U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                  FORM 10-KSB
(Mark One)

|X|   Annual report under Section 13 or 15(d) of the Securities Exchange Act of
      1934 (Fee required)

      for the fiscal year ended December 31, 1998.

|_|   Transition report under Section 13 or 15(d) of the Securities Exchange Act
      of 1934 (No fee required)

      for the transition period from _________________ to ___________________

      Commission file number       0-27132

                            Terrace Food Group, Inc.
                            ------------------------
                 (Name of Small Business Issuer in Its Charter)

           Delaware                                 65-0594270
           --------                                 ----------
     (State or Other Jurisdiction of             (I.R.S. Employer
     Incorporation or Organization)             Identification No.)

     1325 N.W. 22nd Street, Pompano Beach, Florida     33069
     ---------------------------------------------     -----
     (Address of Principal Executive Office)          (Zip Code)

                                     (954) 917-7272
                                     --------------
               (Issuer's Telephone Number, Including Area Code)

     Securities registered under Section 12(b) of the Exchange Act:


                                                   Name of Each Exchange
           Title of Each Class                      on Which Registered
           -------------------                      -------------------

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

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

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

                          Common Stock, $.001 par value
                          -----------------------------
                               (Title of Class)

                    Redeemable Common Stock Purchase Warrants
                    -----------------------------------------

                               (Title of Class)

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for past 90 days.

Yes               X                 No __________________

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

     Issuer's revenues for its most recent fiscal year. $31,011,197.

     Aggregate market value of the voting stock held by non-affiliates  computed
by  reference  to the price of which the stock was sold,  or the average bid and
asked prices of such stock, as of a specified date within the past 60 days.
The aggregate market value on March 31, 1999: $2,291,685.

     As of  December  31,  1998,  the total  number  of  shares of common  stock
outstanding: 948,342.


<PAGE>



                                    PART I

ITEM 1 - DESCRIPTION OF BUSINESS

(a)       Business Development

      Terrace Food Group, Inc., a Delaware  corporation (the  "Registrant"),  is
the successor to a company organized in 1989. The Registrant currently has three
wholly-owned  operating  subsidiaries:   A-One-A  Produce  &  Provisions,   Inc.
("A-One-A  Produce"),  a Pompano Beach,  Florida-based  produce distributor that
sells and distributes  fresh fruit and vegetables and "dry" grocery  products to
hotels,  restaurants,  cruise lines and other businesses in the southern Florida
region; Fresh, Inc. ("Fresh"),  in Pompano Beach,  Florida,  which processes and
packages fresh produce  principally  through A-One-A Produce;  and Banner Beef &
Seafood  Co.,  Inc.  ("Banner"),  a  Miami,   Florida-based  custom  value-added
processor of meat,  seafood and poultry that manufactures and sells food service
products to retail and discount  supermarkets,  restaurants,  airlines and other
industries.  The Registrant  acquired the business of Banner in July,  1998. The
Registrant finalized the sale of its "Hospitality" and "Frozen Dessert" segments
in the first half of 1998.

      Reverse Split of Common Stock.  Effective March 15, 1999, the shareholders
of the  Registrant  approved a  one-for-ten  reverse  split of the  Registrant's
outstanding Common Stock. This reverse split did not affect the number of shares
authorized or its par value. Therefore,  unless otherwise stated explicitly, all
per share and share  amounts for all  periods  presented  have been  adjusted to
reflect this reverse split.

     Sale of Frozen  Desserts  Segment.  In  December,  1997,  the  Registrant's
wholly-owned subsidiary, Deering Ice Cream, Inc. ("Deering"), sold substantially
all of its assets and related  liabilities to a subsidiary of Fieldbrook  Farms,
Inc. ("Fieldbrook"),  for an aggregate purchase price of $1,000,000,  subject to
later adjustment.

      Sale of Hospitality  Segments. On March 13, 1998, A&E Management Corp. and
The Lasko Family Kosher  Tours,  Inc.,  then  wholly-owned  subsidiaries  of the
Registrant,  were  sold  to Dr.  Samuel  H.  Lasko,  formerly  President  of the
Registrant,  effective  as of  January 1, 1998,  for  consideration  aggregating
$575,000 in accordance  with an  independent  fair value  opinion.  The sale was
ratified  by  the   Registrant's   shareholders  at  the  1998  Annual  Meeting.
Additionally, on May 29, 1998, the Registrant sold the business assets and lease
of The Lasko  Companies,  Inc.,  which owned and operated The Terrace  Oceanside
Restaurant  with an  unaffiliated  third party,  for an aggregate sales price of
$90,000 in cash.


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(b)       Businesses of Issuer

Food Distribution

      A-One-A  Produce  distributes  fresh  produce,  fruits and  vegetables  to
restaurants, country clubs, hotels, airline food service and other institutional
food service  providers in the South Florida region.  A-One-A  Produce  delivers
seven days per week and its customers  typically rely on daily  deliveries.  The
served  area  reaches  southward  to  Homestead,  Florida and as far as Jupiter,
Florida, to the north,  principally on the east coast of the state. Service is a
major component of the business' competitive strength.  A-One-A Produce does not
attempt to be the low cost provider, but, rather, seeks to distinguish itself as
a provider of high quality  products and  exceptional  service.  Most orders are
received  in the  afternoon  and  delivered  the  next  morning.  Customers  are
supported by a sales  manager and 12 regional  sales  representatives  to ensure
optimum  service  and  communication.  A-One-A  Produce  operates  a fleet of 33
delivery trucks, all of which are refrigerated and equipped with two-way radios.

      A-One-A  Produce  was  founded in 1987 by Virgil D.  Scarbrough  and Scott
Davis. Messrs. Scarbrough and Davis are now senior executives of A-One-A Produce
under  employment  agreements  expiring  on June 30,  2002.  See  "Management  -
Employment  Agreements  and  Aggregate  Options  Holdings."  Revenue in 1998 for
A-One-A Produce was approximately $27.6 million dollars.
A-One-A Produce employs approximately 154 people.

     Mr. Davis is responsible  for purchasing,  pricing and overall  operations.
Mr. Scarbrough generally is responsible for office and personnel administration.
Jonathan S. Lasko,  Executive Vice- President and Chief Operating Officer of the
Registrant is the President and Chief Executive Officer of A-One-A Produce.

      A-One-A Produce is a member of a produce buying co-operative, Pro*Act, and
is  currently  buying a  substantial  portion of its  requirements  through  it.
Purchasing is also performed directly from farmers.  Pricing to customers is set
on a weekly basis in accordance with market conditions. The Registrant's pricing
formulas are very complex and take into effect a number of qualitative  factors.
Pricing  is set at a  detailed  item by item  level for each type of  produce by
customer.  A small  number of larger  accounts  have pricing  arrangements  that
represent  a  margin  above  cost.  Some of the  Registrant's  larger  customers
currently include TGI Friday's, Darden (Red Lobster and Olive Garden) and Apollo
Ship  Chandlers.  No  individual  customer  accounted  for more  than 10% of the
Registrant's  distribution  sales during 1998.  However,  Apollo Ship  Chandlers
accounted for more than 10% during the second half of 1998 and is anticipated to
account for 10-15% of 1999 sales.

      As  of  July,  1997,  the  Registrant  acquired  the  assets  and  related
liabilities  of A-One-A  Produce for a purchase  price of $3,130,000 in cash and
the issuance of a total of 50,000  shares of Common  Stock.  Effective  January,
1998, the Registrant purchased all of the outstanding stock of A-One-A Produce's
affiliate, Fresh, for $105,000 and 13,895 shares of Common Stock. Fresh supplies
cut  produce  principally  through  A-One-A  Produce  and also to  process  food
manufacturers  directly. In addition, in September,  1997, and in January, 1998,
the Registrant also acquired two smaller

                                      3

<PAGE>



companies,  "Bay  Purveyors" and "Gourmet  Distributors",  which  distribute dry
grocery items in the south Florida region.  Their  businesses are also conducted
as part of A-One-A Produce.

      A-One-A  Produce  leases a building  housing its  offices,  warehouse  and
processing  operations  in Pompano  Beach,  Florida.  This  property is a 55,000
square foot warehouse on 3.5 acres and should allow for further  expansion.  The
building has 24 loading docks  (approximately  half of which are  refrigerated),
1,700  pallet  locations,  and  includes  30,000  square  feet  of  refrigerated
warehouse space.

     Food Processing and  Manufacturing.  Banner has been in business since 1965
as a custom value-added  processor of meat, seafood and poultry. It manufactures
food products customized to customer  specifications for the retail and discount
store,   airline,   restaurant  and  other  industries.   In  addition,   Banner
manufactures  a full line of  products  for the "Home Meal  Replacement"  market
which  is  believed  to be  one of  the  fastest  growing  sectors  in the  food
processing  industry.  The Registrant has spent  extensive time and resources on
the creation and  manufacturing of first class items to meet this demand.  Since
Home Meal  Replacement  has recently  taken a leading role in the market,  as an
alternative to the traditional uncooked meat and seafood products,  Banner's now
provides Home Meal  Replacement  products as a high quality meal  solution.  The
Registrant  believes this emerging  sector will continue to grow at a rapid pace
as the demand for convenient time saving meal opportunities expand even further.

      On July 15, 1998, the Registrant acquired  substantially all of the assets
and  assumed  substantially  all the  liabilities  of  Banner  for an  aggregate
purchase price of approximately $2,652,000.  The acquisition was financed with a
portion  of the funds  received  through a credit  facility  with a bank and the
issuance of Convertible  Subordinated  Notes. In connection with the acquisition
of Banner,  the  Registrant  hired Mr.  Manuel  Jimenez as a vice  president  of
Banner. Mr. Jimenez was a shareholder of Banner Beef and Seafood Co., Inc. prior
to its acquisition by the Registrant and was its Chief Operating Officer.

      Banner  currently  employs  approximately  92 persons,  13  administrative
personnel and 79 processing,  warehousing  and similar  personnel.  There are no
union  contracts and management of Banner  believes that its labor relations are
good.

Advertising And Marketing

      The  Registrant  currently  markets its products and services  through its
direct sales force, brokers and agents. The Registrant is evaluating all aspects
of the  Registrant's  products and services.  Depending  upon the outcome of any
such  marketing  evaluations,  the  Registrant  may decide to make  changes with
respect to the marketing of its products and services.

Competition

      The wholesale fresh produce and grocery  businesses are very  competitive,
and the Registrant's  subsidiaries  face competition from other low-cost produce
providers.  In addition,  the food processing and manufacturing industry is also
very  competitive.  Some  of  the  large  volume  processing  and  manufacturing
competitors have substantially greater capital resources, more

                                      4

<PAGE>



sophisticated  promotional practices and substantially larger and more developed
distribution   networks  than  the  Registrant's   subsidiaries.   However,  the
Registrant  strives to  maintain  high  quality and  exceptional  service in the
market by making  quality  products and  efficient  service its  priority.  Food
related  businesses are often affected by arbitrary  changes in consumer tastes,
national,  regional and local economic conditions,  demographic trends,  traffic
patterns,  the number and  locations  of  competing  businesses  and  employment
trends.

Government Regulation

      The  Registrant  is  subject  to  various  federal,  state and local  laws
affecting its businesses.  Each of the Registrant's  food service  operations is
subject to licensing regulation by numerous  governmental  authorities which may
include building, health and safety and fire agencies. Difficulties in obtaining
or failures to obtain or maintain the necessary licenses or approvals could have
a material adverse effect on the Registrant's operations.

      A-One-A   Produce  and  Fresh  maintain   licenses  under  the  Perishable
Agricultural  Commodities Act ("PACA") which regulates  "commission  merchants,"
"brokers"  and  "dealers"  engaged in the  business  of  shipping  or  receiving
perishable agricultural commodities in interstate commerce.

Employees

      The Registrant and its subsidiaries employs approximately 283 people which
includes  approximately  32  administrative,  47  transportation,  29 sales  and
customer service  representatives,  170 warehouse and processing personnel and 5
executive  management.  None of the Registrant's  employees are represented by a
union nor have there been any work stoppages.

ITEM 2 - DESCRIPTION OF PROPERTY

      A-One-A Produce leases  approximately 55,000 square feet at 1351 N.W. 22nd
Street,  Pompano Beach, Florida, for use as its principal offices and warehouse.
The  building   has  24  loading   docks   (approximately   half  of  which  are
refrigerated),  1700  pallet  locations  and  includes  30,000  square  feet  of
refrigerated  warehouse space. The lease term is for ten years expiring July 31,
2007,  with three five year  options  to  extend,  at a rental of  approximately
$222,000  per year.  The  Pompano  Beach  facility is owned by an  affiliate  of
Messrs.  Scarbrough  and Davis. A lease for this facility was negotiated as part
of the acquisition of A-One-A Produce.

      Fresh leases from an unaffiliated third party  approximately  8,000 square
feet  at 2001  N.W.  15th  Avenue,  Pompano  Beach,  Florida,  for its  offices,
processing and  warehouse.  The lease is for a term of five years with an option
to extend for an additional  five years at an average  annual rental of $70,000.
Fresh may terminate the lease at its option on one year's notice.

