SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


                  Annual report pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the fiscal year ended December 31, 1997.
                        Commission file number 333-45777



                               KRANTOR CORPORATION
             (Exact name of registrant as specified in its charter)

                               DELAWARE 22-2993066
                    (State of incorporation) (I.R.S. Employer
                               Identification No.)


                            10850 Perry Way, Ste 203
                              Wexford, Penna. 15090
                    (Address of principal executive offices)

        Registrant's telephone number, including area code: 412-980-6380

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


                      Title of Each Class Name of Exchange

              Common Stock, $.001 par value NASDAQ/Small-Cap System
                            and Boston Stock Exchange


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ NO__

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

     On April 6, 1998, the aggregate market value of the voting stock of Krantor
Corporation,  held by  non-affiliates  of the  Registrant  (based on the closing
price as  reported  on the NASDAQ for April 6, 1998)  approximately  $7,302,919.
This   determination  of  affiliate  status  is  not  necessarily  a  conclusive
determination  for  other  purposes.  The  number of  outstanding  shares of the
Registrant's Common Stock as of April 6, 1998 was 4,583,604.

<PAGE>

                                     PART I

     Other  than  historical  and  factual  statements,  the  matters  and items
discussed  in this  report on Form  10-K are  forward-looking  information  that
involves  risks and  uncertainties.  The  Company's  actual  results  may differ
materially from the results discussed in the forward-looking statements. Factors
that could contribute to such  differences are discussed in the  forward-looking
statements  and are  summarized  in  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations - Forward-Looking  Information and
Cautionary Statements."

ITEM 1.  BUSINESS

A.       OVERVIEW

     Krantor  Corporation  ("Krantor") and its  subsidiaries  (collectively  the
"Company")  participate  mainly in the food and  grocery  and  health and beauty
aids,  frozen squid  distribution  and premium  handmade cigar and other related
tobacco  product  distribution  industries.  Trade  sources  estimate  that this
industry  generates  annual  nationwide  revenues of over $400  billion and $1.3
billion  respectively.  The  Company,  estimates  that  80% of its  business  is
generated in the Northeastern region of the United States.

     The Company  entered the premium  handmade  cigar market at the end of 1997
through a  Distributorship  Agreement  with a Dominican  Republic  Company.  The
Company  believes  that  distributing  premium  handmade  cigars to its existing
customer base through  regional  sales  offices,  a national  broker network and
cable television  marketing should develop for the Company a unique franchise in
the premium handmade cigar business.

     Presently the Company is conducting its basic grocery  business through and
as an agent for ALT, which business has been reinforced and the Company believes
strengthened  by their 10 year exclusive U.S.  distribution  agreement with ALT.
The agreement  presently calls for the Company to distribute  frozen squid, also
known as calamari,  exclusively in the United States. The agreement provides the
Company with the  opportunity  to earn royalties on both squid and grocery sales
distributed  in the United  States.  It also  allows the  Company to utilize the
purchasing  power and financing  capabilities  of its trading partner to support
the distribution of its products in the United States. In addition,  the Chinese
trading  company is  developing  products  to be  marketed by the Company in the
United States. Sales of calamari by the Company on behalf of its Chinese trading
partner provide for above average profit margins due to the Company's  resultant
direct buying presence in China.

     The Company plans on expanding its core grocery and frozen  seafood  market
through its  subsidiaries.  The Company  believes  that by  discontinuing  IFD's
operation  it should  enable  it to  support  the  capital  requirements  of its
continuing  operations.  However,  the Company  believes it will need additional
financing in the form of  subordinated  debt or equity to finance its  expansion
plans. The Company prefers to use debt financing to expand its business but must
currently  rely on equity  financing  until the Company may be able to establish
trade financing alternatively for its business. (See Management Discussion, Item
6).

     Affiliated  Island Grocers d/b/a Island Frozen and Dairy ("IFD") has ceased
functioning as an active  subsidiary of the Company.  The Company has terminated
its Kosher Foods and Specialty Foods business as previously operated by IFD, has
significantly curtailed its wholesaler operations in general, and

                                      -2-

<PAGE>
is  attempting  to  re-focus  its  business  to its  traditional  business  as a
Promotional  Grocery  Product  distributor,  together  with its  expansion  into
distribution,  presently on an agency basis, of frozen squid through  agreements
with the Company's  established Chinese distribution  agreement with Asia Legend
Trading  Ltd.  ("ALT")(see  "Chinese  Distribution  Agreement"  and  "Management
Discussion and Financial  Analysis" infra) and its acquisition and resale and/or
distribution  of premium  hand made cigars and other  related  tobacco  products
derived from contacts of the Company in the Dominican Republic.  Such businesses
of Krantor are conducted through corporate subsidiaries whose stock is wholly or
majority owned by Krantor,  and the results of whose businesses are consolidated
for reporting purposes with the financial statements of Krantor.

THE  COMPANY'S  EXECUTIVE  OFFICES  ARE LOCATED AT 10850  PERRY WAY,  STE.  203,
WEXFORD , PENNSYLVANIA 15090, AND ITS TELEPHONE NUMBER IS (412) 980-6380.

B.       CIGAR PRODUCTION AND SALE

         1.  DISTRIBUTION RIGHTS

     The   Company,   through  one  of  its  wholly  owned   subsidiaries   (the
"Affiliate"), entered into an exclusive distributorship agreement dated December
31, 1997 (the  "Distribution  Agreement")  with Fabrica De Tobacco Valle Dorado,
SA,  a  Dominican  Republic  corporation  (the  "DR  Company")  for the sale and
distribution of premium hand made cigars  manufactured in and from tobacco grown
in the Dominican Republic. The Affiliate will retain 50% of the profits from the
sale of the premium  handmade  cigars and will have  discretion  as to marketing
strategies.  The DR Company  owns and/or  exclusively  leases,  for at least the
period of the Distribution Agreement,  sufficient land and factory facilities in
the  Dominican  Republic  capable of  producing  premium  hand-made  cigars at a
capacity of at least 500,000 cigars per month. The Affiliate will have the right
to sell the premium  handmade  cigars under the several brand names developed to
date by the DR  Company,  as well as the right to sell brands  developed  by the
Affiliate to fit market niches which it may locate.  The Distribution  Agreement
is for a term of 25 years  with an option for a second 25 years,  for  worldwide
distribution to locations directed by the Affiliate.  The DR Company,  which has
shipped over  1,000,000  cigars to the United States since January 1, 1997,  has
present tobacco inventory on hand to produce approximately 3,500,000 cigars. The
cigars  presently  marketed by the DR Company range from hand made short fillers
that retail  around  $2.00 each to premium  hand-made  long  filler  cigars that
retail as high as $6.00 each. Under the terms of the Distribution  Agreement the
Affiliate  is to pay the DR  Company  for the  cigars  at cost and to split  the
profit derived from their resale.  In addition,  the Affiliate is to advance the
costs  needed  for the sale,  promotion,  marketing,  advertising,  shipping  to
customers and all applicable  taxes,  and would be responsible for exhibition of
the goods at trade shows and other advertising shows and publicity vehicles, all
of which  expenses  would be  deducted  as costs,  together  with other costs of
goods,  including but not limited to delivery  expense,  distribution,  selling,
marketing, tobacco taxes and excise taxes, before arriving at the "profit" to be
split.  Management of the Company believes that the Company's historical inroads
into  the  consumer  goods  distribution   network  will  provide   advantageous
opportunity for establishment  and enhancement of distribution  channels for the
cigars.  There  can be, of  course,  no  assurance  that the  Affiliate  will be
successful in marketing  cigars,  especially in view of the various risk factors
discussed herein.

                                      -3-

<PAGE>
         2.  CIGAR PRODUCTION

     According to statistics compiled by The Cigar Insider, a recognized written
source of authority,  the Dominican  Republic  produces and exports more premium
handmade  cigars into the United States than any other country in the world.  It
has a strong lead over all other cigar exporting nations, with nearly 50% of the
market.  Industry  experts rate cigars  manufactured  in the Dominican  Republic
third in the world in quality, trailing only those from Cuba and Jamaica.

     Cuban cigars  cannot be exported  into the United States as a result of the
1962 trade embargo. Neither the Company nor any of its wholly-owned subsidiaries
currently distribute or engage in any transactions involving Cuban cigars or any
other  products of Cuban origin.  Removal of the trade embargo and the resultant
distribution  of Cuban  cigars  into the  United  States  could  have a material
adverse  effect on the  prospective  business for the  Affiliate and thereby the
Company.

         3.  COMPETITION

     The cigar  distribution  industry is  dominated  by a small number of large
companies  which are well known to the public.  Management  believes  that, as a
distributor of premium handmade cigars,  the Affiliate will compete with a small
number of primarily regional distributors,  including Southern Wine and Spirits,
Specialty Cigars, Inc., Cohabico and Old Scottsdale Cigar Company, Inc. and many
other small tobacco  distributors  and jobbers.  A number of larger,  well-known
cigar  manufacturing  and  wholesale  companies,   along  with  major  cigarette
manufacturers,  have not yet  entered  the  retail  distribution  market  to any
appreciable  degree,  but may do so in the future.  Such  potential  competitors
include  JR  Cigar  Company,  Inc.,   Consolidated  Cigar  Corporation,   Culbro
Corporation,  General Cigar Company, Swisher International Inc., Caribbean Cigar
Company and US Tobacco.  Many  existing and  potential  competitors  have larger
resources than the Company and would, if they enter the premium  handmade cigars
distribution  market,   constitute  formidable  competition  for  the  Company's
business.  There can be no assurance that the Company will compete  successfully
in any market.

         4. GOVERNMENTAL REGULATION AND TOBACCO INDUSTRY LITIGATION

     GENERAL.  The tobacco industry in general has been subject to regulation by
federal,  state  and local  governments,  and  recent  trends  have been  toward
increased regulation. Regulations include labeling requirements,  limitations on
advertising and prohibition of sales to minors,  laws  restricting  smoking from
public places including offices, office buildings,  restaurants and other eating
establishments.  In addition, cigars have been subject to excise taxation at the
federal,  state and local  level,  and those  taxes may  increase in the future.
Tobacco  products  are  especially  likely to be subject to  increases in excise
taxation. Future regulations and tax policies may have a material adverse affect
upon the ability of cigar companies,  including the Company, to generate revenue
and profits.

     HEALTH  REGULATIONS.  Cigars,  like other tobacco products,  are subject to
regulation in the United States at the federal, state and local levels. Together
with changing public attitudes toward smoking,  a constant  expansion of smoking
regulations  since the  early  1970s  has been a major  cause for a  substantial
decline in consumption.  Moreover,  the trend is toward increasing regulation of
the tobacco industry.

                                      -4-

<PAGE>
     FEDERAL REGULATION. In recent years, a variety of bills relating to tobacco
issues have been  introduced  in the  Congress of the United  States,  including
bills that have prohibited the advertising and promotion of all tobacco products
and/or restricted or eliminated the deductibility of advertising expenses;  have
set a  federal  minimum  age of 18  years  for  use of  tobacco  products;  have
increased  labelling  requirements on tobacco  products to include,  among other
things,  addiction  warnings and lists of additives  and toxins;  have  modified
federal  preemption  of  state  laws to  allow  state  courts  to  hold  tobacco
manufacturers  liable  under  common  law or state  statutes;  and have  shifted
regulatory  control of tobacco products and  advertisements  from the FTC to the
FDA.

     EPA LITIGATION.  The U.S.  Environmental  Protection Agency (the "EPA") has
recently  published a report with respect to the respiratory  effects of passive
smoking,  which  report  concluded  that  widespread  exposure to  environmental
tobacco smoke presents a serious and substantial public health impact.

     FDA  REGULATION.  The FDA has  proposed  rules to regulate  cigarettes  and
smokeless  tobacco  in order to protect  minors.  Although  the FDA has  defined
cigarettes  in such a way as to  include  little  cigars,  the  ruling  does not
directly impact large cigars.  However,  once the FDA has  successfully  exerted
authority  over  any  tobacco  product,  the  practical  impact  may be  felt by
distributors and manufacturers of any tobacco product. If the FDA is successful,
this may have long-term repercussions on the larger cigar industry.

     STATE REGULATION.  In addition, the majority of states restrict or prohibit
smoking in certain  public  places and restrict the sale of tobacco  products to
minors. Places where the majority of states have prohibited smoking include: any
public building  designated as non-smoking;  elevators;  public  transportation;
educational  facilities;  health care  facilities;  restaurants  and workplaces.
Local legislative and regulatory bodies have also increasingly  moved to curtail
areas. In a few states,  legislation has been introduced which would require all
little cigars sold in those states to be "fire-safe" little cigars, i.e., cigars
which extinguish themselves if not continuously smoked.  Passage of this type of
legislation and any other related  legislation  could have a materially  adverse
effect on the Company's cigar business.

     TOBACCO  INDUSTRY  LITIGATION.  Historically,  the cigar  industry  has not
experienced  material  health-related  litigation.  However,  litigation against
leading United States cigarette  manufacturers seeking compensatory and, in some
cases,  punitive  damages for cancer and other  health  effects  alleged to have
resulted from cigarette smoking is pending and being processed.

