<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                FORM 10-KSB/A-2
(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, 1997.

[_]  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 Holdings, 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:

<TABLE>
<CAPTION>
                                                Name of Each Exchange
         Title of Each Class                     on Which Registered
         -------------------                     -------------------
<S>                                     <C>  
 
_____________________________________   _____________________________________
 
_____________________________________   _____________________________________
</TABLE>
        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. $8,929,464.

     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, as of a specified date within the past 60 days. The
aggregate market value on June 29, 1998: $7,576,125.

     As of December 31, 1997, the total number of shares of common stock
outstanding: 5,006,400.

           This is page 1 of 26 sequentially numbered pages.
<PAGE>
 
                                     PART I
                                     ------

Item 1 - Description of Business
--------------------------------

(a)  Business Development
-------------------------

     Terrace Holdings, Inc., was incorporated under the laws of the State of
Delaware on June 15, 1995, to change the state of incorporation of Bon Adventure
Kosher Tours, Inc., a Florida corporation, formerly known as Embassy Kosher
Tours of South Florida, Inc.  As of the date of this filing, the Registrant has
three wholly-owned operating subsidiaries, having sold two in the "hospitality"
group and two in the "food services and distribution" group in the first quarter
of 1998. The sold hospitality subsidiaries are A&E Management Corp., which
manages the food and beverage operations of a non-kosher restaurant and catering
operation at The Club at Emerald Hills in Hollywood, Florida; and The Lasko
Family Kosher Tours, Inc., which operates Passover holiday vacations at three
locations within the United States.  The Lasko Companies, Inc., which owns and
operates on leased property the Registrant's kosher, casual dining restaurant.
The food services and distribution subsidiaries are: A-One-A Produce &
Provisions, Inc. which is a Pompano Beach, Florida based produce distributor
that sells and distributes fresh fruit and vegetables and "dry" grocery products
to hotels, restaurants and other businesses in the southern Florida region; and
Terrace Fresh Inc., which was organized to operate as an affiliate of Terrace's
A-One-A Produce & Provisions, Inc. subsidiary.  In December, 1997, the
Registrant disposed of its frozen desserts manufacturing business.  See "Frozen
Desserts."

Food Services and Distribution

     Produce.  In August, 1997, but effective as of July 1, 1997, the
Registrant's wholly-owned subsidiary, A-One-A Produce & Provisions, Inc. ("A-
One-A Produce") acquired the assets and related liabilities of A-One-A Wholesale
Produce, Inc. ("A-One-A Wholesale").  Effective January, 1998, the Registrant
acquired the assets and related liabilities of A One A Wholesale's  affiliate,
Fresh, Inc.  Both corporations were unaffiliated with the Registrant.  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's warehouse encompasses
55,000 square feet on 3.5 acres, with 24 loading docks, 1,700 pallet locations
and includes 30,000 square feet of refrigerated warehouse space.  A-One-A
Produce also operates a fleet of 28 refrigerated delivery trucks.

     Frozen Desserts.  In February, 1997, in consideration of the issuance of
918,900 shares of the Registrant's Common Stock, warrants to purchase an
additional 250,000 shares of Common Stock at $1.1875 per share and approximately
$114,000 in cash, the Registrant's wholly owned subsidiary, Deering Ice Cream,
Inc., acquired all of the assets and related liabilities of DownEast Frozen
Desserts, LLC, a Delaware limited liability company unaffiliated with the
Registrant, which manufactures and markets frozen desserts under the names
Deering Ice Cream and Howard Johnson, as well as co-packing for approximately 15
other unaffiliated companies.  The Registrant also issued warrants to purchase
250,000 shares at $1.1875 to Biltmore Securities, Inc., and 75,000 shares of
Common Stock to Barclay Partners, L.L.C. as investment banking and finder's
fees, and warrants to purchase 50,000 shares at $1.1875 to Bruce Phillips, a
director of the Registrant, in recognition of his efforts successfully to
negotiate and consummate the acquisition.  In December, 1997, however, the
Registrant consummated the sale of the assets and certain liabilities of its
wholly-

                                       2
<PAGE>
 
owned subsidiary, Deering Ice Cream, Inc. to a subsidiary of Fieldbrook Farms,
Inc., Dunkirk, New York, for approximately $613,000 cash at closing, subject to
later adjustment, plus certain royalties over four years. Further, based on 
post-closing accounting, the Company has released to the buyer the $200,000 of
the purchase price held in escrow and is in discussions with the buyer to
finalize the purchase price. The Registrant presently estimates it may have to
refund approximately $50,000 more of the purchase price. During the relatively
short period in which the Registrant owned and operated Deering Ice Cream, Inc.,
it became evident that the Registrant could not effect profitable operations
there without a substantial increase in the commitment of financial resources to
frozen dessert manufacturing, which resources have not been available to the
Registrant. Additionally, the Registrant's management determined that
concentrating on food distribution and processing would better serve its overall
goals over time. Accordingly, management determined to dispose of its frozen
dessert manufacturing operations as soon as practicable and concentrate on its
food distribution businesses in an attempt to enhance shareholder value over the
longer term. There is no assurance, however, that the Registrant will be
successful in accomplishing this.

     In August, 1997, the Registrant guaranteed payment on a Loan and Security
Agreement between Foothill Capital Corporation of Mechanicsville, Virginia and
the Registrant's wholly-owned subsidiaries, Deering Ice Cream, Inc. and A-One-A
Produce & Provisions, Inc. under which Foothill has provided revolving loans in
a total amount of approximately $3,200,000, which were being used to refinance
the principal accounts receivable and inventory financing with respect to
Deering Ice Cream, Inc., and also to provide for the ongoing working capital
needs of A-One-A Produce & Provisions, Inc.  In connection with the sale of the
Deering subsidiary's business in December, 1997, these loans were paid down in
the amount of $1,396,913, leaving a principal balance of approximately
$1,400,000.  As a result of the foregoing transaction, the Registrant's guaranty
was adjusted accordingly.

Hospitality

     Restaurant.  From October, 1993 through May, 1995, the founders of the
Registrant owned and operated the Terrace-on-the-Lake Restaurant, a casual,
upscale kosher restaurant in Hollywood, Florida.  In its short existence,
Terrace-on-the-Lake developed a following among tourists visiting south Florida
who observe the Jewish dietary laws.  Because both the kitchen and the
facilities were not large enough to serve adequately the needs of this
restaurant, it was closed at the end of May, 1995, and in October, 1995, the
Registrant opened a new restaurant, "Terrace Oceanside Restaurant", in
Hallandale, Florida. The Registrant's initial plan was to establish a chain of
kosher restaurants, which were to be called Terrace restaurants, along the
Eastern seaboard and possibly later in the Midwestern United States.  During
1996, however, management of the Registrant determined that the economic
feasibility of opening additional kosher Terrace restaurants would be more
difficult, both on an economic and management/employee basis, than earlier
anticipated and decided, instead, to seek possible acquisitions of going
concerns in the food - or food distribution - related industries.

     Terrace Oceanside Restaurant, in Hallandale, Florida, is the subject of an
agreement of sale with an unaffiliated third party scheduled to close on or
about June 15, 1998.  See "Subsequent Events."

     Food and Beverage Management.  The Registrant, until March 13, 1998,
through its wholly-owned subsidiary, A&E Management Corp., managed a non-kosher
restaurant and catering

                                       3
<PAGE>
 
operation at The Club at Emerald Hills, an upscale country club in Hollywood,
Florida.  See "Subsequent Events."

     Holiday Vacations.  In 1989, the Registrant began operating a kosher
Passover holiday vacation venue at the Bonaventure Resort & Spa, now known as
the Wyndham Resort & Spa, in Fort Lauderdale, Florida.  Passover occurs each
spring and the Registrant takes over the entire Registry Resort & Spa for the
Passover holiday season.  See "Subsequent Events."

     In January, 1996, the Registrant consummated an agreement with an
unaffiliated entity, to assume operation of the annual Passover vacation venues
at the Fontainebleau Hilton Hotel, Miami Beach, the Rye Town Hilton Hotel, Rye,
New York, and the Tamiment Resort & Conference Center, Tamiment, Pennsylvania.
As a result, for the 1996 Passover holiday, the Registrant operated holiday
vacations at four different locations.  The contract to operate a Passover
vacation at the Tamiment Hotel expired after the 1996 Passover holiday and was
not renewed for the 1997 Passover holiday.

     During the second half of 1997, the Board of Directors of the Registrant
determined that its initial strategy of attempting to expand by establishing
additional kosher dining facilities and Passover vacation venues geographically
dispersed would entail substantial costs both economically and in executive
personnel.  Accordingly, the Board determined to seek company growth by
acquisition of existing food services and distribution operations.  Thus, on
November 12, 1997, the Board of Directors determined to discontinue the
"hospitality" segments of its business and shortly thereafter Dr. Lasko notified
the Board of his intention to acquire those segments.  In connection with that
transaction, Dr. Lasko has submitted his resignation as President of the
Registrant effective immediately upon the affirmative vote of the Registrant's
stockholders at its upcoming Annual Meeting ratifying the transaction.  In
accordance with the agreement, Dr. Lasko ceased drawing salary from the
Registrant effective as of January 1, 1998.

(b)  Businesses of Issuer.
--------------------------

Food Services and Distribution

     A-One-A Produce & Provisions, Inc.  Effective July 1, 1997, the
Registrant's wholly-owned subsidiary, A-One-A Produce & Provisions, Inc. ("A-
One-A Produce") acquired the assets and related liabilities of A-One-A Wholesale
Produce, Inc.  ("A-One-A Wholesale") for a purchase price of $3,100,000 in cash
and the issuance of a total of 500,000 shares of Common Stock to the two
shareholders of A-One-A Wholesale.  Effective January, 1998, the Registrant
purchased all of the outstanding stock of A-One-A Wholesale's affiliate, Fresh,
Inc. for a purchase price of $105,000 and the issuance of a total of 138,948
shares of the Registrant's Common Stock to three former shareholders of Fresh,
Inc. Both corporations were unaffiliated with the Registrant. 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 Wholesale was founded in 1987 by Virgil D. Scarbrough and Scott
Davis. Messrs. Scarbrough and Davis are now Co-Chief Operating Officers of 
A-One-A Produce under employment agreements expiring on June 30, 2002. See
"Management - Employment Agreements and Aggregate Options Holdings." The
business is located in Pompano Beach, Florida and is currently housed in 55,000
square feet of rented space. In addition, the Registrant incorporated Terrace
Fresh, Inc. to operate the business of A-One-A Wholesale's affiliate, Fresh,
Inc. Revenue

                                       4
<PAGE>
 
in 1996, prior to the Registrant's acquisition, for A-One-A Wholesale was
approximately $14.5 million dollars.  A-One-A Produce employs approximately 105
people.

     A-One-A Produce delivers seven days per week and its customers 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 nine regional sales
representatives to ensure optimum service and communication.  A-One-A Produce
operates a fleet of 28 delivery trucks, all of which are refrigerated and
equipped with two-way radios.

     Mr. Davis is primarily responsible for buying produce, pricing the produce
to the customers and identifying and selling the new larger accounts.  Mr.
Scarbrough generally is responsible for office administration, personnel,
warehouse and delivery operations.  For the most part, each of Messrs. Davis and
Scarbrough is capable of performing the other's basic day-to-day duties.
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.

     Produce is purchased on an international basis through approximately six
brokers.  All purchases are made on an F.O.B. basis to A-One-A Produce's
warehouse.  The Registrant has also recently joined a produce buying co-
operative, Pro*Act, and is currently buying a portion of its requirements
through it.  Purchasing is also performed directly with farmers in the Florida
market depending upon seasonal availability.  Pricing to customers is set on a
weekly basis in accordance with market conditions.  The pricing scheme is very
complex and takes 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 the larger accounts in terms of sales have pricing arrangements that
represent a margin above market price as an approximation of cost.  Some of the
Registrant's larger customers currently include Boston Market, TGI Friday's,
Darden (Red Lobster and Olive Garden), and Applebee's.  No individual customer
accounts for more than 7% of the Registrant's produce sales.

     Fresh, Inc. supplies cut produce to A-One-A Produce's customers through A-
One-A Produce and also to process food manufacturers directly.  This business is
approximately two years old.  Its revenues in 1996 were approximately
$1,500,000; approximately $1,000,000 of which represents sales to A-One-A for
resale.  The produce is processed by Fresh primarily by means of washing or
peeling and cutting.  The produce is then vacuum sealed in dated plastic bags
and boxed for immediate delivery.  The pre-cut, pre-packaged produce market is
currently in its infancy in southern Florida.  Although there can be no
assurance, it is anticipated that this business segment will contribute material
growth in revenues and profits in the future.