      In connection with the acquisition of Banner, the Registrant  acquired the
land and  building at 1111 N.W.  21st  Terrace,  Miami,  Florida,  where  Banner
maintains processing facilities and offices.


                                      5

<PAGE>



      Banner  leases  22,000  square  feet at 6601 N.W.  37th  Avenue,  Hialeah,
Florida, for use as an additional  processing facility and warehouse.  The lease
term is for five years expiring in 2003, at a rental of  approximately  $128,000
per year.  During the term of the lease,  Banner has an option to purchase  this
property for the lesser of  $1,270,000  or its  independently  appraised  value,
provided  it is not in breach of the lease.  The owners of this real  estate are
the two former principal shareholders of the Banner business,  prior to its sale
to the Registrant,  each of whom has executed a  non-competition  agreement with
the Registrant.

      The  Registrant's  executive  offices are  located in the A-One-A  Produce
facility  in  Pompano  Beach,  Florida.   Management  believes  that  the  above
facilities will be sufficient for its operations for the reasonably  foreseeable
future.

ITEM 3 - LEGAL PROCEEDINGS

      The Registrant is not currently a party to any material legal proceeding.

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

      During the fourth  quarter of the past fiscal year, the Registrant did not
submit any matter to a vote of security holders, through solicitation of proxies
or otherwise.


                                      6

<PAGE>



                                    PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (a) Market  Information.  Until the close of business  September 29, 1998,
the Registrant's  Common Stock and common stock purchase warrants were listed on
the  NASDAQ  SmallCap  Market.   Since  September  30,  1998,  the  Registrant's
securities have been traded on the NASDAQ Electronic Bulletin Board.

      Set forth  below is the range of high and low sales  prices of the  Common
Stock and Warrants for each quarter for the last two fiscal years as reported by
NASDAQ for those periods. Common Stock prices take into account the Registrant's
1-for-10  reverse split of its Common  Stock.  The prices  represent  quotations
between  dealers.  The quotations do not include retail markups,  markdowns,  or
commissions and may not represent actual transactions.

Type of Security           Quarter Ended            High         Low
----------------           -------------            ----         ---

Common Stock               March 31, 1997           233/4       10
                           June 30, 1997            211/4      121/2
                           September 30, 1997        35          15
                           December 31, 1997       26 7/8       111/4
                           March 31, 1998           321/2     10 5/8
                           June 30, 1998             25          83/4
                           September 30, 1998      19 1/16      9 3/8
                           December 31, 1998       15 5/8         5
                           March 31, 19996          9/16        3 1/8

Warrants                   March 31, 1997           15/16       5/16
                           June 30, 1997           2 5/16        5/8
                           September 30, 1997         1        3/4
                           December 31, 1997        2 1/8         1
                           March 31, 1998            13/4        1
                           June 30, 1998             11/2      3/16
                           September 30, 1998        7/8       1/4
                           December 31, 1998        19/32       1/16
                           March 31, 1999           3/16        1/64
Holders

      As of May  13,  1999,  there  were  71 and 17  holders  of  record  of the
Registrant's  Common Stock and Warrants,  respectively.  The Registrant believes
that it has a greater number of  shareholders  and Warrant  holders  because the
Registrant  believes that a substantial  amount of its Common Stock and Warrants
are held of record in street name by broker-dealers for their customers.




                                      7

<PAGE>



Dividends

      The Registrant has not paid any dividends on its Common Stock and does not
expect to pay a cash dividend in the foreseeable  future,  but intends to devote
all funds to the operation of its business.

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

Results of Operations

Terrace Food Group (Consolidated)

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

      The  Registrant's   consolidated  net  loss  for  1998  was  approximately
$2,719,000 compared to a loss of approximately $4,352,000 for the same period in
1997. The major decrease was a result of discontinued operations costs that were
incurred by the  Registrant  in 1997. In addition to these  reductions  from the
prior year, the Registrant also reduced the loss from its operating subsidiaries
purchased  in 1997.  The  Registrant  realized  a  substantial  increase  in its
interest  expense in 1998 with the placement of $2,625,000 in subordinated  debt
in the  beginning  of the  third  Quarter  of 1998  this  interest  amounted  to
approximately  $200,000 and was non-cash expense. In July of 1998 the Registrant
consummated its  transaction to purchase Banner Beef and Seafood,  a Miami based
manufacturer  of  value  added  meat  and  seafood  products.  The  Registrant's
management  identified  this segment as one of the fastest growing food industry
and incorporated  Banner as part of its strategic plan for growth. A substantial
portion of the Registrant's  operating loss in 1998 resulted from the slow start
up and building of  infrastructure  in preparation for what management  believes
will be strong growth in the coming year (See Food Processing and  Manufacturing
below).

Continuing Operations

Food Distribution

      In its first full year as a  subsidiary  of the  Registrant,  A-One-A lost
approximately  $276,000  compared  to a  six-month  loss  of  $208,000  for  the
six-month  period during which the  Registrant  owned A-One-A  during 1997.  The
substantial  reduction in the loss can be  attributed  to several  factors.  The
investment   that  management  made  into   infrastructure   and   technological
improvement  began to be realized in the final quarter of 1998.  Increased sales
volumes and operating  cost  controls  allowed the  distribution  segment of the
Registrant to reach positive  result levels by the end of fiscal 1998.  While it
took  longer  than  expected at A-One-A to reach  profitable  operating  levels,
management  believes  that the results  from it's  A-One-A  subsidiary  have and
should  continue to be positive as the sales  volumes  continue to increase  and
more economics of scale are realized. As sales continue to increase the benefits
of the capital  investments made during late 1997 and the beginning  quarters of
1998 will be realized.  A consistent level of  profitability  should be achieved
and the

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<PAGE>



addition of the cruise ship and export divisions will contribute  positive sales
increases and profit contribution.

Food Processing and Manufacturing

      The Registrant purchased Banner in July of 1998, and accordingly there are
no comparative results for the prior year periods.  The net loss from operations
for the six month  period the  Registrant  owned  Banner Beef was  approximately
$753,000.  This  loss  was  due to  several  factors.  The  Registrant  realized
excessive  expenses with the building of management  infrastructure  to properly
handle the aggressive  approach it has taken toward  increasing sales at Banner.
Several key personnel  were hired to put in place proper  systems and procedures
on an on-going basis. In addition,  management placed tremendous emphasis on the
Home Meal Replacement segment of the business that the previous owners of Banner
had committed to prior to the Registrant's purchase of Banner. The historic core
business at Banner was fragmented and inconsistent and management recognized the
need for a concise and direct selling approach to restore Banner to a profitable
state. By focusing the sales and marketing efforts on a product mix,  management
believes  sales volumes will increase and the Registrant  will realize  positive
results from the acquisition.  As the Home Meal Replacement  business is further
developed,  this high growth  sector of the food industry will play a major role
in  management's  strategic  plan going  forward.  This business was only in its
beginning stages of development during 1998.

Liquidity and Capital Resources

      At December 31, 1998, the  Registrant had a cash deficit of  approximately
$733,000 and a working capital deficit of approximately $3,105,000.

      During  the  first   quarter  of  1999,   management   believes  the  food
distribution  operations have been improved with the securing of substantial new
business,  particularly  with high  volume  institutional  accounts.  Management
believes this additional sales volume will contribute to increased profitability
and reduced seasonable variability. Management intends to continue it aggressive
marketing efforts in these areas as well as to cruise line and export customers.

      Management  further  believes  that  a  key  element  in  its  plan  is to
substantially  increase sales volume at Banner,  where the Company has developed
the capability of producing high quality  innovative  products for the home meal
replacement ("HMR") market.

      Several major customers have accepted the products on a limited basis with
good prospects for significantly expanded distribution.  Presentations have been
made to a number  of  additional  customers  and  initial  responses  have  been
positive.

      In April and May,  1999,  the  Registrant  issued 19,618 shares of a newly
authorized  Series C Preferred Stock together with Warrants to purchase  340,000
shares of the Registrant's  Common Stock. The shares and warrants were purchased
by a private investor group which included three of the Registrant's  Directors.
The Registrant received proceeds of approximately $1,700,000 in this transaction
which will be used for working capital.

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<PAGE>




      Management  believes that the  transactions  described above and operating
improvements will be sufficient to provide for its continuing operations.

      In  addition,  as of June 25,  1998,  the  Registrant  issued to a private
investor  $2,625,000  principal  amount  of 12%  Convertible  Subordinated  Note
("Notes")  and  warrants  to  purchase  400,000  shares of  Common  Stock of the
Registrant.  The proceeds from these Notes,  combined with those from the senior
secured financing,  were used to repay senior  indebtedness,  acquire Banner and
for working capital.

      On July 15, 1998, the Registrant  entered into a funding agreement with an
institutional lender providing the Registrant and its wholly-owned  subsidiaries
an aggregate of up to $6,000,000 in senior secured financing.

      On October 5, 1998, the Registrant,  through its prospectus offered to its
warrantholders  the  opportunity to exercise their Warrants and purchase  Common
Stock at a temporarily  reduced  exercise  price.  At December 31, 1998,  23,785
Warrants were exercised at the temporarily reduced exercise price.

      In October and November,  1998, the Registrant issued 78,000  unregistered
shares of Common Stock  together  with  Warrants and Options to purchase  40,500
shares of Common  Stock to investors  including  private  investors,  directors,
officers  and an  employee of the  Registrant.  The shares were issued at prices
ranging  from $9.30 to $10.00  per share.  Proceeds  of  $760,000  were used for
working capital.

Seasonality

      The continuing  operations of the A-One-A  Produce have been  historically
seasonal  due to the  increased  business  in South  Florida  during  the winter
months.  With the purchase of Banner,  the Registrant has taken steps in keeping
with its plan to reduce the seasonal  impact to its  business.  Banner ships its
products  nationwide  and is not as  vulnerable  to seasonal  swings in regional
business as is A-One-A.  As well,  the  business at A-One-A  continues  to trend
toward  multi-unit chain and contract  business and it too should realize a less
severe  impact from the business  downturn in the summer  months.  These factors
should  result  in a much  more  predictable  profit  trend  by  quarter  as the
Registrants' plan for growth continues to be carried through.

ITEM 7 - FINANCIAL STATEMENTS

      The financial  statements  to this Form 10-KSB are attached  commencing on
Page F-1.

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

      The Registrant did not have any changes in, or any material  disagreements
on accounting and financial disclosure with, its accountants in fiscal 1998.

                                      10

<PAGE>



                                   PART III

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

      As of December 31, 1998, the Registrant's directors and executive officers
were:

Name                       Age      Position Held

Steven Shulman             58       Chairman of the Board of Directors,
                                    President and Chief Executive Officer

Jonathan S. Lasko          28       Executive Vice-President, Secretary, Chief
                                    Operating Officer and Director

Richard Power              50       Director

Fred A. Seigel             42       Director

Houssam T. Aboukhater      27       Director

William P. Rodrigues, Jr.  55       Vice-President -- Finance, Treasurer and
                                    Chief Financial Officer

      Directors are elected on an annual basis.  All directors of the Registrant
hold office  until the next annual  meeting of the  shareholders  or until their
successors  are elected and  qualified.  At present,  the  Registrant's  by-laws
provide for not less than one director nor more than seven. Currently, there are
five directors.  The Registrant's  by-laws permit the Board of Directors to fill
any  vacancy  and such  director  may serve  until the next  annual  meeting  of
shareholders  or until his  successor  is elected and  qualified.  Officers  are
elected to serve,  subject to the  discretion of the Board of  Directors,  until
their successors are appointed.

      STEVEN  SHULMAN,  age 58,  has  served  as the  Chairman  of the  Board of
Directors since February,  1997, and since February 18, 1998, he has also served
as the Chief Executive Officer of the Registrant. He is also a Managing Director
of Latona  Associates,  Inc.,  an  investment  banking firm involved in advisory
services  and  principal  investments.  He serves as a  director  of a number of
public and private  companies  and is  currently a director of WPI Group,  Inc.,
Ermanco  Incorporated,  Beacon Capital Partners,  L.P. and Corinthian Directory,
Inc.  Mr.  Shulman  holds an M.S.  in  Industrial  Management  from the  Stevens
Institute  of  Technology,  where he  currently  serves as Vice  Chairman of its
Board.

     JONATHAN S.  LASKO,  age 28, has been a director  of the  Registrant  since
September,  1994, and its Chief  Operating  Officer and Secretary  since August,
1995.  He has also been the  Registrant's  Executive  Vice-President  since May,
1993. Mr. Lasko was the  vice-president of A&E Management Corp. from October 27,
1993, The Lasko Companies, Inc. from May 11, 1995 and

                                      11

<PAGE>



Prime Concern Kosher Foods, Inc. from December,  1995 until such businesses were
sold in 1998.  He is also  President  and Chief  Executive  Officer  of  A-One-A
Produce.  Mr. Lasko attended  Bernard  Baruch College of City  University of New
York, New York in 1990 and 1991. From January, 1990 until October, 1993, when he
became a  full-time  employee  of the  Registrant,  Mr.  Lasko was a part-  time
employee of the Registrant and managed its food and beverage  operations for its
Passover holiday vacation.

