<PAGE>
 
                     US SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                              --------------------

                                  FORM 10-KSB

  (Mark One)
  [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
               EXCHANGE ACT OF 1934 [FEE REQUIRED]
           For the fiscal year ended December 31, 1996
  [ ]  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: 0-23532
                        -------------------------------

                       AMERICAN DIVERSIFIED GROUP, INC.
         -------------------------------------------------------------

           NEVADA                         88-0292161
     -----------------                   -----------
(State or Other Jurisdiction    (IRS Employer Identification No.)
    of Incorporation)

                700 CANAL STREET, 3RD FLOOR, STAMFORD, CT 06902
                -----------------------------------------------
                    Address of Principal Executive Offices)
                                        
                                (203) 328-3092
                       ---------------------------------
                          (Issuer's telephone number)

  Securities registered under Section 12 (b) of the Exchange Act: NONE
                                                                  ----
                              (Title of class)

  Securities registered under Section 12(g) of the Exchange Act:
                       common stock, par value $.001
                       -----------------------------
                              (Title of class)

  Check whether the issuer: (i) 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 (ii) has been subject to the filing requirements for the past 90 days.

                              Yes    XX    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 the 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. [  ]

       The Registrant had no revenues for its recent fiscal year ended December
  31, 1995. The aggregate market value of the voting stock held by non-
  affiliates(*) of the Registrant based on the average bid and asked prices of
  $.04 and $.035 respectively, of such common stock as of July 6, 1997 is
  $2,466,378.80, based upon an average of $.03 multiplied by 82,212,560 shares
  of common stock as of July 6, 1997 held by non-affiliates. As of July 6, 1997,
  the Registrant had a total of 86,212,560 shares of common stock, par value
  $.001 outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

       There are no documents incorporated by reference in this report on Form
  10-KSB except for certain previously filed exhibits identified in Part III,
  Item 13, hereof.

  (*) Affiliates for the purposes of this Item refer to the officers, directors
  and/or persons or firms owning 5% or more of the Registrant's common stock,
  both record and beneficially.

                                Page 1 of ____.

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                                     PART I

  ITEM 1.  DESCRIPTION OF BUSINESS


  Background-Prior to Fiscal 1996
  -------------------------------
 
     American Diversified Group, Inc., a Nevada corporation (hereinafter the
"Company" or the "Registrant"), was incorporated under the laws of the State
of Nevada as Terra West Homes, Inc. on January 16, 1979. In October, 1991, the
Company changed its name to Gerard Enterprises, Ltd. and in November, 1991,
changed its name to Tera West Ventures, Inc. On March 15 1995, the Company's
name was changed to American Diversified Group, Inc. in contemplation of  the
planned acquisition of American Diversified Medical Corporation ("ADMC"),
which transaction was terminated as discussed below.

      At December 31, 1994, the Company, which was then known as Tera West
Ventures, Inc., owned approximately 70% of the outstanding common stock of
Aimrite Systems International, Inc. ("Aimrite"). The Company's interest in
Aimrite was acquired in exchange for 16,500,000 shares of the Company's common
stock issued between December 1993 and January 1995. Aimrite owned patents and
technology covering computer-controlled shock absorber and air suspension
systems. Pursuant to an agreement with Kenneth Coleman, the principal of
Aimrite, granted Mr. Coleman the right to acquire the Company's interest in
Aimrite. This right was granted in the event that the Company determined not to
devote its resources to the development of the shock absorber and air
suspension systems, or in the event that the Company had a change in
management.
 
      The Company determined that it would devote its efforts towards becoming
a medical products company and as a result, on March 28, 1995, Kenneth
Coleman, the President of Aimrite, resigned as a director and as president of
Tera West Ventures, Inc., and exercised his right to purchase the Company's
interest in Aimrite. As a result of the exercise by Mr. Coleman of this right,
assets previously reflected on the Company's Annual Report of Form 10-KSB for
its fiscal year ended December 31, 1994, in the amount of approximately
$4,200,000 were removed from the Company's balance sheet, and this reduction
was duly reported in the Form 10-QSB for the three month period ended March
31, 1995. Further, the removal of these assets, as well as the liabilities of
Aimrite, also had an impact on shareholders' equity, which reduction when
written off resulted in a loss of approximately $2,500,000 which was also
reported on the Form 10-QSB for the three month period ended March 31, 1995.
See Note 2 to the Financial Statements for the year ended December 31, 1995,
filed in the Company Annual Report on Forms 10-KSB and 10-KSB/A for fiscal
1995.

      In about March 1995, the Company determined to enter into an acquisition
agreement involving the purchase of ADMC. However, as a condition precedent to
the formal closing of this acquisition, ADMC had to satisfy its representation
to the Company that it had net worth of $2,000,000 at the date of closing. As
a result of ADMC's failure to satisfy such net worth requirement, the closing
of this acquisition was terminated with a rescission and settlement that
resulted in the cancellation of 8,530,000 of the restricted shares of the
Company's common stock that had been issued to ADMC's stockholder, Ameril
Corp., in contemplation of the closing. Ameril Corp., prior to the rescission
and settlement with the Company, had transferred 2 million of the shares in a
private transaction to an unaffiliated third party. As a result, the Company
determined that it was in its best interests to settle with Ameril on terms
that provided for the cancellation of the 8.53 million shares rather than
litigate, at possibly significant expense, in an effort to achieve
cancellation of the additional 2 million shares that had been transferred.

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       Following the exercise by Kenneth Coleman of his right to repurchase the
70% interest in Aimrite from the Company, and the termination of the
acquisition agreement with ADMC, the Company through fiscal 1995 should be
considered to be a holding company. During 1995 and in 1996, the Company's
activities involved the search of a business or assets that it could acquire,
in order to become an operating company, or in the alternative, efforts to
develop its own business operations, principally with the assistance of third
parties. To that end, the Company continued to investigate several
opportunities, principally in the medical products field, including the
distribution of HSA and test kits to test cholera, gonorrhea, strep and
syphilis. During fiscal 1996, the Company also explored other potential
acquisitions and businesses, including computer and technology products and
services. See the discussion below.

       As part of the determination to terminate the ADMC acquisition, the
Registrant entered into a one (1) year consulting agreement with Andrew
Montero pursuant to which Montero agreed to identify potential joint venture
or acquisition candidates for the Registrant to pursue business opportunities
and provide other services to the Registrant with respect to Registrant and
its product line, as contemplated. In consideration for the consulting
services, Registrant issued to Montero 1,200,000 shares which were included in
the December 13, 1995 registration statement on Form S-8. As part of his
services to Registrant, Montero was instrumental in negotiating the
termination of the agreement to acquire ADMC and the cancellation and physical
return of the above referenced 8.53 million shares to Registrant's transfer
agent.

       In the same registration statement on Form S-8, the Company registered a
total of 1 million shares to Messrs. Elliot Bauer and Leonard Cohen, the
principals of AVIX International Pharmaceutical Corp. ("AVIX"), in
consideration for a one (1) year consulting agreement between Messrs. Bauer
and Cohen, on behalf of AVIX, and the Company. The services provided by AVIX
included identification of pharmaceutical firms for potential joint ventures
with the Company, services with respect to the approval process for the
commercial sale of medical products in the United States and internationally,
identification of investment banking firms for possible relationships with the
Company and its ventures, and dissemination of information concerning the
Company and its proposed products and services to the medical community, and
services in connection with public relations firms, among other services. In
furtherance of its obligations to provide services to the Company, AVIX:
introduced the Company to a new source of Human Serum Albumin ("HSA"), a
product in that is widely regarded to be in short supply internationally, and
is comprised of the serum component of whole blood. See the discussion under
"Consulting Agreements" below.

       HSA is commonly used in accidents, as well as in operations and warfare
conditions where there is a significant loss of blood, and where HSA serves as
a short-term blood substitute which prevents shock. In addition, HSA does not
require refrigeration and therefore is well suited to the climates in Central
and South American, as well as in other tropical areas, such as West Africa,
where refrigeration is not readily available.

       AVIX also made the initial introduction of the Company to Emerging Trends
Linkages Corp. ("ETLC"), a New York corporation, although no formal business
relationship was formed between ADGI and ETLC until February 12, 1996. See the
discussion below under "Recent Business Developments" and "Consulting
Agreements" with respect to orders from the Republic of Guinea and
registration of pharmaceutical products in West Africa, and other business
opportunities and relationships resulting from the agreements with ETLC.

       Further. AVIX was responsible for the introduction of the Company to Ms.
Judith Grossman, who became a consultant to the Company in mid 1995 and has
provided continuing services to the Company for approximately the past twenty-
four months to date. The services of Ms. Grossman include services that led to
ADGI's receipt of a commitment of pre-export financing from an institutional
investment bank and certain private lenders for the purpose of funding the
purchase of pharmaceutical

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products that are the subject of the Company's orders from the Republic of
Guinea. See "Recent Business Developments" and "Consulting Agreements" below.

        During fiscal 1995 and in early 1996, while the Registrant did not have
actual operations, it believed that its future lay principally in the field of
medical products, including the sale of HSA and test kits. With the advice of
its consultants, the Company believed that the likely market for such products
was in Mexico and South America, as well as in certain developing countries.
However, throughout fiscal 1996, Registrant did not have an assured supply for
HSA, which sources of supply it sought to develop with the assistance of third
parties including its consultants. During fiscal 1996, the Company also lacked
a means to purchase and distribute HSA and test kits products, if and when
both supply of and any firm purchase orders for such products were obtained.
The Company, therefore, pursued third party sources for HSA and test kits and
sought to acquire or otherwise generate purchase orders for such products,
principally in Mexico and South America During 1996 and since the end of the
fiscal year, the Company has also sought various means of financing the
purchase orders it has generated.

        In connection with the efforts to acquire sources of HSA, the Company,
through the efforts of United Biomedical, Inc., a Florida corporation ("UBI"),
found a supplier of HSA in China, which furnished samples of HSA for shipment to
certain potential customers for HSA that had been developed by UBI in Mexico and
South America. See the discussion under "Item 9-Directors, Officers, Promoters
and Control Persons" with respect to employment by UBI of Dr. Jerrold R. Hinton,
president and chief executive officer of the Company, prior to March 1995.

        The Company's experience is that alternate sources of HSA are necessary
because from time to time, manufacturers and suppliers of HSA have supply
difficulties, for among other reasons, demand from within their own countries,
problems with human donors, who are necessary to produce HSA, or other reasons
beyond the particular manufacturer's control.. As a result, UBI was introduced
to a new Chinese manufacturer of HSA by AVIX as a consultant to the
Registrant. In addition to the arrangements that AVIX endeavored to make for
HSA supply directly from the manufacturer in China, AVIX also introduced the
Company to Hemo Biologics International, Inc., of Ft. Lauderdale, FL, which
the Company was informed had another HSA source in China. The services
provided by AVIX and UBI in seeking to secure HSA sources for the Company were
provided pursuant to certain consulting agreements between the Company and UBI
and AVIX, discussed more fully below, and no additional consideration was
given to either UBI or AVIX for such introductions.

        Notwithstanding the supply difficulties, the Company believes that it
will be successful in developing alternate suppliers of HSA, with the
introductions by UBI and its other consultants. The basis for this belief is
that following the end of the 1995 fiscal year, UBI found another source
manufacturer of HSA in Argentina. See the discussion below with respect to the
supply of HSA and other blood derivative products that the Company has secured
from the efforts of ETLC from the Bayer Corporation-Biological Products
Division, for the purpose of fulfilling orders from the Republic of Guinea and
commencement of the registration process for the sale of blood derivative
products to the National Blood Bank of the Ivory Coast. It should be noted that
because of existing distribution arrangements of Bayer Corporation, Bayer
Corporation will supply the Company's needs for purchase orders from West
Africa, but will not supply the Company with HSA for the contingent purchase
orders assigned to the Company by UBI from South America. See "Recent Business
Developments" and "Consulting Agreements" below.

        The Company is not required to have any licenses to sell or export HSA
or any of its existing products that it is endeavoring to sell because in each
instance the manufacturer or the distributor through which the Company shall
supply products subject to any purchase orders has all required licenses.
However, in each instance, the Company or its representatives must submit
samples of each product from a designated supplier/manufacturer. Therefore, if
and when the manufacturer or supplier of any pharmaceutical product that is the
subject of an order changes, the Company, and all entities conducting similar
business, must submit new samples conforming with the products that are the
subject of the order or the pending registration process, in order to secure
approval or complete a sale.

