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                                  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 [Fee Required]

For the fiscal year ended August 31, 1998     Commission File Number: 000-23615

                       AMERICAN DIVERSIFIED HOLDINGS, INC.
                 (Name of Small Business Issuer in its Charter)

             NEVADA                                     86-0854150
  (State or other jurisdiction of                    (I.R.S Employer
   incorporation or organization)                   Identification No.)

10900 WILSHIRE BOULEVARD, 9TH FLOOR, LOS ANGELES, CA               90024
    (Address of principal executive offices)                     (Zip Code)

Issuer's Telephone Number:  (310) 209-5090

         Securities registered under Section 12(b) of the Exchange Act:
(Title of each class)               (Name of each exchange on which registered)
       NONE                                             NONE

         Securities registered under Section 12(g) of the Exchange Act:
                              (Title of each class)
                                  COMMON STOCK

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 shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

        YES (X)              NO ( )

Check if there is no disclosure of delinquent filers 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. ( )

State issuer's revenues for its most recent fiscal year:  $45,585

The aggregate value of the Registrant's Common Stock held by non-affiliates of
the Registrant is $13,534,115. (Based on the last negotiated sales price of
$2.19 per share).

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were 6,817,961 shares of the
Registrant's Common Stock issued and outstanding as of October 30, 1998.


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ITEM 1  DESCRIPTION OF BUSINESS

GENERAL

        American Diversified Holdings, Inc., a Nevada corporation (the
"Company"), is a development stage enterprise which was formed to offer a full
range of financial services in the United States and Europe. The Company was
incorporated in the State of Nevada on February 5, 1997. The Company is a
holding company primarily engaged in the management of its two wholly-owned
subsidiaries, American Diversified Asset Management, Inc., a Nevada corporation
("ADAM") which is located in Los Angeles, California, and American Diversified
AG, a German corporation ("ADAG") which is located in Berlin, Germany. The
principal business activities of the Company and its subsidiaries will be to
provide financial services and distribute financial service products to
individuals and institutional investors in the United States, Germany and other
European Union ("EU") countries. The Company and its subsidiaries will offer
financial services consisting mainly of full service securities brokerage,
Internet discount brokerage, asset management, sponsoring and distributing
mutual funds, underwriting and related financial services.

ADAM

        ADAM was founded in October 1997 to operate as a registered investment
advisor and broker-dealer. Effective March 31, 1998, ADAM merged with James
Buchanan Rea, Inc. ("JBRI") a California corporation, and succeeded to the
business of JBRI as a registered investment adviser and licensed broker-dealer,
underwriter and distributor. ADAM serves as Investment Advisor, Underwriter and
Distributor to American Diversified Funds, Inc., a diversified, open-end
investment company registered under the Investment Company Act of 1940, with a
single series portfolio, the American Diversified Global Value Fund (formerly
the Rea-Graham Balanced Fund).

        The Company plans to expand ADAM's mutual fund business by increasing
the assets of the Global Value Fund and by developing new mutual fund series in
the U.S. and Europe. ADAM currently has in registration a newly developed fund,
the American Diversified International Value Fund, for U.S. distribution
(collectively with the Global Value Fund, the "Funds"). Ladas & Hulings, Inc.
("Ladas & Hulings"), a leader in global value investing with over 25 years of
experience, became sub-advisor to the Global Value Fund in April 1998 and will
provide the day-to-day investment management (sub-advisory services) for the
Funds. ADAM also plans to introduce an asset management business for high net
worth individual and institutional accounts using Ladas & Hulings as the asset
manager.

        ADAM is in the process of registering an umbrella fund, American
Diversified Funds, plc, in Ireland under the Undertaking for Collective
Investments in Transferrable Securities ("UCITS") directive for European ("EU")
distribution, which will offer three sub-funds: the Global Value, International
Value, and SmallCap Value portfolios. Marketing and distribution services will
be provided in Germany and other EU countries by ADAG, and through alliances
with medium-sized banks, broker-dealers, insurance agents, and by-captive sales
forces.

        The Company is in the process of separating its investment management
and broker-dealer businesses by forming a new wholly-owned subsidiary, American
Diversified Global Equities, Inc. ("ADGE"), which will assume the broker-dealer
and underwriting functions of ADAM (including the underwriting and distribution
of mutual funds). In connection with the organization of ADGE, ADAM's
broker-dealer license will be transferred to ADGE, which will also enter into a
new distribution agreement with ADAM with respect to distribution of the Funds.
ADGE will be the distributor for the Company's mutual funds in the U.S. and will
act as broker for on-line brokerage execution in U.S. markets for ADAG. ADAM
will remain as the investment advisor to the Funds and will continue to provide
asset management services.

        ADAM has hired additional executives and support staff in the area of
asset management and brokerage services and retained experts in the areas of
technology, marketing, public relations, and management. New computer systems,
office equipment, phone systems, and technology are being added to insure that
efficient, cost effective, and customer oriented, investment products and
services are available in both the U.S. and EU markets.

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ADAG

        Through its German subsidiary, ADAG, the Company is engaged in the
distribution of financial products and will provide discount securities
brokerage services, asset management services and underwriting services to
clients in Germany and other EU countries after ADAG has received a full banking
license in Germany, which is expected to occur during the first quarter of 1999.
Securities brokerage services will be offered to individual investors and
institutions in Europe through the Internet and ADAG's registered
representatives. ADAG intends to engage in underwriting initial public offerings
of small to medium size European companies, especially in Germany. ADAG has also
applied for membership on the Frankfurt Stock Exchange located in Frankfurt,
Germany. The registration process has been completed and ADAG's membership will
become effective upon approval of ADAG's full banking license. ADAG will offer
trade execution for stocks, mutual funds, options and bonds, as well as market
data and research tools to investors in Europe. ADGE will act as the clearing
broker for ADAG on all transactions involving U.S. securities which are executed
in the U.S. The electronic infrastructure and primary systems necessary to
operate ADAG's securities brokerage business are currently in place and fully
functional. The Company cannot provide any assurance or guarantee that the
regulatory approvals necessary for ADAG to commence its planned securities
brokerage operations will be given in a timely manner or at all. See "-- Delay
in Commencing Operations."

        ADAG will provide retail and institutional financial services under two
distinct brand names, each of which will offer a range of services and
commission rates designed to attract investors within specific demographic
categories. This branding strategy will allow ADAG to align the cost structures
of its brokerage business with the level of services desired by its customers.
By providing clearing and execution services, ADAG will be able to expand its
customer base, create synergies with its retail brokerage business, enhance
mutual fund distribution and diversify its revenues. AMERICAN DIVERSIFIED(R)
will provide ADAG's high-net-worth customers with a full range of brokerage
services, private asset management and mutual fund products, and is expected to
engage in underwriting initial public offerings of fast growing smaller
companies. AMDIV.NET(TM) will provide discount on-line securities brokerage
services, research and investment analysis tools exclusively through the
Internet using advanced electronic systems. AMDIV.NET(TM) also will provide
European investors interested in the U.S. securities market with multi-lingual
service and with toll-free telephone access from seven European countries.
AMDIV.PRONET(TM) is a technologically advanced financial system that will
provide ADAG's correspondent European brokerage firms and financial institutions
with special terminals to access the major European and U.S. stock markets
through the Company's integrated computer network. AMDIV.PRONET(TM) is expected
to provide securities clearing and execution services to approximately 700
independent broker-dealers, depository institutions, registered investment
advisers and financial planners in Germany. See "-- Development of Products and
Services."

        ADAG has developed substantial name recognition through the aggressive
advertisement of ADAG's services during the last six months. ADAG has received
over 10,000 applications for new accounts during the last six months through the
aggressive advertisement of its services in Germany, although ADAG does not
intend to take orders or otherwise commence its brokerage business in Germany
until it has received a full banking license.

        The Company plans to transfer all of the proprietary technology, systems
and software of the Company and its subsidiaries to American Diversified
Technologies, Inc., which is being organized as a new wholly-owned subsidiary of
the Company in the U.S.

THE BUSINESS OPPORTUNITY

        The Company believes that there is a new and growing market in the EU
for investment products denominated in U.S. dollars primarily due to the
following factors: (i) the planned transition in 1999 to a single European
currency, the EURO; (ii) the creation of new and expanding capital markets in
Eastern Europe; (iii) implementation of the UCITS directive in October 1989,
which was designed to create a single EU mutual funds market and has now
expanded the range of available funds for distribution in Europe; (iv) the
continuing growth of the mutual fund market; and (v) the Xetra(R) electronic
trading system of the Frankfurt Stock Exchange has expanded the number of
tradeable instruments and execution possibilities for electronic security
trading. The integration of

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other major European Stock Exchanges into this system and NASDAQ's interest in
participating, creates the possibility of a Pan-European stock market for the
future. Additionally, regulatory reforms in Germany and other EU countries have
enabled smaller financial services companies to compete for investment dollars
traditionally flowing to savings account deposits at commercial banks.

        The services offered by the Company are typically provided in Germany
today through banks and savings institutions and cater primarily to large
institutional individual investors rather than to individuals. Management of the
Company believes it has identified a niche market in Germany and the EU for
providing discount securities brokerage services to individual and small
institutional investors, including the marketing of U.S. mutual fund products.
Brokerage services offered by German banks are targeted for large institutional
customers, are expensive and do not address the needs of individual investors.
German banks typically encourage private clients to maintain savings accounts,
and bank personnel typically lack the incentives and expertise to provide
individual customers with U.S. style investment services. The large U.S.
investment firms operating in Germany typically prefer to market only to large
institutional clients and require minimum account balances in the $1,000,000
range. On the investment banking side, there were approximately 31 public equity
securities offerings in Germany during 1997, and 71 have been completed to date
in 1998. The Company believes there is a strong and growing demand for
investment banking and financial consulting services for emerging growth
companies in Germany, from the early financing through the initial public
offering stage.

        Management believes that an international financial services group with
offices in both the United States and Europe can attract a diverse clientele,
including institutional investors, banks and individuals. The Company is
particularly focusing on Germany. The interest of German investors in foreign
securities and equity investments is growing rapidly, as are the German capital
markets. Germany's sole clearing organization, Deutsche Boerse Clearing has
reported a rise in deposits of foreign securities from 53.4 billion German Marks
to 100.8 billion German Marks, an increase of 47.4 billion German Marks (+88.8%)
during the years 1996 to 1997. During the first six months of 1998, the deposits
of foreign securities totaled 136.5 billion German Marks. Management believes
that these favorable conditions have created a strong demand for the
implementation of advanced electronic trading systems with direct access to the
worldwide equity markets.

INDUSTRY DEVELOPMENTS IN GERMANY

        Before January 1998, the German market for financial products was
traditionally dominated by a group of large banks and insurance companies
marketing savings oriented investment vehicles to their depositors. Companies
interested in expanding their asset base through capital investment or
acquisitions have been generally required to fund the undertaking through cash
flow generated from operations or bank loans.

        In an effort to harmonize financial services regulations within the EU,
German policies were changed with the revision of existing banking laws (6.
Novelle des KwGs) which became effective on January 1, 1998. These changes
allowed for the unbundling of investment services in Germany and have brought
small and medium sized distributors of financial products under the regulation
and supervision of the "Bundesaufsichtsamt fur das Kreditwesen (BaKred)" the
authority regulating the German banking industry.

        At the same time the demand for equity financing has steadily grown
after the initial public offering of Deutsche Telekom in 1996. The "Neuer Markt"
was created in March 1997 on the Frankfurt Stock Exchange to provide a market
for technologically innovative companies. The market growth potential in Germany
is significant. Prior to opening the "Neuer Markt", only 10 to 20 companies
annually registered on the established exchanges in Germany. Since March 1997
the number of initial public offerings has increased by approximately 230%. The
Company believes that the market will continue to expand as more entrepreneurs
realize the competitive advantage associated with a higher capital base.

        These developments brought about the advent of regulated brokerage and
financial services firms, which provide financial advisory services and trade
execution services at a lower price than the banking institutions. Although
investors have been able to use discount brokerage services provided by
subsidiaries of major banks, the

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Company believes that many investors will prefer to use the Internet discount
brokerage services to be provided by the Company, which will offer faster
execution and are expected to be more efficient and competitively priced as
compared to traditional bank brokerage services.

BUSINESS STRATEGY

        The Company seeks to exploit the opportunities created primarily as a
result of regulatory reforms and changing conditions in the financial services
industry and to expand its market share by pursuing the following key
strategies:

        o      Market Distinct Brands. ADAG will market distinct brands with a
               range of services and commission rates designed to appeal to
               specific groups of investors within the financial services
               market. The Company believes that, by tailoring products and
               services for customers within specific demographic categories,
               ADAG can attract a broader range of investors seeking brokerage
               services at discount prices. AMDIV.NET(TM)will offer discount
               on-line brokerage services for investors seeking simple and
               efficient execution services at the lowest possible transaction
               cost, who are comfortable with the Internet and prefer to trade
               exclusively through electronic communications in exchange for
               low-priced trade executions. AMERICAN DIVERSIFIED(R)will provide
               ADAG's high-net-worth customers with a full range of brokerage
               services, private asset management and mutual fund products, and
               underwriting services. AMDIV.PRONET(TM)is a technologically
               advanced financial system that will provide ADAG's correspondent
               European brokerage firms and financial institutions with special
               terminals to access the major European and U.S. stock markets
               through the Company's integrated computer network. Through this
               market segmentation approach, management believes that the
               Company and its subsidiaries will be able to deliver products and
               services tailored to meet the specific needs of its customers in
               the most cost efficient manner. See "--Development of Products
               and Services."

        o      Create Technologically Innovative Solutions to Investor Needs.
               The Company plans to be the technology leader in the retail
               brokerage and clearing and execution businesses. Since April
               1997, the Company has worked on the development of its integrated
               electronic systems, which combine the Company's newly developed
               software with existing electronic services in the U.S. and
               Europe. AMDIV.NET(TM)and AMDIV.PRONET(TM)each comprise a
               single-source trading system for U.S. and European stocks, which
               offer immediate execution services. The "Dial-In" feature of
               AMDIV.PRONET(TM)provides institutional correspondents with a
               secure link to Europe's and the U.S.'s major stock markets using
               special terminals, which enable direct access through the
               Company's integrated computer network. The Company is actively
               pursuing additional technologies to service the rapidly evolving
               financial services industry. See "--Development of Products and
               Services." The Company believes it has adequate protection for
               the proprietary technology it has developed under German law, but
               is developing confidentiality and non- competition agreements and
               other internal security measures to protect its developed
               technology in the U.S. and the other EU countries.

        o      Provide Transaction Value to Investors. The Company strives to
               offer investors transaction value by providing specified services
               at prices that are among the lowest in the discount brokerage
               industry. AMDIV.NET(TM)will be offered generally at a flat
               commission rate on Internet-only trades for equity orders having
               a market value of up to EURO 11,000. AMERICAN DIVERSIFIED(R) will
               provide investors with access to trained registered
               representatives and other customized services for a fee equal to
               .44% of the order volume, for each equity order. Through more
               efficient operations, synergies of strategic alliances, an
               increasing number of transactions and the use of advanced
               technology, the Company strives to minimize costs, which allows
               it to offer low cost investment services. See "--Development of
               Products and Services" and "--Competition".