     PROPOSED SETTLEMENT WITH STATES. Several states have sued tobacco companies
seeking to recover the monetary  benefits paid under Medicaid to treat residents
allegedly  suffering  from  tobacco-related  illnesses.  On June 20,  1997,  the
Attorneys  General of 40 states and the major United  States  tobacco  companies
announced a proposed  settlement of the  litigation,  which,  if approved by the
United  States  Congress,  would require  significant  changes in the way United
States cigarette and tobacco  companies do business.  The potential  impact,  if
any, on the cigar industry is uncertain,  especially in view of the fact that it
is not certain as to what the final terms of the  settlement  will be even as to
cigarettes.  However, the potential limitations on advertising, the distribution
of  anti-nicotine  literature  and the  limitations  on  smoking  areas are just
examples

                                      -5-

<PAGE>
of provisions  which could, if adopted,  adversely impact the cigar industry and
thus the operations of the Company in this industry.

     CLASS ACTIONS. There have been various class actions instituted against the
tobacco  companies  relating to  cigarette  smoking,  certain of which are still
pending.  Although  management  does not  believe  that any of the  deciding  or
pending  actions  will have a material  adverse  effect on the  Company's  cigar
business, there can be no assurance that management's evaluation will be correct
as this litigation evolves.  Although there are numerous differences between the
cigar and  cigarette  industries,  the outcome of pending  and future  cigarette
litigation  may  encourage  various  parties to bring  suits on various  grounds
against  cigar  industry  participants.  While it is impossible to quantify what
effect, if any, any such litigation may have on the Company's operations,  there
can be no  assurance  that such  litigation  would not have a  material  adverse
effect on its operations.

     OSHA REGULATION. The Occupational Safety and Health Administration ("OSHA")
has proposed an indoor air quality regulation  covering the workplace that seeks
to  eliminate  nonsmoker  exposure to  environmental  tobacco  smoke.  Under the
proposed  regulation,  smoking  must be banned  entirely  from the  workplace or
restricted to designated areas of the workplace that meet certain criteria.  The
proposed  regulation  covers all  indoor  workplaces  under  OSHA  jurisdiction,
including,  for  example,  private  residences  used as  workplaces,  hotels and
motels, private offices,  restaurants, bars and vehicles used as workplaces. The
tobacco   industry  is  challenging  the  proposed  OSHA  regulation  on  legal,
scientific and practical grounds.  It also contends that the proposed regulation
ignores  reasonable  alternatives  . There is no  guaranty,  however,  that this
challenge  will be  successful.  Although  management  does not believe that the
proposed  OSHA  regulation  would  have a material  adverse  effect on the cigar
industry or the Affiliate,  there can be no assurance that such regulation would
not adversely impact the Company's business.

C.       CHINESE DISTRIBUTION AGREEMENT

     The Company in the last quarter of 1996  entered  into a 10 year  exclusive
agreement with a major Chinese trading company (Asia Legend Trading Ltd. ("ALT")
to  distribute  frozen squid (also known as calamari) in the United States (also
being non-exclusive  elsewhere). In such agreement and under such arrangement as
provided   therein,   the   Company   acts  as  a   distribution   agent  (on  a
licensing/royalty  independent contractor basis) for the Chinese trading company
and seeks to expand the demand for products  offered by such Chinese  company in
the United States,  including  primarily  squid,  but also for other seafood and
grocery items marketed by such Chinese company.  In return for such services the
Company is given a royalty and, further, such Chinese trading partner has agreed
to  significantly  finance the operations of the Company,  through  subsidiaries
where provided,  in acting as their marketing and  distribution  agent for brand
name  grocery  and  health  &  beauty  aid  products,  including  financing  the
purchase/sale of products marketed for the Chinese trade partner.  Currently the
Company distributes squid in the Northeastern United States,  which is presently
the largest U.S.  market area for such product.  Gross  Revenues  related to the
Chinese  Distribution  Agreement  will not be  reported  by  Krantor.  Krantor's
revenues  will be the  royalties  derived  through  the sales  generated  by the
distribution agreement.

                                      -6-

<PAGE>
D.       PROMOTIONAL DISTRIBUTION BUSINESS

         1.       BACKGROUND

     Since 1989,  the  Company has been a  distributor  of  Promotional  Grocery
Products.  Industry  sources  estimate  that  the  sale of  Promotional  Grocery
Products  generates annual revenues of approximately  $40 billion.  In 1995, the
Company generated  approximately 77% of its gross revenues from the distribution
of Promotional  Grocery  Products.  This business is a part of the approximately
$40 billion promotional grocery distribution industry,  which is a subset of the
approximately $400 billion food distribution  industry.  The Promotional Grocery
Products  business  involves the  purchase of  Promotional  Grocery  Products at
deeply discounted prices.  The companies  operating in this business are able to
purchase   Promotional   Grocery  Products  only  when   manufacturers   provide
promotional allowances as an inducement to promote particular products.


         2.       PROMOTIONAL DISTRIBUTION BUSINESS MERCHANDISING AND SALES

     Promotions  offered by  manufacturers  of Grocery  Products play a critical
role in the  success of the  Company's  promotion  distribution  business.  Such
promotions are offered by manufacturers who wish to increase consumer  awareness
of their products in certain markets.  Promotions offered on favorable terms are
keyed into the Company's information system network and members of the Company's
sales  staff then offer the  discounted  brand-name  products  to their  various
customer  accounts.  All  purchases of  Promotional  Products will be handled by
representatives of ALT.

         3.       PROMOTIONAL DISTRIBUTION BUSINESS - TRUCKING, WAREHOUSE, AND 
                  INSURANCE

     The Company does not own its trucks and is dependent on common  carriers in
the trucking industry. Although the Company can call upon any of several hundred
common  carriers to  distribute  its  products.  From time to time the  trucking
industry  is subject to strikes or work  stoppages,  which could have a material
adverse effect on the Company's  operations if alternative modes of shipping are
not then available.  Additionally,  the trucking  industry is subject to various
natural  disasters which can close  transportation  lanes in any given region of
the country.  To the extent  common  carriers are  prevented  from or delayed in
utilizing  local  transportation  lanes,  the Company  will likely  incur higher
freight costs due to the limited  availability  of trucks during any such period
that transportation  lanes are restricted.  All trucking and warehousing will be
handled by representatives of ALT.

     The  Company  generally  purchases  Promotional  Grocery  Products  for its
promotional  business  in  truck-load  quantities  to take  advantage  of better
pricing  from the  supplier  and lower  freight  costs.  The  Company's  traffic
department   then  arranges  for   transportation   of  the  product  through  a
computerized network of several hundred independent truckers coordinated through
its warehouse  operation.  The Company does not foresee  difficulty in arranging
additional trucking if it increases its business volume. All purchases, shipping
and warehousing is transacted through the Chinese distribution  agreement and is
handled by representatives of ALT. The Company has arranged for warehousing when
and  where  necessary,  on a  contract  basis  and has  thereby  eliminated  the
existence of and need for centralized warehousing.

                                      -7-

<PAGE>
         4.       PROMOTIONAL DISTRIBUTION BUSINESS - COMPETITION

     The  Promotional  Products  business  is a highly  competitive,  fragmented
business which,  as noted above,  generates  approximately  $40 billion in gross
revenues.  On a national  level,  the Company  does not believe  that any single
wholesaler or retailer has a significant percentage of market share. The Company
competes with a large number of wholesalers and retailers in the industry,  many
of whom have substantially  greater financial resources than the Company.  These
competitors  are able to make larger  volume  purchases  and can finance  larger
inventories than the Company. Moreover, some of these competitors will sometimes
receive preferential notice of product promotions prior to the Company.

     The  Company  seeks  to  compete  in  the  Promotional   Grocery   Products
distribution  industry  primarily on the basis of price and service.  Because of
its experienced sales force and its information systems network,  the Company is
generally able to carefully price its purchases,  thereby  offering  products at
competitive  prices.  All sales of  promotional  grocery and Squid products flow
through the Distribution Agreement and are supervised by representatives of ALT.


E.       SEASONALITY

     Seasonality  affects  the demand for  certain of the  products  sold by the
Company such as juice drinks in the summer months or hot cereals in the fall and
winter  months;  however,  all  these  products  are  available  to the  Company
throughout the year.  Manufacturers also tend to promote more heavily toward the
close of their fiscal  quarters  and during the spring and early summer  months.
Accordingly,  the  Company  is  able  to  purchase  more  product  due to  these
promotions.  The Company generally  experiences lower sales volume in the fourth
quarter  due to the  reduced  number of  selling  days  resulting  from the high
concentration of holidays in that quarter.

     Seasonality  also  affects  the squid  market  (and  seafood in general) of
products  originating in China.  Because of time and locality  differences,  the
optimum  timing for catching the seafood and the most popular  times for re-sale
in the United States differ  significantly and such requires that the seafood be
delivered and stored frozen, in many cases for a significant time. Purchases and
sales are likely to be affected thereby.

F.       EXPANSION STRATEGY

     Krantor  plans to expand its core grocery and frozen  squid market  through
its ten year distribution agreement with its Chinese trading partner. Subject to
available  financing,  the Company  plans to expand its  continuing  business by
merchandising  readily marketable  promotional brand grocery products and frozen
seafood and selling these goods to its customer base.


     In the second half of 1996,  Krantor enhanced its expansion into the frozen
squid  business  and has seen such segment of its  business  grow  significantly
since. As a result of this expansion,  the Company believes it can obtain better
margins on its sales of frozen seafood products.

     Management's plans are to focus on growth through internal operations.  The
Company  believes  that  internal  sales  growth of at least 20  percent  can be
achieved over the next five years.  The existing sales force can continue to add
new customers to its base,  in addition to  increasing  sales volume to existing
customers. The
                                      -8-

<PAGE>
Company plans to expand its sales territory by recruiting  additional  qualified
sales  personnel  and  establishing  a broker  network for its premium  handmade
cigars business.

G.       TRADEMARKS, LICENSES AND PATENTS

     The  Company  does not  utilize  any  copyrights,  trademarks,  licenses or
patents in its  business.  The Company has  obtained a wholesale  pharmaceutical
license through the New York State Department of Education,  but to date has not
utilized it. Through its distribution  agreements,  the Company has US rights to
the "Tenda"  "Picolo" name in the marketing of seafood products and "Suarez Gran
Reserva", "Breton Legend",  "Anduleros",  "Don Otilio","Alminante"  "Nativo" and
various other trade names in marketing of premium handmade  cigars.  The seafood
trademarks are owned by ALT. The cigar tradenames are owed by Gran Reserve Corp.

H.       EMPLOYEES

     The Company as of the date of this report  employs 7 full time  persons all
of  which  work  in  executive,   administrative  or  clerical  activities.  The
purchasing,  transportation, sales and operations of the promotional grocery and
seafood  business  employs  approximately 20 full time persons all who are under
the supervision and control of ALT. In the cigar distribution area there are 100
employees  that work in the  Dominican  Republic  for  Fabrica  De Tabaco  Valle
Dorado, SA. The Company also utilizes numerous independent brokers.

I.       ENVIRONMENTAL MATTERS

     The Company is subject to various  federal,  state and local  environmental
laws and regulations.  The Company believes that it is currently  conducting its
operations in material compliance with all such laws and regulations.

J.       COMPETITION

     The  Company  is  small  in  both  physical  and  financial  attributes  in
comparison to many of its competitors in the grocery industry and other business
areas in which it participates,  and, although it plans an expansion to increase
its position, the Company also competes with other more substantial companies in
the sale and distribution of frozen seafood,  including squid,  although in this
latter  area of  business  the  Company  believes  it may be among  the  largest
distributors of squid from China. The Company's  knowledge and experience in and
devotion to its business,  receptiveness to general customers,  service, and its
exclusivity  arrangement  with a major Chinese trading entity should continue to
benefit  its  operations  and  continue  to  allow it to  compete  with its more
financially endowed competitors.

K.       YEAR 2000 ISSUE

     The Company does not consider that there will be any material effect on its
business  operations  of any Year 2000 issues  relating  to  computer  generated
information and  maintenance.  The Company is not reliant on time based computer
generated information which may be affected by such issues. The Company does not
maintain  inventory of any significance,  the records of which might under other
circumstances  be  adversely  affected.  Therefor  the  Company has not made any
general  plans to  address  any Year  2000  issues.  However,  the  Company  has
purchased  the necessary  accounting  software for its system that are Year 2000
compliant.

                                      -9-

<PAGE>
ITEM 2:  PROPERTIES

     The Company's central  headquarters  consists of approximately  1000 square
feet of office space.  Two of the Company  employees work at this facility.  The
Company may expand its  warehousing  activities to other  facilities if and when
same may be deemed  advisable  for easy access to goods at various  locations in
the United States and/or abroad or for other reasons  associated with the nature
of goods sold.  Currently  squid from China is stored in freezers at warehousing
facilities in New Jersey.  The Company utilizes regional sales offices under the
distribution  agreement located in New York, New Jersey,  Florida,  Pennsylvania
and the Dominican Republic.