                                       4
<PAGE>
 
       During 1996 and following the end of the fiscal year, the Company was
  able to outsource with the assistance of UBI access to test kits for cholera,
  syphilis, gonorrhea and strep, and another source of HSA. As a result of using
  new sources for both HSA and test tits, the contingent orders that the Company
  received by assignment from UBI require that the respective products be
  resubmitted to appropriate regulatory authorities prior to confirmation that
  the new products have been approved for registration and sale. Assuming that
  such new sources are approved and the samples comply with the specifications
  contained in the contingent purchase orders, of which there can be no
  assurance, then in such event, the Company can generate actual revenues from
  the presently existing contingent orders assigned to the Company by UBI from
  Mexico and South America, as discussed below. When and if the products are
  approved for registration in each of the countries in South America, the
  Company would be in position to ship and be paid for the products that are
  subject of these contingent purchase orders. This could also result in the
  Registrant being able to generate future sales of medical products, including
  test kits and HSA from Mexico and South America, but there can be no assurance
  that the samples of HSA and the test kits that have been submitted for
  approval to Mexico and South America will be approved or will generate sales
  revenues for the Company. The Company's financial statements for fiscal 1996
  do not reflect such contingent purchase orders as assets or receivables,
  because of the contingent nature of such orders.

  Recent Business Developments
  ----------------------------
 
       The Company's principal efforts during fiscal 1996 and to date have
  principally resulted from the engagement of ETLC, as consultant, for the
  purpose of seeking purchase orders for the distribution and sale of a variety
  of medical/pharmaceutical products, including generic pharmaceuticals and
  vitamins, blood derivative products, and diagnostic test kits. In addition,
  the Company has utilized ETLC for the purpose of seeking the supply form
  unaffiliated third parties of products subject to purchase orders as such
  orders have been received. In addition, ETLC, together with the efforts of Ms.
  Judith Grossman, a Company consultant, have been active in securing pre-export
  financing and commitments for further pre-export financing to enable the
  Company to pay for the products that are part of existing purchase orders,
  which shipments commenced in May, 1997.

       During the last six months of fiscal 1996 and continuing to date, ETLC
  has been successful on behalf of the Company in generating purchase orders
  after obtaining approval for the registration, distribution and sale of
  medical products in the Republic of Guinea in West Africa, including purchase
  orders for generic pharmaceuticals, vitamins, diagnostic test kits and HSA
  from the Central Pharmacy of the Republic of Guinea. In addition, ETLC has
  commenced the registration and approval process, a condition precedent to
  receipt of anticipated purchase orders for blood derivative products,
  following shipment of samples of four blood products to the National Blood
  Bank of the Ivory Coast. Further, ETLC has been able to generate purchase
  orders from the National Health Foundation of Brazil for the State of Roraima
  for dengue fever and malaria vivex test kits. This order is subject only to
  approval of samples of such test kits submitted to the National Health
  Foundation by the Company through ETLC as discussed more fully below.

       The Company is aware that the market for the sale of
  medical/pharmaceutical products is extremely competitive. In order for the
  Company to compete successfully, of which there can be no assurance, the
  Company must be able to have certain competitive advantages, whether on the
  basis of price, with respect to certain products, or as a result of its unique
  marketing niche gained from its agreement with ETLC and to a lesser extent
  with UBI. The Company has benefited from the ability of ETLC to generate
  purchase orders from the Republic of Guinea for generic pharmaceuticals,
  vitamins, HSA and test kits, among other products. In addition, in the Ivory
  Coast, and Brazil, where ETLC has business representatives, the registration
  and approval process has commenced for the sale of blood derivative products
  and test kits, respectively. During fiscal 1996, ETLC submitted samples of HSA
  and test kits to the Central Pharmacy of the Republic of Guinea, which
  resulted in the Company's receipt of an initial purchase order in the amount
  of $200,000. Further, the efforts of ETLC provided the Company with the
  opportunity to expand its product line, by generating additional purchase
  orders in the amount of

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  approximately $750,000 from the Central Pharmacy of the Republic of Guinea for
  generic pharmaceuticals and vitamins. The Company in May, 1997, commenced
  shipment of the initial products subject to the purchase order for generic
  pharmaceuticals and vitamins to the Central Pharmacy of Guinea, and also
  shipped diagnostic test kits in connection with the initial purchase order.

       Historically, generic pharmaceutical products had been only a small
  percentage of the total pharmaceutical product market in the developing
  countries of West Africa (less than 10% of the total market). However, with
  the efforts of ETLC, generic pharmaceuticals have begun to be demanded in the
  Republic of Guinea, and are becoming increasingly in demand elsewhere in West
  Africa, as compared to brand name pharmaceuticals that have previously
  controlled the market. The cost of pharmaceutical products, and indeed all
  products sold to West Africa, have increased significantly following the
  devaluation of the West African currencies. The devaluations have led many
  West African governments to seek a variety of products from suppliers other
  than France and Belgium, which had traditionally been the major suppliers of
  almost all products sold to their former colonies in West Africa. The
  determination by the West African governments and particularly the Ministries
  of Health to seek alternative sources of supply has presented opportunities to
  companies, such as ADGI, to generate purchase orders and penetrate new
  markets.

       Price has become the critical factor and the generic pharmaceuticals
  available from the United States and elsewhere offer an opportunity to
  penetrate a previously "closed" market, with an expanded line of
  pharmaceutical products, including diagnostic test kits, blood derivative
  products, HSA, generic pharmaceuticals and vitamins. ADGI does not have the
  resources of many of its competitors and is a newcomer to the industry, but
  the Company believes that it has an opportunity to compete in Mexico, and
  South America as well as in West Africa because of the expertise and
  relationships of its consultants and their respective representatives,
  described more fully below. See "Management's Plan of Operation" with respect
  to its receipt of commitment for pre-export financing to fund the purchase of
  products subject to pending and future purchase orders, and its receipt of
  private financing that is funding its ongoing expenses and expanded marketing
  efforts in West Africa.

  Consulting Agreements
  ---------------------

       On February 20, 1996, Registrant entered into a one year consulting
  agreement with United Biomedical Inc., of Miami, FL  ("UBI"), which has been
  engaged in the business of the distribution and marketing of HSA and cholera,
  syphilis, gonorrhea and strep test kits, as well as related medical products
  and services. In connection with the consulting agreement with UBI, the
  Company issued to UBI 2.5 million shares of common stock which were included
  in a registration statement on Form S-8 dated February 29, 1996. Such shares
  were issued to UBI in consideration for UBI's providing consulting services
  including the introduction of rights to market in Mexico the telemedicine
  programming which UBI had developed. See the discussion under "Item 9-
  Directors, Officers, Promoters and Control Persons" with respect to employment
  by UBI of Dr. Jerrold R. Hinton, president and chief executive officer of the
  Company, prior to March 1995.

       Telemedicine programming involves remote medical diagnostic and treatment
  procedures using two-way video teleconferencing. The procedures include a
  physician specialist located at a remote location, with on-line video, so that
  he can assist a medical technician, who is instructed on a step by step basis,
  in conducting tests of and treatment for a patient. The Company believed that
  this telemedicine programming could be a cost effective way of treating
  patients in developing countries with limited medical resources and personnel,
  such as those countries where the Company was seeking to market HSA, test
  kits, and other medical products. UBI also granted Registrant non-exclusive
  rights to distribute a DNA Analyzer in Mexico and South America. A DNA
  Analyzer is an instrument designed to accurately measure cancer cells in human
  patients.

       Prior to the Company's acquisition of these rights, DNA Analyzers were
  sold by unaffiliated persons to hospitals in Italy, France, Germany as well as
  the United States. The DNA Analyzer is

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  manufactured by RatCom, Inc., located in Miami, FL. During fiscal 1996 and to
  date, Registrant has not yet generated any revenues from its consulting
  agreement with UBI, from either the rights to market the telemedicine program
  or the DNA Analyzer. Further, Registrant has not pursued nor does it
  contemplate devoting any efforts involving the DNA Analyzer or the
  telemedicine program, principally because it has determined to devote its
  resources and energies to the pharmaceutical business, which is not as capital
  intensive as marketing and selling expensive equipment, such as the DNA
  Analyzer, or installing sophisticated telecommunication equipment necessary
  for video teleconferencing.

       This determination to devote efforts to pharmaceuticals and medical
  products was based upon success of Registrant, through the efforts of ETLC, in
  receipt of purchase orders from the Republic of Guinea for HSA, test kits,
  generic pharmaceuticals and vitamin products; the commencement of the
  registration process for blood derivative products in the Ivory Coast; and
  receipt of purchase orders from Brazil for dengue fever and malaria vivex test
  kits, subject to approval of samples. Notwithstanding its decision not to
  pursue the telemedicine program and DNA Analyzer businesses, Registrant
  considers that UBI fulfilled its obligations to the Company under the above
  referenced consulting agreement, because of the assets the Company received
  from UBI, evidenced by assignment of contingent purchase orders for HSA and
  cholera test kits and other valuable services provided to Registrant by UBI.
  See the discussion below with respect to the assignment to ADGI of UBI's
  contingent purchase orders.

       Prior to the determination to devote its energies to the distribution of
  pharmaceuticals and medical products, the Company entered into another
  agreement with UBI dated June 16, 1996, with the purpose of acquiring UBI. The
  principal purpose of acquiring UBI was based upon the Company's determination
  at that time that its future was in the medical equipment products field, as
  well as its belief in its ability to generate confirmed orders for medical
  products, such as HSA and test kits. The planned acquisition of UBI included
  the assignment of UBI's sources of HSA and test kits, and assignment of UBI's
  contingent purchase orders for HSA and test kits. In connection with the
  agreement to acquire UBI, the Company issued 2,000,000 restricted shares of
  common stock and undertook to register these restricted shares in a
  registration statement on Form S-1 under the Act. Further, by action of both
  UBI and the Company, the Company was assigned UBI's contingent purchase orders
  with respect to HSA and test kits, which assignment included UBI's
  distribution and marketing agreements between UBI and: Probifasa, S.A. DE
  C.V.-Mexico; American Entrepreneur Corporation-Brazil; Chembiomed Comercio E.
  Representacoes LTDA-Brazil; Hampton Roberts International-Ecuador, Peru,
  Argentina, Bolivia and Columbia; Total orders, which are contingent upon
  registration and approval of product samples. With respect to HSA, the
  contingent orders are $585,750 from South America as follows: Ecuador-
  $177,500; Peru-$88,750; Columbia-$53,250; Bolivia-$53,250; and Argentina-
  $106,500 through Hampton Roberts International, and Brazil-$106,500 through
  American Entrepreneur Corp. With respect to cholera test kits the contingent
  orders are Mexico-$351,500 through Probifasa.

       The Company has since agreed with UBI that it shall not acquire UBI
  because it has been assigned those assets which it considers to be of most
  value--the assignment of contingent purchase orders and the sources of HSA and
  test kits--and the Company does not have a present interest in entering into
  the capital intensive medical equipment products business. Therefore, both
  parties have agreed that the 2 million shares shall be returned to the
  Company's transfer agent for cancellation. This determination not to acquire
  UBI was also based upon the fact that Dr. Thornthwaite did not intend to
  become a full time employee of the Company and rather preferred to remain as a
  consultant, providing services from time to time with respect to the Company's
  generic pharmaceutical, blood product, and diagnostic test kit business, which
  arrangement the Company has determined is satisfactory, in consideration for
  the shares issued to UBI by the Company in the initial consulting agreement.
  Dr. Jerrold R. Hinton, President of the Registrant, was an officer of UBI from
  1992 through early 1995, during which period Mr. Hinton was owed salary by UBI
  at the rate of $7,000 per month, which amount was accrued but unpaid. Such
  accrued but unpaid salary in the total amount of $240,000 was paid by UBI in
  1996 from the proceeds of its sale of a portion of Registrant's securities
  issued under the consulting agreement, which shares were registered in the
  registration statement on Form S-8 dated February 29, 1996.

                                       7
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       At present, the principal supplier of cholera, strep, gonorrhea and
  syphilis test kits is New Horizons Diagnostics Corp., located in Columbia, MD.
  The Company has had several different suppliers of HSA, including three in
  China and one source in Argentina for its contingent orders for HSA from
  Mexico and South America. See the discussion below with respect to: the
  purchase orders received from the Republic of Guinea for HSA and test kits;
  purchase orders, subject to sample approval, for dengue fever and malaria
  vivex test kits, received from Brazil; and the registration process for blood
  derivative products obtained by the Company from the Bayer Corporation for
  sale in the Ivory Coast. The Company does not market any medical products in
  the United States and has no present intention of doing so. The Company is
  also negotiating with several other manufacturers for the supply of additional
  diagnostic test kits, including test kits for malaria vivex, dengue fever and
  a rapid AIDS test kit, as a result of the efforts of a new representative of
  ETLC working in Brazil.