      RICHARD POWER,  age 50, has served as a director of the  Registrant  since
February, 1997. He was Vice-President of Tyco Fire and Safety Services from May,
1997, to March, 1999, and the President of Carlisle Plastics,  Inc. from January
to May,  1997,  both  divisions  of Tyco  International  Ltd.,  a New York Stock
Exchange  listed  corporation.  He served as a consultant to Tyco in Mergers and
Acquisitions  from 1995 through 1996, Vice President and Chief Financial officer
of Abex Inc. a New York Stock Exchange listed corporation between 1994 and 1995,
and was the Managing Director of a private  investment company from 1992 through
1994. Mr. Power holds a B.S. and an M.B.A. from Boston College.

     FRED A. SEIGEL,  age 42, has served as a Director  since February 18, 1998.
Mr. Seigel was the founder, President and Director of Energy Capital Partners, a
privately-held,  Boston-based  company organized in September,  1993,  providing
financing for energy  efficiency  projects  throughout  the United  States.  The
company was sold to ABB  Structured  Finance  (Americas) in February,  1999. Mr.
Siegel continues to serve as its President. From January, 1988 to October, 1994,
he served as a limited partner in two large-scale energy co-generation  projects
in New York state, representing a total investment of $350,000,000.  From March,
1984 to November,  1986, Mr. Seigel was a project manager for Wheelabrator-Frye,
Inc., in that  company's  Resource  Recovery  Division.  From  January,  1981 to
January,  1993, he was the Director of the  Executive  Office for Energy for the
State of New  Hampshire.  Mr.  Seigel  holds a B.A.  from New  England  College,
Henniker, New Hampshire.

      HOUSSAM T. ABOUKHATER, age 27, was elected a Director of the Registrant on
August 26, 1998.  He is Vice  President of  Prestolite  Wire, a  privately-held,
Southfield,   Michigan-based   company,   which  is  a   leading   producer   of
telecommunications  wire.  From  1993 to 1996,  Mr.  Aboukhater  served  as Vice
President of Balcrank Products, an automotive components division of the General
Chemical Group, a New York Stock Exchange  listed  corporation.  Mr.  Aboukhater
also currently serves as Director of Market Analysis for Latona  Associates,  an
investment banking firm involved in advisory services and principal investments.
Mr.  Aboukhater holds a B.A. in business  administration  from the University of
San Diego, San Diego, California.

     WILLIAM P. RODRIGUES,  JR., age 55, was appointed Vice-President -- Finance
and Chief Financial Officer on July 18, 1998. Previously, he had been Controller
of Mueller  Co., a unit of Tyco  International,  Inc.  since 1989.  From 1976 to
1987, he was  Vice-President  -- Finance and  Controller  of  Clearfield  Cheese
Company,  a subsidiary of H.P. Hood Inc., a Boston-based dairy products company.
Mr. Rodrigues holds an A.B. degree from Boston College.




                                      12

<PAGE>



Director Compensation

      Directors are reimbursed for expenses actually incurred in connection with
attending  meetings of the Board of Directors.  Non-employee  directors are paid
$750 for  each  directors'  meeting  attended.  In  addition  to the  foregoing,
directors are also granted options annually through the Registrant's  1997 Stock
Option Plan. At the Annual Directors  Meeting held August 26, 1998, the Chairman
of the Board and President,  Mr. Shulman,  was granted 5,000 options and each of
the other four  directors  was granted 3,000  options for 1998.  The  Registrant
anticipates  that the Board of  Directors  will  continue  to meet at least four
times a year.

ITEM 10 - EXECUTIVE COMPENSATION

      The following table sets forth all compensation paid or distributions made
during  the  fiscal  years  ended  December  31,  1998,  1997 and  1996,  by the
Registrant  or any of its  subsidiaries  to the Chief  Executive  Officer of the
Registrant and to each of its most highly compensated executive officers,  other
than the Chief Executive Officer, whose compensation exceeded $100,000.

                                                          Annual Compensation
                                                          -------------------
                               Year Ended    Annual      Other
Name & Principal Position      December 31   Salary      Compensation  Options
-------------------------      -----------   ------      ------------  -------

Samuel H. Lasko,               1996          $125,000    $   9,517(2)(3)
President and                  1997          $150,000    $  22,502(2)
Treasurer(1)                   1998          $   -0-     $   -0-

Jonathan S. Lasko,             1996          $  70,000   $   7,255(2)
Executive Vice                 1997          $  95,000   $  21,727(2)
President, Secretary and       1998          $125,000    $  14,058     8,000(5)
Chief Operating Officer

Steven Shulman                 1997          $  -0-      $  -0-       13,000(5)
Chief Executive Officer        1998          $  -0-      $  -0-       15,000(5)
and President(4)

Milton Namiot,                 1997          $175,000    $   9,500(2) 12,500(6)
Chief Executive Officer(6)
----------------------------
(1)  Resigned effective August 26, 1998.
(2)  Represents amounts paid for lease of automobile,  automobile  insurance and
     health insurance.
(3)  Does not include  repayments of loans from A&E Management  Corp., The Lasko
     Companies, Inc. and the Registrant.
(4)  Steven  Shulman  became  Chief  Executive  Officer  of  the  Registrant  in
     February,  1998, subsequent to the resignation of former CEO Milton Namiot.
     Mr. Shulman became President of the Registrant in August, 1998,  subsequent
     to the resignation of Samuel H. Lasko.
(5)  Represents  options  granted to directors and executive  officers under the
     Registrant's 1997 Stock Option Plan.
(6)  In connection  with the sale of the  Registrant's  Deering Ice Cream,  Inc.
     business, Mr. Namiot resigned as an officer. He was an officer and director
     of the  Registrant  from February 17, 1997 until the closing of the Deering
     transaction.  In connection  with his  resignation,  the termination of his
     three year employment contract,  50% of the options theretofore granted Mr.
     Namiot,  or options to purchase  12,500 shares of the  Registrant's  common
     stock,  were  made  immediately  exercisable.   They  have  since  expired,
     unexercised.

                                      13

<PAGE>



                   Option/SAR Grants in the Last Fiscal Year

                                Individual Grants
                                -----------------

                       Number of    % of Total
                      Securities   Options/SARs
                      Underlying    Granted to       Exercise
                     Options/SARs    Employees       or Base
       Name           Granted(#)  in Fiscal Year  Price ($/Sh) Expiration Date
       ----           ----------  --------------  ------------ ---------------

Steven Shulman          15,000         26.3%         $11.25    Aug-Nov, 2008
Jonathan S. Lasko        8,000         11.4%         $11.41    Aug-Nov, 2008
Dr. Samuel H. Lasko       -0-           -0-            -0-          -0-

              Aggregated Option/SAR Exercises in Last Fiscal Year
                         and FY-End Option/SAR Values

      The following table sets forth options exercised by the Registrant's chief
executive  officer  and the  Registrant's  two  other  most  highly  compensated
executive  officers  during  fiscal  1998,  and  the  number  and  value  of all
unexercised  options at year end. The value of "in-the-money"  options refers to
options  having an  exercise  price  which is less than the market  price of the
Registrant's  stock at fiscal  year-end.  On that date, none of the Registrant's
executive officers held exercisable options which were "in-the-money".

                                                     Number of
                                                    Securities     Value of
                                                    Underlying    Unexercised
                                                   Unexercised   In-The-Money
                                                   Options/SARs  Options/SARs
                                                   at FY-End (#) at FY-End ($)

                   Shares Acquired     Value       Exercisable/  Exercisable/
Name                On Exercise (#) Realized ($)   Unexercisable Unexercisable
----                --------------- ------------   ------------- -------------

Steven Shulman            -0-            -0-       6,333/21,667     $0/0

Jonathan S. Lasko         -0-            -0-       41,667/16,333    $0/0

William P. Rodrigues, Jr.   -0-          -0-         0/12,500       $0/0

Employment Agreements and Aggregate Options Holdings

      The Registrant  has a five-year  employment  agreement,  ending August 31,
2000, with Jonathan S. Lasko.  Under his employment  agreement,  Mr. Lasko is to
receive an annual base salary of $115,000  for the fourth year and  $125,000 for
the fifth year of his  employment.  On February 18, 1998, the Board of Directors
accepted the recommendation of its Compensation Committee and increased Jonathan
S. Lasko's base  compensation for 1998 to $125,000.  In connection with the sale
by Registrant of its Deering Ice Cream subsidiary,  by amendments dated February
17, 1997, to his

                                      14

<PAGE>



employment  agreement,  Jonathan  Lasko  voluntarily  surrendered  his  one-time
performance  based  option to purchase up to an  aggregate  of 75,000  shares of
common stock,  and in lieu thereof,  the Registrant  issued to him,  warrants to
purchase  37,500 shares of its common stock at an exercise  price of $11.875 per
share.  The  employment  agreement  also  entitles  Mr.  Lasko  to the use of an
automobile  and  to  employee  benefit  plans,  such  as  group  life,   health,
hospitalization and life insurance.  Under the employment agreement,  employment
terminates upon death or total  disability of the employee and may be terminated
by the  Registrant  for "cause,"  which is defined,  among other things,  as the
willful  failure to perform  duties,  embezzlement,  conviction of a felony,  or
breach of the  employee's  covenant  not to  compete  or  maintain  confidential
certain information.

      In August,  1998,  Dr. Samuel H. Lasko resigned as an officer and director
of the Registrant. As was done by Jonathan Lasko, Dr. Lasko also surrendered his
one-time  performance  based  option to  purchase up to an  aggregate  of 75,000
shares of common stock in  connection  with the sale by the  Registrant  and, in
lieu thereof,  received warrants to purchase 37,500 shares of common stock at an
exercise price of $11.875 per share.

      In connection with the A-One-A Produce transaction, the Registrant entered
into five-year  employment  agreements,  effective July 1, 1997, and ending July
30, 2002, with both Virgil D. Scarbrough and Scott Davis. Under these employment
agreements,  Messrs.  Scarbrough  and Davis  serve as senior  executives  of the
Registrant's  wholly-owned  subsidiaries  A-One-A  Produce  and Fresh,  and each
receive a annual base  salary of  $120,000,  an annual  discretionary  bonus,  a
performance  incentive bonus of 20% of annual salary,  which  percentage will be
increased  incrementally  if the  pre-tax  income of A-One-A  Produce  and Fresh
exceed specified  levels,  and all other benefits  available to other Registrant
executives.

The 1997 Stock Option Plan and Participants

      The Registrant amended its 1997 Stock Option Plan (the "Plan") enabling it
to grant options for shares of its Common Stock. While the Plan still authorizes
the grant of options to purchase up to an aggregate  of 1,750,000  shares of the
Registrant's  Common  Stock,  options are granted and  reported on a  post-split
basis.  Options  may be granted to (i)  officers  and other  full-time  salaried
employees of the Registrant and its subsidiaries  with managerial,  professional
or supervisory  responsibilities,  and (ii)  consultants and advisors who render
bona fide services to the Registrant and its  subsidiaries,  in each case, where
the Compensation Committee determines that such officer, employee, consultant or
advisor has the capacity to make a  substantial  contribution  to the success of
the  Registrant.  The number of individuals  who currently  would be eligible to
receive options pursuant to the Plan is approximately seven. As used herein with
respect to the Plan,  references to the Registrant  include  subsidiaries of the
Registrant.

      The  purposes  of the Plan are to enable the  Registrant  to  attract  and
retain persons of ability as officers and other key employees  with  managerial,
professional  or supervisory  responsibilities,  to retain able  consultants and
advisors,  and to motivate  such  persons to use their best efforts on behalf of
the Registrant by providing them with an equity participation in the Registrant.
The  full  text of the  Plan is set  forth as an  exhibit  to this  Registration
Statement,  and the  following  description  is  qualified  in its  entirety  by
reference thereto.

                                      15

<PAGE>



      The Plan is administered by the Compensation Committee, which is appointed
by the  Registrant's  Board of  Directors,  and consists of three members of the
Board of Directors,  two of whom are "disinterested"  persons within the meaning
of Rule 16b-3 under the Securities  Exchange Act of 1934. Under the terms of the
Plan, the Committee  will have the authority to determine,  subject to the terms
and conditions of the Plan, the persons to whom options are granted,  the number
of  options  granted  to each  optionee,  and the terms and  conditions  of each
option, including its duration.

      The Plan can be amended, suspended,  reinstated or terminated by the Board
of  Directors;  provided,  however,  that without  approval of the  Registrant's
shareholders,  no amendment shall be made which (i) increases the maximum number
of shares of Common stock which may be subject to stock  options  granted  under
the Plan, except for specified adjustment  provisions,  (ii) extends the term of
the Plan,  (iii) materially  increases the benefits  accruing to optionees under
the Plan,  (iv)  materially  modifies the  requirements  as to  eligibility  for
participation  in the Plan,  or (v) will cause stock  options  granted under the
Plan  to fail  to  meet  the  requirements  of  Rule  16b-3.  Unless  previously
terminated  or extended by the Board of  Directors,  the Plan will  terminate on
February 20, 2007.

