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

                                 FORM 10-KSB/A
                                  Amendment 2

[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
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. $4,139,299

  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.
$4,682,166 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. ("NQB") on April 15, 1998.

  State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 7,419,500 as of April 15,
1998.


                      DOCUMENTS INCORPORATED BY REFERENCE
NONE

  Transitional Small Business Disclosure Format YES [_] NO [X]
<PAGE>
 
PART II.
Item 7.  Financial Statements.


                     CAPITOL COMMUNITIES CORPORATION, INC.
                               AND SUBSIDIARIES

                         AUDITED FINANCIAL STATEMENTS

                              SEPTEMBER 30, 1997
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------



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

<TABLE>
<CAPTION>
                                                        Page
                                                        ----
<S>                                                     <C>
 
Independent Auditor's Report                               3
 
Financial Statements
  Balance Sheet                                            4
  Statements of Operations and Retained Deficit            6
  Statements of Changes in Shareholders' Equity            7
  Statements of Cash Flows                                 8
 
Notes to Financial Statements                          10-19
 
Signatures                                                19
</TABLE>

                                      -2-
<PAGE>
 
                             BAUM & COMPANY, P.A.
                         Certified Public Accountants
                       1515 University Drive - Suite 209
                         CORAL SPRINGS, FLORIDA  33071
                                (954) 752-1712
                                        
                         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.

                                     /s/ Joel S. Baum
                                         Joel S. Baum

December 23, 1997
Coral Springs, Florida


                                     -3-
<PAGE>
 
             CAPITAL COMMUNITIES CORPORATION, INC AND SUBSIDIARIES
             -----------------------------------------------------
                                 BALANCE SHEET
                                 -------------
                              September 30, 1997
                              ------------------
 
<TABLE> 
<CAPTION> 
                                    ASSETS
                                    ------
                                                                          1997
                                                                          ----
<S>                                                                  <C>  
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
                                                                     -----------
  Deferred Tax Asset (Note 1)                                             69,425
                                                                     -----------
                                                               
         Total Non-current Assets                                      9,756,100
                                                                     -----------
                                                               
         Total Assets                                                $10,234,292
                                                                     ===========
 
                     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
                                                                     -----------
  Deferred Taxes Payable                                                  14,000
                                                                     -----------
                                                                                
         Total Liabilities                                             6,067,825
                                                                     -----------
                                                                                
Shareholders' Equity:                                                           
  Preferred Stock, $.01 par value, none                                         
    issued and outstanding                                                   -0-
  Common Stock, $.01 par value; 40,000,000                                      
    shares authorized; 7,312,000 shares                                         
    issued and outstanding                                                73,120
  Additional Paid in Capital                                           6,555,088
  Accumulated Deficit                                                 (2,461,741)
                                                                     -----------
                                                                                
    Total Shareholders' Equity                                         4,166,467
                                                                     -----------
                                                                                
    Total Liabilities and Shareholders' Equity                       $10,234,292
                                                                     ===========
</TABLE>


              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
                    ---------------------------------------

<TABLE>
<CAPTION>
                                                 1997          1996   
                                             -----------    -----------
<S>                                          <C>            <C>      
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                           1,687,329        610,820
                                             -----------    -----------
                                                                     
Income (Loss) Before                                                 
   Interest Income (Expense)                     556,145       (579,144)
                                                                     
Interest Income                                   71,543        245,905
                                                                     
Interest Expense                                (826,881)      (775,814)
                                             -----------    ----------- 

Net (Loss) Before Provision
   For Income Taxes                             (199,193)    (1,109,053)
                                           
Provision for Income Taxes (Note 1)        
   Tax Benefit of Change in                
      Prior Year Valuation Allowance              69,425            -0-
   Deferred Taxes                                (14,000)           -0-
                                             -----------    -----------
                                                  55,425            -0-
                                             -----------    -----------
                                           
Net (Loss)                                      (143,768)    (1,109,053)
                                           
Accumulated Deficit - Beginning            
   of Year                                    (2,317,973)    (1,208,920)
                                             -----------    -----------
                                                                       
Accumulated Deficit - End of Year            $(2,461,741)   $(2,317,973)
                                             ===========    ===========
                                                                       