     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.  The building is leased from an affiliate of Messrs. Scarbrough
and Davis.  The lease was

                                       5
<PAGE>
 
negotiated in connection with the acquisition of A-One-A Wholesale and Fresh, to
become effective on the property's purchase by the affiliate of Messrs. Davis
and Scarbrough.

     In September, 1997, the Registrant acquired the assets of  Dry Dock
Distributors, Inc. a Florida corporation d/b/a Bay Purveyors ("Bay Purveyors"),
which distributes "dry" grocery items in the south Florida region.  The purchase
price was $340,000.  The business of Bay Purveyors is conducted as part of A-
One-A Produce.

     In January, 1998, the Registrant acquired the assets of D.M.S. Food
Distributors, Inc., a Florida corporation, d/b/a Gourmet Distributors ("Gourmet
Distributors"), which distributes "dry" grocery items in the south Florida
region.  The purchase price was $125,000.  The business of Gourmet Distributors
is conducted as part of A-One-A Produce.

Sale of Frozen Desserts Business

     Deering Ice Cream, Inc. 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.  In conjunction with the sale, Milton Namiot, Chief Executive
Officer of the Registrant and President of Deering, and Joseph Dane, Controller
of the Registrant and Chief Financial Officer of Deering, resigned their
respective positions with the Registrant.

     Under the agreement with Fieldbrook, $200,000 of the purchase price was
placed in escrow for 60 days pending receipt by the parties of an independent
post-closing audit of Deering, any third party claims against Deering relating
to matters prior to the closing and certain other matters.  In addition, there
was a downward adjustment of the purchase price made at closing of $387,142 as a
result of the working capital deterioration at Deering from September 30, 1997
to closing.  On March 20, 1998, the Registrant released the full escrow amount
to Fieldbrook and is currently in discussion to finalize the purchase price
based on the post-closing audit.  The Registrant presently estimates it may have
to refund approximately $50,000 more of the purchase price.

     The Registrant will receive annual royalties from Fieldbrook for four years
at the rates of 2%, 2%, 1% and 1%, respectively, of net sales by Fieldbrook of
products under the Howard Johnsons and Deering labels.  At this time, the
Registrant cannot estimate whether or if such royalties, if received, will be
material.

Subsequent Events

     Sale of Hospitality Segments.   In November, 1997, Samuel H. Lasko,
President, notified the Registrant of his intention to exercise his option to
purchase the hospitality subsidiaries of the Registrant at a purchase price
equal to the "fair value" of the subsidiaries.  Dr. Lasko's exercise of his
option is subject to the Registrant securing an independent fairness opinion and
the affirmative vote of the majority of the Registrant's shareholders.  The
Board of Directors retained an independent accounting, consulting and valuation
firm to render such an opinion and that opinion was acceptable to Dr. Lasko.
Accordingly, on March 12, 1998, the A&E Management, Inc., and The Lasko Family
Kosher Tours, Inc. subsidiaries of the Registrant were sold to him effective as
of January 1, 1998, subject to the affirmative shareholder vote required for
consideration aggregating $575,000 in accordance with the independent fairness
opinion received by the Registrant.  The

                                       6
<PAGE>
 
consideration consisted of Dr. Lasko giving up the approximately three years
remaining under his employment agreement with the Registrant (independently
valued at $417,807) and 114,322 of his warrants to purchase Common Stock at
$1.1875 per share (independently valued at $157,193). Additionally, Dr. Lasko
agreed to manage the business of The Lasko Companies, Inc. (The Terrace
Oceanside Restaurant) for the Registrant, without fee, until the Registrant
consummates the sale thereof to an unaffiliated third party.

     On March 23, 1998, an agreement was entered into under which the restaurant
business will be sold to an unaffiliated third party for an aggregate purchase
price of $90,000.  Closing of the sale is scheduled for June 15, 1998.  Pending
such closing, Dr. Samuel H. Lasko is managing the restaurant, without fee, on
behalf of the Registrant.  If for any reason this sale is not completed, Dr.
Lasko will continue his management of the restaurant until the earlier of
approximately one year or a new buyer is found and purchases the Restaurant.

Advertising And Marketing

     The Registrant currently markets its products and services through the use
of mailing lists and various trade publications.  The Registrant presently is
considering engaging in the future outside professional marketing firms to
conduct its marketing activities, none of whom yet have been engaged.  Such
marketing activities may include an evaluation of 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 also very
competitive, and the Registrant's subsidiaries face competition from other low-
cost produce providers.   However, A-One-A Produce and Fresh strive to maintain
high quality and exceptional service in the market by making quality products
and efficient service its priority.

     It must be noted that 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.

                                       7
<PAGE>
 
Employees

     The Registrant employs approximately 105 people which includes
administrative, transportation and warehouse personnel, as well as executive
management.

Recent Private Placement and Investment Banking Agreement

     On July 1, 1997, the Company entered into an Investment Banking Agreement 
with Midas Investment Group, Inc. d/b/a Biltmore Securities, Inc. ("Midas"), 
under which for a period of three years Midas is to provide services including, 
without limitation, (i) review of business plans and projections; (ii) review of
financial data as it relates to raising financing; (iii) advising on the 
Company's capital structure and on alternatives for raising capital; (iv) 
reviewing and advising on prospective mergers and acquisitions, and on any 
financing required to complete such transactions; (v) advising on issues 
relating to public offerings; (vi) providing fairness opinions; (vii) reviewing 
managerial needs; and (viii) advising on issues relating to financial public 
relations. In consideration, the Company issued to Midas and its assignees 
Warrants to purchase 750,000 shares of Common Stock of the Company.

     As the Company's investment banker, Midas was its placement agent with
respect to the private offer and sale to accredited investors of 1,352,500 
Units, each Unit consisting of one share of convertible Preferred Stock and two 
Warrants. Each share of Preferred Stock is convertible into two shares of the 
Company's Common Stock. In connection with this placement of its securities the 
Company issued an additional 156,325 Units to Midas, and 15,000 Units to 
Westport Capital Markets, LLC.


Item 2 - Description of Property
--------------------------------

     A-One-A Produce & Provisions, Inc. 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 with three five year
options to extend expiring June 30, 2007, 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
A-One-A transaction. Under the lease, the Registrant has an option to purchase
the land and building in Pompano Beach, Florida at a purchase price of
$2,000,000 until December, 1998, though there is no assurance that such will be
the case.

     Until August 1, 1997, the Registrant leased approximately 2,000 square feet
at 2699 Stirling Road in Ft. Lauderdale, Florida, for use as its executive
offices and reservations center.  The Registrant's executive offices are now
located in the A-One-A Produce facility in Pompano Beach, Florida.  Management
believes that the above facilities will be sufficient for its operations in the
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 has not
submitted any matter to a vote of security holders, through solicitation of
proxies or otherwise.
               
                                       8
<PAGE>
 
                                    PART II
                                    -------

Item 5 - Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

     (a)  Market Information. Since the Registrant's initial public offering in
early December, 1995, the Registrant's common stock and common stock purchase
warrants have been and currently are traded in the NASDAQ SmallCap Market.

     Set forth below is the range of high and low sales prices of the Common
Stock and Warrants for each month since the Registrant's initial public offering
as reported by NASDAQ for those periods.  The prices represent quotations
between dealers.  The quotations do not include retail markups, markdowns, or
commissions and may not represent actual transactions.
    
<TABLE>
<CAPTION>
                                                    Bid               Ask
                                                ------------      -----------
Type of Security    Quarter Ended               High    Low       High    Low
----------------    -------------               ----    ----      ----    ---
<S>                 <C>                         <C>     <C>       <C>     <C> 

Common Stock        December 29, 1995/(1)/      6 1/8   2 1/4     7 1/8   4 1/4
 
                                                  High/(2)/         Low/(2)/
                                                  ---------         --------

                    March 31, 1996                 6 3/4             4 1/4
                    June 30, 1996                  4 5/8             3 
                    September 30, 1996             4 1/2             2 3/4 
                    December 31, 1996              2 7/8               7/8 
                    March 31, 1997                 2 3/8             1  
                    June 30, 1997                  2 1/8             1 1/4 
                    September 30, 1997             3 1/2             1 1/2
                    December 31, 1997              2 11/16           1 1/8
 
                    Quarter Ended               High    Low       High    Low
                    -------------               ----    ----      ----    ---
 
Warrants            December 29, 1995/(1)/      1 1/2    3/4        2     1 1/2
 
                                                  High/(2)/         Low/(2)/
                                                  ---------         --------
                    March 31, 1996                 2  1/2            1  1/4
                    June 30, 1996                  1  3/4            1  
                    September 30, 1996             1  5/8               1/2  
                    December 31, 1996                 3/4              5/16  
                    March 31, 1997                  15/16              5/16  
                    June 30, 1997                  1                    5/8  
                    September 30, 1997             2 5/16               3/4 
                    December 31, 1997              2  1/8            1  
</TABLE>      
 
----------------------------
/(1)/  Includes only the period December 6, 1996 through December 29, 1996.
/(2)/  In February, 1996, NASDAQ changed its reporting system to no longer
       including Bid and Ask amounts; therefore, the prices shown for these
       dates only reflect the High and Low actual sales price.

                                       9
<PAGE>
 
Holders

     As of January 7, 1997, there were 40 and 39 holders of record of the
Registrant's Common Stock and Public Warrants, respectively.  The Registrant
believes that it has a greater number of shareholders and Public Warrant holders
because the Registrant believes that a substantial amount of its Common Stock
and Public Warrants are held of record in street name by broker-dealers for
their customers.

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.

                                       10
<PAGE>
 
Item 6 - Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------

Results of Operations:
----------------------

Terrace Holdings, Inc. (Consolidated)
-------------------------------------

Year ended December 31, 1997, compared to year ended December 31, 1996.
-----------------------------------------------------------------------
    
     The Registrant's consolidated net loss for 1997 was approximately 
$4,352,000, compared to a net loss of approximately $1,156,000 for 1996.  The
substantial increase was due to several factors. The primary factor was the loss
on the disposition of several of the Registrant's operating subsidiaries.  In
November, 1997, Management and the Board restructured the focus and objective of
the Registrant going forward.  A major part of this restructuring included the
concentration on the processing and distribution of produce and other food
related items.  The Registrant's plan called for the sale of its ice cream and
hospitality units. The sale of these operations resulted in losses on disposal
of approximately $2,127,000. The balance of the operating losses primarily
resulted from the underperformance of the ice cream unit due to increased cost
associated with production as well as increased selling, general, and
administrative costs.      

     In addition, the Registrant incurred losses from its A-One-A Produce and
Provisions, Inc. subsidiary in the six-months it owned the Registrant in 1997.
These losses were due primarily to costs associated with its moving into its new
facility and increased labor costs.  See Below.

Continuing Operations:
----------------------

     A-One-A Produce & Provisions, Inc., the Registrant's subsidiary that
distributes produce, dairy, and other grocery items, operates in Pompano Beach,
Florida, out of its 55,000 sq. ft. warehouse.  There are no comparable results
for 1996, as the company was not part of the Registrant's organization.  For the
other six-month period ended December 31, 1997, A-One-A Produce and Provisions,
Inc. sustained a loss of approximately $437,000. This loss, was primarily due to
the increased cost in selling, general, and administrative expenses due to the
Registrant's plan to develop the business in a very aggressive manner. In
addition, the Registrant moved into its new facility September 7, 1997, and
incurred additional costs of approximately $150,000 as a result of inefficiency
within its operations. The Registrant has taken steps to increase efficiency,
both with technology as well as internal control in order to overcome initial
inefficiencies and realize greater profitability from its distribution sector.
The Registrant also purchased two small distribution companies in late 1997 to
expand and consolidate with A-One-A's current operation. Management believes
that as it continues to attempt to increase value, both through increased
produce sales as well as varying its product lines, the Registrant will realize
greater profitability.