      Stock  options may be granted to purchase  Common  Stock under the Plan at
not less than the fair market  value of the shares as of the date of grant.  The
maximum  number of shares for which  options may be issued to an employee of the
Registrant during any calendar year may not exceed 250,000. Other than the limit
of 250,000 options per year,  there is no limitation on the aggregate  number of
stock options which may be granted to any optionee pursuant to the Plan.

      As of December 31, 1998,  114,300  options  have been  granted,  including
82,000 to current officers and directors.

      Stock  options  may be  granted  for a term of up to ten  years.  The Plan
provides that if a stock option,  or portion  thereof,  expires,  lapses without
being exercised or is terminated, canceled or surrendered for any reason without
being  exercised  in full,  the  unpurchased  shares of Common  Stock which were
subject to such stock option or portion  thereof  shall be available  for future
grants of stock options under the Plan.

      Pursuant to the terms of the Plan,  the option  price for all options must
be paid in cash,  by check,  bank draft or money order  payable in United States
dollars to the order of the  Registrant,  or with Common Stock of the Registrant
owned by the  optionee  and having a fair  market  value on the date of exercise
equal to the aggregate  exercise  price of the shares to be so  purchased,  or a
combination thereof.

      Options   granted   pursuant  to  the  Plan  will  not  be  assignable  or
transferable  except  by  will  or the  laws of  intestate  succession.  Options
acquired  pursuant  to  the  Plan  may be  exercised  by the  optionee  (or  the
optionee's  legal  representative)  only while the  optionee  is employed by the
Registrant,  or within six  months  after  termination  of  employment  due to a
permanent disability, or within three months after termination of employment due
to retirement.  The executor or administrator of a deceased optionee's estate or
the person or persons to whom the deceased

                                      16

<PAGE>



optionee's  rights  thereunder  have passed by will or by the laws of descent or
distribution  shall be entitled to  exercise  the option  within the sixth month
after the decedent's death.  Options expire immediately in the event an optionee
is terminated with or without cause or resigns; provided,  however, in the event
the Registrant  terminates the employment of an optionee who at the time of such
termination was an officer of the Registrant and had been continuously  employed
by the  Registrant  during  the  two  year  period  immediately  preceding  such
termination,  for any reason except "good cause" (as defined in the Plan),  each
stock  option held by such  optionee  (which had not then  previously  lapsed or
terminated  and which had been held by such  optionee  for more than six  months
prior to such  termination)  shall be  exercisable  for a period of three months
after such termination to the extent otherwise  exercisable  during that period.
All of the  aforementioned  exercise  periods  set forth in this  paragraph  are
subject to the further  limitation  that an option  shall not,  in any case,  be
exercisable beyond its stated expiration date.

      The purchase price and the number and kind of shares that may be purchased
upon exercise of options granted  pursuant to the Plan, and the number of shares
which may be granted  pursuant to the Plan, are subject to adjustment in certain
events, including stock splits, recapitalizations, mergers, and reorganizations.

      As of December 31, 1998, the following  officers,  directors,  significant
employees  and  other  employees  have  received  the  number of  options  as is
designated opposite their respective names:

      Name                             Number of Options (1)
      ----                             -----------------
     Steven Shulman                          28,000(2)(9)
     Jonathan S. Lasko                       20,500(3)
     Richard Power                           15,000(4)(9)
     William P. Rodrigues, Jr.               12,500(5)
     Samuel H. Lasko(6)                      12,500
     Houssam T. Aboukhater                    3,000(7)
     Fred A. Seigel                           3,000(7)
     Bruce S. Phillips(6)                     2,000(9)
     Other Employees                         17,800(8)
                                          ---------

     TOTAL                                  114,300(10)
                                          =========

----------

(1)  Unless  otherwise  stated,  these options become  exercisable one third per
     year over three years from the date granted.
(2)  Includes  5,000 options at an exercise price of $13.75 per share and 10,000
     at $10.00 per share granted in 1998.
(3)  Includes  3,000 options at an exercise  price of $13.75 per share and 5,000
     at $10.00 per share granted in 1998.
(4)  Includes  3,000 options at an exercise price of $13.75 per share and 10,000
     at $10.00 per share granted in 1998.
(5)  Includes 10,000 options at an exercise price of $15.625 per share and 2,500
     at $10.00 per share granted in 1998.
(6)  Former Director.

                                      17

<PAGE>



(7)  Includes  3,000 options at an exercise price of $13.75 per share granted in
     1998.
(8)  Includes 1,000 options at an exercise price of $16.90 per share,  10,000 at
     $23.10 per share and 500 at $10.00 per share granted in 1998.
(9)  All of Mr.  Phillips'  options,  2,000 of Mr. Power's  options,  as well as
     3,000 of Mr. Shulman's  options,  granted in February,  1997, at a price of
     $11.85, became exercisable at the time they were granted.
(10) Does not include  options  granted to Milton Namiot,  a former director and
     former  Chief  Executive   Officer,   and  Joseph  Dane,  former  Corporate
     Controller of the Registrant.  In February,  1997, Messrs.  Namiot and Dane
     were granted 25,000 and 2,500 options, respectively.  Although they were no
     longer  affiliated  with  the  Registrant  subsequent  to the  sale  of the
     Registrant's  Deering  Ice  Cream  business,   the  Compensation  Committee
     determined to make immediately  exercisable  12,500 of Mr. Namiot's options
     and all of Mr.  Dane's  options  for a total of 120 days beyond the date of
     the cessation of their  employment by the  Registrant.  All of such options
     have expired unexercised.


ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table  provides   information   concerning  the  beneficial
ownership of Common Stock of the Registrant by each director,  certain executive
officers,  and by all directors and officers of the  Registrant as a group as of
December 31, 1998. In addition,  the table provides  information  concerning the
beneficial  owners known to the Registrant to hold more than five percent of the
outstanding Common Stock of the Registrant as of December 31, 1998.

                                          Common Stock
                                          Beneficial               Percent of
Name of Beneficial Owner                  Ownership(1)              Class(1)
------------------------                  ------------              --------

Jonathan S. Lasko                              49,000(2)               5.2%
Richard Power                                  42,250                   *
Steven Shulman                                 71,950                  7.6%
Fred A. Siegel                                  7,875                   *
Houssam T. Aboukhater                          20,000                   *
William P. Rodrigues                            2,500                   *
A-One-A Wholesale Produce, Inc.                50,000(3)               5.3%
Michael Feinberg                               50,000                  5.3%

All Directors, Executive Officers and 5%
    Holders as a Group                       293,575(4)              30.1%

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

     *Less than five percent.

(1)  In each case the  beneficial  owner has sole  voting and  investment  power
     except  that  380,000  shares  held by  Jonathan S. Lasko are held in joint
     tenancy with his wife Ellen J. Lasko.
(2)  Includes 25,000 shares held for the benefit of Jordana Lasko, a minor.
(3)  These shares were issued in connection  with the Company's  acquisition  of
     the  business  and assets of the named  company  which is owned  equally by
     Virgil Scarbrough and Scott Davis. Messrs. Scarbrough

                                      18

<PAGE>



     and Davis are Officers of A-One-A  Produce & Provisions,  Inc.,  one of the
     Company's wholly-owned subsidiaries.
(4)  Does not include stock options granted in the amounts as follows:  Jonathan
     S. Lasko - 20,500; Steven Shulman - 28,000; Richard Power - 15,000; Fred A.
     Seigel - 3,000;  Houssam T.  Aboukhater - 3,000;  and William P. Rodrigues,
     Jr. - 12,500.  Also does not include warrants to purchase Common Stock at a
     price of  $1.1875 in the  following  amounts:  Jonathan  S. Lasko - 37,500;
     Steven Shulman - 3,667; Richard Power - 3,167; and Fred A. Seigel - 1,583.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In connection  with the acquisition of DownEast,  the Registrant  issued to
each of Samuel H.  Lasko and  Jonathan  S.  Lasko  (collectively  the  "Laskos")
warrants to purchase 37,500 shares of the  Registrant's  common stock at $11.875
per share.  Messrs.  Laskos surrendered their respective  performance options to
purchase up to 75,000  shares of the  Registrant's  common  stock,  contained in
their respective employment agreements. In addition, they entered into an option
agreement to purchase the  businesses,  assets or capital  stock of three of the
Registrant's wholly owned subsidiaries, The Lasko Family Kosher Tours, Inc., The
Lasko Companies, Inc. and A&E Management,  Inc. at the fair market value thereof
to be  independently  determined.  The option was  exercised  by Samuel H. Lasko
alone and on March 13, 1998, he purchased  The Lasko Family  Kosher Tours,  Inc.
and A&E Management,  Inc. for consideration equal to $575,000 in accordance with
"fair value" and  "fairness"  opinions from an independent  valuation  firm. The
sale was ratified by the  shareholders  at the 1998 Annual Meeting on August 26,
1998.

     A-One-A Produce leases  approximately  55,000 square feet at 1351 N.W. 22nd
Street,  Pompano Beach, Florida, for use as its principal offices and warehouse.
The  lease  term is for ten years  expiring  July 31,  2007,  with two five year
options to extend at an annual  rental of  approximately  $222,000.  The Pompano
Beach facility is owned by an affiliate of Messrs. Scarbrough and Davis. A lease
for this facility was negotiated as part of the A-One-A acquisition.

ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

     (3)(i) Articles of Incorporation *
     ----------------------------------

     (3)(ii) By-laws *
     -----------------

     (3)(iii) Instruments defining the rights of holders *
     -----------------------------------------------------

     (10) Material Contracts **
     --------------------------



                                      19

<PAGE>



     (21) Subsidiaries of the Registrant
     -----------------------------------

     The Registrant's three operating wholly-owned subsidiaries are:

     1.     A One A Produce & Provisions, Inc.
            1325 N.W. 22nd Street
            Pompano Beach, Florida 33069

     2.     Fresh, Inc.
            1325 N.W. 22nd Street
            Pompano Beach, Florida 33069

     3.     Banner Beef & Seafood Co., Inc.
            1111 N.W. 21st Terrace
            Miami, Florida  33127

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

*    Incorporated by this reference to the Registrant's registration statement #
     33-96892-A.

**   All material  contracts  presently in full force and effect and  heretofore
     filed with the  Commission  are hereby  incorporated  by this  reference to
     Registrant's   registration  statements  #33-96892-A  and  #333-45195;   to
     Registrant's Form 10-KSB and amendments thereto for the year ended December
     31, 1997,  Commission file number 0-27132;  and to Registrant's  Reports on
     Form 8-K filed with the Commission on July 30, 1998.

b)  Reports on Form 8-K

     The Registrant  filed Current  Reports on Form 8-K (i) on January 16, 1998,
to report the  consummation of the sale of its Deering Ice Cream subsidiary to a
unaffiliated   third  party;  (ii)  on  April  21,  1998,  to  report  financial
information related to the Registrant's  acquisition of A-One-A;  (iii) on April
21, 1998, to report financial  information  related to the Registrant's  sale of
the business of its Deering subsidiary;  (iv) on July 8, 1998, to report a press
release  announcing the agreement to purchase Banner Beef and Seafood Co., Inc.;
(v) on July 30, 1998, to report the consummation of the Banner acquisition, file
exhibits related to that transaction,  and report financial  information related
to the Banner acquisition; and (vi) on April 26, 1999, to report a press release
announcing the  completion of its $1.6 million  preferred  equity  financing and
issuance of its Series C Preferred Stock to those unaffiliated investors.


                                      20

<PAGE>



                                  SIGNATURES

     In accordance  with Section 13 of the Exchange Act, the  Registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


                              TERRACE  FOOD GROUP, INC.
--------------------------------------------------------------------------------
                                  Registrant

By:                       /s/ Steven Shulman, President
--------------------------------------------------------------------------------
                              Steven Shulman, President

Date:                          May 14, 1999
--------------------------------------------------------------------------------

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


Signature                          Title                              Date
---------                          -----                              ----

/s/ Steven Shulman             Chairman of the Board, Chief       May 14, 1999
-------------------------      Executive Officer, President
Steven Shulman                 and Director

/s/ Jonathan S. Lasko          Executive Vice-President, Chief    May 14, 1999
-------------------------      Operating Officer, Secretary
Jonathan S. Lasko              and Director


/s/ Richard D. Power           Director                           May 14, 1999
-------------------------
Richard D. Power


/s/ Fred A. Seigel             Director                           May 14, 1999
-------------------------
Fred A. Seigel


/s/ Houssam T. Aboukhater      Director                           May 14, 1999
--------------------------
Houssam T. Aboukhater


/s/ William P. Rodrigues, Jr.  Vice President-Finance, Treasurer  May 14, 1999
-----------------------------  and Chief Financial Officer
William P. Rodrigues, Jr.


                                      21

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


To the Stockholders and Board of Directors of
  Terrace Food Group, Inc.



            We have  audited  the  accompanying  consolidated  balance  sheet of
Terrace Food Group,  Inc. and its  subsidiaries as of December 31, 1998, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the two years in the period ended  December  31,  1998.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
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  consolidated   financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall  consolidated  financial  statement  presentation.  We believe  that our
audits provide a reasonable basis for our opinion.