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        o      Expand Mutual Fund Products and Distribution. ADAM has been
               expanding its sponsorship and distribution of mutual funds by
               developing one new portfolio in the U.S., the International Value
               Fund. In addition, ADAM is in the process of registering an
               umbrella fund in Dublin, Ireland, under the UCITS directive for
               European distribution, which will offer three sub-funds: the
               Global Value, International Value and SmallCap Value portfolios.
               The Ireland-based funds will be distributed in Germany and other
               EU countries through ADAG's distribution network and other
               channels in Europe.

        o      Expand the Underwriting of Initial Public Offerings. ADAG will
               engage in underwriting initial public offerings for small and
               medium size EU companies which plan to be listed on NASDAQ and
               the Frankfurt Stock Exchange in Frankfurt, Germany. ADAG has
               commenced due diligence review of a few companies in connection
               with their proposed initial public offerings. ADAG intends to
               expand its underwriting business to take advantage of the
               increased demand for equity financing among small and medium size
               companies in the EU. There were approximately 31 public equity
               securities offerings in Germany during 1997, and 71 have been
               completed to date in 1998. The Company believes there is a strong
               and growing demand for investment banking and financial
               consulting services for emerging growth companies in Germany,
               from the early financing through the initial public offering
               stage.

DEVELOPMENT OF PRODUCTS AND SERVICES

        The Company has developed a broad range of products and services
designed to address specific consumer needs and the Company is actively pursuing
opportunities to improve and increase the products and services offered to
customers. The development of products and services by the Company and its
subsidiaries will continue to require substantial capital expenditures. The
Company expenses all research and development costs as they are incurred. The
Company regularly monitors the costs and projected benefits of its product and
service developments to determine their continued viability. The Company does
not believe that the failure of any of its products and services would have a
material adverse effect on the Company's future business, financial condition or
operating results.

        MUTUAL FUND PRODUCTS

        ADAM's mutual fund families in the U.S. will consist of the Funds,
including:

        o      American Diversified Global Value Fund

        o      American Diversified International Value Fund *

        ADAM's mutual fund families established in Ireland for distribution in
the EU will consist of value-oriented mutual funds, including:

        o      American Diversified Global Value Fund *

        o      American Diversified International Value Fund *

        o      American Diversified SmallCap Value Fund *

--------------------
*  In registration.

        The Funds will be managed by ADAM, based on Benjamin Graham's "value
investment" principles. Mr. Graham authored "Security Analysis" and "The
Intelligent Investor," which are recognized texts on the fundamental value of
common stocks. Ladas & Hulings, a leader in value investing with over 25 years
of experience, will serve as investment sub-advisor to the Funds and will
provide their day-to-day management. Portfolios managed by Ladas & Hulings have
been rated by Nelson's Information as among the "Top 20" Money Managers -- 10
year returns.

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        A principal component of the Company's planned expansion involves
marketing the Funds to institutional investors. The Company plans to develop a
special class of institutional series or shares for distribution to
institutional investors. As the Funds grows in size, the revenues and
profitability of ADAM are expected to increase because ADAM's revenues and
income will be based on the net assets of the Funds and with other mutual funds
that it may manage in the future.

        DISCOUNT SECURITIES BROKERAGE SERVICES

        ADAG will provide Internet-discount brokerage services under the brand
name AMDIV.NET(TM) and brokerage services for its high-net-worth clients under
the brand name AMERICAN DIVERSIFIED(R). See "-- Servicemark Application." ADAG
has also developed AMDIV.PRONET(TM), a brand of services for European brokerage
firms, banking institutions and other institutional correspondents to access the
major U.S. and European stock markets on special terminals through the Company's
integrated computer network. Through this market segmentation approach, ADAG
will offer a variable range of services and competitive rate structures designed
to attract specific groups of individual and institutional investors in Europe.

        The development of the Company's products and services will continue to
require substantial capital expenditures. See "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operation."

        The following chart summarizes by brand these planned services and the
average commission per trade which ADAG expects to charge its customers:


<TABLE>
<CAPTION>
                                          AMERICAN DIVERSIFIED(R)      AMDIV.NET(TM)        AMDIV.PRONET(TM)
                                          -----------------------                           ----------------
<S>                                          <C>                      <C>                    <C>
WAYS TO TRADE
  Internet                                         --                   EURO 12.00*           EURO 10.00*
  Personal terminal                            EURO 20.00                   --                    --
  Professional Terminal                            --                       --                EURO 14.00*
  Registered  representative                  EURO 22.00**                  --                    --
PRODUCTS
  U.S.-Stocks                                       x                        x                     x
  European-Stocks                                   x                        x                     x
  Foreign-Stocks                                    x                        x                     x
  Mutual funds                                      x                        x                     x
  Options                                           x                        x                     x
  Bonds                                             x                        x                     x
  Foreign securities                                x                        x                     x
SERVICES OFFERED
  Live quotes                                     x***                      --                     x
  10 Minute delayed quotes                         --                        x                    --
  Research tools                                  x***                       x                     x
  Credit card                                       x                       --                    --
  Debit card                                       --                        x                    --
  Check writing                                     x                       --                    --
  News search                                     x***                       x                     x
  Program investing                                 x                        x                     x
  Day trading                                     x***                       x                     x
</TABLE>


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*   For equity orders having a market value of up to EURO 11,000.
**  0.20% of the market value or a minimum charge of EURO 22.00.
*** With personal terminal only.


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                              [LOGO AMDIV.NET(TM)]

        AMDIV.NET(TM) will be a discount broker that offers technologically
advanced delivery systems for sophisticated on-line investors via the Internet.
AMDIV.NET(TM) customers in Germany and other EU countries will be able to place
trades, obtain quotes and review pertinent account information electronically
using the Internet. AMDIV.NET's(TM) web site will allow customers to enter
orders for stocks, mutual funds and options, to view their balances, positions,
order status, quotes and transaction history and to use research provided by
various data service providers. The research and market data available for
AMDIV.NET(TM) customers will include historical and intra-day charts, company
reports, earnings estimates, stock screening and general market information.

        AMDIV.NET(TM) will offer an advanced program trading feature, which will
allow customers to create conditions under which orders will be placed and then
have their personal computer monitor the market to automatically place the
order. Customers will be able to design baskets of stocks to track and trade.
Investors also will be able to place spread, straddle and buy/write orders using
the AMDIV.NET(TM) features no other competing online-brokerage in Europe offers.
In addition, the system will provide investors access to multiple news and
research services. Customers will be able to access company highlights or
detailed company reports and earnings estimates from a variety of data banks. A
prototype system offering the above-described features is in the final stage of
development and is undergoing testing at this time.

        In addition, AMDIV.NET(TM) will offer a wide range of third-party
research services to assist its customers in selecting the best trading
strategy. Stock research will include professional reports on over 20,000 listed
companies on the major U.S. and European exchanges, qualitative and quantitative
analyses on all major industry sectors and ranking tables, including performance
ratios for large, middle and small cap stocks. AMDIV.NET's(TM) stock alerts will
notify clients of earnings announcements, dividend reports, price changes of
more than three percent and other significant events affecting investments.

        AMDIV.NET(TM) will cater to investors who are comfortable with the
Internet and prefer to trade exclusively through electronic communications in
exchange for low priced trade executions. Customer inquiries will be accepted
via e-mail and representatives are required to respond within two hours,
although responses usually will be sent by return e-mail promptly. Although
AMDIV.NET(TM) will maintain toll-free telephone numbers for customer inquiries,
these inquiries will be limited to technical support and customer inquires
during specified time intervals. AMDIV.NET(TM) expects to charge a commission of
EURO 12.00 for equity orders having a market value of up to EURO 11,000.
Management believes that AMDIV.NET(TM) will offer one of the lowest commission
rates in the industry in Germany, especially on U.S.-securities.

                             [LOGO AMDIV.PRONET(TM)]

        AMDIV.PRONET(TM) will be a wholesale provider, in Germany and other EU
countries, of discount brokerage and other financial services to independent
broker-dealers, registered investment advisors and financial planners, including
smaller banks, who serve their own retail customers. AMDIV.PRONET(TM) will act
as the discount brokerage arm of correspondent institutional clients by
providing their retail customers with access to equity and bond markets. ADAG
will maintain a staff of registered representatives to service the retail
customers of correspondent institutional clients using AMDIV.PRONET(TM).

SYSTEMS

        The Company will use a variety of systems to support investors and the
Company's correspondents. The Company currently is developing a sophisticated
proprietary computer network that will link the various trading applications to
the proprietary core system, the AMDIV Operating System ("AMDOS"). All of the
customer trading applications will interface and feed data through standardized
messaging and formatting into AMDOS. AMDOS will deliver quotes and information
to the investor and route trades to the market. AMDOS will then update account
balances and positions via multiple lines of communication. AMDOS also will
support other operations such as clearing functions, account administration and
record keeping.

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        The Company's technology relies on a scalable computer system connected
to the Internet backbone. To enhance the reliability of the system and integrity
of data, the Company maintains multiple backup systems. A backup power supply
supports the operations facility. Tape backups are made nightly to prevent a
loss of data.

        The Company's technology is supported by an internal staff of
programmers, developers and operators 24 hours a day, seven days a week. The
programming staff is supplemented by a team of quality control analysts, Web
page developers, technical writers and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new services.
Software is designed to be versatile and easily adaptable to new and emerging
technologies.

        The secure transmission of confidential information over public networks
is a critical element of the Company's operations. The Company relies on
encryption and authentication technology, which is in part provided by outside
sources, including public key cryptography technology provided by Veresign to
provide the security and authentication necessary to effect secure transmission
of confidential information over the Internet.

        A major advantage is the Company's direct fiberoptic connections to the
Internet through a main backbone of UUNETt. ADAG is connected to the fiberoptic
network of COLT Telecom, one of Europe's most progressive providers of
commercial fiberoptic networks. COLT Telecom is servicing the majority of the
German banking industry and stock exchanges. ADAG has signed agreements to
receive unlimited network capacity for its data and telecommunication needs on a
scalable basis at competitive prices. The Company plans to connect the premises
in Berlin and Los Angeles by a direct line by the end of 1998.

        All proprietary technology, systems and software of the Company and its
subsidiary will be transferred to American Diversified Technologies, Inc., which
is being established as a wholly-owned subsidiary of the Company in the U.S. The
Company believes that it has adequate protection for its proprietary technology,
systems and software under German law, but is developing confidentiality and
non-competition agreements, and other internal security measures to further
protect its proprietary interests.

MARKETING

        The Company and its subsidiaries seek to increase their market share
through direct-response advertising, advertising on their own and other Web
sites, a public relations program and co-marketing. ADAG has recently completed
an aggressive marketing campaign in Germany designed to bring brand name
recognition to ADAG's product lines. The Company intends to significantly
increase its spending on print, television, radio, direct mail, telemarketing
and online advertising during the next fiscal year. See "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations." From
time to time, the Company may choose to increase spending on advertising to
target specific groups of investors or to decrease advertising expenditures in
response to market conditions.

        ADAM plans to expand the advertising of its mutual fund products in the
U.S., and to build awareness of the Funds' value investment approach.

        At the Company's Web sites, prospective customers both in the U.S. and
Europe will be able to obtain detailed information on the services offered by
the Company and its subsidiaries, use an interactive demonstration system,
request additional information and complete an account application online.
Visitors to the Company's German Web site can obtain detailed information about
the U.S.-equity markets, NASDAQ and all major European stock exchanges. The
Company's programmers have developed a search engine which provides financial
information from over 800 sources. Visitors to ADAM's U.S.-based Web site will
be able to obtain performance information on the funds, request literature and
prospectuses online, download reports and get basic information about ADAM's
value investment approach.



                                        8

<PAGE>   10

CUSTOMER SERVICE

        The Company and its subsidiaries strive to optimize the level of
customer service provided to their clients by (i) expanding their use of
technology to handle most typical inquiries generated in the course of
customers' securities trading and related activities, (ii) ensuring adequate
staffing with properly trained and motivated personnel in their customer service
departments, enabling prompt response to customer inquiries and (iii) tailoring
customer service to the particular expectations of the clients of each of their
respective services.

        In order to optimize the level of service provided to European
customers, ADAG has installed advanced call handling capabilities and provides
24 hours, 365-day live customer service through an 800-number. The new phone-
systems provide automated answering, departmental call forwarding, information
on expected wait times, summary market data while on hold and integrated
voice-mail and response capabilities. The new telephone systems also allow
linkage between the caller identification units and the customer database to
provide customer service representatives with immediate access to customer's
account data. It is expected that these telephone systems will increase call-
handling efficiency and enhance the customers' experience when calling for
service, particularly during periods of heavy market activity.

        The Company and its subsidiaries have also developed software and Web
sites which provide basic information on how to use the Company's services. For
those inquiries that cannot be answered through one of the Company's automated
systems, customers are encouraged to use e-mail for matters that are not time
sensitive. The Company's operating standards require a response within two hours
of receipt of the e-mail for such matters; however, the Company strives to
respond within 30 minutes of the original message. The Company also maintains
electronic bulletin boards where customers and potential customers can ask
questions and exchange information about the Company's services.

        The Company plans to monitor the level of overall customer satisfaction
through use of customer response cards sent with trade confirmations or through
periodic surveys. Written comments, e-mails and electronic postings by customers
will be regularly reviewed by the Company's senior officers. The Company has
established a policy to respond to all customer questions or complaints,
regardless of their mode of transmission.

EMPLOYEES

        As of November 15, 1998, the Company employed a total of 24 full-time
associates, including management, and 12 part-time associates. The Company
believes that its future success will depend on its continued ability to attract
and retain highly skilled and qualified employees. The Company believes that its
relations with its employees are good.

        The Company's employment assessment process is a critical factor in
identifying candidates whose abilities and potential create the opportunity to
be a successful associate with the Company. The assessment process includes an
in-person interview, a work-related behavioral trait profile, a cognitive
reasoning assessment test, a telephone structured interview to measure
communication skills, and a data entry "keyboarding" or computer skills test
when appropriate. The Company believes based on its experience to date that its
employment assessment process has a positive impact on the Company's success.

        The Company has approved a policy of paying cash bonuses to its
management and non-management employees out of a pool based on a percentage of
annual income. Bonuses are based upon the success of the Company and the
individual job performance of the employee.

        The Company believes that the continuous training of its management,
employees and part-time associates is a key factor for the Company's ability for
rapid growth. The Company has established a training facility in Berlin and
implemented a training schedule.



                                        9

<PAGE>   11

SERVICEMARK APPLICATION

        The Company has registered "AMERICAN DIVERSIFIED" as a servicemark in
the U.S. and in Germany, and has applied for but not been issued any registered
servicemark for its or "AmDiv(TM)" service-name in Germany. ADAG is planning to
register its trademarks in Germany and other European countries. No assurance
can be given that the Company will be successful in obtaining these marks, or
that the servicemarks, if obtained, will afford the Company any competitive
advantages. ADAG owns the "AMERICAN DIVERSIFIED" trademark for Germany, which
was registered on February 26, 1998 with the German Patent and Trademark Office
in Munich, registration No. 39745648.

LACK OF PROFITABLITY, POTENTIAL LOSSES

        The Company is a development stage enterprise which was formed on
February 5, 1997 for the purpose of engaging in the financial services business
through its subsidiaries in Europe and the United States. Except for the merged
operations of ADAM, the Company has a limited operating history and is in the
process of implementing an aggressive business expansion strategy involving the
development and distribution of sophisticated financial products and services in
Europe and the United States. No assurance can be given that the Company will be
able to successfully develop and market its proposed products and services in
any of its targeted market sectors.

