500,000 to Century (the "Resure Loan I"), (b) issuing two promissory notes to
Century, in the amount of $1,400,000 (the "Century Note I") and $350,000 (the
"Century Note II"), respectively, to replace the original Century promissory
note, and (c) issuing 700,000 shares of Common Stock to Century which
represented 9.57% of the Company's outstanding Common Stock, as of September 30,
1997. See ITEM 12, "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."  In consideration of the cash payment, promissory notes, and stock,
Century released all of the real property securing the original promissory note
and accepted approximately 36 acres of Maumelle Property commercial lots as
collateral to secure the $1,400,000 Century Note II. The Resure Loan I was
evidenced by a promissory note (the "Resure Note I") which is secured by
approximately 1,045 acres of the Maumelle Property residential acreage.
Effective September 30, 1997, the Company entered into a settlement agreement
with Century (the "Century Settlement Agreement) to cancel the Century Note I
and Century Note II in exchange for the delivery of a deed to 36 acres of the
commercial Maumelle Property and an additional 3.8 acres of commercial land in
Maumelle, Arkansas (the "Corner Tract") that the Company acquired on May 7,
1997.  The Company retains an option to purchase the approximately 40 acres of
property from Century.  See ITEM 2, "DESCRIPTION OF PROPERTY," ITEM 3, "LEGAL
PROCEEDINGS" and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and Other Liquidity
Requirements."

     Concurrently with the Resure Loan I, Resure issued to the Operating
Subsidiary a subordinated surplus debenture in the original principal amount of
$3,500,000 (the "Resure Debenture"). As consideration for the Resure Debenture,
the Operating Subsidiary issued a $3,500,000 promissory note to Resure (the
"Resure Note II"), which was secured by approximately 410 acres of the 1,044
acres of residential property securing the Resure Loan I. In February 1997, an
Illinois court found that Resure was insolvent, ordered that Resure be
liquidated, and appointed the Illinois Director of Insurance, Mark Boozell, (the
"Resure Liquidator") to oversee the liquidation. In May, 1997, Resure's
liquidator, agreed to release 67 acres held as collateral in exchange for
$675,100 to be placed in a cash collateral account. Effective September 30,
1997, the Company entered into a settlement agreement with the Liquidator of
Resure (the "Resure Settlement Agreement") whereby the Liquidator modified the
Resure Note I to bring all past due payments current in return for acceleration
of the maturity date from July 1, 2000 to September 1, 1999 and released the
approximately 344 acres that secured the Resure Note II. The Liquidator also
agreed to cancel the Resure Note II in exchange for the Company's termination of
its right to the Resure Debenture. The Resure Settlement Agreement was approved
by the Circuit Court of Cook County, Illinois, Chancery Division, on October 24,
1997. See ITEM 2, "DESCRIPTION OF PROPERTY - RESURE DEBENTURE," and ITEM 6
"MANAGEMENT'S DISCUSSION AND ANALYSIS

                                       7
<PAGE>
 
OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and Other
Liquidity Requirements."

     In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger.  Under the terms of the merger, each share of Predecessor
Corporation common stock was converted to a single share of Capitol Communities
Corporation common stock (the "Common Stock"), and Capitol Communities
Corporation succeeded to all of the assets, rights, obligations and liabilities
of the Predecessor Corporation.

     On April 17, 1997, the Company formed Capitol Resorts, Inc., an Arkansas
corporation (the "Resort Subsidiary"), for the purpose of conducting the
Company's proposed vacation ownership interest operations.  See "Business of the
Company," below.

     On July 30, 1997, the Company acquired Capitol Resorts of Florida, Inc.
(the "Florida Resorts Subsidiary"), a newly formed Florida Corporation pursuant
to an Agreement and Plan of Reorganization between MLT Management Corp.("MLT"),
a corporation not affiliated with the Company.  Under the agreement MLT
transferred its contract right to purchase approximately 36 acres of land and
improvements near Disney World in Osceola County, Florida (the "Florida Bible
College Property").  The Company acquired all of the outstanding stock in the
Florida Resorts Subsidiary in exchange for the issuance of 100,000 shares of
Company common stock to MLT.  The Florida Resorts Subsidiary then closed the
purchase of the Florida Bible College Property July 30, 1997, at a purchase
price of $922,000 plus costs. See ITEM 2, "DESCRIPTION OF PROPERTY."


RECENT BUSINESS DEVELOPMENT

     OCEAN PALMS RESORT PROPERTY.  On December 9, 1997, the Florida Resorts
Subsidiary acquired the lease rights to 120 feet of beachfront land and
improvements located in Pompano Beach, Florida (the "Ocean Palms Resort
Property") from Ocean Palms Resort, Inc. ("OPRI"), and Ocean Palms Development
Corporation ("OPDC") unaffiliated third parties.  The ground lease rights to the
Ocean Palms Resort Property is for a period of 99 years, of which 66 years and 3
months remain (the "Ground Lease").  The improvements include a 53 LTL unit
complex, and other common area facilities.  The Company also acquired the
interest in several long term tenant leases, a $2,600,000 interest in promissory
notes arising out of the sale of long term leaseholds ("LTL")units of Ocean
Palms Resorts (the "Ocean Palms Resort Paper"), and the right to manage and
operate the on-going rental of the LTL units as hotel rooms on behalf of the LTL
owners.

     The Company acquired the Ocean Palms Resort Property, the Ocean Palms
Resort Paper and the other rights for approximately $868,000 in cash, the
issuance of 33,500 shares of the Company's Common Stock and the assumption of

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a $1,158,000 mortgage encumbering the Ground Lease. See "ITEM 2, "DESCRIPTION OF
PROPERTY- -CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED."
 
     OCEAN VILLAS.  On December 9, 1997, the Florida Resorts Subsidiary acquired
all of the issued and outstanding of OPV Development, Inc. ("OPV"), an
unaffiliated third party. With the stock acquisition, the Company acquired OPV's
primarily asset, two lease rights to a four lot parcel of land and improvements
(the "Ground Leases") located in Pompano Beach, Florida (the "Ocean Villas
Property").  The First Ground Lease is for a period of 99 years, of which 65
years and 5 months remain.  The Second Ground Lease is for a period of 93 years
and 3 months, of which 65 years and 5 months remain. The Company acquired the 16
LTL unit Ocean Villas, and approximately $294,000 in promissory notes (the
"Ocean Villas Paper"), which arose from the prior sale of 4 LTL units, for
approximately $107,000 in cash, and the assumption of a first mortgage of
$375,000 and a second mortgage of $150,000 encumbering the Ground Leases. See
"ITEM 2, "DESCRIPTION OF PROPERTY- -CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE
ACQUIRED."

BUSINESS OF THE COMPANY

     GENERAL.  The Company is in the business of developing and selling real
estate, primarily in the City of Maumelle, Arkansas, a 5,000 acre planned
community located on the Arkansas River, across from the western Little Rock
area and fifteen miles from downtown Little Rock, Arkansas.  The Company also
intends to engage in vacation ownership operations consisting of the following:
(1) the acquisition, renovation, development and operation of vacation ownership
resorts, hotels and other vacation properties, (2) marketing and selling
vacation ownership interests ("VOIs") and LTLs interest in such properties
(collectively, "Vacation Intervals"), and (3) providing financing for the
purchase of Vacation Intervals at its properties.

     The Company's real estate as of September 30, 1997, consisted of the
remaining unsold portion of the Maumelle Property consisting of approximately
1,731 acres and the approximately 36 acres of the Florida Bible College land.
During fiscal year ended September 30, 1997, the Company sold approximately  109
acres of Maumelle real estate for an aggregate sales price of $3,855,313.
Included in the 109 acres was approximately 40 acres of commercial Maumelle
Property the Company deeded to Century to retire debt and resolve a pending
legal action.  See ITEM 2, "DESCRIPTION OF PROPERTY," and ITEM 3, "LEGAL
PROCEEDINGS."

     In the last three years, the Company's business has consisted primarily of
selling unimproved residential and commercial lots from its Maumelle Property
inventory to private individuals and other developers.  Although management of
the Company in the 1997 fiscal year decided to shift the Company's primary focus
from selling land to the construction and sale of single-family homes, and the
development, sale and operation of vacation ownership intervals, the Company has
not yet commenced material development, building or other operational activities
and will require substantial funding before it can do so.  Moreover, if the
Company cannot extend, replace, convert into long-term debt or retire its
current short-term debt, it may suffer

                                       9
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liquidity problems that will prevent the Company from realizing or consummating
any of its business plans, objectives, strategies, or transactions.  See ITEM 7,
"FINANCIAL STATEMENTS."  There can be no assurance that the Company will be able
to raise sufficient capital to commence meaningful operations maintain adequate
liquidity and pursue the business plans, objectives, strategies, or transactions
discussed herein. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."

     The Maumelle Property is managed by Maumelle Enterprises, Inc. ("Maumelle
Enterprises"), a real estate management firm that was affiliated with certain
officers, directors and controlling shareholders of the Company until March,
1997, and as of the date of this Report is still affiliated with certain
officers of the Company.  The Company expects that Maumelle Enterprises will
continue in the foreseeable future to manage the Maumelle Property and any other
Maumelle-area real property the Company may acquire.  In other geographic areas,
the Company expects to engage local unaffiliated brokers to manage its
properties.  See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--
SERVICES PROVIDED BY AFFILIATED COMPANIES."

     The Company expects that, once developed, its vacation ownership resorts
will be managed, at least initially, by unaffiliated third parties.

     PRINCIPAL PRODUCTS AND MARKETS.

     RESIDENTIAL AND COMMERCIAL PROPERTIES.  The Company plans to conduct its
single-family development and construction activities primarily in Arkansas,
through the Operating Subsidiary and/or the Home Construction Subsidiary. The
Company intends to construct single-family homes, apartments, and commercial
buildings on the land that it presently owns in Maumelle or may acquire in
Maumelle in the future.  The developed properties will be sold to private home
purchasers and apartment or commercial building operators, as appropriate.  See
ITEM 2, "DESCRIPTION OF PROPERTY--PROGRAM OF DEVELOPMENT."

     The Company's initial focus in its home-building operations is to develop
single-family homes in the $125,000 to $200,000 price range on the approximately
3,800 unimproved single-family home lots it owns in Maumelle and on improved
lots it intends to acquire from third parties in Maumelle.  The Company does not
expect to operate, manage or lease any of the single-family homes, apartment, or
commercial properties it may develop.

     The Company intends to sell vacant property from its real estate inventory
only as needed to meet liquidity requirements or if Company management
determines that a particular property is not appropriate for development by the
Company.  Since the end of the fiscal year, the Company has sold some of its
real property to fund operating and debt expense.  See ITEM 6 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--
Certain Recent Capital Raising Transactions."  The Company expects that any such
land sold in the future likely will be land which has been zoned for commercial
or multi-family use, since the Company wishes to retain as many single-family
home lots, as it can for development and sale by the Company.  Company
management expects that any such commercial or multi-

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family properties sold will be purchased by other real estate developers, who
may compete with the Company in any development activity undertaken by the
Company in Maumelle.

     Based on current sales trends as evidenced by building permits issued,
recent improvement bond refinancing and renewed efforts of the Maumelle City
staff to attract industrial development, Management of the Company believes that
there is substantial unmet demand in the Maumelle area for single-family homes
in the $125,000 to $200,000 price range.  There can be no assurance, however, as
to the existence of such demand or how long such demand will continue or that
the Company will be able to sell all of the homes it may build in Maumelle.

     VACATION INTERVALS.  The Company intends to sell Vacation Intervals in
vacation ownership properties owned or to be acquired by the Company.  The
Company initially plans to complete the remodeling and sale of whole ownership
LTL interests in the 16 unit Ocean Palms Villas property in Pompano Beach, which
it recently acquired. The Company also plans in the third quarter of 1998 to
construct a new hotel on its Florida Bible College Property, which will be
utilized to sell Vacation Intervals in the price range of $10,000 to $12,000 per
week, assuming it can obtain construction financing.  The Company intends to
manage and operate the vacation ownership properties it acquires in Pompano
Beach.  The Company intends, initially, to contract with unaffiliated third
parties to operate the vacation ownership properties it acquires or develops in
other areas, including the Florida Bible College Property. The Company plans to
conduct its vacation ownership operations primarily through individual
subsidiaries to be owned by the Resort Subsidiary.  See ITEM 2, "DESCRIPTION OF
PROPERTY--PROGRAM OF DEVELOPMENT," and "DESCRIPTION OF PROPERTY--POLICIES WITH
RESPECT TO CERTAIN ACTIVITIES."

      VOIS AND LTLS.  The purchase of a Vacation Interval typically entitles the
buyer to use a fully-furnished vacation residence, generally for a one-week
period each year, in perpetuity.  Typically, the purchaser of a VOI acquires an
ownership interest in the vacation residence, which is often held as tenant in
common with other buyers of interests in the property generally a one-week
period each year in perpetuity.  The purchaser of an LTL typically acquires a
long-term leasehold interest in the property, and therefore owns all 52 weeks of
a year for a specified number of years, typically 50 to 60 years.

     The owners of VOI's typically manage the property through a non-profit
homeowners' association, which is governed by a Board consisting of
representatives of the developer and owners of Vacation Intervals at the resort.
The Board hires an agent, delegating many of the rights and responsibilities of
the homeowners' association to a management company, as described above,
including grounds landscaping, security, housekeeping and operating supplies,
garbage collection, utilities, insurance, laundry and repair and maintenance.
In the case of LTLs, the same functions are performed by the landlord or a
management company selected by the landlord.

                                       11
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     Each Vacation Interval owner typically is required to pay the homeowners'
association or management company, a share of all costs of maintaining the
property. These charges can consist of an annual maintenance fee plus applicable
real estate taxes and special assessments, assessed on an as-needed basis. If
the owner does not pay such charges, the owner's use rights may be suspended and
the homeowners' association or the holder of the note and assignment of the
leasehold interest may foreclose on the owner's Vacation Interval.

     THE VACATION OWNERSHIP INDUSTRY AND MARKET.  The vacation ownership
industry has existed in the United States since the late 1960s and has during
the past few years become one of the fastest growing real estate and vacation
industries in the country, as reported by the Wall Street Journal in October
1996.  According to the American Resort Development Association (the "ARDA"), a
trade association for the vacation ownership industry, it is estimated that
approximately 1.7 million United States families own VOI units worldwide and
that sales volume for 1996 in the United States was in excess of $2.0 billion
and in excess of $5.0 billion worldwide.  The average VOI unit in the United
States sells for $10,000 for a one week ownership interval, according to
industry sources.  LTL interest typically sell in the range of $60,000 to
$125,000 per unit, depending upon the unit's location and size.

     For many vacationers, particularly those with families, a lengthy stay at a
quality commercial lodging establishment can be very expensive, and the amount
of space required by a family (without renting multiple rooms) makes it
uneconomical for vacationers.  Also, room rates and availability at such
establishments are subject to change periodically.  In addition to providing
improved lifestyle benefits to owners, vacation ownership presents an economical
alternative to commercial lodging for vacationers.

     The Company believes that, based on published industry data, the following
factors have contributed to the increased acceptance of the vacation ownership
concept among the general public and the substantial growth of the vacation
ownership industry over the past 15 years:

  .  Increased consumer confidence resulting from consumer protection regulation
of the vacation ownership industry and the entrance of brand name national
lodging companies to the industry;

  .  Increased flexibility of vacation ownership due to the growth of
international exchange organizations;

  .  Improvement in the quality of both the facilities themselves and the
management of available vacation ownership resorts;

  .  Increased consumer awareness of the value and benefits of vacation
ownership including the cost savings relative to other lodging alternatives; and

  .  Improved availability of financing for purchasers of Vacation Intervals.

                                       12
<PAGE>
 
     The vacation ownership industry traditionally has been highly fragmented
and dominated by a large number of local and regional resort developers and
operators, each with small resort portfolios generally of differing quality.
The Company believes that one of the most significant factors contributing to
the current success of the vacation ownership industry is the entry into the
market of some of the world's major lodging, hospitality and entertainment
companies. Such major companies which now operate or are developing Vacation
Interval resorts include Marriott Ownership Resorts, The Walt Disney Company,
Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, and
Inter-Continental Hotels and Resorts, as well as Primus Hotel Corporation and
Westin Hotels & Resorts.

     The Company believes that national lodging and hospitality companies are
attracted to the vacation ownership concept because of the industry's rapid
historic growth rate and high profit margins. In addition, such companies
recognize that Vacation Intervals provide an attractive alternative to the
traditional hotel-based vacation and allow the hotel companies to leverage their
brands into additional resort markets where demand exists for accommodations
beyond traditional hotels.

     According to information compiled by the ARDA for the year ended December
31, 1994 (the most recent year for which statistics are available), the prime
market for Vacation Intervals is customers in the 40-55 year age range who are
reaching the peak of their earning power and are rapidly gaining more leisure
time. The median age of a Vacation Interval buyer at the time of purchase is 46.
The median annual household income of current Vacation Interval owners in the
United States is approximately $63,000, with approximately 35% of all Vacation
Interval owners having annual household income greater than $75,000 and
approximately 17% of such owners having annual household income greater than
$100,000. Despite the growth in the vacation ownership industry as of December
31, 1994, Vacation Interval ownership has achieved only an approximate 3.0%
market penetration among United States households with income above $35,000 per
year and 3.9% market penetration among United States households with income
above $50,000 per year.

     According to the ARDA study, the three primary reasons cited by consumers
for purchasing a Vacation Interval are (i) the ability to exchange the Vacation
Interval for accommodations at other resorts through exchange networks (cited by
82% of Vacation Interval purchasers), (ii) the money savings over traditional
resort vacations (cited by 61% of purchasers) and (iii) the quality and appeal
of the resort at which they purchased a Vacation Interval (cited by 54% of
purchasers).  According to the ARDA study, buyers have a high rate of repeat
purchases: approximately 41% of all Vacation Interval owners own more than one
interval representing approximately 65% of the industry inventory and
approximately 51% of all owners who bought their first Vacation Interval before
1985 have since purchased a second Vacation Interval.  In addition, customer
satisfaction increases with length of ownership, age, income, multiple location
ownership and accessibility to Vacation Interval exchange networks.

                                       13
<PAGE>
 
     The Company intends to take advantage of these demographic and other trends
if it is able to extend, replace, convert into long-term debt or retire its
current short-term debt obligations and obtain the necessary funds to commence
development.  See "- - GROWTH STRATEGIES," below.  Based on past industry
statistics, the Company expects the vacation ownership industry to continue to
grow as the baby-boom generation continues to enter the 40-55 year age bracket,
the age group which purchased the most Vacation Intervals in 1994.

     MARKETING AND ADVERTISING.

     The Company intends to develop a marketing and advertising plan, with
emphasis on the print media, to promote the sale of homes built by the Company
on the Maumelle Property.  The Company also plans to build, decorate, furnish
and landscape model homes to facilitate sales on the Maumelle Property.  The
Company intends to use community, regional and cooperative brokers to sell the
homes and other properties it develops.

     The Company intends to employ a variety of marketing programs to generate
prospects for Vacation Interval sales efforts, which would include targeted
mailings, overnight mini-vacation packages at the vacation ownership resorts or
hotels the Company intends to develop, gift certificates, seminars and various
destination-specific local marketing efforts. Additionally, the Company intends
to offer incentive premiums to guests to encourage resort tours, in the form of
entertainment tickets, hotel stays, gift certificates or free meals.  The
Company also intends to employ the traditional direct mail channels of
marketing, as well as telemarketing organizations and major travel agents to
promote the sale of Vacation Intervals.  The Company expects to use an on-site
sales force at the vacation ownership resorts it intends to develop to market
its Vacation Interval product.