Income (Loss) Per Common Share                      (.02)        (0.158)
                                             ===========    ===========
                                                                       
Weighted Average                                                       
   Common Shares Outstanding                   7,171,014      7,000,000
                                             ===========    =========== 
</TABLE>

               See Accompanying Notes to the Financial Statements

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


<TABLE>
<CAPTION>
                                                            ADDITIONAL
                                            COMMON STOCK     PAID-IN      ACCUMULATED
                                  # SHARES     AMOUNT        CAPITAL        DEFICIT
                                 ----------   --------      ----------    -----------
<S>                              <C>          <C>           <C>           <C>
September 30, 1995               $7,000,000   $  7,000      $4,764,108    $(1,208,920)

  Adjustment to Par
  From $.001 to $.01
  due to Merger on
  January 30, 1996
  (See Note 1A)                                 63,000         (63,000)


Net Loss                                -0-        -0-             -0-    $(1,109,053)
                                 ----------  ---------      ----------    -----------

September 30, 1996                7,000,000     70,000       4,701,108     (2,317,973)


Additional Paid-In
   Capital Attributed to
   Forgiveness of Debt                  -0-        -0-         240,000            -0-


Additional Stock
  Issued (Net)                      312,000      3,120       1,613,980            -0-


Net (Loss)                              -0-        -0-             -0-       (143,768)
                                 ----------   --------      ----------    -----------


September 30, 1997                7,312,000   $ 73,120      $6,555,088    $(2,461,741)
                                 ==========   ========      ==========    ===========
</TABLE>

              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
                    ---------------------------------------

<TABLE> 
<CAPTION> 
                                                1997          1996
                                              -------        ------
<S>                                         <C>           <C>
 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Income (Loss)                         $ (143,768)   $(1,109,053)
  Adjustments to Reconcile Net
  Income (Loss) to Cash Used in
  Operating Activities:
      Depreciation                               2,412            -0-
      Amortization                             155,344         57,232
      Forgiveness of Accrued
         Compensation Credited To
         Additional Paid in Capital            240,000            -0-
      (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-
      (Increase) in Deferred Tax Asset         (69,425)           -0-
      Increase in Deferred Taxes
        Payable                                 14,000            -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-
  Proceeds 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)
                                            ==========    ===========
</TABLE>

              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.


                                      -8-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -------------------------------------------

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

         The Consolidated financial statements include accounts of its 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.
 
         The Statement of Financial accounting Standards (SFAS) No. 121,
         "Accounting for the Impairment of Long Lived Assets and for Long Lived
         Assets to be Disposed Of," was issued by the Financial Accounting Board
         (FASB) in March 1995, and was effective for fiscal years beginning
         after December 15, 1995.  SFAS 121 requires that long-lived assets be
         reviewed for impairment and written down to fair value whenever events
         or changes in circumstances indicate that the carrying value might not
         be recoverable.  Under the provisions of SFAS 121, impairment losses
         are recognized when future expected cash flows are less than the
         assets' carrying value.  The Company has completed a review and has
         concluded that no impairment expense is required.  The Company has not
         recorded any expense related to impairment losses since adoption of
         SFAS 121.

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

         In February 1992, the Financial Accounting Standards Board issued
         Statement of Financial Accounting standards 109 of "Accounting for
         Income Taxes."  Under FASB 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.  The
         Company has NOL's of approximately 2,000,000 expiring in the years 2009
         through 2012.
<TABLE> 
                   <S>                               <C> 
                   Deferred Tax Benefit              $688,000
                   Valuation Allowances               618,575
                                                     --------
                                                     $ 69,425
                                                     ========
</TABLE>


                                      -9-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
             -----------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -------------------------------------------

      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.
                                        
      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 1995, the Board of Directors of AWEC Resources, Inc., (the
"Predecessor Company") authorized the following transactions:


                                     -10-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------

NOTE 2 - CAPITAL TRANSACTIONS(CONTINUED)
         -------------------------------
         (a)  A one for five reverse split of the common stock of the
              Predecessor Company, at the consummation of which there would be a
              total of 2,227,004 shares issued and outstanding.