        From its inception through August 31, 1998, the Company has devoted the
bulk of its resources to raising capital and implementing the first phase of its
business plan and has experienced aggregate losses of $4,658,516. The Company
and its subsidiaries are expected to have further and substantial losses during
its start-up phase primarily due to the high costs associated with the formation
of a new financial services company and the marketing and promotion of mutual
funds and other financial services in its market area. Results of operations in
the future will be influenced by numerous factors including, among others,
expansion, the ability of the Company to manage its growth and maintain the
quality of its personnel, and the ability of the Company to implement its
strategic plan. There is no assurance that the Company will ever operate
profitably. Any future success that the Company might enjoy and its results of
operations in the future will also depend upon many factors which may be beyond
the control of the Company or which cannot be predicted at this time. These
factors may include changes in the securities and banking industries,
technological advances or product obsolescence, increased levels of competition
including the entry of additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in operating
costs including costs of personnel and equipment, reduced margins caused by
competitive pressures and other factors. These conditions may have a materially
adverse effect upon the Company or may force the Company to reduce or curtail
operations.

DELAY IN COMMENCING OPERATIONS

        ADAG has applied for a full banking license in Germany to engage in its
planned securities brokerage business. The Company cannot provide any assurance
or guarantee that the regulatory approvals necessary for ADAG to commence its
planned securities brokerage operations will be given in a timely manner or at
all. Any delay in commencing operations will increase pre-opening expenses and
postpone realization of potential revenues by ADAG and the Company. Absent the
receipt of revenues and commencement of profitable operations, the Company's
accumulated deficit will continue to increase (and the book value per share will
continue to decrease) as operating expenses such as salaries and other
administrative expenses continue to be incurred.

MANAGEMENT OF GROWTH

        The Company plans to expand its business with the formation of
subsidiaries in Austria, Spain, Ireland and Switzerland. To a significant
extent, the Company's future success will be dependent upon its ability to
engage in a successful expansion program and will be dependent, in part, upon
its ability to secure regulatory approvals in its chosen markets, attract
customers for its financial products, maintain adequate financial controls and
reporting systems, manage its growth, and obtain additional capital upon
favorable terms. There can be no assurance that the Company will be able to
successfully implement its planned expansion, finance its growth or manage the
resulting larger operation.

                                       10

<PAGE>   12

COMPETITION

        All aspects of the Company's investment management business are
intensely competitive. The Company competes with U.S. brokerage firms which have
affiliates in Germany and other EU countries and with German banking
institutions which are authorized, under German law, to offer both traditional
brokerage functions and investment advisory services. The Company encounters
significant competition in connection with the operation of its business in the
U.S. for its mutual fund products. The Company's competitors in the U.S. include
numerous enterprises with extensive experience in the financial services sector.
Therefore, the Company intends to use the bulk of its marketing resources to
promote its investment products in Europe, where it expects initially to
encounter only limited competition for its discount brokerage services and the
distribution of mutual funds to its targeted potential clientele in Germany, its
primary marketing area. The services offered by the Company are typically
provided in Germany today through banks and savings institutions, which cater
primarily to large institutional individual investors rather than to
individuals. Management of the Company believes it has identified a niche market
in Germany and the EU for providing discount securities brokerage services to
individual and small institutional investors, including the marketing of U.S.
mutual fund products. Brokerage services offered by German banks are targeted
for large institutional customers, are expensive and do not address the needs of
individual investors. German banks typically encourage private clients to
maintain savings accounts, and bank personnel typically lack the incentives and
expertise to provide individual customers with U.S. style investment services.
The large U.S. investment firms operating in Germany typically prefer to market
only to large institutional clients and require minimum account balances in the
$1,000,000 range. On the investment banking side, there were approximately 31
public equity securities offerings in Germany during 1997, and 71 have been
completed to date in 1998. The Company believes there is a strong and growing
demand for investment banking and financial consulting services for emerging
growth companies in Germany, from the early financing through the initial public
offering stage.

        There are currently approximately ten discount brokerage firms in
Germany, all of them wholly owned subsidiaries of German commercial banks. These
discount brokerage firms include Comdirect Bank, ConSors Dicount Broker, Advance
Bank, Brokerage24 and Direkt Anlage Bank. The Company also encounters
competition from the established banks, which provide full-commission brokerage
services as well as mutual fund sponsors and other organizations, some of which
provide electronic services. Although these competitors are well established,
they generally do not provide prospective customers with the desired
capabilities in international securities trading. None of these competitors
offer direct execution of U.S. securities after 5:30 P.M., when the German
exchanges stop trading and, during the trading session, fast order execution for
U.S. securities is limited to the stock of the U.S. companies listed on one of
the German exchanges.

        The Company believes, that providing investors with the ability to buy,
sell and execute trades in U.S. securities until the close of the trading
session in the U.S., 10 P.M. German time, will give the Company's Internet
brokerage a significant advantage over all its competitors. This will give
ADAG's on-line customers the ability for day trading in U.S. securities during
the entire period from 8:30 A.M. to 10 P.M. German time.

        The Company believes that the principal competitive factors affecting
the market for its discount brokerage services are price, customer service,
quality and speed of trade execution, delivery platform capabilities, ease of
use, graphical user interface, breadth of services and innovation. Firms compete
on the elements of price, technology, financial strength and customer service.
Based on management's experience, preliminary market research and the success
the Company's marketing campaign has enjoyed to date, the Company believes that
it can compete effectively with respect to each of these factors.

        In addition, factors affecting the Company's business expansion success
include: 1) the abilities, performance records and reputations of its investment
managers; and, 2) its ability to develop new investment products and implement
marketing strategies in the U.S. and Europe. The marketability of the Company's
investment products, primarily mutual funds, is also dependent, in part, on the
relative attractiveness of their investment strategies and practices under
prevailing market conditions. There are relatively few barriers to entry by new
investment management firms or distributors of U.S. mutual funds in the EU
markets. This lack of entry barriers may facilitate the introduction of new
investment products by the Company, although it may also lead to increased
competition from other securities firms.

                                       11

<PAGE>   13

        The general financial success of companies within the securities
industry over the past several years has strengthened existing and emerging
competitors. The Company believes that such success will continue to attract new
competitors to the industry, including large U.S. discount brokers such as
E*TRADE, Charles Schwab, AmeriTrade and similarly structured groups. Charles
Schwab has already commenced operations in Great Britain and is monitoring the
German and European markets closely. "E*TRADE" has signed a licensing agreement
with E*TRADE Central Europe, Inc, which is owned by two emerging German
financial services firms. Commercial banking institutions and other financial
institutions have become a competitive factor in the securities industry by
offering their customers discounted financial services. While it is not possible
to predict the type and extent of competitive services that the banking
institutions and other newly emerging financial institutions ultimately may
offer, the Company may be adversely affected by such competition.

        The Company expects competition to continue and intensify in the future.
There can be no assurance that the Company will be able to compete effectively
with current or future competitors or that the competitive pressures faced by
the Company will not have a material adverse effect on the Company's business,
financial condition and operating results.

GOVERNMENT REGULATION

        The international investment management and broker-dealer operations are
subject to extensive regulation, supervision and licensing under various U.S.
federal and state laws and regulations and under the securities and corporate
laws and regulations of the European countries under which it will market its
financial services.

        ADAM's operations in the U.S. are subject to extensive regulation under
U.S. federal and state securities laws. The Securities and Exchange Commission
(the "Commission") is the federal agency responsible for administering the
federal securities laws in the U.S. In general, broker-dealers are required to
register with the Commission under the Exchange Act of 1934 (the "Exchange
Act"). Under the Exchange Act, every registered broker-dealer that does business
with the public is required to be a member of and is subject to the rules of the
NASD. The NASD has established Rules of Fair Practice, which are subject to the
Commission's approval, for all securities transactions among broker-dealers and
private investors, trading rules for the over-the-counter markets, and
operational rules for its member firms. The NASD conducts examinations of member
firms, investigates possible violations of the federal securities laws and its
own rules, and conducts disciplinary proceedings involving member firms and
associated individuals. The NASD administers qualification testing for all
securities principals and registered representatives for its own account and on
behalf of the state securities authorities.

        In addition, broker-dealers are subject to extension regulations under
state laws. A recent amendment to the federal securities laws prohibits the
states from imposing substantive requirements on broker-dealers, which exceed
those imposed under federal law. The recent amendment, however, does not
preclude the states from imposing registration requirements on broker-dealers
that operate within their jurisdiction or from sanctioning such broker-dealers
for engaging in misconduct.

        ADGE is being established to assume the broker-dealer and underwriting
functions of ADAM. After the transfer is completed, ADGE will be subject to
regulation as a broker-dealer and ADAM will continue as a registered investment
advisor under the Investment Company Act of 1940, as amended. ADGE will also
succeed to ADAM's broker-dealer registration in the State of California.

        ADAG, the Company's German subsidiary, is subject to regulation under
German law and in the various EU jurisdictions it may operate under in the
future. Germany recently revised its banking laws and for the first time,
financial service providers and broker-dealers are subject to rules and
regulation and supervision of the various regulatory agencies, mainly the
Bundesaufsichtsamt fuer das Kreditwesen ("BaKred"), the body regulating the
banking industries, as well as the Bundesaufsichtsamt fuer Wertpapierhandel
("BAWH"), the body regulating the securities transactions and stock exchanges
and the Bundesbank, Germany's Central Bank. The revision of the banking law was
adopted in October 1997 and became effective on January 1, 1998. ADAG currently
may engage in the distribution of financial products. Due to the uncertainties
regarding interpretation of the new laws, ADAG

                                       12

<PAGE>   14

has filed an application with the "BaKred" to obtain a full banking license.
Upon approval of its full banking license, ADAG will commence operations as a
fully licensed bank and brokerage firm. The Company cannot provide any assurance
or guarantee that the regulatory approvals necessary for ADAG to commence its
planned securities brokerage operations will be given in a timely manner or at
all. See "-- Delay in Commencing Operations."

        All marketing activities by ADAG regulated by the BaKred, and all such
marketing materials are required to be reviewed by the Company's compliance
officer prior to release. If ADAG were to engage in soliciting orders or making
investment recommendations, it would become subject to additional rules and
regulations governing, among other things, the suitability of recommendations to
customers and sales practices.

        ADAG will be engaged in clearing and settling transactions and
maintaining customer accounts. In its capacity as a depository bank, ADAG has to
be a member of the "Einlagensicherungsfond", the depository trust fund of the
German Banking Association. There can be no assurance that ADAG will be accepted
as a member in the future. As a depository bank, ADAG will be further required
to comply with the rules of banking institutions, including rules relating to
possession and control of customer funds and securities, margin lending and
execution and settlement of transactions.

NET CAPITAL REQUIREMENTS; LIQUIDITY

        As a registered broker-dealer and member of the NASD, ADAM, the
Company's U.S. subsidiary, is subject to the Commission's Rule 15c3-1 (the "Net
Capital Rule"). The Net Capital Rule, which specifies minimum net capital
requirements for registered brokers-dealers, is designed to measure the general
financial integrity and liquidity of a broker-dealer and requires that at least
a minimum part of its assets be kept in relatively liquid form. As the planned
successor to ADAM's broker-dealer functions, ADGE will be subject to the same
rules and requirements as a broker-dealer. ADAM is in compliance with applicable
net capital requirements. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operation --ADAM's Historical Operations."

        As a depository bank, ADAG will be subject to the net capital
requirements of the "Kreditwesengesetz." The law presently requires a minimum
net capital of 10 million German Marks (approximately $5.6 million), for the
operations planned by ADAG. The BaKred can increase the net capital requirement
at any time.

        In general, net capital is defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings and certain discretionary
liabilities, and less certain mandatory deductions that result from excluding
assets that are not readily convertible into cash and from valuing
conservatively certain other assets. Among these deductions are adjustments
(called "haircuts"), which reflect the possibility of a decline in the market
value of an asset prior to disposition.

        Failure to maintain the required net capital by either subsidiary may
subject a firm to suspension or revocation of registration by the Commission or
BaKred, and suspension or expulsion by the NASD and other regulatory bodies and
ultimately could require the firm's liquidation. The Net Capital Rule prohibits
payments of dividends, redemption of stock, the prepayment of subordinated
indebtedness and the making of any unsecured advance or loan to a stockholder,
employee or affiliate, if such payment would reduce the firm's net capital below
a certain level. The Net Capital Rule also provides that the Commission may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to stockholders, employees or affiliates ("capital
withdrawal") if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and it is
determined that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. In addition, the Net Capital Rule provides that
the total outstanding principal amount of a broker-dealer's indebtedness under
certain subordination agreements, the proceeds of which are included in its net
capital, may not exceed 70% of the sum of the outstanding principal amount of
all subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.



                                       13

<PAGE>   15

        A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital, such as the financing of
customer account balances, and also could restrict the Company's ability to
withdraw capital from its brokerage subsidiaries, which in turn could limit the
Company's ability to pay dividends, repay debt and repurchase shares of its
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect the ability of the Company to expand
or even maintain its present levels of business, which could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company's broker-dealer subsidiary is expected to maintain a
minimum net capital well in excess of the present minimum net capital
requirement.

        ADAM is a member of Securities Investor Protection Corporation ("SIPC"),
which provides, in the event of the liquidation of a broker-dealer, protection
for customers' accounts held by each of them of up to $500,000 for each customer
account, subject to a limitation of $100,000 for claims for cash balances.
ADAM's SIPC membership will be transferred to ADGE.

ITEM 2  DESCRIPTION OF PROPERTIES

        The Company and its subsidiaries currently have three business offices
under lease. The Company has a one-year lease expiring in March 1999, from CB
Commercial, Inc., for office space located at 12100 Wilshire Boulevard, Suite
680, Los Angeles, California 90025, at $2,370 per month, which is the office
space formerly occupied by JBRI. The Company recently sub-leased new office
space from Froley Revy Investment Company, Inc., for a term of three years at
$8,561 per month, and has moved its principal business address to the newly
sub-leased premises located at 10900 Wilshire Boulevard, 9th floor, Los Angeles,
California 90024. ADAG has entered into a five-year lease expiring January 2003
for office space in Berlin from 58 Grundstucksverwaltungsgesellschaft -- Bull
and Liedtke, Hamburg, at $3,700 per month. All three premises are in good
condition and are adequately insured. It is anticipated that the Company will
enter into new office leases as additional subsidiaries are formed and the
business activities of the Company and its subsidiaries are expanded into
additional EU countries.

ITEM 3  LEGAL PROCEEDINGS

        The Company is not a party to, nor is the Company's property the subject
of any pending legal proceeding.

ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        On December 20, 1997, holders of 10,000,000 shares of the Company's
Common Stock, representing 100% of the total outstanding shares of the Company,
executed a written consent authorizing the Amendment to the Articles of
Incorporation of the Company, which is incorporated by reference to Exhibit
3.1.3 below. At the same time, the shareholders also elected the following
individuals to the Company's Board of Directors: Peter Hartmann, Klaus Conradi,
Thomas C. Corcovelos, Roland Kuettner and James Buchanan Rea, Jr. Effective May
26, 1998, a majority of the shareholders representing 95,000,000 (pre-reverse
splits) shares or 92.2% of the total shares outstanding executed written
consents authorizing the Amendment to the Articles of Incorporation of the
Company, which is incorporated by reference to Exhibit 3.1.5 below. Effective
August 20, 1998, a majority of the Company's shareholders, representing more
than 7,185,250 shares or approximately 70.0% of the total outstanding shares,
executed written consents authorizing the Amendment to the Articles of
Incorporation of the Company, which is filed on Exhibit 3.1.6 below.



                                       14

<PAGE>   16

                                     PART II

ITEM 5  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

        There is no public market for the Company's Common Stock. The Company
filed on August 28,1998, a registration statement on Form SB-2 for a planned
initial public offering of 1,733,334 shares of Common Stock. In connection with
the registration, the Company has applied for and been approved for quotation on
the NASDAQ National Market under the trading symbol "AMDV." There can be no
assurance that an active public market will ever develop or be sustained for the
Common Stock, or that the planned public offering will be successful. The
initial offering price will be determined through negotiations between the
Company and its underwriters, and therefore may not reflect the market price for
the Common Stock. Even if the Company completes its initial public offering and
effectuates a listing on NASDAQ, the future market price of the Common Stock
could be subject to significant fluctuations. Additionally, because a
significant amount of the Company's securities are restricted securities
pursuant to Rule 144, the aggregate amount of shares held by non-affiliates that
are not restricted is very limited.

        Moreover, if for any reason, the Company's Common Stock is not eligible
for continued listing on NASDAQ or another public trading market, purchasers of
the Common Stock may have difficulty selling their securities should they desire
to do so. Under newly adopted rules of the NASD, in order to qualify for initial
quotation of securities on NASDAQ, a company, among other things, must have at
least $18.0 million in net tangible assets, 1.1 million in public float shares,
$18.0 million in market value of public float and a minimum bid price of $5.00
per share. For continued listing, a company, among other things, must have $4.0
million in net tangible assets, 750,000 in public float shares, $5.0 million in
market value of public float and a minimum bid price of $1 per share. If the
Company is unable to satisfy the requirements for quotation on NASDAQ, trading,
if any, in the Common Stock could be conducted in the over-the-counter market in
what are commonly referred to as the "pink sheets" or on the NASD OTC Electronic
Bulletin Board. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Common Stock
offered hereby. The above-described rules may materially adversely affect the
liquidity of the market of the Company's securities.

HOLDERS

        As of October 30, 1998, there were 62 shareholders of record of the
Company's Common Stock, after giving effect to the conversion of the 5,000,000
previously issued Series A Preferred Stock into 1,666,611 shares of Common Stock
in October 1998. However, the Company is aware that the beneficial shareholders
of the Company's Common Stock exceeds 350.

DIVIDEND POLICY

        Holders of shares of Common Stock are entitled to dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
The Company previously had issued 5,000,000 shares of Series A Preferred Stock,
all of which were converted into 1,666,611 shares of Common Stock in October
1998. Holders of the previously outstanding shares of Series A Preferred Stock
were entitled to an annual cumulative preferential dividend of $.09 per share,
when and as declared by the Board of Directors. On July 2, 1998, the Company
declared dividends of $.045 per share on the Series A Preferred Stock. Before
any dividends may be paid or declared with respect to the Common Stock, the
Company is required to pay dividends which had accrued and have not been paid
with respect to the Series A Preferred Stock for any period prior to the
conversion of the Series A Preferred Stock. The Company does not expect to pay
any dividends on the Common Stock in the foreseeable future. The Company intends
to use all retained earnings for working capital and to finance the anticipated
growth and expansion of its business enterprise.


                                       15

<PAGE>   17

RECENT SALES OF UNREGISTERED SECURITIES

        The following are all securities sold by Registrant within the past
three (3) years without registering the sale of the securities under the
Securities Act of 1933 (the "Securities Act"):

<TABLE>
<CAPTION>
       DATE                 TITLE                     AMOUNT
       ----                 -----                     ------
<S>                        <C>                       <C>
(1)(a) June 17, 1998        Common Stock Option       100,000
</TABLE>

    (b) There were no underwriters used in connection with this offering. The
securities were issued to the following directors, officers and employees:

<TABLE>
<CAPTION>
               NAME AND TITLE                       NUMBER OF UNDERLYING SHARES
               --------------                       ---------------------------
             <S>                                            <C>
               James Buchanan Rea, Jr.                         35,000
               Director, President and CEO

               Thomas C. Corcovelos                            20,000
               Director

               Thomas H. Fitzgerald, Jr.                       20,000
               Director

               Michael B. Jeffers                              20,000
               Corporate Secretary

               Isabella Bautista                                5,000
</TABLE>

    (c) The securities were issued in consideration of services rendered.

    (d) The issuer relied on Section 4(2) of the Securities Act.

    (e) Each of the above-identified individuals can exercise their Common Stock
Options to purchase the number of shares of Common Stock set forth opposite
their names, at a purchase price of $3.00 per share. The Common Stock Options
expire ten years from the date of issuance.

<TABLE>
<CAPTION>
       DATE                 TITLE                          AMOUNT
       ----                 -----                          ------
<S>                        <C>                            <C>
(2)(a) March 31, 1998       Series A Preferred Stock      5,000,000
                            Common Stock                    118,750
</TABLE>

    (b) There were no underwriters used in connection with this offering. The
5,000,000 shares of Series A Preferred Stock were offered and sold in Germany to
approximately 384 investors. The 118,750 shares of Common Stock were offered and
sold to Mr. James Buchanan Rea, Jr., in connection with ADAM's merger with JBRI.

    (c) The Series A Preferred Stock were offered and sold for cash
consideration of $1.00 per share. The shares of Common Stock were offered and
sold in exchange for 50,500 shares of JBRI capital stock, representing 50.5% of
the total outstanding shares of JBRI.

    (d) The issuer relied on Regulation S promulgated under the Securities Act
with respect to the sale of the Series A Preferred Stock. The issuer relied on
Section 4(2) of the Securities Act with respect to the sale of the Common Stock.

    (e) All 5,000,000 shares of Series A Preferred Stock were converted into
1,666,611 shares of Common Stock in October 1998.

                                       16

<PAGE>   18

<TABLE>
<CAPTION>
       DATE                 TITLE                     AMOUNT
       ----                 -----                     ------
<S>                        <C>                       <C>
(3)(a) February 28, 1998    Common Stock               7,600
</TABLE>

    (b) There were no underwriters used in connection with this offering. 710
shares of Common Stock were offered and sold to each of ten employees (the
"Employee Group"). 500 shares of Common Stock were offered and sold to Mr. Bernd
Gebert, an ADAG employee residing in Germany.

    (c) The shares issued to the Employee Group were sold for cash consideration
of $2.19 per share. The 500 shares sold to Mr. Gebert were issued in
consideration of services rendered.

    (d) The issuer relied on Section 4(2) of the Securities Act and Regulation S
promulgated thereunder.

    (e) Not applicable

<TABLE>
<CAPTION>
       DATE                 TITLE                     AMOUNT
       ----                 -----                     ------
<S>                        <C>                       <C>
(4)(a) February 23,1998     Common Stock             4,525,000
</TABLE>

    (b) 4,500,000 shares (the "ADC Shares") were offered and sold to American
Diversified Corporation, the shareholders of which are among the issuer's
founding shareholders. The remaining 25,000 shares were offered and sold to Mr.
Roland Kuettner, Director and former Chief Financial Officer of the issuer.

    (c) The ADC Shares were issued in exchange for a "Bearer Note" issued by
Immofin Grundstuecksuerwaltungsgersellschaff Conradi & Hilger GbRmbH. See "Item
12. Certain Relationships and Related Transactions." The 25,000 shares sold to
Mr. Kuettner were issued in consideration of services rendered.

    (d) The issuer relied on Section 4(2) of the Securities Act and Regulation S
promulgated under the Securities Act with respect to the offer and sale of the
ADC Shares. The issuer relied on Section 4(2) of the Securites Act with respect
to the offer and sale of the shares to Mr. Kuettner.

<TABLE>
<CAPTION>
       DATE                 TITLE                     AMOUNT
       ----                 -----                     ------
<S>                        <C>                       <C>
(5)(a) March 14, 1997       Common Stock              381,250
</TABLE>

    (b) There were no underwriters used in connection with this offering. In
connection with the formation of the Company, 118,750 shares were offered and
sold to each of the following founding shareholders: Peter Hartmann, Chairman of
the Board and Executive Vice-President of International Development; Joseph
Hilger; William H. Smith, and Corcovelos & Forry, LLP, outside contractor.

    (c) The securities issued to Mr. Hilger were sold for approximately $5.17
per share. The remaining securities were issued in consideration of services
rendered.

    (d) The issuer relied on Section 4(2) of the Securities Act.

    (e) Not applicable

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

GENERAL

        The Company was organized on February 5, 1997 as a provider of financial
services in the United States and Europe. As a development-stage enterprise, the
Company has devoted most of its resources since inception to raising capital and
implementing the first stages of its business plan.

                                       17

<PAGE>   19

PLAN OF OPERATION

        The Company and its subsidiaries will offer financial services
consisting mainly of full service securities brokerage, Internet discount
brokerage, asset management, sponsoring and distributing mutual funds,
underwriting and related financial services. The Company is a development stage
enterprise and, has not generated any significant revenue from operations to
date since its inception on February 5, 1997.

        The Company has financed its development activities through the sale of
equity securities to its existing stockholders in private transactions. As of
August 31, 1998, the Company had approximately $309,000 in cash to conduct
operations. At the current expense rate, the Company anticipates that such
funds, together with $11,621,000 received by the Company in October 1998 from
the sale of the "Bearer Note" contributed by certain founding Shareholders, will
be sufficient to continue operations until December 31, 1999. Thereafter, the
Company will be dependent upon the receipt of additional capital to sustain
operations. WITHOUT ADDITIONAL CAPITAL, THERE IS SUBSTANTIAL UNCERTAINTY ABOUT
THE ABILITY OF THE COMPANY TO ACHIEVE ITS BUSINESS PLAN. See "Interest of
Management and Others in Certain Transactions."

        The Company filed on August 28, 1998, a registration statement on Form
SB-2 for a planned public offering relating to the sale of 1,733,334 shares of
Common Stock. There can be no assurance as to if and when the registration
statement will become effective or the sale of the shares will be completed.

        The Company intends to commence its financial services business in
Germany and the EU in early 1999, and to continue on-going development of its
products and services, to the extent permitted by available financing. The
Company and its subsidiaries do not anticipate any significant sale of equipment
during the fiscal year ending August 31, 1999, but do expect to purchase
technology and various equipment and technology for development purposes at an
anticipated cost of $3.5 million.

        The Company has recently expanded staffing at both executive and
employee levels and expects to hire approximately eight to ten additional
compliance and administrative personnel in the U.S. and Germany with the
commencement of its on-line operations. The Company does not otherwise expect
any additional significant changes in the number of employees or compensation
payable to employees. See "Item 1. Description of Business-- Employees."

ADAM'S HISTORICAL OPERATIONS

        ADAM merged with and into James Buchanan Rea, Inc., a California
corporation ("JBRI"), effective March 31, 1998, to acquire an existing mutual
fund operation and establish a presence for the Company in the U.S. JBRI served
as the investment advisor and distributor to the Rea-Graham Balanced Fund
(renamed the American Diversified Global Value Fund; interchangeably, the
"Fund"), a series mutual fund of American Diversified Funds, Inc. (formerly
named the "Rea-Graham Funds, Inc."), a diversified open-end investment company
registered under the Investment Company Act of 1940. ADAM has succeeded JBRI as
a registered broker-dealer and registered investment advisor and the
shareholders of the Fund have approved ADAM as investment advisor to the Fund.

        Pursuant to the revised investment advisory agreement, the Fund pays
ADAM a monthly advisory fee equal on an annual basis to one percent of the first
$20,000,000 of the Fund's net assets as of the close of business on the last
business day of each calendar month during the Fund's fiscal year; reduced to
0.75% of such net assets in excess of $20,000,000 up to $100,000,000; 0.5% of
such net assets in excess of $100,000,000 up to $200,000,000; and 0.45% of all
such net assets in excess of $200,000,000.



                                       18

<PAGE>   20

THE COMPANY'S OPERATIONS FOR THE FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO
THE FISCAL YEAR ENDED AUGUST 31, 1998

        Results of Operations. The Company was incorporated on February 5, 1997.
Therefore, a comparison of the 1997 and 1998 fiscal years is not meaningful
because fiscal 1997 was a partial year and the Company commenced the bulk of its
development and marketing activities after recruiting certain key executives and
personnel in fiscal 1998. For the fiscal year ended August 31, 1998, the Company
reported operating revenue of $45,585, as compared to no operating revenue for
the fiscal year ended August 31, 1997. The increase in revenue is substantially
attributable to the merged operations of ADAM. ADAM reported revenues and
operating expenses of $39,585 and $248,400, respectively during the year ended
August 31, 1998. ADAG is still in the developmental stage and did not commence
any significant business operations during the 1998 fiscal year.

        On May 29, 1998, the Company sold a bearer note originally contributed
by certain founding Shareholders to a group of unrelated investors for DM 20.2
million. In connection with the sale, the Company realized an economic gain of
$1,517,000, which for U.S. accounting purposes was reported as an adjustment to
the issuance price of share capital. See Note 2 of the Notes to Consolidated
Financial Statements at F-9.

        The Company's total operating expenses for the fiscal year ended August
31, 1998, were $4,704,163, as compared to operating expenses of $139,527 for the
fiscal year ended August 31, 1997. The increase was substantially attributable
to an increase in advertising, promotion, employee compensation and benefits,
professional fees and other expenses relating to the Company's ongoing
development and expansion activities. The costs incurred for employee
compensation and advertising increased from $20,841 and $7,220 during the fiscal
year ended August 31, 1997, to $1,010,213 and $1,974,044 for the fiscal year
ended August 31, 1998. Expenses for professional fees increased from $66,474 for
the fiscal year ended August 31, 1997 to $633,977 for the fiscal year ended
August 31, 1998. The increase in professional fees was substantially
attributable to legal and accounting fees relating to the registration of the
Company's Common Stock under the Exchange Act and the Company's proposed initial
public offering. The Company's administrative expenses increased from $22,506
for the fiscal year ended August 31, 1997, to $727,196 for the fiscal year ended
August 31, 1998.

        Liquidity and Capital Resources. Initial promotional costs associated
with marketing efforts in Germany and costs associated with operating ADAG in
Germany increased the Company's monthly cash requirements to approximately
$160,000 during the fiscal year ended August 31, 1998 as opposed to, $20,000
during the fiscal year ended August 31, 1997. Cash inflows from the sale of
5,000,000 shares of Series A Preferred Stock sold during the period provided the
working capital.

        ADAM is subject to the Net Capital Rule (Rule 15c3-1) promulgated under
the Exchange Act, which prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital,
as those rules are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for ADAM as of August 31, 1998 were $110,461, $5,000, and
0.16 to 1, respectively.