            In our opinion,  the consolidated  financial  statements referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of Terrace  Food Group,  Inc. and its  subsidiaries  as of December 31,
1998, and the consolidated  results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998, in conformity  with
generally accepted accounting principles.






                                     MOORE STEPHENS, P. C.
                                     ---------------------
                                     Certified Public Accountants.

New York, New York
April 2, 1999, except for
Note 18 for which the date is
April 13, 1999

                                       F-1

<PAGE>



TERRACE FOOD GROUP, INC.
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
------------------------------------------------------------------------------



                                       Assets

Current Assets:
  Accounts Receivable (Less Allowance for Doubtful Accounts
   of $161,292)                                                     $ 4,008,153
  Inventories                                                         1,627,876
  Current Portion of Note Receivable - Stockholder                       53,000
  Other Current Assets                                                  166,431
                                                                    -----------

  Total Current Assets                                                5,855,460

Property and Equipment - Net                                          5,189,378

Note Receivable -Stockholder                                            106,000

Cost in Excess of Net Assets of Businesses Acquired -
  Net of Accumulated Amortization of $312,650                         4,199,477

Other Assets, Net                                                       469,854
                                                                    -----------

  Total Assets                                                      $15,820,169
                                                                    ===========


See Notes to Consolidated Financial Statements.

                                        F-2

<PAGE>



TERRACE FOOD GROUP, INC.
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
------------------------------------------------------------------------------




                        Liabilities and Stockholders' Equity

Current Liabilities:
  Cash Overdraft                                                    $   773,011
  Accounts Payable                                                    3,719,884
  Accrued Expenses                                                    1,054,866
  Current Portion of Long-Term Debt                                     566,754
  Line of Credit                                                      2,845,809
                                                                    -----------

  Total Current Liabilities                                           8,960,324

Long-Term Debt                                                        2,310,631
Convertible Subordinated Notes                                        2,335,000
Other Non-Current Liabilities                                           184,166
                                                                    -----------

  Total Liabilities                                                  13,790,121
                                                                    -----------
Commitments and Contingencies                                                --

Stockholders' Equity:
  Preferred Stock, $.001 Par Value, 10,000,000
   Shares Authorized, None Issued or Outstanding.                            --

  Common Stock - $.001 Par Value, 25,000,000 Shares Authorized,
   948,342 Issued and Outstanding                                           948

  Additional Paid-in Capital                                         10,642,012

  Accumulated Deficit                                                (8,612,912)
                                                                    -----------
  Total Stockholders' Equity                                          2,030,048
                                                                    -----------

  Total Liabilities and Stockholders' Equity                        $15,820,169
                                                                    ===========



See Notes to Consolidated Financial Statements.

                                        F-3

<PAGE>



TERRACE HOLDINGS, INC.
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



                                                          1 9 9 8      1 9 9 7
                                                          -------      -------

Net Sales                                              $31,011,197  $ 8,929,464

Cost of Sales                                           23,624,475    6,853,507
                                                       -----------  -----------

  Gross Profit                                           7,386,722    2,075,957
                                                       -----------  -----------

Operating Expenses:
  Selling, General and Administrative Expenses           9,065,269    3,370,480
  Provision for Doubtful Accounts                          241,855       60,000
                                                       -----------  -----------

  Total Operating Expenses                               9,307,124    3,430,480
                                                       -----------  -----------

  Loss from Operations                                  (1,920,402)  (1,354,523)
                                                       -----------  -----------

Other (Expense) Income:
  Interest Expense                                        (670,128)     (79,594)
  Interest Income                                           10,549       22,601
                                                       -----------  -----------

  Total Other (Expense)                                   (659,579)     (56,993)
                                                       -----------  -----------

  Loss From Continuing Operations                       (2,579,981)  (1,411,516)

Discontinued Operations:
  Loss from Operations of Discontinued Businesses
   (Net of Income Taxes of $-0-)                                --     (813,795)
  Loss on Disposal of Businesses, including
   Provision of $20,000 for Operating Loss during the
   Phase Out Period in 1997 (Net of Income Taxes of
   $-0- in both years)                                    (139,483)  (2,126,742)
                                                         ---------  -----------

  Net Loss                                             $(2,719,464) $(4,352,053)
                                                       ===========  ===========

Basic and Diluted Loss Per Share of Common Stock:
  Loss from Continuing Operations                      $     (3.84) $     (3.17)
  Loss from Operations of Discontinued
   Businesses (Net of Income Tax of $-0- in both years)         --        (1.83)
  Loss on Disposal of Discontinued Businesses                 (.20)       (4.77)
                                                       -----------  -----------

  Basic and Diluted Net Loss Per Share of
   Common Stock                                        $     (4.04) $     (9.77)
                                                       ===========  ===========

  Basic and Diluted Weighted Average Shares of
   Common Stock Outstanding                                672,620      445,403
                                                       ===========  ===========



See Notes to Consolidated Financial Statements.

                                        F-4

<PAGE>



TERRACE HOLDINGS, INC.
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------

<TABLE>


                                 Convertible                       Additional                 Total
                              Preferred Stock    Common Stock       Paid-in   Accumulated Stockholders'
                            Shares       Amount   Shares   Amount   Capital      Deficit    Equity
                            ------       ------   ------   ------   -------      -------    ------

<S>                        <C>         <C>       <C>     <C>       <C>         <C>          <C>
Balance - December 31, 1996      --    $    --   331,250 $     331 $ 3,948,930 $(1,541,395) $ 2,407,866

  Asset Acquisition -
   Deering                       --         --    91,890        92     763,907          --      763,999

  Finders Fee                    --         --     7,500         8      88,305          --       88,313

  Asset Acquisition -
   A-One-A                       --         --    50,000        50     999,950          --    1,000,000

  Private Placement       1,523,825      1,524        --        --   2,671,776          --    2,673,300

  Net Proceeds from the
   Issuance of Common Stock      --         --    20,000        20     219,980          --      220,000

  Stock Based Compensation       --         --        --        --     387,000          --      387,000

  Net Loss                       --         --        --        --          --  (4,352,053)  (4,352,053)
                          ---------    -------   ------- --------- -----------  ----------  -----------

Balance - December 31,
 1997                     1,523,825      1,524   500,640       501   9,079,848  (5,893,448)   3,188,425

  Asset Acquisition -
   Fresh, Inc.                   --         --    13,895        14     269,986          --      270,000

  Conversion of
   Preferred to Common   (1,523,825)    (1,524)  304,765       305       1,219          --           --

  Net Proceeds from
   Issuance of Common
   Stock and Exercise
   of Common Stock
   Purchase Warrants             --         --   104,951       104     736,351          --      736,455

  Asset Acquisition -
   Banner                        --         --     3,000         3      37,497          --       37,500

  Deering Acquisition
   Liability Conversion          --         --    10,091        10     126,122          --      126,132

  A-One-A Acquisition
  Liability Conversion           --         --    11,000        11     109,989          --      110,000

  Warrants and Options
   Issued with Convertible
   Subordinated Notes            --         --        --        --     281,000          --      281,000

  Net Loss                       --         --        --        --          --  (2,719,464)  (2,719,464)
                         ----------    -------   ------- --------- ----------- -----------  -----------

Balance - December 31,
 1998                            --         --   948,342 $     948 $10,642,012 $(8,612,912) $ 2,030,048
                         ==========    =======   ======= ========= =========== ===========  ===========

</TABLE>

See Notes to Consolidated Financial Statements.

                                              F-5

<PAGE>



TERRACE HOLDINGS, INC.
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------


<TABLE>

                                                              1 9 9 8      1 9 9 7
                                                              -------      -------

Operating Activities:
<S>                                                         <C>         <C>
  Net Loss from Continuing Operations                       $(2,579,981)$(1,411,516)
  Adjustments to Reconcile Net Loss to Net Cash (Used for)
   Provided by Operating Activities:
   Depreciation and Amortization                               769,466      157,613
   Provision for Doubtful Accounts                             241,855       60,000
   Stock Based Compensation                                         --      180,000

  Changes in Assets and Liabilities:
   (Increase) Decrease in:
     Restricted Cash                                           137,701     (137,701)
     Accounts Receivable                                    (1,924,768)    (541,699)
     Inventory                                                (573,885)    (102,069)
     Notes Receivable                                         (159,000)          --
     Other Current Assets                                       47,779       17,638
     Other Assets                                              (35,033)      (1,728)

   Increase (Decrease) in:
     Accounts Payable and Cash Overdrafts                    2,563,373      554,530
     Accrued Expenses and Other Current Liabilities            392,590      338,955
     Other Liabilities                                         184,166           --
                                                            ----------  -----------

     Total Adjustments                                       1,644,244      525,539
                                                            ----------  -----------

  Net Cash - Continuing Operations                            (935,737)    (885,977)
                                                            ----------  -----------

Discontinued Operations:
  Loss From Discontinued Businesses                           (139,483)  (2,940,537)
  Adjustments to Reconcile Loss to Net Cash:
   Depreciation and Amortization                                    --      180,115
  Loss on Disposal of Businesses (Including Provision
   of $20,000 for Operating Loss During Phase Out Period)           --    1,974,742
  Changes in Net Assets, Liabilities                                --   (1,787,219)
                                                            ----------  -----------

  Net Cash - Discontinued Operations                          (139,483)  (2,572,899)
                                                            ----------  -----------

  Net Cash - Operations - Forward                           (1,075,220)  (3,458,876)
                                                            ----------  -----------

Investing Activities - Continuing Operations:
  Purchase of Property and Equipment                        (2,382,604)    (201,744)
  Purchase of Businesses - Net of Cash Acquired             (3,389,668)  (3,616,993)
                                                            ----------  -----------

  Net Cash - Investing Activities - Continuing Operations   $(5,272,272)$(3,818,737)
                                                            ----------- -----------
</TABLE>



See Notes to Consolidated Financial Statements.


                                        F-6

<PAGE>



TERRACE HOLDINGS, INC.
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------

<TABLE>

                                                              1 9 9 8      1 9 9 7
                                                              -------      -------

Investing Activities - Discontinued Operations:
  Purchase and Disposal of DownEast Frozen Desserts, LLC -
<S>                                                         <C>         <C>
   Net of Cash Acquired                                     $       --  $   288,900
  Acquisition of Assets                                             --      (40,933)
                                                            ----------  -----------

  Net Cash - Investing Activities - Discontinued Operations         --      247,967
                                                            ----------  -----------

Financing Activities - Continuing Operations:
  Proceeds from Issuance of Convertible Subordinated Notes
   with Warrants and Option                                  2,500,000           --
  Borrowing of Long-Term Debt                                3,001,684      100,000
  Repayment of Long-Term Debt                                 (368,049)     (64,467)
  Borrowing Under Line of Credit                             2,845,810    1,354,085
  Repayment of Line of Credit                               (1,354,085)          --
  Net Proceeds from Issuance of Common Stock
   and Exercise of Common Stock Purchase Warrants              736,455      220,000
  Incurrence of Deferred Financing Costs                      (514,323)          --
  Proceeds from Issuance of Convertible Preferred Stock             --    2,673,300
                                                            ----------  -----------

  Net Cash - Financing Activities - Continuing Operations    6,847,492    4,282,918
                                                            ----------  -----------

Financing Activities - Discontinued Operations:
  Proceeds of Demand Notes Payable                                  --    1,175,821
                                                            ----------  -----------

  Net (Decrease) in Cash and Cash Equivalents                       --   (1,570,907)

Cash and Cash Equivalents - Beginning of Years                      --    1,570,907
                                                            ----------  -----------

  Cash and Cash Equivalents - End of Years                  $       --  $        --
                                                            ==========  ===========

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the years for:
   Interest                                                 $  345,097  $    51,093
   Income Taxes                                             $       --  $        --
</TABLE>

Supplemental Disclosures of Non-Cash Financing Activities:
  During the first  quarter of 1998,  the Company  issued  13,895  shares of its
common stock valued at $270,000 in  connection  with the  acquisition  of Fresh,
Inc.  and in the  third  quarter  issued  3,000  shares of its  common  stock in
connection  with the  acquisition  of Banner Beef and  Seafood,  Inc.  valued at
$37,500.

  During the third quarter of 1998,  the Company  issued 21,091 Shares of Common
Stock  valued at $236,132  to satisfy  liabilities  relating to the  purchase of
A-One-A and Deering.

  During the first quarter of 1997,  the Company  issued 99,390 shares of common
stock valued at  approximately  $853,000 in connection  with the  acquisition of
DownEast  Frozen  Desserts,  LLC. and during the third  quarter,  issued  50,000
shares  of its  common  stock  valued  at  $1,000,000  in  connection  with  the
acquisition of A-One-A Wholesale Produce, Inc.

  The  Company's  Convertible  Subordinated  Notes were issued at a discount of
$406,000 that is being amortized over the term of the Notes (See Note 7).

  The Company's outstanding convertible preferred stock automatically converted
to common (See Note 12).

See Notes to Consolidated Financial Statements.

                                        F-7

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(1) Nature of Operations and Summary of Significant Accounting Policies

Name Change - In August 1998 the Company's  shareholders  approved the change of
the  Company's  name from Terrace  Holdings,  Inc. to Terrace  Food Group,  Inc.
("Terrace" or the "Company").