                                       11
<PAGE>
 
Discontinued Operations:
------------------------

Passover Holiday Segments:
--------------------------

     For the Passover season in 1997, the Registrant operated three venues, the
Registry Resort & Spa in Fort Lauderdale, Florida, the Fontainebleau Hotel in
Miami Beach, Florida, and the Rye Town Hilton in Westchester, New York. Revenue
for this segment was approximately $3,475,000, compared to $3,750,000 in 1996.
The decrease in revenue was a result of the Registrant's decision not to renew
1997 operations at the Tamiment Hotel in Pennsylvania. As a result of non-
operation at this facility, the Registrant expensed the remainder of the
amortized value directly associated with that hotel. The Registrant originally
acquired the contracts to operate vacation venues at the Fontainebleau, Rye Town
Hilton and Tamiment Resort in 1996 for $675,000. The full amount was recorded as
intangible assets. Management decided that the growth and income trend of this
segment was not in the ultimate plans of the Registrant, and accordingly decided
to exit this segment of the Registrant's business. Subsequent to the year ended
December 31, 1997, the Registrant sold these operations retroactive to the
beginning of the year and subject to shareholder ratification. These operations
and one of the food services subsidiaries were sold to Samuel H. Lasko,
President, pursuant to Mr. Lasko's exercise of his option to purchase the
hospitality subsidiaries for an aggregate purchase price of $575,000, which is
the value of the businesses as determined by an independent fairness opinion.

Food Service Segment
--------------------

     The Registrant decided in November, 1997, to dispose of its food service
units. As of the end of fiscal 1997, the Registrant's reported loss for its 
A & E Management, Inc. and The Lasko Companies, Inc. subsidiaries was
approximately $98,000 compared to a loss of approximately $189,000 in 1996. The
increase was due primarily to costs associated with the disposal of these
entities. Management's decision to dispose of these entities was primarily based
on the Registrant's inabilities to effectively grow these specific entities. As
mentioned above, while the Registrant has already sold, subject to shareholder
ratification, the A & E Management Corp. subsidiary to Samuel H. Lasko, it
expects to sell the Terrace Oceanside Restaurant, which is the operation of The
Lasko Companies, Inc. subsidiary in the second quarter of 1998. Presently, the
Registrant has entered into a Management Agreement with Samuel H. Lasko, under
which Mr. Lasko will continue to manage the restaurant until such a sale of the
operations is consummated.

Deering Ice Cream, Inc.
-----------------------

     In February, 1997, the Registrant purchased the assets and related
liabilities of DownEast Frozen Desserts, LLC. The loss incurred for the year
ended December 31, 1997, was approximately $738,000. The losses were incurred
from operations as well as from the disposal of the ice cream business.
Management decided to dispose of this segment because it did not fit into the
Registrant's long term plan of goals and objectives, additionally, the revenues
in the ice cream subsidiary took a downturn. As a result, profitability was not
obtained. In order to overcome these two issues, the Registrant would have had
to infuse substantial funding to compete with some of the larger competition,
and such additional funding, whether in the form of equity capital or debt
financing, did not appear to be reasonably available. Thus, Management felt
concentrating on its distribution and processing entities was a better direction
to take.

                                       12
<PAGE>
 
Liquidity and Capital Resources
-------------------------------
    
     At December 31, 1997, the Registrant had cash of approximately $(372,000)
and working capital of approximately $(1,050,000).  The Registrant, A-One-A
Produce & Provisions, Inc. and Terrace Fresh, Inc. have relied principally on
internally generated funds to fund their working capital needs.      

Management has initiated a financing plan with a bank and a number of its
investors to provide the necessary funds to continue to operate its businesses
and to provide additional capital for a possible acquisition.

The Registrant has received a letter of intent from a bank to provide financing
to the Registrant. The bank has commenced its normal due diligence investigation
which should be completed shortly. Management is not presently aware of any
matter which would prevent the completion of the financing.

The Registrant has a pending registration statement covering a proposed offer to
its warrantholders to exercise their warrants and purchase common stock at a
temporarily reduced exercise price. Several warrantholders have indicated they
intend to exercise their warrants, once the registration statement is declared
effective. In addition, if so requested by the Registrant, a private investor
has indicated his intent to purchase equity capital in the Registrant if
sufficient proceeds are not realized by the Registrant from such warrant
exercises.

Management believes that actions presently being taken to revise the
Registrant's operating and financial requirements provide the opportunity for
the Registrant to continue as a going concern. However, the success of
management's plans is not assured.

Seasonality:
------------

The continuing operations of the Registrant are seasonal due to the increased
business in South Florida during the winter months.  However, the Registrant's
Management believes that continuing operations will be less seasonal than the
hospitality and ice cream units have been.  Additionally, Management believes
that through additional acquisitions in the food processing and distribution
areas it may minimize these seasonal effects, though there is no assurance that
any further acquisitions will be successfully made or that less seasonal effects
will be accomplished.

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 1997.

                                       13
<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, 1997, the Registrant's directors and executive officers
were:

<TABLE>
<CAPTION>
Name                         Age  Position Held
<S>                          <C>  <C>
 
Dr. Samuel H. Lasko/(1)/      52  President, Treasurer and Director
 
Jonathan S. Lasko             26  Executive Vice-President, Secretary, Chief 
                                  Operating Officer and Director
 
Bruce S. Phillips             54  Director
 
Steven Shulman                56  Chairman of the Board of Directors and Chief
                                  Executive Officer
 
Richard Power                 48  Director
 
Bernard Rubin, M.D.           49  Director
 
Fred A. Seigel/(2)/           42  Director
</TABLE>
______________________________
/(1)/ In connection with the sale of the "hospitality" businesses, in
      March, 1998, Dr. Lasko has resigned as an officer of the Registrant
      effective on the ratification of the sale by the Registrant's shareholders
      (later this year).  Dr. Lasko has also advised that he will not stand for
      re-election as a director at that time.
/(2)/ Elected a director on February 18, 1998, to fill the vacancy caused by the
      resignation of Milton Namiot. See Item 10, "Executive Compensation," Note
      6.

     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.  Until the DownEast
acquisition in February, 1997, there were five directors, and as of February 17,
1997, there have been seven 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.

     DR. SAMUEL H. LASKO, age 52, has been President, Treasurer and a director
of the Registrant since its inception in October, 1988, and was Chairman of the
Board of Directors and Chief Executive Officer from August, 1995 until February
17, 1997, immediately following the DownEast transaction. Dr. Lasko has also
been president of A&E Management Corp. since October 27, 1993, The Lasko
Companies, Inc. since May 11, 1995, and Prime Concern Kosher Foods, Inc. since
December, 1995. Dr. Lasko holds a B.A. from Yeshiva University in New York City
and received his Ed.D. in 1984 from the University of Maryland. Dr. Lasko is the
father of Jonathan S. Lasko, currently the Executive Vice-President, Secretary,
the Chief Operating Officer of the

                                       14
<PAGE>
 
Registrant and one of its directors, and the brother-in-law of Bruce S.
Phillips, a director of the Registrant.

     JONATHAN S. LASKO, age 26, 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 has also been vice-president of A&E Management Corp. since
October 27, 1993, The Lasko Companies, Inc. since May 11, 1995 and Prime Concern
Kosher Foods, Inc. since December, 1995.  He is also President and Chief
Executive Officer of A-One-A Produce and Provisions, Inc.  Mr. Lasko attended
Yeshiva University, New York, New York, in 1988 and 1989, and 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.  Mr. Lasko is
the son of Dr. Samuel H. Lasko, the President and Treasurer of the Registrant
and one of its directors, and the nephew of Bruce S. Phillips, a director of the
Registrant.

     BRUCE S. PHILLIPS, age 54, has been a director of the Registrant since
August, 1995.  He is a graduate of City College of New York.  From April, 1988
until August, 1994, Mr. Phillips was president and director of Frem Corp., a
plasticware manufacturer.  Since August, 1994, Mr. Phillips has owned PFS
Venture Group, a business management and financial consulting firm.  Mr.
Phillips is the brother-in-law of Dr. Samuel H. Lasko, a director of the
Registrant and its President and Treasurer, and the uncle of Jonathan S. Lasko,
a director of the Registrant and its Executive Vice-President, Secretary and
Chief Operating Officer.

     STEVEN SHULMAN, age 56, is 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. Since February, 1997, Mr.
Shulman has served as the Chairman of the Board of Directors and since February
18, 1998, has also served as the Chief Executive Officer of the Registrant.

     RICHARD POWER, age 48, has been the President of Carlisle Plastics, Inc., a
division of Tyco International Ltd., a New York Stock Exchange listed
corporation, since January, 1997.  He served as a consultant to Tyco 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. Since February, 1997, Mr. Power
has served as a director of the Registrant.

     BERNARD RUBIN, M.D., age 49,  was a director of the Registrant from August,
1995, to February 17, 1997, when he voluntarily resigned.  He was re-elected a
director at the Registrant's 1997 Annual Meeting of Shareholders.  For the past
approximately 19 years, Dr. Rubin has been a practicing cardiologist in
Baltimore, Maryland, where, for the past six years he has been the President of
Baltimore Heart Associates, an 18-member cardiology group.  Dr. Rubin has served
as President of the Medical Staff and is currently Chief of Cardiology and
Medical Director of the Critical Care Unit at Northwest Hospital Center in
Baltimore.  He holds undergraduate degrees from

                                       15
<PAGE>
 
Yeshiva University and a medical degree from New York Medical College, both in
New York.  Dr. Rubin is a Fellow in the American College of Cardiology.

     FRED A. SEIGEL, age 42, was elected a Director on February 18, 1998, to
fill a vacancy. Mr. Seigel is a founder, President and a Director of Energy
Capital Partners, a privately-held, Boston-based company organized in September,
1993, providing financing for energy efficiency projects for commercial,
industrial and institutional property owners throughout the United States. He
has more than twenty years experience in the energy field. 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, 1983, 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.

Director Compensation

     Directors are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors and commencing in fiscal 1996, non-
employee directors were paid $750 for each directors' meeting attended.  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, 1997, 1996 and 1995, 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.

<TABLE>
<CAPTION>
                                                       Annual Compensation
                                             ----------------------------------------
                                Year Ended    Annual        Other
Name & Principal Position       December 31   Salary    Compensation         Options
-------------------------       -----------   ------    ------------         -------
<S>                             <C>          <C>       <C>                 <C>

Samuel H. Lasko,                       1995  $ 31,403   $ 169,081/(2)/     750,000/(5)/
President and                          1996  $125,000   $   9,517/(3)(4)/
Treasurer                              1997  $150,000   $  22,502/(3)/

Jonathan S. Lasko,                     1995  $ 24,592   $ 169,081/(2)/     750,000/(5)/
Executive Vice                         1996  $ 70,000   $   7,255/(3)/
President, Secretary and               1997  $ 95,000   $  21,727/(3)/
Chief Operating Officer

Milton Namiot,                         1997  $175,000   $   9,500/(3)/     125,000/(6)/
Chief Executive Officer/(6)/
</TABLE>

                                       16
<PAGE>
 
____________________________________________________

/(1)/ Paid by A&E Management Corp. ("A&E").

/(2)/ Represents combined "S" corporation distributions in the nature of
      dividends through December 5, 1995, when the Registrant first offered and
      sold its securities to the public.

/(3)/ Represents amounts paid for lease of automobile, automobile insurance,
      cell phone and health insurance.

/(4)/ Does not include repayments of loans from A&E, The Lasko Companies, Inc.
      and the Registrant.

/(5)/ In connection with the DownEast acquisition in February, 1997, each of
      Samuel Lasko and Jonathan Lasko surrendered their respective right to
      performance options, contained in their respective employment agreements
      and, in lieu thereof, the Registrant issued to each of Samuel H. Lasko and
      Jonathan D. Lasko warrants to purchase 375,000 shares of the Registrant's
      common stock at $1.1875 per share exercisable immediately and expiring
      August 31, 2000.

/(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 this three year employment contract and his release of the Registrant
      from the terms thereof, Mr. Namiot was vested with 50% of the options
      theretofore granted him, or options to purchase 125,000 shares of the
      Registrant's common stock.

                                       17
<PAGE>
 
              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 1996, 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".

<TABLE>
<CAPTION> 
                                                          Number of
                                                          Securities        Value of
                                                          Underlying        Unexercised
                                                          Unexercised       In-The-Money
                                                          Options/SARs      Options/SARs
                                                          at FY-End (#)     at FY-End ($)
 
                       Shares Acquired On   Value         Exercisable/      Exercisable/
Name                   Exercise (#)         Realized ($)  Unexercisable     Unexercisable
---------------------  ------------------   -----------   ---------------   -------------
<S>                    <C>                  <C>           <C>               <C>
 
Milton Namiot/(1)/            ---              ---            ---               ---
 
Samuel H. Lasko               ---              ---        0/750,000/(2)/        $0/0
 
Jonathan S. Lasko             ---              ---        0/750,000/(2)/        $0/0
</TABLE>
__________________________________________________

/(1)/ Mr. Namiot was not an officer of the Registrant in 1996.  He was elected
      an officer on February 17, 1997, following the DownEast transaction, and
      resigned in December, 1997 following the sale of the Deering business.