     The Company intends to commence its Vacation Interval marketing activities
by selling whole ownership LTL units in its 16 units LTL complex, Ocean Villas
located in Pompano Beach, and selling discount vacation packages, which would
include stays at the hotel that the Company intends to develop on the Florida
Bible College Property near Disney World in Osceola, Florida. See ITEM 2,
"DESCRIPTION OF PROPERTY" and "PROGRAM OF DEVELOPMENT-Development of Vacation
Ownership Properties."  The Company intends to employ sales representatives at
the hotel to sell Vacation Intervals to the hotel guests.

     GROWTH STRATEGIES.

     The Company's primary business objective is to increase long-term total
returns to shareholders through appreciation in value of the Common Stock.  The
Company intends to achieve this objective by implementing the long-term growth
strategies summarized below.  The Company will not be able to implement any of
these strategies if it cannot convert into long-term debt or extend, replace or
retire its current short-term debt and raise substantial additional capital to
commence development operations, of which there can be no assurance.  See ITEM
6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."

                                       14
<PAGE>
 
     DEVELOPMENT OF MAUMELLE PROPERTY AND VACATION OWNERSHIP OPERATIONS.  The
     ------------------------------------------------------------------      
Company initially intends to focus on the building and sale of single-family
homes in Maumelle, Arkansas, the construction and acquisition of vacation
ownership properties, and the sale and marketing of Vacation Interval interests
in such properties.  The Company believes that such activities are the Company's
most significant growth opportunities.

     Development of Maumelle Property.  The Company's growth strategy with
     --------------------------------                                     
respect to the Maumelle Property is to focus on the building and sale of single-
family homes on improved lots it intends to acquire in Maumelle and on the
approximately 3,800 unimproved single-family home lots that are now part of the
Maumelle Property.

     Of the approximately 5,300 single-family vacant sites in the City of
Maumelle, approximately 1,500 sites are not owned by the Company.  The Company
plans to acquire some of these single-family sites, including some that are
owned by affiliates of the Company, if it can raise sufficient funds to do so.
Given the Company's ownership of a majority of available home sites in Maumelle,
and the fact that under Maumelle's current Master Land Use Plan little or no new
property can be added to the City of Maumelle without public hearings regarding
any proposed annexation of land by the City and the subsequent approval by the
City's Board of Directors, the Company believes it can achieve a dominant
position in the Maumelle market for single-family home sites.  Management
expects that this dominance will enable the Company to implement an orderly
build-out program designed to maximize the selling prices of the homes it sells.
See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--POSSIBLE
ACQUISITIONS OF LAND FROM AFFILIATES."

     Vacation Interval Operations.  The Company's growth strategy with respect
     ----------------------------                                             
to its proposed vacation interval business is to capitalize on the increasing
popularity of Vacation Intervals by identifying and pursuing attractive
acquisition, conversion, development and marketing opportunities in the
industry.

     The Company intends to acquire and/or develop vacation interval properties
in destinations where it discerns a strong demand.  In evaluating whether to
acquire, convert or develop a vacation interval property in a particular
location, the Company expects to analyze relevant demographic, economic and
financial data.  Specifically, the Company intends to consider the following
factors, among others, in determining the viability of a potential new vacation
interval resort or other property in a particular location: (i) supply/demand
ratio for the purchase of Vacation Intervals in the relevant market and for
Vacation Interval exchanges into the relevant market by other Vacation Interval
owners, (ii) the market's growth as a vacation destination, (iii) the ease of
converting a hotel or condominium property into a vacation interval resort from
a regulatory and construction point of view, (iv) the availability of additional
land at or nearby the property for potential future development and expansion,
(v) competitive accommodation alternatives in the market, (vi) uniqueness of
location, and (vii) barriers to entry that would tend to limit competition.

                                       15
<PAGE>
 
     If the Company can convert into long-term debt, or extend, replace or
retire its current short-term debt and raise sufficient development capital, the
Company intends to focus its initial vacation interval activities in Florida and
Missouri by (1) remodeling and selling LTL units on the Ocean Villas Property,
(2) constructing a hotel on the Florida Bible College Property near Disney World
in Osceola, Florida, and marketing Vacation Intervals to guests at the hotel,
(3) constructing vacation interval units on the Bible College Property, and (4)
acquiring or constructing additional vacation interval interest in other resort
properties in Florida. See ITEM 2, "DESCRIPTION OF PROPERTY--CERTAIN PROPERTY
RECENTLY ACQUIRED OR TO BE ACQUIRED" and "--PROGRAM OF DEVELOPMENT."  The ARDA
estimates that Florida has a higher concentration of Vacation Intervals than any
other state in the United States.  See "--COMPETITION," below.

     The Company believes that an important part of its growth strategy will be
to obtain approval to have any vacation interval properties it develops
participate in broad-based Vacation Interval exchange networks.  In a 1995 study
sponsored by the Alliance for Timeshare Excellence and the ARDA, the exchange
opportunity was cited by purchasers of Vacation Intervals as one of the most
significant factors in determining whether to purchase a Vacation Interval.
Participation in an exchange network would allow the Company's vacation interval
customers to exchange in a particular year their occupancy right in the unit in
which they own a Vacation Interval for an occupancy right at the same time or a
different time in another participating resort, based upon availability and the
payment of a variable exchange fee. A member may exchange his Vacation Interval
for an occupancy right in another participating resort by listing his Vacation
Interval as available with the exchange organization and by requesting occupancy
at another participating resort, indicating the particular resort or geographic
area to which the member desires to travel, the size of the unit desired and the
period during which occupancy is desired.

     Once the Company's first vacation interval property has been developed, the
Company intends to apply to have its property included in a broad-based Vacation
Interval exchange network.  There can be no assurance, however that any future
vacation interval properties developed by the Company will be accepted on a
Vacation Interval exchange.  See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION--RESULTS OF OPERATION--Factors That May Affect Future
Results and Market Price of Stock."

     Another important component of the Company's growth strategy in the
vacation interval industry will be the financing of Vacation Interval purchases.
The Company intends to offer financing to purchasers of Vacation Intervals.  The
Company anticipates that this financing would be secured by an assignment of
interest or a first mortgage on the underlying Vacation Interval.  The Company
intends to raise capital for its operation and/or debt servicing requirements by
selling the promissory notes generated by this activity or using the notes as
collated for future commercial loans.

     GEOGRAPHIC MARKETS DIVERSIFICATION.  The Company believes that geographic
     ----------------------------------                                       
diversity in its real property and vacation interval development

                                       16
<PAGE>
 
activities will be a key factor in achieving long-term stability and growth.
The Company intends to work toward this diversity by considering real estate
development and vacation interval opportunities throughout the United States and
by forming joint ventures with local developers.
 
     PRODUCT DIVERSIFICATION.  Although, initially, the Company's primary focus
     -----------------------                                                   
will be on the construction of single-family homes and vacation interval
properties, the Company intends to diversify its portfolio and income sources by
developing for sale the commercial and multi-family properties it currently owns
or may acquire in the future.

     STRATEGIC ACQUISITIONS.  The Company intends to make strategic acquisitions
     ----------------------                                                     
of businesses in geographic areas outside of Arkansas and Florida, particularly
in the vacation interval and home construction industries.

     COMPETITION.

     The real estate development and vacation interval industries are highly
competitive.  In Arkansas--the geographic area in which the Company initially
intends to commence its single-family home and commercial development--there are
numerous large national and regional firms with significantly greater experience
and financial resources than the Company currently possesses.  Such firms will
likely compete with the Company in the acquisition of land for development, the
hiring of sub-contractors, experienced management personnel, construction
workers and other employees, and the sale of product.  The Company also will
compete for residential sales with the resale market for existing homes, multi-
family home sales, including townhouses and condominiums, and with available
rental properties.

     In the vacation interval industry, the Company will be subject to
significant competition from other vacation interval resort owners and
operators, many with extensive experience in the lodging, hospitality and
entertainment areas.  Many of the world's most recognized lodging, hospitality
and entertainment companies have begun to develop and sell Vacation Intervals in
resort properties, including, among others, Marriott Ownership Resorts, The Walt
Disney Company, Hilton Hotels Corporation, Hyatt Corporation, Four Seasons
Hotels & Resorts, and Inter-Continental Hotels and Resorts.  These entities
possess significantly greater development experience, financial, marketing,
personnel and other resources than those of the Company and may be able to grow
at a more rapid rate or more profitably as a result.

     The Company currently has no material presence or reputation in Arkansas,
Florida, Missouri or any other area in the real estate development or vacation
interval industries, and due to the substantial amount of short-term debt the
Company needs to extend, replace, convert into long-term debt or retire such
debt and also the lack of sufficient capital, it may not be able to commence
significant development activities.  As a result, the Company may experience
difficulties in competing with established developers.  Although the Company
intends to improve its ability to compete by entering into joint venture or
similar development agreements with established real estate and

                                       17
<PAGE>
 
vacation interval developers and raising additional capital, there can be no
assurance of the success of any such agreements or attempts to raise capital.

     RAW MATERIALS.

     The main raw materials used in the construction of homes and vacation
interval units are concrete and lumber.  In addition, the Company will use a
variety of other construction material, including glass and sheetrock.  For
commercial construction the primary materials are steel, concrete and glass.
The Company intends to use materials that are commercially available on
competitive terms from a variety of sources, but there can be no assurance that
such materials will be available on terms that are acceptable to the Company.
Since the Company has not commenced significant construction activities, it does
not yet have any principal suppliers.

     GOVERNMENTAL REGULATIONS AND STATE GOVERNMENT APPROVAL OF VACATION INTERVAL
SALES.

     The building industry is subject to extensive and complex regulations.  The
Company, its subcontractors and any joint venture partners must comply with
various federal, state and local laws, ordinances, rules and regulations
regarding zoning, architectural design, construction, population, density,
availability and installation of utility services, such as water, electricity,
gas, and waste disposal, the preservation of the natural terrain, and other
related matters, which requires resources and expertise which, for the most
part, the Company currently lacks.  The Company intends to obtain such resources
and expertise by raising additional capital, hiring appropriate sub-contractors,
and entering into consulting agreements and/or joint venture agreements with
experienced real estate developers and other appropriate parties.

     The vacation interval operations of the Company will be subject to
extensive regulation by the federal government and the zoning and other laws in
the state, county and city jurisdictions where the Company's vacation interval
properties will be located and where Vacation Intervals will be marketed and
sold.  At the federal level, the Company may be subject to, among others, the
following legislation: the Federal Trade Commission Act, which prohibits unfair
or deceptive acts, the Truth-in-Lending Act, Regulation Z, the Equal Opportunity
Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the
Real Estate Standards Practices Act, the Telephone Consumer Protection Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act
and the Civil Rights Acts of 1964 and 1968.  In addition, most states including
Florida have adopted laws and regulations regarding the sale of Vacation
Intervals, including laws that will require the Company to file with a state
authority for its approval a detailed offering statement describing the Company,
all material aspects of the project and the sale of the Vacation Intervals.
Most states grant the right to purchasers to cancel a contract of purchase at
any time within a period of time, usually ranging from three to fifteen days.
Other applicable state laws include licensing requirements for sellers of real
estate and travel sellers,

                                       18
<PAGE>
 
and anti-fraud and telemarketing laws, price, gift, and sweepstake laws, and
labor laws.
 
     The Company's Maumelle Property is subject to the City of Maumelle's Master
Land Use Plan.  Under this Plan, approximately 1,241 acres of the approximately
1,285 acres of the Maumelle Property that was developable land as of September
30, 1997, was already zoned for single-family homes.  The current zoning allows
the Company to apply for building permits for the approximately 3,800 single-
family home sites located on this acreage.  Although much of the Company's
property is currently zoned for single-family homes, none of the developable
land acreage is subdivided and the Company will be required to incur a
significant additional cost to subdivide the property into individual lots.  The
Company believes it can satisfy all anticipated governmental requirements
involved in the subdivision process, if it obtains adequate additional funding
and expertise.

     The Company must seek building permits from the City of Maumelle Building
Inspector for each home it builds in Maumelle.  The Company must apply for
building permits for each commercial property it develops in Maumelle from the
Maumelle City Planning Commission and the City's Board of Directors.  Although
the Company believes it can satisfy all necessary requirements to obtain
building permits, at the present time, the Company is not seeking building
permits and does not intend to do so until it raises additional capital or
obtains construction funding.

     The Company may be required to mitigate any environmental impact on its 446
acres of wetlands in Maumelle that may be caused by the Company's proposed
development activities in Maumelle.  Although the Company is not currently aware
of any such mitigation requirements, the Company will be required to obtain
approval from the Army Corp of Engineers of any required mitigation efforts.
The Company may incur additional costs and delays in seeking such approvals and
performing such mitigation.  See "--ENVIRONMENTAL LAWS," below.

     Delays in obtaining governmental permits and approvals may increase
development costs to the Company.  Zoning requirements and restrictions could
become more restrictive in the future, resulting in additional time and money
being spent to obtain approvals for development of the Company's properties.

     The Company also may be subject to periodic delays or may be precluded from
developing projects due to building moratoriums or slow-growth or no-growth
initiatives that could be implemented in the future in the areas which it does
business.  In addition, governmental authorities could change the zoning of all
or some of the Company's properties, or change vacation interval regulations,
which could result in a decrease in property values.

     Under various state and federal laws governing housing and places of public
accommodation the Company is required to meet certain requirements related to
access and use by disabled persons.  The Company is likely to incur substantial
costs complying with such laws, which may have a material adverse effect on the
Company.  Additional legislation may impose further burdens or restrictions on
owners with respect to access by disabled persons.  The

                                       19
<PAGE>
 
ultimate amount of the cost of compliance with such legislation is not currently
ascertainable.  Limitations or restriction arising from such laws may make it
difficult for the Company to develop its vacation interval resort properties and
may limit application of the Company's growth strategy in certain instances or
reduce profit margins on the Company's operations.
 
     The Company believes that, with adequate funding, it can comply with all
applicable laws regarding its real estate development and vacation interval
operations. There can be no assurance, however, that the Company will be able to
comply with all such laws.  The Company expects that the costs of complying with
governmental regulations will be very significant once it commences development
activities.  There can be no assurance that the Company will be able to obtain
state approval to sell Vacation Intervals in all jurisdictions in which the
Company desires to sell such interests, or that the cost of complying will not
be so prohibitive as to make it unprofitable to commence vacation interval
operations.  Any failure to comply with applicable laws or regulations could
have a material adverse effect on the Company.

     ENVIRONMENTAL LAWS.

     The Company is subject to various federal, state and local laws, ordinances
and regulations regarding environmental matters.  Under these laws, a current or
previous owner or operator of real property may be required to investigate and
clean up hazardous or toxic substances or petroleum product releases at such
property, and may be held liable to a governmental entity or to third parties
for property damage and the costs of investigation, removal and decontamination
incurred by such parties in connection with contamination.  The penalty is
imposed whether or not the owner or operator was aware of, or responsible for
the hazardous or toxic substances, and the liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation or responsibility.

     The costs of investigation, removal or decontamination  of such substances
could be substantial.  If such substances are found on real property or there is
a failure to properly remove or decontaminate the area, the property could be
difficult to sell, rent, develop or use to secure debt financing.  Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person.  In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination.  Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting form
environmental contamination emanating from a site.  In connection with its
ownership and operation of real property, the Company potentially may be liable
for the foregoing costs.

     Certain Federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of

                                       20
<PAGE>
 
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners and operation of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs.

     In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to develop its residential and commercial properties or sell
Vacation Intervals at such properties, as well as the market value of such
property.

     Recently-enacted federal legislation will eventually require the Company to
disclose to potential purchasers of Vacation Intervals at any Company resorts
that were constructed prior to 1978 any known lead-paint hazards and will impose
treble damages for failure to so notify. If the Company decides to renovate and
of the existing buildings on the Florida Bible College Property, or any other
properties that it may acquire in the future, the Company will be subject to
this legislation if the buildings were constructed before 1978, as are the
existing buildings on the Florida Bible College Property.

     Electric transmission lines are located in the vicinity of the Company's
properties.  Electric transmission lines are one of many sources of electro-
magnetic fields ("EMFs") to which people may be exposed. Research into potential
health impacts associated with exposure to EMFs has produced inconclusive
results. Notwithstanding the lack of conclusive scientific evidence, some states
now regulate the strength of electric and magnetic fields emanating from
electric transmission lines, while others have required transmission facilities
to measure for levels of EMFs. In addition, the Company understands that
lawsuits have, on occasion, been filed (primarily against electric utilities)
alleging personal injuries resulting from exposure as well as fear of adverse
effects from transmission lines has been a factor considered in determining
property values in obtaining financing and in condemnation proceedings in
eminent domain brought by power companies seeking to construct transmission
lines. Therefore, there is a potential for the value of a property to be
adversely affected as a result of its proximity to a transmission line and for
the Company to be exposed to damage claims by person exposed to EMFs.

     The Company had a Phase I investigation conducted on approximately 63% of
the Maumelle Property in July and August 1995 which found no evidence of soil or
ground water contamination on the studied property and recommended that a Phase
II study was not warranted.  This Phase I assessment was carried out in
accordance with accepted industry practices and consisted of

                                       21
<PAGE>
 
non-invasive investigations of environmental conditions at the properties,
including a preliminary investigation of the sites and identification of
publicly known conditions concerning properties in the vicinity of the sites,
physical site inspections, review of aerial photographs and relevant
governmental records where readily available, interviews of knowledgeable
parties, investigation for the presence of above ground and underground storage
tanks presently or formerly at the sites, a visual inspection of potential lead-
based paint and suspect friable ACMs where appropriate, a radon survey, and the
preparation and issuance of a written report.  In 1986, an Environmental
Protection Agency ("EPA") representative stated in a letter to a previous owner
of the Maumelle Property, that although part of the Maumelle Property had been
used by the United States government during World War II as a munitions ordnance
facility until 1950, the entire site had been decontaminated by the U.S.
government prior to its sale in 1961.  In the letter, the EPA characterized the
property as not having any further environmental concerns.  No environmental
studies were conducted by the Company of the Florida Bible College Property.

     The Company is not aware of any environmental liability with respect to any
of its real property that the Company believes would have a material adverse
effect on the Company's business, assets, or results of operations.
Nevertheless, there can be no assurance, that the Company's real property does
not contain hazardous or toxic substances, particularly on the property which
has not been subjected to a Phase I investigation, or that the Company will not
incur costs associated with the decontamination of any such substances or
liability arising from any such contamination.  No assurance can be given that
the environmental studies conducted on the property reveal all environmental
liabilities or that no prior owner created any material environmental condition
not known to the Company.

     The Company believes that compliance with applicable environmental laws and
regulations will have a material adverse effect on the Company, its financial
condition and its results of operations unless the Company can raise substantial
additional capital to fund its operations.  The Company believes that its
properties are in compliance in all material respects with all federal, state
and local laws, ordinances and regulations regarding hazardous or toxic
substances. The Company has not been notified by any governmental authority or
any third party, and is not otherwise aware, of any material noncompliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with any of its present properties.

     NUMBER OF EMPLOYEES.  The Company and its subsidiaries have ten part-time
employees, and one full-time employee, its President, Michael G. Todd.

ITEM 2.  DESCRIPTION OF PROPERTY.

GENERAL

     The Company's principal asset is the Maumelle Property, located in
Maumelle, Arkansas, title to which is held by the Operating Subsidiary.  At the
Company's fiscal year-end, the Maumelle Property consisted of

                                       22
<PAGE>
 
approximately 1,241 acres of single-family sites (which included approximately
3,800 home sites), approximately 43 acres of multi-family sites, and
approximately 446 acres of miscellaneous undevelopable property. The Company
currently has no Commercial Lots. The Maumelle Property is currently zoned under
the City of Maumelle Master Land Use Plan for various development uses,
including single-family residences, multi-family units, and commercial
development.  As of September 30, 1997, the Company's single-family home sites
in the City of Maumelle represented approximately 70% of all available vacant
land in Maumelle zoned for single-family homes.