     The Company has relocated its principal  offices to 10850 Perry Way,  Suite
203, Wexford,  Pennsylvania  near Pittsburgh,  Pennsylvania and has arranged for
warehousing,  where  necessary,  on a contract  basis.  Such facility change was
accomplished because of the lesser need for larger facilities in the wake of the
Company's entering into its distributorship arrangement with its Chinese trading
partner,  the  latter  company  being  responsible  for  purchasing,  financing,
shipping and handling of all goods distributed for them by the Company.  The new
principal  offices for the Company were established in  Pennsylvania,  closer to
the domicile of Krantor's president,  Henry Platek, which offices continue to be
used  principally  as a  contact  point  and  are  fully  accessible  by  modern
telecommunications.  The Company  maintains  satellite  offices in New York, New
Jersey, Florida and the Dominican Republic.

ITEM 3:  LEGAL PROCEEDINGS

     The Company is subject to legal  proceedings  and claims which arise in the
ordinary  course of  business.  Except for the items  below,  in the  opinion of
management,  the amount of ultimate  liability with respect to these proceedings
and claims will not materially affect the financial position of the Company.

     The Company is named as a defendant  in various  lawsuits  arising from the
liquidation  of  Island  Frozen  and  Dairy  ("IFD"),  a  previous  wholly-owned
subsidiary  of the  Company.  The Company has  reserved and accrued on its books
minimal  funds to cover these  possible  claims.  In June 1996, a complaint  was
filed in Superior  Court Law  Division,  Essex  County,  New Jersey,  Docket No.
ESX-L-  6491-96 by New Jersey  National  Bank  against the  Company,  Affiliated
Island Grocers, the then affiliate of the Company, and certain other defendants,
seeking  payment on  secured  business  financing,  to which  claim the  Company
believes it has and has asserted  significant  claims to monetary  offsets.  The
principal amount claimed owed by the Company in such lawsuit is $350,000.00. The
Company  does not  believe  that the extent of the  balance  of above  mentioned
lawsuits exceeds $100,000.  While it is not reasonably  possible to estimate the
amount of losses in excess of amounts  accrued and reserved for such losses,  if
any, that may arise out of such litigation, management believes that the outcome
will not have a material effect on the operations of the Company.

     Action was brought by Krantor  Corporation,  and Island  Wholesale  Grocers
Inc., an affiliated company of Krantor  Corporation against The Proctor & Gamble
Distributing  Company, in which case The Proctor & Gamble  Distributing  Company
counterclaimed,  which  action was  brought  in United  States  District  Court,
Eastern  District of New York under docket no. CIV. 96- 1503(FB),  the nature of
the claims relating to promotional rebates which the Company claims from Proctor
& Gamble and  accounts  payable  from the Company to Proctor & Gamble  which are
claimed  as due  and  outstanding.  The  Company  has  negotiated  a  settlement
agreement with Proctor and Gamble in connection with this matter entered in

                                      -10-

<PAGE>
May 1997. The settlement involves recognition of debt due to Proctor & Gamble in
the amount of  $1,465,976  which the  Company  shall pay in cash and  stock,  as
reduced by  promotional  rebates  expected  to offset at least one third of such
settled amount.  Full payment is due by April 30, 2000.  Failure to abide by the
terms of such  settlement  may have a material  adverse  effect on the Company's
business.

     Two former officers of IFD were awarded through arbitration  $467,000 under
disputed  employment  contracts.  The award was converted to a judgment  against
Krantor  and  Affiliated   Island  Grocers  d/b/a  Island  Frozen  &  Dairy.  An
involuntary  Bankruptcy  petition  was  attempted  and the  Company  settled all
actions  relating  to this case for  $300,000  in shares of the Common  Stock by
stipulation entered in the Eastern District of New York, Case No.  897-87458-478
dated November 6, 1997.

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

     In 1997 no matters  were  submitted  for  shareholder  approval  during the
fourth quarter.


                                     PART II

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

     The Company's  Common Stock are traded on NASDAQ Small-Cap under the symbol
"KRAN",  and on the Boston Stock  Exchange  under the symbol  "KRN".  The NASDAQ
Stock Market,  which began  operation in 1971,  is the world's first  electronic
securities  market  and the  fastest  growing  stock  market in the U.S.  NASDAQ
utilizes today's information  technologies -computer and  telecommunications- to
unite its participants in a screen-based,  floorless  market.  It enables market
participants  to compete  with each  other for  investor  orders in each  NASDAQ
security  and   surveillance  of  thousands  of  securities.   This  competitive
marketplace,  along with the many products and services available to issuers and
their  shareholders,  attracts today's largest and fastest growing  companies to
NASDAQ.   These  include   industry   leaders  in   computers,   pharmaceutical,
telecommunications,  biotechnology,  and financial  services.  More domestic and
foreign  companies list on NASDAQ than on all other U.S. stock markets combined.
The high and low sales prices in the NASDAQ  Small Cap Market for the  Company's
Common  Stock,  as  reported  by the  NASDAQ  for  each of the  quarters  of the
Company's two most recent fiscal years are as follows:

                                      -11-

<PAGE>
                                  COMMON STOCK

Quarter Ended                                High              Low
-------------                              -------           -------
March 31, 1996                              38.28             34.38
June 30, 1996                               35.93             33.59
September 30, 1996                           9.38              7.81
December 31, 1996                            9.38              1.56
March 31, 1997                               4.68              1.50
June 30, 1997                                3.13               .75
September 30, 1997                           1.44               .97
December 31, 1997                            3.19              1.03
March 31, 1998                               2.50              1.59

     On April 6, 1998,  the  Company  had  approximately  5000  shareholders  of
record,  with much of the  stock  being  held in street  name.  The  Company  is
currently  listed on NASDAQ Small Cap. In May 1997 the Company reserve split its
common stock 1 for 25. The figures shown through  December 31, 1996 are adjusted
to show pro-forma post-split; all figures thereafter are also split adjusted.

     The Company has never paid any  dividends  on its Common Stock and does not
presently  intend to pay any  dividends on the Common  Stock in the  foreseeable
future.  The Company also has authorized and outstanding Class A Preferred Stock
but dividends thereon have been waived (see below).

REDEMPTION OF PREFERRED STOCK AND SETTLEMENT ON DIVIDENDS

     In December  1997,  the  Company,  by  agreement  with the holder  thereof,
redeemed all of its outstanding  Preferred Stock and reached agreement regarding
settlement on  outstanding  accrued  dividends  thereon,  issuing to such holder
400,000 shares of unlegended common stock (as and for redemption), and an option
(the "Option") to purchase  500,000  additional  shares of legended common stock
exercisable  at $1.00 per share,  together  with  payment of  $350,000  from the
Company to the holder (as settlement on any claims for accrued  dividends and in
lieu of future  dividends).  The  Option  does not vest  until the  Company  has
reached a pre-tax  profit of  $1,000,000  and if and when vested  shall be for a
five year term. The Preferred  Stock was  thereafter  re-issued to Mair Faibish,
the Company's  Executive Vice  President in recognition of and in  consideration
for his efforts in locating new product  lines for  marketing by the Company and
his assistance in locating  financing  therefor,  but dividends  associated with
such  Stock  have been  waived and there  will be no  acceptance  of  redemption
thereof unless same is done with the written consent of the Company's full Board
of  Directors,  such  alteration  in the  terms  of the  Preferred  Stock  being
agreeable  to the new holder  evidenced  by written  agreement  reached with the
Company.

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

OVERVIEW

     The Company  primarily  distributes and merchandises  squid and promotional
brand name grocery  products  through an agency agreement with a Chinese trading
company ("ALT") to the food industry.  The Company  discontinued its Kosher Food
business (IFD) on June 30, 1996. The Company's  current assets consist primarily
of accounts  receivable,  prepaid  expenses and cash. The Company's  liabilities
consist of accounts  payable,  short term and long term debt.  The Company  also
recently entered the business of the sale and distribution of premium handrolled
cigars.
                                      -12-

<PAGE>
RESULTS OF OPERATIONS

     The following  table sets forth selected  operational  data of the Company,
expressed as a percentage of revenues for the periods indicated below:


                            Years Ended December 31,

                                 1993     1994     1995     1996     1997
                                 ----     ----     ----     ----     ----

Revenues                         100.0%   100.0%   100.0%   100.0%   100.0%

Cost of Sales                    (90.8)   (89.3)   (87.9)  (106.2)   (77.8)

Operating Expenses                (7.7)   (10.6)    (8.1)   (11.0)   (17.1)


Other Income (expense)            (1.0)    (3.7)    (1.6)    (0.8)     0.6
                                  ----     ----      ----    ----     ----
Income(loss)from  
Operations Before 
Income Tax                         0.5     (3.6)     2.4    (18.0)     5.7

Income Tax  
(Expense)Benefit                  (0.2)     1.2     (0.8)    (0.3)      --

Discontinued Operations             --       --     (0.3)  (131.5)    (2.4)
Extraordinary Item                 0.0      0.6       --       --       --
                                  ----     ----      ----    ----     ----

Net Income(Loss)                   0.3%    (1.8)%    1.3%  (149.8)%    3.3%

                                      -13-

<PAGE>
                          Year Ended December 31, 1997
                    Compared to Year Ended December 31, 1996

     Revenues from  continued  operations  decreased for the year ended December
31, 1997 to $5.4 million,  a (27%) decrease as compared to the prior period. The
decrease in revenues is related to  discontinuing  IFD's business and operations
and the  recognition  of  commission  income as  opposed  to direct  sales.  The
Company's sales increased materially in the second half of 1997. The Company was
able to re-establish direct vendor contacts, especially with its largest vendor,
Proctor & Gamble thereby  reducing  overall  product cost. The Company  believes
that in 1998 sales growth should substantially exceed 1996 and 1997 levels.

     Cost of  sales  decreased  for the year  ended  December  31,  1997 to $4.2
million or (46%)  decrease as compared to the prior year.  The Company's cost of
goods decreased as a percentage of sales. The Company  attributes this change to
increased  commission  income,  increased  squid  sales  and  a  more  favorable
marketing promotional program. The Gross Profit in 1997 was 23% as compared to a
Gross Profit loss in 1996 due to the liquidation of IFD.


     Selling  General  &  Administrative  expenses  from  continuing  operations
increased to $907,386 for the period, a 16% increase.  The increase in operating
expenses is attributable  to the total  absorption by the Company of expenses in
connection  with  closing  down IFD.  Costs  incurred  include  legal  expenses,
financing  costs and stock  issuances in connection with satisfying IFD creditor
claims.

     Net income from  continuing  operations  increased  to  $305,807  ($.19 per
share) compared to a loss of $1.5 million ($5 per share). The Company attributes
its profitability to:

         a)       Closing its kosher business (IFD).

         b)       signing a  Distributorship  Agreement with its Chinese trading
                  partner to re-enter the  promotional  grocery  business.  This
                  Agreement  allowed the Company to reestablish  vendor contacts
                  and obtain financing for product  purchases for re-sale to its
                  customers in the  promotional  grocery and health & beauty aid
                  (HBA) business.

         c)       increasing  commission  sales of squid  manufactured by ALT at
                  higher margins.

         d)       streamlining  its corporate  overhead by  establishing  profit
                  centers  in each  business  segment  with  separate  operating
                  budgets.

         e)       outsourcing  all primary  services  relating  sales,  freight,
                  warehousing and management information systems.

         f)       significant  utilization of the internet for sales,  marketing
                  and corporate exposure.

     One time charges from discontinued  operations  totalled $130,632 ($.08 per
share) as  compared  to $9.7  million  ($29 per  share).  As a result net income
totalled  $175,175  ($.11 per share) as compared to a loss of $11.3 million ($34
per share).  The Company does not expect its future  expenses from  discontinued
operations to be material to its future business.

     In 1998 the Company hopes to benefit from its entry to the premium handmade
cigars business,  as well as increasing its sales by purchasing from its primary
vendors in the promotional grocery and HBA business.

                                      -14-

<PAGE>
                          Year Ended December 31, 1996
                    Compared to Year ended December 31, 1995

     Revenues from  continued  operations  decreased for the year ended December
31, 1996 to $7.4  million an (83%)  decrease  as  compared to the prior  period.
Revenues  from  discontinued  operations  (IFD)  for the  period  totaled  $12.8
million.  Total revenues for the combined business would have been $20.2 million
a 54%  decrease  from the prior  period.  The decrease in revenues is related to
discontinuing  IFD's  business  and the lack of  sufficient  working  capital to
maintain continuing operations.  In addition a major kosher poultry manufacturer
filed and was granted an injunction  against the Company and IFD. The injunction
limited the company's  ability to do business in the third quarter and prevented
the  utilization  of its credit  facilities.  In  October,  1996 the  injunction
against the company was lifted. The injunction was related to IFD's business and
not the Company's  grocery and squid  business.  The  redirection  of capital to
continuing  operations should allow the promotional grocery and seafood business
to expand to Fiscal 1995 profit  levels  starting in Fiscal year 1997;  although
additional  capital may be required (See  "Liquidity and Capital  Resources" and
"Forward looking and Cautionary  Statement").  However, the Company will only be
recognizing  royalty revenues in connection with its distribution and not direct
product  revenue.  This would cause the  Company's  revenue  base to decrease as
compared to prior years, but should not affect profitability.