/(2)/ Represents options(based on performance by the Registrant) contained in
      the Lasko's employment agreements.  In connection with the DownEast
      acquisition, effective February 17, 1997, each of Messrs. Samuel and
      Jonathan Lasko voluntarily surrendered their respective right to these
      options and, in lieu thereof, the Registrant issued to each of Samuel H.
      Lasko and Jonathan D. Lasko warrants to purchase 375,000 shares of the
      Registrant's common stock at $1.1875 per share exercisable immediately and
      expiring August 31, 2000.

Employment Agreements and Aggregate Options Holdings

     The Registrant has 5-year employment agreements, ending August 31, 2000,
with each of Dr. Samuel H. Lasko and Jonathan S. Lasko.  Dr. Samuel H. Lasko
tendered to the Registrant the balance of his employment agreement in partial
consideration of his purchase of the Registrant's "hospitality" segments.  See
"Subsequent Events."

     Under his employment agreement, Dr. Samuel H. Lasko received an annual base
salary of $95,000 for the first two years and was to receive $125,000 for the
third year, $150,000 for the fourth year and $175,000 for the fifth year of his
employment.  Under his employment agreement, Jonathan S. Lasko receives an
annual base salary of $70,000 for the first two years, $95,000 for the third
year, $115,000 for the fourth year and $125,000 for the fifth year of his
employment.  In connection with the DownEast transaction, by amendments dated
February 17, 1997, to their respective employment agreements, Dr. Lasko and
Jonathan Lasko each voluntarily surrendered their one-time performance based
options under their respective employment agreements to purchase up to an
aggregate of 750,000 shares of common stock, and in lieu thereof, the Registrant
issued to each of Samuel Lasko and

                                       18
<PAGE>
 
Jonathan Lasko, warrants to purchase 375,000 shares of its common stock at an
exercise price of $1.1875 per share.  (Dr. Lasko tendered to the Registrant
114,322 of such warrants in partial consideration of his purchase of the
Registrant's "hospitality" businesses.)  The employment agreements also entitle
the individuals to the use of an automobile and to employee benefit plans, such
as group life, health, hospitalization and life insurance.  Under each of these
employment agreements, 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. 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 DownEast transaction, the Registrant entered into a
3-year employment agreement, effective February 17, 1997, and ending August 31,
2000, with Milton Namiot under which Mr. Namiot served as the President and
Chief Executive Officer of Deering and Chief Executive Officer of the
Registrant.  As a result of the sale of the Deering business, Mr. Namiot
resigned from his positions as an officer and director of the Registrant.

     In connection with the A-One-A transaction, the Registrant entered into 5
year employment agreements, effective July 1, 1997, and ending July 30, 2002,
with both Virgil D. Scarbrough and Scott Davis under which Messrs. Scarbrough
and Davis will serve as Co-Chief Operating Officers of the Registrant's wholly-
owned subsidiaries A-One-A Produce & Provision, Inc. and Terrace Fresh, Inc.
Under their respective employment agreements, Messrs. Scarbrough and Davis each
receive an annual base salary of $120,000.

     In connection with the Bay Purveyors acquisition, the Registrant's wholly-
owned subsidiary, A-One-A Produce, entered into a 5 year employment agreement
effective September 1, 1997, with Kenneth Cohen under which Mr. Cohen will serve
in an upper level management position for A-One-A Produce.  Under his employment
agreement, Mr. Cohen receives an annual base salary of $65,000.

The 1997 Stock Option Plan and Participants

     The Registrant recently adopted the 1997 Stock Option Plan (the "Plan")
which enables it to grant options for shares of its Common Stock.  The Plan
authorizes the grant of options to purchase up to an aggregate of 1,250,000
shares of the Registrant's Common Stock, 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

                                       19
<PAGE>
 
Plan is set forth as an exhibit to this Registration Statement, and the
following description is qualified in its entirety by reference thereto.

     The Plan is administered by the Compensation Committee, which was 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, 1997, 738,000 options have been granted, including
380,000 to Samuel H. Lasko, Jonathan S. Lasko, and Steven Shulman.

     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 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

                                       20
<PAGE>
 
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.

     In February, 1997, the following officers, directors, significant employees
and other employees have received the number of options as is designated
opposite their respective names:

<TABLE>
<CAPTION>
     Name                        Number of Options/(1)/
     ----                        ----------------------
     <S>                         <C>
     Samuel H. Lasko                    125,000
     Jonathan S. Lasko                  125,000
     Steven Shulman                     130,000/(2)/
     Bruce Phillips                      20,000/(2)/
     Richard Power                       20,000/(2)/
     Milton Namiot/(3)/                 125,000
     Joseph Dane/(3)/                    25,000
     Hersh Taubenfeld                    20,000
     Keith Stuart                        20,000
     Amy Lasko                           15,000
     Vivien Cypkin                        5,000
     Other Employees/(4)/               108,000
                                        -------
     TOTAL                              738,000
</TABLE> 
---------------------------------------------------
(1) Unless otherwise stated, these options were granted at an exercise price of
    $1.185 per share, such options become exercisable one third per year over
    three years from the date granted.
(2) All of Mr. Phillip's and Mr. Power's options, as well as 30,000 of Mr.
    Shulman's options, became exercisable at the time they were granted.
(3) In connection with the Registrant's sale of its Deering subsidiary's
    business, Messrs. Namiot and Dane are no longer affiliated with the
    Registrant. The Registrant's Compensation Committee determined that the
    number of options listed became exercisable after consummation of such sale
    on such date the options would have been exercisable had Messrs. Namiot and
    Dane stayed affiliated with the Registrant. See footnote 8 to "Executive
    Compensation" table.
(4) Includes options granted to 17 individual employees of the Registrant's
    subsidiaries at an exercise price of $2.31 per share, such options become
    exercisable one third per year over three years from the date granted.

                                       21
<PAGE>
 
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
March 1, 1998. In addition, the table provides information concerning the
beneficial owners known to the Registrant to hold more than 5 percent of the
outstanding common stock of the Registrant as of March 1, 1998.

<TABLE>
<CAPTION>
                            Common                             Preferred
                            Stock                              Stock
                            Beneficial      Percent            Beneficial   Percent
Name of Beneficial Owner    Ownership/(1)/  of Class/(1)(2)/   Ownership    of Class
------------------------    --------------  -----------------  -----------  ---------
<S>                         <C>             <C>                <C>          <C>
 
Dr. Samuel H. Lasko          383,750/(3)/     7.7%               -0-           -0-
 
Jonathan S. Lasko            380,000          7.6%              25,000/(4)/     *
 
Richard Power                204,154           *                50,000          *
 
Steven Shulman               346,154          6.9%              50,000          *
 
Bernard Rubin, M.D.            -0-            -0-               15,000          *
 
Fred A. Seigel                64,577           *                  -0-          -0-
 
Bruce S. Phillips              -0-            -0-                 -0-          -0-
 
Milton Namiot/(5)/
 
All Directors and
Executive Officers
as a Group (6 persons)     1,378,635/(6)/    27.5%             140,000        9.2%
</TABLE> 
------------------------------------------------
*   Less than five percent

(1) In each case the beneficial owner has sole voting and investment power
    except that shares held by Dr. Samuel H. Lasko are held in joint tenancy
    with his wife Arlene Lasko and the shares held by Jonathan S. Lasko are held
    in joint tenancy with his wife Ellen J. Lasko.

(2) The calculation of percent of class is based upon the number of shares of
    common stock outstanding as of September 30, 1997.

(3) Includes 3,750 shares held for the benefit of Dr. Lasko's minor child.

(4) Held for the benefit of Jordana Lasko, a minor.

(5) In December, 1997, following the sale of the Deering subsidiary's business,
    Mr. Namiot resigned as an officer and director of the Registrant.

(6) Does not include stock options granted. See "1997 Stock Option Plan and
    Participants." Also does not include Warrants to purchse Common Stock at a
    price of $1.1875 in the following amounts: Samuel H. Lasko - 375,000;
    Jonthan S. Lasko - 375,000; Steven Shulman - 36,666.7; Richard Power -
    31,666.7; Fred A. Siegel - 15,833.3; Bernard Rubin, M.D. - 20,000; and Bruce
    S. Phillips -70,000.

                                       22
<PAGE>
 
Item 12 - Certain Relationships and Related Transactions
--------------------------------------------------------

     Effective July 1, 1995, A&E Management Corp. ("A&E") and Prime Concern
Kosher Foods, Inc. ("Prime Concern") entered into an agreement whereby A&E
provided certain management services to Prime Concern and acted as the primary
operator of the Deli Maven, Prime Concern's retail kosher delicatessen in Boca
Raton, Florida, for a period of six months for a non-refundable fee of $50,000
payable on the earlier of the closing of the Registrant's public offering or
March 31, 1996.  As noted, the Registrant's public offering was closed on
December 11, 1995.

     Samuel Lasko loaned Terrace Holdings, Inc., The Lasko Companies, Inc. and
A&E Management Corp. the sums of $7,276, $42,715 and $235,558, respectively, or
an aggregate of $285,549.  Each loan provided interest at the prime rate of
interest and principal and interest due on demand.  $100,000 of principal of
these loans was repaid from the proceeds of the Registrant's offering.  Pursuant
to agreements, the remaining principal of $185,549, together with all accrued
interest, was payable out of the Registrant's working capital in twelve equal
monthly installments commencing in December, 1995.  At December 31, 1996, the
principal balance of these loans was paid in full.

     In connection with the DownEast acquisition, the Registrant issued to each
of Samuel H. Lasko and Jonathan D. Lasko (collectively the "Laskos") warrants to
purchase 375,000 shares of the Registrant's common stock at $1.1875 per share.
Messrs. Laskos surrendered their respective performance options to purchase up
to 750,000 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
a "fairness opinion" received by the Registrant and Dr. Lasko from an
independent valuation firm.  The sale is subject to shareholders' approval.  See
"Business - Sale of Hospitality Segments."

     A-One-A Produce & Provisions, Inc. 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 with three five year
options to extend expiring June 30, 2007 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.  Under the lease, the Registrant has an option to purchase
the land and building in Pompano Beach, Florida at a purchase price of
$2,000,000 until December, 1998.

     In July, 1997, the Registrant loaned $30,000 to its then wholly-owned
subsidiary, Deering Ice Cream, Inc.  As a result of the consummation of the sale
of the assets of Deering to a subsidiary of Fieldbrook Farms, Inc., this loan
was terminated.

                                       23
<PAGE>
 
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 **
    -----------------------   

    The following Material Contracts are filed herewith:

    10.1  Employment Agreement, dated July 1, 1997, between Terrace
          Holdings, Inc. and Scott Davis
    10.2  Employment Agreement, dated July 1, 1997, between Terrace
          Holdings, Inc. and Virgil Scarbrough
    10.3  Employment Agreement, dated July 17, 1997, between Terrace
          Holdings, Inc. and Kenneth Cohen
    10.4  Investment Banking Agreement, dated July 1, 1997 between Terrace
          Holdings, Inc. and Biltmore Securities, Inc.
    10.5  Asset Acquisition Agreement, dated July 6, 1997 between Terrace
          Holdings, Inc. and A One A Wholesale Produce, Inc.
    10.6  Stock Purchase Agreement, dated February 2, 1998, between Terrace
          Holdings, Inc. and Virgil Scarbrough and Scott Davis
    10.7  Sale of Assets Agreement, dated September 1, 1997, between Terrace
          Holdings, Inc. and Dry Dock    
    10.8  Guaranty dated August 7, 1997, by Terrace Holdings, Inc. in favor of
          Foothill Capital Corporation
    10.9  Agreement to Sell and Purchase, dated as of March 2, 1998, between the
          Registrant and Samuel H. Lasko, relating to The Lasko Family Kosher
          Tours, Inc. and A&E Management, Inc.
    10.10 Management Agreement dated as of March 2, 1998, relating to the
          Terrace Oceanside Restaurant
    10.11 Terrace Holdings, Inc. 1997 Stock Option Plan
    10.12 Asset Purchase Agreement, dated December 31, 1997, between D.M.S. Food
          Distributors, Inc. (Gourmet Distributors) and the Registrant
    10.13 Form of Contract for Sale of Business between The Lasko Family
          Companies, Inc. and Steven Newman, relating to the Terrace Oceanside
          Restaurant
    10.14 Agreement dated as of June 25, 1998, between Terrace Holdings, Inc. 
          and Network Funds III, Ltd.
    10.15 Asset Acquisition Agreement dated as of June 25, 1998, between Terrace
          Holdings, Inc. and Banner Beef & Seafood Co., Inc.