       Registrant has not yet generated any revenues from the assignment by
  UBI of the above referenced contingent purchase orders for HSA and cholera
  test kits, nor can there be any assurance that revenues will be generated in
  the foreseeable future, because these products must be approved for
  registration and sale prior to shipment of the products subject to the
  purchase orders. Because of the change in the manufacturing source of the HSA,
  new samples of HSA have been sent to the appropriate regulatory authorities in
  South America for approval, and the purchase orders are being revalidated.
  However, because HSA is presently sold in each of the countries where the
  Company has been assigned purchase orders, the only regulatory protocol that
  the Company must satisfy is that its source of supply meets the criteria and
  specifications established for such products. The Company believes that the
  new supplier of HSA from Argentina should satisfy all regulatory protocols in
  the South American market.

       The Company entered into a second consulting agreement AVIX on January
  15, 1996, for a term of two (2) years. The principal business of AVIX during
  the past two years has involved the registration of pharmaceutical products
  manufactured by third parties, for the purpose of securing approval of the
  distribution and sale of such products in Mexico, China and elsewhere in the
  Far East. The Company retained AVIX for such additional services because of
  the expertise gained by AVIX in such areas, which expertise has been of value
  to the Company, in management's opinion. In connection with the second
  consulting agreement, AVIX agreed to perform additional services for the
  Company, including but not limited to services in medical product development
  and sourcing, as well as medical product distribution. AVIX, through its
  contacts in China continued efforts to secure for the Company further source
  manufacturers for HSA, and following the Company's agreement to utilize the
  services of ETLC, AVIX provided services for the purpose of assisting the
  Company in its efforts to outsource generic pharmaceutical products that are
  the subject to its purchase orders from the Republic of Guinea. In addition,
  AVIX in 1996 introduced Registrant to Hemo Biologics International, Inc. of
  Ft. Lauderdale, FL, which has another source of HSA in China. As stated above,
  AVIX was helpful in bringing ETLC and the Company together in 1996 and also
  paid the initial consideration to Ms. Grossman, who has continued to provide
  valuable services to the Company in connection with arrangements for the
  Company to receive a commitment for pre-export financing from the
  institutional investment bank and from private lenders, to which end the
  Company has furnished the institutional investment bank and the private
  lenders with the documentation necessary for the funding of the pre-export
  financing under the commitment with the assistance of Ms. Grossman.

       In consideration for this second consulting agreement, the Company agreed
  to issue AVIX a total of 6,500,000 shares, all of which were registered under
  the Form S-8 registration statement dated February 29, 1996. In fact,
  5,200,000 shares were issued to AVIX and its principals and 1,300,000 shares
  were issued directly to Diversified Corporate Consulting Group L.C. for the
  purpose of providing corporate and financial consulting services to the
  Company. The 1,300,000 shares which were issued to Diversified Corporate
  Consulting Group L.C. were included in the AVIX agreement, because of the
  obligation of AVIX to secure for Registrant a corporate and financial public
  relations firm to assist in the promotion of the Registrant and its principal
  business endeavors, which involve medical related products. However, AVIX has
  informed the Company that it did not negotiate the agreement with Diversified
  Corporate Consulting Group and has conducted no prior or subsequent business
  with such firm. While the

                                       8
<PAGE>
 
  Company believes that AVIX has continued to fulfill its obligations to the
  Company, to date Diversified Corporate Consulting Group has not performed any
  services for the Company.

       AVIX also advanced to the Company the sum of $50,000 pursuant to a
  convertible promissory note (the "AVIX Note") to assist the Company in its
  cash flow. The AVIX Note provided for conversion into shares of the Company's
  common stock at a price of $.25 per share, which conversion would have been
  required upon the filing by the Company of a registration statement on Form S-
  1 under the Act. The AVIX Note provided for interest at 12% per annum and
  would have been due July 30, 1997, unless the Company filed a registration
  statement prior to such date and the AVIX Note was converted.

       AVIX was also instrumental in the Company's negotiations with respect to
  the initial consulting agreement between the Company and ETLC, dated February
  12, 1996. However, prior to the end of the Company's fiscal year, AVIX
  confirmed that it did not continue to have sources for HSA. As a result, the
  Company and AVIX agreed that the principal and interest due under the AVIX
  Note be foregiven, which indebtedness was foregiven during the first quarter
  of 1997.

       In connection with this consulting agreement with ETLC, ETLC agreed to
  use its best efforts to secure approvals for product registration, and obtain
  purchase orders for the distribution and sale of HSA, ADGI's principal product
  at the date of the agreement, within the West African countries of Ivory
  Coast, Mali, Congo, and Guinea. ETLC also agreed to use the services of ETLC's
  West African representatives to secure and service any purchase orders
  generated for ADGI. In consideration for the February 12, 1996 consulting
  agreement with ETLC, the Company issued 600,000 shares to ETLC and granted
  ETLC an option to acquire 900,000 shares ("option shares") for an adjusted
  price of $.18 per option share. These shares and the option shares were
  registered in the Company's registration statement on Form S-8 filed with the
  Commission on February 29, 1996. The grant of the option may be deemed as
  ETLC's payment for the rights to market the Company's products within its
  territory in West Africa. This agreement was amended on May 31, 1996, to also
  provide for the sale by ETLC, on behalf of the Company, of Test Kits for
  strep, cholera, syphilis and gonorrhea in the above referenced West African
  countries. In connection with this amendment, additional consideration of
  1,500,000 shares were issued to ETLC, which were registered in a registration
  statement on Form S-8 dated December 17, 1996, described below, as were
  additional shares issued to ETLC, pursuant to the further agreements of the
  parties after the end of fiscal year 1996, discussed below.

       On August 5, 1996, following confirmation from ETLC that orders for HSA
  and test kits were imminent, ETLC transmitted to the Company two written
  purchase orders that ETLC received from the Central Pharmacy for the Republic
  of Guinea, as follows: a purchase order for $200,000 in HSA and test kits,
  which products at that time constituted ADGI's entire product line of medical
  products. Further, ETLC presented the Company with a purchase order for
  $750,000 for generic pharmaceuticals and vitamins, which at the time of
  receipt of this order was not part of the Company's existing product line. The
  Company, with the assistance principally of ETLC, Judith Grossman, and Thomas
  J. Craft, Jr., the Company's counsel, corporate secretary and a director, has
  outsourced from several manufacturers and distributors in the United States,
  Canada, Mexico, Europe and has also developed a relationship with Chinese
  sources of generic pharmaceuticals to fulfill the initial orders. The Company
  believes that it will be able to fulfill the orders from the Republic of
  Guinea and further orders as they are received from West Africa and Brazil
  (see the discussion below), from more than one third party
  manufacturer/distributor sources at terms and conditions satisfactory to the
  Company, and does not believe that it will be dependent upon any one source.

       The Company commenced shipment of generic pharmaceuticals and diagnostic
  test kits in June, 1997, of the initial products subject to the orders from
  the Central Pharmacy of the Republic of Guinea and will continue shipment of
  products pursuant to both purchase orders during fiscal 1997. Further, because
  it has received commitments for pre-export financing from an institutional
  investment bank and has received loans from certain private lenders to permit
  it to purchase and prepay for the products that are subject of the orders, the
  Company believes that it should be able to secure more advantageous pricing

                                       9
<PAGE>
 
  than if it sought to purchase the products on credit, and pay for the products
  after receipt of payment from the Republic of Guinea. The Republic of Guinea
  is providing for a letter of credit to pay for the products through Bicgui
  Bank, the National Bank of Guinea.

       In addition, ETLC has been requested by the Ministry of Health of Guinea,
  on behalf of Sierra Leone, to assist Guinea in its agreement with
  international health organizations including the World Health Organization and
  the United Nations, in efforts to rebuild the medical services sector of
  Sierra Leone. Although Sierra Leone is not part of ETLC's initially designated
  territory in West Africa under the agreements between the Company and ETLC,
  ETLC agreed to use its best efforts to sell medical such products on behalf of
  the Company to the Ministry of Health and Sanitation in Sierra Leone, which
  efforts, however, have been halted as a result of the political unrest in
  Sierra Leone. No assurance can be given as to whether the Company through ETLC
  will generate any business from Sierra Leone, based upon current conditions in
  that country.

       The Company and ETLC have agreed to a further addendum to the consulting
  agreements, based upon ETLC's commitment to generate up to $15 million in
  purchase orders for generic pharmaceutical products and other medical related
  products from the Republic of Guinea and elsewhere in West Africa. In
  consideration for such addendum and the commitment from ETLC to provide
  additional consulting services to the Company, including services related to
  generating orders for ADGI for an increased period from two (2) years to five
  (5) years, the Company issued to ETLC 3 million additional shares in a
  registration statement on Form S-8, which was filed on December 17, 1996, an
  additional 4 million shares that were included in a post effective amendment
  no. 1 to Form S-8 dated January 2, 1997, and an additional 7 million shares
  that were included in a post effective amendment no. 2 to Form S-8 dated
  February 13, 1997, of which latter amount 2 million shares are being held in
  escrow by counsel to the Company, and shall vest upon the shipment of
  additional orders to the Republic of Guinea. This was based upon ETLC's
  receipt on behalf of the Company of the purchase orders for generic drugs and
  vitamins beyond the scope of the initial and amended agreements, and provided
  for the sale of products by the Company that were not within its existing or
  contemplated product line at the time the initial agreements were executed.

       Further, with the collaboration of ETLC and Ms. Grossman, the Company, in
  January, 1997, received a written commitment from an institutional investment
  banking firm for a continuing line of credit, and in May, 1997, the Company
  received private financing from lenders to permit the Company to purchase the
  generic pharmaceuticals that are the subject of its existing orders from
  Guinea. This line of credit will also be available to fund the purchase of
  products that become the subject of future orders from the Republic of Guinea,
  which order are backed by the written commitment of Bicgui Bank, the National
  Bank of Guinea and will be followed by letter of credit.

       The Company in consideration for her continued services to the Company
  during the past two years issued to Ms. Grossman 350,000 shares in the
  registration statement on Form S-8 dated December 17, 1996 and 1.5 million
  shares in post effective amendment no. 2 to such registration statement dated
  February 13, 1997. Further, in the registration statement on Form S-8 dated
  December 17, 1996, the Company issued to Thomas J. Craft, Jr., Esq. 350,000
  shares for serving as a director and providing certain legal services to the
  Company, and in post effective amendment no. 2, the Company also issued to
  Thomas J. Craft, Jr., Esq., in consideration for serving as corporate
  secretary, a director and counsel to the Company, and for his direct
  assistance in sourcing pharmaceutical products and dengue fever and malaria
  vivex test kits for Brazil an additional 3 million shares. The Company also
  issued to Dr. Hinton, in consideration for his continuing to serve as the
  Company's president and chief executive officer, as well as director 1 million
  shares in post effective amendment no. 1 and in consideration for the
  execution of a three year employment agreement, which provides for no salary
  until the Company's cash flow shall permit, an additional 3 million shares.
  The Company has also agreed to negotiate with Messrs. Hinton, and Craft, and
  Ms. Grossman, as well as ETLC, and other persons providing continuing services
  to the Company, for the issuance of additional shares, in a registration
  statement on Form S-8 and/or Form S-1, to compensate such parties for
  continuing services performed and to be performed on behalf of the

                                       10
<PAGE>
 
  Company in developing its pharmaceutical products business and other services
  necessary for the Company's operations prior to its generating a positive cash
  flow.

       The Company, based upon the orders and the commitment it has received for
  pre-export financing, as well as additional financing that it has negotiated
  utilizing the services of ETLC and Ms. Grossman, firmly believes that it will
  be able to continue to supply such generic drugs and vitamins at prices that
  shall permit the Company to generate a profit. Further, through the efforts of
  ETLC's new representative in Brazil, the Company has recently received
  purchase orders for malaria vivex and dengue fever test kits from the National
  Health Foundation, State of Roraima, Brazil, and is utilizing several
  manufacturers to supply these test kits. The purchase orders for 100,000 of
  each of the above test kits is subject only to approval of products samples,
  which will be sent to Brazil during June, 1997, with shipment of actual orders
  to follow. The Company has been informed that the potential market for dengue
  fever and malaria vivex test kits in Brazil, nationally, is approximately 1
  million of each test kit, with potential sales of $16 million, based upon
  current world pricing of such kits.