     Cost of sales for continued  operations decreased to $7.8 million or (80 %)
decrease as compared to the prior year. This decrease was primarily attributable
to the decrease in the Company's revenues due to discontinued  operations and $1
million  adjustment to a trade payable due Proctor & Gamble  resulting  from the
Company's  settlement with this primary vendor.  The Company's gross profit from
continuing  operations  decreased  from 12.1% to (6.2)% in the same  period.  In
order to support IFD's business and maintain its liquidity the Company needed to
quickly sell inventory at margins that were lower than customarily  realized. At
the closing date of IFD's  business the  Company's  cost of goods  totaled $15.6
million on $12.8 million in revenues. In order to raise cash to satisfy creditor
obligations the Company was forced to sell below its product cost.  Furthermore,
IFD reserved $425,000 against its $671,587  accounts  receivable at December 31,
1996.  The Company felt that in closing down IFD, it would have a difficult time
to fully  collect on its accounts and would need  significant  legal  support in
this effort.

     Selling  General  &   Administrative   (S,G&A)   expenses  from  continuing
operations decreased to $782,367 for the period a 77% decrease. This decrease is
related to lower  revenues from  continued  operations.  SG&A as a percentage of
sales for continued  operation increased from 7.7% to 11.0% for the same period.
The  increase  in  operating  expenses  as a  percentage  of sales is due to the
drastic  reduction of sales.  Major  components of SG&A include freight expense,
sales  commissions and general service fees that are direct percentage of sales.
As sales decline, these components of sale decline as well.


     Loss from  continuing  operations  totaled  $1.3  million for the period as
compared to a $703,632  profit for the same period.  This decrease is related to
an (83%) drop in revenues from continuing  operations and $1 million  adjustment
to a trade payable due Proctor & Gamble resulting from the Company's  settlement
with this primary vendor. Loss from discontinued  operations totaled $9,690,148.
The Company believes that the total costs incurred from discontinuing operations
have been fully  charged to earnings  and should not  materially  affect  future
operating results.

     The Company fully  reserved its IFD inventory at December 31, 1996.  Due to
Empire's  injunction  on the IFD  inventory,  the goods  lost value due to their
perishable  nature.  At December 31, 1997 the Company realized no sales from its
inventory  and in fact the public  warehouses  liquidated  the IFD  inventory to
cover warehousing costs.

                                      -15-

<PAGE>
                          Year Ended December 31, 1995
                    Compared to Year Ended December 31, 1994

     Revenues  increased for the year ended December 31, 1995 to $43,917,040,  a
$11,900,189  (27.0%)  increase as compared to the prior year.  This increase was
primarily due to two factors:  (i) the increase in the Company's  line of credit
in November 1994 from $2.0 million to $5.0 million; and (ii) the completion of a
secondary  public  offering in November  1994  resulting  in net proceeds to the
company of approximately $3.7 million.  These two factors enabled the Company to
purchase larger  quantities of products and maintain  greater  inventory  levels
thus  leading  to  higher  sales  volume  in  1995.  All  activity   related  to
discontinued operations has been eliminated.

     Cost  of  sales   increased  for  the  year  ended  December  31,  1995  to
$38,588,738,  a $10,001,045  (or 26.0%)  increase as compared to the prior year.
This  increase  was  primarily  attributable  to the  increase in the  Company's
revenues.  The gross profit  increased  from 10.7% in 1994 to 12.1% in 1995 as a
result of the increased percentage of sales derived from the Company's wholesale
business. All activity related to IFD has been eliminated.

     Selling,  general and administrative  expenses increased for the year ended
December 31, 1995 to $3,386,874,  a $364,449 (or 10.8%)  increase as compared to
the prior year.  This increase is primarily  attributable to the increase in the
Company's revenues by 27.0% in 1995 as compared to 1994.

     The Company had net income of $552,883 in 1995 as compared  with a net loss
of $571,743 in 1994.  The gain is  attributable  to the increase in sales volume
during 1995 increasing  gross profit from 10.7% to 12.1% and decreasing  selling
general and administration costs from 9.4% of sales in 1994 to 7.7% in 1995.

                                      -16-

<PAGE>
                         Liquidity and Capital Resources


     The company had a positive working capital of $85,000 at December 31, 1997.
Excluding IFD's current liabilities,  working capital for continuing  operations
equals $746,000.  Liabilities were reduced from $3.4 million to $2 million a 41%
drop. (See Notes 4 & 5 to Consolidated Statements).  Reaching a positive working
capital position is a significant milestone for the Company. The Company finally
raised  enough  capital  and  turned  its  operations  to  profitability   which
significantly enhanced the liquidity of the Company. As a result the Company can
begin to secure  vendor  credits and  secured  financing  to grow its  operating
business.  These  changes  reflect a positive  working  capital  position of the
Company after absorbing all costs related to discontinued  operation  (IFD). The
Company  believes that it has sufficient  working capital to fund its continuing
operations but requires additional  financing to expand.  Continuing  operations
will be conducted  through Island Wholesale  Grocers (IWG), and the distribution
agreement  entered into on October 1, 1996 with ALT. (See Note 9 to Consolidated
Statements).

     The  Company's  receivables  for  the  fiscal  year  increased  by  130% to
$1,128,000.  The increase of receivables is due to several factors which include
the Company's  re-establishment,  as a primary supplier,  through IWG, of direct
sales through its  Distribution  Agreement  with ALT. The Company is financing a
portion of its business  through trade credits  arranged  through ALT and vendor
credits  established  by IWG. The Company  hopes to continue this trend with the
support of ALT. The Company currently buys directly from one of the major food &
consumer product companies in the United States.

     The Company plans on expanding its core grocery and frozen  seafood  market
through its distribution agreement. Krantor believes that by discontinuing IFD's
operation  it should  enable  it to  support  the  capital  requirements  of its
continuing  operations.  However,  the Company  believes it will need additional
financing in the form of  subordinated  debt or equity to finance its  expansion
plans. See "Forward-Looking Information and Cautionary Statements."

     The Company  had a $8 Million  credit  facility  with  Fidelity  Funding of
California  which  expires on November  14, 1997.  The Company is currently  not
borrowing under the facility.  The Company's  business is being conducted though
its  distribution  agreement.  The Company  believes that it no longer  requires
Fidelity's  facility and intends to pay the facility off through the liquidation
of IFD's assets.  The facility,  which expired in November 1996, was extended on
May 11, 1996 through November 14, 1997 by Fidelity.

     Management  is not  aware  of  negative  trends  in the  Company's  area of
business or other economic  factors which may cause a significant  change in the
Company's  viability or financial  stability,  except as specified herein and in
"Forward-Looking Information and Cautionary Statements." Management has no plans
to alter the nature of its business.

     Subject to available  financing,  the Company intends to further expand its
continuing  business  through its distribution  agreement by merchandising  well
accepted readily  marketable  promotional  brand-name  grocery products,  frozen
squid and handmade premium cigars.  However,  there can be no assurance that the
Company's proposed expansion plans will be successful.

SEASONALITY

     Seasonality  affects the demand for certain  products  sold by the Company,
such as juice  drinks in the  summer  months or hot  cereals  in fall and winter
months.  However, all these products are available to the Company throughout the
year. Manufacturers also tend to promote

                                      -17-

<PAGE>
more heavily  towards the close of the fiscal quarters and during the spring and
early summer months. Accordingly, the Company is able to purchase more products,
increase  sales  during  these  periods and reduce its product cost due to these
promotions.  The Company generally  experiences lower sales volume in the fourth
quarter  due  to  the  reduced   number  of  selling  days  resulting  from  the
concentration  of  holidays  in the  quarter.  Sale  of  frozen  squid  is  more
significant  in the third and fourth  quarters due to the  seasonal  catch which
occurs in the second quarter.

INFLATION

     The Company believes that inflation, under certain circumstances,  could be
beneficial to the Company's business.  When inflationary pressures drive product
costs up, the  Company's  customers  sometimes  purchase  greater  quantities of
product  to  expand  their   inventories  to  protect  against  further  pricing
increases.  This enables the Company to sell greater quantities of products that
are sensitive to inflationary pressures.

     However,  inflationary  pressures frequently increase interest rates. Since
the Company is  dependent  on  financing,  any  increase in interest  rates will
increase the Company's credit costs, thereby reducing its profits.

FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS

     Other than the factual matters set forth herein,  the matters and items set
forth in this  report are  forward-looking  statements  that  involve  risks and
uncertainties.  The  Company's  actual  results may differ  materially  from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the following:

         1.       Cash Flow.

                  The Company has  experienced  cash shortages which continue to
                  adversely  affect its  business.  See  "Liquidity  and Capital
                  Resources". The Company requires additional working capital in
                  order to maintain and expand its business.

         2.       Dependence on Public Trends.

                  The  Company's  business is subject to the effects of changing
                  customer  preferences  and  the  economy,  both of  which  are
                  difficult  to  predict  and  over  which  the  Company  has no
                  control.  A  change  in  either  consumer   preferences  or  a
                  down-turn  in the  economy may affect the  Company's  business
                  prospects.

         3.       Potential Product Liability.

                  As  a  participant  in  the  distribution  chain  between  the
                  manufacturer  and consumer,  the Company would likely be named
                  as a defendant in any product  liability  action  brought by a
                  consumer.  To date, no claims have been  asserted  against the
                  Company for  products  liability;  there can be no  assurance,
                  however,  that  such  claims  will not  arise  in the  future.
                  Currently,  the  Company  does  not  carry  product  liability
                  insurance.  In the event that any products  liability claim is
                  not fully funded by insurance, and if the Company is unable to
                  recover  damages  from the  manufacturer  or  supplier  of the
                  product that caused such  injury,  the Company may be required
                  to pay some or all of such claim from its own funds.  Any such
                  payment could have a material adverse impact on the Company.


                                      -18-

<PAGE>
         4.       Reliance on Common Carriers.

                  The Company  does not  utilize its own trucks in its  business
                  and is dependent, for shipping of product purchases, on common
                  carriers in the trucking  industry.  Although the Company uses
                  several  hundred  common  carriers,  the trucking  industry is
                  subject  to  strikes  from  time to  time,  which  could  have
                  material  adverse  effect  on  the  Company's   operations  if
                  alternative   modes  of  shipping  are  not  then   available.
                  Additionally  the trucking  industry is susceptible to various
                  natural disasters which can close  transportation lanes in any
                  given region of the country. To the extent common carriers are
                  prevented  from or delayed in utilizing  local  transportation
                  lanes,  the Company will likely incur higher freight costs due
                  to the limited  availability  of trucks during any such period
                  that transportation lanes are restricted.

         5.       Competition.

                  The  Company  is  subject to  competition  in its  promotional
                  grocery, squid, and premium handmade cigars businesses.  While
                  these  industries  may  be  highly  fragmented,  with  no  one
                  distributor dominating the industry, the Company is subject to
                  competitive  pressures from other  distributors based on price
                  and service and product quality and origin.


         6.       Trade Relations With China.

                  The Company is dependent  on trade with the People's  Republic
                  of China  (PRC).  The  Company's  financing  arrangements  and
                  distribution  contracts  with ALT  involve a  Chinese  trading
                  company and squid, which is directly supplied through the PRC.
                  Any government  sanctions that cause an  interruption of trade
                  or  prohibit  trade with PRC through  higher  duties or quotas
                  could  have  a  material   adverse  effect  on  the  Company's
                  business.  China  currently  maintains a Most  Favored  Nation
                  status  with  the  United  States,  which  it  has  maintained
                  continuously since 1980, renewal of which is done on an annual
                  basis  each May,  Loss of such  status  could  have a material
                  adverse affect on Company business.

         7.       Litigation

                  The  Company  is  named as a  defendant  in  various  lawsuits
                  arising  from the  liquidation  of  Island  Frozen  and  Dairy
                  ("IFD"),  a previous  wholly-owned  subsidiary of the Company.
                  The Company  has  reserved  and  accrued on its books  minimal
                  funds  to  cover  these  possible  claims.  In  June  1996,  a
                  complaint  was filed in  Superior  Court Law  Division,  Essex
                  County,  New Jersey,  Docket No.  ESX-L-6491- 96 by New Jersey
                  National Bank against the Company,  Affiliated Island Grocers,
                  the  then   affiliate  of  the  Company,   and  certain  other
                  defendants,  seeking payment on secured business financing, to
                  which  claim  the  Company  believes  it has and has  asserted
                  significant  claims to monetary offsets.  The principal amount
                  claimed  owed by the Company in such  lawsuit is  $350,000.00.
                  The Company does not believe that the extent of the balance of
                  above mentioned  lawsuits  exceeds  $100,000.  While it is not
                  reasonably possible to estimate the amount of losses in excess
                  of amounts accrued and reserved for such losses,  if any, that
                  may arise out of such litigation, management believes that the
                  outcome will not have a material  effect on the  operations of
                  the Company.