YEAR 2000 COMPLIANCE

        The Company and its subsidiaries will rely upon a significant number of
computer software programs and operating systems in conducting their operations,
including systems and software utilized by third party service providers. The
Company has reviewed its computer systems, including information technology
("IT") and non-IT systems, and has determined that they are in compliance with
the requirements of the Year 2000. The Year 2000 problem, however, is pervasive
and complex as virtually every computer operation will be affected in some way
by the rollover of the two digit year to 00. Failure of any of the Company's
third party service providers to adequately address this issue could result in a
substantial interruption of the Company's normal plan of operation and business
affairs, and could result in significant losses from operations. Although the
Company could incur substantial costs in connection with the failure of third
party computing systems and software, such costs are not sufficiently certain to
estimate at this time. The Company also has not developed any plan to address
these contingencies. Consequently, no assurance can be given that the potential
failure of third party systems will not increase the

                                       19

<PAGE>   21

Company's operating costs or create uncertainties that may have an adverse
effect on the Company's operating results or financial condition.

ITEM 7  FINANCIAL STATEMENTS

        See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.

ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.

                                    PART III

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

MANAGEMENT

        The Company is assembling an international team of managers and
entrepreneurs with experience in the initial market area and a shared commitment
to its future growth and success.

        PETER HARTMANN, age 43, has been Chairman of the Board since February 5,
1997, and Executive Vice-President of International Development since March 31,
1998. From February 5, 1997 to March 31, 1998, Mr. Hartmann also served as the
Company's President and CEO. Mr. Hartmann has over 20 years of experience with
international business development and project management. Between 1992 and
January 1997, Mr. Hartmann served as President and Chief Executive Officer of
EMDC, an international consulting company specializing in project development
with clients in Europe, Russia, Singapore and Vietnam. Although Mr. Hartmann has
only limited experience in the financial services industry, he has extensive
experience in the development of international companies and in mergers and
acquisitions. He was engaged by the Company to structure and develop its
business. Mr. Hartmann speaks five languages. Mr. Hartmann received his MBA
degree from Glasgow College of Technology, in Scotland.

        JAMES BUCHANAN REA JR., age 43, has served as the Company's President
and Chief Executive Officer since March 1998, and has been a Director since
December 1997. Mr. Rea has over 20 years experience in the mutual fund industry,
especially in financial, accounting and operating positions. Mr. Rea is
President and Chief Executive Officer of ADAM, the Company's U.S. investment
advisory and brokerage subsidiary. He served as President of JBRI, the
predecessor of ADAM, since 1986. He is also Chairman of the Board of ADAM, and
has managed Rea-Graham Funds, Inc. (renamed American Diversified Funds, Inc.)
since 1986 as president, chief executive officer and chairman of the board. From
1980 to November 1995 he was vice president of James Buchanan Rea, Inc., the
company founded by his father, Dr. James Buchanan Rea. He is a registered
investment advisor and broker-dealer with the Commission, NASD, and State of
California. Mr. Rea received his Bachelor of Science degree from the University
of Southern California.

        JOEL EPSTEIN, age 38, has served as the Company's Executive Vice
President, Chief Financial Officer and Treasurer since September 1998. Mr.
Epstein has over 11 years of professional experience as a CPA. Since April 1995,
Mr. Epstein has been providing financial consulting services for companies,
including start-ups, in various industries. From 1987 to 1995, Mr. Epstein
served as Senior Vice President and Chief Financial Officer of the Pilgrim
Group, Inc., a mutual fund group. Prior to that time, Mr. Epstein was employed
as an auditor with Peat Marwick Main & Co. in Los Angeles for over three years.
Mr. Epstein received his Bachelor of Science degrees in Marketing and Accounting
from California State University, Northridge in 1982 and 1984, respectively.

                                       20

<PAGE>   22



        T. MICHAEL GRAF, age 61, was appointed as the Company's Executive Vice
President of Asset Management in September 1998. Mr. Graf has over 28 years of
experience in portfolio management, new business development and client
servicing. Mr. Graf has six years of experience managing an investment
management organization. From 1986 to the present, Mr. Graf has served as First
Vice President of Schroder Capital Management, Inc. ("Schroder"). Schroder
merged Wertheim Schroder Investment Services into Schroder Capital Management in
July, 1995. Mr. Graf's primary responsibilities at Schroder have included
business development for endowments, foundations and high net worth individuals
in the western half of the U.S. Mr. Graf has also been responsible for servicing
Schroder's institutional and individual clients on the west coast. Mr. Graf
received his MBA degree from Harvard Business School in 1962 and his Bachelor of
Science degree in Petroleum Engineering from Stanford University in 1960. Mr.
Graf is a chartered investment counselor ("CIC") and a chartered financial
analyst ("CFA").

        ROLAND KUETTNER, age 43, has been a Director of the Company since
December 1997. Mr. Kuettner is also Managing Director of American Diversified
Emissionsberatungs GmbH (ADAG's German subsidiary) and previously served as the
Company's Chief Financial Officer and Treasurer. Mr. Kuettner qualified as a CPA
in 1983 and served with the accounting firm of Arthur Anderson & Co in Toronto,
Seattle and Berlin from 1980 to 1993. Mr. Kuettner moved to Germany in 1991 and
has been practicing as an independent CPA since 1993. As a Manager in the
Accounting and Audit Division of Arthur Andersen & Co., Mr. Kuettner gained
extensive experience in dealing with matters affecting financial reporting and
control.

        THOMAS C. CORCOVELOS, age 47 has been a Director of the Company since
November 1997. Mr. Corcovelos is a partner in the law firm of Corcovelos & Forry
LLP in Manhattan Beach, California. Since 1985, Mr. Corcovelos has served as
Corporate Counsel and Federal Securities Compliance Officer to JBRI, which was
merged with and into ADAM, effective March 31, 1998. Mr. Corcovelos received his
Bachelor of Science degree from Loyola University of Los Angeles in 1973, and
his law degree from Boalt Hall School of Law, University of California at
Berkeley in 1976.

        THOMAS H. FITZGERALD, JR., age 65, has been a Director of the Company
since August 1998. Mr. Fitzgerald is President of T.H. Fitzgerald & Co., a Wall
Street asset management firm, and a member of the American Finance Association.
Mr. Fitzgerald is also an advisor to the management of the American Institution
of Management and the Market Technician Association. For more than 18 years Mr.
Fitzgerald published the "Money Market Directory," a world renowned reference
book regarding investors and their portfolio managers.

        ARTHUR GRAY, JR., age 75, was appointed as an Advisory Director in
October 1998. Mr. Gray is expected to be nominated for election to the Board
after the Bylaws are amended to authorize an expansion of the Board. As an
Advisory Director, Mr. Gray is invited to attend Board meetings, but is not a
member of the Board. Since 1993, Mr. Gray has been a Managing Director of SG
Cowen Investment Counselors in New York City. He currently serves as the
Chairman of the Board of Seventh Generation, Inc., the President of Lerner-Gray
Foundation and is a director of Genelabs Technology, Inc. Mr. Gray is an
Honorary Trustee of the American Museum of Natural History, a Director of the
Smithsonian Museum of Natural History and an Honorary Director of Pathways for
Youth. Mr. Gray has extensive experience in the financial services sector. From
1984 to 1993, Mr. Gray served as the President and CEO of Dreyfus Personal
Management. Mr. Gray attended the Massachusetts Institute of Technology for two
years before entering military service in World War II.

        JOHN BARRIER, age 41, was appointed as the Company's Chief Technical
Officer in October 1998. Mr. Barrier has over 24 years of experience in network
engineering, software development and project planning and implementation. Prior
to joining the Company, from 1996 to 1997, Mr. Barrier was the Vice President of
Software and Technology with NTN Communications, Inc., a Carlsbad, California
provider of Interactive programs, where he was responsible for the management of
50 Windows NT servers, all technology requirements for Hospitality and Online
networks and the development of front-end and back-end software for AOL. In 1995
he was the lead network Administrator for Premis software in Houston where he
developed the Quick Comp software for Texas Workers' Compensation, client
database. From 1992 to 1995, Mr. Barrier was the Supervisor of Systems
Engineering at King Khaled International Airport located in Riyadh, Saudi
Arabia, where he was responsible for systems design, network

                                       21

<PAGE>   23



interface and the development of Windows based hypertext help system. Mr.
Barrier received his Bachelor of Science degree in Electrical Engineering
Technology from Northern Arizona University. Mr. Barrier joined the Company on
November 1, 1998.

        Messrs. Rea, Hartmann, Corcovelos, Epstein, Graf and Fitzgerald reside
in the U.S. Mr. Kuettner resides in Berlin, Germany.

PRINCIPAL ADVISORS

        Ladas & Hulings, Inc. ("Ladas & Hulings"), a registered investment
advisor founded in 1970 and headquartered in Scottsdale, Arizona, with regional
offices in Austin, Texas, and Palm Beach, Florida, has been investment
sub-advisor to the Fund since April 1998. Ladas & Hulings is also expected to
serve as investment sub- advisor to the new small-cap and international funds to
be offered by ADAM in the future. Ladas & Hulings currently has approximately
$270.0 million in assets under management, including $180.0 million in domestic
managed accounts and $90.0 million in non-domestic managed accounts. Ladas &
Hulings' investment style is substantially similar to that of the Company's,
involving the use of fundamental investment analysis applied and adapted to the
global equity markets.

        Mr. William R. Hulings, age 62, President and Chief Investment Officer
of Ladas & Hulings, had over 25 years of experience in investment management.
Mr. Hulings has Masters of Science and MBA degrees from the University of
Southern California.

        The Company retained Mr. Joseph Breslin in August 1998, age 44, to head
the Company's expanded offices in New York. Mr. Breslin has over 16 years of
experience in investment management services and the mutual funds industry.
Since September 1994, Mr. Breslin has served as the President of a wholly owned
consulting firm specializing in all aspects of the investment management
business, including institutional and retail marketing, design and formation of
mutual funds and other investment services, advising on the sale or acquisition
of investment management firms or funds and expense/profitability analyses of
all aspects of mutual fund operations. From 1985 to July 1994, Mr. Breslin
variously served as the Vice President and General Counsel, President and
Director of the Mutual Fund Group at Spears, Benzak, Salomon & Farrell. From
1981 to 1985, Mr. Breslin was Senior Vice President -- Finance and General
Counsel of National Securities and Research Corporation. Mr. Breslin received
his law degree from Fordham University in 1980 and his Bachelor of Science
degree in Accounting from Georgetown University in 1975.

        Mr. Stanley Lanzet, age 54, was retained by the Company in July 1998 as
its investment banking advisor and consultant in the Company's New York office.
Mr. Lanzet is President and Chairman of Lanzet Global Securities Corp., an
investment research firm founded in 1993 specializing in small and medium cap
stocks and emerging market investing. Mr. Lanzet has been an investment analyst
since 1967. From 1992 to mid-1993, Mr. Lanzet was a Managing Director\Principal
of Bear Stearns and Co. and the Director of Research for Emerging Markets. Prior
to joining Bear Stearns, Mr. Lanzet was a Senior Vice-President and the
Associate Director of Research at Arnhold and S. Bleichroeder, Inc. from 1988 to
1992. Mr. Lanzet is a member of the New York Society of Security Analysts and
holds a B.B.A. degree in Economics from the City College of New York and an
M.B.A. in Investments from New York University.

ADAG'S EXECUTIVE TEAM

        ADAG's executive team includes a young group of experienced managers
with an average age of 38 and 17 years practical experience in the banking
sector. The German educational system provides graduates an opportunity to
literally "learn on the job" with a potential employer after completing high
school. The apprenticeship program, which leads to a Diploma in Commercial
Banking, consists of theoretical and practical instruction over a 2 to 3 year
period. The employer who is satisfied with a student's performance will
generally offer that individual a full-time position after completion of his
studies. ADAG's Board of Management consists of the following executives:

                                       22

<PAGE>   24



        BERNWARD J. ROHMANN, age 47, was appointed as Chief Executive Officer
(Vorstand) in November 1998. Mr. Rohmann has over 22 years international
experience in the banking industry, in leading positions with major financial
institutions during the last 7 years. Mr. Rohmann studied at the
Ruhr-University, Bochum, Germany where he graduated 1975 with a degree as
economist (Diplom Okonom). From 1991 through 1997 Mr. Rohmann was the Head of
DM-Treasury Department at JP Morgan, Frankfurt where he also served as a member
of the JP Morgan Investment Committee for pension funds. Between 1991 and 1992
he was the responsible General Manager for reorganizing the London Branch of
Hessische Landesbank. From July 1992 through December 1993 Mr. Rohmann was a
member of the Executive Management Board in charge of Capital Markets,
Securities and the UBS Invest Division of Schweizerische Bankgesellschaft in
Frankfurt. From February 1994 through December 1996 Mr. Rohmann was a member of
the Executive Management Board in charge of Securities, treasury, Controlling
and DATA Processing of National Westminster Bank plc in Frankfurt. Mr. Rohmann
received a diploma for participating in the Advanced Management Program for
Overseas Bankers of the Wharton School in Philadelphia.
He joined the Company on September 1, 1998.

        DERNST-HENNING GRAF VON HARDENBERG, age 57, was appointed as Senior
Executive in November 1998. Mr. Hardenberg has more than 30 years of experience
in banking and has held leading positions with major German banks. Mr. Graf von
Hardenberg began as an apprentice with Commerzbank AG, Hamburg in 1962, where he
was assigned to the corporate credit department. In 1968, he joined IKB Deutsche
Industriebank AG, Dusseldorf, and was promoted in 1973 to head the credit
department of the bank's Berlin branch, of which he was appointed General
Manager in 1981. Mr. Graf von Hardenberg has also served on the Executive
Management Board of Berliner Industriebank AG, Berlin. He was later appointed to
the Executive Management Board of Deutsche Handelsbank AG, Berlin, where he was
responsible for Corporate Lending and Treasury. Since 1994, Mr. Graf von
Hardenberg has been advising start-up companies on raising equity and on
organizing their respective finance and controlling functions. He is also the
Managing Partner of J. Strauss Verlag GmbH, Potsdam. He joined the Company on
November 1, 1998.

        Additional key personnel will be hired to fill the rest of the positions
in the coming weeks and months.

MANAGEMENT COMMITTEES

        The Company expects to formally establish management committees in
Germany and in the U.S. that institute policies and procedures regarding the
Company's daily operations regarding risk, expense and operations. The committee
in Germany will include Messrs. Rohmann, von Hardenberg, Kuettner, and assigned
executives from each of the Company's subsidiaries. The committee in the U.S.
will include James Buchanan Rea Jr., Joel Epstein, Michael Graf and Peter
Hartmann. The committees provide oversight and assist the subsidiaries in
achieving their goals. The committees may suggest the establishment of, or
changes to, policies and procedures of the subsidiaries to strengthen controls
in areas of risk, expense and operations. The committees, however, do not take
the place of the decision-making authority vested in each of the subsidiaries.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Section 16(a) of the Exchange Act requires the Company's directors and
certain of its officers, and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Commission. Officers, directors and
greater than 10 percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.

        Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that during the year ended
August 31, 1998, all filing requirements applicable to its officers, directors
and greater than 10 percent beneficial owners were complied with except a Form 4
report covering a purchase transaction, was filed late by Mr. Fitzgerald.



                                       23

<PAGE>   25

ITEM 10 EXECUTIVE COMPENSATION

        As a newly formed entity, the Company has no prior history of executive
compensation. Mr. Rea received aggregate compensation of $91,765 during 1997, as
President and Chief Executive Officer of JBRI.