                                       24
<PAGE>
 
    (21) Subsidiaries of the Registrant
    -----------------------------------

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

    1.    The Lasko Companies, Inc.
          2699 Stirling Road
          Suite C - 405
          Ft. Lauderdale, Florida 33312

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

    3.    Terrace Fresh, Inc.
          1325 N.W. 22nd Street
          Pompano Beach, Florida 33069
    
    (23.1) Consent of Moore Stephens, P.C.      

_______________
 *  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 statement #33-96892-A, and to Registrant's Form 
    10-KSB for the year ended December 31, 1995, Commission file number 0-27132.


b)  Reports on Form 8-K

    The Registrant filed Current Reports on Form 8-K on January 16, 1998 for the
purpose of reporting the consummation of the sale of its Deering Ice Cream
subsidiary to a unaffiliated third party.

                                       25
<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 HOLDINGS, INC.
--------------------------------------------------------------------------------
                                  Registrant

By:                      /s/ Samuel H. Lasko, President
   -----------------------------------------------------------------------------
                           Samuel H. Lasko, President

Date:                             July 8, 1998
     ---------------------------------------------------------------------------

     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.

<TABLE> 
<CAPTION> 
Signature                       Title                                Date
---------                       -----                                ----
<S>                             <C>                              <C> 

/s/ Samuel H. Lasko             President and Director            July 8, 1998
--------------------------              
Samuel H. Lasko


/s/ Jonathan S. Lasko           Executive Vice-President,         July 8, 1998
--------------------------      Secretary, Chief Operating         
Jonathan S. Lasko               Officer, Principal Financial
                                Officer and Director        


/s/ Bruce S. Phillips           Director                          July 8, 1998
--------------------------              
Bruce S. Phillips


/s/ Richard Power               Director                          July 8, 1998
--------------------------              
Richard Power


/s/ Steven Shulman              Director, Principal Executive     July 8, 1998
--------------------------      Officer                              
Steven Shulman


/s/ Fred A. Siegel              Director                          July 8, 1998
--------------------------              
Fred A. Siegel


/s/ Bernard Rubin, M.D.         Director                          July 8, 1998
--------------------------              
Bernard Rubin, M.D.


/s/ Mario Jacobs                Principal Accounting Officer      July 8, 1998
--------------------------              
Mario Jacobs
</TABLE> 
                 
                                      26
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS


To the Stockholders and Board of Directors of
  Terrace Holdings, Inc.


          We have audited the accompanying consolidated balance sheet of Terrace
Holdings, Inc. and its subsidiaries as of December 31, 1997, and the related 
consolidated statements of operations, stockholders' equity, and cash flows for 
each of the two years in the period ended December 31, 1997. 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 Holdings, Inc. and its subsidiaries as of December 31, 1997,
and the consolidated results of their operations and their cash flows for each 
of the two years in the period ended December 31, 1997, in conformity with 
generally accepted accounting principles.





                                       MOORE STEPHENS, P. C.
                                       Certified Public Accountants

New York, New York
March 13, 1998

                                      F-1
<PAGE>
 
TERRACE HOLDINGS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                     Assets
 
<S>                                                                  <C>
Current Assets:
 Accounts Receivable (Less Allowance for Doubtful Accounts
  of $60,000)                                                        $1,869,198
 Inventories                                                            280,458
 Due from Related Party                                                 122,752
 Restricted Cash                                                        137,701
 Due on Sale of Discontinued Operations                                  90,000
 Other Current Assets                                                   107,823
                                                                     ----------
 
 Total Current Assets                                                 2,607,932
 
Property and Equipment - Net                                            665,282
 
Cost in Excess of Net Assets of Businesses Acquired -
 Net of Accumulated Amortization of $88,148                           3,639,882
 
Other Assets                                                             14,246
                                                                     ----------
 
 Total Assets                                                        $6,927,342
                                                                     ==========
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-2
<PAGE>
 
TERRACE HOLDINGS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
--------------------------------------------------------------------------------

<TABLE>     
<CAPTION> 
                      Liabilities and Stockholders' Equity
 
<S>                                                                 <C>
Current Liabilities:
 Cash Overdraft                                                     $   372,451
 Accounts Payable                                                       892,742
 Accrued Expenses                                                       805,890
 Current Portion of Long-Term Debt                                      162,370
 Line of Credit                                                       1,354,084
 Provision for Phase-Out Costs                                           20,000
 Other Current Liabilities                                               50,000
                                                                    -----------
 
 Total Current Liabilities                                            3,657,537
                                                                    -----------
 
Long-Term Debt                                                           81,380
                                                                    -----------
 
 Total Liabilities                                                    3,738,917
                                                                    -----------
 
Commitments and Contingencies                                                --
                                                                    -----------
 
Stockholders' Equity:
 Convertible Preferred Stock, $.001 Par Value, 10,000,000
  Shares Authorized, 1,523,825 Shares Issued and Outstanding              1,524
 
 Common Stock - $.001 Par Value, 25,000,000 Shares Authorized,
  5,006,400 Issued and Outstanding                                        5,006
 
 Additional Paid-in Capital                                           9,075,343
 
 Accumulated Deficit                                                 (5,893,448)
                                                                    -----------
 
 Total Stockholders' Equity                                           3,188,425
                                                                    -----------
 
 Total Liabilities and Stockholders' Equity                         $ 6,927,342
                                                                    ===========
</TABLE>     

See Notes to Consolidated Financial Statements.

                                      F-3
<PAGE>
 
TERRACE HOLDINGS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
--------------------------------------------------------------------------------

<TABLE>    
<CAPTION>
                                                                    1 9 9 7       1 9 9 6
                                                                  -----------   -----------
<S>                                                               <C>           <C>
Net Sales                                                         $ 8,929,464   $        --
 
Cost of Sales                                                       6,853,507            --
                                                                  -----------   -----------
 
 Gross Profit                                                       2,075,957            --
                                                                  -----------   -----------
 
Operating Expenses:
 Selling, General and Administrative Expenses                       3,370,480       348,439
 Loss on Disposal                                                          --       129,826
 Provision for Doubtful Accounts                                       60,000            --
                                                                  -----------   -----------
 
 Total Operating Expenses                                           3,430,480       478,265
                                                                  -----------   -----------
 
 (Loss) from Operations                                            (1,354,523)     (478,265)
                                                                  -----------   -----------
 
Other (Expense) Income:
 Interest Expense                                                     (79,594)           --
 Interest Income                                                       22,601        19,338
                                                                  -----------   -----------
 
 Total Other (Expense)                                                (56,993)       19,338
                                                                  -----------   -----------
 
 (Loss) From Continuing Operations                                 (1,411,516)     (458,927)
 
Discontinued Operations:
 (Loss) from Operations of Discontinued Business
  Segments (Net of Income Taxes of $-0-)                             (813,795)     (697,100)
 (Loss) on Disposal of Business Segments, including
  Provision of $20,000 for Operating Loss during the Phase Out
  Period (Net of Income Taxes of $-0-)                             (2,126,742)           --
                                                                  -----------   -----------
 
 Net (Loss)                                                       $(4,352,053)  $(1,156,027)
                                                                  ===========   ===========
 
(Loss) Per Share of Common Stock:
 (Loss) from Continuing Operations                                $      (.32)  $      (.14)
 (Loss) from Operations of Discontinued
  Business Segments (Net of Income Tax of $-0-)                          (.18)         (.21)
 (Loss) on Disposal of Discontinued Business Segments                    (.48)           --
                                                                  -----------   -----------
 
 Basic and Diluted Net (Loss) Per Share of Common Stock           $      (.98)  $      (.35)
                                                                  ===========   ===========
 
 Weighted Average Shares of Common Stock Outstanding                4,454,034     3,312,500
                                                                  ===========   ===========
</TABLE>     
 
See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>
 
TERRACE HOLDINGS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996.
--------------------------------------------------------------------------------
    
<TABLE> 
<CAPTION>
                                           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 - January 1, 1996                   --        $   --  3,312,500       $3,313     $3,945,948  $  (385,368)  $ 3,563,893
 
 Net (Loss)                                 --            --         --           --             --   (1,156,027)   (1,156,027)
                                     ---------        ------  ---------       ------     ----------  -----------   -----------
 
Balance - December 31, 1996                 --            --  3,312,500        3,313      3,945,948   (1,541,395)    2,407,866
 
 Asset Acquisition - Deering                --            --    918,900          918        763,081           --       763,999

 Finders Fee                                --            --     75,000           75         88,238           --        88,313  

 Asset Acquisition - A-One-A                --            --    500,000          500        999,500           --     1,000,000
 
 Private Placement                   1,523,825         1,524         --           --      2,671,776           --     2,673,300
 
 Stock Issuances                            --            --    200,000          200        219,800           --       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  5,006,400       $5,006     $9,075,343  $(5,893,448)  $ 3,188,425
                                     =========        ======  =========       ======     ==========  ===========   ===========
</TABLE>     

See Notes to Consolidated Financial Statements.

                                      F-5
<PAGE>
 
TERRACE HOLDINGS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
--------------------------------------------------------------------------------
    
<TABLE> 
<CAPTION>
                                                                        1 9 9 7      1 9 9 6
                                                                      -----------   ---------
<S>                                                                   <C>           <C>
Operating Activities:
 Net (Loss) from Continuing Operations                                $(1,411,516)  $(458,927)
                                                                      -----------   ---------
 Adjustments to Reconcile Net (Loss) to Net Cash
  (Used for) Provided by Operating Activities:
  Depreciation and Amortization                                           157,613          --
  Stock Based Compensation                                                180,000          --
  Provision for Doubtful Accounts                                          60,000          --
 
 Changes in Assets and Liabilities:
  (Increase) Decrease in:
   Accounts Receivable                                                   (541,699)         --
   Inventory                                                             (102,069)         --
   Other Current Assets                                                    17,638          --
   Other Assets                                                            (1,728)         --
 
  Increase (Decrease) in:
   Accounts Payable                                                       182,082          --
   Accrued Expenses                                                       338,955          --
                                                                      -----------   ---------
 
  Total Adjustments                                                       290,792          --
                                                                      -----------   ---------
 
 Net Cash - Continuing Operations - Forward                            (1,120,724)   (458,927)
                                                                      -----------   ---------
 
Discontinued Operations:
 (Loss) From Discontinued Business Segments                            (2,940,537)   (697,100)
 Adjustments to Reconcile (Loss) to Net Cash:
  Depreciation and Amortization                                           180,115     340,086
 (Loss) on Disposal of Business Segments (Including Provision
  of $20,000 for Operating Loss During Phase Out Period)                1,974,742          --
 Changes in Net Assets, Liabilities                                    (1,787,219)   (165,304)
                                                                      -----------   ---------
 
 Net Cash - Discontinued Operations - Forward                          (2,572,899)   (522,318)
                                                                      -----------   ---------
 
Investing Activities - Continuing Operations:
 Acquisition of Assets                                                   (201,744)   (179,308)
 Purchase of Business - Net of Cash Acquired                           (3,616,993)         --
                                                                      -----------   ---------
 
 Net Cash - Investing Activities - Continuing Operations - Forward     (3,818,737)   (179,308)
                                                                      -----------   ---------
 
Investing Activities - Discontinued Operations:
 Acquisition of Intangible Assets                                              --    (675,000)
 Purchase and Disposal of DownEast Frozen Desserts, LLC -
  Net of Cash Acquired                                                    288,900          --
 Acquisition of Assets                                                    (40,933)         --
                                                                      -----------   ---------
 
 Net Cash - Investing Activities - Discontinued Operations -
  Forward                                                             $   247,967   $(675,000)
</TABLE>     

See Notes to Consolidated Financial Statements.