                  Action  was  brought  by  Krantor   Corporation,   and  Island
                  Wholesale  Grocers  Inc.,  an  affiliated  company  of Krantor
                  Corporation against The Proctor & Gamble Distributing Company,
                  in  which  case The  Proctor  &  Gamble  Distributing  Company
                  counterclaimed, which action was brought in United



                                      -19-

<PAGE>
                  States  District  Court,  Eastern  District  of New York under
                  docket no. CIV. 96-1503(FB), the nature of the claims relating
                  to promotional rebates which the Company claims from Proctor &
                  Gamble  and  accounts  payable  from the  Company to Proctor &
                  Gamble which are claimed as due and  outstanding.  The Company
                  has negotiated a settlement  agreement with Proctor and Gamble
                  in  connection  with this  matter  entered  in May  1997.  The
                  settlement  involves  recognition  of debt  due to  Proctor  &
                  Gamble in the amount of $1,465,976 which the Company shall pay
                  in cash and stock, as reduced by promotional  rebates expected
                  to  offset at least one  third of such  settled  amount.  Full
                  payment  is due by April  30,  2000.  Failure  to abide by the
                  terms of such settlement may have a material adverse effect on
                  the Company's business.

                  Two former  officers of IFD were awarded  through  arbitration
                  $467,000 under disputed  employment  contracts.  The award was
                  converted to a judgment against Krantor and Affiliated  Island
                  Grocers d/b/a Island Frozen & Dairy. An involuntary Bankruptcy
                  petition  was  attempted  and the Company  settled all actions
                  relating  to this case for  $300,000  in shares of the  Common
                  Stock by  stipulation  entered in the Eastern  District of New
                  York, Case No. 897- 87458-478 dated November 6, 1997.

                  The Company is subject to other legal  proceedings  and claims
                  which arise in the  ordinary  course of its  business.  In the
                  opinion of management,  the amount of ultimate  liability with
                  respect  to these  actions  will  not  materially  affect  the
                  financial position, results of operations or cash flows of the
                  Company, but there can be no assurance as to this.

         8.       Possible Loss of NASDAQ Small Cap Listing.

                  Krantor  currently  qualifies  for trading on the Nasdaq Small
                  Cap  system.  Nasdaq  has  adopted,  and  the  Commission  has
                  approved,  certain  changes  to its  maintenance  requirements
                  which became effective as of February 28, 1998,  including the
                  requirement  that a stock  listed  in such  market  have a bid
                  price greater than or equal to $1.00.  The bid price per share
                  for the Common  Stock of Krantor  has been below  $1.00 in the
                  past and the Common Stock has remained on the Nasdaq Small Cap
                  System  because  Krantor  has  complied  with the  alternative
                  criteria which are now eliminated  under the new rules. If the
                  bid price  continues  below $1.00 per share,  the Common Stock
                  could be  delisted  from  the  Nasdaq  Small  Cap  System  and
                  thereafter  trading  would  be  reported  in  the  NASD's  OTC
                  Bulletin  Board  or in the  "pink  sheets."  In the  event  of
                  delisting  from the Nasdaq Small Cap System,  the Common Stock
                  would  become  subject  to  rules  adopted  by the  Commission
                  regulating   broker-dealer   practices  in   connection   with
                  transactions   in  "penny   stocks."  The   disclosure   rules
                  applicable to penny stocks require a broker-dealer, prior to a
                  transaction  in a penny  stock not  otherwise  exempt from the
                  rules,  to deliver a  standardized  list  disclosure  document
                  prepared by the  Commission  that provides  information  about
                  penny  stocks  and the  nature and level of risks in the penny
                  stock market. In addition, the broker-dealer must identify its
                  role,  if any,  as a  market  maker in the  particular  stock,
                  provide  information  with  respect  to  market  prices of the
                  Common  Stock  and  the  amount  of   compensation   that  the
                  broker-dealer  will  earn  in the  proposed  transaction.  The
                  broker-dealer  must also  provide the  customer  with  certain
                  other   information   and   must   make  a   special   written
                  determination  that the penny  stock is a suitable  investment
                  for the purchaser and receive the purchaser's

                                      -20-

<PAGE>
                  written  agreement  to the  transaction.  Further,  the  rules
                  require   that   following   the  proposed   transaction   the
                  broker-dealer   provide  the  customer  with  monthly  account
                  statements  containing market  information about the prices of
                  the securities.  These  disclosure  requirements  may have the
                  effect  of  reducing  the  level of  trading  activity  in the
                  secondary market for a stock that becomes subject to the penny
                  stock rules.  If the Common Stock became  subject to the penny
                  stock rules, many broker-dealers may be unwilling to engage in
                  transactions in the Company's  securities because of the added
                  disclosure requirements,  thereby making it more difficult for
                  purchasers  of the Common Stock in this offering to dispose of
                  their shares of the Common Stock.

         9.       Risks of Business Development.

                  The   Company   has   ventured   into  new  lines  of  product
                  distribution  (see  "Item I B  (Cigars)  (1997)  and C (Squid)
                  (1996)") and such product  lines are expected to  constitute a
                  material part of the Company's revenue stream. The Company has
                  not  restored  its level of product  sales to that of previous
                  years but with the  addition  of these new  product  lines the
                  Company is hopeful of reaching and hopefully  exceeding  those
                  prior  levels.  Because  of the  newness  of  these  lines  of
                  products to the Company,  the  Company's  operations  in these
                  areas  should  be  considered  subject  to all  of  the  risks
                  inherent in a new business  enterprise,  including the absence
                  of a  profitable  operating  history  and the  expense  of new
                  product development. Various problems, expenses, complications
                  and  delays  may  be  encountered   in  connection   with  the
                  development of the Company's new products. These expenses must
                  either be paid out of the proceeds of future  offerings or out
                  of  generated  revenues and Company  profits.  There can be no
                  assurance as to the availability of funds from either of these
                  sources.

         10.      Rapidly Changing Market May Impact Operations.

                  The market for the Company's products is rapidly changing with
                  evolving   industry   standards   and   frequent  new  product
                  introductions.  The  Company's  future  success will depend in
                  part  upon its  continued  ability  to  enhance  its  existing
                  products  and to  introduce  new products and features to meet
                  changing   customer   requirements   and   emerging   industry
                  standards.  The Company will have to develop and  implement an
                  appropriate marketing strategy for each of its products. There
                  can  be  no  assurance  that  the  Company  will  successfully
                  complete  the  development  of  future  products  or that  the
                  Company's  current  or future  products  will  achieve  market
                  acceptance levels conducive to the Company's fiscal needs. Any
                  delay  or  failure  of  these   products  to  achieve   market
                  acceptance would adversely affect the Company's  business.  In
                  addition,  there  can be no  assurance  that the  products  or
                  technologies developed by others will not render the Company's
                  products or technologies non-competitive or obsolete.

                  The  Company's  revenue base has been slowly  recovering  from
                  losses  of 1996  generating  from the  discontinuation  of its
                  Kosher  Food  business.  In order for the  Company to increase
                  grocery sales, it must reestablish it's relationships with the
                  major   grocery   manufactures.   The  Company  is  vigorously
                  attempting to reestablish these

                                      -21-

<PAGE>
                  ties to prior  customers as well as develop new ones.  Failure
                  to re-establish these ties would have an adverse effect on the
                  Company.  Furthermore,  the  Company  has  entered new markets
                  which include squid,  and premium  handmade cigars for sale to
                  its existing customers and newly found sources.  These product
                  lines have lower sales volume than the  Company's  traditional
                  business,  but higher  margins  and  greater  advertising  and
                  promotional  expenses.  The Company  believes that  developing
                  propriety  products is in the best  interest of the  Company's
                  expansion.   The  existence  of  and  relationship   with  the
                  Company's  Chinese  Trading  Partner  has  also  significantly
                  decreased the Company's cost of goods sold.  Failure to secure
                  market penetration in the new product lines would however have
                  an adverse effect on the Company's  profitability.  Management
                  believes actions presently being taken to revise the Company's
                  operating  and  financial   requirements  should  provide  the
                  opportunity  for the Company to  continue as a going  concern.
                  However,  Management  cannot  predict  the  outcome  of future
                  operations  and no  adjustments  have been made to offset  the
                  outcome of this uncertainty.

         11.      Dependence Upon Attracting and Holding.

                  The  Company's  future  success  depends  in large part on the
                  continued service of its key technical,  marketing,  sales and
                  management  personnel  and  on  its  ability  to  continue  to
                  attract,  motivate  and  retain  highly  qualified  employees.
                  Although the Company's key employees have stock  options,  its
                  key employees may voluntarily  terminate their employment with
                  the Company at any time.  Competition  for such  employees  is
                  intense and the process of locating  technical and  management
                  personnel  with  the  combination  of  skills  and  attributes
                  required to execute the Company's  strategy is often  lengthy.
                  Accordingly,  the loss of the services of key personnel  could
                  have a material  adverse  effect upon the Company's  operating
                  efforts  and on its  research  and  development  efforts.  The
                  Company does not have key person life  insurance  covering its
                  management personnel or other key employees.

         12.      Extensive and Increasing Regulation of Tobacco Products
                  and Litigation May Impact Cigar Industry.

                  The tobacco  industry in general has been subject to extensive
                  regulation  at the  federal,  state and local  levels.  Recent
                  trends have  increased  regulation  of the  tobacco  industry.
                  Although    regulation    initially   focused   on   cigarette
                  manufacturers,  it has begun to have a  broader  impact on the
                  industry  as a whole and may focus more  directly on cigars in
                  the future.  The recent increase in popularity of cigars could
                  lead to an  increase  in  regulation  of cigars.  A variety of
                  bills relating to tobacco  issues have been  introduced in the
                  U.S. Congress,  including bills that would have (i) prohibited
                  the  advertising  and  promotion  of all  tobacco  products or
                  restricted or eliminated the deductibility of such advertising
                  expense,  (ii)  increased  labeling  requirements  on  tobacco
                  products to include,  among others things,  addiction warnings
                  and lists of additives and toxins,  (iii)  shifted  control of
                  tobacco  products and  advertisements  from the Federal  Trade
                  Commission  (the  "FTC")  to the Food and Drug  Administration
                  (the  "FDA"),  (iv)  increased  tobacco  excise  taxes and (v)
                  required tobacco companies to pay for health care costs

                                      -22-

<PAGE>
                  incurred by the federal  government in connection with tobacco
                  related  diseases.  Future  enactment  of  such  proposals  or
                  similar  bills may have an  adverse  effect on the  results of
                  operations or financial condition of the Company.

                  In addition, a majority of states restrict or prohibit smoking
                  in  certain  public  places and  restrict  the sale of tobacco
                  products to minors.  Local  legislative and regulatory  bodies
                  also have increasingly moved to curtail smoking by prohibiting
                  smoking  in  certain  buildings  or  areas  or  by  designated
                  "smoking"  areas.  Further  restrictions  of a similar  nature
                  could  have  an  adverse  effect  on the  Company's  sales  or
                  operations,  such as banning  counter  access to or display of
                  premium handmade cigars,  or decisions by retailers because of
                  public pressure to stop selling all tobacco products. Numerous
                  proposals  also  have been  considered  at the state and local
                  level restricting smoking in certain public areas,  regulating
                  point of sale placement and  promotions and requiring  warning
                  labels.

                  Although   federal  law  has  required   health   warnings  on
                  cigarettes  since 1965 and on  smokeless  tobacco  since 1986,
                  there is no  federal  law  requiring  that  cigars  carry such
                  warnings. California, however, requires "clear and reasonable"
                  warning to consumers  who are exposed to chemicals  determined
                  by  the  State  to  cause  cancer  on  reproductive  toxicity,
                  including   tobacco  smoke  and  several  of  its  constituent
                  chemicals.  Similar  legislation  has been introduced in other
                  states, but did not pass. There can be no assurance that other
                  states will not enact similar  legislation.  Consideration  at
                  both the  federal  and  state  level  also  has been  given to
                  consequences  of tobacco smoke on others who are not currently
                  smoking  (so  called  "second-hand"  smoke).  There  can be no
                  assurance that regulations  relating to second hand smoke will
                  not be adopted or that such  regulation or related  litigation
                  would not have a  material  adverse  effect  on the  Company's
                  results of operations or financial condition.

                  Increased  cigar  consumption  and the publicity such increase
                  has received may increase the risk of  additional  regulation.
                  The Company  cannot  predict the ultimate  content,  timing or
                  effect of any additional regulation of tobacco products by any
                  federal,  state, local or regulatory body, and there can be no
                  assurance that any such  legislation  or regulation  would not
                  have a material adverse effect on the Company's business.  See
                  "Recent Developments"

                  On June 20,  1997 the  Attorneys  General of 40 states and the
                  major  United  States  cigarette   manufacturers  announced  a
                  proposed  settlement  of a lawsuit  filed by the  States.  The
                  proposed settlement, which will require that the United States
                  Congress  take  certain  action,  is  complex  and may  change
                  significantly  or be rejected.  However,  the  proposal  would
                  require significant changes in the way United States cigarette
                  and tobacco  companies do business.  Among other  things:  the
                  tobacco  companies  will pay  hundreds of billions of dollars;
                  the  FDA  could  regulate  nicotine  as a drug;  class  action
                  lawsuits and  punitive  damages  would be banned;  and tobacco
                  billboards   and   sporting   event   sponsorships   would  be
                  prohibited.  The potential  impact,  if any, of the settlement
                  and related legislation on the cigar industry is uncertain.