        The following table sets forth information concerning the compensation
received for the fiscal year ended August 31, 1998 for services to be rendered
to the Company in all capacities by the Company's Chief Executive Officers and
other highly compensated executive officers. The Company had no executive
officers under employment during 1997.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------

                                ANNUAL COMPENSATION               LONG TERM COMPENSATION
                                ---------------------------------------------------------
                                                                  AWARDS          PAYOUTS
                                                                  -----------------------
NAME AND PRINCIPAL         SALARY    BONUS  OTHER ANNUAL  RESTRICTED SECURITIES    LTIP      ALL OTHER
     POSITION       YEAR    ($)       ($)   COMPENSATION    STOCK    UNDERLYING   PAYOUTS  COMPENSATION
                                                 ($)       AWARD(S)   OPTIONS/      ($)         ($)
                                                             ($)      SARS (#)
--------------------------------------------------------------------------------------------------------
<S>                <C>     <C>       <C>     <C>           <C>        <C>       <C>         <C>
James B. Rea, Jr.   1998    76,667    -0-        -0-         -0-       35,000       -0-         -0-
Director, CEO and
President(1)
--------------------------------------------------------------------------------------------------------
Peter Hartmann      1998   120,000    -0-        -0-         -0-         -0-        -0-         -0-
Chairman, Executive
Vice President -
International
Development(1)
--------------------------------------------------------------------------------------------------------
Roland Kuettner     1998    66,667    -0-        -0-         -0-         -0-        -0-         -0-
Director (1)(2)
--------------------------------------------------------------------------------------------------------
</TABLE>

(1)     See "Employment Agreements" below for a description of Mr. Rea's, and
        Mr. Hartmann's benefits entitlements. All other compensation in the form
        of perquisites and other personal benefits has been omitted because the
        aggregate amount of such perquisites and other personal benefits
        constituted the lesser of $50,000 or 10% of the total annual salary and
        bonus of the named executive for such year.

(2)     Mr. Kuettner was the Company's Chief Financial Officer and received
        compensation in that capacity during the fiscal year ended August 31,
        1998 pursuant to an employment agreement. Mr. Kuettner has since
        resigned as the Company's Chief Financial Officer and is employed as
        Managing Director of American Diversified Emissionsberatungs GmbH, a
        subsidiary of ADAG in Germany. His employment agreement with the Company
        has been terminated.

        Directors of the Company who are also employees do not receive cash
compensation for their services as directors or members of committees of the
Board of Directors, but are reimbursed for their reasonable expenses incurred in
connections with attending meetings of the Board of Directors or management
committees. Non- employee directors are expected to be paid a fee of $1,000 per
Board meeting attended, and reimbursement for expenses.

EMPLOYMENT AGREEMENTS

        Mr. Rea has a three-year employment agreement with ADAM and the Company
to perform the duties of President and Chief Executive Officer of ADAM at an
annual salary of $125,000 per year, and an annual discretionary benefits fund of
$40,000, and the Company provides personal and family medical insurance
coverage.

                                       24

<PAGE>   26

Mr. Rea will also be the designated general securities principal and financial
principal of ADAM (and of ADGE). If Mr. Rea is terminated without cause or the
employment agreement is not renewed, he would receive a severance payment equal
to one-quarter of the average annual base salary during the term of his
employment plus an amount equal to one-quarter of the highest annual bonus or
profit-sharing received during his employment. The discretionary benefits
includes life and disability insurance, business automobile expenses, and
business-associated memberships and expenses. Any portion of the benefits fund
not expended is paid as additional compensation. Mr. Rea is also entitled to
participate in all employee plans and benefits that may be established for
executive employees. Bonuses are expected to be determined in the future by the
Board based upon an evaluation of performance against the Company's strategic
business plan and operating budget. Mr. Rea's employment agreement also includes
a buyout provision, pursuant to which Mr. Rea is entitled, at any time during
the term of his employment agreement, to require the Company to repurchase all
of his shares of the Company's Common Stock at a purchase price equal to the
greater of the consideration paid for or the fair market of such shares, in the
event that Mr. Rea is no longer employed with the Company, in the event of a
change in control (as defined in the employment agreement) or sale of
substantially all of the Company's assets, or at such time as the Company is no
longer a registered broker-dealer. The buyout provision terminates in the event
that the Company has effected a registered public offering of its Common Stock
under the Securities Act in an amount of at least $5.0 million and there exists
a public trading market for the Common Stock.

        The Company has also entered into an employment agreement with Mr.
Hartmann. Mr. Hartmann's employment agreement provides for a thirty-month term
commencing July 1, 1998, pursuant to which Mr. Hartmann has agreed to perform
the duties of Chairman of the Board and Executive Vice President --
International Development at an initial annual base salary of $180,000 and an
annual discretionary benefits funds of $40,000, generally on the same terms as
Mr. Rea's employment agreement described above, including severance and bonus
provisions (but not including any buyout rights).

STOCK OPTION GRANTS

        The following table sets forth information concerning stock options
granted to date in 1998 to each member of the Board of Directors and Executive
Officers, the corporate secretary and an employee of ADAM.

INDIVIDUAL GRANTS

<TABLE>
<CAPTION>

                                   PERCENT OF TOTAL
                                   OPTIONS GRANTED TO   EXERCISE PRICE
                                   EMPLOYEES DURING     OR BASE PRICE
NAME                        GRANT     THE YEAR(1)          (S/SHARE)      DATE
----                        -----  ------------------   --------------    ----
<S>                         <C>       <C>                 <C>            <C>
James B. Rea, Jr. ......... 35,000         35%               $3.00       6/17/08
Thomas H. Fitzgerald, Jr. . 20,000         20%               $3.00       6/17/08
Thomas C. Corcovelos ...... 20,000         20%               $3.00       6/17/08
Michael B. Jeffers ........ 20,000         20%               $3.00       6/17/08
Isabel Bautista ...........  5,000          5%               $3.00       6/17/08
</TABLE>

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The Company declared a 1:10 reverse stock split of its Common Stock,
effective May 26, 1998. The Company recently declared another 1:2 reverse stock
split of its Common Stock, effective August 20, 1998. All amounts of Common
Stock outstanding reflected herein give effect to both reverse stock splits.

        As of October 30, 1998, the Company had issued 6,817,961 shares of
Common Stock. See "Item 5. Market for Common Equity and Related Stockholder
Matters - Holders." Except as otherwise indicated, the following table sets
forth certain information regarding the beneficial ownership of the Company's
capital stock as of October 30, 1998, after giving effect to the conversion of
the Series A Preferred Stock, by: (i) each of the Company's directors and
officers, (ii) each person who beneficially owned more than five percent of the
Company's

                                       25
<PAGE>   27


capital stock, and (iii) all directors and executive officers of the Company as
a group. Unless otherwise indicated, the address of each named beneficial owner
is the same as that of the Company's principal office located at 10900 Wilshire
Boulevard, 9th Floor Los Angeles, California 90024.

<TABLE>
<CAPTION>
                                                                Shares            Percentage
                                                              Beneficially       Beneficially
                                                                 Owned              Owned(1)
                                                              ------------       ------------
<S>                                                         <C>                   <C>
Dr. Michael Klug...................................             489,500               7.2%
  Pfalzburger Strasse 20, 10717 Berlin, Germany
Eureka Consulting, Inc.............................             422,000               6.2%
  1350 E. Flamingo Road #742, Las Vegas, NV 89119
Prodevco, Inc......................................             406,000               6.0%
  7135 Pintale Drive, Carlsbad, CA 92009
Peter Hartmann.....................................             451,750               6.6%
James Buchanan Rea, Jr.............................             121,250               1.8%
Thomas Corcovelos..................................              25,000                 *
Ronald Kuettner....................................              25,000                 *
  Kurfurstendamm 15, Berlin, D-10719, Germany
Bernward J. Rohmann................................              15,000                 *
  Kurfurstendamm 15, Berlin, D-10719, Germany
Officers and Directors as a group (5 individuals)..             638,000               9.4%
</TABLE>

----------------------
*Less than one percent

(1)     Beneficial ownership is determined in accordance with the applicable
        rules under the Exchange Act. In computing the number of shares
        beneficially owned by a person and the percentage ownership of that
        person, shares of Common Stock subject to options held by that person
        that are currently exercisable, or become exercisable within 60 days
        from the date hereof, are deemed outstanding. However, such shares are
        not deemed outstanding for purposes of computing the percentage
        ownership of any other person. Percentage ownership is based on
        6,817,961 shares of Common Stock outstanding.

PREFERRED STOCK

        As of August 31, 1998, the Company had 5,000,000 shares of Series A
Preferred Stock issued and outstanding, held by approximately 320 individual
preferred shareholders. All of the Series A Preferred Stock was converted into
1,666,661 shares of Common Stock in October 1998.

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The merger of JBRI into ADAM was completed and became effective on March
31, 1998. On January 12, 1998, the shareholders of the Fund approved a new
investment advisory agreement with ADAM. Under the terms of the merger, Mr. Rea
received 2,375,000 shares (pre-reverse splits) of the Company's common stock at
the closing in exchange for his 50,500 shares of JBRI stock, and the other JBRI
shareholders received aggregate cash payments of $160,875 in consideration for
their 49,500 shares of JBRI stock, at a value of $3.25 per share. The 2,375,000
shares of the Company's Common Stock issued in connection with the JBRI-ADAM
Merger were converted into 118,750 shares, after giving effect to the Company's
1:10 reverse stock split, effective May 26, 1998, and the 1:2 reverse stock
split, effective August 20, 1998. Mr. Rea acquired the Company shares without
registration in reliance on the exemption provided by Section 4(2) under the
Securities Act. Mr. Rea is a sophisticated investor knowledgeable in the
securities business. He will continue to serve as President of ADAM, the
successor to JBRI. The Company shares issued to Mr. Rea are "restricted
securities" and may not be publicly resold except pursuant to a registration
promulgated under the Securities Act, Rule 144 or other exemption under the
Securities Act that may be applicable.


                                       26

<PAGE>   28

        On August 28, 1997, the Company issued 90,000,000 (pre-reverse split)
shares of Common Stock to American Diversified Corporation ("ADC"), a Delaware
corporation, the principal shareholders of which are by Messrs. Conradi, Hilger
and Hartmann, in exchange for its contribution of a "Bearer Note" issued by
Immofin Grundstuecksverwaltungsgessellschaft Conradi & Hilger GbRmbH, a
partnership consisting of Messrs. Klaus Conradi and Josef Hilger, two of the
Company's founding shareholders. The shares issued to ADC were converted into
4,500,000 shares, after giving effect to the Company's 1:10 reverse stock split
of the Common Stock, effective May 26, 1998, and 1:2 reverse stock split of the
Common Stock, effective August 20, 1998. The shares previously held by ADC have
since been transferred to various individual investors, pursuant to applicable
exemptions from registration under U.S. state and federal securities laws. On
May 28, 1998, the Company sold the Bearer Note to unrelated third parties for
20,200,000 Deutschmarks (approximately $11,584,186, including accrued interest).
Cash proceeds from the sale of the Bearer Note were released from escrow and
transferred to the Company's German bank account on October 12, 1998. (See Note
2 to "Consolidated Financial Statements," page F-8) .

                                     PART IV

ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits: See "Exhibit Index".

        (b)    Reports on Form 8-K. No reports on Form 8-K were filed during the
               last quarter of the fiscal year ended August 31, 1998.


                                       27

<PAGE>   29

                                   SIGNATURES


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

                                           AMERICAN DIVERSIFIED HOLDINGS, INC.


Date:   November 30, 1998             By:  /s/ James Buchanan Rea, Jr.
                                           ---------------------------
                                           James Buchanan Rea, Jr.,
                                           President and Chief Executive Officer


        In accordance with the Exchange Act, this amended report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the date indicated.


<TABLE>
<CAPTION>
Signatures                                  Title                         Date Signed
----------                                  -----                         -----------
<S>                                  <C>                              <C>
/s/ Peter Hartmann                    Chairman of the Board             November 24, 1998
--------------------------------      and Vice President of
Peter Hartmann                        International Development


/s/ James Buchanan Rea, Jr.           Director, President and           November 30, 1998
--------------------------------      Chief Executive Officer
James Buchanan Rea, Jr.             


/s/ Roland Kuettner                   Director                          November 30, 1998
--------------------------------
Roland Kuettner


/s/ Joel Epstein                      Chief Financial Officer and 
--------------------------------      Treasurer                         November 30, 1998
Joel Epstein

</TABLE>




                                       28

<PAGE>   30

                          INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                     AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES


                                                                            Page
                                                                            ----

Independent Auditor's Report.................................................F-2
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity..............................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Financial Statements........................................F-7 to F-13



                                       F-1

<PAGE>   31

                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
American Diversified Holdings, Inc.
Los Angeles, California

       We have audited the accompanying consolidated balance sheets of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended August 31, 1998 and the periods from February 5, 1997
(inception) to August 31, 1997 and 1998. 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 audits.

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

       In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1998 and 1997, and
the result of their operations and their cash flows for the periods indicated in
conformity with generally accepted accounting principles.