                                      F-6
<PAGE>
 
TERRACE HOLDINGS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
--------------------------------------------------------------------------------
    
<TABLE> 
<CAPTION>
                                                                          1 9 9 7       1 9 9 6
                                                                        -----------   -----------
<S>                                                                     <C>           <C>
 Net Cash - Continuing Activities - Forwarded                           $(1,120,724)  $  (458,927)
                                                                        -----------   -----------
 
 Net Cash - Discontinued Operations - Forwarded                          (2,572,899)     (522,318)
                                                                        -----------   -----------
 
 Net Cash - Investing Activities - Continuing Operations -
  Forwarded                                                              (3,818,737)     (179,308)
                                                                        -----------   -----------
 
 Net Cash - Investing Activities - Discontinued Operations -
  Forwarded                                                                 247,967      (675,000)
                                                                        -----------   -----------
 
Financing Activities - Continuing Operations:
 Proceeds from Notes Payable                                                100,000            --
 Payment of Notes Payable                                                   (64,467)      (10,000)
 Payments of Demand Notes Payable - Stockholders and Related Parties             --      (185,549)
 Proceeds from Line of Credit                                             1,354,085            --
 Restricted Cash                                                           (137,701)           --
 Bank Overdrafts                                                            372,448            --
 Proceeds from Issuance of Convertible Preferred Stock                    2,673,300            --
 Proceeds from Issuance of Common Stock                                     220,000            --
                                                                        -----------   -----------
 
 Net Cash - Financing Activities - Continuing Operations                  4,517,665      (195,549)
                                                                        -----------   -----------
 
Financing Activities - Discontinued Operations:
 Proceeds of Demand Notes Payable                                         1,175,821            --
                                                                        -----------   -----------
 
 Net (Decrease) in Cash and Cash Equivalents                             (1,570,907)   (2,031,102)
 
Cash and Cash Equivalents - Beginning of Years                            1,570,907     3,602,009
                                                                        -----------   -----------
 
 Cash and Cash Equivalents - End of Years                               $        --   $ 1,570,907
                                                                        ===========   ===========
 
Supplemental Disclosures of Cash Flow Information:
 Cash paid during the years for:
  Interest                                                              $    51,093   $     9,020
  Income Taxes                                                          $        --   $        --
</TABLE>     

Supplemental Disclosures of Non-Cash Financing Activities:

  During the quarter ending March 31, 1997, the Company issued 993,900 shares of
common stock valued at approximately $853,000 in connection with the acquisition
of DownEast Frozen Desserts, LLC.

  During the third quarter, the Company issued 500,000 shares of its common
stock valued at $1,000,000 in connection with the acquisition of A-One-A
Wholesale Produce, Inc.

See Notes to Consolidated Financial Statements.

                                      F-7
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------

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

Terrace Holdings, Inc. ("Terrace" or the "Company"), was incorporated under the
laws of the State of Delaware on June 15, 1995, to change the state of
incorporation of Bon Adventure Kosher Tours, Inc., a Florida corporation,
formerly known as Embassy Kosher Tours of South Florida, Inc.  During 1997, the
Board of Directors determined to dispose of the net assets of the Company's
frozen dessert and hospitality business segments (See Note 3). The Company's
continuing operations focus on the food services and distribution business
through its wholly-owned subsidiary, A-One-A Produce & Provisions, Inc. ("A-One-
A"). A-One-A is a Pompano Beach, Florida based produce distributor that sells
and distributes fresh fruit and vegetables and dry grocery products to hotels,
restaurants and other businesses in southern Florida.

Consolidation Policy - The consolidated financial statements include the
accounts of Terrace and its subsidiaries.  All significant intercompany
transactions and balances have been eliminated in consolidation.

The consolidated financial statements as of and for the year ended December 31,
1997, include the accounts of Terrace and its wholly-owned subsidiaries, A&E
Management Corp. ("A&E"), The Lasko Family Kosher Tours, Inc. ("LFKT"), The
Lasko Companies ("Lasko") (together, the "Hospitality Group"), and A-One-A.  A-
One-A's fiscal year ends on the Saturday nearest to December 31.  LFKT was
incorporated on February 14, 1997 for the purpose of managing and operating the
Passover holiday vacation business, which was subsequently disposed of in
December 1997 (See Note 3B).  On February 10, 1997, Deering Ice Cream, Inc.
("Deering") was incorporated to acquire certain assets and related liabilities
from DownEast Frozen Desserts, LLC ("DownEast"), to manufacture and market
frozen desserts.  This subsidiary was disposed of in December 1997 (See 
Note 3A).

The consolidated financial statements for the year ended December 31, 1996,
include the accounts of Terrace, A&E, Lasko and Prime Concern Kosher Foods, Inc.
["Prime"].  In July 1996, the Company disposed of all of the operating assets of
Prime which operated a kosher delicatessen/fast food operation in Boca Raton,
Florida incurring a loss of $129,826.

Cash and Cash Equivalents - The Company considers certain highly liquid
investments, with a maturity of three months or less when purchased to be cash
equivalents.  The Company did not have any cash equivalents at December 31,
1997.

Inventories - Inventories are recorded at the lower of cost or market.  Cost is
determined on the first-in, first-out ("FIFO") basis.  Inventories consist of
fresh fruit, vegetables and dry goods.

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, 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:

Transportation Equipment                      7 - 10 Years
Equipment, Furniture and Fixtures             5 - 7 Years
Leasehold Improvements                        5 - 10 Years

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.  Amortization expense amounted to $88,148 for the year ended December
31, 1997.

                                      F-8
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #2
--------------------------------------------------------------------------------

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

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, a
significant change in the environment in which the business assets operate or if
the expected future non-discounted cash flows of the business was 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, 1997, 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 - Financial instruments that potentially subject
the Company to concentration of credit risk include cash and cash equivalents
and accounts receivable arising from its normal business activities.  The
Company places its cash and cash equivalents with high credit quality financial
institutions.  The Company had approximately $452,000 at December 31, 1997  in a
financial institution subject to normal credit risk beyond insured amounts.  The
Company does not require collateral on its financial instruments.

The Company extends credit to its customers, which results 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's estimate of the financial
strength of its customers may be subject to change in the near term.

Other Concentrations - In December 1997, A-One-A became a full-time member of a
cooperative of independent distribution specialists (the "Cooperative") which
enables the Company to enter group negotiations which results in better pricing
on purchases.  Although the Company purchased approximately 37% through the
Cooperative, management believes that there is no business vulnerability
regarding this concentration of purchases from the Cooperative as the produce
purchased is available from other sources.

Business Risk - The Company is subject to the Perishable Agricultural
Commodities Act ("PACA") which regulates certain entities engaged in the
business of shipping or receiving perishable agricultural commodities in
interstate commerce.  Currently, the Company maintains a PACA license to
distribute fresh produce, fruits and vegetables.  The ability of the Company to
continue distribution and sales of its fresh produce, fruits and vegetables is
dependent upon its continued compliance with the PACA statute. Loss of its PACA
license would have a materially adverse effect on the Company.

Advertising - Advertising costs, which were not material at December 31, 1997
and 1996, are expensed as incurred.

Earnings Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which is effective for financial statements issued for periods ending
after December 15, 1997.   Accordingly, earnings per share data in the financial
statements for the year ended December 31, 1997, have been calculated in
accordance with SFAS No. 128.  Prior period earnings per share data have been
recalculated as necessary to conform prior year data to SFAS No. 128.

                                      F-9
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #3
--------------------------------------------------------------------------------

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

Earnings Per Share (Continued) - SFAS No. 128 supersedes Accounting Principles
Board Opinion No. 15, "Earnings per Share," and replaces its primary earnings
per share with a new basic earnings per share representing the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period.  SFAS No. 128 also requires a dual presentation of
basic and diluted earnings per share on the face of the statement of operations
for all companies with complex capital structures. Diluted earnings per share
reflects the amount of earnings for the period available to each share of common
stock outstanding during the reporting period, while giving effect to all
dilutive potential common shares that were outstanding during the period, such
as  common shares that could result from the potential exercise or conversion of
securities into common stock.

The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e., increasing earnings per share or reducing
loss per share).  The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share.  It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.  Securities that could potentially dilute earnings per share in the
future are disclosed in Notes 13 and 14.

(2) Business Acquisitions

In August 1997, but effective as of 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 500,000 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 date and has been accrued at December 31,
1997.

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.

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 an option to purchase the land and building at a
purchase price of $2,000,000 until December, 1998 (See Note 12A).
    
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 its October 1, 1997 effective
purchase date. In connection with the Bay Purveyors acquisition, the Company
entered into an employment agreement with an upper level manager.      

                                      F-10
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #4
--------------------------------------------------------------------------------

(2) Business Acquisitions (Continued)

In consideration for the acquisition, the Company paid the shareholders of Dry
Dock Distributors, Inc. $340,000.  The acquisition has been accounted for as a
purchase.

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:
    
<TABLE>
<CAPTION>
Current Assets:
<S>                                                             <C>
 Cash                                                           $   20,445
 Accounts Receivables                                            1,383,703
 Inventories                                                       178,389
 Other                                                             123,082
                                                                ----------
 
 Total                                                           1,705,619
                                                                ----------
 
Property, Plant and Equipment                                      545,475
Cost in Excess of Net Assets Acquired (Including Acquisition
 Costs of $239,725)                                              3,728,030
Other Assets                                                         4,366
                                                                ----------
 
 Total                                                           5,983,490
                                                                ----------
 
Current Liabilities:
 Accounts Payable and Accrued Expenses                             914,206
 Other                                                             221,960
                                                                ----------
 
 Total                                                           1,136,166
                                                                ----------
 
 Aggregate Consideration Paid                                   $4,847,324
 ----------------------------                                   ==========
</TABLE>      

The cost in excess of net assets acquired recorded for the acquisitions is to be
amortized over 20 years using the straight-line method.

The following pro forma information presents the results of the combined
operations of Terrace and A-One-A, treating the latter as if it was a subsidiary
of the Terrace for the full period then ended.  This pro forma information does
not purport to be indicative of what would have occurred had the acquisitions
been completed as of January 1, 1996 or results which may occur in the future.

Pro forma unaudited information:
    
<TABLE>
<CAPTION>
                                          Twelve months ended
                                          -------------------
                                             December 31,
                                             ------------
                                         1 9 9 7       1 9 9 6
                                         -------       -------
<S>                                    <C>           <C>
 
Total Revenues                         $17,110,152   $14,497,109
Net (Loss) Income                      $(1,010,800)  $  (179,669)
Basic and Diluted Net (Loss) Income
 Per Share of Common Stock             $      (.23)  $      (.05)
</TABLE>      

                                      F-11
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #5
--------------------------------------------------------------------------------

(3) Discontinued Operations
    
(A) Frozen Dessert Business Segment - On February 17, 1997, the Company acquired
certain of the assets and related liabilities of DownEast, which manufactured
and marketed frozen desserts under the name Deering Ice Cream.  The assets
acquired included accounts receivable, inventories, and certain furniture and
equipment.  The stated liabilities assumed were principally trade payables and
certain long-term debt.      
 
In consideration for the acquisition, the Company issued: (1) 993,900 shares of
its common stock, including 75,000 shares of common stock issued for investment
banking and finders fees, valued at approximately $853,000 and (2) warrants to
purchase 250,000 additional shares of the Company's common stock at an exercise
price of $1.1875 per share, (exercisable commencing February 17, 1997, through
August 31, 2000), and paid approximately $114,000 in cash. The acquisition was
accounted for as a purchase, effective January 1, 1997.

The total cost of the consideration tendered and the liabilities assumed in
excess of the assets purchased, including acquisition costs, was approximately
$1,800,000.
    
In November 1997, the Company adopted a formal plan to sell Deering.  The
disposal occurred in December 1997.  The net proceeds on disposal was
approximately $373,000.  The loss on disposal was approximately $1,385,000
(including estimated disposal costs of $50,000 and $152,000 of liabilities not 
assumed by purchaser.)     

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.

Assets and liabilities disposed of consisted of the following at the disposal
date:

<TABLE>
<CAPTION>
<S>                                                  <C>
Cash                                                 $   43,784
Accounts Receivable                                     573,808
Inventories                                             581,648
Property, Plant and Equipment - Net                   1,667,520
Intangible Assets - Net                                 922,790
Other                                                   486,281
                                                     ----------
 
 Total Assets                                         4,275,831
                                                     ----------
 
Accounts Payable and Accrued Expenses                 1,543,930
Notes Payable and Lines of Credit                     1,175,821
                                                     ----------
 
 Total Liabilities                                    2,719,751
                                                     ----------
 
 Net Assets Disposed of                              $1,556,080
 ----------------------                              ==========
</TABLE>

(B) Hospitality Business Segment - In November 1997, the Company adopted a
formal plan to sell the Hospitality Group to Samuel H. Lasko ("Dr. Lasko") (See
Note 11) and to an unrelated party (See Notes 16 and 17). The disposal is
expected to be completed within one year. The assets of the Hospitality Group to
be sold consist primarily of accounts receivable, inventories, property and
equipment and intangible assets.