                                      -23-

<PAGE>
                  In  addition  to the  40-state  litigation  referred to in the
                  preceding paragraph,  the tobacco industry has experienced and
                  is   experiencing   significant    health-related   litigation
                  involving  tobacco  and  health  issues.  Plaintiffs  in  such
                  litigation  have sought and are seeking  compensatory,  and in
                  some cases punitive,  damages for various  injuries claimed to
                  result from the use of tobacco products or exposure to tobacco
                  smoke. The proposed  settlement of the 40-state litigation may
                  have a material impact to limit  litigation,  but there can be
                  no   assurance   that  there  would  not  be  an  increase  in
                  health-related  litigation against the cigarette and smokeless
                  tobacco industries or similar litigation in the future against
                  the cigar industry.  Costs of defending  prolonged  litigation
                  and any  settlement or successful  prosecution of any material
                  health-related  litigation  against  manufacturers  of cigars,
                  cigarettes  or  smokeless  tobacco or suppliers to the tobacco
                  industry could have a material adverse effect on the Company's
                  results of operations and/or financial  condition.  The recent
                  increase  in the  sales  of  cigars  and  the  publicity  such
                  increase has received  may have the effect of  increasing  the
                  probability of legal claims. Also, a recent study published in
                  the journal Science  reported that a chemical found in tobacco
                  smoke has been  found to cause  genetic  damage in lung  cells
                  that is identical to damage observed in many malignant  tumors
                  of the lung and thereby directly links lung cancer to smoking.
                  This study and other reports  could affect  pending and future
                  tobacco regulation or litigation relating to cigar smoking.

         13.      Risks Relating to Marketing of Cigars.

                  The Company primarily will distribute  premium handmade cigars
                  which are  hand-rolled and use tobacco aged over one year. The
                  Company  believes that there is an abundant  supply of tobacco
                  available  through its supplier in the Dominican  Republic for
                  the types of premium  handmade  cigars the  Company  primarily
                  will sell.  However,  there can be no assurance that increases
                  in demand would not adversely affect the Company's  ability to
                  acquire higher priced premium handmade cigars.

                  While the cigar industry has experienced increasing demand for
                  cigars  during  the  last  several  years,  there  can  be  no
                  assurance that the trend will  continue.  If the industry does
                  not  continue  as the  Company  anticipates  or if the Company
                  experiences  a reduction  in demand for whatever  reason,  the
                  Company's supplier may temporarily accumulate excess inventory
                  which could have an adverse  effect on the Company's  business
                  or results of operations.

         14.      Social, Political, And Economic Risks Associated With
                  Foreign Trade May Adversely Impact Business.

                  The Company  purchases all of its premium handmade cigars from
                  manufacturers  located in countries outside the United States.
                  In addition,  the Company  acquires squid through the People's
                  Republic  of China  ("PRC").  Social and  economic  conditions
                  inherent in foreign  operations  and  international  trade may
                  change, including changes in the laws and policies that govern
                  foreign investment and international trade. To a lesser extent
                  social, political and economic conditions may cause changes in
                  United States laws and regulations relating to foreign

                                      -24-
<PAGE>
                  investment and trade.  Social,  political or economic  changes
                  could,  among other  things,  interrupt  cigar supply or cause
                  significant   increases  in  cigar  prices.   In   particular,
                  political  or labor  unrest in the  Dominican  Republic  could
                  interrupt the  production of premium  handmade  cigars,  which
                  would   inhibit  the  Company  from  buying   inventory.   Any
                  government  sanctions that cause an  interruption  of trade or
                  prohibit  trade with the PRC through  higher  duties or quotas
                  could  have  a  material   adverse  effect  on  the  Company's
                  business.  Accordingly, there can be no assurance that changes
                  in social,  political or economic  conditions  will not have a
                  material adverse affect on the Company's business.

         15.      Seasonality.

                  Seasonality  affects the demand for certain  products  sold by
                  the Company,  such as juice drinks in the summer months or hot
                  cereals in fall and winter months. However, all these products
                  are   available   to  the   Company   throughout   the   year.
                  Manufacturers  also tend to promote more  heavily  towards the
                  close of the fiscal  quarters  and during the spring and early
                  summer months.  Accordingly,  the Company is able during these
                  periods to purchase more products, increase sales during these
                  periods and reduce its product  cost due to these  promotions.
                  The Company  generally  experiences  lower sales volume in the
                  fourth  quarter  due to the  reduced  number of  selling  days
                  resulting from the  concentration  of holidays in the quarter.
                  Sale of  frozen  squid is more  significant  in the  third and
                  fourth  quarters due to the seasonal catch which occurs in the
                  second quarter.

         16.      No Dividends Likely.

                  No  dividends  have  been  paid  on  the  Common  Stock  since
                  inception,  nor, by reason of its current financial status and
                  its   contemplated   financial   requirements,   does  Krantor
                  contemplate or anticipate paying any dividends upon its Common
                  Stock in the foreseeable future.

                                      -25-

<PAGE>
                                    PART III

     The  information  required by items  10-13 are omitted  pursuant to general
instruction G(3) to form 10K. The Company intends to include this information in
its proxy statement which is expected to be mailed and filed with the Commission
on or before April 30, 1998. The annual meeting  expected to be scheduled in May
1998.

                                      -26-

<PAGE>
                                     PART IV

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

(a)      Documents filed as part of this Report:

1.       Financial Statements

The  following  financial  statements  of the Company are contained in Item 8 of
this Report on the pages indicated:
                                                               Page
                                                               ----

Independent Auditors Reports                                   F1

Balance Sheets -
December 31, 1997                                              F2

Statements of Operations -
Years ended December 31, 1997 and
1996                                                           F3 - F4

Statements of Changes in Stockholders'
Equity - Years ended December 31, 1997 and
1996                                                           F5 - F6

Statements of Cash Flows - Years
ended December 31, 1997, and 1996                              F7 - F8 

Notes to Financial Statements as of
December 31, 1997, and 1996                                    F9 - F15


2. Financial Statement Schedules

I. Independent Auditors Report on
   Financial Statement Schedule                                F-17
     
II.  Valuation Accounts                                        F-18



3.       (a) Exhibits:

         See Index to Exhibits

         (b) Reports on Form 8-K
         There were no reports  on Form 8-K filed  during the fourth  quarter of
         1997.

                                      -27-

<PAGE>
                                   SIGNATURES


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

                               KRANTOR CORPORATION



                               by /s/ Mair Faibish
                               --------------------------------
                                      Mair Faibish
                                      Executive Vice President

Dated: April 14, 1998


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

                               by /s/ Mair Faibish
                               ----------------------------------
                                      Mair Faibish
                                      Executive Vice President
                                      Principal Financial Officer
                                      and Director
Signed: April 14, 1998



                               by /s/ Mitchell Gerstein
                               ----------------------------------
                                      Mitchell Gerstein, Director

Signed: April 14, 1998

                                      -28-

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


The Board of Directors
Krantor Corporation

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Krantor
Corporation  and   subsidiaries  as  of  December  31,  1997,  and  the  related
consolidated statements of operations,  changes in stockholders' equity and cash
flows for the years ended December 31, 1997 and 1996. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our 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 our audits provide a reasonable basis for our opinion.

In our report dated April 4, 1997, we were unable to confirm promotional rebates
totaling  $1,467,738  at  December  31,  1996 or  satisfy  ourselves  about  the
recoverability  of  promotional  rebates  through  alternative  procedures.   As
described in Note 14 to the financial  statements,  the Company has restated its
December 31, 1996 financial  statements to correctly record promotional rebates.
Accordingly,  our present opinion on the December 31, 1996 financial statements,
as presented herein, is different from that expressed in our previous report.

In our opinion,  the consolidated  financial statements referred to in the first
paragraph present fairly, in all material  respects,  the financial  position of
Krantor  Corporation and subsidiaries as of December 31, 1997 and the results of
their  operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.


                                                               BELEW AVERITT LLP

Dallas,  Texas 
March 18, 1998, except for 
Note 15, as to which the 
date is March 31, 1998

                                      F-1

                                      -29-

<PAGE>
                      KRANTOR CORPORATION AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                December 31, 1997


                                     ASSETS
                                     ------

CURRENT ASSETS
   Cash  and cash equivalents                                      $    189,626
   Accounts receivable, net of allowance for doubtful accounts
    of $95,826                                                        1,128,000
   Promotional rebates (Note 14)                                        270,496
   Other current assets                                                 136,189
                                                                   ------------

       Total current assets                                           1,724,311

COLLATERAL SECURITY DEPOSIT (Note 9)                                  2,252,995

PROPERTY AND EQUIPMENT, net (Note 3)                                    117,402
                                                                   ------------

                                                                   $  4,094,708
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES
   Notes payable (Note 4)                                          $    535,810
   Accounts payable and accrued expenses (Note 5)                     1,092,716
   Income taxes payable                                                  10,529
                                                                   ------------
       Total current liabilities                                      1,639,055

VENDOR DEBT DUE AFTER ONE YEAR (Note 5)                                 395,048

COMMITMENTS AND CONTINGENCIES (Note 9)                                     --

PREFERRED STOCK OF SUBSIDIARY (Note 6)                                  105,000

STOCKHOLDERS' EQUITY (Note 7)
   Class A preferred stock - $.001 par value; 100,000 shares
    authorized                                                              100
   Common stock - $.001 par value; 29,900,000 shares authorized           4,140
   Additional paid-in capital                                        14,467,141
   Deficit                                                          (12,348,276)
                                                                   ------------
                                                                      2,123,105

   Less treasury stock, at cost, 1,400 shares                          (167,500)
                                                                   ------------

       Total stockholders' equity                                     1,955,605

                                                                   $  4,094,708
                                                                   ============

          See accompanying notes to consolidated financial statements.

                                      F-2
                                      -30-

<PAGE>
                      KRANTOR CORPORATION AND SUBSIDIARIES

                     Consolidated Statements of Operations

                     Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>

                                                                      1997            1996
                                                                 ------------    ------------

REVENUE
<S>                                                              <C>             <C>         
   Net sales (Note 10)                                           $  5,007,336    $  7,086,521
   Commission income (Note 9)                                         382,025         285,013
                                                                 ------------    ------------
                                                                    5,389,361       7,371,534

COST OF SALES (Note 14)                                             4,195,519       7,829,881
                                                                 ------------    ------------

GROSS PROFIT (LOSS)                                                 1,193,842        (458,347)

SELLING, GENERAL AND ADMINISTRATIVE
 EXPENSES                                                             907,386         782,367

DEPRECIATION AND AMORTIZATION                                          16,915          33,660
                                                                 ------------    ------------

OPERATING INCOME (LOSS)                                               269,541      (1,274,374)

OTHER INCOME (EXPENSE)
   Interest Income                                                    134,875            --
   Net gain (loss) on marketable securities                           (37,625)         13,673
   Miscellaneous income (expense)                                     (48,505)          3,027
   Interest expense                                                      --           (72,169)
   Financing costs                                                    (12,479)           --
                                                                 ------------    ------------

                                                                       36,266         (55,469)
                                                                 ------------    ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
 BEFORE INCOME TAXES                                                  305,807      (1,329,843)

INCOME TAX EXPENSE (Note 8)                                              --            23,149
                                                                 ------------    ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                              305,807      (1,352,992)

DISCONTINUED OPERATIONS (Note 11)
   Loss from operations of IFD, net of applicable
     income tax benefit of $0                                            --        (4,386,904)
   Loss on disposal of IFD, net of applicable income
     tax benefit of $0                                               (130,632)     (5,303,244)
                                                                 ------------    ------------

NET INCOME (LOSS)                                                     175,175     (11,043,140)

LESS PREFERRED DIVIDENDS                                                 --           220,000
                                                                 ------------    ------------

INCOME (LOSS) APPLICABLE TO COMMON
 STOCK (Note 1)                                                  $    175,175    $(11,263,140)
                                                                 ============    ============
</TABLE>

                                      F-3
                                      -31-

<PAGE>
                      KRANTOR CORPORATION AND SUBSIDIARIES

                 Consolidated Statements of Operations (Cont.)