     The Maumelle Property can be divided into four categories: (1) the Large
Residential Tract, (2) the Pine Ridge Lots, (3) the Multi-Family Lots, (4) the
Miscellaneous Tract and Property.  Each category of Maumelle Property will be
discussed separately below after the following overview of the City of Maumelle.
In July, 1997, the Company acquired additional real property, including
approximately 36 acres of land and improvements in Osceola, Florida, discussed
below, and in ITEM 1, "DESCRIPTION OF BUSINESS."  See ITEM 6, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES."

     Until September 30, 1997, the Operating Subsidiary owned the Resure
Debenture, when pursuant to the terms of the Resure Settlement Agreement, the
Company terminated its rights to the Resure Debenture in exchange for the
cancellation of the Resure Note II.  See ITEM 2, "DESCRIPTION OF PROPERTY -
RESURE DEBENTURE," which is described below.

     Except as otherwise noted, the Company believes that its real property
assets are in good condition and are suitable and adequate for the uses
indicated. Since there are no insurable improvements on the Company's properties
other than the Osceola, Florida property discussed below, the Company does not
maintain any insurance coverage on most of its real property assets.  The
Florida Bible College Property is covered by an insurance policy covering bodily
injury and property damage combined, in the amount of $1,000,000 per occurrence
and in the aggregate, and a $2,000,000 policy covering the buildings on the
property.  Management believes the property is adequately insured.

MAUMELLE PROPERTY

     THE CITY OF MAUMELLE.  The City of Maumelle is a 5,000 acre planned
community located off Interstate 40 on the Arkansas River.  Fifteen miles from
downtown Little Rock, the capital of Arkansas, Maumelle is patterned after other
"new town" communities such as Reston, Virginia, Irvine Ranch in Orange County,
California and Columbia, Maryland.

     Under the Master Plan, Maumelle cannot add new property to the city for
residential development without public hearings regarding any proposed
annexation of land by the City and the subsequent approval by the City Board of
Directors.  From Maumelle's inception in 1966 to 1996, approximately $120
million has been spent on infrastructure, including sewer and water capacity for
a city of up to 25,000 residents and a system of designated common areas,

                                       23
<PAGE>
 
including pathways, parks, lakes, a golf course and other recreational areas.
The City of Maumelle was incorporated as a city in 1985.  It is governed by a
mayor and city council and has police, fire, and emergency services.

     The population of Maumelle has grown at a faster rate than that of
neighboring Little Rock, Arkansas.  From 1990 to 1996, Maumelle had a 13%
increase in its population; whereas Little Rock grew at only a 2% rate.  The
community of Maumelle appears to be attracting more highly educated residents
than does Little Rock.  The U.S. Department of Commerce and the Little Rock
Metropolitan Planning Commission ("Metroplan"), a government planning agency,
stated that in 1990, 92.6% of Maumelle residents had completed high school, with
38.8% having four or more years of college.  During the same period, only 76.6%
of Little Rock residents had completed high school and 20.4% had four years or
more of college.  Maumelle also exceeds the national average for high school and
college attendance.  As of 1990, only 75.2% of U.S. citizens had completed high
school and 20.3% had four or more years of college.

     Since 1979, Maumelle has attracted some major companies to its industrial
areas, including Target Distribution Center, Kinney Shoe Distribution Center,
Carrier (a manufacturing facility), Kimberly Clark (a manufacturing facility),
Ace Hardware Distribution Center, Family Dollar Distribution Center, and Lamb
Packaging and Iskco (both manufacturing facilities).  The job growth rate in the
City of Maumelle has increased by 7.5% from 1990 to 1995; during the same period
Little Rock had a job growth rate increase of 14%.

     As of June 30, 1996, the average new home price in Maumelle was $152,551
and in Little Rock was $162,339, according to a Metroplan report.  The number of
building permits issued by Maumelle has increased 112% between 1990 and 1995,
according to Metroplan.  During the same period, Little Rock experienced a
growth rate in building permit issuances of 58%.  A total of 124 building
permits were issued in Maumelle in 1995, 220 in 1996, and 142 for the first six
months of 1997, with a projected total for the year of 350 permits.

     LARGE RESIDENTIAL TRACT.  As of the end of the 1997 fiscal year, the Large
Residential Tract was comprised of approximately 1,045 acres of undeveloped
residential land.  In May, the Company sold 67 acres of this land to increase
its liquidity.  See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS--LIQUIDITY AND
CAPITAL-- Certain Capital Raising Transactions."  Under current zoning, the
Company believes this land can be subdivided into approximately 3,300 single-
family lots.  The Large Residential Tract currently is zoned for residential
development.

     The following summary of certain terms of the Resure Loans I and II is
qualified in its entirety by the fact that effective September 30, 1997, the
Company entered into the Resure Settlement Agreement which modified and brought
current the Resure Note I.  Under the Resure Settlement Agreement, the Resure
Note II was canceled in exchange for the termination the Resure Debenture owned
by the Company. See discussion below and ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and
Other Liquidity Requirements."

                                       24
<PAGE>
 
     The Operating Subsidiary has fee title to the Large Residential Tract, all
of which is subject to a first-priority mortgage securing the $3,500,000 Resure
Loan I. Approximately 701 acres of the Large Residential Tract ("Residential
Parcel 1) is retained by the Liquidator as collateral on the modified Resure
Note I.

     Under the original terms of the Resure Note I, quarterly payments of
principal and interest in the amount of $101,591.16 commenced January 1, 1997,
until its maturity date on July 1, 2000. Prior to that date interest only
payments were required on a quarterly basis. Under the Resure Settlement
Agreement the Company will continue to pay quarterly installments of principal
and interest in the amount of $101,591.16 until the Resure Note I's modified
maturity date on September 1, 1999.  The amount of $525,460 that was held by the
Liquidator in a restricted cash collateral account was applied to the past due
interest payment of October 1, 1996, and for the principal and interest
installment payments that were due January 1, April 1 and October 1,1997.  The
balance due at maturity, assuming payment of all scheduled principal and
interest payments and no pre-payments, will be $3,305,842.  The Resure Note I
bears interest at a rate of 10% per annum. As of the date of this Report, the
Company is current on all payments to Resure and will not owe another quarterly
payment until January 1, 1998. The current principal amount of the Resure Note I
is $3,426,713 as of the date of this Report.  The Resure Note I may be prepaid
at anytime by the Company without incurring premiums or penalties.  As
additional consideration for the Liquidator to enter into the Resure Settlement
Agreement, the Company agreed to pay a developer's fee of $2,000 (the
"Developer's Fee") for each lot sold in Parcel 1, which is comprised of
approximately 701 acres of the Large Residential Property and Parcel 2, which is
comprised of approximately 344 acres of the Large Residential Property.  In the
event that any portion of Parcel 1 is sold prior to being subdivided into
single-family lots, the Company will pay $2,853 per acre, and $5844.20 per acre
if Parcel 2 is sold prior to being subdivided; however, such Developer's Fees
shall not exceed $2,000,000.  The Developer's Fee shall be secured by a written
amendment to the loan mortgage securing the Resure Note I, which shall be
recorded against the 701 acres of the Large Residential Property.

     Under the Resure Settlement Agreement, the Liquidator released
approximately 344 acres of the Large Residential Tract that secured the
$3,500,000 Resure Note II. Prior to the settlement, payments of interest only at
a rate of 7% per annum were required semi-annually on each June 30 and December
31, which coincide with substantially concurrent and equal payments payable to
the Company by Resure pursuant to the Resure Debenture.  See ITEM 2,
"DESCRIPTION OF PROPERTY--RESURE DEBENTURE."  Under the Resure Settlement
Agreement, the Resure Note II was canceled by the Liquidator in exchange for the
termination of the Resure Debenture, which was issued to the Company in
consideration for the Resure Note II.  As of the date of this Report, there are
no mortgages on the 344 acres of the Large Residential Property; however, the
property has been used to secure the $1,750,000 line of credit at the Bank of
Atkins.

                                       25
<PAGE>
 
     PINE RIDGE LOTS.  The Pine Ridge Lots are comprised of approximately 197
acres, including 487 single-family lots which have a preliminary plat filed with
the City of Maumelle.  The property is zoned for residential development. The
Operating Subsidiary has fee title to the Pine Ridge Lots. There are no
mortgages or liens for indebtedness or any other material encumbrances on the
property.  There are, however, certain legal proceedings that may result in a
lien on the property.  See ITEM 3, "LEGAL PROCEEDINGS." The Company, through its
Home Construction Subsidiary or joint ventures anticipate constructing single-
family homes on the Pine Ridge Lots in the calendar year of 1999, assuming it
can raise sufficient capital.

     COMMERCIAL LOTS.  The Company owned approximately 40 acres of Commercial
Lots, which were zoned for commercial use. Effective September 30, 1997, the
Company deeded the approximately 40 acres of Commercial Lots to Century as
consideration to retire debt comprised of the Century Note I for $1,400,000 and
the $350,000 Century Note II, and settle a pending legal action. The Company
retains the option to purchase the 40 acres of property from Century;  provided
it makes certain option payments and pays a final payment in the amount of
$2,132,057.39 (the "Purchase Price) by April 17, 1998. If the Company is able to
purchase the Commercial Lots, the Company proposes to develop these Commercial
Lots for sale, either through joint ventures or through its Home Construction
subsidiary ITEM 3, "LEGAL PROCEEDINGS," and ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES."

     Thirty-six acres of the Commercial Lots were encumbered by a lien securing
payment of special improvement taxes assessed against the property to service a
$380,000 bond issuance by the City of Maumelle, Arkansas Multi-Purpose
Improvement District No. 2.  The annual tax on the property was $92,430, payable
each October 10.  Century assumed the liability for the special improvement
taxes and the ad valorem taxes, including those due on October 10, 1997, upon
the delivery of the deed to said 36 acres.

     MULTI-FAMILY LOTS.  The Multi-Family lots are approximately 43 acres of
land that have been zoned for multi-family use. The Company proposes to develop
these Multi-Family Lots for sale, either through joint ventures or through its
Home Construction Subsidiary.  The Company, however, may sell certain portions
of the Multi-Family Lots prior to development as required to meet liquidity
requirements or if the Company's Management determines that a particular
property is not appropriate for development by the Company.  The Operating
Subsidiary has fee title to these lots, subject to the liens discussed below.

     Approximately 30 acres of the Multi-Family Lots are subject to a lien in
favor of the Bank of Little Rock, as security for a $400,000 line of credit and
a $450,00 line of credit provided by that Bank, of which an aggregate of
$849,024 was outstanding as of the Company's fiscal year end, and $700,000 as of
December 1, 1997.  See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and Other Liquidity
Requirements.  Each line of credit bears interest of a fixed rate of 10% per
annum.  The $400,000 line of credit requires monthly interest payments

                                       26
<PAGE>
 
commencing May 10, 1997, until April 10, 1998, when a balloon payment consisting
of the entire principal balance and accrued interest under the line is due and
payable.  This line is secured by approximately 11 acres of the Commercial
Property.  The $450,000 line of credit requires no monthly payments of interest
or principal, but was payable on demand or November 5, 1997, whichever was
sooner.  This line of credit is secured by approximately 19 acres of the
Commercial Property.  Subsequent to the Company's fiscal year, the $450,000 line
of credit from the Bank of Little Rock was modified to extend the maturity date
to February 5, 1998, or on demand, whichever is sooner.
 
     As of September 30, 1997, all ad valorem taxes on the Multi-Family Lots are
current.

     MISCELLANEOUS TRACT AND PROPERTY. The Miscellaneous Tract and Property
consists of approximately 446 acres of wetlands.  The Operating Subsidiary has
fee title to the Miscellaneous Tract and Property, which are held free of any
encumbrances or liens. The Company has no current development plans for such
property.  The wetlands property is located in the Arkansas River and,
therefore, is unsuitable for development.

     FLORIDA BIBLE COLLEGE PROPERTY. As discussed above, the Company acquired
the Florida Bible College Property in Osceola, Florida on July 30, 1997.  Fee
title to such property is held by the Florida Resorts Subsidiary.  There are no
liens on the property, other than those for taxes not yet due.  See ITEM 1,
"DESCRIPTION OF BUSINESS."  As of the date of this Report, the Company has not
taken depreciation on the property. Taxes on the property and improvements were
$0 in 1997, as the previous owner was a tax exempt organization. The Florida
Bible College Property has not been reassessed, but the Company believes taxes
should be around $58,000 per year based upon prior assessments.

     The Florida Bible College Property consists of buildings and other
improvements on approximately 36 acres of land near Disney World.  The
improvements include two vacant two-story hotel buildings, totaling
approximately 49,450 square feet.  The buildings contain 95 rooms, as well as a
lobby area, offices, a cafeteria, a kitchen, and meeting space.  The
improvements also include a swimming pool, landscaping, irrigation, an asphalt
paved parking area and concrete walks and curbs.  The structures are not
occupied and Management has determined that the facilities are not adequate for
or suitable for the Company's intended use of the property.  See "--PROGRAM OF
DEVELOPMENT," below.

     Approximately 22 acres are zoned for commercial and industrial use.  This
property includes an office/education building, an auditorium, an administrative
building, and five single-family residences.  These improvements are in fair to
good condition. The buildings are not occupied and as of the date of this
Report, the Company has listed this portion of the property for sale.

                                       27
<PAGE>
 
CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED

     THE BRANSON, MISSOURI PROPERTY.  In June 1997, the Company entered into
agreements to purchase approximately 21 acres of undeveloped land in Branson,
Missouri, for approximately $4,200,000.  The purchase agreements relating to
this property required the sale to close by September 12, 1997.  Although the
Company did not close on the Branson property in September, the Company
continues to negotiate to acquire the property. The Company does not currently
have the funds necessary to close the transaction.  See "Prospective Sources of
Liquidity," below.  If the property can be acquired and sufficient capital
raised, the Company intends to develop vacation ownership units on the property.

     OCEAN PALMS RESORT.  As discussed above, subsequent to the Company's fiscal
year-end, the Company purchased the rights to the Ground Lease and improvements
of Ocean Palms Resort located in Pompano Beach, Florida.  The property consist
of a 53 LTL unit complex, pool, office areas, parking area and other amenities.
The assignment of the Ground Lease rights is held by the Florida Resorts
Subsidiary.  The Ground Lease is for a period of 99 years, and will expire on
March 1, 2064.  The Ground Lease is payable to Nancy H. Newell and Jane H.
Tubbs, or their successors or assigns, at a rate of $76,200, per year due on
March 1.  The Ground Lease is encumbered by a mortgage in the amount of
$1,158,000 held by various trusts and individuals (the "Ocean Palms Mortgagee"),
which the Florida Resorts Subsidiary assumed. The Ocean Palms Mortgage is
evidenced by a promissory note ("Ocean Palms Note") in the amount of $1,158,000
and bears interest at a rate of 12.75% per annum.  The Ocean Palms Note is
payable interest only in the amount of $12,303.75 each month from January 1,
1998 to May 1, 1998.  The note is payable thereafter in the amount of
$17,119.85, commencing May 1, 1998, until its maturity on April 1, 1998, when
the note is due in full.  The Company has the option of extending the Ocean
Palms Note for two additional years, by paying an option fee of 1% of the then
outstanding principal balance of the note on or before March 1 of each year. The
Ocean Palms Note is collaterized by an assignment of the Ocean Palms Resort
Paper held by the Company and the conditional assignment of the Ground Lease to
the Ocean Palms Mortgagee. Under the terms of the assignment of the paper, the
Company is obligated to pay the Ocean Palms Mortgagee the monthly proceeds from
the Ocean Palms Paper up to the amount of the monthly mortgage payment.

      The 53 LTL units have been sold and are in good condition, as is the
common area improvements. The owners of the individual units are responsible for
the taxes, insurance and maintenance of their unit and a share of the common
area maintenance.  These costs are assessed and collected monthly by the Company
as part of its management services. These management services also include the
management of the common area property and the rental of LTL units for owners
that choose to rent their units as hotel rooms.  Management believes Ocean Palms
Resort is adequately insured.

     OCEAN VILLAS.    As discussed above, subsequent to the Company's fiscal
year-end, the Florida Resorts Subsidiary acquired all of the issued and
outstanding stock of OPV Development, Inc. ("OPV"), an unaffiliated third

                                       28
<PAGE>
 
party. With the stock acquisition, the Company acquired OPV's primarily asset,
two lease rights to a four lot parcel  of land and improvements (the "Ground
Leases") located in Pompano Beach, Florida (the "Ocean Villas Property").  The
Company acquired the 16 LTL unit Ocean Villas, and approximately $294,000 in
promissory notes (the "Ocean Villas Paper") created from the prior sale of 4 LTL
units, for approximately $107,000 in cash, and the assumption of a first
mortgage of $375,000 and a second mortgage of $150,000 which encumbers the
Ground Leases.

     The First Ground Lease, dated July 1964, requires payment in the amount of
$2,614.18 every six months, with the next payment due January 20, 1998, and is
for a period of 99 years, of which 65 years and 5 months remain.  The Second
Ground Lease, dated December 1969, requires payment in the amount of $2,848.55
every six months, with the next payment due January 21, 1998, and is for a
period of 99 years, of which 65 years and 5 months remain.

     The First and Second Ground Leases are encumbered by two mortgages.  The
first mortgage leasehold, and promissory note evidencing the mortgage (the
"First Ocean Villas Note",),dated September 17, 1997 in the amount of $375,000,
payable to Onofrio Biviano.  The First Ocean Villas Note bears interest at a
rate of 10.5% per annum with payments of interest and principal of $3,743.92 due
on the 17/th/ of each month until the note matures on September 17, 2001, when
any remaining outstanding balance is due.

     The second mortgage leasehold and promissory note evidencing the mortgage
(the "Second Ocean Villas Note"), dated December 9, 1997 in the amount of
$150,000, payable to Domenick Greco, Trustee and Leonard Gross.  The First Ocean
Villas Note bears interest at a rate of 12% per annum payable interest only in
the amount of $1,500 per month, commencing January 9, 1998 until the note's
maturity on December 9, 1998, when the entire principal and accrued interest is
due.

     The First and Second Ocean Villas Mortgage are secured by collateral
assignments to the mortgagees of any and all non-recourse installment notes
arising out of the sale of the Ocean Villas LTL units, until such mortgages are
paid in full.

     Four of the 16 Ocean Villas units have been remodeled and sold to third
parties at an average price of $73,743 per unit, which resulted in the Ocean
Villas Paper, discussed above. The remaining 12 unsold units will require
approximately $50,000 in renovation.  The Company is in the process of
renovating and marketing the LTL units for sale through an unaffiliated real
estate brokerage firm.  Management believes the property is adequately insured.

     Taxes on the Ocean Villas complex are approximately $12,432 and are due on
December 31, 1997.  The Company intends to pay the taxes in a timely manner.
 
PROGRAM OF DEVELOPMENT.

                                       29
<PAGE>
 
     The Company will not be able to implement any of the following plans for
developing its properties if it cannot convert into long-term debt, or extend,
replace or retire its current short-term debt and raise substantial additional
capital, of which there can be no assurance.  See ITEM 6, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."

     DEVELOPMENT OF PROPERTY IN MAUMELLE.  The Company intends to commence its
initial home development activities by the first quarter of 1998 by acquiring
approximately 30 improved single-family lots from third-party property owners
and building its first homes on such property. The Company intends to build
approximately 175 homes on acquired single-family lots within the next 2 years,
to be sold for sales prices in the range of $125,00 to $160,000.

     The Company expects that some of the improved single-family lots referred
to above will be acquired from DeHaven Todd Limited Partnership ("DTLP"). The
Company expects to purchase any lots it acquires from DTLP at fair market value,
to be determined at the time of purchase. Such fair market value will be
established by an unaffiliated certified appraiser. See ITEM 12, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." The Company estimates that the
aggregate cost for acquiring the approximately 100 single-family lots it wishes
to purchase from DTLP will be approximately $19,000 per lot and that the
aggregate cost of development of the homes it wishes to build on the sites will
be approximately $60 to $65 per square foot.