The estimated loss on the disposal of the Hospitality Group of approximately
$742,000, includes a provision of $20,000 for expected losses during the phase-
out period.  The Company is to receive $90,000 from the unrelated party.  Dr.
Lasko relinquished his employment contract and certain warrants (See Note 11).

                                      F-12
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #6
--------------------------------------------------------------------------------

(3) Discontinued Operations (Continued)

Operating results, including net sales of approximately $4,853,000 and
$4,557,000, respectively, of the Hospitality Group for the years ended December
31, 1997 and 1996 are included in discontinued operations, in the statements of
operations. The statement of operations for 1996 has been restated. For the two
years ended December 31, 1997, the Hospitality Group operated kosher Passover
holiday vacation venues, kosher and non-kosher restaurants and a catering
operation in southern Florida and New York. The Passover holiday usually occurs
in the second quarter of the calendar year. The Company managed and operated
three Passover holiday vacation venues in 1997 and four in 1996.

Assets and liabilities of the Hospitality Group to be disposed of consisted of
the following at December 31 1997:

<TABLE>
<CAPTION>
<S>                                                  <C>
Accounts Receivable                                  $  164,929
Intangible Assets - Net                                 335,000
Other Current Assets                                    105,540
Property and Equipment - Net                            469,277
                                                     ----------
 
 Total Assets                                         1,074,746
                                                     ----------
 
Accounts Payable and Accrued Expenses                   149,512
Deferred Revenue                                        113,750
                                                     ----------
 
 Total Liabilities                                      263,262
                                                     ----------
 
 Net Assets to Be Disposed of                        $  811,484
 ----------------------------                        ==========
</TABLE>

Assets are shown at their expected net realizable values and payables and
deferred revenue are shown at their face amounts.

There is no income tax benefit on the loss from operations of discontinued
business segments or on the loss on disposal of discontinued business segments.
    
(4) Going Concern Considerations and Related Proposed Financing      
    
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has suffered recurring losses
from operations and has a working capital deficiency of approximately $1,050,000
at December 31, 1997. These factors had raised substantial doubt about the
ability of the Company to continue as a going concern. Such substantial doubt
has been alleviated primarily due to management's plans for dealing with the
possible adverse effects of these factors.     

Management has initiated a financing plan with a bank and a number of its
investors to provide the necessary funds to continue to operate its businesses
and to provide additional capital for a possible acquisition.

The Company has received a letter of intent from a bank to provide financing to 
the Company. The bank has commenced its normal due diligence investigation which
should be completed shortly. Management is not presently aware of any matter
which would prevent the completion of the financing.

The Company has a pending registration statement covering a proposed offer to
its warrantholders to exercise their warrants and purchase common stock at a
temporarily reduced exercise price. Several warrantholders have indicated they
intend to exercise their warrants, once the registration statement is declared
effective. In addition, if so requested by the Company, a private investor has
indicated his intent to purchase equity capital in the Company if sufficient
proceeds are not realized by the Company from such warrant exercises.

Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern. However, the success of management's plans is not 
assured.

                                      F-13
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #7
--------------------------------------------------------------------------------

(5) Restricted Cash

In connection with a financing agreement (See Note 8) the Company entered into
a trust indenture with a bank, pursuant to which, the bank debits monthly
principal and interest loan payments.

(6) 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 and bank line 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.

(7) Property and Equipment

The following is a summary of property and equipment:

<TABLE>
<CAPTION>
<S>                                                     <C>
Transportation Equipment                                $608,820
Office Equipment, Furniture and Fixtures                 113,696
Leasehold Improvements                                    12,231
                                                        --------
 
Total                                                    734,747
Less: Accumulated Depreciation                            69,465
                                                        --------
 
 Property and Equipment - Net                           $665,282
 ----------------------------                           ========
</TABLE>

Depreciation expense related to property and equipment amounted to $69,465 for
the year ended December 31, 1997.

(8) Line of Credit

During 1997, the Company had a working capital line of credit with Suntrust
Bank, South Florida, N.A. amounting to $300,000, at a variable interest rate at
 .75% over the bank's prime-based rate.  The working capital revolver was secured
by a blanket lien on all Company assets, excluding amounts due from affiliates.
The principal was paid in full on March 31, 1997, and the account was closed.

In August 1997, the Company guaranteed payment on a Loan and Security Agreement
between Foothill Capital Corporation of Mechanicsville, Virginia ("Foothill")
and the Company's then wholly-owned subsidiaries, Deering and A-One-A under
which Foothill agreed to provide revolving loans subject to available collateral
to a maximum of $3,200,000. The principal balance of approximately $1,360,000 at
December 31, 1997 represents substantially all credit available under the
facility at that date. The balance incurs interest at 2.5% above the bank's
prime rate. The prime rate at December 31, 1997, was 8.5%. The loan is
collateralized by virtually all assets of the Company.

                                      F-14

<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #8
--------------------------------------------------------------------------------

(9) Long-Term Debt

At December 31, 1997, long-term debt consisted of the following:

<TABLE>
<CAPTION>
<S>                                                                            <C>
Note payable in thirty-six monthly total installments of $6,583,
 including interest at 9.1% per annum, through June 1999,
 collateralized by certain transportation equipment.                           $110,370
 
Note payable in thirty-six monthly total installments of $1,154,
 including interest at 9.8% per annum, through December 1999,
 collateralized by certain transportation equipment.                             25,071
 
Note payable in thirty-six monthly total installments of $1,150,
 including interest at 9.8% per annum, through December 1999,
 collateralized by certain transportation equipment.                             24,976
 
Note payable - bank in eighteen monthly total installments of $5,556, plus
 interest of 2.5% above a variable interest rate (prime rate), per annum,
 through February 1999, collateralized by certain transportation equipment.      83,333
                                                                               --------
 
Total                                                                           243,750
Less: Current Portion                                                           162,370
                                                                               --------
 
 Total                                                                         $ 81,380
 -----                                                                         ========
 
Long-term debt at December 31, 1997, matures as follows:
 
1998                                                                           $162,370
1999                                                                             81,380
2000                                                                                 --
2001                                                                                 --
2002                                                                                 --
Thereafter                                                                           --
                                                                               --------
 
 Total                                                                         $243,750
 -----                                                                         ========
</TABLE>

The Company is subject to restrictive covenants including restrictions on the
use of proceeds, and collateral, and assurance of the maintenance of marketable
title to collateral.  Management believes the Company was in compliance with all
debt covenants at December 31, 1997.

The weighted average interest rate on short-term borrowings as of December 31,
1997, was 11%.

                                      F-15
 

<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #9
--------------------------------------------------------------------------------

(10) 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 carryforwards.  The
operating loss carryforwards at December 31, 1997, (assuming all operating loss
carryforwards will be available) amount to approximately $5,550,000.  Such loss
carryforwards will expire at the rate of $4,000,000 in 2012, $1,200,000 in 2011
and $350,000 in 2010.  At December 31, 1997, based on the amount of operating
loss carryforwards, the Company would have had a deferred tax asset of
approximately $1,900,000.  However, because of the uncertainty that the Company
will generate income in the future sufficient to fully or partially utilize
these carryforwards, a valuation allowance of $1,900,000 has been established
representing an increase of $1,374,000 from December 31, 1996. Accordingly, no
deferred tax asset is reflected in these financial statements.

(11) Related Parties Transactions

During 1996, the Hospitality Group paid off an outstanding loan due to a
stockholder, which was payable on demand plus interest.  The interest rate on
the loan was 8.5%.  Interest expense related to this loan amounted to $7,667 for
the period ended December 31, 1996.

A-One-A had sales to a related entity whose shareholders include shareholders of
the Company.  Sales to the related entity totaled $203,327 for the period July 1
(effective purchase date) to December 27, 1997.

A-One-A also purchased goods from the same related party totaling $357,425 for
the period July 1 (effective purchase date) to December 27, 1997. The Company
had net receivables of $122,752 (net of a payable of $56,964) due from the
related party at December 27, 1997, which will be collected and paid within one
year, during the normal course of business. The Company purchased the related
entity in February 1998 (See Note 16).

In February 1997, the Company entered into an option agreement with Dr. Lasko,
the President, Treasurer, and a Director of the Company and his son, Jonathan S.
Lasko, the Executive Vice-President, Secretary, Chief Operating Officer and a
Director of the Company, which gave the Laskos, individually or together, the
option to purchase the businesses, assets or capital stock of the Hospitality
Group at the fair market value thereof. The option is exercisable for
approximately three years commencing April 1, 1998 until February 17, 2001, or
earlier under certain circumstances, exercise of the option, is subject to
shareholders' approval. The Company and Dr. Lasko agreed to accelerate the
exercise of his option, and in March 1998, he purchased (subject to shareholder
approval) LFKT and A&E in exchange for the relinquishment of his employment
contract and certain warrants. Dr. Lasko did not purchase The Lasko Companies,
Inc. however, but has agreed to manage it for the Company (See Notes 16 and 17).

                                      F-16
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #10
--------------------------------------------------------------------------------

(12) Commitments and Contingencies

(A) Operating Leases - The Company's operating facilities are leased from an
affiliate of A-One-A's officers.  Future minimum rentals payments under
operating leases with terms in excess of one year are as follows:

<TABLE>
<CAPTION>
Year ending                                   Amount
-----------                                   ------
December 31,
------------
<S>                                         <C>
 1998                                       $  240,852
 1999                                          228,492
 2000                                          221,544
 2001                                          221,544
 2002                                          221,544
 Thereafter                                    996,948
                                            ----------
 
 Total                                      $2,130,924
 -----                                      ==========
</TABLE>

Rent expense related to the leases for the years ended December 31, 1997 and
1996 was $142,630 and $15,900, respectively.

(B) Employment Agreements - In addition to the A-One-A employment agreements
(See Note 2), the Company has an employment agreement with Jonathan S. Lasko,
through August 31, 2000, for a base salary of $125,000 per year. The employment
agreement was amended in February 1997. The amendment eliminated certain options
in the agreement in consideration of the issuance of warrants to purchase
375,000 shares of the Company's common stock. Additionally, the agreement was
amended to provide that certain other benefits be made available to the
executive.

In connection with the Bay Purveyors acquisition (See Note 2), A-One-A entered
into a 5-year employment agreement effective September 1, 1997 with an upper
level manager for a base salary of $65,000 per year.

(C) Standby Letter of Credit - The Company has available a standby letter of
credit in the amount of $100,000, which is being maintained as security for
payments related to purchases of inventory.  The letter of credit expires May 1,
1998 and is collateralized by a blanket lien on the Company's assets.  At
December 31, 1997, there was no balance outstanding pursuant to the letter of
credit.

(13) Description of Securities
    
(A) Convertible Preferred Stock - The Company is authorized to issue 10,000,000
shares of convertible preferred stock (the "Convertible Preferred Stock"), par
value $.001 per share. Pursuant to an offering memorandum dated July 7, 1997,
the Company offered 1,750,000 units of its securities at $2 per unit (the
"Preferred Units").  Each Preferred Unit consisted of one share of Convertible
Preferred Stock and two warrants, each to purchase one share of Company common
stock at an exercise price of $4 per share. As of December 31, 1997, 1,523,825
Preferred Units (including 171,325 Units issued as investment banking placement
fees) were issued for aggregate consideration of $2,637,300 net of offering
costs. Each share of Convertible Preferred Stock is non-voting, unless converted
into common stock of the Company. The Convertible Preferred Stock is entitled to
preference in the declaration of dividends if and when any dividends are
declared or paid. There were no dividends declared or paid on the Convertible
Preferred Stock at December 31, 1997. The Convertible Preferred Stock is
entitled to preference over the common stock in the event of dissolution,
liquidation or winding-up the Company. Each share of Convertible Preferred Stock
is convertible into two shares of common stock of the Company at the option of
the holder. All shares of the Convertible Preferred Stock not converted on or
prior to July 31, 1998 will be automatically converted, based on that ratio,
into shares of common stock of the Company on that date. The Company issued
156,325 Preferred Units to Biltmore Securities, Inc., and 15,000 Preferred Units
to Westport Capital Markets, LLC, as placement fees (accounted for as offering
costs) in connection with the offering. Additionally, the Company issued to
Biltmore and its assignees, warrants to purchase 750,000 shares of Company
common stock at a price of $4.00 per share, exercisable through and including
December 4, 2000.     