         (b)  Pursuant to an agreement, the Board authorized the issuance of
              2,122,498 shares each to Prescott Investment L.P. and Charlie
              Corporation. The shares were issued at par.

         (c)  The Board authorized the issuance of 700,000 shares of stock of
              the Predecessor Company to Century Realty, Inc. in exchange for
              $3,317,709 in debt owed to Century by the Company.

         (d)  Prescott Investment L.C. and Charlie Corporation returned a total
              of 350,000 shares of stock to the Predecessor Company in order
              that no more than 7,000,000 shares of the stock of the Company
              would be issued and outstanding.

         Net changes in common stock for fiscal year ended September 30, 1997,
         consisted of the following transactions:
<TABLE>
<CAPTION>
         # Shares         Date     Description of Transaction
         --------         ----     --------------------------
         <C>            <C>        <S>  
           38,000        10/7/96   Stock option exercised for
                                   performance of consulting fees
 
          150,000       11/12/96   Stock option exercised for      
                                   performance of consulting fees
 
          (38,000)       4/17/97   Stock certificate canceled
 
          (19,000)       4/25/97   Stock certificate canceled
 
          (19,000)        5/7/97   Stock certificate canceled
 
          100,000        7/29/97   Stock issued as consideration   
                                   for acquisition (see Note 13)
 
          100,000        7/29/97   Stock issued for employee       
                                   compensation
          -------
          312,000
          =======
</TABLE> 

                                     -11-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------

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.

      B. 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.

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 October 1, 1999.


                                     -12-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------

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. (See Note 12).

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

         The Company is subleasing office space from Dehaven & Todd Co., in
         which Mike 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.
<TABLE>
         <S>                                                           <C>
         The lease commitment is as follows:
            Year ended September 30, 1998                               22,800
 
            Total Minimum
             Rental Payments                                           $22,800
                                                                       =======
</TABLE> 

         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:
<TABLE> 
<CAPTION> 
                                                            9/30/1997
                                                            ---------
         <S>                                                <C> 
         Note Payable - Bank of Little Rock
         ----------------------------------
          Secured 10% Line of Credit 10% per annum;
          maturing May 10, 1998                             $ 399,024
</TABLE> 


                                     -13-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------


NOTE 8 - NOTES PAYABLE (CONTINUED)
         -------------------------
<TABLE> 
         <S>                                                <C> 
         Note Payable - Bank of Little Rock
         ---------------------------------- 
          Secured 10% Line of Credit 10% per annum;            450,000
          maturing November 5, 1997
 
         Note Payable - Davister
         -----------------------
          Unsecured 9% per annum due
          January 9, 1996                                      200,000

         Notes Payable
         -------------
         Various Notes payable
         ---------------------

          Unsecured notes with interest rates ranging
          from 10% to 12% with maturing not to exceed
           nine months.                                      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
                                                            ==========

         Maturing of Long Term Debt
         --------------------------

          September 1999                                    $   71,129
          September 2000                                     3,305,919
                                                            ----------
                                                            $3,377,048
                                                            ==========
</TABLE> 

NOTE 9   LOAN ORIGINATION FEES
         ---------------------

         Loan origination fees were incurred in connection with the Resure, Inc.
         debt refinancing September 11, 1995. These costs are being amortized on
         a straight-line basis over fifty-seven months, or upon satisfaction of
         the note.

                                     -14-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------


NOTE 9   LOAN ORIGINATION FEES (CONTINUED)
         ---------------------------------

         During the year, one of the notes was satisfied, thus the loan
         origination costs related to that note were written off.  The costs for
         the remaining debt is being amortized over the life of the note
         obligation remaining.

NOTE 10  SUPPLEMENTAL CASH FLOW INFORMATION
         ----------------------------------
<TABLE> 
<CAPTION> 
               Year End                       1997             1996
            <S>                             <C>              <C> 
            Interest Paid                   $826,881         $775,814
</TABLE> 

         On July 29, 1997, the company issued 100,000 shares for an acquisition
         of Capitol Resorts of Florida, Inc. (See Note 13).

         As of September 30, 1997, the President forgave $240,000 of accrued
         compensation and credited it as additional paid in capital.