     The Company intends to commence development activity on portions of the
property it now owns in Maumelle as soon as it can obtain the necessary funds to
do so.  Management anticipates that the Company will begin developing its
existing inventory in Maumelle with the Pine Ridge Lots.  The Company intends to
start home site improvements on at least one Pine Ridge subdivision in the third
quarter of 1998, assuming it is able to obtain necessary capital for such
development.  The Company plans to commence single-family home construction on
the first Pine Ridge subdivision lots in the 1999 calendar year.

     The Pine Ridge Lots are fully entitled with a preliminary subdivision plat
recorded with the City of Maumelle.  The Pine Ridge Lots are comprised of 487
lots in four subdivisions, averaging approximately 120 lots each.  The
improvement district in which the Pine Ridge Lots are located is already
partially improved, with a roughly graded roadway.

     Because the Pine Ridge Lots were partially improved prior to the Company's
acquisition, the Company expects its cost to develop an improved lot will be
less in Pine Ridge than the other Maumelle Property.  Management estimates that
construction costs for single-family homes built on the acquired lots and on the
Pine Ridge Lots will average approximately $50 to $53 per square foot.  The
Company estimates that the aggregate cost of building and selling 487 homes on
the Pine Ridge Lots, inclusive of general and administrative expenses, sales and
marketing expenses, will be in the range of $75 to $85 per square foot.

                                       30
<PAGE>
 
     The Company intends to build up to 3,300 moderately priced single-family
homes on the Large Residential Tract for sales prices in the range of $125,00 to
$200,000.  The Company estimates that the cost for building and selling these
homes, inclusive of general and administrative expenses, sales and marketing
expenses, and closing costs, will be in the range of $100,000 to $160,000 per
home.

     Because the Company lacks experience in the home construction industry and
has only limited experience in the vacation ownership industry, the Company
believes it may be difficult to obtain conventional credit sources sufficient to
finance the foregoing development activity.  The Company, therefore, believes it
may be necessary to enter into joint ventures with well capitalized real estate
developers to pursue the Company's building program.

     The Company's estimated costs of development, on a per square foot cost
basis, is higher than the national average and is reflective of the Company's
inexperience in the home construction industry.  Given such inexperience and
likelihood of price fluctuations over time, no assurance can be given, however,
that construction costs will not exceed the Company's estimates.

     There are no current plans for the improvement or development of the
Commercial Lots or the Miscellaneous Tracts and Properties.  These properties
are being held for the purpose of future development or resale, depending upon
the Company's liquidity needs or if Management determines specific properties do
not meet its development strategies.

     DEVELOPMENT OF VACATION INTERVAL PROPERTIES.  The Company intends to
conduct vacation interval operations initially in Florida, Arkansas and
Missouri, either on its own or with joint venture partners. The Company intends
to immediately commence vacation ownership activities by renovating and selling
LTL units in the Pompano Beach, Florida Ocean Villa Property that was acquired
subsequent to the fiscal year end. The Ocean Villa Property consists of 16 LTL
units, of which 12 units remain unsold. The Company intends to initially manage
the Ocean Villas and the Ocean Palms Resort LTL units. Such management services
include the up-keep of the common areas and the rental of the LTL units as hotel
rooms for LTL owners that choose to rent their units.

     The Company also intends to initially construct a hotel on its Florida
Bible College Property near Disney World, Florida.  Although the property has
two vacant two-story hotel buildings on the property, totaling approximately
49,450 square feet, Management has determined that the buildings are not
suitable or adequate for their purposes and plan to demolish the buildings.
Assuming the Company is able to obtain the necessary capital through
construction and long-term debt financing for such development, of which there
can be no assurance, the Company intends to begin vacation ownership business
development activities by constructing a seven story 264 room hotel on the
Florida Bible College Property.  The Company intends to use the hotel in the
Company's proposed Vacation Interval marketing operations.  See  "--DESCRIPTION
OF PROPERTY," above, and ITEM 1,  "DESCRIPTION OF BUSINESS--RECENT BUSINESS
DEVELOPMENT."  The Company intends to sell discount vacation tours to
prospective Vacation Interval purchasers, which would include a stay in the

                                       31
<PAGE>
 
Company's hotel, and employ marketing representatives to sell VOI units to the
hotel guests. See ITEM 1, "DESCRIPTION OF BUSINESS--BUSINESS OF THE COMPANY--
MARKETING AND ADVERTISING."  Management estimates that the construction of the
hotel, which will include a vacation interval sales offices, on the Florida
Bible College Property will cost approximately $14,000,000 and will commence
when the Company is able to obtain the necessary financing.  The Company
initially intends to contract with an unaffiliated management firm to manage the
hotel.

     After the construction of the hotel, the Company intends to develop a
health spa and approximately 150 Vacation Interval units on the property,
although such plans are in the preliminary stages. The timing and actual number
of rooms and Vacation Interval units built will depend on the demand for hotel
space and Vacation Intervals and the level of the Company's Vacation Interval
pre-sales.

     The Company intends to finance the construction of the hotel building by
obtaining a construction and permanent loan secured by the property, which
currently is unencumbered by indebtedness for borrowed money.  Although an
unaffiliated third party appraised the property in December 1997 at $4,570,000,
there can be no assurance that the Company will be able to obtain the necessary
financing, given the Company's need to extend, replace, convert into long-term
debt, or retire its short-term debt and raise sufficient capital to commence
meaningful operations.  The Company intends to finance the construction of the
spa and the construction of the Vacation Interval units on the Florida Bible
College Property by construction and long-term debt financing, secured by the
property.

     The Company intends to sell the approximately 22 acre commercial and
industrial portion of the property to a developer of commercial property.
 
     The Company also intends to construct a vacation ownership resort on the
approximately 21 acres of undeveloped land in Branson, Missouri, if it is able
to negotiate a new agreement to purchase the property.  The current agreement
expired September 12, 1997; although the Company currently does not have
sufficient funds to consummate this acquisition.  See ITEM 6,  "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--
Indebtedness and Other Liquidity Requirements."

RESURE DEBENTURE.

     On September 1, 1995, the Operating Subsidiary acquired the Resure
Debenture in connection with the $3,500,000 Resure Loan II.  See ITEM 1,
"DESCRIPTION OF BUSINESS--BUSINESS DEVELOPMENT," and ITEM 6, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--
Indebtedness and Other Liquidity Requirements."  The Resure Debenture was issued
by Resure to the Operating Subsidiary as consideration for the $3,500,000 Resure
Note II.  The Operating Subsidiary was entitled to receive semi-annual payments
of principal and interest on the Resure Debenture, which generally matched the
amount and timing of the semi-annual principal and interest payments payable by
the Company to Resure under the Resure Note II.

                                       32
<PAGE>
 
The principal and interest payments received by the Company under the Resure
Debenture were used to pay the semi-annual payments due to Resure under the
Resure Note II.  The semi-annual principal and interest payments commenced
December 1995 and were to terminate in June 2000.  Interest under the Resure
Debenture accrued at a rate of 7% per annum.

     Under the Resure Settlement Agreement, effective September 30, 1997, the
Resure Liquidator canceled the Company's obligations under the Resure Note II,
in return for the cancellation of the Resure Debenture.

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     GENERAL.  The following is a discussion of investment policies, financing
policies, conflict of interest policies, and policies with respect to certain
other activities of the Company.  The policies with respect to these activities
have been determined by the Company's Board of Directors and may be amended or
revised from time to time at the discretion of the Board without a vote of the
shareholders of the Company, except that changes in certain policies with
respect to conflicts of interest must be approved by a majority of the
independent directors and otherwise be consistent with legal requirements.

     INVESTMENT POLICIES.

     Investments in Real Estate or Interests in Real Estate.  The Company
     ------------------------------------------------------              
generally conducts all of its investment activities through the Operating
Subsidiary and intends to do so for the foreseeable future, except that any
construction activity will likely be conducted through the Home Construction
Subsidiary and any vacation ownership development will be conducted through
individual subsidiaries to be owned by the Resort Subsidiary.   During the 1997
fiscal year, the Company expanded its focus to include vacation ownership
operations, because Management believes that the vacation ownership industry has
substantial growth potential.

     The Company's investment objective is to increase long-term total returns
to shareholders through appreciation in the value of the Common Stock.  The
Company's policy is to acquire or develop assets where the Company believes that
favorable investment opportunities exist based on market conditions at the time
of the investment.

     The Company expects to pursue its investment objectives primarily through
the direct ownership of properties by the Operating Subsidiary and/or
subsidiaries to be owned by the Resort Subsidiary, although, as discussed below,
the Company may also pursue indirect property ownership opportunities,
particularly if it is necessary or advisable to do so in order to acquire the
development resources, which the Company now lacks.  The Company intends to
acquire or develop residential, commercial, and vacation ownership properties
primarily in the Maumelle area, Florida, and Missouri, but may pursue the
acquisition or development of residential, commercial and vacation ownership
properties in other areas of the United States.

                                       33
<PAGE>
 
     Future development or investment activities will not be limited by the
governing documents of the Company or its subsidiaries to any geographic area,
product type or specified percentage of the Company's assets.  It is the
Company's policy to acquire assets primarily for possible capital gain.

     Securities of or Interests in Persons Primarily Engaged in Real Estate
     ----------------------------------------------------------------------
Activities and Other Issuers.  The Company also may invest in securities of
----------------------------                                               
other entities engaged in real estate activities or invest in securities of
other issuers, including investments by the Company for the purpose of
exercising control over such entities.  No such investments will be made,
however, unless the Board of Directors determines the proposed investment would
not cause the Company to be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").
Should management recommend prospective  acquisitions in the be the policy to
enumerate a correlation between the strategic objectives of the Company and the
prospective acquisition, or a plan to enhance shareholder value as measured by
future book value or earnings per share.

     Investments in Mortgages.  Subsequent to the Company's fiscal year, the
     ------------------------                                               
Company acquired $2,600,000 in promissory notes, secured by conditional
assignments on leases on various LTL units in the Ocean Palms Resort Property.
The notes have been collaterally assigned by the Company to the holder of the
Ground Lease mortgage, as security.  The Company has no immediate plans to
warehouse mortgages. The Company has determined that it is in its best interests
to engage in such activities as a means of providing enhanced service to its
Vacation Interval buyers.  The Company may also offer such services to its home
buying customers, and hold mortgages generated from the sale of its Maumelle
Property inventory, as well as its Vacation Interval units.

     FINANCING POLICIES.  The organizational documents of the Company and its
subsidiaries impose no limits on the amount of indebtedness they may incur.  The
Company will from time to time determine its borrowing policies in light of
then-current economic conditions, relative costs of debt and equity capital,
market value of the Company's real estate assets, growth and acquisition
opportunities, and other factors.

     The Company intends to raise additional capital through equity offerings,
debt financing, or a combination thereof, although there can be no assurance
that the Company will be able to raise such capital on favorable terms or at
all.

     The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on the Company's
portfolio as a whole.

     CONFLICTS OF INTEREST POLICIES.  The Board of Directors is subject to
certain provisions of Nevada law that are designed to eliminate or minimize
certain potential conflicts of interest.  There can be no assurances, however,
that these policies always will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that

                                       34
<PAGE>
 
might fail to reflect fully the interest of all shareholders.  See ITEM 12,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

     Under Nevada law, each director is subject to restrictions on the
misappropriation of corporate opportunities to himself or his affiliates of
which he becomes aware solely as a result of his service as a director. The
Company may transact business with one or more of its directors or officers or a
corporation, firm or association in which one or more of its directors or
officers are directors, officers or are financially interested, provided any of
the following requirements are satisfied:

     (a)  The interested directors or officers must disclose the common
          directorship, office or financial interest to the board of directors,
          have it noted in the minutes, and a majority of the disinterested
          directors must approve or ratify the contract or transaction; or

     (b)  The interested directors or officers must disclose the common
          directorship, office or financial interest to the shareholders, and
          the shareholders must approve by a majority vote the contract or
          transaction. The votes of the interested director or officer must be
          counted in any such vote of the shareholders; or

     (c)  The common directorship or office or financial interest is not known
          to the director and officer at the time the transaction is brought
          before the board of directors and therefore is not disclosed; or

     (d)  The contract or transaction is fair as to the Company at the time it
          is authorized or approved.

     CERTAIN POLICIES WITH RESPECT TO OTHER ACTIVITIES.  The Company and its
subsidiaries have authority to offer their securities and to repurchase and
otherwise acquire their securities, and they are likely to engage in such
activities.  In the future, the Company and its subsidiaries may make loans to
joint ventures in which they participate in order to meet working capital needs.
The Company and its subsidiaries have not engaged in trading, underwriting,
agency distribution, or sale of securities of other issuers and do not intend to
do so.  The Company and its subsidiaries intend to make investments in a manner
such that they will not be treated as an investment company under the Investment
Company Act.

     COMPETITIVE CONDITIONS.  The Company's real property is subject to the
highly competitive conditions of the real estate development and vacation
ownership industries.  In Arkansas--the geographic area in which the Company
initially intends to commence its single-family home and commercial development-
-there are numerous large national and regional firms with significantly greater
experience and financial resources than the Company currently possesses.  Such
firms will likely compete with the Company in the acquisition of land for
development, the hiring of sub-contractors, experienced management personnel,
construction workers and other employees,

                                       35
<PAGE>
 
and the sale of product.  The Company also will compete for residential sales
with the resale market for existing homes, multi-family home sales, including
townhouses and condominiums, and with available rental properties.

     In the vacation interval industry, the Company will be subject to
significant competition from other vacation ownership resort owners and
operators, many with extensive experience and market presence in the lodging,
hospitality and entertainment areas. Many of the world's most recognized
lodging, hospitality and entertainment companies have begun to develop and sell
Vacation Intervals in resort properties, including, among others, Marriott
Ownership Resorts, The Walt Disney Company, Hilton Hotels Corporation, Hyatt
Corporation, Four Seasons Hotels & Resorts, and Inter-Continental Hotels and
Resorts.  These entities possess significantly greater development experience,
financial, marketing, personnel and other resources than those of the Company
and may be able to grow at a more rapid rate or more profitably as a result.

     The Company currently has no material presence or reputation in Arkansas,
Florida, Missouri, or any other area in the real estate or vacation interval
development industry and does not have sufficient capital to commence
significant development activities.  For this and other reasons discussed
herein, the Company may experience difficulties in competing with established
developers.

     The Company believes that its ownership of a substantial majority of the
available undeveloped single-family home properties in Maumelle will give the
Company an advantage in entering the single-family home construction market in
Maumelle, assuming it is able to obtain sufficient capital to commence
construction activities.  Although the Company does not currently have
substantial vacation interval industry expertise, Management believes that such
expertise can be acquired if the Company obtains the necessary capital to
attract experienced personnel.

ITEM 3.  LEGAL PROCEEDINGS.

     On August 12, 1996, a foreclosure action was instituted against the
Operating Subsidiary and the Predecessor Corporation, AWEC Resource, Inc., as
guarantor, by Century in the Chancery Court of Pulaski County, Arkansas (the
"Century lawsuit").  Century was seeking to foreclose on 36 acres of the
Commercial Lots of the Maumelle Property securing the $1,400,000 Century Note I,
which currently was in default.  As a result of cross-default provisions of the
$350,000 Century Note II, Century alleged that the Century Note II was also in
default.  On September 16, 1996, the Company filed an answer and counterclaim
against Century claiming that the Century Note I and the Century Note II were
usurious.

     The Operating Subsidiary and the Company entered into the Century
Settlement Agreement, Effective September 30, 1997, to settle the foreclosure
action instituted by Century and the counterclaim filed by the Company.  Under
the provisions of the Century Settlement Agreement, the Company delivered to an
escrow agent for the benefit of Century, a deed to 36 acres of the

                                       36
<PAGE>
 
Commercial Property, known as Tract D, and an approximate 3.8 acre tract of land
adjoining Tract D ("Corner Tract").  The Company also paid $17,500 to Century
simultaneous to the execution of the Century Settlement Agreement.  The Company
retains the right to repurchase the approximate 40 acres of the Commercial
Property and the Corner Property; provided it makes five option payments of
$17,500 each on the 17/th/ of each month commencing November 17, 1997.  In
addition, the Company must make a final payment in the amount of $2,132,057.39
(the "Purchase Price", due on April 17, 1998; provided that the Option Payments
are not in default.  In return, Century canceled the Century Note I in the
amount of $1,400,000 and Century Note II in the amount of $350,000 owed by the
Company and delivered to the escrow agent certificates for 700,000 shares of the
Company's common stock it currently owns.  The shares of Common Stock and the
deeds to the approximate 40 acres of Commercial Property and the Corner Tract
will be delivered to the Company upon the completion of the option Payments and
the Purchase Price.  As of the date of this Report, the Company has paid the
November 17/th/ and December 17/th/ payments.

     As of the Company's fiscal year-end, the approximately 197-acre Pine Ridge
Lots were subject to a possible tax assessment by the Pine Ridge Addition
Residential Property Owners Multi-Purpose Improvement District No. 9 (the "Pine
Ridge Improvement District").  The Pine Ridge Improvement District is faced with
a possible judgment in the amount of $237,811 in a lawsuit unrelated to the
Company and has claimed the authority to levy taxes against the Company's Pine
Ridge Lots to satisfy any judgment.  The Company had accrued the full amount of
the possible liability in its 1995 fiscal year financial statements in case the
Residential Lots became subject to a tax to satisfy any judgment.

     On March 13, 1997, the Company, as intervenor in the foregoing lawsuit, was
granted a summary judgment, that released the Pine Ridge Improvement District's
lien on the Pine Ridge Lots owned by the Company.  An appeal of this judgment is
pending, and there can be no assurance that the lower court's decision will be
upheld.

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

     No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

PART II.

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The Common Stock is listed for trading in the over-the-counter market on
the NASDAQ electronic bulletin board under the symbol "CPCY"; however, the
market for shares of the Common Stock is extremely limited.  There can be no
assurance that the present limited market for the Company's common stock will
become more active or even be sustained.  In addition, any future sale of the
Company's stock by any of the controlling shareholders may have a substantial
adverse impact on any such public market.

                                       37
<PAGE>
 
     The high and low bid prices for shares of common stock of the Company for
each quarter within the last two fiscal years are as follows:

                                      BID
<TABLE>
<CAPTION>
Quarter Ending                       High                    Low
--------------                       ----                    ---   
<S>                                  <C>                     <C>
                                                        
September 30, 1995                   1 1/16                  1/16
                                                        
December 30, 1995                    5/8                     3/8
                                                        
March 31, 1996                       2 1/2                   2 1/2
                                     
June 30, 1996                        2 3/4                   1 3/4
                                                        
December 30, 1996                    2                       1.25
                                                        
March 31, 1997                       1.25                    1.06
                                                        
June 30, 1997                        1.25                     .81
                                                        
September 30, 1997                    .94                     .75
</TABLE>

     These bid prices were obtained from the National Quotation Bureau, Inc.
("NQB"), and reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not reflect actual transactions.

HOLDERS

     The number of record holders of the Company's common stock was 508 as of
September 30, 1997, and 514 as of December 16, 1997.

DIVIDENDS

     During the fiscal year ended September 30, 1997 and the fiscal year ended
September 30, 1996, the Company did not declare any cash dividends with respect
to its Common Stock.  The Company does not expect to declare dividends in the
foreseeable future.  The future dividend policy of the Company cannot be
ascertained with any certainty, particularly since the Company has decided to
shift the focus of its primary business to developing single-family homes and
vacation ownership properties and in marketing and selling Vacation Intervals,
and has had no operational history in these new areas of business.  There are no
material restrictions limiting, or restrictions that are likely to limit, the
Company's ability to pay dividends on its Common Stock in the future, except
that the articles of incorporation of the Company permit the board of directors
to approve the issuance of preferred stock having such rights as may be
designated by the board without shareholder approval.  Such rights may include
preferences with respect to dividends as well as prohibitions against the
declaration of dividends on Common Stock under certain circumstances.