Operations  - The Company  operates in two segments of the food  industry,  Food
Distribution and Food Processing and Manufacturing.

The Food  Distribution  segment  includes the operations of the Company's  AoneA
Produce and Provisions,  Inc. ("AoneA") and Fresh, Inc. ("Fresh")  subsidiaries.
AoneA  distributes  fresh and precut  produce,  dairy  products  and dry grocery
products  to  foodservice,  cruiseline  and export  customers  throughout  South
Florida.  Fresh  processes  precut produce which is marketed  primarily by AoneA
(See Note 2).

The Food  Processing and  Manufacturing  segment  includes the operations of the
Company's Banner Beef & Seafood Co., Inc. ("Banner") subsidiary acquired in July
1998 (See Note 2). Banner is a custom value added processor of meat, seafood and
poultry products marketed nationally to retail and foodservice customers.

During  1997,  the  Company  decided  to  dispose  of  its  frozen  dessert  and
hospitality  businesses.  The divestitures  were completed during 1998 (See Note
3).

Reverse Split of Common Stock - Effective  March 15, 1999, the  shareholders  of
the Company  approved a one for ten reverse split of the Company's  common stock
without any other  changes in  authorization,  par value or  otherwise.  All per
share and share amounts for all periods  presented have been adjusted to reflect
this reverse split.

Consolidation  Policy  -  The  consolidated  financial  statements  include  the
accounts of Terrace and its subsidiaries.  All significant intercompany balances
and transactions have been eliminated. The subsidiaries' fiscal years end on the
Saturday closest to December 31. The 1997 consolidated financial statements also
include, in discontinued  operations,  the accounts of A&E Management Corp., The
Lasko Family Kosher Tours, Inc., The Lasko Companies and Deering Ice Cream, Inc.
all of which have been sold. (See Note 3).

Inventories - Inventories  are recorded at the lower of cost or market.  Cost is
determined on the first-in, first-out ("FIFO") basis.

Property  and   Equipment  -  Property  and  equipment  are  recorded  at  cost.
Expenditures  for normal  repairs  and  maintenance  are  charged to earnings as
incurred.  When assets are retired or  otherwise  disposed  of,  their costs and
related accumulated depreciation are removed from the accounts and the resulting
gains or losses are included in operations.  Depreciation  is recorded using the
straight-line  method  over the  shorter of the  estimated  lives of the related
asset or the remaining lease term. Estimated useful lives are as follows:

Buildings                                  30    Years
Machinery and Equipment                    5 - 7 Years
Transportation Equipment                   7 -10 Years
Office Equipment, Furniture and Fixtures   5 -10 Years
Leasehold Improvements                     5 -10 Years

Cash and Cash  Equivalents - The Company  considers  highly liquid  investments,
with a maturity of three months or less,  when acquired to be cash  equivalents.
The Company did not have any cash equivalents at December 31, 1998.

                                       F-8

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------


(1)  Nature  of  Operations  and  Summary  of  Significant  Accounting  Policies
     (Continued)

Cost in Excess of Net Assets of Businesses  Acquired - The cost in excess of net
assets of businesses  acquired is being amortized on a straight-line  basis over
20 years.

Impairment - The Company's  policy is to record an  impairment  loss against the
balance of a  long-lived  asset in the  period  when it is  determined  that the
carrying amount of the asset may not be recoverable. This determination is based
on an evaluation of such factors as the  occurrence of a significant  event or a
significant change in the environment in which the business assets operate.  The
Company considers assets to be impaired when the expected future  non-discounted
cash flows of the business is determined  to be less than the carrying  value of
the assets. If impairment is deemed to exist, the assets will be written down to
fair value.  Management  also evaluates  events and  circumstances  to determine
whether revised estimates of useful lives is warranted. As of December 31, 1998,
management expects its long-lived assets to be fully recoverable.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles  requires  management to make certain
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and the disclosure of contingent  assets and liabilities at the date
of the financial  statements,  and the reported  amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.

Concentration  of Credit Risk - The  Company  extends  credit to its  customers,
resulting in accounts  receivable  arising from its normal business  activities.
The Company  routinely  assesses the financial  strength of its  customers  and,
based upon factors  surrounding the credit risk of its customers,  believes that
its  receivable  credit risk  exposure is limited.  The Company does not require
collateral on its financial instruments.

Other  Concentrations  - A-One-A  is a member of a  cooperative  of  independent
distributors  through  which  it  obtains  advantageous  pricing  on  purchases.
Although  A-One-A   purchased  26%  of  consolidated   purchases   through  this
cooperative,  management believes there is no business  vulnerability  regarding
this  concentration  of purchases,  as the products are readily  available  from
other sources.

Advertising - Advertising  costs,  which were not material in 1998 or 1997,  are
expensed as incurred.

Earnings Per Share - Effective  December  31, 1997 the company  adopted SFAS No.
128  "Earnings  Per  Share,"  which  established  standards  for  computing  and
presenting both Basic and Diluted Earnings Per Share ("EPS").

(2) Business Acquisitions

On  January  2,  1998,  the  Company  purchased  certain  assets of D.M.S.  Food
Distributors,   Inc.,  a  Florida   Corporation   d/b/a   Gourmet   Distributors
("Gourmet").  Gourmet is a wholesaler  of dry goods.  In  consideration  for the
purchase,  the Company paid $453,764  primarily for inventory  which resulted in
costs  in  excess  of  fair  value  of net  assets  acquired  of  $400,000.  The
acquisition has been accounted for as a purchase. The operations of Gourmet have
been  included  in  the  Company's  results  of  operations  from  the  date  of
acquisition. Management has deemed the operations of this acquisition immaterial
for pro forma purposes.

In February 1998,  effective  January 1, 1998, the Company  purchased all of the
outstanding stock of Fresh, a related entity because of common shareholders. The
operations of Fresh have been  included in the  Company's  results of operations
from the date of  acquisition.  Results of operations  for 1997 include sales to
and purchases from Fresh of $203,327 and $357,425 respectively. In consideration
for the  purchase,  the Company paid  $105,000 in cash,  issued 13,895 shares of
common stock valued at $270,000 and forgave net accounts receivable of $141,986.
The acquisition, accounted for as a purchase, resulted in cost in excess of fair
value of net assets acquired of $373,004.

                                       F-9

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(2) Business Acquisitions (Continued)

On July 15,  1998,  the Company  acquired the assets and  substantially  all the
liabilities of Banner through an  acquisition  accounted for as a purchase.  The
operations  of Banner  Beef and  Seafood  Co.,  Inc.  have been  included in the
Company's  results  of  operations  from  that  date.  The cost of the  purchase
included  a base  cash  price of  $1,800,000,  the  payoff of  existing  debt of
$670,536, and other costs of $181,212. The cost of the acquisition was primarily
allocated to property, plant and equipment.

In connection with the Banner acquisition,  the Company entered into a five year
employment agreement with the Banner operations vice president at an annual base
salary of $200,000  and entered  into a five-year  lease for a plant  located in
Hialeah, Florida, which Banner uses as a processing facility. During the term of
the lease, the Company has an option to purchase this property for the lesser of
$1,270,000 or its independently appraised value.

A  summary  of  the   allocation  of  the  aggregate   consideration   paid  for
aforementioned  acquisitions to the fair market value of the assets acquired and
liabilities assumed is as follows:

Current Assets:
  Accounts Receivable                      $  448,535
  Inventories                                 773,533
  Other                                        23,893
                                           ----------

  Total                                     1,245,961

Property, Plant and Equipment               2,289,286

Cost in Excess of Net Assets Acquired         773,004
                                           ----------

  Total                                     4,308,251
                                           ----------
Current Liabilities:
  Accounts Payable and Accrued Expenses       679,452
  Other                                         6,301
                                           ----------
  Total                                       685,753
                                           ----------

  Aggregate Consideration                  $3,622,498
                                           ==========

Effective  July 1, 1997,  the  Company  acquired  all of the assets and  related
liabilities  of  A-One-A  in a  transaction  accounted  for as a  purchase.  The
operations of A-One-A have been included in the Company's  results of operations
from that date.

In  consideration  for the acquisition,  the Company issued 50,000  unregistered
shares of its common stock valued at  $1,000,000,  and paid  $3,130,000 in cash.
Additionally,  an adjustment to the purchase price of approximately $148,000 was
made subsequent to the acquisition.

In connection with the acquisition,  the Company entered into 5-year  employment
agreements with two officers,  effective July 1, 1997, and ending July 30, 2002.
The employment agreements call for aggregate annual compensation of $240,000.


                                      F-10

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(2) Business Acquisitions (Continued)

Also in connection  with the A-One-A  acquisition,  the Company  entered into an
agreement to lease space for use as its  principal  offices and  warehouse.  The
lease term is for ten years with three five-year options to extend expiring June
30, 2007, at an annual rental of approximately $222,000 including sales tax. The
Pompano Beach facility is owned by an affiliate of A-One-A  officers.  Under the
lease,  the  Company  has the right of first  refusal to  purchase  the land and
building at a fair market value.

During 1997, the Company  acquired all of the assets and related  liabilities of
Dry Dock  Distributors,  Inc.  d/b/a Bay Purveyors,  ("Bay  Purveyors") a Miami,
Florida based dry goods  distributor  which sells and  distributes dry goods and
dairy goods to various  restaurants and other business in Southern Florida.  The
acquisition  was deemed  immaterial by management of the Company.  Bay Purveyors
has  operated  as a division  of  A-One-A  since the  October 1, 1997  effective
purchase date.

In consideration  for the acquisition,  the Company paid the shareholders of Bay
Purveyors $340,000. The acquisition has been accounted for as a purchase.

The cost in excess of net assets of businesses  acquired is to be amortized over
20 years using the straight-line  method.  Amortization amounted to $224,502 and
$88,148 in the years ended December 31, 1998 and 1997 respectively.

The  following  pro forma  information  presents  the  results  of the  combined
operations  of  Terrace,   A-One-A,  Fresh  and  Banner  treating  the  acquired
businesses as if they were subsidiaries of Terrace for each year. This pro forma
information  does not purport to be  indicative  of what would have occurred had
the acquisitions been completed as of January 1, 1997 or results which may occur
in the future.

Pro forma unaudited information:
                                                         Twelve months ended
                                                             December 31,
                                                         1 9 9 8      1 9 9 7
                                                         -------      -------

Total Revenues                                        $ 33,832,500  $23,559,721

Loss from Continuing Operations                       $ (3,016,591) $(1,986,438)

Basic and Diluted Loss from Continuing
  Operations Per Share of Common Stock                $      (4.48) $    (4.32)

(3) Discontinued Operations and Divestitures

Frozen Dessert  Business - In February 1997, the Company acquired certain assets
and related  liabilities of DownEast Frozen Desserts,  LLC  ("DownEast"),  which
manufactured and marketed frozen desserts under the name Deering Ice Cream, Inc.
("Deering").

The  Company  sold this  business  in December  1997,  at loss of  approximately
$1,385,000.  Operating results of Deering,  including net sales of approximately
$6,360,000  are  included  in  discontinued   operations  in  the  statement  of
operations for the year ended December 31, 1997.


                                      F-11

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------


(3) Discontinued Operations and Divestitures (Continued)

Hospitality  Business - In November 1997,  the Company  adopted a formal plan to
sell the Hospitality Business to Samuel H. Lasko then President, Treasurer and a
Director of the Company and to an unrelated party. The disposal was completed in
1998.

The  1997  estimated  loss  on  the  disposal  of  the   Hospitality   Group  of
approximately  $742,000,  included a provision  of $20,000 for  expected  losses
during the phase- out period.  The Company  received  $90,000 from the unrelated
party. Dr. Lasko relinquished his employment contract and gave the Company an 8%
promissory  note in the principal  amount of $159,000.  The note is due in equal
annual principal installments on April 30, 1999, 2000, and 2001.

Operating  results,  including  net  sales of  approximately  $4,853,000  of the
Hospitality Group are included in discontinued operations,  in the statements of
operations for the year ended December 31, 1997.

During  1998 the  Company  incurred  costs of $39,483  in excess of the  amounts
provided in 1997 for expected losses during the phase out periods.

(4) Inventories

Inventories at December 31, 1998 consisted of:

Raw Materials                                         $    729,205
Semi-Processed Goods                                        65,625
Finished Goods                                             833,046
                                                      ------------

  Total                                               $  1,627,876
  -----                                               ============

(5) Property and Equipment

The following is a summary of property and equipment:

Land                                                  $    197,951
Buildings                                                1,322,475
Machinery and Equipment                                  2,475,179
Transportation Equipment                                   964,943
Office Equipment, Furniture and Fixtures                   374,248
Leasehold Improvements                                      97,836
Construction in Progress                                   161,499
                                                      ------------

Total - At Cost                                          5,594,131
Less: Accumulated Depreciation                            (404,753)
                                                      ------------

  Property and Equipment - Net                        $  5,189,378
  ----------------------------                        ============

Included in the total cost above are assets acquired under capital leases in the
gross amount of $1,048,799.  Amortization  expense totaling $117,109 is included
in  depreciation  expense.  Accumulated  amortization  at  December  31, 1998 is
$168,971.  Depreciation  expense  related to property and equipment  amounted to
$335,217  and  $69,465  for  the  years  ended   December  31,  1998  and  1997,
respectively.