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


                                     -15-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------


NOTE 11 - SETTLEMENT (CONTINUED)
          ----------------------
         the Corner Tract, and the 700,000 shares of the Company's stock owned
         by Century. See Discussion in Note 14. The fair value of the assets
         transferred, i.e. Tract D and the Corner Lot, exceeded the carrying
         value of the Century Notes and the related accrued interest.

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 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 $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 (a) Resure terminate the
         $3,500,000 Resure Note II and Contribution Agreement and deliver the
         same to the Company.  (b) The Company terminate the Resure Debenture
         issued in connection with the Resure Note II and the Contribution
         Agreement and deliver the same to Resure.

         As additional consideration to the Liquidator to enter into the
         Settlement Agreement, the Company agreed to pay a developer's fee of
         $2,000 for each lot sold in Parcel 1 and Parcel 2.  The Developer's fee
         is secured by a written amendment to the loan mortgage securing the
         Resure Note I.

                                     -16-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------

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

         The Settlement Agreement did not settle the Resure debt for less than
         the carrying value, and further the modification of terms did not
         reduce the interest rate, extend the maturity date, reduce the amount,
         or reduce the accrued interest on that debt.

         The Company was considering diversifying into the insurance industry at
         the time of the transaction and Resure was considered as a possible
         acquisition or merger candidate.  Resure required the Debenture and
         Note transaction as part of the entire transaction.  The Company later
         determined that the insurance industry would not be a suitable
         diversification.

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

         On July 30, 1997, the Company acquired Capitol Resorts of Florida, Inc.
         ("CRF"), 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 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
         ------

         The Company has the option to repurchase Tract D, the 3.5 acre parcel
         tract adjoining Tract D and 700,000 shares of the Company's common
         stock owned by Century.  The option requires the Company to make 5
         monthly option payments of $17,500 commencing November 17, 1997 and a
         final payment of $2,138,087.39 on April 17, 1998.


                                     -17-
<PAGE>
 
            CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
            ------------------------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                              SEPTEMBER 30, 1997
                              ------------------


NOTE 15  SUBSEQUENT EVENT
         ----------------

A.       On April 17, 1998, the Company's Operating Subsidiary exercised its
         option under the Century Settlement Agreement to purchase 36 acres of
         Commercial Property, known as Tract D, the 3.5 acre tract of land
         adjoining Tract D,  and the 700,000 shares of the Company's voting
         common stock owned by Century.  The purchase price was $2,132,057.39
         paid on April 17, 1998.  In addition, the Company had already made five
         option payments between November 17, 1997, and March 17, 1998, in the
         amount of $17,500 per option payment.

B.       On December 9, 1997, Capitol Resorts of Florida, Inc., a wholly owned
         subsidiary of the Company, acquired the lease rights to 120 feet of
         beachfront land and improvement located in Pompano Beach, Florida.  The
         improvements known as Ocean Palms Resort, include a 53 unit residential
         complex and other common area facilities.  The Company also acquired
         the interest of the previous owner in several long-term tenant leases,
         approximately $2,500,000 in Promissory Notes derived from the sale of
         long term leasehold interests in the units to various owners and the
         right to manage and operate the on-going rental of the units as hotel
         rooms on behalf of the owners.  The Resort Subsidiary acquired the
         property, the Promissory Notes 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.

C.       On December 9, 1997, Capitol Resorts of Florida, Inc. acquired all the
         issued and outstanding stock of OPV Development Inc.  OPV's primary
         asset is the ground lease rights to a four lot parcel of land and
         improvements located in Pompano Beach, Florida.  The improvements,
         known as Ocean Villas, consist of 16 residential units and common area.
         The Company also acquired approximately $244,000 in Promissory Notes
         derived from the prior sale of four of the units.  The cost of the
         acquisitions of OPV was approximately $107,000 in cash, the assumption
         of a  first mortgage of $375,000 and a second mortgage of $150,000
         encumbering the ground leases.

D.       Contingencies
         On April 28, 1998 the Arkansas Court of Appeals upheld the Chancery
         Court of Pulaski County, Arkansas' summary judgment in favor of the
         Company.  (See Note 4).

                                     -18-
<PAGE>
 
                                  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


                                     -19-