                                       38
<PAGE>
 
     The following issuances of unregistered securities occurred during the
fiscal year ended September 30, 1997:

     (1)  In November 1995, the Predecessor Corporation issued 700,000 shares of
Common Stock to Century in connection with the refinancing of the original
$6,737,000 Maumelle Property acquisition promissory note.  The shares were
issued as consideration for the payment of $3,321,794 of such debt.  Such shares
were issued to Century in reliance on Section 4(2) of the Securities Act.
Effective September 30, 1997, Century delivered the shares to an escrow agent.
Upon the completion by the Company of the Option and Purchase Payments, the
escrow agent will deliver to the Company the 700,000 shares owned by Century for
cancellation.

     (2)  In July 1996, the Company entered into a financial consulting
agreement with Olsen & Associates Consulting, Inc. ("Olsen"), which was amended
in September 9, 1996. As consideration for the financial consulting services to
be rendered by Olsen, the Company agreed to issue 150,000 shares of Common Stock
to Olsen, as well as an option to purchase up to 350,000 shares of Common Stock.
On September 30, 1997, the agreement between the Company and Olsen was extended
to December 31, 1998. The Company relied on Section 4(2) of the Securities Act
in agreeing to issue such securities.

     (3)  On July 30, 1997, the Company issued 100,000 shares of Common Stock to
MLT in exchange for all of the outstanding stock in Capitol Resorts of Florida,
Inc. (the "Florida Resorts Subsidiary"). The shares were issued as consideration
for the Florida Resorts Subsidiary's contractual right to purchase approximately
36 acres of land and improvements in Osceola County, Florida, (the "Florida
Bible College"). The Company relied on Section 4(2) of the Securities Act in
agreeing to issue such securities.

     (4)  On July 29, 1997, the Company issued 50,000 shares of common stock to
David Paes in consideration of management services rendered to the Company. The
Company relied on Section 4(2) of the Securities Act in agreeing to issue such
securities.

     (5)  On July 29, 1997, the Company issued 50,000 shares of Common Stock to
Mary Peyton in consideration for management services rendered to the Company.
The Company relied on Section 4(2) of the Securities Act in agreeing to issue
such securities.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

OVERVIEW

     The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing in Item 7 of this Report (the
"Financial Statements"). As noted in below and elsewhere in this Report, the
Company needs to convert into long-term debt, or extend, replace or retire its
current short-term debt obligations in order to remain liquid and raise
additional capital to commence significant operations.

                                       39
<PAGE>
 
     During the period covered by the financial statements, the Company
significantly changed the nature of its business activities from land sales to
real estate development and vacation interval operations (all as discussed in
more detail herein), although no meaningful development operations have
commenced.  As a result, the Company's management does not believe the
historical financial information presented in the Financial Statements is
indicative of likely future results of operations.  The Company believes that
its ability to generate revenues in the future from real estate development and
interval activities will depend in large part on its ability to  extend,
replace, convert into long-term debt or retire its current short-term debt and
raise sufficient capital to commence meaningful development operations, and the
Company's ability to develop or acquire greater construction, sales and other
real estate and interval development expertise than the Company now possesses.

RESULTS OF OPERATIONS

     COMPARISON OF YEAR ENDED SEPTEMBER 30, 1997 TO YEAR ENDED SEPTEMBER 30,
1996.  For the year ended September 30, 1997, the Company experienced a profit
of $40,807 compared with a loss of $1,109,053 for the year ended September 30,
1996.  The difference in performance resulted primarily from revenues of
$4,139,299 in the year ended September 30, 1997. In comparison revenues for the
year ended September 30, 1996 were $31,676.  The cost of sales for the year
ended September 30, 1997, amounted to $1,895,828, resulting in a gross profit of
$2,243,474 or an increase of $2,211,798 over 1996 results.  This increase in
gross profits more than offset an increase of $836,509 in selling, general and
administrative expenses over the comparable expenses for 1996 of $610,820.

     Sales increased by $4,107,623 for the year ended September 30, 1997, from
$31,676 for the year ended September 30, 1996, as a result of the sale of a 67
acre single family parcel of land at a price of $1,552,730, the sale of a two
acre commercial parcel for $110,000, the sale of a small tract of residential
property for $30,000, the sale of 40 acres of commercial property to Century
Realty for $2,192,583, and the sale of timber from the undeveloped single family
portion of the Maumelle Property  for $235,864. The dissolution of the joint
venture with The Monterra Group also provided revenues of $18,122 from the net
proceeds of the sale of lots. gross profits for the year ended September 30,
1997 was $2,243,474. Gross profits for the year ended September 30, 1996 was
$31,676.

     From the year ended September 30, 1996 to the year ended September 30,
1997, operating expenses increased from $610,820 to $1,447,329, an increase of
$836,509.  The increase in operating expenses resulted primarily from increased
expenses for financial consulting, legal fees, amortization of loan costs on
short term borrowings and recognition of the uncollectible accrued interest due
from the Resure Debenture.  A major portion of the increase resulted from an
increase in management and consulting fees from $49,944 for the year ended
September 30, 1996, to $564,074, an increase of $514,130.  However, of this
increase, $163,983 was accrued for management fees to Maumelle Enterprises.
$226,000 was not paid in cash but credited against the

                                       40
<PAGE>
 
exercise price of certain stock options granted to two consultants.
Amortization expenses increased to $291,271 in the year ended September 30,
1997, from a total of $57,232 in the prior year, an increase of $234,039.  This
resulted from expensing the remaining capitalized loan costs on the $3,500,000
Resure Note II and amortization of loan fees on various short term notes.  The
Company also realized an expense of $123,893 as an allowance for accrued
interest due from Resure which was not collected under the Settlement Agreement
with Resure.  There were no corresponding expenses in the year ended September
30, 1996.  However, there was a decrease of $240,000 from September 30, 1996
expenses due to the forgiveness of $240,000 in salary for fiscal year 1997 by
the Company's President, Michael G. Todd in the fourth quarter of fiscal year
ended 1997.  Mr. Todd forgave another $240,000 in accrued salary for fiscal year
1996 during fiscal year 1997, which increased additional paid in capital as of
September 30, 1997.  The Company continues to accrue expenses to Maumelle
Enterprises, a related party, of management and consulting fees.  Mr. Todd has
indicated it is his intention to commence accruing his salary of $20,000 per
month as of October 1, 1997.  Maumelle Enterprises and Mr. Todd have represented
to the Company that it is their intention to allow the Company to accrue such
fees until the Company is financially in the position to pay the fees.

     The Company believes that its results of operations can improve in the
future if it is able to raise sufficient additional capital to extend, replace
or retire its short-term debt, or convert such debt into long-term debt, and
commence significant development operations and to take advantage of an apparent
increase in building activity in the City of Maumelle in 1996, and the increase
in sales nationally of Vacation Intervals, which are summarized below.  There
can be no assurance, however, that such trends will continue or that the Company
will be able to capitalize on these trends.

     Two hundred and twenty permits were issued by the City of Maumelle for the
construction of new single-family homes during the 1996 calendar year.  During
the first six months of 1997, 142 permits have been issued for the construction
of new homes and a total of 350 permits are projected for the 12 month period.
Although there can be no assurance that such increase in activity will continue
the Company believes that the level of home development activity in Maumelle
will continue to increase in the future, as compared to 1996, for the following
reasons:

     (1)  In June 1995, three of the outstanding improvement bond issues in the
City of Maumelle, to which 558 improved lots in the City of Maumelle were
subject, were refinanced with a new bond issue whose terms of indenture were
more favorable to homeowners.  The Company believes that such bond issue will
result in an increase in the availability of building capital, because
management believes that home loan lenders are more likely to make loans if they
are secured by property that has no bond assessments.

     (2)  In June 1996, two additional improvement bond issues to which
approximately 655 Maumelle improved lots were subject were refinanced with a new
issue, again on more favorable terms.

                                       41
<PAGE>
 
     (3)  The Country Club of Arkansas, a golf-oriented development in Maumelle,
has completed improvements and opened its new golf course to the public in the
Fall of 1996. As of September 30, 1997, this development has approximately 450
home sites remaining to be developed.  The owner/developer of the Country Club
of Arkansas has placed substantial amounts of advertising and promotion into
local print media which may produce a positive effect for future development
activity in Maumelle.

     (4)  Since May 1997, 750 new jobs have been created in the City of Maumelle
as a result of continuing industrial expansion. Since 1992, City of Maumelle has
added 4,000 new jobs and expects this growth to continue, although there can be
no assurance that the city will continue to see such job expansion.

     The Company does not foresee any significant elements of income or loss
that would arise outside of the ordinary course of business, except for the
losses that would likely arise if the Company becomes unable to liquidate
property or obtain the necessary capital to retire its existing short-term debt
if the Company is unable to extend, replace or convert such debt into long-term
debt. See "LIQUIDITY AND CAPITAL RESOURCES," below.

     Even if the Company can extend, replace, convert into long-term debt or
retire its existing short-term debt, obtain construction loans and/or raise
sufficient capital to commence its home-building and interval operations, there
may be some seasonal variance in the flow of income from these operations.  Such
variances could arise, for example, from the impact of weather on any
construction in progress.  Typically, substantial rainfall is experienced in
Central Arkansas from November through March, from April through September in
Florida, and snow or rain from November through March in Missouri.

     FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK.  The
factors identified below are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward looking statement made by
or on behalf of the Company, whether in this section or elsewhere in this Report
or in any other written or verbal statement of the Company or its officers or
directors.  Unpredictable or unknown factors not discussed herein could also
have material adverse effects on forward looking projections.  The Company does
not intend to update these cautionary statements.

     Liquidity Issues. The Company currently has $2,025,000 in short term debt
     ----------------                                                         
that will mature during fiscal year ended September 30, 1998 and which may
prevent the Company, unless extended, replaced retired or converted into long-
term debt, from realizing or consummating any of its business plans, objectives,
strategies, or transactions.  Except for the short-term debt, the Company has
minimal operating income and its primary source of funds to meet operating
expenses for the last two years has been the liquidation of its real property
inventory.  There can be no assurance that the Company will be able to extend,
replace, convert the short term debt into long-term debt, raise sufficient
capital to retire the debt, or generate sufficient revenues to

                                       42
<PAGE>
 
pursue the business plans, objectives, strategies, or transactions discussed
herein.

     The home building and construction and interval resort industries are
capital-intensive and generally involve a high degree of leveraging and up-front
expenses to acquire land, improve it, and begin development. The Company intends
to commence Vacation Interval activities by renovating and offering for sale LTL
units in the Ocean Villas Property located in Pompano Beach, Florida in the
first quarter of 1998. The Company further intends to commence building a hotel
on its Florida Bible College during the fiscal year 1998, assuming it can obtain
a construction loan collaterized by the property, which is currently
unencumbered.  The Company also intends to commence single-family home
development in Maumelle in the first quarter of 1998. There can be no assurance,
however, that the Company will be able to obtain such loans.  In addition, the
Company will need to raise substantial additional capital, or enter into joint
ventures or other development agreements with well-funded development partners
to implement its growth strategies in the vacation industry. There can be no
assurance that the Company will be able to raise sufficient additional capital
or enter into joint venture or other development agreements with developers
under terms that are favorable to the Company, or at all.
 
     Competition.  The real estate development and vacation interval industries
     -----------                                                               
are highly competitive.  In Arkansas--the geographic area in which the Company
initially intends to build homes--there are numerous large national and regional
firms with significantly greater experience and financial resources than the
Company currently possesses.  Such firms will likely compete with the Company in
the acquisition of land for development, the hiring of sub-contractors,
experienced management personnel, construction workers and other employees, and
the sale of product.

     In the vacation interval industry, the Company is subject to significant
competition from other interval developers and operators, many with extensive
experience and market presence in the lodging, hospitality and entertainment
areas and significantly greater development and operating experience and
financial, marketing, personnel and other resources than those of the Company.
The ARDA estimates that Florida--the state in which the Company intends to
commence its interval development--has a higher concentration of Vacation
Intervals than any other state in the United States.  See ITEM 2, "DESCRIPTION
OF PROPERTY--POLICIES WITH RESPECT TO CERTAIN ACTIVITIES--Competitive
Conditions."

     The Company currently has no material presence or reputation in Arkansas,
Florida, Missouri, or any other area in the real estate development or interval
industries and does not have sufficient capital to commence significant
development activities.  For this and other reasons discussed herein, the
Company may experience difficulties in competing with established developers.

     Lack of Experience.  The Company has no operational experience in the real
     ------------------                                                        
estate development industry and has little experience in the vacation

                                       43
<PAGE>
 
interval industry.  Such inexperience may make it difficult for the Company to
achieve its business plans and objectives, particularly given the existence of
competition from more experienced and better capitalized companies.

     Dependence on Vacation Interval Exchange Networks; Risk of Inability to
     -----------------------------------------------------------------------
Qualify Resorts.  The attractiveness of Vacation Interval ownership is enhanced
---------------                                                                
significantly by the availability of exchange networks that allow Vacation
Interval owners to exchange in a particular year the occupancy right in their
Vacation Interval for an occupancy right in another participating network
resort.  According to the ARDA, the ability to exchange Vacation Intervals was
cited by buyers as a primary reason for purchasing a Vacation Interval.  Several
companies provide broad-based Vacation Interval exchange services.  Since the
Company has not commenced interval operations, the Company is not currently
qualified for participation in any exchange network.

     No assurance can be given that the Company will be able to qualify its
future resorts for participation in any exchange network. Exchange networks are
under no obligation to include any resorts the Company may develop.  If the
major exchange networks cease to function effectively, or if the Company's
resorts are not accepted as exchanges for other desirable resorts in such
networks, the Company will have difficulty selling Vacation Intervals.  See
"Business--Participation in Vacation Interval Exchange Networks."

     Interest Rates; Mortgage Financing.  Demand for homes, as well as for
     ----------------------------------                                   
commercial construction, is adversely affected by increases in interest rates.
If interest rates increase, demand for homes and other projects the Company may
develop may be significantly reduced due to prospective buyers' inability to
obtain financing.  Changes in interest rates may also affect the Company's
ability to sell Vacation Intervals to consumers on credit.  Any adverse changes
in the availability of Federal Housing Administration or Veterans Administration
mortgage financing may also adversely impact the Company's housing sales.

     Many Factors Beyond The Company's Control.  The nature of the real estate
     -----------------------------------------                                
development and interval industries is cyclical and is affected by various
factors beyond the Company's control, including changes in the general and local
economy, employment, availability of financing, interest rates, changes in
demographics, housing or Vacation Interval demands, as well as changes in
government regulations.  Developers are subject to a number of other risks,
including availability and cost of land, materials, and labor, weather
conditions, construction delays, costs controls, and increases in real property
taxes and local government fees.  Any economic downturn in the United States
could negatively affect the travel and tourism industry which could have a
material adverse effect on the Company's plans to develop interval properties.

LIQUIDITY AND CAPITAL RESOURCES

     INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS.  The principal amount of the
Company's total debt at September 30, 1997, included, without limitation,

                                       44
<PAGE>
 
the following (see ITEM 2, "DESCRIPTION OF PROPERTY--MAUMELLE PROPERTY" for
descriptions of encumbered properties referenced below):

     .    $3,500,000 Resure Note I, the amended recourse note, payable to
          Resure, matures September 1, 1999, secured by the approximately 701-
          acre Large Residential Tract; 10% interest, paid quarterly until
          October 1, 1996, then quarterly payments of principal and interest in
          the amount of $101,591.15 are required.

     .    $200,000 recourse note payable to Davister Corp. (the "Davister
          Note"), matured January 9, 1996, unsecured; 9% interest payable at
          maturity.

     .    $977,706 in non-secured short-term debt financed by private sources.
          The promissory notes generally bear interest at a rate of 10% per
          annum and mature nine months from the date of issuance of each note.

     .    $400,000 in a commercial revolving line of credit from the Bank of
          Little Rock (the "Little Rock Credit Line I"), secured by 11 acres of
          the multi-family Maumelle Property. The Little Rock Credit Line I
          bears interest at a fixed rate of 10% per annum. The Company is
          required to pay interest only on a monthly basis until the credit line
          matures on April 10, 1998, when the unpaid principal balance plus any
          accrued interest is due and payable. As of December 10, 1997, the
          balance of the Little Rock Credit Line I is $378,000.

          $450,000 in a commercial revolving line of credit from the Bank of
          Little Rock (the "Little Rock Credit Line II"), secured by 19 acres of
          the multi-family Maumelle Property.  The Little Rock Credit Line II
          bears interest at a fixed rate of 10% per annum and matured November
          5, 1997 or on demand. On November 5, 1997, the credit line's maturity
          date was extended to until February 5, 1998, or on demand, whichever
          is sooner, at which time the interest and principal is due and
          payable. As of December 10, 1997, the balance of the Little Rock
          Credit Line II is $450,000.

     .    $25,000 in ad valorem real property taxes, relating to all portions of
          the Maumelle Property, due and payable as of December 31, 1997.

     The Company is current on all of the foregoing debt, except the Davister
Note. Although the Davister Note has matured, the lender has not demanded
payment or instituted collection proceedings. The Company intends to retire this
debt in fiscal year 1998, from debt financing or generated revenues. The Company
intends to timely pay the ad valorem real property taxes for the fiscal year
1997.
 
     CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND LIQUIDITY
REQUIREMENTS.

                                       45
<PAGE>
 
     Since the end of the 1997 fiscal year, the Company obtained a revolving
line of credit with the Bank of Atkins in the amount of $1,750,000 at a fixed
rate of interest of 10% per annum. The revolving line of credit matures May 27,
1998, at which time the principal and all accrued interest) is due. This line of
credit is secured by approximately 344 acres of the Large Residential Tract of
the Maumelle Property.  As of December 19, 1998, the outstanding balance of the
revolving line of credit is $1,548,000. The funds were used to complete the
acquisition of the Ocean Palms Resorts Property, the Ocean Villas Property, to
pay off certain accounts payable and for working capital.

     Under the Resure Settlement Agreement, the Company is required to pay a
Developer's Fee of $2,000 for each lot sold in the approximately 1,045 acres of
the Large Residential Tract of the Maumelle Property, with such Developer's Fees
not to exceed $2,000,000.  The Developer's Fees shall be secured by written
amendment to the loan mortgage securing the Resure Note I, which shall be
recorded solely against 701 acres of the Large Residential Tract of the Maumelle
Property.

     In November, the Company retired $155,000 in non-secured short-term debt
from private investors.

     Due to recent acquisitions, the Company's debt now includes the following:

     .    $1,158,000 note ("Ocean Palms Resort Note"), payable to various trusts
          and individuals (the "Ocean Palms Mortgagee"), secured by an
          assignment of the Ocean Palms Paper and the conditional assignment of
          the Ocean Palms Ground Lease; 12.75% interest per annum, with interest
          only payments made monthly until May 1, 1998, at which time it is the
          note is payable interest and principal each month until it matures on
          April 1, 1998. The note can be extended by two additional years upon
          the payment of a 1% extension fee of the then outstanding principal
          balance of the note on or before March 1.

     .    $375,000 note ("First Ocean Villas Note"), payable to Onofrio Biviano
          and secured by collateral assignments of the non-recourse installment
          notes (the "Ocean Villas Paper"); 10.5% interest, payable interest and
          principal monthly until the note matures on September 17, 2001.

     .    $150,000 note ("Second Ocean Villas Note"), payable to Domenick Greco,
          Trustee and Leonard Gross, and secured by collateral assignments of
          the Ocean Villas Paper; 12% interest, payable interest only per month,
          commencing January 9, 1998, until the note matures on December 9,
          1998.