                                                   McGLADREY & PULLEN, LLP

New York, New York 
October 16, 1998, except for 
Note 10 as to which the date 
is October 30, 1998



                                       F-2

<PAGE>   32

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           August 31,          August 31,
                                                              1998                1997
------------------------------------------------------------------------------------------

<S>                                                       <C>                 <C>         
ASSETS
Cash and cash equivalents                                 $    309,053        $      2,264
Cash held in escrow (Note 2)                                11,621,493                  --
Fees receivable                                                  9,682                  --
Capital stock subscriptions receivable (Note 6)                     --             117,000
Marketable equity securities (cost $308,282)                   281,117                  --
VAT receivable (Note 9)                                        350,358                  --
Prepaid expenses and other                                     139,378               4,220
Deferred offering costs                                         72,847                  --
Other                                                           60,243                  --
Goodwill, net of accumulated
  amortization of $21,636                                      351,143                  --
Equipment, net of accumulated depreciation
   of $88,004 1998; 1997 -0-                                   249,292              14,320
                                                          ------------        ------------

                                                          $ 13,444,606        $    137,804
                                                          ============        ============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------
Liabilities:
   Accounts payable and accrued expenses                  $    975,220        $     63,577
   Note payable (Note 3)                                       387,597                  --
   Other                                                        86,439                  --
                                                          ------------        ------------
      Total liabilities                                      1,449,256              63,577
                                                          ------------        ------------

Stockholders' Equity (Note 6 and 7):
  Preferred stock, 10,000,000 shares authorized:
     Series A 9% convertible redeemable cumulative
      preferred stock, $1.00 par value; 5,000,000
      shares designated:
        Issued and outstanding, 5,000,000 and no
         shares, respectively; preference in
         liquidation $5,000,000                              4,725,766                  --
        Subscribed for but not paid for and not
          issued, 162,495 shares                                    --             150,545
  Common stock, no par value; 20,000,000 shares
   authorized; issued and outstanding 5,151,350 and
   10,000,000 shares, respectively (1997 prior to
   reverse stock splits)                                    12,236,710              96,754
  Unpaid subscriptions as of December 22, 1997                      --             (33,545)
  Deficit accumulated during the development stage          (4,883,516)           (139,527)
  Accumulated other comprehensive income (loss)                (83,610)                 --
                                                          ------------        ------------
      Total stockholders' equity                            11,995,350              74,227
                                                          ------------        ------------
                                                          $ 13,444,606        $    137,804
                                                          ============        ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>   33

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                         Period From                             Period from
                                         February 5,                             February 5,
                                             1997                                    1997
                                         (inception)                             (inception)
                                              to              Year Ended              to
                                          August 31,          August 31,          August 31,
                                             1998                1998                1997
-------------------------------------------------------------------------------------------------

<S>                                      <C>                 <C>                 <C>        
Revenue                                  $    45,585         $    45,585         $        --
                                         -----------         -----------         -----------
Expenses (Note 3):
   Advertising and promotion               1,981,264           1,974,044               7,220
   Employee compensation and
    benefits                               1,031,054           1,010,213              20,841
   Administrative                            749,702             727,196              22,506
   Professional fees                         700,451             633,977              66,474
   Travel and entertainment                  142,708             120,222              22,486
   Depreciation                               88,004              88,004                  --
   Rent                                       70,284              70,284                  --
   Amortization                               21,636              21,636                  --
   Interest                                   19,789              19,789                  --
   Other                                      19,037              19,037                  --
   Communication                              19,761              19,761                  --
                                         -----------         -----------         -----------
                                           4,843,690           4,704,163             139,527
                                         -----------         -----------         -----------
     Operating (loss)                     (4,798,105)         (4,658,578)            139,527)
                                         -----------         -----------         -----------

Nonoperating income (loss):
   Realized (loss) on sale of
    equity securities                        (12,583)            (12,583)                 --
   Gain on foreign currency
    transactions                             148,149             148,149                  --
   Interest income                             4,023               4,023                  --
                                         -----------         -----------         -----------


       (Loss) before income taxes         (4,658,516)         (4,518,989)           (139,527)

Income taxes (Note 7)                             --                  --                  --
                                         -----------         -----------         -----------

       Net (loss)                        $(4,658,516)        $(4,518,989)        $  (139,527)
                                         ===========         ===========         ===========

Average common shares outstanding          3,421,170           5,085,838             500,000
                                         ===========         ===========         ===========

Basic and diluted (loss)
  per common share                       $     (1.43)        $     (0.93)        $     (0.28)
                                         ===========         ===========         ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       F-4

<PAGE>   34

American Diversified Holdings, Inc. and Subsidiaries
(A Development Stage Company)

Consolidated Statements of Stockholders' Equity
Period from February 5, 1997 (inception) to August 31, 1997 and Year Ended
August 31, 1998

<TABLE>
<CAPTION>
                                                   Series A 9%
                                              Convertible Cumulative
                                                 Preferred Stock             Common Stock        Accumulated  
                                              ----------------------    ----------------------      Other     
                                              Number of                 Number of               Comprehensive 
                                                Shares       Amount      Shares       Amount        Income     
                                              ---------   ----------    ----------  ----------  -------------


<S>                                           <C>         <C>           <C>         <C>           <C>      
Balance February 5, 1997, date of inception               $        -                $        -    $        

Stock Issued:
Common Stock:
  For cash at $.01/share                                                 4,750,000       47,795            
  For legal and other services at $.01/share                             5,250,000       48,959            
Preferred Stock:
  For cash at $1.00 share paid
   by December 22, 1997                         126,287      117,000
  Unpaid for at December 22, 1997                36,208       33,545                                       
                                              ---------   ----------     ---------  -----------   -------- 
Balance, August 31, 1997                        162,495      150,545    10,000,000       96,754            

Comprehensive income (loss):
   Translation (loss)                                                                              (56,445)
   Unrealized (loss) on securities                                                                 (27,165)
                                                                                                           
Common Stock:
  1 for 10 reverse stock split                                          (9,000,000)
  1 for 2 reverse stock split                                             (500,000)
  Stock Issued:
   For cash at $2.19/share                                                   7,100       15,550            
   In exchange for note receivable
    from affiliate at $2.17/share                                        4,500,000    9,773,260            
   Interest on note receivable                                                          165,446            
      Sale of note receivable                                                         1,517,100            
   For legal and other services at
     $2.20/share                                                            25,500       56,100            
   In exchange for shares of JBRI                                          118,750      237,500            
   Stock option compensation                                                            375,000            
Preferred stock:
  For cash and securities at  $1.00/share,
   net of offering cost of $262,284           4,837,505    4,575,221                                       
                                              ---------   ----------     ---------  -----------   -------- 
Balance, August 31, 1998                      5,000,000   $4,725,766     5,151,350  $12,236,710   $(83,610)
                                              =========   ==========     =========  ===========   ======== 
</TABLE>


<TABLE>
<CAPTION>
                                                   (Deficit)                                   
                                                  Accumulated                      Notes       
                                                  During the                    Receivable       Total
                                                  Development      Unpaid          From       Comprehensive
                                                     Stage      Subscriptions   Stockholder   Income (loss)      Total
                                                  -----------   -------------   -----------   -------------    ----------

<S>                                               <C>             <C>           <C>            <C>            <C>        
Balance February 5, 1997, date of inception       $         -     $      -      $         -    $          -   $         -
                                                                                                                  
Comprehensive income (loss):                                                                                      
  Net loss                                           (139,527)                                 $   (139,527)     (139,527)
                                                                                               ============
Stock Issued:                                                                                                     
Common Stock:                                                                                                     
  For cash at $.01/share                                                                                           47,795
  For legal and other services at $.01/share                                                                       48,959
Preferred Stock:                                                                                                  
  For cash at $1.00 share paid                                                                                    
  by December 22, 1997                                                                                            
  Unpaid for at December 22, 1997                                  (33,545)                                       117,000
                                                  -----------     --------      -----------                   -----------
Balance, August 31, 1997                             (139,527)     (33,545)               -                        74,227

Comprehensive income (loss):                                                                                      
   Translation (loss)                                                                           $   (56,445)      (56,445)
   Unrealized (loss) on securities                                                                  (27,165)      (27,165)
   Net (loss)                                      (4,518,989)                                   (4,518,989)   (4,518,989)
                                                                                                -----------
                                                                                                $(4,602,599)        
                                                                                                ===========
Common Stock:                                                                                                     
  1 for 10 reverse stock split                                                                                    
  1 for 2 reverse stock split                                                                                     
  Stock Issued:                                                                                                   
   For cash at $2.19/share                                                                                         15,550
   In exchange for note receivable                                                                                
     from affiliate at $2.17/share                                               (9,773,260)                            
   Interest on note receivable                                                     (165,446)                            
      Sale of note receivable                                                     9,938,706                    11,455,806
   For legal and other services at                                                                                
     $2.20/share                                                                                                   56,100
   In exchange for shares of JBRI                                                                                 237,500
   Stock option compensation                                                                                      375,000
Preferred stock:                                                                                                  
  For cash and securities at  $1.00/share,                                                                        
    net of offering cost of $262,284                                33,545                                      4,608,766
  Dividends paid $.045/share                         (225,000)                                                   (225,000)
                                                  -----------     --------      -----------                   -----------
Balance, August 31, 1998                          $(4,883,516)    $      -      $         -                   $11,995,350
                                                  ===========     ========      ===========                   ===========
</TABLE>




See Notes to Consolidated Financial Statements

                                       F-5

<PAGE>   35

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                     Period from                               Period from
                                                                     February 5,                               February 5,
                                                                        1997                                      1997
                                                                   (Inception) to          Year Ended        (Inception) to
                                                                     August 31,            August 31,          August 31,
                                                                        1998                  1998                1997
                                                                     -----------          -----------          -----------
<S>                                                                  <C>                  <C>                  <C>         
Cash Flows from Operating Activities
Net (loss)                                                           $(4,658,516)         $(4,518,989)         $  (139,527)
Adjustments to reconcile net (loss) to net cash
    (used in) operating activities:
    Noncash expense, professional fees                                   105,059               56,100               48,959
    Stock option compensation                                            375,000              375,000                   --
    Loss on sale of securities                                            12,583               12,583                   --
    (Gain) on foreign currency translation                              (148,149)            (148,149)                  --
    Depreciation and amortization                                        110,528              110,528                   --
    Effect of changes in foreign currency                                (56,445)             (56,445)                  --
    Change in assets and liabilities:
    Increase in receivables                                             (377,578)            (377,578)                  --
    Increase in prepaid expenses and other                              (267,422)            (263,202)              (4,220)
    Increase in accounts payable, accrued expenses and other           1,038,708              975,131               63,577
                                                                     -----------          -----------          -----------
Net cash (used in) operating activities                               (3,866,232)          (3,835,021)             (31,211)
                                                                     -----------          -----------          -----------

Cash Flows from Investing Activities
    Purchase of equipment                                               (338,184)            (323,864)             (14,320)
    Purchase of J.B. Rea, Inc., net of cash acquired                    (146,973)            (146,973)                  --
    Purchase of marketable equity securities                            (500,865)            (500,865)                  --
    Proceeds from sales of marketable equity securities                  180,000              180,000                   --
                                                                     -----------          -----------          -----------
Net cash (used in) investing activities                                 (806,022)            (791,702)             (14,320)
                                                                     -----------          -----------          -----------

Cash Flows from Financing Activities
    Proceeds from issuance of preferred stock                          4,725,766            4,725,766                   --
    Dividends paid on preferred stock                                   (195,401)            (195,401)                  --
    Proceeds from issuance of  common stock                               63,345               15,550               47,795
    Increase in note payable                                             387,597              387,597                   --
                                                                     -----------          -----------          -----------
Net cash provided by financing activities                              4,981,307            4,933,512               47,795
                                                                     -----------          -----------          -----------

Increase in cash and cash equivalents                                    309,053              306,789                2,264
Cash and cash equivalents
Beginning                                                                     --                2,264                   --
                                                                     -----------          -----------          -----------
Ending                                                               $   309,053          $   309,053          $     2,264
                                                                     ===========          ===========          ===========

Supplemental schedule of noncash financing activities
   Issuance of 288,000, 25,500 and  262,500 common
    shares in exchange for services rendered                         $   105,059          $    56,100          $    48,959
                                                                     ===========          ===========          ===========

   Issuance of 4,500,000 common shares in
   exchange for notes receivable                                     $ 9,938,706          $ 9,938,706          $        --
                                                                     ===========          ===========          ===========

   Issuance of 118,750 common shares in connection
   with the acquisition of JB Rea, Inc.                              $   237,500          $   237,500          $        --
                                                                     ===========          ===========          ===========

   Capital contribution associated with sale of
   note receivable to unrelated investors                            $ 1,517,100          $ 1,517,000          $        --
                                                                     ===========          ===========          ===========
</TABLE>


See Notes to Consolidated Financial Statements


                                       F-6

<PAGE>   36

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.   Nature Of The Business And Significant Accounting Policies

Nature of business: American Diversified Holdings, Inc. (the "Company") was
organized on February 5 1997 as a provider of financial services in the United
States and Europe. As a development-stage enterprise, the Company has devoted
most of its resources since inception to raising capital and implementing the
first stages of its business plan. The Company, through its subsidiaries, plans
to provide financial services and distribute financial service products to
individual and institutional investors in the United States, Germany and the
European Union countries. The Company's fiscal year ends on the last day of each
August.

The Company has established four wholly-owned subsidiaries:

<TABLE>
<CAPTION>
                                                           Planned Operation
                                            -----------------------------------------------
<S>                                         <C>
American Diversified AG ("ADAG")            Provider of financial services in Germany

American Diversified Asset                  Investment adviser/distributor
  Management, Inc. ("ADAM")                  to planned mutual funds

American Diversified                        Will report on technological and
  Publications GmbH ("AMDIV")               financial developments

American Diversified                        Will provide consulting support for enterprises
  Emissionsberatungs GmbH ("AMEG")          considering a public offering valued
                                            in the U.S. or German marketplace
</TABLE>

        Effective March 31, 1998, ADAM merged with and into James Buchanan Rea
Inc.("JBRI"), the investment advisor and distributor of the Rea-Graham Balanced
Fund(the "Fund"), subsequently renamed American Diversified Global Value Fund.
The merger was recorded as a purchase transaction which resulted in the exchange
of 118,750 shares of the Company's common stock valued at $237,500 and cash of
$160,875 for the common stock of JBRI. Goodwill of $372,779 was recorded upon
completion of the acquisition, which represents the excess of the purchase price
over the fair value of the net assets acquired. The pro forma effects on
operations as though the transaction occurred on February 5, 1997 (inception)
are not presented herein as the effects are immaterial.

A summary of the Company's significant accounting policies follows:

Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany accounts
and transactions are eliminated in consolidation.

Cash and cash equivalents: Cash equivalents include highly liquid debt
instruments which have a maturity of three months or less from the date of
purchase and other highly liquid investments which are readily convertible into
cash. Cash equivalents are stated at cost which approximates market value.

Goodwill: Goodwill is being amortized over seven years. Management periodically
evaluates the recoverability of goodwill, which would be adjusted for a
permanent decline in value, if any, as measured by the recoverability from
projected future cash flows from the acquired business.


                                       F-7

<PAGE>   37

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Equipment: Equipment is recorded at cost and includes expenditures for major
improvements. Depreciation is determined using accelerated methods based on five
to ten year estimated useful lives. The equipment was placed in service during
fiscal 1998.

Foreign currency transactions: The Company has agreed to fund any cash flow
deficits incurred by ADAG, its European subsidiary until such time that ADAG
generates sales revenue. The Company's functional currency is the U.S. dollar.
ADAG's functional currency is the Deutschmark (DM). Assets and liabilities of
the Company's foreign subsidiary are translated at exchange rates in effect at
the balance sheet date and the resulting adjustments are recorded as a
translation adjustment in stockholders' equity. The results of operations of the
Company's foreign subsidiary are translated using the average exchange rates
during the period.

Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.

Fair value of financial instruments and credit risk: The fair value of cash and
cash equivalents, cash held in escrow and capital stock subscriptions receivable
approximates carrying amounts because of the short term nature of those
instruments. The fair value of marketable equity securities is based on quoted
market prices. The carrying amount of the Company's debt approximates fair value
based on the short-term nature of the debt and rates available for similar
borrowings. A portion of the Company's cash and all of its cash held in escrow
is held in DM in German banks. The Company is exposed to the risk of foreign
exchange rate fluctuations and credit risk. The Company manages its credit risk
by limiting its deposits to banks with the highest credit ratings.

Marketable equity securities: Marketable equity securities consist of an
investment in the Fund, an open-end mutual fund, and is considered
available-for-sale. Such securities are carried at their current net asset value
with any unrealized gains or losses reported as other comprehensive income in
stockholders' equity. Realized gains and losses are recorded on the identified
cost method.

Advertising:  The Company expenses the costs of advertising as incurred.

Loss per common share: The basic loss per common share is computed in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128, Earning Per
Share, and is based on the net loss from operations and the weighted average
number of shares of common stock outstanding during the period. Common shares
issuable upon conversion of preferred stock have not been included in the
computation because their inclusion would have had an antidilutive effect
(reduced the loss per common share).