                                      F-12

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(6) Line of Credit and Term Loan

In  July  1998,  the  Company  and its  subsidiaries  entered  into a  financing
agreement with a bank under which the bank provided a line of credit, subject to
available collateral,  to a maximum of $4,000,000 and a term loan of $2,000,000.
The loans are  collateralized  by virtually all assets of the Company.  All cash
received  by the  Company  must be  remitted  to the bank as long as there is an
outstanding  balance  under the line of credit,  which  will  expire on July 15,
2001. The line of credit  accrues  interest at .5% over the bank's prime lending
rate.  The interest  rate at December 31, 1998 was 8.25%.  The weighted  average
interest  rate on short-term  borrowings as of December 31, 1998 was 8.25%.  The
term loan is payable in thirty-six  monthly  installments of $23,810 plus annual
interest of 1% above the bank's prime rate through July 2001, with the remaining
balance  then due.  The  interest  rate at  December  31, 1998 was 8.75% and the
outstanding  balance on the loan was  $1,880,950  (See Note 8). Costs related to
the financing are being amortized over its term.  Amortization  expense recorded
in 1998 was $93,747.

The loan agreement requires the Company to maintain certain financial ratios. In
addition,  the loan agreement  restricts  additional  borrowings,  dividends and
acquisitions  as defined.  The Company  was in default of certain  covenants  at
December 31, 1998.  The bank has agreed to waive its right to consider the loans
in default.

(7) Convertible Subordinated Notes

On June 25, 1998, the Company issued to a private investor $2,625,000  principal
amount 12% convertible  subordinated  notes ("Notes"),  and warrants to purchase
40,000  shares of  common  stock of the  Company.  The  original  terms of Notes
included conversion, at the option of the private investor, into Common Stock of
the  Company at a rate of the lower of $10.00 per share,  or a rate based on the
market  price of the  Company's  common  stock  during the 30 trading day period
preceding the end of the 60-day period ended December 4, 1998,  during which the
Company temporarily reduced the exercise price of its $40.00 warrants to $10.00.
The  exercise  price of the warrants is the same as the  conversion  rate of the
Notes.  At any time, the Notes not then converted or repaid,  could be converted
at  the  option  of the  Company,  into  redeemable  convertible  8%  cumulative
preferred  stock  ("Preferred  Stock") of the Company.  The Notes,  warrants and
Preferred  Stock  issued to the private  investor  are subject to  anti-dilution
adjustments,  registration rights, interest and dividend adjustments and payment
by the Company of certain fees and expenses in connection with the  transaction.
The  Company  also  granted the  private  investor an option to purchase  50,000
shares of the Company's common stock. That option expired, unexercised, December
31, 1998.

The Company received proceeds of $2,500,000 on the $2,625,000 Notes resulting in
a discount of $125,000 and an additional  discount of $281,000 attributed to the
warrants and option.  The Note discount of $406,000 is being  amortized over the
term of the Notes. Amortization expense recorded in 1998 related to the note was
$116,000.

The terms of the Note required the Company to attain a specified  earnings level
for 1998, which was not attained. Accordingly, the Company is obligated to issue
the private  investor  additional  warrants to purchase  25,000 shares of common
stock of the Company which are exercisable at $6.00 per share. Additionally, the
original terms of Notes have been amended (See Note 18).




                                      F-13

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(8) Long-Term Debt

At December 31, 1998, long-term debt consisted of the following:

Bank term loan  payable in  thirty-six  monthly  installments
  of  $23,810  plus interest at 1% above the bank's prime rate
  through July 2001, with the balance then due (See Note 6).         $1,880,950

Note payable in thirty-six monthly total installments of $9,382,
  including interest at 8.77% per annum, through October 2001,
  collateralized by certain manufacturing equipment.                    281,552

Capital lease obligation  payable in forty-eight  monthly total
  installments of $6,215   including   interest  at  11.14%
  per  annum   through   March  2003, collateralized by certain
  manufacturing equipment.                                              239,822

Notes payable in  thirty-six  to sixty  total  monthly
  installments  of $1,377-$2,142  including  interest at
  14.6%-16.1%  per annum through  February 2003,
  collateralized by certain computer equipment and software.            109,288

Notes payable in thirty-six to sixty total monthly installments of
  $1,150-$6,583 including interest at 7.68%-9.8% per annum
  through July 2003, collateralized by certain transportation
  equipment.                                                            365,773
                                                                    -----------

  Total                                                               2,877,385
  Less: Current Portion                                                (566,754)
                                                                    -----------
  Total                                                             $ 2,310,631
                                                                    ===========

Long-term debt at December 31, 1998 matures as follows:

  1999                                                              $   566,754
  2000                                                                  537,168
  2001                                                                1,555,047
  2002                                                                  167,540
  2003                                                                   50,876
                                                                    -----------

  Total                                                             $ 2,877,385
                                                                    ===========




                                      F-14

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------




(9) Income Taxes

Under  generally  accepted  accounting  principles,   deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
temporary  differences  between  the  financial  statement  carrying  amounts of
existing  assets and liabilities  and their  respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which  temporary  differences  are expected to be
recovered or settled. Temporary differences include different tax and book bases
of property and equipment and intangible assets.  Generally accepted  accounting
principles requires the establishment of a deferred tax asset for all deductible
temporary  differences  and operating  loss carry  forwards.  The operating loss
carry forwards at December 31, 1998, (assuming all operating loss carry forwards
will be available) amount to approximately $8,900,000.  Such loss carry forwards
will expire at the rate of $3,350,000 in 2013, $4,000,000 in 2012, $1,200,000 in
2011 and  $350,000  in 2010.  At  December  31,  1998,  based on the  amount  of
operating loss carry  forwards,  the Company would have had a deferred tax asset
of  approximately  $3,000,000.  However,  because  of the  uncertainty  that the
Company  will  generate  income in the future  sufficient  to fully or partially
utilize  these carry  forwards,  a valuation  allowance of  $3,000,000  has been
established  representing  an increase of  $1,100,000  from  December  31, 1997.
Accordingly, no deferred tax asset is reflected in these financial statements.

(10) Loss Per Share

Loss per share of common  stock is based on  weighted  average  number of common
shares  outstanding for each period  presented.  There were no potential  common
shares included as they were all considered to be anti-dilutive. Securities that
could  potentially  dilute earnings per share in the future include common stock
purchase   warrants   and  options  to  purchase   common   stock   representing
approximately  777,000 Common  Shares.  The Company has 948,342 shares of common
stock issued and outstanding at December 31, 1998.

(11) Commitments and Contingencies

Operating  Leases - Future  minimum  rental  payments  under  operating  leases,
including equipment leases, with terms in excess of one year are as follows:

Year ending December 31,                        Amount

  1999                                       $  579,470
  2000                                          575,070
  2001                                          572,592
  2002                                          538,236
  2003                                          333,775
  Thereafter                                    775,912
                                             ----------

  Total                                      $3,375,055
                                             ==========

A-One-A's  main  operating  facility  is  leased  from  an  affiliate  of two of
A-One-A's  officers at an annual rate of  approximately  $222,000  through  June
2007. The lease provides the Company with three five year renewal options.

The Company also leases a plant located in Hileah,  Florida at an annual rate of
approximately  $128,000.  The lease  term is for five years  through  June 2003.
There is no renewal option for this lease.

Rent  expense  related to the leases for the years ended  December  31, 1998 and
1997 was $462,005 and $142,630, respectively.

                                      F-15

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(11) Commitments and Contingencies (Continued)

Employment  Agreements  - In  addition  to the  A-One-A  and  Banner  employment
agreements  (See Note 2),  the  Company  has an  employment  agreement  with its
Executive Vice President and Chief Operating  Officer,  through August 31, 2000,
for a base salary of $125,000 per year.

Standby  Letter of Credit - The Company has available a standby letter of credit
in the amount of $25,000,  which is being  maintained  as security  for payments
related  to  purchases  of  inventory.  The  letter of credit is  collateralized
through the Company's bank line of credit.

Litigation - The Company is party to  litigation  arising from the normal course
of business. In management's opinion, this litigation will not materially affect
the Company's financial position, results of operations or cash flows.

(12) Description of Securities

Common Stock - The Company is  authorized to issue  25,000,000  shares of common
stock, par value $.001 per share.

Holders of common stock are entitled to  dividends  when,  as and if declared by
the  Board  of  Directors,  subject  to any  priority  as to  dividends  for any
preferred stock that may be outstanding.

In  September  1998,  the Company  issued  10,091  unregistered  shares to repay
$126,132 of outstanding loans related to its 1997 acquisition of the Deering Ice
Cream business.

In October and November  1998,  the Company sold 78,000  unregistered  shares at
prices  ranging  from $9.30 to $10.00,  with  proceeds  of  $760,000.  Unrelated
investors  purchased  50,000  shares  and  directors,   officers  and  employees
purchased 28,000 shares.

Warrant  holders  exercised  warrants to purchase 26,951 shares of the Company's
common stock for $306,704.

In November  1998,  the Company  issued  11,000  unregistered  shares to satisfy
$110,000  of  indebtedness  to the  former  owners  of  A-One-A  related  to its
acquisition in 1997.

In November 1997, the Company sold 20,000 shares of unregistered common stock to
an unrelated  party for $11.00 per share.  The issuance of these shares resulted
in a charge to operations of $180,000.

Convertible Preferred Stock - During 1997 the Company issued 1,523,825 Preferred
Units  each  consisting  of one  share of  Convertible  Preferred  Stock and two
warrants,  each to purchase  one-tenth of a share of Company common stock at $40
per share for aggregate  consideration of $2,637,300,  net of offering costs. In
connection  with the offering,  the Company issued the soliciting  agent and its
assignees, warrants to purchase 75,000 shares of Company common stock at a price
of $40 per share,  exercisable through December 4, 2000. There were no dividends
declared or paid on the Convertible Preferred Stock during 1997 or 1998. On July
31, 1998,  all of the  outstanding  shares of the  Convertible  Preferred  Stock
automatically  converted  on the basis of  one-fifth  of a common share for each
convertible preferred share into shares of common stock of the Company.



                                      F-16

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(12) Description of Securities (Continued)

Options and  Warrants - The Company has the  following  options and  warrants to
purchase of shares common stock outstanding at December 31, 1998:

Options - In connection with the initial public  offering of Common Shares,  the
underwriter purchased an option from the Company to purchase up to 125,000 units
each  consisting  of  one-tenth  of a share of common  stock  and a  warrant  to
purchase  one-tenth of a share of common stock and 1,650 shares of common stock.
The option is exercisable  through  December 4, 2000 at $45.00 for each unit and
each share of common stock.

Warrants                                         Number of Shares Exercise Price
--------                                         ---------------- --------------

Issued in connection  with initial public
  offering of Common Shares in 1995 and
  the sale of Convertible Preferred Stock Units
  in 1997; exercisable through December 4, 2000       445,610        $ 40.00

Issued in connection with Deering purchase and to one
  current and one former executive of the company in
  1997; exercisable through August 31, 2000           130,833         11.875

Issued in connection with Convertible  Subordinated
 Notes in 1998;  exercisable through June 30, 2002
  (See Note 6).                                        40,000           6.00

Issued in connection with sales of Common
  Shares in 1998; exercisable through
  November 30, 2003                                    12,500          10.00

Issued prior to initial public offering in 1995;
  exercisable through December 4, 2000.                20,000         100.00

(13) Stock Option Plan

The Company  adopted the 1997 Stock Option Plan (the "Plan")  which  enables its
Board of  Directors  to grant  options for the  purchase of shares of its common
stock.  The Plan, as amended,  authorizes the grant of options to purchase up to
an aggregate of 1,750,000  shares of the Company's Common Stock, to (i) officers
and other full-time  salaried employees of the Company and its subsidiaries with
managerial,  professional or supervisory responsibilities,  and (ii) consultants
and advisors who render bona fide services to the Company and its  subsidiaries,
in each  case,  where  the  compensation  committee  of the  Board of  Directors
determines that such officer,  employee,  consultant or advisor has the capacity
to make a substantial  contribution to the success of the Company.  The purposes
of the Plan are to enable the Company to attract  and retain  persons of ability
as officers and other key employees with managerial, professional or supervisory
responsibilities,  to retain able consultants and advisors, and to motivate such
persons to use their best  efforts on behalf of the  Company by  providing  them
with an equity participation in the Company.


                                      F-17

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------


(13) Stock Option Plan (Continued)

Pursuant to the Plan, the Board of Directors have made the following grants:

                  Shares     Exercise Price            Expiration
                  ------     --------------            ----------
1997
                  63,000         $11.875                February, 2007
                  10,800           23.10                June-September, 2007
1998
                   1,000           16.90                January, 2008
                   1,000           23.10                March, 2008
                  10,000           15.60                July, 2008
                  17,000           13.75                August 2008
                  28,000           10.00                November, 2008

The options generally vest over a three-year period, one-third per year.