     .    Ocean Palms Resort Ground Lease is payable yearly in the amount of
          $76,200 until March 1, 2064.

                                       46
<PAGE>
 
     .    Ocean Villas First Ground Lease is payable every six months in the
          amount of $2,614.18 until July 20, 2063.

     .    Ocean Villas Second Ground Lease is payable every six months in the
          amount of $2,848.55 until July 20, 2063.

     In addition to the foregoing debt and other liquidity requirements, the
Company will, within six months after the date of this Report, require general
working capital to cover overhead and administrative expenses in the amount of
at least $500,000.

     CERTAIN CAPITAL RAISING TRANSACTIONS. During the fiscal year ended 1997,
the Company obtained capital through the following transactions:

     .    On December 31, 1996, the Company raised $110,000 from the sale of a
          2-acre parcel of the Commercial Lots.

     .    In May 1997, the Company sold a 67 acre single-family parcel of the
          Maumelle Property to an unaffiliated home developer for a gross sales
          price of $1,552,730. $675,100 of the sale proceeds were placed in a
          restricted cash collateral account as security for the Resure Note II.
          As part of the Resure Settlement, the funds were released from the
          restricted cash collateral account and used to bring current the
          payments due under the Resure Note I. $200,000 of the proceeds were
          used to purchase approximately 3.8 acres of commercial property (the
          "Corner Tract") in Maumelle from Maumelle Enterprises an affiliated
          real estate management firm. The deed to the Corner Tract has been
          delivered to an escrow agent as part of the Century Settlement. See
          ITEM 2, "DESCRIPTION OF PROPERTY," and ITEM 12, "CERTAIN RELATIONSHIPS
          AND RELATED TRANSACTIONS."

     .    As discussed above, the Company obtained two secured lines of credit
          from the Bank of Little Rock.

     Subsequent to the Company's fiscal year end, the Company raised additional
capital for the purpose of acquisitions and working capital through the
following transactions:

     .    As discussed above, the Company obtained a revolving line of credit in
          the amount of $1,750,000, which matures on May 27, 1998.

     .    The Company borrowed an additional $280,755 in non-secured short-term
          debt from private investors. The promissory notes generally bear
          interest at a rate of 10% per annum and mature nine months from the
          date of issuance of each note.

     PROSPECTIVE SOURCES OF LIQUIDITY.  Current operating cash flows will be
sufficient to service the Company's existing debt.  However, the Company
currently has insufficient funds to retire its short-term debt if agreements

                                       47
<PAGE>
 
to extend the present bank credit lines cannot be obtained or if the Company is
unable to raise additional equity and/or debt capital.

     The Company's negotiations with a mortgage banking firm to arrange debt and
construction financing have not been successful.

     However, the Company is currently negotiating with two mortgage banking
firms to arrange debt financing in the amount of $15,000,000 (the "Debt
Financing Loan").  If the Debt Financing Loan is obtained, the Company will use
the proceeds to retire its short-term debt and for working capital.

     The Company is currently negotiating with two mortgage banking firms to
arrange debt and construction financing in the amount of $15,000,000(the
"Construction Financing Loan").  If the Construction Financing Loan is obtained,
the Company intends to use the net proceeds to begin operations as a home
builder and to service existing debt.  The Company intends to use part of the
unsecured potions of the Maumelle Property to secure $10,000,000 of the loan,
with the remaining $5,000,000 to be secured by home construction. Such
negotiations remain in the initial stage and there is no assurance that the
Company will able to obtain the Construction Financing Loan on favorable terms
or at all.

     In addition, the Company is negotiating with a commercial bank and other
institutional investors to obtain a construction loan in the amount of
$14,000,000, to be secured by the Florida Bible College Property (the "Florida
Bible College Construction Loan").  The Florida Bible College Construction Loan
proceeds will be used to construct a 264 room hotel.

     There can be no assurance, however, that the Company will be able to
negotiate terms acceptable to the Company on any or all of these loans, or at
all.

     The Company's sale of an 11 acre parcel of Maumelle Property commercial
lots which, as of the fiscal year end, was expected to close on or before March
31, 1997, was canceled due to the buyer's inability to obtain the financing it
required.  The Company has no current plans to sell these lots.

     With respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by building and selling homes
initially in the City of Maumelle, as well as its proposed interval operations.
At present, management of the Company believes that the most likely sources of
substantial cash flow during the next two years are (1) the development and sale
of single-family home product in the $125,000 to $200,000 price range on the
approximately 3,500 single-family home sites it owns in Maumelle and on the
improved lots it intends to acquire in Maumelle from the third parties, (2) the
sale of Vacation Intervals and the installment contracts generated from such
sales, and (3) the liquidation of property which Management considers unsuitable
for the Company's purposes or as required.  See ITEM 1, "DESCRIPTION OF
BUSINESS--BUSINESS OF THE COMPANY--GROWTH STRATEGIES."

                                       48
<PAGE>
 
     The Company intends to raise operating capital by selling debt and/or
equity securities to the public or in private transactions.  There can be no
assurance, however, that such public or private offerings will be successful.

     The Company intends to meet home building and interval operating capital
requirements by obtaining development financing in the form of secured credit
line facilities from lenders, although there can be no assurance that such
financing can be obtained on attractive terms, or at all.  See ITEM 2,
"DESCRIPTION OF PROPERTY."

     COMPARISON OF YEAR ENDED SEPTEMBER 30, 1997 TO YEAR ENDED SEPTEMBER 30,
1996.  At September 30, 1997, the Company had total assets of $10,164,867, a
decrease of $2,773,310 or 21.44% from the Company's total assets as of the
fiscal year ended September 30, 1996.The Company had cash of $227,162 at
September 30, 1997, compared to a negative cash position on September 30, 1996,
an increase of $413,073. This improvement resulted from sales of land, timber
royalties and the secured short term debt financing. See "LIQUIDITY AND CAPITAL
RESOURCES" above.

     Prepaid assets increased from $6,893 on September 30, 1996 to $202,674 on
September 30, 1997, an increase of $195,781. This increase was primarily due to
the prepayment of amounts owed under a financial consulting contract. The
contract extends through September 30, 1998, and the prepaid portion of the
contracted amounted to $150,000. The prepayment of these amounts did not result
in a decrease in cash. The consultant was given credit against the exercise
price of certain stock options granted to them pursuant to the consulting
contract.

     Investments decreased from $3,500,000 as of September 30, 1996 to $0 as of
September 30, 1997. This represented the cancellation of the Resure Debenture.

     The carrying value of the Company's real estate holdings increased by
$312,280 during the year, from $9,156,357 to $9,468,637.  The net increase was a
result of various transactions. One component was the decrease resulting from
the elimination of $208,172 of Special Taxes of certain Maumelle Property
commercial tracts. This cost had previously been capitalized, thus reducing the
carrying value of the property. A second component was the decrease resulting
from the dismissal of the Holloway Lawsuit against the Pine Ridge District. The
Company had accrued a liability of $200,000 which was capitalized as a part of
the cost of the tract. Upon dismissal of the suit, this liability was eliminated
and the carrying value of the land was reduced. The sale of one of the
commercial sites in December, 1996 resulted in a net  reduction of $28,361. The
sale of a 67 acre single-family parcel resulted in a reduction of real estate
holdings of $322,256. The sale of 40 acres of commercial property to Century
resulted in a reduction of real estate holdings of $1,435,309, representing the
allocated cost of the property. The major addition to real estate holdings
resulted from the acquisition of the property in Orlando, Florida. The
acquisition cost and additional capitalized expenditures through September 30,
1997 amounted to a total of $2,062,888. Other additions to real estate holdings
resulted from expenditures of $63,070

                                       49
<PAGE>
 
in connection with the renewal of a purchase contract for the acquisition of the
West Little Rock, Capitol Lakes Estates project. The contract was renewed after
an appeal and subsequent reversal of the Little Rock City Council's prior denial
of zoning changes and annexation into the City. On April 15, 1997, the Company
paid a fee of $10,000 for a six month extension on the agreement to October 14,
1997, and subsequently to April 14, 1998.  Additional capitalized costs totaling
$95,706 were added to real estate holdings, primarily for pre-development costs
on four different properties in Maumelle. Other additions to real estate
holdings resulted from pre-acquisition costs on properties in Branson, Missouri
and in North Carolina of $31,800.

     Total liabilities of the Company as of September 30, 1997, decreased by a
total of $4,431,217 from the September 30, 1996 total of $10,485,042. The
liability for accrued interest decreased to $59,810 at September 30, 1997 from
$252,712. This decrease of $192,861 resulted from the settlements with Century
and Resure, which resulted in the payoff of the Century notes and the Resure
Note II, and the payment of all interest due on the Resure Note II. The current
liability for notes payable increased by $135,567 during the year from
$1,964,406 to $2,099,973. This increase included the $977,706 of secured short
term loans obtained during the year and a $49,665 reclassification of notes
payable to current liabilities for principal payments due within one year of
September 30, 1997. New short term lines with an aggregate balance owing of
$849,024 were also obtained during the year. The Century notes totaling
$1,750,000 in short term notes payable were retired.

     Accounts payable and accrued expenses decreased by $591,932, from
$1,108,926 as of September 30, 1996 to $516,994 as of September 30, 1997.
Accrued Special Taxes decreased by $208,172 in the year. The decrease was a
result of the bond refinancing by the Improvement District encompassing the bulk
of the Company's commercial land. A decrease in the Pine Ridge District
liability of $200,000 resulted from the dismissal of the lawsuit filed against
the District. As sole property owner in the Pine Ridge District, any liability
of the District would impact on the Company. Accrued real estate taxes payable
also decreased by $55,890, which represents the difference between new accruals
of $59,990 and payment of taxes totaling $115,880. Accrued Officers salaries of
$240,000 at September 30, 1996 were forgiven at September 30, 1997 and
reclassified as Additional Paid in Capital.  Shareholders' Equity increased by
$1,657,907 or 67.57% in the year. The increase is a result of the net income of
$40,807 for the year ended September 30, 1997, the issuance of 188,000 new
shares of the Company's common stock at $2.00 per share, pursuant to the
Consultants stock options discussed above, and the issuance of 100,000 of the
Company's common stock in relation to the Company's acquisition of the Orlando,
Florida property.

ITEM 7.  FINANCIAL STATEMENTS.

     The audited financial statements of the Company are included
in this Annual Report on Form 10-KSB at pages F1 to F16.

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

                                       50
<PAGE>
 
     The Company has not changed accountants during the last two fiscal years;
nor has the Company had any disagreements with the accountants on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.

PART III

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

DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                                                Date of     Expiration of
Name                    Age   Position          Election    Director Term
----                    ---   --------          --------    -------------
<S>                     <C>   <C>               <C>         <C>
 
Michael G. Todd          48   Chairman,         7/95        1996 or until
                              President,                    successor
                              and Secretary                 elected
 
Ronald J. Campbell(1)    53   Director          3/94        Removed March
                                                            29, 1997
 
Herbert E. Russell       70   Director          3/94        1996 or until
                                                            successor
                                                            elected
 
Robert R. Neyland        42   Director          4/94        1996 or until
                                                            successor
                                                            elected
 
Thomas Blake(1)          62   Director          3/97        until successor
                                                (Date elected
                                                of
                                                appoint-
                                                ment)
 
David R. Paes            42   Vice President,   7/95        N/A
                              Treasurer and
                              Assistant Secretary

Raymond Baptista         55   Vice President    10/97       N/A
                              of Finance
</TABLE> 

1) On March 28, 1997, Ronald J. Campbell resigned as Secretary. The Board of
Directors appointed Michael G. Todd secretary of the Company, effective March
29, 1997.  Effective March 28, 1997, shareholders of the Company holding more
than two-thirds of the Company's common stock removed Mr. Campbell from the
board of directors without cause by written consent.  Effective March 31, 1997,
a majority of the remaining directors voted to appoint Thomas Blake as a
director of the Company to fill the vacancy created by Mr. Campbell's removal.

     The following is a biographical summary of the experience of the directors
and executive officers of the Company:

                                       51
<PAGE>
 
MICHAEL G. TODD.  Chairman of the Board, President and Chief Executive Officer,
and Secretary of the Company.  Todd also is the sole Director and President of
the Operating Subsidiary and the Florida Resorts Subsidiary.  Todd is a general
partner of DeHaven Todd & Co., a merchant banking partnership he co-founded in
1985 with John W. DeHaven.  Todd has extensive experience in the banking
industry, having been the President and Chief Executive Officer of two Southern
California banks, Orange City Bank and Bay Cities National Bank.  Upon the
resignation of Ronald J. Campbell as secretary of the Company, the Board of
Directors appointed Todd Secretary, effective March 29, 1997.

HERBERT E. RUSSELL.  Director.  Russell is the President of Charlie Corporation,
a Nevada corporation, which is a controlling shareholder of the Company.
Russell is also President of Hermico Corporation, a company founded by Russell
and engaged in the business of prospecting and producing precious metal
concentrates.  Prior to forming Hermico, Russell owned and operated an oil field
trucking company and a cotton farm.

ROBERT R. NEYLAND.  Director.  Neyland also serves on the Board of Directors of
Home Capital Investment Corporation, a public company.  Since 1993, Neyland  has
been the Chief Financial Officer for Select Switch Systems, Inc., a privately-
held Texas company.  He was also a partner in Living Suite, a weekly and monthly
residential rental company, from 1990 to 1996.

DAVID R. PAES.  Vice President, Treasurer, and Assistant Secretary.  Paes is
Executive Vice President and a controlling shareholder of Maumelle Enterprises,
a real estate management company that currently provides management and
administrative service to the Company.  See ITEM 12, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--SERVICES PROVIDED BY AFFILIATED COMPANIES."  He has been
involved in real estate development as a chief financial officer of two real
estate land companies since 1977, and is a certified public accountant.

THOMAS BLAKE.  Director.  Blake is the Director, Business/ Finance, of Glenwood
L. Garvey Associates, an urban planning and consulting firm.  As Special Advisor
to Self-Cleaning Environments USA, Inc., a manufacturer of environmentally
friendly waste disposal units, Blake provides consulting services regarding
business planning, financing, and marketing.  His the founder and former
principal of Thomas C. Blake Consulting, an advisory service firm, and was Chief
Executive Officer of Interstate Group Administrators, Inc., a benefit services
company.  He is a director of West Coast Savings & Loan and formerly was a
director of various other financial institutions.

RAYMOND C. BAPTISTA. Vice President - Finance. Baptista has 25 years experience 
in banking and finance, both nationally and internationally. He has also been 
actively involved in real estate acquisitions and development and was president 
and CEO of a national Real Estate Management company.

SIGNIFICANT EMPLOYEES

     The Company's sole full-time employee is Michael G. Todd, its Chairman,
President, Chief Executive Officer, and Secretary.

FAMILY RELATIONSHIPS

                                       52
<PAGE>
 
     There are no family relationships between any directors or executive
officers of the Company, either by blood or by marriage.


INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

     During the past five years, no director, person nominated to become a
director, executive officer, promoter or control person of the Company:

     (1)  was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the bankruptcy or
two years prior to that time;

     (2)  was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);

     (3)  was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or

     (4)  was found by a court of competent jurisdiction (in a civil action),
the SEC or the Commodity Futures Trading Commission to have violated a federal
or state securities or commodities law, and the judgment has not been reversed,
suspended or vacated.

ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

     The following table sets forth certain information with respect to the
compensation that was paid in 1997 fiscal year to the Company's executive
officers.

     The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated:

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                LONG-TERM COMPENSATION

      ANNUAL COMPENSATION                 AWARDS      PAYOUTS
 
<S>       <C>      <C>      <C>     <C>       <C>     <C>       <C>    <C>
(a)       (b)      (c)      (d)     (e)       (f)     (g)       (h)    (i)
 
Name &    Year     Salary   Bonus   Other     Res-    Securi-   LTIP   All
Prin-     or       ($)      ($)     Annual    tric-   ties      Pay-   Other
cipal     Period                    Compen-   ted     Under-    outs   Compen-
</TABLE>

                                       53
<PAGE>
 
<TABLE>
<S>       <C>      <C>      <C>     <C>       <C>     <C>       <C>    <C>
Position Ended                      sation    Stock   Lying            sation
                                                      Options
 
Michael   9/30/97  0/(1)/   0       0         0          0      0         0
Todd,
Chairman/
President
 
David     9/30/97  0        0       0         50,000     0      0         0
Paes/(2)/
</TABLE>
_____________

(1)  Michael G. Todd has been employed as President of the Company since
November 1994. Todd received no salary from the Company for the period November
1994 through September 30, 1997, and has deferred his salary for the period
October 1, 1996 through September 1, 1997. Effective September 30, 1997, Todd
canceled the deferred salary in the amount of $480,000 owed to him by the
Company for the above mentioned period. Todd has received no other compensation.

(2)  David Paes has been Vice-President of the Company since July 1995 but has
not devoted any significant amount of time to its  operations.  Paes has
received no salary or other compensation from the Company from July 1995 through
September 30, 1996. On July 29, 1997, Mr. Paes received 50,000 shares of
restricted shares of the Company's common stock in compensation for management
services rendered to the Company.

     The Company does not have any qualified or non-qualified stock or option
plans for its employees.

     The Company has a five-year written agreement with Todd to perform the
duties of President.  Under the agreement, which became effective on October 1,
1995, Todd is to be compensated at a rate of $20,000 per month.  The agreement
expires on September 30, 2000.  The Company is not party to any other employment
agreements.

DIRECTOR COMPENSATION

     Outside directors are compensated for their services in the amount of $500
per month.  Outside directors Neyland, Russell, and Blake have agreed to defer
such compensation until the Treasurer of the Company determines that sufficient
funds are available to make such payments.  Such compensation has been deferred
since April 1994, and continues to be deferred.  For the fiscal year ended
September 30, 1997, the Company had a deferred liability in the amount of
$18,000 for outside directors' compensation.

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

     The following table sets forth the beneficial ownership of shares of Common
Stock as of September 30, 1997, for (i) each person who is known by the Company
to be the beneficial owner of more than a 5% interest in the Company,

                                       54
<PAGE>
 
(ii) directors of the Company, (iii) the sole "named executive officer" of the
Company, as defined in Item 402(a)(2) of SEC Regulation S-B, and (iv) the
directors and named executive officer of the Company as a group. Unless
otherwise indicated in the footnotes, all such interests are owned directly, and
the indicated person or entity has sole voting and investment power.  Addresses
are provided only for 5% or greater owners.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

<TABLE>
<CAPTION>
                    Name and
Title of Class      address of               Amount and           Percent of
                    beneficial               nature of bene-         class
                    owner(1)                 ficial owner
<S>                 <C>                      <C>                 <C>
 
Common Stock        Michael G. Todd(2)       2,851,589 shares         39%
 
Common Stock        John W. DeHaven(3)(4)    2,844,189 shares         38.90%
 
Common Stock        Herbert E. Russell(3)    2,844,189 shares         38.90%
 
Common Stock        Century Realty           700,000 shares            9.57%
                    Inc. (5)
 
Common Stock        Jens Olsen(6)            500,000 shares            6.84%
 
Common Stock        Robert R. Neyland        0 shares                    0%
 
Common Stock        Thomas Blake             0 shares                    0%

Common Stock        Directors and Executive
                    Officers as a Group      5,695,778 shares         77.90%
</TABLE> 

(1)  Unless otherwise indicated, the address of the beneficial owner is 25550
     Hawthorne Boulevard, Suite 207, Torrance, California 90505.

(2)  All of these shares are owned by Prescott Investments, L.P. Michael G. Todd
     is the sole managing member of Granite Industries LLC, which is the
     managing general partner of Prescott LP. Todd is the sole "named executive
     officer" of the Company, as defined in Item 402(a)(2) of SEC Regulation S-
     B. See ITEM 9, "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
     PERSONS."