                                       F-8

<PAGE>   38

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Information about the computation of the basic loss per share follows:

<TABLE>
<CAPTION>
                                                        Weighted
                                           Income        Average      (Loss)
                                           (Loss)        Shares      Per Share
                                        -----------     ---------    -------- 
<S>                                     <C>             <C>          <C>      
     1998
     Net (loss)                         $(4,518,989)
     Less: preferred stock dividends       (225,000)
                                        ----------- 
                                        $(4,743,989)    5,085,838    $  (0.93)
                                        ===========     =========    ========

     1997
     Net (loss)                         $  (139,527)      500,000    $  (0.28)
                                        ===========     =========    ========

     From inception through 1998
     Net (loss)                         $(4,658,516)
     Less: preferred stock dividends       (225,000)
                                        ----------- 
                                        $(4,883,516)    3,421,170    $  (1.43)
                                        ===========     =========    ========
</TABLE>

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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.

Recent accounting pronouncements: In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires companies to classify items of other comprehensive
income, such as unrealized gains and losses on available-for-sale securities, by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Company adopted this statement in its fiscal year ended August 31, 1998.

        In June 1997, the FASB also issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 established
standards for reporting information about operating and geographic segments and
is effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company has determined that there will be no significant
changes to the Company's disclosures pursuant to the adoption of SFAS No 131.

Note 2. Cash Held in Escrow

        In connection with the Company's founding, a group of stockholders
contributed their ownership of a "Bearer Note" secured by a first mortgage on
certain real property in Berlin, Germany. The 4% note, with a face amount 17.5
million Deutschmarks (DM), was due on December 31, 1999. For U.S. accounting
purposes the capital contribution (valued at $9,773,260) and the accumulated
interest thereon were reported as common stock issued and the note receivable
from stockholders was reflected as a reduction of stockholders' equity until
such time the note and accumulated interest are converted to cash.

        On May 29, 1998, the note was sold, on a non-recourse basis, to a group
of unrelated investors for DM 20.2 million resulting in an economic gain of
$1,517,000. For U.S. accounting purposes the gain was reported as an adjustment
to the issuance price of share capital. The transaction was handled through
escrow agents in Berlin. On October 12, 1998 all of the cash held in escrow (DM
20,366,667) was released and transferred to the Company's German bank account.


                                       F-9

<PAGE>   39

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 3. Line of Credit

        ADAG has an unsecured line of credit of DM 300,000 which bears interest
at 8.75%. During August 1998, ADAG's bank permitted a level of short-term
borrowings of DM 686,000, more than 100% above the contractually established
limit of DM 300,000, with the portion above the limit bearing interest at
12.75%. Subsequent to August 31, 1998, ADAG reduced its outstanding line of
credit within contractual limits. Interest paid on short-term borrowings during
the year ended August 31, 1998 was approximately $20,000.

Note 4. Related Party Transactions

        Legal and other services provided by the Company's stockholders and
reported as operating expenses in the accompanying financial statements totaled
$56,100 during the year ended August 31, 1998 and $48,959 in the period ended
August 31, 1997.

        ADAM is the investment advisor to the Fund. Under the investment
advisory agreement, ADAM receives a monthly fee of 1/12 of 1% of the first
$20,000,000 of the Fund's net assets on the last business day of the month, 1/12
of .75% of the next $80,000,000, 1/12 of .5% of the next $100,000,000, and 1/12
of .45% of monthly net assets in excess of $200,000,000. ADAM also receives a
distribution fee charged against the assets of the Fund and equal on an annual
basis to .35% of the Fund's average daily net assets.

        ADAM has agreed to reimburse the Fund's expenses, including waiving its
fees to the extent the Fund's expenses exceed, on an annual basis, 1.88% of the
Fund's average daily net assets. In connection with this undertaking the Company
waived fees of $18,608 during the period ended August 31, 1998.

Note 5. Lease Commitment

        During fiscal 1998, the Company and its subsidiaries operated in
facilities primarily under short-term lease arrangements. The Company's current
long-term lease requires monthly payments of approximately $3,700, plus
utilities and VAT and expires in 2002. Future minimum lease commitments are as
follows:



                 1999                         $   44,000
                 2000                             44,000
                 2001                             44,000
                 2002                             15,000
                                              ----------
                                              $  147,000
                                              ==========

        Subsequent to August 31, 1998, the Company entered into a long-term
lease for additional space in Los Angeles, California. The lease requires annual
minimum payments of approximately $103,000 through December 2001. The Company is
currently in negotiating the terms of a long-term lease for larger office
facilities in Berlin.

Note 6. Preferred Stock

        The Company's Board of Directors has authorized the issuance of
5,000,000 shares of Series A 9% cumulative convertible redeemable preferred
stock. The cumulative dividends accrue daily and are payable semi-annually, when
and as declared, at an annual rate of $.09 per share commencing January 1, 1998.
No dividends can be paid on the common stock until any accrued, but not yet
declared dividends on the preferred stock have been paid.


                                       F-10

<PAGE>   40

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        The Company may at its option, and subject to certain notification
provisions, redeem all or a portion of the preferred stock at the price of $1.00
per share, plus any accrued and unpaid dividends. The stockholders do not have
the right to demand redemption of the preferred stock. Each share is convertible
at the option of the holder into common stock at the rate of three preferred
shares for one share of common stock (see Note 10).

        In addition, each share of preferred stock shall be automatically
converted into shares of common stock at a conversion price equal to the initial
issue price of the preferred shares, subject to certain adjustments, immediately
upon the closing of a sale of the Company's common stock in a public offering
under the Securities Act that results in net proceeds to the Company of at least
$10,000,000.

        During 1998, the Company completed its sale of preferred stock in
Germany under Regulation S, guidelines established under the Securities Act for
Securities offerings made outside of the United States. The Offering was
registered with the ABundesaufsichtsamt fuer Wertpapierhandel, the German
governmental agency which regulates German securities transactions. As of August
31, 1997, the Company received subscriptions for 162,495 preferred shares. As of
July 31, 1998, all preferred stock subscriptions were collected.

Note 7. Common Stock

        In September 1997, the Company issued 4,500,000 shares (giving effect to
all stock splits and reverse stock splits, see below) of its common stock in
exchange for a note receivable (see Note 2) from an affiliate of one of the
Company's stockholders.

        In November 1997, the Company's Board of Directors approved a
ten-for-one stock split which increased the number of authorized voting and
non-voting shares to 110,000,000, and increased issued and outstanding shares to
10 million at August 31, 1997.

        On May 26, 1998, the Board of Directors approved a one-for-ten reverse
stock split which decreased the number of the outstanding shares. On this date
the Company also amended their articles of incorporation to change the number of
authorized common stock to 20,000,000 and preferred shares to 10,000,000. On
August 20, 1998, the Board approved a second reverse stock split of one-for-two.
All fiscal 1998 transactions in the Company's common stock and the loss per
common share for all the periods presented have been adjusted to give effect to
the stock split and reverse stock splits.

        The total common stock on the balance sheet as of August 31, 1998 and
1997, respectively, includes $2,057,546 and $-0- of additional paid-in capital
resulting from transactions not directly related to issuances of common stock.

        On September 25, 1998, the Company signed a letter of intent with
Millennium Financial Group, Inc. (the "Managing Underwriter") which outlines
plans for the Company's Initial Public Offering. Subject to terms and certain
conditions set forth in an underwriting agreement with the Company, the Managing
Underwriter will form a syndicate of underwriters to sell the Company's common
shares on a firm commitment basis for resale to the public. The letter of intent
anticipates that the Managing Underwriter will sell approximately one-half of
the 1,733,334 shares of common stock expected to be sold. The Company expects to
sell the balance of the shares in a direct offering in Europe. In addition to a
selling commission of 8% on the shares sold by the Managing


                                      F-11

<PAGE>   41

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Underwriter and an expense allowance, the letter of intent provides for the
Managing Underwriter to receive warrants, exercisable for 5 years, to purchase
up to 10% of the number of shares of common stock sold in the offering at an
exercise price of 150% of the issue price per share.

Note 8. Stock Option Plan

        On May 26, 1998 the Board of Directors approved the 1998 Stock Option
and Incentive Plan (the "Plan") which authorizes the granting of options to
employees and directors to purchase an aggregate of up to 1,000,000 shares, but
not more than 5% of the outstanding shares of the Company's common stock. The
Plan authorizes the Board of Directors, or a committee of the Board of
Directors, to grant Incentive Stock Options ("ISOs") as defined under section
422 of the Internal Revenue Code of 1986, as amended, options not so qualified
("NQSOs"), Dividend Equivalent Rights ("DERs"), Stock Appreciation Rights
("SARs"), and Phantom Stock Rights ("PSRs").

        Options become exercisable six months after the date granted and expire
ten years after the date granted. During the year ended August 31, 1998, there
were 100,000 options granted to buy common shares at an average exercise price
of $3.00. These are the only options outstanding as of August 31, 1998 and none
of the options are exercisable until December 17, 1998.

        The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, only the intrinsic value of options granted has been
recognized as compensation cost. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date for awards
in 1998 consistent with the provisions of SFAS No. 123, the Company's net loss
and loss per share would have been reduced to the pro forma amounts indicated in
the table below. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model:

<TABLE>
<CAPTION>
                                                             Period
                                                         from Inception
                                                             through           Year Ended
                                                            August 31,         August 31,
                                                              1998               1998
------------------------------------------------------------------------------------------
<S>                                                        <C>                <C>         
Net (loss) - as reported                                   $(4,658,516)       $(4,518,989)
Net (loss) - pro forma                                      (4,711,016)        (4,571,489)
                                                                              
Basic and diluted (loss) per share - as reported                 (1.29)             (0.93)
Basic and diluted (loss) per share - pro forma                   (1.30)             (0.94)
                                                                              
Assumptions:                                                                  
   Dividend yield                                                    -%                 -%
   Expected volatility                                               -%                 -%
   Risk-free interest rate                                        5.50%              5.50%
   Expected lives                                               7 years            7 years
</TABLE>                                                               

The fair value of options granted during 1998 was $10.26 per share


                                      F-12

<PAGE>   42

              AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 9. Income and Value Added Taxes

        The Company has approximately $4,000,000 of federal and state operating
loss carryforwards, which may be utilized to offset future taxable income. The
federal operating loss carryforwards expire in 2018 and the state operating loss
carryforwards expire in 2003. The tax benefit recognized for the net operating
losses have been offset by an equal increase in the valuation allowance for
deferred taxes resulting in no income tax expense or benefit reflected in the
accompanying statement of operations and no income tax expense or benefit has
been allocated to the components of comprehensive income or loss.

        The Company's operations in Germany have not yet generated taxable
income and therefore are not yet subject to income taxes. The Company's German
subsidiaries are subject to value added taxes ("VAT")on certain services,
supplies and equipment. The Company also will collect VAT on certain services
that it performs, e.g. consulting services. At August 31,1998 the Company had
refundable VAT of $350,358.

Note 10. Subsequent Events

        As of October 30, 1998 substantially all holders of the Company's
preferred stockholders had elected to convert their shares of preferred stock
into common stock at the stated rate of three preferred shares for one share of
common stock. The conversion had the effect of increasing the Company's
outstanding shares of common stock to approximately 6,818,000 shares.


                                      F-13

<PAGE>   43

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                                 DESCRIPTION                                 SEQUENTIALLY
NUMBER                                  -----------                                   NUMBERED
------                                                                              ------------
<C>                   <S>                                                           <C>

   2.1                Plan and Agreement of Merger and Reorganization among
                      JBRI, ADAM, the Company and certain shareholders of JBRI.
                      Incorporated herein by reference from Exhibit 8.1 of
                      Amendment No. 1 to Registrant's Registration Statement on
                      Form 10-SB filed on May 11, 1998.*

   3.1                Articles of Incorporation. Incorporated herein by
                      reference from Exhibit 2.1 of the Registrant's
                      Registration Statement on Form 10-SB filed on January 14,
                      1998.*

   3.1.1              Amendment to Articles of Incorporation dated April 1,
                      1997. Incorporated herein by reference from Exhibit 2.1.1
                      of Registrant's Registration Statement on Form 10-SB filed
                      on January 14, 1998.*

   3.1.2              Amendment to Articles of Incorporation dated November 20,
                      1997. Incorporated herein by reference from Exhibit 2.1.2
                      of Registrant's Registration Statement on Form 10-SB filed
                      on January 14. 1998.*

   3.1.3              Amendment to Articles of Incorporation dated January 12,
                      1998. Incorporated herein by reference from Exhibit 2.1.3
                      of Registrant's Registration Statement on Form 10-SB filed
                      on January 14, 1998.*

   3.1.4              Certificate of Designation re: Series A Preferred Stock,
                      dated February 5, 1998. Incorporated herein by reference
                      from Exhibit 2.1.4 of Amendment No. 1 to Registrant's
                      Registration Statement on Form 10-SB filed on May 11,
                      1998.*

   3.1.5              Amendment to Articles of Incorporation dated May 29, 1998.
                      Incorporated herein by reference from Exhibit 3.1.5 of
                      Registrant's Quarterly Report on Form 10-QSB for the
                      Period Ended May 31, 1998.*

   3.1.6              Amendment to Articles of Incorporation, dated October 5,
                      1998.**                                                            45

   3.2                Bylaws of the Registrant. Incorporated herein by reference
                      from Exhibit 2.2 of Registrant's Registration Statement on
                      Form 10-SB filed on January 14, 1998.*

   4.1                Specimen of Common Stock of Registrant. Incorporated
                      herein by reference from Exhibit 4.1 of Registrant's
                      Registration Statement on Form 10-SB filed on January 14,
                      1998.*
</TABLE>

<PAGE>   44

                                  EXHIBIT INDEX
                                   (continued)

<TABLE>
<CAPTION>
EXHIBIT                                 DESCRIPTION                                 SEQUENTIALLY
NUMBER                                  -----------                                   NUMBERED
------                                                                              ------------
<C>                   <S>                                                           <C>
   4.2                Specimen of Series A Preferred Stock of Registrant.
                      Incorporated herein by reference from Exhibit 4.2 of
                      Registrant's Registration Statement on Form 10-SB filed on
                      January 14, 1998.*

  10.1                Form of Investment Advisory Agreement of ADAM with
                      Rea-Graham Balanced Fund, Inc. Incorporated herein by
                      reference from Exhibit 6.1 of Amendment No. 1 to
                      Registrant's Registration Statement on Form 10-SB filed on
                      May 11, 1998.*

  10.2                Form of Investment Sub-Advisory Agreement of ADAM with
                      Ladas & Hulings, Inc. Incorporated herein by reference
                      from Exhibit 6.2 of Amendment No. 1 to Registrant's
                      Registration Statement on Form 10-SB filed on May 11,
                      1998.*

  10.3                Employment Agreement among Registrant, ADAM and James B.
                      Rea, Jr. Incorporated herein by reference from Exhibit 9.1
                      of Amendment No. 1 to Registrant's Registration Statement
                      on Form 10-SB filed on May 11, 1998.*

  10.5                Employment Agreement between Registrant and Peter Hartmann
                      Incorporated herein by reference from Exhibit 10.5 of
                      Registrant's Registration Statement on Form SB-2 (File No.
                      333-62489) filed on August 31, 1998.*

  21.1                Subsidiaries of the Registrant. Incorporated herein by
                      reference from Exhibit 21.1 of Registrant's Registration
                      Statement on Form SB-2 (File No. 333-62489) filed on
                      August 31, 1998.*

  27.1                Financial Data Schedules.**                                        49
</TABLE>

----------
*    Previously filed with the Securities and Exchange Commission.
**   Being filed herewith.