  Prior Contemplated Projects
  ---------------------------

       Registrant during 1996, entered into letter of intent with respect to
  the proposed acquisition of Aptek Communications Products, Inc. ("Aptek"), a
  computer company owned by Gerard Haryman, who served as a director of
  Registrant from January, 1996 through December, 1996. In contemplation of the
  business arrangement with Aptek, the Registrant moved into the corporate
  offices of Aptek, which included 6,000 square feet of office and warehouse
  space at 501 South Dixie Highway, West Palm Beach, FL 33480. (See "Description
  of Property" below with respect to the relocation of the Company's offices to
  Stamford, CT.) In connection with this proposed acquisition of Aptek and its
  computer assets, Registrant engaged Denise Valentini, Palm Beach, FL, as a
  consultant to prepare a business valuation and valuation of the inventory of
  Aptek. The consultant was issued 2,250,000 shares of common stock which were
  included in the Form S-8 registration statement dated February 29, 1996. In
  the Company's registration statement on Form S-8 dated December 12, 1996, the
  Company issued to Mr. Haryman 500,000 shares for his services as a director
  from January, 1996 through December, 1996.

       The Registrant, after reviewing the valuations of Aptek for the purpose
  of determining the consideration that it would pay, which would have consisted
  of restricted shares of ADGI, has since determined not to pursue the
  acquisition of Aptek. Prior to this determination, Mr. Haryman had agreed that
  as a director, he would not vote, but rather would abstain, on any
  determination to merge and the amount of share consideration to be issued in
  consideration of the contemplated merger, assuming that the board of directors
  voted to acquire Aptek. However, Mr. Haryman resigned from the board of
  directors following the determination by the board in December, 1996, not to
  acquire Aptek, because of Mr. Haryman's continuing interest in pursuing the
  business of Aptek, which involves computers and related telecommunication
  products and services, including video teleconferencing, fax and cellular
  phone technology. The decision of Mr. Haryman to resign as a director was
  based solely upon his determination to pursue the business opportunities
  presented by his ownership of Aptek and his other business interests, and was
  not based upon any disagreement with management with respect to any matter of
  policy of business practices.

       Registrant, during fiscal 1996, also entered into purchase agreement with
  Imaging Systems Synergies Inc. ("ISS") with offices located at North Miami
  Beach, FL. ISS is an internet gateway provider and a provider of related
  satellite technology, including earth station for global communication
  services. in Wisconsin and Illinois. During the negotiations with respect to
  the proposed acquisition of ISS, the Company advanced approximately $100,000
  to assist ISS in continuing its operations, while the Company continued its
  due diligence efforts. The Company believed that ISS's business and technology
  matched well with the contemplated acquisition of Aptek.

       Following the completion of due diligence with respect to ISS, and the
  discovery of facts that the Company considered to constitute
  misrepresentations by ISS, the Company determined not to acquire ISS

                                       11
<PAGE>
 
  but rather limit its efforts to the anticipated growth and the potential it
  believed and continues to believe exists in the pharmaceutical business and
  related medical products business in West Africa and South America, and in
  other developing countries.

       The Company, after consulting with counsel in Florida, determined to
  pursue a cause of action against ISS for damages, including recovery of the
  $100,000 in interim capital advanced to ISS. The Company's action was moved to
  Dade County Superior Court and cannot determine at this time whether it will
  prevail against and be successful in recovering any damages against ISS. The
  entire board of directors of ADGI agreed unanimously not to acquire ISS. The
  Company generated no income from its involvement with either Aptek or ISS.

       On January 12, 1996, Registrant entered into a consulting agreement
  with Harvard Financial Corp. in consideration for which Registrant issued to
  Harvard a total of 5,000,000 shares, all of which were included in the Form S-
  8 registration statement dated February 29, 1996. However, prior to Harvard
  being able to fulfill its consulting obligations under the agreement, the
  Registrant was informed that a principal or affiliate of Harvard had been
  convicted of violations of the Federal securities laws. As a result of such
  conviction, the Registrant terminated the agreement.


  ITEM 2.  DESCRIPTION OF PROPERTY

       The Company leases approximately 250 square feet of executive office
  space at 700 Canal Street, 3rd Floor, Stamford, CT 06902 for $800 per month.
  In addition, the Company has use of warehouse facilities at JFK International
  Airport, New York City and conference room facilities at the International
  Building Rockefeller Center, New York, which are available to the Company on
  an hourly or on a month-to-month basis, at the Company's discretion, and on an
  "as-used" basis. The condition of the Company's leased facilities in Stamford
  is excellent, and its arrangements with respect to warehouse and conference
  facilities are at advantageous terms, because of its relationship with ETLC.

       During the period from January, 1996 through December, 1996, the Company
  shared office facilities with Aptek, including use of executive offices and
  warehouse space, at a monthly expense of $1,500, which the Company believes to
  be the fair market value of the facilities used by the Company. In addition,
  the Company paid its pro-rata share of the telephone, secretarial and other
  monthly office expenses.

       The Company during the period commencing in September, 1994, and through
  the period ending April, 1995, issued a total of 3.8 shares of restricted
  common stock in connection with the acquisition of a rental property. The
  Company recorded the shares issued and the building and rights acquired based
  upon the estimated fair market value of shares issued. The contract with
  respect to the acquisition of the rental property provided that the transferor
  of the property could rescind the transaction if the price of the Company's
  shares fell below $5.00 per share. In fact, following exercise by Mr. Coleman
  of his right to repurchase Aimrite, the Company became in essence a holding
  company without operations, and as a result the stock price dropped reflecting
  the lack of operations and assets. The rescission of the transfer of the
  rental property to the Company was the result of inability of the Company to
  perform its obligations under the agreement and satisfy a condition subsequent
  contained therein. As a result of negotiations between counsel for the Company
  and the transferor of the rental property, it was determined that the Company
  was unable to fulfill its obligation under the condition subsequent and
  therefore the transferor was permitted to retain 2.5 million of the total
  shares issued in connection with the acquisition. The cancellation of the
  transaction was recorded by reversing the amounts initially recorded, less the
  par value of the shares retained. No loss was recorded in connection with this
  transaction.

                                       12
<PAGE>
 
  ITEM 3.  LEGAL PROCEEDINGS

       On December 30, 1994, Deniston Limited, a British Virgin Islands
  corporation, filed a complaint against Kenneth Coleman, Tera West Ventures,
  Inc., PBA Energy Associates and Peter Berney seeking injunctive relief,
  specific performance and damages in connection with a securities subscription
  agreement in which Deniston Limited alleged that it was to acquire common
  stock of the Company. Deniston Limited v. Kenneth Coleman, Tera West Ventures,
                        --------------------------------------------------------
  Inc., PBA Energy Associates, and Peter Berney, 11th Judicial Circuit, Dade
  ----------------------------------------------                            
  County, Florida, Case No. 94-24371. The case was settled in February 1996 with
  the payment by Kenneth Coleman and Peter Berney of a total of $50,000.

       The Company has pending a cause of action against ISS for damages,
  including recovery of the $100,000 in interim capital advanced to ISS. The
  Company's action, American Diversified Group, Inc. v. Imaging Systems
                    ---------------------------------------------------
  Synergies, Inc., et al., which action was moved to the 11th Judicial Circuit,
  -----------------------                                                      
  Dade County, Florida, Case No. 97-001983AN, from Palm Beach County, where the
  proceeding was initially commenced. The Company cannot determine at this time
  whether it will prevail against and be successful in recovering any damages
  against ISS. The entire board of directors of ADGI agreed unanimously not to
  acquire ISS. The Company generated no income from its involvement with either
  Aptek or ISS.

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

       No matters were submitted to a vote of security holders during the fiscal
  year ending 1996.

                                       13
<PAGE>
 
                                     PART II

  ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

       The Company's common stock is traded over-the-counter in what is referred
  to as the "Bulletin Board" or "pink sheets."  As of July 6, 1997, there were
  15 markets makers in the Company's stock. The following information with
  respect to the high and low market prices was obtained from the Company's
  records.
<TABLE>
<CAPTION>
 
                                 Bid Prices
                           --------------------
        1993                 High       Low
-------------------------  --------  ----------
<S>                        <C>       <C>
 
Quarter Ending March 31     $8-3/4     $4-7/8
Quarter Ending June 30      $8-3/4     $7-1/2
Quarter Ending Sept. 30     $  1/4     $  1/4
Quarter Ending Dec. 31      $6-3/4     $  1/2
 
                                Bid Prices
                           --------------------
        1994                 High        Low
-------------------------  --------  ----------
 
Quarter Ending March 31     $8-1/4     $6
Quarter Ending June 30      $8-3/4     $8
Quarter Ending Sept. 30     $10        $6-3/4
Quarter Ending Dec. 31      $7-1/4     $4-1/4
 
                                Bid Prices
                           --------------------
         1995                High        Low
-------------------------  --------  ----------
 
Quarter Ending March 31     $5-5/8     $1/8
Quarter Ending June 30      $5/16      $1/32
Quarter Ending Sept. 30     $7/16      $1/4
Quarter Ending Dec. 31      $7/16      $1/4
 
                                Bid Prices
                           --------------------
        1996                 High        Low
-------------------------  --------  ----------
 
Quarter Ending March 31     $11/32     $1/8
Quarter Ending June 30      $1/2       $3/16
Quarter Ending Sept. 30     $5/16      $3/16
Quarter Ending Dec. 31      $1/8       $1/32
 
                                Bid Prices
                           --------------------
        1997                 High        Low
-------------------------  --------  ----------
 
Quarter Ending March 31     $3/16      $1/8
Period Ending July 6        $1/8       $1/32

</TABLE>

                                       14
<PAGE>
 
       As of July 6, 1997, there were 655 holders of the Company's common stock,
  and no holders of the Company's preferred stock. The Company has never paid a
  dividend and does not anticipate that any dividends will be paid in the near
  future.

  ITEM 6.  MANAGEMENT'S PLAN OF OPERATION

       The Company has never had revenues from operations. During the period
  from 1994 and through the first quarter of fiscal 1995, the Company, through
  Aimrite, endeavored to develop and market a computer controlled shock absorber
  system See the discussion under Item 1. "Description of Business-Background
  Prior to Fiscal 1996" with respect to Aimrite. Before the shock absorber
  system could be completed, of which there was no assurance, the Company
  divested itself of ownership of Aimrite, upon the exercise by Kenneth Coleman
  of his option to repurchase Aimrite, because of a change in management of the
  Company and management's determination that it did not have the intensive
  capital resources necessary to complete the development, of which there was no
  assurance of success. As discussed in Item 1 above, the Company commenced a
  plan to acquire ADMC and thereafter determined to terminate the acquisition of
  ADMC, because of ADMC's failure to satisfy the net worth requirements of the
  agreement.

       However, during  and subsequent to fiscal 1995, the Company began to
  develop its plan to devote its business energies and limited resources to
  become a medical products company, with intention to seek operations involving
  the sale of products manufactured by others, principally in the medical field.
  See the discussion in Item 1. "Description of Business: "Recent Business
  Developments" and "Consulting Agreements" above. During the last half of
  fiscal 1995 and throughout fiscal 1996, the Company entered into consulting
  agreements with third parties for the purpose of exploring potential
  acquisitions of operating businesses, seeking advise and assistance in
  identifying business opportunities in the medical products and services fields
  and also contemplated other business opportunities.
 
       The Company did not generate any operating revenues in fiscal 1996.
  Therefore, the Company was dependent upon the funds provided by non-interest
  bearing loans from the Company's executive officer and directors, as well as
  the willingness of the Company's executive officer and consultants to accept
  shares in lieu of cash compensation for continued services to the Company.
  With the assistance of the Company's consultants the Company's management
  determined that its best business opportunities were in the area of medical
  products and principally in its ability of generating revenues the sale of
  products manufactured by third parties.

       To that end, the Company entered into consulting agreements during fiscal
  1996 with AVIX, and with UBI, all of which were intended to assist the Company
  in entering into the medical products field and becoming an operating company.
  In connection with the consulting agreement with ETLC, the Company received
  $81,000 from the exercise of options to acquire 450,000 shares at $.18 per
  share, the price of the stock on the date of the grant to ETLC. The Company
  deems that this payment may also be considered as payment by ETLC for the
  rights to market the Company's test kits and HSA in ETLC's territory, which
  includes Ivory Coast, Guinea, Mali and Congo. In addition, during the last
  quarter of 1996 and through February, 1997, ETLC paid an additional $36,000
  for the exercise of 200,000 option shares. The Company and ETLC have agreed to
  negotiate whether any payment shall be required with respect to the remaining
  250,000 option shares.