                                      F-17
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #11
--------------------------------------------------------------------------------

(13) Description of Securities (Continued)

(B) 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.  Holders of common stock are entitled
to cast one vote for each share held at all stockholder meetings for all
purposes, including the election of Directors.

In November 1997, the Company sold 200,000 shares of unregistered common stock
to an unrelated party for $1.10 per share.  The issuance of these shares
resulted in a charge to operations of $180,000.

(C) Options and Warrants - In December 1995, the Company completed a public
offering (the "Offering") of 1,437,500 units ("Units") of its securities at
$3.75 per Unit.

Each Unit consisted of one share of common stock and one redeemable common stock
purchase warrant exercisable at $4.00 per share during the four year period
commencing one year after the December 5, 1995 effective date of the Offering.
The warrants ("Public Warrants") are redeemable under certain conditions.  The
Offering resulted in net proceeds of approximately $4,347,000 to the Company.
In connection with the Offering, the underwriter purchased an option from the
Company to purchase up to 125,000 Units (each Unit identical to the Units sold
in the Offering) and up to 16,500 shares of common stock.  The option is
exercisable for a four-year period, which commenced December 5, 1996, and
entitles the underwriter to purchase each unit and each share of common stock at
an exercise price of $4.50, subject to adjustment under certain circumstances.

During 1995, prior to the Offering, the Company received an aggregate of
$400,000 in bridge loans.  The loans were repaid from the proceeds of the
Offering. As additional consideration, solely for making the loans, the Company
granted the lenders the right to receive an aggregate of 200,000 units ("Bridge
Units") which were substantially similar to the units sold in the Offering.

Additionally, at December 31, 1997, the Company also had warrants outstanding
(the "Bridge Warrants") to purchase 200,000 shares of its common stock at ten
dollars ($10.00) per share.  The terms and conditions of the Bridge Warrants
(other than the exercise price) are identical to the terms and conditions of the
Public Warrants.

On February 17, 1997, in connection with the Deering acquisition, the Company
issued; (i) warrants to purchase 250,000 shares of its common stock to Biltmore
Securities, Inc. as its investment banking fee; and (ii) warrants to purchase
50,000 shares of its Common Stock to Bruce S. Phillips, a director of the
Company, in recognition of his efforts successfully to negotiate and consummate
this transaction.  These warrants have an exercise price of $1.1875 exercisable
commencing February 17, 1997, the closing date of the transaction, and expiring
on August 31, 2000.

(D) Reduction in Warrant Price - During a 60-day period ("Temporary Exercise
Period") commencing with the effective date of a pending registration statement,
the Company will temporarily reduce the exercise price of certain warrants with
an exercise price of $4.00 per share to $1.25 to attempt to secure additional
cash liquidity for immediate working capital and to increase the Company's
equity capital base. After the expiration of the Temporary Exercise Period, the
exercise price of the warrants will return to the original $4.00 per share for
the balance of the term of the warrants.

                                      F-18
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #12
--------------------------------------------------------------------------------

(14) Stock Option Plan and Warrants

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 authorizes the grant of options to purchase up to an aggregate
of 1,250,000 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.

Pursuant to the Plan, in February 1997, the Board of Directors granted certain
officers, directors and significant employees 630,000 options to purchase
Company common stock at an exercise price of $1.185 per share.  The options of
which the majority vest over a 3 year period, one-third per year and expire on
February 20, 2007.

In July and September 1997, the Board of Directors granted certain employees
108,000 options to purchase Company common stock at an exercise price of $2.31
per share.  The options vest over a 3 year period, one-third per year and expire
on June 30, and September 21, 2007.

As per the amended employment agreements with an executive, he received warrants
to purchase 375,000 shares of Company common stock at $1.1875 per share which
warrants are immediately exercisable at any time through August 31, 2000.

The Company also issued two directors warrants to purchase 40,000 shares of the
Company common stock at $1.1875 per share which are exercisable at any time
through August 31, 2000.

During 1997, the Company issued 300,000 stock options to consultants at an
exercise price of $1.1875 at the date of grant, and having a weighted average
exercise price of $1.1875. The total cost of issuing these stock options to
consultants during 1997 is approximately $207,000 which is being charged to
operations for the year ended December 31, 1997.  The weighted average fair
value of stock options granted to consultants during 1997 is estimated at $.69
using the Black-Scholes option-pricing model and using a weighted average risk-
free interest rate of 6% and a weighted average expected life of 3.8 years with
an estimated volatility of 75%.  No dividends are expected to be paid during the
expected life of the options.

A summary of the options and warrants is as follows:

<TABLE>
<CAPTION>
                                                            Weighted Average
                                                            ----------------
                                                  Shares     Exercise Price
                                                  -------    --------------
<S>                                              <C>        <C>
 
Outstanding at December 31, 1995                        --       $  --
 Granted                                                --          --
 Exercised                                              --          --
 Expired/Canceled                                       --          --
                                                 ---------       -----
 
Outstanding at December 31, 1996                        --          --
 Granted                                         1,453,000        1.27
 Exercised                                              --          --
 Expired/Canceled                                       --          --
                                                 ---------       -----
 
 Outstanding at December 31, 1997                1,453,000       $1.27
                                                 =========       =====
 
 Exercisable at December 31, 1997                  717,667       $1.24
                                                 =========       =====
</TABLE>

                                      F-19
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #13
--------------------------------------------------------------------------------

(14) Stock Option Plan and Warrants (Continued)
 
If compensation cost (totaling approximately $890,000), for options issued under
the Plan 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 reduced on a pro forma basis as indicated below:

<TABLE>    
<CAPTION> 
                                                        1 9 9 7       1 9 9 6
                                                      -----------   -----------
<S>                                                   <C>           <C>
Year ended December 31:

Net Loss:
 As Reported                                          $(4,352,053)  $(1,156,027)
 Pro Forma                                            $(5,242,053)  $(1,156,027)
 
Basic and Diluted Net Loss Per Share of Common Stock:
 As Reported                                          $      (.98)  $      (.35)
 Pro Forma                                            $     (1.18)  $      (.35)
</TABLE>    

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
assumptions used for the grants awarded in 1997 and 1996, respectively:

<TABLE>
<CAPTION>
                                                     December 31,
                                                     ------------
                                                 1 9 9 7      1 9 9 6
                                                 -------      -------
<S>                                             <C>         <C>
Dividend Yields                                        0%        --%
Expected Volatility                                   76%        --%
Risk-Free Interest Rate                              6.0%        --%
Expected Lives                                  4.0 Years        --
</TABLE>

The weighted-average fair value of options granted was $.76 and $-0- for the
years ended December 31, 1997 and 1996, respectively.

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

<TABLE>
<CAPTION>
                                     Outstanding                       Exercisable
                     -------------------------------------------  ----------------------
                                    Weighted        Weighted                 Weighted
                                    --------        --------                 --------
    Range of                       Remaining         Average                  Average
    --------                       ---------         -------                  -------
Exercise Prices       Shares    Contractual Life  Exercise Price  Shares   Exercise Price
---------------      ---------  ----------------  --------------  -------  --------------
<S>                  <C>        <C>               <C>             <C>      <C>
 
$1.185 - $1.1875     1,345,000     9.2 Years          $1.186      681,667      $1.186
$ 2.31                 108,000     9.5 Years          $ 2.31       36,000      $ 2.31
                     ---------     ---------          ------      -------      ------
 
Totals               1,453,000     9.3 Years          $ 1.27      717,667      $ 1.40
------               =========     =========          ======      =======      ======
</TABLE>

(15) New Authoritative Accounting Pronouncements

The FASB has issued SFAS No. 130, "Reporting Comprehensive Income."  SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in the financial statements.  SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.  Earlier application is
permitted.  Reclassification of financial statements for earlier periods
provided for comparative purposes is required.  Management is in the process of
determining its preferred format.  The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.

                                      F-20
<PAGE>
 
TERRACE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 
DECEMBER 31, 1997 AND 1996, Sheet #15
--------------------------------------------------------------------------------

(15) New Authoritative Accounting Pronouncements (Continued)

The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information."  SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders.  SFAS No. 131 is effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated.  SFAS
No. 131 need not be applied to interim financial statements in the initial year
of its application. The Company is in the process of evaluating the disclosure
requirements.  The adoption of SFAS No. 131 will have no impact on the Company's
consolidated results of operations; financial position or cash flows.

In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997.  The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.

(16) Subsequent Events

In January 1998, the Company entered into an employment agreement with its Chief
Financial Officer. The compensation for services rendered under this agreement
is $90,000 per annum and includes an incentive bonus.  The agreement also
includes options to purchase the Company's stock and a severance package.

In January 1998, the Company purchased certain non-cash 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 approximately $254,000 including inventory and
furniture and fixtures, which resulted in costs in excess of net assets of
approximately $125,000 which will be allocated to intangible assets.

In February 1998, the Company purchased all of the outstanding stock of Fresh,
Inc., ("Fresh") a related entity (See Note 11). Fresh is a wholesaler which
sells packaged and cut fresh produce. In consideration for the purchase, the
Company paid $105,000 in cash and issued 138,948 shares of common stock valued
at $270,000. The acquisition resulted in costs in excess of net assets of
approximately $350,000 which will be allocated to intangible assets.
    
On March 13, 1998, the Company sold its A&E Management Corp. and The Lasko 
Family Kosher Tours, Inc., subsidiaries to Samuel H. Lasko for consideration
aggregating $575,000 in accordance with an independent fair value opinion
received by the Company, subject to the affirmative vote of shareholders at the
next annual meeting. On that date the Company also entered into a management
agreement with Dr. Lasko to operate and manage the business and activities of
The Lasko Companies, Inc. ("TLC") which operates a restaurant business (the
"Restaurant"). The agreement will terminate upon the sale or other disposition
of the Restaurant or the The Lasko Companies (See Notes 3 and 17).    

(17) Subsequent Events--Unaudited (Subsequent to the Date of The Report of
     Independent Auditors)

On March 23, 1998, the Company entered into a contract to sell its wholly-owned
subsidiary, The Lasko Companies, Inc. The sale price $90,000 to be paid as
follows, with $25,000 paid at the execution of the agreement (currently held in
escrow by the seller's attorney) and $65,000 to be paid by cash or certified
check upon execution and delivery of Bill of Sale.

On May 29, 1998, the Company received a commitment letter from an institutional
lender, to provide to the Company and its wholly-owned subsidiaries an aggregate
of $6,000,000 in senior secured financing, the proceeds of which will be used
for (i) repayment of existing senior indebtedness, (ii) a possible acquisition,
and (iii) ongoing working capital. As of the date of this Prospectus, the new
financing arrangement is being documented.
    
On June 25, 1998, the Company issued to a private investor $2,625,000 principal
amount of 12% Convertible Subordinated Notes ("Notes"), and warrants to purchase
400,000 shares of Common Stock of the Company. The proceeds of the Notes have
been added to the working capital of the Company. The Notes will be repaid from
the first net proceeds, if any, received by the Company from the exercises of
its $4.00 warrants at the temporary $1.25 per share exercise price. At any time
subsequent to the expiration of the 60-day Temporary Exercise Period, the Notes
are convertible at the option of the private investor, at the rate of one share
of Common Stock for each $1.25 of principal and accrued but unpaid interest, and
the warrants are exercisable at a price of $1.25 per share of Common Stock. At
any time subsequent to the Temporary Exercise Period, any Notes not then
converted or repaid, will be converted by the Company, into $1.25 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. In addition, the Company has granted to such
private investor an option expiring no later than December 31, 1998, to purchase
500,000 shares of the Company's Common Stock at a price determined on the basis
of the average closing price for the Company's Common Stock for the ten trading
days immediately following the expiration of the Temporary Exercise Period. See
Risk Factors - Warrants Subject to Redemption; Temporary Exercise Price."      

On June 25, 1998, the Company signed an agreement to acquire the assets and
liabilities of a privately held south Florida company engaged in the business of
processing meat, seafood and poultry. The base purchase price is $1,800,000 and
is to be financed through the Company's new senior secured financing arrangement
described above. Closing of this acquisition is scheduled for no later than July
31, 1998.
                 .   .   .   .   .   .   .   .   .   .   .   .

                                      F-21