(3)  All of these shares are owned by Charlie Corporation, of which Herbert E.
     Russell, as grantor and trustee of an irrevocable trust, owns 100% of the
     outstanding stock.  John W. DeHaven is the sole income beneficiary of the
     trust, but Russell has sole investment and voting power over the trust.
     The trust terminates on the death of John W. DeHaven.  See ITEM 9,
     "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS."

(4)  John W. DeHaven disclaims beneficial ownership of these shares.

                                       55
<PAGE>
 
(5)  Century Realty, Inc.  The Company believes that Century Realty is a wholly-
     owned subsidiary of Transcontinental Realty Investors, Inc., which is the
     beneficial owner of these shares. Transcontinental Realty's address is
     10670 North Central Expressway, Suite 300, Dallas, Texas 75231.  Effective
     September 30, 1997, the Company entered into a Settlement Agreement with
     Century, which included the delivery to an escrow agent of the Century's
     shares.  Such shares shall be delivered to the Company for cancellation;
     provided the Company makes certain payments by April 17, 1998.

(6)  Jens Olsen was granted the right to purchase up to 500,000 shares of the
     Company's Common Stock at a price ranging from $2.00 to $4.00 per share in
     a financial consultant agreement dated October 7, 1996.  As of the date
     hereof, Olsen has exercised his right to purchase 150,000  shares, and has
     the right to exercise his option to purchase up to 350,000 shares of Common
     Stock at anytime until December 31, 1998, when any unexercised shares
     expire.  Olsen's address of record is 230 Park Avenue, Suite 1000, New York
     City, New York 10169.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SERVICES PROVIDED BY AFFILIATED COMPANIES

     The Company has paid fees or expects to pay fees to certain affiliated
companies for various types of services, and will continue to do so in the
future.  These arrangements are summarized below.

     MAUMELLE ENTERPRISES, INC. AGREEMENT.  The Company has an oral agreement
with Maumelle Enterprises, Inc. to provide management and administrative
services for the Maumelle Property.  Currently, Maumelle Enterprises manages the
Company's inventory of property, oversees any sale of property, and manages
administrative matters such as ensuring payment of taxes, mortgages and other
expenditures incurred in management of the property.  Maumelle Enterprises also
represents the Company at local and state hearings that may affect the Company's
property. Until March 1997, Maumelle Enterprises was owned primarily by officers
and directors of the Company.  It has no clients other than the Company and
DeHaven Todd Limited Partnership, an Arkansas limited partnership ("DTLP"),
which is owned almost entirely by Michael G. Todd and John W. DeHaven. In March
1997,  Michael G. Todd and John W. DeHaven agreed to cancel all of their shares
of Maumelle Enterprises common stock, which aggregately represented twenty
percent (20%) of the shares in Maumelle Enterprises, as partial consideration
for Maumelle Enterprises' agreement to sell approximately 3.8 acres of
commercial property, known as the Corner Tract, in the City of Maumelle to the
Company, See "--ACQUISITION OF LAD FROM AFFILIATES," discussed below.  After
giving effect to the cancellation of the shares owned by Mr. Todd and Mr.
DeHaven, David Paes and Mary Peyton each owns 50% of the outstanding shares of
Maumelle Enterprises, as of the date of this Report.  Mary Peyton, the President
of the Resort Subsidiary, receives a salary of $39,600 per annum as an officer
of Maumelle Enterprises.

                                       56
<PAGE>
 
     Under the oral management and administrative services agreement, payment to
Maumelle Enterprises for management services depends upon the actual services
rendered in a given month and the current liquidity of the Company. If funds are
not available, Maumelle Enterprises has agreed to defer payment of its fees. For
the fiscal year ended September 30, 1996, the Company paid Maumelle Enterprises
$33,367 and accrued unpaid fees of $198,230.  In the fiscal year ended September
30, 1997, the Company paid Maumelle Enterprises $231,448 and accrued unpaid fees
of $130,616.

     The Company intends to formalize its management agreement with Maumelle
Enterprises in writing.  The duration, terms and conditions of the contract have
not yet been determined and will be subject to approval by the independent
directors of the Company.

     SUBLEASING OF OFFICE SPACE.  The Company is currently subleasing its
principal office space in Torrance, California from DTC, a California
partnership.  The partnership, owned equally by Michael G. Todd and John W.
DeHaven charges the Company $1,900 per month.  The Company paid DTC the total of
$21,600 in rental payments for the fiscal year ended September 30, 1997.

     The majority of the disinterested board of directors on October 1, 1995,
voted to approve the oral agreement between the Company and DTC for the
subleasing of office space from DTC to the Company.

     The Company plans to continue to sublease its office space from DTC until
at least September 30, 1998.

ACQUISITIONS OF LAND FROM AFFILIATES

     LAND ACQUISITION.  The Company intends to purchase 121 improved single-
family lots from DTLP.  John W. DeHaven, who is the sole general partner of
DTLP, owns 75% of DTLP, while Michael G. Todd owns 20% as a limited partner.  In
addition to the 121 single-family lots, DTLP owns approximately 6 acres of
commercial property and approximately 135 single-family lots in the City of
Maumelle.

     The Company expects to purchase any lots it acquires from DTLP at fair
market value, to be determined at the time of purchase.  Such fair market value
will be established by an unaffiliated certified appraiser.  Any future
transactions between the Company and its officers, directors and affiliates will
be approved by a majority of the Company's outside directors or will be
consistent with policies approved by such outside directors.

     On May 7, 1997, the Company purchased approximately 3.8 acres of commercial
property, known as the Corner Tract, in the City of Maumelle from Maumelle
Enterprises for $200,000, and as partial consideration for the cancellation of
Michael G. Todd and John W. DeHaven's shares of common stock in Maumelle
Enterprises.  The property was appraised at $265,000 by an unaffiliated third-
party appraiser in 1994. The Corner Tract was deeded to Century as part of the
Century Settlement Agreement to retire the Century Note

                                       57
<PAGE>
 
1 and Century Note II. The Company retains the option to repurchase the
property.

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

     (a) FINANCIAL STATEMENTS AND EXHIBITS

     FINANCIAL STATEMENTS

CAPITOL COMMUNITIES CORPORATION, INCLUDING PREDECESSOR CORPORATION AND
SUBSIDIARIES.

<TABLE>
<S>                                                                        <C>
Report of Independent Auditors..........................................   F-3
                                                                
Balance Sheet as of September 30, 1997..................................   F-4
                                                                
Statements of Operations for the Years Ended                    
September 30, 1997 and 1996.............................................   F-6
                                                                
Statements of Changes in Shareholders' Equity                   
September 30, 1997......................................................   F-7
                                                                
Statements of Cash Flows for the Years Ended                    
September 30, 1997 and 1996.............................................   F-8
                                                                
Notes to Financial Statements...........................................   F-10
</TABLE>

                                      58
<PAGE>
 
     EXHIBITS

     The following Exhibits are filed as part of this Report.  (Exhibits numbers
correspond to the exhibits required by Item 601 of Regulation S-B for an annual
report on Form 10-KSB,

2.1.1  Articles of Merger, filed with State of Nevada, dated November 29, 1995,
       merging AWEC Resources into Capitol Communities Corporation.*

2.1.2  Agreement of Merger, filed with State of Nevada, dated November 15, 1995,
       between AWEC Resources, Inc., and Capitol Communities Corporation.*

2.2    Certificate of Merger, filed with State of New York, dated January 5,
       1996, merging AWEC Resources, Inc., into Capitol Communities
       Corporation.*

3.1.1  Articles of Incorporation of Capitol Communities Corporation, dated
       August 18, 1995.*

3.1.2  Certificate of Amendment of Articles of Incorporation of Capitol
       Communities Corporation, dated February 6, 1996.*

3.2    Bylaws of Capitol Communities Corporation, dated August 22, 1995.*

10.1   Contribution Agreement, dated September 11, 1995, between AWEC
       Development Corporation and Resure, Inc.*

10.2   Subordinated Surplus Debenture, dated September 11, 1995, between AWEC
       Development Corporation and Resure, Inc.*

10.3   Non-Recourse Promissory Note, dated September 11, 1995, between AWEC
       Development Corporation and Resure, Inc.*

10.4   Non-Recourse Mortgage, dated September 11, 1995 between AWEC Development
       Corporation and Resure, Inc.*

10.5   Security Agreement, dated September 11, 1995 between AWEC Development
       Corporation and Resure, Inc.*

10.6   Environmental Indemnity Agreement, dated September 11, 1995, between AWEC
       Development Corporation and Resure, Inc.*

10.7   Loan Agreement, dated September 11, 1995 between AWEC Development
       Corporation and Resure, Inc.*

10.8   Promissory Note, dated September 11, 1995 between AWEC Development
       Corporation and Resure, Inc.*

10.9   Mortgage, dated September 11, 1995 between AWEC Development Corporation
       and Resure, Inc.*

                                       59
<PAGE>
 
10.10  Environmental Indemnity Agreement, dated September 11, 1995, between
       AWEC Development Corporation and Resure, Inc.*

10.11  Agreement for Refinance of Secured Note, dated September 11, 1995 between
       Century Realty, Inc., AWEC Resources, Inc., and AWEC Development
       Corporation.*

10.12  Promissory Note, dated September 11, 1995, between AWEC Development
       Corporation and Century Realty, Inc. in the amount of $1,400,000.*

10.13  Mortgage, dated September 11, 1995, between AWEC Development Corporation
       and Century Realty, Inc. in the amount of $350,000.*

10.14  Promissory Note, dated September 11, 1995, between AWEC Development
       Corporation and Century Realty, Inc.*

10.15  Guaranty, dated September 11, 1995, between AWEC Development Corporation
       and Century Realty, Inc.*

10.16  Stock Option Agreement, dated September 11, 1995, between Century Realty,
       Inc., and AWEC Development Corporation.*

10.17  Release Deed, dated September 9, 1995, between Century Realty, Inc., and
       AWEC Development Corporation.*

10.18  Employment Agreement, dated July 14, 1995 between the Company and Michael
       G. Todd.*

10.19  Olsen Consultant Agreement, dated October 7, 1996 between the Company and
       Jens Olsen.**

10.20  Purchase Agreement, dated October 24, 1995, between John L. Burnett,
       Trustee for Wood Health Joint Venture and the Company.***

10.21  Asset Purchase Agreement, effective February 21, 1997, between Capitol
       Communities Corporation and SunBay Inc. for the purchase of the SunBay
       Resort.****

10.22  RealEstate Contract, effective February 28, 1997, between Capitol
       Communities Corporation and Steve Hockersmith as agent for an
       unidentified buyer for the sale of 67.51 acres of land in Maumelle,
       Arkansas.****

10.23  Asset Purchase Agreement, effective June 16, 1997, between Capitol
       Communities Corporation and PVP Development Company, L.L.C. an Arkansas
       limited liability company, for the purchase of approximately 20.71 acres
       of land in Branson, Missouri.*****

10.24  Asset Purchase Agreement, effective June 16, 1997, between Capitol
       Communities Corporation and Palace View Ventures, L.L.C., a Missouri
       limited liability company, and Palace View, Inc.,a Missouri corporation

                                       60
<PAGE>
 
       for the purchase of approximately 1 acres of land with 2 finished
       pads.*****

10.25  Agreement and plan of reorganization dated July 30, 1997 to acquire
       shares of Capital Resorts of Florida, Inc. and Florida Bible
       College.*****

10.26  Century Realty, Inc. Settlement and Release Agreement signed October 20,
       1997, effective September 30, 1997.******

10.27  Debt Settlement and Release dated effective September 30, 1997.******

10.28  Agreement, dated December 9, 1997, between Capitol Resorts of Florida,
       Inc. and Ocean Palms Development Corporation and Ocean Palms Resort, Inc.

10.29  Ground Lease, dated February 10, 1996, between Lighthouse Point
       Construction Corp. and Nancy H. Newell and Jane H. Tubbs.

10.30  Assignment of Ground Lease and Tenant Leases, dated December 9, 1997,
       between Capitol Resorts of Florida Inc., and Ocean Palms Development
       Corporation.

10.31  Assignment of Leashold Improvements, dated December 9, 1997, between
       Capitol Resorts of Florida Inc., and Ocean Palms Development Corporation.

10.32  Mortgage and Note Modification and Assumption Agreement, dated December
       9, 1997, between Capitol Resorts of Florida Inc., and the Trustee of the
       M.B. Co., Inc. Pension Plan, the Trustee of the Domenick Greco Revocable
       Trust, Stanley Elkman, the Trustee of the Arthur A. Kober Co., Inc.,
       Employees Profit Sharing Fund, and Morton J. Berman ("Ocean Palms Resort
       Mortgagee").

10.33  Collateral Assignment and Pledge of Agreements and Conditional
       Assignments of Lease and Purchase Money Promissory Note, dated December
       9, 1997, between Capitol Resorts of Florida Inc., and jointed by Ocean
       Palms Development Corporation and assigned to the Ocean Palms Resort
       Mortgagee.

10.34  Assignment of Agreements and Conditional Assignments of Lease and
       Purchase Money Promissory Notes, dated December 9, 1997, between Capitol
       Resorts of Florida Inc., and Ocean Palms Development Corporation and
       Ocean Palms Resort, Inc.

10.35  Purchase Money Leasehold Mortgage and Security Agreement, dated February
       2, 1992, between Lucaya Beach Hotel Corporation and Del-Aire Management
       Co., Inc.

                                       61
<PAGE>
 
10.36  Mortgage and Note Modification Agreement, dated January 22, 1997, between
       the Ocean Palms Resort Mortgagee and Ocean Palms Cooperative Association,
       Inc.

11.    Statement of Computation of Per Share Earnings.

21.    List of Subsidiaries.*

23.    Consent of Joel S. Baum P.A.

       See Financial Statements at F-1 To F-16.

       * Exhibit(s) incorporated by reference from the Registration on Form 10-
       SB of the Company, Registration No.915636 filed on September 16, 1996.

       ** Exhibit incorporated by reference from Form 8-K, Commission File No.
       915636 filed on October 18, 1996.

       *** Exhibit(s) incorporated by reference from the December 31, 1996
       Quarterly Report on Form 10-QSB filed on February 19, 1997.

       ****Exhibit(s) incorporated by reference from the March 31, 1997
       Quarterly Report on Form 10-QSB filed on May 19, 1997.

       *****Exhibit(s) incorporated by reference from the June 30, 1997
       Quarterly Report on Form 10-QSB filed on August 13, 1997.

       ******Exhibit(s) incorporated by reference from the Form 8-K, Commission
       File No. 915636 filed on November 5, 1997.

(b)  REPORTS ON FORM 8-K

       The following reports on Form 8-K were filed by the Company during the
fiscal quarter ended September 30, 1997.

       None

                                  SIGNATURES

       In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
there unto duly authorized.

                                CAPITOL COMMUNITIES CORPORATION


 

                                By: /s/ Michael G. Todd
                                    Michael G. Todd, Chairman,
                                    President and Chief
                                    Executive Officer

                                       62
<PAGE>
 
                     CAPITOL COMMUNITIES CORPORATION, INC.
                                AND SUBSIDIARIES

                          AUDITED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1997

                                       1
<PAGE>
 
             CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
             ------------------------------------------------------




                               TABLE OF CONTENTS
                               -----------------

 
 
                                                     Page
                                                     -----

 
Independent Auditor's Report                           3

Financial Statements
  Balance Sheet                                        4
  Statements of Operations and Retained Deficit        5
  Statements of Changes in Shareholders' Equity        6
  Statements of Cash Flows                             7
 
Notes to Financial Statements                       8-16
 

                                       2
<PAGE>
 
                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------
                                        

To the Board of Directors and Stockholders
of Capitol Communities Corporation, Inc. and Subsidiaries


We have audited the accompanying balance sheets of Capitol Communities
Corporation, Inc. and Subsidiaries as of September 30, 1997 and the related
statements of income and accumulated deficit, stockholders equity and cash flows
for the years ended September 30, 1997, and 1996.  These financial statements
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 financial statements referred to above present fairly, in
all material respects, the financial position of Capitol Communities
Corporation, Inc. and Subsidiaries as of September 30, 1997  and the results of
its operations and its cash flows for the years ended September 30, 1997 and
1996 in conformity with generally accepted accounting principles.



December 23, 1997
/s/ Joel S. Baum, P.A., CPA
Coral Springs, Florida

                                       3
<PAGE>
 
             CAPITAL COMMUNITIES CORPORATION, INC AND SUBSIDIARIES
             -----------------------------------------------------
                                 BALANCE SHEET
                                 -------------
                               SEPTEMBER 30, 1997
                               ------------------

                                      ASSETS
                                      ------
                                                                    1997
                                                                -----------
Current Assets:
  Cash and Cash Equivalents                                   $     227,162
  Accounts Receivable                                                12,096
  Prepaid Assets                                                    202,674
                                                                -----------
 
      Total Current Assets                                          441,932
                                                                -----------
 
Fixed Assets:
  Furniture and Fixtures
      (Net of accumulated depreciation of $2,412)                    36,260
                                                                -----------
 
Non-Current Assets:
  Deposits                                                           62,679
  Real Estate Holdings                                            9,468,637
  Loan Origination Fees
      (Net of accumulated amortization of $295,597)                 155,359
                                                                -----------
 
         Total Non-current Assets                                 9,686,675
                                                                -----------
 
         Total Assets                                           $10,164,867
                                                                ===========
 
                     LIABILITIES AND SHAREHOLDERS' EQUITY
                     ------------------------------------
 
Current Liabilities:
  Accounts Payable & Accrued Expenses                           $   516,994
  Accrued Interest                                                   59,810
  Notes Payable                                                   2,099,973
                                                                -----------
         Total Current Liabilities                                2,676,777
 
Non-Current Liabilities:
  Notes Payable                                                   3,377,048
                                                                -----------

         Total Liabilities                                        6,053,825
                                                                 ----------
 
Shareholders' Equity:
  Preferred Stock, $.01 par value, none
      issued and outstanding                                          - 0 -
  Common Stock, $.001 par value; 40,000,000
      shares authorized; 7,312,000 shares
      issued and outstanding                                          7,312
  Additional Paid in Capital                                      6,380,896
  Retained Deficit                                               (2,277,166)
                                                                -----------
 
      Total Shareholders' Equity                                  4,111,042
                                                                -----------
 
      Total Liabilities and Shareholders' Equity                $10,164,867
                                                                ===========

               See Accompanying Notes to the Financial Statements

                                       4
<PAGE>
 
             CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
             ------------------------------------------------------
                 STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
                 ---------------------------------------------
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996
                    ---------------------------------------
                                        
                                          1997              1996
                                      -----------        ----------
Revenues:

  Sales (Note 11)                     $ 4,139,299        $   31,676

Cost of Sales                           1,895,825             - 0 -
                                      -----------        ----------

  Gross Profit                          2,243,474            31,676


Operating Costs and Expenses:
  Selling, General &
   Administrative                       1,447,329           610,820
                                      -----------        ----------

Income (Loss) Before
  Interest Income (Expense)               796,145          (579,144)


Interest Income                            71,543           245,905


Interest Expense                         (826,881)         (775,814)
                                      ------------       ---------- 


Net Income (Loss)                          40,807        (1,109,053)


Retained Deficit - Beginning of
  Year                                 (2,317,973)       (1,208,920)
                                      ------------      ----------- 


Retained Deficit - End of Year        $(2,277,166)      $(2,317,973)
                                      ============      =========== 


Income (Loss) Per Common Share              0.006            (0.158)
                                      ===========       =========== 


Weighted Average
  Common Shares Outstanding             7,171,014         7,000,000
                                      ===========       ===========

              See Accompanying Notes to the Financial Statements

                                       5
<PAGE>
 
             CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
             ------------------------------------------------------
                 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 ---------------------------------------------
                               SEPTEMBER 30, 1997
                               ------------------