       The Company during fiscal 1996 has been dependent upon the willingness of
  its consultants to accept shares of the Company's common stock, issued
  pursuant to registration statements on Form S-8, in consideration for
  providing services to the Company. Such services have enabled the Company to
  reach its present level of development, which includes: having received
  product registration and approved purchase orders aggregating approximately
  $1,000,000 for generic pharmaceuticals, vitamins, test kits and HSA from the
  Republic of Guinea; having secured a commitment for pre-export financing from
  an institutional investment banking firm; having received from private lenders
  pre-export funding for its initial shipment to Guinea in May, 1997; having
  secured purchase orders for 100,000 dengue fever and 100,000 malaria vivex
  test kits from the National Health Foundation of Brazil, State of Roraima,
  subject only to approval

                                       15
<PAGE>
 
  of sample test kits submitted, which order may result in additional orders for
  up to 1,000,000 test kits in Brazil, nationally; having submitted samples of
  blood derivative products, manufactured by the Bayer Corporation, Biological
  Products Division, pursuant to the request of the National Blood Bank of the
  Ivory Coast, which samples, when approved, should result in additional orders
  for such products.

       Directly as a direct result of the foregoing business advances and
  pending business developments, the Company has been able to raise
  approximately $150,000 from the private placement of its units, with
  additional commitments form private financing, as described below. This
  funding, together with the shipment in June, 1997, of the initial generic
  pharmaceutical order to the Republic of Guinea, and the anticipated continued
  shipment of orders for generic pharmaceuticals, diagnostic test kits, and
  blood derivative products to the Republic of Guinea, as well as revenues that
  the Company believes will be generated from orders for dengue fever and
  malaria vivex test kits from Brazil and blood derivative products from the
  Ivory Coast, as well as additional sales of generic pharmaceutical to West
  Africa, should enable the Company to become operational and hopefully will
  permit the Company's independent auditors to remove from their report the
  qualification regarding the Company as a "going concern"

       The Company's ability to ship these products that are the subject of the
  purchase orders is the result of the Company having received a commitment from
  an institutional investment banking firm for pre-export financing, which
  commitment involves a revolving credit line that will be used for continued
  shipments of orders as future orders are received. The Company is outsourcing
  through 10-15 third party manufacturers and distributors located in the United
  States, Canada, Mexico, South America and Europe and may utilize sources in
  China as well as India, for the products that are the subject of the purchase
  orders. The Company is presently seeking the best prices that are available
  from such manufacturers, consistent with the Guinean pharmaceutical products
  budget allocated for such products. Neither the Company nor ETLC presently can
  estimate the length of time that will be required to secure the supply from
  third party manufacturers for all of the pharmaceutical products in the
  required quantities to satisfy the orders generated from Guinea or the
  anticipated orders that the Company hopes to generate from other West African
  country within the territory granted to ETLC. However, the Company firmly
  believes that all such products are available, at prices and in quantities
  sufficient to satisfy the orders in a timely manner.

       To assist the Company in its cash flow requirements while the initial
  orders are shipped, and in order to pay the operating expenses of the Company,
  which are estimated to be approximately $10,000 per month, the Company from
  January, 1997 to early June, 1997, has raised approximately $150,000 from the
  private placement of units, each unit comprised of one (1) share and one (1)
  common stock purchase option exercisable at $.08 per share. The units were
  priced at $.04 per unit, which was the price of the Company's shares on
  January 15, 1997, the date of the private placement subscription agreement.
  The Company has also received indications of interest from certain private
  investors for additional subscriptions of up to $120,000 in units, at a per
  unit price to be determined on the date(s) of subscription. However, there can
  be no assurance that any additional subscriptions shall be received under the
  unit private placement. The trading price of shares of the Company's common
  stock during the past three months has been in the range of $.027 to $.04.
  While the Company has been successful in raising capital in the unit private
  placement, there can be no assurance that the Company will be able to continue
  to raise private capital if the Company's shares continue to trade at the
  levels that have prevailed since the beginning of the 1997 fiscal year.

       Based upon the Company's present liquid resources after the expenses that
  were paid by the Company following receipt of the private placement funds,
  which expenses included office expenses, relocation expenses,
  professional/accounting fees, transfer agent fees, and certain other expenses,
  and based upon its present monthly operating expenses, the Company will be
  able to operate for approximately 5 to 7 months if no revenues are generated
  from operations. However, the Company believes that it will begin to generate
  operating revenues during the second quarter of 1997, following the initial
  shipment in May, 1997, of the generic pharmaceutical products pursuant to the
  order from the Republic of Guinea, as well as from the anticipated
  commencement of orders from the Ivory coast and Brazil. The Company

                                       16
<PAGE>
 
  presently estimates that it will begin to receive monies from its initial
  shipments within thirty to sixty days from the first shipment. This is based
  upon the terms of the purchase orders with the Republic of Guinea, which are
  backed by Bicgui Bank, the National Bank of Guinea, and a letter of credit
  provided in the purchase order. Further, such operating revenues, supplemented
  by the Company acceptance of up to an additional $120,000 in private placement
  subscriptions, should permit the Company to operate, at present levels, for up
  to one additional year or longer, depending upon the timing of shipments and
  receipt of payments on the orders.

       The Company's monthly operating expenses of $10,000 include rents, office
  expenses, professional/accounting fees, telephones and salaries to an
  employee, but excluding Dr. Hinton, the Company's sole executive officer. The
  Company does not contemplate commencing payment to Dr. Hinton of the monthly
  salary of $8,333.33 provided in his three year employment agreement unless and
  until it begins to generate revenues from operations. The monies received from
  the Company's unit private placement and any pre-export funding will not be
  used to pay salaries to officer or fees to directors or consultants, each of
  whom have agreed receive compensation for services by the issuance of shares
  in registration statements on Form S-8 and/or Form S-1. During 1996 and
  through early 1997, the Company's executive officer, directors and consultants
  were issued shares in registration statements on Form S-8 in consideration for
  their continued services to the Company.

                                       17
<PAGE>
 
  ITEM 7.   FINANCIAL STATEMENTS

       The financial statements for the fiscal year ended December 31, 1996,
  are attached hereto.

                                       18
<PAGE>
 
  ITEM 8.   CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.
 
       In connection with the audit of the consolidated financial statements of
  American Diversified Group, Inc. ("ADGI" or "Registrant") for the fiscal year
  ended December 31, 1994, Duane V. Midgley, CPA, Salt Lake City, UT, issued a
  report dated February 9, 1995, a copy of which was attached to the
  Registrant's Form 10-KSB, for the fiscal year ended December 31, 1994, which
  was duly filed with the Securities and Exchange Commission.

       In March, 1995, Tera West Ventures, Inc. ("TWVI"), the Registrant's
  former name, changed its name to American Diversified Group, Inc. and its
  business location from TWVI's offices in Las Vegas, NV to that of ADGI in
  Florida. As a result of the move of its base of operations to Florida, the
  Registrant, by action of its board of directors, determined to change its
  independent accountant from Mr. Midgley, the former accountant for TWVI, to a
  firm in Florida. The accountant did not resign, nor did he decline to stand
  for re-election, and the board of directors did not dismiss Mr. Midgley. There
  was no disagreement with Mr. Midgley on any matter of accounting principles or
  practices, financial statement disclosure, or auditing scope of procedure

       On May 24, 1996, Registrant engaged the firm of Rachlin, Cohen and Holtz
  to perform the audit for the fiscal year ended December 31, 1995. A copy of
  this engagement was attached as an exhibit to the Registrant's Current Report
  on Form 8-K on July 5, 1996. However, by letter dated June 24, 1996, as a
  result of the inability of Registrant and Rachlin, Cohen and Holtz to agree on
  the amount of time that the accounting firm could devote to Registrant as a
  new client, and the cost of conducting the audit, the Registrant and Rachlin
  Cohen and Holtz agreed to discontinue the engagement of Rachlin Cohen and
  Holtz. A copy of this letter was also attached as an exhibit to such Current
  Report. In that letter, Registrant informed Rachlin Cohen and Holtz that
  Registrant had retained the accounting firm of Grant-Schwartz Associates,
  CPA's, as its auditors, and Rachlin Cohen and Holtz agreed to cooperate with
  Registrant in transmitting copies of all records necessary for Grant Schwartz
  Associates to complete the 1995 audit. Grant-Schwartz Associates has recently
  merged its practice with the accounting firm of Beck Villota & Co., P.C.,
  independent public accountants, which combined firm has conducted the audit
  for fiscal 1996.

        During the past two years there were no disagreement with either former
  accountant on any matter of accounting principles or practices, financial
  statement disclosure, or auditing scope of procedure. The engagement of Grant-
  Schwartz Associates, CPA's, 40 SE 5th Street-Suite 500, Boca Raton, FL 33432
  was attached as an exhibit to the Current Report referenced above. As a result
  of the change in auditors, Registrant was delayed in completing its Annual
  Report on Form 10-KSB for fiscal 1995 and its Quarterly Reports on Forms
  10-QSB, for the periods ended March 31, 1996 and June 30, 1996.

                                       19
<PAGE>
 
                                    PART III
 
ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

       (a) The directors and executive officers are:
<TABLE>
<CAPTION>
 
         Name                   Age                     Title
         ----                   ---                     -----
<S>                             <C>  <C>
  Jerrold R. Hinton              55  President, Chief Executive Officer, and
                                     a Director
 
  Thomas J. Craft, Jr., Esq.     32  Secretary, Corporate Counsel and a Director
</TABLE>

       All directors hold office until the next annual meeting of stockholders
  of the Company and until their successors have been elected and shall qualify.
  Officers serve at the discretion of the Board of Directors, but the Company
  contemplates that it may elect during the current fiscal year to enter into
  employment agreements with certain of its executive officers and employees,
  the terms of which have not been determined as of the date of this Report on
  Form 10-KSB/A.

  Jerrold R. Hinton has served as President, Chief Executive Officer and a
  Director of the Company from March 1995  to the present in a full time
  capacity, following the change of the Company's operations from that of Tera
  West Ventures to that of ADGI. Dr. Hinton, a graduate of Florida State
  University, holds bachelors, masters and doctorate degrees in management,
  engineering, surveying, real estate and construction. From 1992 to early 1995,
  prior to joining Registrant in his present capacity Dr. Hinton served as an
  officer of United Biomedical, Inc. (UBI), a private company. Dr. Hinton was
  not a shareholder of UBI.

  Thomas J. Craft, Jr., Esq., is an attorney practicing law under the laws of
  the State of Florida. Mr. Craft has been Secretary and a Director of the
  Company since March, 1996. From July 1994 to the present,  Mr. Craft has been
  counsel, secretary and a director of Trident Environmental Systems, Inc., an
  inactive public company located in West Palm Beach, FL. During the past five
  years, prior to his present positions with Registrant and Trident, Mr. Craft
  was engaged in the private practice of law in West Palm Beach, FL

  RESIGNATION OF REGISTRANT'S DIRECTORS
  -------------------------------------

       During the fiscal year ended December 31, 1996, and in connection with
  the change of its business, principally as set forth in Item 1, "Description
  of Business" above, Mr. Gerard Haryman resigned as a director. Copies of the
  resignations were filed as exhibits to the Form 10-KSB filed with the
  Commission.

       The Registrant does not believe that Mr. Haryman resigned as a result of
  any disagreement with respect to or relating to Registrant's operations,
  policies or practices. Rather, the resignation of Mr. Haryman was the result
  of the Registrant's determination not to complete the acquisition of Aptek,
  which determination was made by the Registrant after it determined that the
  Company was not interest in devoting its assets and energies to a
  computer/telecommunications hardware business, and was a result of Mr.
  Haryman's individual determination that desired to devote his business efforts
  in such field.