A summary of the options is as follows:

                                                             Weighted Average
                                                      Shares  Exercise Price
                                                      ------  --------------
Outstanding at December 31, 1996
  Granted                                             73,800         $13.50
  Exercised                                               --             --
  Expired/Canceled                                        --             --
                                                     -------

Outstanding at December 31, 1997                      73,800         $13.50

  Granted                                             57,000         $12.45
  Exercised                                               --             --
  Expired/Canceled                                   (16,500)         12.53
                                                     -------

Outstanding at December 31, 1998                     114,300         $13.11
                                                     =======

Exercisable at December 31, 1998                      23,767         $13.40
                                                     =======

Certain  options  and  warrants  included  in the  prior  year  table  have been
reflected in Note 12.

If compensation cost of $492,000 and $890,000, for options issued under the Plan
in 1998 and 1997,  respectively,  had been determined based on the fair value at
the grant dates for awards under Plan,  consistent with the  alternative  method
set forth under SFAS No. 123, the  Company's  net loss and basic and diluted net
loss per share of Common Stock would have been increased on a pro forma basis as
indicated below:

                                                            Years ended
                                                            December 31,
                                                        1 9 9 8        1 9 9 7
                                                        -------        -------
Net Loss:
  As Reported                                          $(2,719,464) $(4,352,053)
  Pro Forma                                            $(3,211,464) $(5,242,053)

Basic and Diluted Net Loss Per Share of Common Stock:
  As Reported                                          $     (4.04) $     (9.80)
  Pro Forma                                            $     (4.77) $    (11.80)


                                      F-18

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------


(13) Stock Option Plan (Continued)

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumption used for the grants awarded in 1998 and 1997, respectively:

                                                             Years ended
                                                            December 31,
                                                         1 9 9 8      1 9 9 7
                                                         -------      -------

  Dividend Yields                                            0%           0%
  Expected Volatility                                       92%          76%
  Risk-Free Interest Rate                                  4.7%         6.0%
  Expected Lives                                        3.8 Years    4.0 Years

The  weighted-average  fair value of options granted was $8.63 and $7.60 for the
years ended December 31, 1998 and 1997, respectively.

The following table summarizes  information  about stock options and warrants at
December 31, 1997:

                                    Outstanding                    Exercisable
                                    -----------                    -----------
                              Weighted      Weighted                 Weighted
  Range of                    Remaining      Average                 Average
  --------                    ---------      -------                 -------
Exercise Prices   Shares  Contractual Life Exercise Price Shares  Exercise Price
---------------   ------  ---------------- -------------- ------  --------------

$10.00  - 11.85    75,500     8.8 Years       $ 11.16      20,550    $11.85
$13.75  - 16.90    28,000     9.6 Years       $ 14.52          --        --
$23.10             10,800     8.6 Years       $ 23.10       3,267    $23.10
                  -------                                  ------

                  114,300     9.0 Years       $ 13.11      23,767    $13.40
                  =======                                  ======

(14) Going Concern Considerations

The Company has incurred  recurring  operating  losses from operations and had a
working  capital  deficiency of  approximately  $3,105,000 at December 31, 1998,
which would ordinarily raise  substantial  doubt about the Company's  ability to
continue  as a going  concern.  Management's  actions and plans to deal with the
possible adverse effects of these factors have alleviated such doubt.

A group of private  investors has committed to invest  additional equity capital
into the Company (See Note 18). Additionally,  during the first quarter of 1999,
management believes the food distribution operations have been improved with the
securing  of   substantial   new   business,   particularly   with  high  volume
institutional  accounts.  Management  believes this additional sales volume will
contribute  to  increased  profitability  and  reduced  seasonable  variability.
Management intends to continue it aggressive marketing efforts in these areas as
well as to cruise line and export customers.

Management  further  believes that a key element in its plan is to substantially
increase sales volume at Banner,  where the Company has developed the capability
of producing  high  quality  innovative  products for the home meal  replacement
("HMR") market.

Several major  customers have accepted the products on a limited basis with good
prospects for significantly expanded distribution.  Presentations have been made
to a number of additional customers and initial responses have been positive.

 Management believes the proceeds from the equity investment,  combined with its
plans for  operating  growth  and  efficiencies  will  allow  for the  Company's
continuing operations.

                                      F-19

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------




(15) Segment Data

The following  information is presented as a result of the Company adopting SFAS
No. 131,  "Disclosures about Segments of on Enterprise and Related Information."
At December 31, 1998, the Company's two business units have distinct  management
teams and  infrastructures  that offer  different  products  which are evaluated
separately in assessing  performance  and allocating  resources.  These business
units have been reported as two reportable segments,  Food Distribution and Food
Processing  and  Manufacturing.  Each segment has a distinct  customer  base and
requires different strategic and marketing efforts.  Food Distribution  includes
the  operations  of the  Company's  A-One-A  and  Fresh  subsidiaries  and  Food
Processing and Manufacturing is represented by Banner.

Terrace  evaluates  performance  based on operating  profit before  interest and
taxes. Accordingly, interest has not been allocated to the operating segments.

Year ended December 31, 1998

                                                      Food
                                     Food        Processing and
                                 Distribution     Manufacturing     Total
                                 ------------     -------------     -----

Sales                            $27,981,862      $3,029,335     $31,011,197
Depreciation and Amortization        478,383          81,039         559,422
Operating Loss                      (276,394)       (753,454)     (1,029,848)
Segment Assets                     9,837,572       5,358,607      15,196,179
Expenditures For Segment Property
  and Equipment                      872,161       1,697,865       2,570,026

Reconciliation of segment amounts to consolidated amounts:

Loss from continuing operations:
  Total Segments                                                 $(1,029,848)
  Interest Expense                                                  (670,128)
  Amortization of Deferred Financing Costs                           (61,550)
  Interest Income                                                     10,549
  Corporate Expenses                                                (829,004)
                                                                 -----------

  Total                                                          $(2,579,981)
                                                                 ===========

Assets:
  Total Segments                                                 $15,196,179
  Note Receivable                                                    159,000
  Other Assets                                                       426,368
  Other Current Assets                                                38,622
                                                                 -----------

  Total                                                          $15,820,169
                                                                 ===========

                                      F-20

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(15) Segment Data (Continued)

Year ended December 31, 1997


                                                    Food
                                                Distribution         Total
                                                ------------         -----

Sales                                             $8,929,462      $8,929,462
Depreciation and Amortization                        157,613         157,613
Operating Loss                                      (207,722)       (207,772)
Segment Assets                                     6,689,284       6,689,284
Expenditures for Segment Property and Equipment      201,774         201,774

Reconciliation of segment amounts to consolidated amounts:

Loss from Continuing Operations:
  Segment                                                        $  (207,772)
  Interest Expense                                                   (79,594)
  Interest Income                                                     22,601
  Corporate Expenses                                              (1,146,751)
                                                                 -----------

  Total                                                          $(1,411,516)
                                                                 ===========

Assets:
  Segment                                                        $ 6,689,284
  Due on Sale                                                         90,000
  Other Assets                                                           500
  Restricted Cash                                                    137,701
  Other Current Assets                                                 9,857
                                                                 -----------

  Total                                                          $ 6,927,342
                                                                 ===========

(16) Fair Value of Financial Instruments

The Company  adopted  SFAS No. 107,  "Disclosure  About Fair Value of  Financial
Instruments,"  which requires  disclosing fair value, to the extent practicable,
for financial  instruments  which are recognized or  unrecognized in the balance
sheet.  The fair  value of the  financial  instruments  disclosed  herein is not
necessarily  representative of the amount that could be realized or settled, nor
does the fair value  amount  consider the tax  consequences  of  realization  or
settlement.

In assessing the fair value of these financial  instruments,  the Company used a
variety of methods  and  assumptions,  which were based on  estimates  of market
conditions and risks existing at that time. For certain  instruments,  including
trade receivables, amounts due on sale of discontinued operations, related party
balances,  trade  payables,  bank line of credit and  letter of  credit,  it was
assumed that the carrying amount  approximated  fair value for these instruments
because of their short maturities.  It was estimated that the carrying amount of
the Company's  long-term debt approximated its fair value based on quoted market
prices for similar issues.


                                      F-21

<PAGE>



TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------


(17) New Authoritative Accounting Pronouncements

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS No.
133 establishes  accounting and reporting standards for derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities.  SFAS  No.  133  requires  that  an  entity  recognize  all
derivatives  as either  assets or  liabilities  in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a  derivative  depends  on the  intended  use of the  derivative  and  how it is
designated, for example, gains or losses related to changes in the fair value of
a derivative not designated as a hedging instrument is recognized in earnings in
the  period  of the  change,  while  certain  types of hedges  may be  initially
reported as a component of other  comprehensive  income (outside earnings) until
the consummation of the underlying transaction.

On March 31, 1999,  the FASB  released a proposal for public  comment that would
resolve certain practice issues raised when accounting for stock options.  Since
the  issuance of APB Opinion 25,  "Accounting  for Stock  Issued to  Employees,"
questions  have surfaced  about its  application  and differing  practices  have
developed.  The FASB's broad  reconsideration  of the stock  compensation  issue
culminated  in the  issuance  of  SFAS  No.  123,  "Accounting  for  Stock-Based
Compensation,"  in 1995.  SFAS No. 123 permits the continued  application of APB
Opinion 25 for employees. However, questions remain about the proper application
of  APB  Opinion  25  in  a  number  of   circumstances.   The  FASB's  proposed
Interpretation would clarify how to apply APB Opinion 25 in certain situations.

The proposed Interpretation includes the following conclusions:

o Once an option is repriced,  that option must be  accounted  for as a variable
  plan from the time it is repriced to the time it is  exercised.  Consequently,
  the final  measurement  of  compensation  expense  would  occur at the date of
  exercise.

o  Employees  would be defined  as they are under  common  law for  purposes  of
applying APB Opinion 25.

o APB Opinion 25 does not apply to outside directors because, by definition,  an
  outside director cannot be an employee. Accordingly, the cost of issuing stock
  options to outside  board  members will have to be  determined on a fair value
  basis in  accordance  with SFAS No.  123,  and  recorded  as an expense in the
  period of the grant (the service period could be prospective, however).

o Since APB Opinion 25 was issued in 1972,  the terms of many  "section 423" tax
  plans have changed  from those in  existence at the time.  Many of those plans
  now provide that  employees can purchase an employer's  stock at the lesser of
  85 percent of the stock  price at the date of grant or 85 percent of the price
  at the date of  exercise.  This  provision  is  refereed  to as a  "look-back"
  option. The FASB decided that plans with a look-back option do not," in and of
  themselves, create a compensatory plan.

o A subsidiary  may account for parent  company  stock  issued to its  employees
  under APB Opinion 25 in their separately issued financial statements, provided
  the subsidiary is part of the parent's Consolidation financial statements.

The FASB's proposed  Interpretation  would be effective upon issuance,  which is
expected  in  September   1999,  but  generally  would  cover  plan  grants  and
modifications that occur after December 25, 1998.


                                      F-22

<PAGE>


TERRACE FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------



(18) Subsequent Event

On April 13, 1999, the Company issued 19,618 shares of a newly  authorized Class
C Preferred  Stock  together  with  Warrants to purchase  340,000  shares of the
Company's  Common  Stock.  The shares and warrants  were  purchased by a private
investor group which included three of the Company's Directors.
 The Company received  proceeds of approximately  $1,700,000 in this transaction
which will be used for operating purposes.

The Preferred Stock provides for a cumulative  annual coupon dividend of 13% and
the issue was priced to yield an effective annual dividend of 15%. The Preferred
Stock is  redeemable,  in cash,  at the option of the Company  through March 30,
2000,  when  it  becomes  mandatorily  redeemable  either  in  cash  or  through
conversion  into 17% Notes  which  would  mature on March  31,  2003.  The stock
purchase warrants, which expire four years from their date of issue, provide for
the purchase of Company's Common Stock at a price of $9.00 per share.

Also on April 13, 1999, the Company and the private investor agreed to amend the
terms of the Convertible  Subordinated  Notes (See Note 7). The maturity date of
the Notes was extended to March 31, 2000, the  Conversion  Price of the Notes to
either Common or Preferred Shares and the Exercise Price of the Warrants was set
at $6.00 per share through that date.  Any default which may have occurred under
the  agreement  was waived or deemed  cured.  The Company will issue  additional
$621,000  in Notes as  payment  for  accrued  and unpaid  interest  on the Notes
through  April 13, 1999 and other  consideration  to the private  investor.  The
Company  will also issue the  private  investor  additional  25,000  Warrants to
purchase the Company's Common Stock at an exercise price of $9.00 per share.

(19)  Subsequent  Event  (Unaudited)  Subsequent  to the Date of the  Report  of
Independent Auditors

On April 30, 1999, the Company  reached a final  settlement  relating to certain
claims and disputes arising from the sale of Deering in December 1997. The terms
of the settlement  provide for the Company to make a cash payment and relinquish
its right to receive royalties from the buyer.  Costs relating to the settlement
of $100,000 have been included in  discontinued  operations in the  consolidated
statement of operations for the year ended December 31, 1998.



                          .   .   .   .   .   .   .   .

                                      F-23