                     Years ended December 31, 1997 and 1996

<TABLE>
<CAPTION>


                                                                      1997            1996
                                                                 ------------    ------------

BASIC EARNINGS (LOSS) PER COMMON SHARE (Note 13)
<S>                                                              <C>             <C>          
   Income (loss) from continuing operations                      $        .19    $      (4.76)
   Discontinued operations                                               (.08)         (29.36)

NET INCOME (LOSS) PER COMMON SHARE                               $        .11    $     (34.12)
                                                                 ============    ============

DILUTED EARNINGS (LOSS) PER COMMON SHARE                         $        .11    $     (34.12)
                                                                 ============    ============

</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4

                                      -32-

<PAGE>
              [GRAPHIC OMITTED]KRANTOR CORPORATION AND SUBSIDIARIES

           Consolidated Statements of Changes in Stockholders' Equity

                     Years ended December 31, 1997 and 1996

<TABLE>
<CAPTION>


                               Class A                                Additional                                    Total
                              Preferred Stock      Common Stock        paid-in                      Treasury     stockholders'
                             Shares     Amount   Shares     Amount     capital         Deficit       stock          equity
                             ------------------  -----------------   ------------   ------------   -----------  --------------

Balance at
<S>                          <C>       <C>       <C>       <C>        <C>           <C>            <C>          <C>         
 December 31, 1995           100,000   $  100    197,996   $   198    $  8,596,510  $ (1,480,311)  $ (167,500)  $  6,948,997

Common stock issued
 in connection with
 Regulation S offering,
 less related expenses          --        --     597,381       597      3,325,967            --         --         3,326,564

Common stock issued
 for dividend on preferred
 stock                          --        --       3,000         3             (3)           --         --           --

Cash dividend on
 preferred stock                --        --        --        --          (75,500)           --         --       (75,500)

Common stock issued
 in connection with
 compensation plan              --        --      48,658        49        435,895            --         --        435,944

Net loss (Note 14)              --        --        --        --             --      (11,043,140)        --       (11,043,140)
                             --------  --------  --------  -------   ------------    ------------   -----------  --------------
Balance at
 December 31, 1996           100,000      100    847,035       847     12,282,869    (12,523,451)    (167,500)   (407,135)
                             =======      ===    =======       ===     ==========    ===========     ========    ======== 

</TABLE>
                                      F-5
                                      -33-

<PAGE>
              [GRAPHIC OMITTED]KRANTOR CORPORATION AND SUBSIDIARIES

       Consolidated Statements of Changes in Stockholders' Equity (Cont.)

                     Years ended December 31, 1997 and 1996

<TABLE>
<CAPTION>

                               Class A                                Additional                                    Total
                              Preferred Stock      Common Stock        paid-in                      Treasury     stockholders'
                             Shares     Amount   Shares     Amount     capital         Deficit       stock          equity
                             ------------------  -----------------   ------------   ------------   -----------  --------------
Common stock issued
 in connection with
 Regulation S offering,
<S>                          <C>       <C>        <C>      <C>            <C>            <C>           <C>        <C>        
 less related expenses           --    $  --     1,612,200  $ 1,612  $  1,330,168   $     --       $    --       $  1,331,780

Redemption of
 preferred stock             (100,000)  (100)      400,000      400      (350,300)        --           --           (350,000)

Preferred stock issued
 to officer                   100,000    100          --       --            --           --           --                100

Common stock
 options exercised               --     --         275,000      275       442,225         --           --            442,500

Common stock issued
 in connection with
 compensation plan               --     --       1,006,280    1,006       762,179         --           --            763,185

Net income                       --     --            --       --            --        175,175         --            175,175
                             -------  ---------  ---------- -------  ------------   ------------   -----------  --------------

Balance at
 December 31, 1997            100,000  $ 100     4,140,515  $ 4,140  $ 14,467,141   $ (12,348,276) $ (167,500)   $ 1,955,605
                              =======  =====     =========  =======  ============   =============  ==========    ===========

</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
                                      -34-

<PAGE>
                      KRANTOR CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                     Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>

                                                                                         1997           1996
                                                                                   ------------    --------------  
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                <C>             <C>          
   Net income (loss)                                                               $    175,175    $(11,043,140)
   Adjustments to reconcile net income (loss) to net cash
    provided (used) by operating activities:
      Discontinued operations                                                          (167,717)      3,558,312
      Depreciation and amortization                                                      16,915          33,660
      Loss on disposal of property and equipment                                         14,496            --
      Net (gain) loss from marketable securities                                         37,625         (13,673)
      Operating expenses paid with common stock                                         353,178         776,858
      Provision for bad debts                                                              --           318,346
   Changes in operating assets and liabilities:
      Purchases of marketable securities                                                (73,687)        (50,277)
      Sales of marketable securities                                                     36,062          77,821
      (Increase) decrease in:
         Accounts receivable                                                           (933,160)      6,149,894
         Inventory                                                                         --         4,683,366
         Promotional rebates                                                            (47,524)          8,186
         Deferred taxes                                                                    --           166,103
         Other current assets                                                            22,789          94,448
         Other assets                                                                    85,812        (215,213)
      Increase (decrease) in:
         Accounts payable and accrued expenses                                          (58,680)     (3,273,632)
         Income taxes payable                                                           (60,629)       (236,696)
                                                                                   ------------    ------------
                                                                                       (599,345)      1,034,363
                                                                                   ------------    ------------
   Net cash flows provided (used) by operating activities:
       Continuing operations                                                           (215,996)      7,166,199
       Discontinued operations                                                         (383,349)     (6,131,836)
                                                                                   ------------    ------------
Net cash flows provided (used) by operating activities                                 (599,345)      1,034,363
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                                                     (118,202)         (3,486)
Payment of collateral security deposit                                                  (75,000)       (739,400)
Payments from related party                                                                --           228,718
                                                                                   ------------    ------------
Net cash flows used by investing activities                                            (193,202)       (514,168)

CASH FLOWS FROM FINANCING ACTIVITIES
   Net payments on debt                                                                 (50,000)     (3,868,198)
   Issuance of subordinated debenture                                                      --           377,000
   Cash dividends on preferred stock                                                   (350,000)        (75,500)
   Proceeds from issuance of preferred stock of subsidiary                              105,000            --
   Proceeds from issuance of common stock                                             1,274,276       2,679,400
                                                                                   ------------    ------------
   Net cash flows provided (used) by financing activities                               979,276        (887,298)
                                                                                   ------------    ------------
NET INCREASE (DECREASE) IN CASH                                                         186,729        (367,103)

CASH, beginning of year                                                                   2,897         370,000
                                                                                   ------------    ------------

CASH, end of year                                                                  $    189,626    $      2,897
                                                                                   ============    ============
</TABLE>
                                      F-7
                                      -35-

<PAGE>

                                       KRANTOR CORPORATION AND SUBSIDIARIES

                                   Consolidated Statements of Cash Flows (Cont.)

                                      Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>


                                                                                        1997            1996
                                                                                   ------------    ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION

<S>                                                                                <C>             <C>         
   Interest paid                                                                   $     37,100    $    967,778
                                                                                   ============    ============

   Income taxes paid                                                               $     60,629    $     65,443
                                                                                   ============    ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
  OPERATING, INVESTING AND FINANCING
  ACTIVITIES

   Inventory conveyed for collateral security deposit                              $       --      $  1,007,345
   Conversion of subordinated debentures                                                377,000            --
   Non-cash issuance of common stock                                                    532,610         306,250
                                                                                   ------------    ------------
       Total non-cash operating, investing and
         financing activities                                                      $    909,610    $  1,313,595
                                                                                   ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      F-8
                                      -36-
<PAGE>

                      KRANTOR CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996



1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         ORGANIZATION

         Krantor  Corporation  (Company) is a distributor of groceries,  general
         household  merchandise  and health and beauty  aids in the  promotional
         wholesale industry. In addition, the Company also distributes squid and
         premium handmade cigars throughout the United States.

         In April 1994,  Krantor  formed a  wholly-owned  subsidiary  which is a
         full-service  wholesale  delivery  company capable of providing  direct
         store  deliveries  of  inventory  within  hours of  receiving an order,
         principally in the northeastern United States.

         In December 1995, Krantor formed a wholly-owned subsidiary,  Affiliated
         Island Grocers,  Inc., which does business under the name Island Frozen
         and Dairy (IFD).  IFD  distributed  specialty  food,  poultry and dairy
         products  throughout the northeastern  United States. In June 1996, the
         Company discontinued all operations of IFD (see Note 11).

         In September 1996, Krantor formed a wholly-owned  subsidiary,  New Era,
         Inc.,  which  is  a  brokerage  company   representing   manufacturers,
         retailers and  wholesalers in connection  with  distribution of grocery
         and general merchandise products (see Note 9).

         In October  1997,  New Era,  Inc.  formed a  subsidiary,  Premium Cigar
         Wrappers,  Inc.  (PCW),  for the  purpose of  producing  premium  cigar
         wrappers  in the  Dominican  Republic.  New Era,  Inc.  owns 66% of the
         common stock and  approximately  22% of the preferred stock of PCW (see
         Note 6).

         PRINCIPLES OF CONSOLIDATION

         The consolidated  financial  statements include the accounts of Krantor
         Corporation,  its  wholly-owned  subsidiaries  and  its  majority-owned
         subsidiary  (collectively,  the Company). All significant  intercompany
         accounts and transactions have been eliminated in consolidation.

         REVENUE RECOGNITION

         The Company  recognizes  revenue at the time  merchandise is shipped to
         the customer.  The Company returns  merchandise  that is damaged or has
         the wrong  specifications  to the supplier.  The cost is recovered from
         the trucking company or the supplier,  depending upon the nature of the
         return.

         CASH EQUIVALENTS

         The Company  considers time deposits with original  maturities of three
         months or less to be components of cash.
                                      F-9
                                      -37-

<PAGE>
         CONCENTRATIONS OF CREDIT RISK

         Financial   instruments  which  potentially   subject  the  Company  to
         concentrations   of  credit  risk  consist   principally   of  accounts
         receivable.   The   concentration   of  credit  risk  with  respect  to
         receivables  is mitigated  by the credit  worthiness  of the  Company's
         major  customers.  The Company  maintains an allowance for losses based
         upon  the  expected  collectibility  of  all  receivables.  Fair  value
         approximates carrying value for all financial instruments.

         During 1997, the Company  distributed its products through an unrelated
         intermediary   and  hence,   all   revenues   were  derived  from  this
         organization. As a result, the Company has an inherent business risk in
         concentrating its sales through this entity.

         PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation of property and
         equipment is computed using the straight-line method over the estimated
         useful lives of the assets, ranging from three to five years.

         Maintenance  and repairs of a routine  nature are charged to operations
         as incurred.  Betterments and major renewals which substantially extend
         the useful life of an existing asset are  capitalized  and  depreciated
         over the asset's  estimated  useful life. Upon retirement or sale of an
         asset, the cost of the asset and the related  accumulated  depreciation
         or amortization are removed from the accounts and any resulting gain or
         loss is credited or charged to income.

         ADVERTISING

         The Company  expenses  advertising and  promotional  costs as incurred.
         Advertising  expense totaled  approximately  $63,000 and $5,000 for the
         years ended December 31, 1997 and 1996, respectively.

         EARNINGS PER SHARE

         The Company  calculates  earnings  per share  pursuant to  Statement of
         Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128).
         FAS 128 requires dual  presentation  of basic and diluted  earnings per
         share  (EPS) on the face of the  statement  of income for all  entities
         with complex capital  structures and requires a  reconciliation  of the
         numerator and denominator of the basic EPS computation to the numerator
         and denominator of the diluted EPS computation.  Basic EPS calculations
         are based on the  weighted-average  number of common shares outstanding
         during the  period,  while  diluted EPS  calculations  are based on the
         weighted-average  common shares and dilutive  common share  equivalents
         outstanding during each period.

         MANAGEMENT ESTIMATES

         In preparing financial statements in conformity with generally accepted
         accounting  principles,  management  is required to make  estimates and
         assumptions  that affect the reported  amounts of assets,  liabilities,
         revenues and expenses during the reporting period. Actual results could
         differ from management's estimates.

                                      F-10
                                      -38-

<PAGE>
         STOCK-BASED COMPENSATION PLANS

         Statement of Financial  Accounting  Standards No. 123,  "Accounting for
         Stock-Based Compensation" (SFAS 123), encourages, but does not require,
         companies  to  record   compensation  cost  for  stock-based   employee
         compensation  plans at fair value.  The Company has elected to continue
         to account  for  stock-based  compensation  using the  intrinsic  value
         method  prescribed  in  Accounting  Principles  Board  Opinion  No. 25,
         "Accounting for Stock Issued to Employees" and related interpretations.
         Accordingly,  compensation  cost for stock  options is  measured as the
         excess,  if any, of the fair market value of the Company's stock at the
         date of the grant over the amount the employees or  non-employees  must
         pay to acquire  the  stock.  Disclosures  required  by SFAS 123 are not
         material to the Company's financial statements.

         RECLASSIFICATIONS

         Certain  1996  amounts  have been  reclassified  to conform to the 1997
         presentation.


2.       MARKETABLE SECURITIES

         Realized gains or losses on marketable securities are determined on the
         specific identification method. Net realized gains (losses) on sales of
         securities  included in the  determination  of consolidated  net income
         (loss)   amounted   to   $(37,625)   and  $13,673  in  1997  and  1996,
         respectively.