                                       20
<PAGE>
 
  (B) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

       Section 16(a) of the Securities Exchange Act of 1934 requires that the
  Company's officers and directors, and persons who own more that ten percent of
  a registered class of the Company's equity securities, to file reports of
  ownership and changes in ownership with the Securities and Exchange Commission
  and with any exchange on which the Company's securities are traded. Officers,
  directors and persons owning more than ten percent of such securities are
  required by Commission regulation to file with the Commission and furnish the
  Company with copies of all reports required under Section 16(a) of the
  Exchange Act. Based solely upon its review of the copies of such reports
  received from officers, directors and greater than ten percent shareholders,
  the Company reports the following failures to file reports under Section 16(a)
  of the Exchange Act:

       Name of Filer                  Report Not Filed
       -------------                  ----------------

       Kenneth Coleman                Forms 4 and 5
       Jerrold R. Hinton              Forms 4 and 5


  ITEM 10.     EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
 
                                                                                     Long Term Compensation
                                                                                     ----------------------
 
                                  Annual Compensation                        Awards                       Payouts
                                  --------------------------------------------------------------------------------
 
(a)                     (b)           (c)          (d)           (e)           (f)         (g)     (h)      (i)
                                                 Other  
                                                 Annual       Restricted   Securities                    All Other
Name and                                         Compen-      Stock        Underlying     LTIP            Compen-
Principal                                        sation       Award(s)    Options/SAR's  Payouts          sation
Position (*)            Year         Salary      Bonus($)     ($)             (#)          ($)     ($)      ($)
-------------------  ----------   ----------     ----------   ----------  -------------  ------- ------- ---------
<S>                  <C>          <C>            <C>          <C>         <C>            <C>     <C>     <C>
 Jerrold Hinton
President, CEO         1996           0            0             0            0         0           0         0

 Jerrold Hinton
President, CEO         1995           0            0             0            0         0           0         0

 Kenneth Coleman
President, CEO         1994           0            0             0            0         0           0         0

  Kenneth Coleman
President, CEO         1993           0            0             0            0         0           0         0
</TABLE>

  (*)  Messrs. Hinton and Coleman were the Company's chief executive officer and
  president during the respective years set forth above. Mr. Hinton was issued
  shares in registration statements on Form S-8 during fiscal 1996 in
  consideration for his continued services to the Company, in lieu of cash
  compensation.

                                       21
<PAGE>
 
       The Company has not had sufficient funds to pay its executive officers or
  directors during fiscal 1995 and 1996. However, Ameril Corporation prior to
  the determination not to proceed with the acquisition of ADMC, advanced the
  following amounts to the Company's executive officers during the period from
  January 1, 1995 through October 18, 1995:

       Jerrold R. Hinton, Pres./CEO   $27,508.00
       Douglas G. Morgan, V-P         $59,093.17

       While Ameril expected to be repaid the amounts, as part of the settlement
  with Ameril and the cancellation of all but 2 million of the shares issued to
  Ameril, the amounts advanced were forgiven and no monies are owed to Ameril in
  connection with the advances.

       To date, the Company has not commenced payment of any salaries, but has
  executed a three (3) year employment agreement with Dr. Jerrold R. Hinton, who
  has agreed to serve the Company in a full time capacity of President and Chief
  Executive Officer, as well as a director of the Company. The agreement
  provides for the payment to Mr. Hinton of $100,000 and the issuance of 5
  million shares and 5 million options, which options are exercisable at $.08
  per share. The salary portion of the agreement shall not commence until the
  Company begins to generate revenues from operations, of which there can be no
  assurance. The Company during fiscal 1996 issued to Dr. Hinton, its president
  and chief executive officer a total of 500,000 shares in a Form S-8
  registration statement on December 17, 1996 and issued 500,000 shares to
  Gerard Haryman in a Form S-8 registration statement on February 29, 1996. In
  addition, Thomas J. Craft, Jr., Esq., a director and corporate counsel to the
  Company, was issued 350,000 shares in a Form S-8 registration statement on
  December 17, 1996. The Company issued additional shares to Messrs. Hinton and
  Craft after the end of fiscal 1996, as disclosed under "Business: Consulting
  Agreements" above. Also, see the discussion under Item 12. "Certain
  Relationships and Related Transactions" below.

  ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       As of July 6, 1997, the security ownership of the following persons and
  entities, who were either executive officers of the Company or were known to
  the Company to own more than five percent (5%) of the Company's outstanding
  voting securities was as follows:

<TABLE>
<CAPTION>
               (1)        (2)                   (3)                    (4)
 
        Title of Class    Name and Address of   Amount and             Percent
                          Beneficial Owner      Nature of              of
                                                Beneficial Ownership   Class (1)
--------------------------------------------------------------------------------
<S>                       <C>                   <C>                    <C>
       Common Stock       Jerrold R. Hinton      4,000,000             4.6%
                          700 Canal Street
                          3rd Floor
                          Stamford, CT 06902
</TABLE> 
       ______
       (1) Based upon  86,212,560 shares issued and outstanding.


  ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       Other than the contemplated acquisition of Aptek, which acquisition the
  Company did not consummate, during fiscal 1996, the Company has not entered
  into any material contracts with any officers, directors or 5% shareholders of
  the Company, other than the issuance of shares to its chief executive officer
  and directors pursuant to registration statements on Form S-8 and post
  effective amendments thereto, as described more fully above. Further, Dr.
  Hinton received accrued but unpaid compensation from UBI in the amount of
  $240,000 in 1996, for his services to UBI during the period from

                                       22
<PAGE>
 
  1992 to March 1995, when he joined the Company as its chief executive officer
  and a director. UBI generated the funds used to pay Dr. Hinton the accrued
  salary from its consulting agreement with the Company and its sale of shares
  registered in the Company's February 29, 1996, registration statement on Form
  S-8.
 
       During the period from July, 1996 through the end of the fiscal year, the
  Company leased approximately 40% of the executive office and warehouse space
  from Aptek at 501 South Dixie Highway, West Palm Beach, FL 33401, which was
  owned by Gerard Haryman. The Company's prorata share of the monthly rental was
  $1,500 and the Company also paid certain expenses including telephone,
  secretarial, utilities and maintenance expense on a shared basis with Aptek.
  The Company believes that the sums paid for the space and the use of Aptek
  facilities represented the fair market value of the space and uses.

       During the fiscal year ended December 31, 1996, the Company issued to Dr.
  Hinton, President and chief executive officer, and Gerard Haryman, a director
  of the Company, 500,000 shares each and issued to Thomas J. Craft, Jr., Esq.,
  the Company's secretary, corporate counsel and a director 350,000 shares
  pursuant to a registration statement on Form S-8, dated December 17, 1996.

                                       23
<PAGE>
 
  ITEM 13.        EXHIBITS AND REPORTS ON FORM 8-K.
                                                      Sequential
  Exhibit No.    Document Description                 Page No.
  -----------    --------------------                 --------

    3.1           Articles of Incorporation (filed as Exhibits 3.1, 3.2 and
                  3.3 to the Company's Registration Statement on Form
                  10-SB and incorporated herein by reference)

    3.2           Bylaws (filed as Exhibit 3.4 to the Company's
                  Registration Statement on Form 10-SB and incorporated
                  herein by reference)

    10(iii)       Material Contracts-Consulting Agreements and Employment
                  Agreement(filed as Exhibits to Registration Statements of Form
                  S-8 and post-effective amendments thereto and incorporated
                  herein by reference

    23            Consent of Grant-Schwartz Associates, CPA's

       (b)  During fiscal 1996, the Company filed Reports on Form 8-K and 8-K/A
  on July 5, 1996  and October 22, 1996, respectively. The Company has not filed
  any report on Form 8-K during   the quarter ended March 31, 1997.
 

                                       24
<PAGE>
 
                                   SIGNATURES
                                   ----------

       In accordance with Section 12 or 15(d) of the Exchange Act, the
  Registrant has caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized.

                                 AMERICAN DIVERSIFIED GROUP, INC.


                                 By: /s/ Jerrold R. Hinton
                                     ---------------------
                                    Jerrold Hinton, President, Chief
                                    Executive Officer and Director


                                 Date: July   , 1997



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


                                 /s/ Thomas J. Craft, Jr.
                                 ------------------------
                                 Thomas J. Craft Jr., Secretary and Director

                                       25
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)

                              FINANCIAL STATEMENTS

                           December 31, 1996 and 1995
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                           December 31, 1996 and 1995

<TABLE>
<CAPTION>


              TABLE OF CONTENTS
                                        

                                            Page
                                            ---- 
<S>                                    <C>
Independent Auditor's Report                 3
 
Financial Statements:
 
  Balance Sheets                             4
 
  Statements of Operations                   5
 
  Statement of Stockholders' Equity          6
 
  Statements of Cash Flows                   7
 
Notes to Financial Statements             8-14
 
</TABLE>

                                      F-2
<PAGE>
 
                        GRANT-SCHWARTZ ASSOCIATES, CPA'S
                       40 Southeast 5th Street, Suite 500
                              Boca Raton, FL 33432


                         REPORT OF INDEPENDENT AUDITORS



Boards of Directors
American Diversified Group, Inc.


We have audited the accompanying balance sheets of American Diversified Group,
Inc. (formerly Tera West Ventures, Inc.) as of December 31, 1996 and 1995, and
the related statements of operations, stockholders' equity, and cash flows for
the years then ended.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
combined financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Diversified Group
(formerly Tera West Ventures, Inc.) as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 5 of the
financial statements, the Company has suffered recurring losses from operations
and other transactions.  At December 31, 1996, the Company has an accumulated
deficit of $13,144,044.  These issues raise substantial doubt about its ability
to continue as a going concern.  Management's plans in regard to these matters
are also described in Note 5.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



GRANT-SCHWARTZ ASSOCIATES, CPA'S
Boca Raton, Florida
July 2, 1997

                                      F-3
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                                 BALANCE SHEETS
                        As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
 
ASSETS
------
                                                           1996      1995
                                                         --------  --------
<S>                                                      <C>       <C>
CURRENT ASSETS
 Cash                                                     $     -   $   944
 Inventories                                                5,000     5,000
                                                          -------   -------
    TOTAL CURRENT ASSETS                                    5,000     5,944
                                                          -------   -------
FIXED ASSETS
 Property and equipment (net)                              17,642    21,574
                                                          -------   -------
OTHER ASSETS
 Deposits                                                     570         -
 Miscellaneous receivable (net of $100,000 allowance)           -         -
                                                          -------   -------
    TOTAL OTHER ASSETS                                        570         -
                                                          -------   -------
 
TOTAL ASSETS                                              $23,212   $27,518
                                                          =======   =======
 
</TABLE>

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------

<S>                                                                <C>              <C>
CURRENT LIABILITIES
    Cash overdraft                                                   $      4,010     $          -
    Accounts payable and accrued expenses                                  68,494           17,826
    Notes payable to related parties                                      125,521                -
                                                                     ------------     ------------
         TOTAL LIABILITIES - ALL CURRENT                                  198,025           17,826
                                                                     ------------     ------------
 
STOCKHOLDERS' (DEFICIT) EQUITY
    Preferred stock, Series A, $10 par value, authorized 50,000
      shares; none outstanding                                                  -                -
    Common stock, par value $.001 per share, authorized
      200,000,000 shares at December 31, 1996 and 50,000,000
      at December 31 1995;  issued and outstanding 63,462,520
      shares at December 31, 1996 and 42,542,520 shares at
      December 31 1995                                                     63,462           42,542
    Additional paid-in capital                                         13,513,519        9,408,939
    Deferred consulting fees                                        (     607,750)   (     630,000)
    Deficit accumulated during development stage                    (   4,332,255)               -
    Deficit accumulated prior to development stage                  (   8,811,789)   (   8,811,789)
                                                                     ------------     ------------
         TOTAL STOCKHOLDERS' (DEFICIT) EQUITY                       (     174,813)           9,692
                                                                     ------------     ------------
 
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY                 $     23,212     $     27,518
                                                                     ============     ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
                 For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
 
 
                                              1996             1995
                                          -------------    ------------- 
<S>                                     <C>               <C>
 
REVENUES                                  $           -    $           -
                                          -------------    -------------
 
EXPENSES
 Selling, general and administrative          4,279,670          920,599
                                          -------------    -------------
 
LOSS FROM OPERATIONS                      (   4,279,670)   (     920,599)
                                          -------------    -------------
 
OTHER INCOME (EXPENSE)
 Loss on disposal of subsidiary                       -    (   2,545,076)
 Debt forgiveness income                         50,000                -
 Gain (loss) on settlements                       4,795    (      115,310)
 Loss on abandoned acquisitions          (      107,380)   (      250,000)
 Loss on settlement of litigation                     -    (      375,000)
                                          -------------    --------------
    NET OTHER EXPENSE                    (       52,585)   (    3,285,386)
                                          -------------    --------------
 
NET LOSS                                 (  $ 4,332,255)   (  $ 4,205,985)
                                          =============    ==============
 
Net loss per share                       (  $     0.079)   (  $     0.104)
                                          =============    ==============