                                                            
                                                            

                                              ADDITIONAL              
                           COMMON STOCK         PAID-IN   ACCUMULATED 
                       # SHARES     AMOUNT      CAPITAL     DEFICIT
                       ----------   ------    ----------  ------------

September 30, 1994     11,135,018   $11,135   $1,438,191  $  (323,002)
 
Reverse Stock
 Split (July, 1995)    (8,908,014)   (8,908)       8,908        - 0 -
 
Additional Stock
 Issued                 4,772,996     4,773    3,317,009        - 0 -
 
Net Loss                    - 0 -     - 0 -        - 0 -     (885,918)
                       ----------   -------   ----------  -----------
 
September 30, 1995      7,000,000     7,000    4,764,108   (1,208,920)
 
Net Loss                    - 0 -     - 0 -        - 0 -   (1,109,053)
                       ----------   -------   ----------  -----------
 
September 30, 1996      7,000,000     7,000    4,764,108   (2,317,973)
 
Additional Stock
  Issued                  312,000       312    1,616,788        - 0 -
 
Net Income                  - 0 -     - 0 -        - 0 -       40,807
                       ----------   -------   ----------  -----------
 
September 30, 1997      7,312,000   $ 7,312   $6,380,896  $(2,277,166)
                       ==========   =======   ==========  ===========
 
              See Accompanying Notes to the Financial Statements

                                       6
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                           STATEMENTS OF CASH FLOWS
                           ------------------------

                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996
                    ---------------------------------------
 
                                             1997          1996
                                         ------------  ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Income (Loss)                      $    40,807   $(1,109,053)
  Adjustments to Reconcile Net
  Income (Loss) to Cash Used in
  Operating Activities:
     Depreciation                              2,412         - 0 -
     Amortization                            155,344        57,232
     (Increase) Decrease in Accounts
       Receivable                            (11,039)      (38,191)
     (Increase) Decrease in Prepaid
       Assets                               (195,781)          535
     (Increase) Decrease in Accrued
       Interest Receivable                    62,140         - 0 -
     (Increase) Decrease in Deposits         (62,550)        - 0 -
     (Increase) Decrease in Real
       Estate Holdings                      (312,280)     (254,936)
     (Increase) Decrease in Loan
       Obligation Fees                       (99,102)        - 0 -
     (Increase) Decrease in
         Investments                       3,500,000         - 0 -
     Increase (Decrease) in Accounts
       Payable and Accrued Expenses         (784,793)      906,631
     Increase (Decrease) in Short
       Term Notes Payable                    135,567         - 0 -
                                         -----------   -----------
  Net Cash Provided (Used) in
   Operating Activities                    2,430,725      (437,782)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of Furniture and
     Fixtures                                (38,672)        - 0 -
                                         -----------   -----------
  Net Cash Provided (Used) in
    Investing Activities                     (38,672)        - 0 -
                                         -----------   -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (Decrease) in Long Term
     Debt                                 (3,596,080)      (13,832)
  Issuance of Common Stock                       312         - 0 -
  Issuance of Additional Paid in
    Capital                                1,616,788         - 0 -
                                         -----------   -----------
 
  Net Cash Provided (Used) by
    Financing Activities                  (1,978,980)      (13,832)
                                         -----------   -----------
 
 NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                       413,073      (451,614)
 
CASH AND CASH EQUIVALENTS -
  BEGINNING OF YEAR                         (185,911)      265,703
                                         -----------   -----------
 
CASH AND CASH EQUIVALENTS -
  END OF YEAR                            $   227,162   $  (185,911)
                                         ===========   ===========

              See Accompanying Notes to the Financial Statements

                                       7
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------

NOTE 1  SIGNIFICANT ACCOUNTING POLICIES
        -------------------------------

     A. BACKGROUND
        ----------

        The Company was originally incorporated in the State of New York on
        November 8, 1968 under the name of Century Cinema Corporation. In 1983,
        the Company merged with a privately owned company, Diagnostic Medical
        Equipment Corp. and as a result changed its name to that of the acquired
        company. By 1990, the Company was an inactive publicly held corporation.
        In 1993, the Company changed its name to AWEC Resources, Inc. and
        commenced operations. On February 11, 1994 the Company formed a wholly
        owned subsidiary AWEC Development Corp, an Arkansas Corporation, which
        later changed its name to Capitol Development of Arkansas. The Company
        is currently in the business of developing and selling real estate
        properties.

        In February, 1994 Petro Source Energy Corporation transferred the
        majority of its holdings in the common shares of the predecessor
        corporation, AWEC Resources, Inc., to Prescott Investments Limited
        Partnership and Charlie Corporation, both of which were then and
        currently are affiliates of Michael Todd, Herbert Russell and John
        DeHaven, the beneficial owners of the Company. These shares were
        transferred in consideration for public relations services provided by
        Prescott Limited Partnership and Charlie Corporation to Petro Source.
        Such services were deemed by Petro Source to be integral and
        indispensable to the concurrent acquisition of approximately 2,041 acres
        of land in Maumelle, Arkansas by the Company's Operating Subsidiary. The
        Company was not a party to the transfer of shares. The Company did not
        issue any new shares pursuant to the acquisition of the land.
        Accordingly, the transfer of shares did not affect the capitalization of
        the Company, and was non-dilutive to all other shareholders.

        In order to effectuate a change in domicile and name change approved by
        a majority of the Predecessor Corporation shareholders, the Predecessor
        Corporation merged, effective January 30, 1996, into Capitol Communities
        Corporation, a Nevada corporation formed in August 1995 solely for the
        purpose of the merger.

     B. PRINCIPLES OF CONSOLIDATION
        ---------------------------

        The Consolidated financial statements include accounts of its

                                       8
<PAGE>
 
wholly-owned subsidiaries.  All material intercompany transactions have been
eliminated.

     C. REAL ESTATE HOLDINGS
        --------------------

        Real estate investments are stated at the lower of cost or market.
        Acquisition costs are allocated to respective properties based on
        appraisals of the various properties acquired in the acquisition.

     D. INCOME TAXES
        ------------

        In February 1992, the Financial Accounting Standards Board issued
        Statement on Financial Accounting standards 109 of "Accounting for
        Income Taxes." Under Statement 109, deferred tax assets and liabilities
        are recognized for the estimated future tax consequences attributable to
        differences between the financial statement carrying amounts of existing
        assets and liabilities and their respective tax bases.

     E. REVENUE RECOGNITION
        -------------------

        Revenue is recognized under the full accrual method of accounting upon
        the completed sale of real property held for development and sale. All
        costs incurred directly or indirectly in acquiring and developing the
        real property are capitalized.

     F. USE OF ESTIMATES
        ----------------

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

     G. CASH AND CASH EQUIVALENTS
        -------------------------

        Cash and cash equivalents include cash on hand, cash in banks, and any
        highly liquid investments with a maturity of three months or less at the
        time of purchase.

        The Company and its Subsidiaries maintain cash and cash equivalent
        balances at several financial institutions which are insured by the
        Federal Deposit Insurance Corporation up to $100,000. At September 30,
        1997 there is no concentration of credit risk from uninsured bank
        balances.

                                       9
<PAGE>
 
     H. EARNINGS/LOSS PER SHARE
        -----------------------

        Primary earnings per common share are computed by dividing the net
        income (loss) by the weighted average number of shares of common stock
        and common stock equivalents outstanding during the year. The number of
        shares used for the fiscal years ended September 30, 1997 and 1996 were
        7,171,014 and 7,000,000, respectively.

NOTE 2  CAPITAL TRANSACTIONS
        --------------------

        In July, 1997, the Company issued 100,000 shares of common stock in a
        stock for stock acquisition (See Note).

NOTE 3  AGREEMENTS
        ----------

        Currently the Company has an oral agreement with Maumelle Enterprise,
        Inc. (Maumelle), an affiliated company, to provide management, sales and
        administrative services for the Company's inventory of property. Under
        this oral agreement, payment to Maumelle for management services depends
        upon the actual services rendered in a given month and the current
        liquidity of the Company. If funds are not available, Maumelle has
        agreed to defer payment of its fees.

        During the fiscal year ended September 30, 1997, the Company paid
        Maumelle a total of $198,081 for fees accrued from prior years and
        $33,367 for fees due for 1997. As of September 30, 1997, a balance of
        $130,616 remained accrued and unpaid for fiscal 1997.

NOTE 4  CONTINGENCIES
        -------------

     A. There was a lawsuit pending in the amount of $200,000 with interest at
        5% per annum dated February 9, 1994 against Pine Ridge Improvement
        District, filed by Robert D. Holloway, Inc. for engineering services,
        planning, and surveying. Capitol Communities Corporation, Inc. and its
        subsidiaries were not a party to the action; however, as owner of the
        property, any judgement against the property could be a liability to the
        Company.On March 12, 1997 the Chancery Court of Pulaski County,
        Arkansas, Second Division granted a summary judgement in favor of the
        Company, relieving it of any liability arising from assessment or tax
        levy in the matter of Robert Holloway, Inc. vs Pine Ridge Residential
        Property Owners Improvement District. Robert Holloway, Inc. subsequently
        appealed the summary judgment. The Company has not accrued a liability
        for this contingency.

                                       10
<PAGE>
 
NOTE 5  MORTGAGES
        ---------

        On September 11, 1995, the Company entered into a promissory note with
        Resure, Inc. for $3,500,000, bearing interest at 10% per annum, payable
        in full on July 1, 2000 and secured by a 701.3 acre tract of land in
        Maumelle, Arkansas. Effective September 30, 1997, the Company entered
        into a modification of the promissory note with Resure, Inc. The
        principal becomes due and payable in full, on September 1, 1999.

NOTE 5  MORTGAGES (CONTINUED)
------  --------------------

        Payments are due in the amount of $101,591.16 including principal and
        interest at 10% per annum, payable quarterly. The next payment is due
        January 1, 1998.

NOTE 6  LEASE AGREEMENT
        ---------------

        The Company is subleasing office space from Dehaven & Todd Co., in which
        Michael G. Todd, is a partner. The monthly lease payment began on
        October 1, 1995 and is $1,900 per month. The lease expires September 30,
        1998.

        The lease commitment is as follows:
             Year ended September 30

               1998                 22,800

            Total Minimum
                  Rental Payments  $22,800
                                   =======

        As of September 30, 1997, all amounts due under this agreement have been
        paid.

NOTE 7  EXECUTIVE EMPLOYMENT AGREEMENT
        ------------------------------

        The Company has a five-year written agreement with Michael Todd to
        perform the duties of President. Under the agreement, which became
        effective on October 1, 1995, Michael Todd is to be compensated at a
        rate of $20,000. per month. The agreement expires on September 30, 2000.
        The Company is not a party to any other employment agreements.

        Michael Todd has forgiven all liability of the Company, under the
        agreement for the periods ending September 30, 1996 and 1997.

NOTE 8  NOTES PAYABLE
        -------------

        Notes payable consist of the following:

                                       11
<PAGE>
 
                                                                9/30/1997
                                                                ---------
       Note Payable - Bank of Little Rock
       ----------------------------------
         Secured 10% Line of Credit 10% per annum;
         maturing May 10, 1998
                                                               $  399,024
 
       Note Payable - Bank of Little Rock
       ----------------------------------
         Secured 10% Line of Credit 10% per annum;                
         maturing November 5, 1997                                450,000
 
NOTE 8 NOTES PAYABLE
       -------------
 
       Note Payable - Davister
       -----------------------
         Unsecured 9% per annum due
         January 9, 1996                                          200,000
 
       Notes Payable
       -------------
          Miscellaneous Short-Term                              1,001,284
 
       Note Payable - Resure Mortgage                              49,665
       ------------------------------                         -----------
 
         Total Current Maturities                              $2,099,973
                                                              -----------
 
       Note Payable - Resure Mortgage
       ------------------------------
          Secured 10% per annum due
          September 1, 1999 - Quarterly
          payments beginning 1/1/98
          for $101,591                                          3,377,048
 
           Total Non-Current                                    3,377,048
                                                              -----------
 
  Total Notes Payable                                          $5,477,021
                                                              ===========
NOTE 9 LOAN ORIGINATION FEES
       ---------------------

       Loan origination fees were incurred in connection with the Resure, Inc.
       debt refinancing September 11, 1995. aid costs included attorney,
       consult, title, appraisal and survey fees and are being amortized over 57
       months on a straight-line basis. Upon the modification of the obligation,
       50% of the balance was written off.

NOTE 10 SUPPLEMENTAL CASH FLOW INFORMATION
        ----------------------------------
        Year End                                1997           1996

                                       12
<PAGE>
 
               Interest Paid    $826,881       $775,814

NOTE 11  SETTLEMENT
         ----------

         On October 20, 1997, Capitol Communities Corporation, Capital
         Development of Arkansas, Inc., a wholly-owned subsidiary of the Company
         and Century Realty, Inc. entered into a Settlement and Release
         Agreement effective September 30, 1997. The Settlement Agreement was
         entered to settle the foreclosure action instituted by Century, on
         August 12, 1996 against Operating Subsidiary and the Company in the
         Chancery Court of Pulaski County and to settle the counterclaim filed
         by the Company. In the foreclosure action, Century was seeking to
         foreclose on 36 acres of the commercial lots, known as Tract D, located
         in Maumelle, Arkansas, which secured a $1,400,000 Century promissory
         note. As a result of cross-default provisions, an unsecured (Century
         Note 1) $350,000 Century promissory note (Century Note 2) was also in
         default.

         Under the provisions of the Settlement Agreement, the Company paid
         $17,500 to Century simultaneous to the execution of the Settlement
         Agreement and delivered to an escrow agent a Warranty Deed conveying to
         Century Tract D and an approximately 3.5 acre track of land adjoining
         Tract D. In return, Century acknowledged that all obligations due
         Century pursuant to the Century Note 1 and the Century Note 2 were
         satisfied. Under the Settlement Agreement the Company has the option to
         repurchase Tract D and the Corner Tract. In return, Century delivered
         to the escrow agent certificates of 700,000 shares of the Company's
         common stock, and a Quitclaim Deed to Tract D and the Corner Lot in
         favor of the Company.

NOTE 12  REFINANCING DEBT
         ----------------

         Effective September 30, 1997, Capitol Communities Corporation, Capital
         Development of Arkansas, Inc., a wholly-owned subsidiary of the Company
         and Mark Boozell, Director of Insurance of the State of Illinois
         liquidator for Resure, Inc entered into a Debt Settlement and Release
         Agreement. On October 24, 1997, Judge Ellis E. Reid of the Circuit
         Court of Cook County, Illinois County Department, Chancery Division,
         approved the Settlement Agreement.

         Under the provisions of the Settlement Agreement, the Liquidator
         modified and amended the $3,500,000 recourse note payable to Resure to
         become due and payable in full on September 1, 1999. Resure applied the
         amount of $525,460, to the Company's four quarterly payments that were
         due October 1, 1996, January 1, 1997, April 1, 1997, and October 1,
         1997. The approximately

                                       13
<PAGE>
 
         $150,000 remaining in the Resure cash collateral account was retained
         by the Liquidator. As part of the Settlement Agreement, the Liquidator
         released 342.22 acres of the Company's single-family residential
         property of the original 1,044 acres of residential property that
         secured the Resure Note I. The remaining 701.03 acres of single-family
         residential property was retained by the Liquidator as collateral on
         the modified Resure Note I.

         The Settlement Agreement further provided that the Company's $3,500,000
         non-recourse note payable to Resure and return the Resure Note II and
         the contribution agreement, signed in connection with the Resure Note
         II to the Company. The Company terminated the Resure Debenture, which
         was issued by Resure as consideration for the Resure Note II, and
         delivered it to the Liquidator.

NOTE 12  REFINANCING DEBT (CONTINUED)
         ----------------------------

         As additional consideration for the Liquidator to enter into the Resure
         settlement Agreement, the Company agreed to pay a developer's fee of
         $2,000 for each lot sold in Parcel 1, which is comprised of
         approximately 701 acres of the Large Residential Property and Parcel 2,
         which is comprised of approximately 344 acres of the Large Residential
         Property. In the event that any portion of Parcel 1 is sold prior to
         being subdivided into single-family lots, the Company will pay $2,853
         per acre and $5,844.20 per acre if Parcel 2 is sold prior to being
         subdivided, however, such Developer's Fees shall not exceed $2,000,000.
         The Developer's Fee shall be secured by a written amendment to the loan
         mortgage securing the Resure Note I, which shall be recorded against
         the 701 acres of the Large Residential Property.
 

NOTE 13  ACQUISITIONS
         ------------

         On July 30, 1997, the Company acquired Capitol Resorts of Florida, Inc,
         a Florida Corporation formed on July 22, 1997, whole sole asset was the
         right to purchase a 36.301 acre parcel of land in Osceola County,
         Florida formerly known as the Florida Bible College property. On July
         30, 1997, the Company entered into a reorganization agreement with MLT
         Management Corp., the parent of CRF. Under the terms of the agreement
         the Company acquired all of the issued and outstanding capital shares
         of CRF in exchange for 100,000 shares of the Company's voting common
         stock. Upon acquisition of the CRF stock, its sole director resigned
         and Michael G. Todd, president and director of the Company, was
         appointed the sole director of CRF. On the same day, CRF closed on the
         contract to acquire Florida Bible College

                                       14
<PAGE>
 
         property for $922,000 plus costs. The property was appraised by a third
         party on May 12, 1997 at a value of $3,385,000. A subsequent appraisal
         by another qualified third party appraiser, dated December 5, 1997,
         valued the property at $4,570,000. A portion of the property (14.24
         acres in two parcels) is developed with a 95 room hotel and various
         structures.


NOTE 14  OPTION
         ------

         Under the Settlement Agreement the Company has the option to repurchase
         Tract D and the Corner Tract. In return, Century delivered to the
         escrow agent certificates for 700,000 share of the Company's common
         stock, and a Quitclaim Deed to Tract D and the Corner Lot in favor of
         the Company.

NOTE 15 SUBSEQUENT EVENTS
        -----------------

        On December 9, 1997, the Florida Resorts Subsidiary acquired the lease
        rights to 120 feet of beachfront land and improvements located in
        Pompano Beach, Florida from Ocean Palms Resort, Inc. and Ocean Palms
        Development Corporation, unaffiliated third parties. The ground lease
        rights to the Ocean Palms Resort Property is for a period of 99 years,
        of which 66 years and 3 months remain. The improvements include a 53 LTL
        unit complex, and other common area facilities. The Company also
        acquired the interest in several long term tenant leases, a $2,600,000
        interest in promissory notes, arising out of the sale of long term
        leasehold units of Ocean Palms Resorts and the right to manage and
        operate the on-going rental of the units as hotel rooms on behalf of the
        owners.

        The Company acquired the Ocean Palms Resort Property, the Ocean Palms
        Resort Paper and the other rights for approximately $868,000 in cash,
        the issuance of 33,500 shares of the Company's Common Stock and the
        assumption of a $1,158,000 mortgage encumbering the Ground Lease.

        On December 9, 1997, the Florida Resorts Subsidiary acquired all of the
        issued and outstanding common stock of OPV Development, Inc. an
        unaffiliated third party. With the stock acquisition, the Company
        acquired OPV's primary asset, two lease rights to a four lot parcel of
        land and improvements located in Pompano Beach, Florida. The First
        Ground Lease is for a period of 99 years of which 65 years and 5 months
        remain. The Second Ground Lease is for a period of 93 years and 3
        months, of which 65 years and 5 months remain. The Company acquired the
        16 LTL unit Ocean Villas, and approximately $294,000 in promissory
        notes, which

                                       15
<PAGE>
 
        arose from the prior sale of 4 LTL units, for approximately $107,000 in
        cash, and the assumption of a first mortgage of $375,000 and a second
        mortgage of $150,000 encumbering the Ground Leases.
 

                                       16