3.       PROPERTY AND EQUIPMENT

         Property  and  equipment  as of  December  31,  1997  consisted  of the
         following:
<TABLE>
<CAPTION>

<S>                                                                                   <C>             
         Office equipment                                                             $        193,355
         Machinery and equipment                                                                48,824
         Leasehold improvements                                                                 61,378
                                                                                      ----------------

                                                                                               303,557
         Less accumulated depreciation and amortization                                      (186,155)

                                                                                      $        117,402

4.       NOTES PAYABLE

         Notes payable at December 31, 1997 consisted of the following:

         Revolving line-of-credit                                                     $        301,633
         Note payable to investment company; non-interest bearing;
           principal due May 8, 1996, previously collateralized by
           inventory of IFD                                                                    159,177
         Note payable to bank due July 5, 1996; non-interest bearing;
           previously collateralized by inventory of IFD                                        75,000
                                                                                      ----------------

                                                                                      $        535,810
</TABLE>

         The  Company  financed  its  receivables  in the prior  year  through a
         revolving  line-of-credit and security  agreement with a lender.  Under
         the terms of the agreement, the Company received cash advances of up to
         80% of its eligible accounts receivable,  as defined,  with interest at
         prime plus 2%. During 1997,  the lender ceased  corresponding  with the
         Company  and  reporting  the  activity  related to  collections  of the
         collateral and corresponding reductions of the loan.

                                      F-11
                                      -39-

<PAGE>
5.       VENDOR DEBT

         In 1997,  the Company  entered into an agreement with a vendor to repay
         the December  31, 1996  accounts  payable  balance of  $1,465,976.  The
         Company  was   required  to  pay  $50,000  and  offset  50%  of  earned
         promotional  rebates  against the  payable due to the vendor.  In March
         1998, the Company  renegotiated  with the vendor and modified the terms
         of the agreement to pay off the remaining balance (see Note 15).

         The following  are the scheduled  maturities of vendor debt at December
         31, 1997:

         Year ending
         December 31,
         ------------

              1998                         $        777,776
              1999                                  266,664
              2000                                  128,384
                                           ----------------

                                           $      1,172,824

6.       PREFERRED STOCK OF SUBSIDIARY

         PCW was  incorporated  in October  1997.  The  Company  owns 66% of the
         common stock and  approximately  22% of the preferred stock of PCW. The
         holders of PCW  preferred  stock are  entitled  to  receive  cumulative
         dividends  at the rate of $14 per share  before  any  dividends  on the
         common stock are paid. In the event of  dissolution of PCW, the holders
         of the preferred  shares are entitled to receive $60 per share together
         with all accumulated  dividends,  before any amounts can be distributed
         to the common  stockholders.  The shares  are  convertible  only at the
         option of PCW at $120 per share.


7.       STOCKHOLDERS' EQUITY

         In May 1997, the majority of common stockholders voted to authorize a 1
         for 25 reverse split of the Company's $.001 par value common stock. Any
         stockholders  entitled to  fractional  shares were paid with cash based
         upon the current fair market value of the stock.  All references in the
         accompanying  financial  statements to the number of common shares have
         been restated to reflect the stock split.

         During 1997, the Company  redeemed 100% of the Class A preferred  stock
         in exchange for $350,000, 400,000 shares of common stock and options to
         purchase  500,000 shares of restricted  common stock  exercisable at $1
         per share. The options will vest if the Company achieves  $1,000,000 in
         pretax income within five years.  The  preferred  stock was  thereafter
         reissued,  at par value, to an officer of the Company in recognition of
         services  rendered,   however,   all  dividend   privileges  and  stock
         redemption  rights were stripped from the stock.  The stock retains the
         13 to 1 voting privilege.

         At December 31, 1997, the Company had outstanding  warrants to purchase
         578,000 shares of the Company's  common stock, at $1.10 per share.  The
         warrants become  exercisable  when the shares are registered and expire
         at various dates through 2002. At December 31, 1997,  578,000 shares of
         common stock were reserved for that purpose.

                                      F-12
                                      -40-

<PAGE>
         In 1994,  the  Company  registered  with the  Securities  and  Exchange
         Commission on Form S-8, 600,000 shares of the Company's common stock to
         be  distributed  under  the  Company's  1994  Services  and  Consulting
         Compensation  Plan (Plan).  An  additional  3,900,000  shares have been
         reserved since that date.  Since the inception of the Plan, the Company
         has issued  1,343,450  shares for payment of services to employees  and
         professional  service  providers.  Under the Plan, the Company  granted
         options in 1994, 1995 and 1997 to selected  employees and  professional
         service providers.

         The  following is a summary of such stock option  transactions  for the
         years ended December 31, 1997 and 1996 in accordance with the Plan:
<TABLE>
<CAPTION>


                                                                         Number of
                                                                          Shares
                                                                      ---------------

<S>                                                                            <C>   
         Outstanding at December 31, 1995 (37,200 exercisable):                43,200
           Granted                                                                  -
           Terminated                                                        (14,000)
           Exercised                                                          (2,400)
                                                                      ---------------

         Outstanding at December 31, 1996 (26,800 exercisable):                26,800
           Granted                                                            275,000
           Terminated                                                        (26,800)
           Exercised                                                        (275,000)
                                                                      ---------------

         Outstanding at December 31, 1997                                           -
                                                                      ===============
         Option price                                                 $ .50 -  $ 2.25
                                                                      ===============
         Available for grant:
           December 31, 1996                                                2,409,430
                                                                      ===============
           December 31, 1997                                                3,156,550
                                                                      ===============
</TABLE>

         The Company has also  reserved  100,000  shares for a stock option plan
         (Option Plan) for non-employee,  independent directors,  which entitles
         each  non-employee,  independent  director an option to purchase 10,000
         shares of the Company's stock  immediately upon election or re-election
         to the Board of Directors.  Options  granted under the Option Plan will
         be at the  fair  market  value on the date of  grant,  are  immediately
         exercisable and have a term of ten years. The Company had 1,200 options
         outstanding and exercisable and 98,800  available for grant at December
         31, 1997, 1996 and 1995 at an option price of $.50 per share.


8.       INCOME TAXES

         At December 31, 1997, the Company had a net operating loss carryforward
         of approximately  $10,660,000  which will begin expiring in 2011 if not
         utilized.  No Federal tax  provision  was  required for 1996 due to the
         Company's  net  loss.  The  components  of the  deferred  tax  asset at
         December 31, 1997 were approximately as follows:

         Allowance for doubtful accounts                      $         32,600
         Net operating loss carryover                                3,624,500
         Deferred compensation                                          99,600
         Capital losses                                                 44,500
         Valuation allowance                                        (3,801,200)
                                                              ----------------

                                                              $              -
                                                              ================

                                      F-13
                                      -41-

<PAGE>
9.       COMMITMENTS AND CONTINGENCIES

         LEASE COMMITMENTS

         The  Company  leases  office  space in Wexford,  Pennsylvania  under an
         operating  lease which expires in August 2000.  The Company also leases
         office  space in  Syosset,  New York,  under an  operating  lease which
         expires in December 1998. Rent expense for the years ended December 31,
         1997 and 1996 was approximately $30,000 and $95,000, respectively.

         Future minimum lease commitments are $7,620,  $7,620 and $5,080 for the
         years ending December 31, 1998, 1999 and 2000, respectively.

         DISTRIBUTION AGREEMENT

         In 1996, the Company  entered into a ten-year  agreement with a Chinese
         trading company to distribute frozen seafood in the United States under
         a licensing  arrangement.  The Chinese  trading  company  finances  the
         purchase  and  sale of  products  marketed  on its  behalf,  and pays a
         commission to the Company, based on sales generated by the distribution
         agreement.  In consideration  for the Chinese trading company providing
         products to the Company for sale and distribution,  and as security for
         doing so, the Company was required to provide $2,052,995 in 1996 and an
         additional  $200,000 in 1997, as collateral security for performance by
         the Company under the terms of the agreement.  The collateral  security
         deposit bears interest at 5% and is received quarterly.

         LITIGATION

         The Company is a named defendant in various  lawsuits  arising from the
         liquidation of IFD. While it is not reasonably possible to estimate the
         amount of losses in excess of amounts  accrued at December 31, 1997, if
         any,  that may arise out of such  litigation,  management  believes the
         outcome  will not  have a  material  effect  on the  operations  of the
         Company.

         The Company is subject to legal  proceedings  and claims which arise in
         the ordinary course of its business. In the opinion of management,  the
         amount of ultimate  liability  with  respect to these  actions will not
         materially affect the financial position, results of operations or cash
         flows of the Company.


10.      MAJOR CUSTOMERS

         The Company had one  customer,  the U.S.  agent of the Chinese  Trading
         Company that  provides  financing to the Company,  which  accounted for
         100% of total sales for 1997.  Accounts  receivable  from this customer
         accounted for approximately  $1,013,000 (89.8%) of total trade accounts
         receivable at December 31, 1997. No single customer  accounted for more
         than 10% of sales in 1996.


11.      DISCONTINUED OPERATIONS

         On June 30, 1996, the Company  adopted a formal plan to discontinue the
         operations  of  IFD  through  a  liquidation  that  is  expected  to be
         completed  during 1998.  During 1997, the Company  incurred  additional
         expenses related to the liquidation of IFD and related litigation.  The
         Company has  approximately  $536,000 in notes  payable and  $125,000 in
         accounts   payable   related  to  IFD  at  December   31,   1997.   The
         aforementioned expenses related to IFD are included in the accompanying
         statement of operations as discontinued operations.

                                      F-14
                                      -42-

<PAGE>
12.      FOURTH QUARTER ADJUSTMENTS

         The  Company   made  a  fourth   quarter   adjustment   to  correct  an
         overstatement of promotional rebates of $984,209 (see Note 14).


13.      EARNINGS PER SHARE

         The  following  data shows the amounts used in  computing  earnings per
         share  and the  effect  on the  weighted  average  number  of shares of
         dilutive common stock.

<TABLE>
<CAPTION>

                                                                      1997                  1996
                                                               ----------------      ---------------

<S>                                                            <C>                   <C>             
         Net income applicable to common stockholders          $        175,175      $   (11,263,140)
                                                               ================      ===============

         Weighted average number of shares in basic EPS               1,630,220               330,071
         

         Effect of dilutive securities (stock warrants)                  17,320                     -
                                                               ----------------      ----------------

         Weighted average number of common shares
           and dilutive potential common shares used
           in diluted EPS                                             1,647,540               330,071
                                                               ================      ================
</TABLE>


14.      PRIOR PERIOD ADJUSTMENTS

         The Company's  financial  statements as of December 31, 1996, have been
         restated to reflect an error in the  recording of  promotional  rebates
         and preferred  stock  dividends.  The effect of the  restatement  is as
         follows:

<TABLE>
<CAPTION>

           For Year Ended                               As Previously
         December 31, 1996                                Reported                As Restated
         -----------------                                --------                -----------
         Balance sheet:
<S>                                                  <C>                        <C>             
           Promotional rebates                       $      1,467,738           $        483,529
           Deficit                                   $    (11,539,242)          $   (12,523,451)

         Statement of operations:
           Cost of sales                             $      6,845,672           $      7,829,881
           Net loss applicable to common stock       $    (10,223,931)          $   (11,263,140)
           Net loss per common share                 $     (30.97)              $     (34.12)
</TABLE>


15.      SUBSEQUENT EVENTS

         The Company renegotiated the settlement of amounts owing to a vendor on
         March 31, 1998. According to the terms of the agreement, the Company is
         required to issue  $500,000 of common stock to the vendor  during 1998,
         and repay the remaining balance in monthly payments of $22,222 from May
         1998  through  April 2000.  No interest is being  charged by the vendor
         (see Note 5).

         In March  1998,  the Company  guaranteed  a  $1,000,000  line-of-credit
         facility to a  Dominican  cigar  manufacturer,  which is owned by a PCW
         stockholder.  The purpose of the line-of-credit is to provide financing
         to the cigar manufacturer to which PCW will supply the wrappers.

                                      F-15
                                      -43-

<PAGE>
                            SUPPLEMENTAL INFORMATION

                                      F-16
                                      -44-

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



The Board of Directors
Krantor Corporation


We have audited, in accordance with generally accepted auditing  standards,  the
consolidated  financial  statements  of  Krantor  Corporation  and  subsidiaries
included  in this Form 10-K and have issued our report  thereon  dated March 18,
1998.  Our audits  were made for the  purpose of forming an opinion on the basic
consolidated  financial  statements  taken as a whole.  Schedule II of this Form
10-K is the  responsibility  of the  Company's  management  and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements.  This schedule has been
subjected  to the  auditing  procedures  applied  in  the  audits  of the  basic
consolidated  financial  statements  and, in our opinion,  fairly  states in all
material  respects,  the  financial  data  required  to be set forth  therein in
relation to the basic consolidated financial statements taken as a whole.





                                                               BELEW AVERITT LLP

Dallas, Texas
March 18, 1998


                                      F-17
                                      -45-

<PAGE>
                      KRANTOR CORPORATION AND SUBSIDIARIES

                               Valuation Accounts

                                   Schedule II

<TABLE>
<CAPTION>


                                                                     Additions
                                                  Balance at         charged to                       Balance at
                                                  beginning          costs and                            end
Description                                        of year            expenses         Deductions      of year
---------------------------------                -------------     -------------      ------------  --------------
Year ended December 31, 1997,
<S>                                              <C>               <C>                <C>            <C>        
  allowance for doubtful accounts                $   551,000       $     --           $   455,174    $    95,826
                                                 =============     =============      ============  ============== 

Reserve for deferred tax assets                  $ 3,819,443       $     --           $    18,243    $ 3,801,200
                                                 =============     =============      ============  ============== 

</TABLE>

                                      F-18
                                      -46-