Average number of shares outstanding         54,588,325        40,611,127
                                          =============    ==============

</TABLE> 

The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                 For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
 
                                        COMMON STOCK                ADDITIONAL                            MINORITY INTEREST
                                                                     PAID-IN        ACCUMULATED
                                 SHARES            AMOUNT            CAPITAL          DEFICIT          SHARES           TOTAL
                             --------------  -------------------  --------------  ---------------  --------------  ----------------
<S>                          <C>             <C>                  <C>             <C>              <C>             <C>
Balance, December 31, 1994      15,152,520             $ 15,152    $ 12,142,029    ($  4,605,804)        674,619    $  1,129,494
Issued shares for services          20,000                   20          54,980                -               -               -
Issued additional shares                                                                                            
Issued for possible                                                                                                 
 acquisition                       100,000                  100         249,900                -               -               -
Issued in settlement of                                                                                             
 litigation                        150,000                  150         374,850                -               -               -
Issued additional shares                                                                                            
 for building and rights         9,300,000                9,300    (      9,300)               -               -               -
                                                                                                                    
Issued shares as bonus              10,000                   10          24,990                -               -               -
Issued for acquisition of                                                                                           
 ADMC                           12,000,000               12,000    (     12,000)               -               -               -
                                                                                                                    
Issued as finder's fee and                                                                                          
 for consulting services         3,150,000                3,150         144,850                -               -               -
Issued additional shares                                                                                            
 for building and rights         1,000,000                1,000    (      1,000)                -               -               -
                                                                                                                    
Issued for professional                                                                                             
 services                          480,000                  480          21,120                -               -               -
Disposal of Aimrite           (  8,000,000)            (  8,000)              -                -          (674,619)    ( 1,129,494)
                                                                                                                    
Issued for consulting                                                                                               
 services                        1,000,000                1,000         124,000                -               -               -
Issued for consulting                                                                                               
 services                          300,000                  300          37,200                -               -               -
Issued for cash                  2,000,000                2,000         248,000                -               -               -
Rescission of acquisition                                                                                           
 of building and rights       (  1,300,000)            (  1,300)  (   4,993,500)               -               -               -
Issued for inventory and                                                                                            
 equipment                          80,000                   80          19,920                -               -               -
Issued for consulting                                                                                               
 services and professional                                                                                          
 fees                            3,300,000                3,300         986,700                -               -               -
Net loss for year ended                                                                                             
 December 31, 1995                       -                    -               -   (    4,205,985)              -               -
                               -----------         ------------    ------------   --------------    -------------   ---------------
Balance, December 31, 1995
 - as previously reported       42,742,520               42,742       9,408,739    (    8,811,789)             -                -
Shares canceled in 1995       (    200,000)       (         200)           200                  -              -                -
                               -----------         -------------    ------------   ---------------   -------------   ---------------

                                           
Balance, December 31, 1995
 - restated                     42,542,520               42,542       9,408,939     (    8,811,789)            -                -
Issued shares for services      26,550,000               26,550       3,936,950                -               -                -
Issued shares for possible
 acquisitions                    2,000,000                2,000       (   2,000)               -               -                -
                                                                          
Canceled shares per
 settlement                  (   8,530,000)       (       8,530)          8,530                -               -                -
Issued shares for cash             900,000                  900         161,100                -               -                -
Net loss for year ended
 December 31, 1996                       -                    -               -     (   4,332,255)             -                -
                               -----------             --------    ------------    --------------   -------------   ---------------
Balance, December 31, 1996      63,462,520             $ 63,462    $ 13,513,519      ($13,144,044)  $          -      $         -
                               ===========             ========    ============    ==============   =============   ===============
 
</TABLE>
In addition to the above, the Company has authorized 50,000 shares of Preferred
Stock; no shares are outstanding.

The accompanying notes are an integral part of these financial statements.
American Diversified Group, Inc.

                                      F-6
<PAGE>
 
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
 
 
                                                             1996               1995
                                                      ------------------  -----------------
<S>                                                   <C>                 <C>
 
CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss                                                  ($ 4,332,255)      ($ 4,205,985)
 Depreciation                                                     4,482              2,692
 General and administrative expenses paid by stock            3,985,750            772,100
 Other expenses paid by stock                                         -            375,000
 Loss on abandoned acquisitions                                 107,380            250,000
 Loss on disposal of subsidiary                                       -          2,545,076
 Debt forgiveness                                          (     50,000)                 -
 Increase in accounts payable and accrued expenses               50,668             14,326
                                                          -------------      -------------
    NET CASH USED IN OPERATING ACTIVITIES                 (     233,975)      (    246,791)
                                                          -------------      -------------
 
CASH FLOWS FROM INVESTING ACTIVITIES
 Acquisition of property and equipment                   (          550)      (      9,066)
 Payments for possible acquisitions                      (      107,380)                 -
 Deposits                                                (          570)                 -
                                                          -------------      -------------
    NET CASH USED IN INVESTING ACTIVITIES                (      108,500)     (       9,066)
                                                          -------------      -------------
 
CASH FLOWS FROM FINANCING ACTIVITIES
 Sales of common stock                                          162,000            250,000
 Proceeds from notes payable to related parties                 175,521                  -
 Cash overdraft                                                   4,010                  -
                                                          -------------      -------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                   341,531            250,000
                                                          -------------      -------------
 
Net decrease in cash                                       (        944)     (       5,857)
 
CASH - beginning of year                                            944              6,801
                                                          -------------      -------------
 
CASH - end of year                                        $           -      $         944
                                                          =============      =============
</TABLE>
Non-cash Transactions in 1996:
------------------------------
1.  Issued 26,550,000 shares of common stock for services of $3,963,500.
2.  Issued 2,000,000 shares of common stock for possible acquisition; recorded
    at par value ($.001 per share).
3.  Canceled 8,530,000 shares per settlement agreement; recorded at par value.
4.  Note payable of $50,000 was forgiven.

Non-cash Transactions in 1995:
------------------------------
1.  Issued 8,250,000 shares of common stock for services of $1,377,100.
2.  Issued 80,000 shares of common stock for inventory and equipment valued at
    $20,000.
3.  Issued 10,000 shares of common stock for bonus of $25,000.
4.  Issued 8,100,000 shares of common stock for possible acquisition valued at
    $250,000.
5.  Issued 150,000 shares of common stock in settlement of litigation of
    $375,000.


The accompanying notes are an integral part of these financial statements.

                                      F-7
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:

Organization and Capitalization
-------------------------------

The Company was organized January 16, 1979 under the laws of the State of Nevada
as Terra West Homes, Inc.  On October 5, 1991, the Company changed its name to
Gerard Enterprises, Ltd. in connection with a merger.  The merger was not
consummated, and on November 23, 1991, the name was changed to Tera West
Ventures, Inc.  On March 15, 1995, the Company changed its name to American
Diversified Group, Inc.

On October 20, 1991, the authorized number of shares of common stock was
increased from 25,000 shares to 25,000,000 shares and the par value was changed
from $1 per share to $.001 per share, and on the same date the Company approved
a 40 for 1 stock split on outstanding shares.  On November 22, 1992, the
authorized shares were increased to 50,000,000 shares.  On July 17, 1996, the
authorized shares were increased to 200,000,000 shares.

On April 7, 1993, the Company amended its Articles of Incorporation and
authorized 50,000 shares of preferred Series A stock with a par value of $10 per
share.  No shares of preferred Series A stock are outstanding.

Nature of Operations
--------------------

Effective 1996, the Company is considered to be a developmental stage company
seeking to operate as a diversified medical company with intentions to acquire,
develop, distribute and/or market medical products, including generic
pharmaceuticals, vitamins, blood derivative products and diagnostic test kits,
principally for the export market.   During 1995, the Company was considered to
be a holding company in search of businesses to acquire.  The Company has not
generated any revenues from operations during the past two fiscal years ending
December 31, 1996.

Inventories
-----------
Inventories consist of medical supplies and equipment held for resale and are
stated at the lower of cost or market.  Cost is determined on a first-in, first-
out basis.

Property and Equipment
----------------------

Property and equipment is recorded at cost.  Depreciation of property and
equipment is computed on a straight line basis and depreciated over the
estimated useful life of the assets which is 5 years.

Accounting Estimates
--------------------

The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period.

Income Taxes
------------

The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes."  The statement
requires that the Company follow the liability method of accounting for income
taxes and requires an adjustment to the provision for income taxes for the
effect on deferred income taxes of any changes in corporate income tax rates.

Through December 31, 1996, the Company has accumulated net operating losses
which can be used to offset future earnings.  Accordingly, no provision for
income taxes is recorded in the financial statements.

                                      F-8
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED):

Net Loss Per Common Share
-------------------------

Loss per common share has been computed based upon the weighted average number
of shares of common stock outstanding.  The weighted average number of shares
outstanding for the years ended December 31, 1996 and 1995 was 54,588,325 and
40,611,127, respectively.

NOTE 2:  BUSINESS DISPOSITION:

At December 31, 1994, the Company owned approximately 69% of the outstanding
stock of Aimrite Systems International, Inc. ("Aimrite").  In January, 1995, an
additional 4 million shares were issued in connection with the Company's
acquisition of Aimrite.

Effective March 28, 1995, all of the Company's interest in Aimrite, including
patents and technology for a computer controlled shock absorber system and a
computer controlled air suspension system, was repurchased by the original
selling shareholders of Aimrite in June of 1995 by the return of the 8 million
shares originally issued in the purchase.

During the year ended December 31, 1995, the Company recorded a loss of
$2,545,076 on the disposal of Aimrite.

NOTE 3:  PROPERTY AND EQUIPMENT:

Property and equipment as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                                         1996      1995
                                       --------  --------
<S>                                    <C>       <C>
 
     Medical equipment                  $21,656   $21,656
     Office furniture and equipment       2,960     2,410
                                        -------   -------
                                         24,616    24,066
 
     Less: Accumulated depreciation       6,974     2,492
                                        -------   -------
 
       Net property and equipment       $17,642   $21,574
                                        =======   =======
</TABLE>
Depreciation expense was $4,482 for 1996, and $2,692 for 1995.

NOTE 4:  MISCELLANEOUS RECEIVABLE:

During 1996, the Company entered into an agreement to acquire Imaging Systems
Synergies, Inc. ("ISS").  During negotiations with respect to the proposed
acquisition, the Company advanced $100,000 to assist ISS in continuing its
operations while the Company pursued its due diligence efforts.

Following the completion of due diligence, the Company concluded that it should
not acquire ISS and, after consulting with counsel, pursued a cause of action
against ISS for damages, including recovery of the $100,000 advance.  It cannot
be determined at this time whether the Company will be successful in recovering
any damages against ISS.

                                      F-9
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


NOTE 5:  COMMITMENTS AND CONTINGENCIES:

Going Concern
-------------

As shown in the accompanying financial statements, during the year ended
December 31, 1996, the Company had no revenues and incurred a net loss of
$4,332,255 and, as of December 31, 1996, the Company's accumulated deficit is
$13,144,044.  These factors, as well as the uncertain conditions the Company
faces regarding its ability to successfully acquire, develop and distribute
and/or market medical products, including generic pharmaceuticals, vitamins,
blood derivative products and diagnostic test kits, create substantial doubt
about the Company's ability to continue as a going concern.

The Company's management determined its best business opportunities are in the
export and sale of products manufactured by third parties.  During 1996, the
Company entered into consulting agreements to assist in entering into the
medical products field and becoming an operating company.

Management's plans also include seeking to raise funds through sales of stock in
private placements and public sales of securities.  During the year ended
December 31, 1996, the Company sold 900,000 shares of stock for cash of
$162,000.  Subsequent to the year ended December 31, 1996, the Company sold
3,250,000 shares of stock for cash of $130,000.  The Company has been actively
seeking to acquire and/or merge with other suitable businesses in its field of
medical products distribution.

Other Risks
-----------

The Company has not obtained insurance for general liability.  Because the
Company is currently in the Development stage, it does not expect to incur any
losses in connection with uninsured risks.  Therefore, no provision for any such
loss has been provided in the accompanying financial statements.

Leases
------
The Company leases its office premises on a month-to-month basis.  Rent expense
for 1996 and 1995 was $14,780 and $5,148, respectively.

NOTE 6:  SHAREHOLDERS' EQUITY:

Shares Issued for Building and Contractual Rights
-------------------------------------------------

In September and December, 1994, the Company issued a total of 1.5 million
shares of common stock as prepayment on the acquisition of a rental building and
certain contractual rights to a construction company.  In February, 1995, the
Company issued a total of 9.3 million additional shares (restricted under Rule
144) and, in April, 1995, the Company issued an additional 1 million shares as
further consideration.

The building and contractual rights were never delivered to the Company, and in
February, 1995, the Company agreed to rescind the acquisition and relinquish its
rights to the building and contractual rights in return for 1.3 million of the
shares previously issued.  In September, 1995, 1.3 million shares were returned
to the Company and canceled.

Shares Issued and Canceled in Connection with Possible Acquisitions
-------------------------------------------------------------------

Effective February 27, 1995, the Company entered into an agreement to acquire
all of the issued and outstanding stock of American Diversified Medical Corp.
("ADMC"), a Delaware corporation, in exchange for the issuance of 12 million
shares of the Company's common stock (restricted under Rule 144), of which 10.53
million shares were issued to ADMC's principal shareholder, Ameril Corp.  The
agreement was never consummated, and on April 4, 1996, the Company entered into
a settlement agreement with Ameril, which, among other things, terminated the
agreement "ab initio," as if the agreement had never been entered into.

                                      F-10
<PAGE>
 
                       American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


NOTE 6:  SHAREHOLDERS' EQUITY (CONTINUED):

Shares Issued and Canceled in Connection with Possible Acquisitions (Continued)
-------------------------------------------------------------------------------

The settlement provided for Ameril, as the corporate seller of ADMC, to retain 2
million shares of the Company's common stock in consideration for the
cancellation of 8.53 million shares held by Ameril, which 8.53 million shares
were returned to the Company's transfer agent for cancellation.

The settlement also provides for mutual releases of all parties, and
accordingly, during the year ended December 31, 1996, the Company recorded a
gain of $4,795 for net amounts due to the seller, and from ADMC.

In connection with the initial acquisition agreement, the Company issued a total
of 3,150,000 shares of common stock (restricted under Rule 144) as finders' fees
and for consulting services.  The Company estimated the value of the fees and
services at $148,000 based on a percentage of the purchase price as stated in
the agreement, and has charged this amount to expense during the year ended
December 31, 1995.

In February, 1995, the Company also issued 100,000 shares of common stock
(restricted under Rule 144) in connection with another possible acquisition.
The acquisition was never consummated.  The shares issued were valued by the
Company at $250,000 based on 50% of the bid price of free-trading shares of the
Company's stock which approximates the fair value of the restricted shares
issued.  The Company has recorded this amount as a loss during the year ended
December 31, 1995.

In January, 1996, the Company issued 2 million shares of common stock
(restricted under Rule 144) in connection with the possible acquisition of a
company.  The acquisition was never consummated and the other company has agreed
to return the 2 million shares to the Company for cancellation.  As of the date
these financial statements were prepared, these 2 million shares have note yet
been physically canceled, but the Company's transfer agent has been instructed
that such shares have in fact been canceled.  Upon cancellation of these shares,
the Company will adjust stockholders' equity for the par value of the shares
canceled.

Shares Issued in Settlement of Litigation
-----------------------------------------

In February, 1995, the Company issued 150,000 shares of common stock (restricted
under Rule 144) in settlement of a pending lawsuit.  The shares issued were
valued by the Company at $375,000 based on 50% of the bid price of free-trading
shares of the Company's stock which approximates the fair value of the
restricted shares issued.  The Company has recorded this amount as a loss during
the year ended December 31, 1995.

Shares Issued for Services
--------------------------

In January, 1995, the Company issued 20,000 shares of common stock (restricted
under Rule 144) for professional services rendered.  The shares issued were
valued by the Company at $55,000 based on 50% of the bid price of free-trading
shares of the Company's stock which approximates the fair value of the
restricted shares issued. The Company has charged this amount to expense during
the year ended December 31, 1995.

In February, 1995, the Company issued 10,000 shares of common stock (restricted
under Rule 144) as a bonus to an officer of the Company.  The shares issued were
valued by the Company at $25,000 based on 50% of the bid price of free-trading
shares of the Company's stock which approximates the fair value of the
restricted shares issued.  The Company has charged this amount to expense during
the year ended December 31, 1995.

                                      F-11
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


NOTE 6:  SHAREHOLDERS' EQUITY (CONTINUED):

Shares Issued for Services (Continued)
--------------------------------------

In April, 1995, the Company issued a total of 480,000 shares of common stock
(restricted under Rule 144) for legal and consulting services rendered.  The
shares issued were valued by the Company at $21,600 based on 50% of the bid
price of free-trading shares of the Company's stock which approximates the fair
value of the restricted shares issued. The Company has charged this amount to
expense during the year ended December 31, 1995.

In June, 1995, the Company issued a total of 1 million shares, and in August
issued an additional 300,000 shares of common stock for consulting services.
The shares issued were valued by the Company at $125,000 and $37,000,
respectively, based on the issuance price of shares recently sold for cash.  The
Company has charged these amounts to expense during the year ended December 31,
1995.

In December, 1995, the Company issued a total of 3.3 million shares of common
stock for consulting and professional services rendered during the year ended
December 31, 1995 and to be rendered during future periods.  The shares issued
were valued by the Company at $990,000 based on the average of the bid and ask
price of free-trading shares of the Company's stock.  In connection with
services rendered, the Company charged $360,000 to expense during the year ended
December 31, 1995, and in connection with services to be rendered during future
periods, the Company charged $630,000 to deferred consulting fees, which amount
was charged to expense in 1996.

In March, 1996, the Company issued a total of 17.850 million shares of common
stock for consulting services and professional fees rendered during the fiscal
year and to be rendered during future periods.  The shares issued were valued by
the Company at $3,034,500, based upon the average of the bid and ask price of
the shares on the date of issuance.  In connection with services rendered, the
Company has charged $2,426,750 to expense during the year ended December 31,
1996, and in connection with services to be rendered during future periods, the
Company has charged $607,750 to deferred consulting fees.

In December, 1996, the Company issued a total of 4.7 million shares of common
stock for consulting services, professional fees and executive compensation for
services rendered during the year ended December 31, 1996.  The shares issued
were valued by the Company at $329,000 based upon the average bid and ask price
of the shares on the date of issuance, and the Company charged this amount to
expense during the year ended December 31, 1996.

In December, 1996, the Company agreed with a shareholder to issue 4 million
shares of common stock (restricted under Rule 144) as reimbursement for shares
advanced by the shareholder to third parties for services rendered on the
Company's behalf during fiscal 1996.  The shares were valued at $600,000, based
upon the estimated fair market value of the services rendered and the value of
the shares on the dates the shares were advanced, and the Company has charged
this amount to expense during the year ended December 31, 1996.  The Company has
also agreed to register these shares, as soon as practicable, and to issue
additional shares as necessary to equal a total market value of $600,000, based
upon the average bid and ask price of the shares on the effective date of the
registration statement.

Shares Issued for Medical Equipment and Supplies
------------------------------------------------

In August, 1995, the Company issued 80,000 shares of common stock (restricted
under Rule 144) in exchange for medical equipment and medical supplies, valued
at $15,000 and $5,000, respectively.  The Company recorded this transaction
based on the fair value of the medical equipment and supplies, which was more
clearly evident than the fair value of the Company's stock.

                                      F-12
<PAGE>
 
                       American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


NOTE 6:  SHAREHOLDERS' EQUITY (CONTINUED):

Stock Issued for Cash
---------------------
During July and August, 1995, the Company issued 2,000,000 shares of common
stock at $.125 per share, for $250,000 cash.

During the year ended December 31, 1996, a shareholder exercised stock options
to purchase 900,000 shares of common stock of the Company at $.18 per share, for
which the Company received $162,000.

Common Stock Purchase Options
-----------------------------

In connection with the Company's private placement, subsequent to the end of the
fiscal year 1996, the Company issued a total of 3,250,000 shares and 3,250,000
options exercisable to purchase 3,250,000 shares at a price of $.08 per share.
The Company has agreed to register the shares and the shares underlying the
options in a registration statement of Form S-1 as soon as reasonably
practicable.

In connection with the Company's consulting agreements with two consultants, the
Company has granted options exercisable to acquire shares of the Company's
common stock.  One consultant was granted options to acquire 10 million share
per year, for up to five years, provided that the shareholder is continuing to
provide services to the Company during each of the five years.  The options are
exercisable at the lower of $1.00 per share or 50% of the average bid price of
the shares on the 10 days prior to the exercise of the options.  The other
consultant has been granted options to acquire 5 million shares at a price of
$.08 per share.

Further, in connection with the retainer agreement with the Company's corporate
counsel, who is also a director and officer of the Company, the corporate
counsel was granted options to acquire 5 million shares at a price of $.08 per
share.

As of December 31, 1995, there are no warrants or options outstanding to acquire
any additional shares of common stock of the Company.

NOTE 7:  RELATED PARTY TRANSACTIONS:

Notes Payable to Related Parties
--------------------------------
As of December 31, 1996, the Company is obligated under four convertible
promissory notes as follows:
<TABLE>
<CAPTION>
 
<S>                                       <C>
       Shareholder and former director    $ 75,000
       Shareholder and current officer      35,521
       Shareholder and consultant           10,000
       Shareholder and consultant            5,000
                                          --------
                                          $125,521
                                          ========
</TABLE>

The notes are due and payable, without interest, nine months from December 31,
1996, and are convertible at the discretion of the holder, on the basis of
twelve (12) shares for each $1.00 of indebtedness.  During the year ended
December 31, 1996, a consultant loaned the Company $50,000 pursuant to a
convertible promissory note, with interest at 12% per annum.  The principal and
interest under the note was convertible into shares at a price of $.25 per
share.  Subsequent to the Company's year ended December 31, 1996, the $50,000
note was forgiven, based upon a written letter agreement between the Company and
the consultant.

                                      F-13
<PAGE>
 
                        American Diversified Group, Inc.
                       Formerly Tera West Ventures, Inc.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


NOTE 7:  RELATED PARTY TRANSACTIONS (CONTINUED):

Employment Agreement
--------------------

Effective October 1, 1996, the Company entered into a three (3) year employment
agreement with an employee/officer/director pursuant to which the Company agreed
to pay compensation of $100,000 per annum, payable monthly at the rate of
$8,333.  In accordance with the agreement,  this compensation was accrued but
unpaid because of the Company's lack of positive cash flow.  In addition, the
Company agreed to issue to the employee/officer/director 5 million shares and
grant an option exercisable to acquire 5 million shares at a price of $.08 per
share.  The above shares and options are in addition to any compensation paid
and payable to the employee/officer/director evidenced by the issuance of shares
in registration statements on Form S-8 during and after the year ended December
31, 1996.

NOTE 8:  SUBSEQUENT EVENTS:

Subsequent to the Company's year ended December 31, 1996, the Company shipped
its initial order of generic pharmaceuticals, vitamins and diagnostic test kits
to the Central Pharmacy of the Republic of Guinea.  The Company has sources and
is continuing to ship products subject to its order totaling $1 million and has
received commitments from its consultant/distributor to sell up to $15 million
of products to West Africa and Brazil.  In addition, the Company is servicing a
request from the National Health Foundation, State of Roraima, in Brazil, to
provide 100,000 dengue fever and 100,000 malaria vivex test kits.  The Company
is exploring a joint venture with a third party to manufacture the diagnostic
test kits for the order from Brazil.  Further, the Company has shipped blood
derivative products to the National Blood Bank of the Ivory Coast, in West
Africa.  The Company has also received a  request to supply $1 million in
generic pharmaceutical products to West Africa, and has secured supplies from
third party manufacturers at advantageous pricing in order to fulfill the above
orders and requests to supply products.

On January 2, 1997, the Company issued 4 million shares to a consultants and 1
million shares to its chief executive officer for continued services to the
Company.  The shares issued were valued by the Company at $250,000 based upon
the average bid and ask price of the shares on the date of issuance, and the
Company charged this amount to expense during the first quarter of its current
fiscal year.  In addition, in consideration for the services of two consultants,
as well as its corporate counsel, director and officers, the Company issued 14.5
million shares.  These shares issued were valued by the Company at $725,000
based upon the average bid and ask price of the shares on the date of issuance,
and the Company charged this amount to expense during the first quarter of its
current fiscal year.

The Company has been dependent upon the willingness of its consultants,
officers, directors and professionals to accept shares issued in registration
statements of Form S-8 for services, in lieu of cash compensation.  The Company
shall continue to be dependent upon the willingness of persons to accept shares
as compensation for services, until such time, if ever, that it shall generate a
positive cash flow from operations.

                                      F-14