<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, 1997                          
[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES   
             EXCHANGE ACT OF 1934 [NO FEE REQUIRED]      
         For the transition period from  _____________  to  _____________      
                                                                                
                      COMMISSION FILE NUMBER: 0-23532                           
                      -------------------------------                           
                                                                                
                       AMERICAN DIVERSIFIED GROUP, INC.                         
         ------------------------------------------------------------
                                                                    
              NEVADA                                       88-0292161 
---------------------------------              ---------------------------------
 (State or Other Jurisdiction of               (IRS Employer Identification No.)
          Incorporation)
                                                                                
             110 NORTH CENTER STREET, SUITE 202, HICKORY, NC 28601
         ------------------------------------------------------------
                   (Address of Principal Executive Offices)

                                                                                
                                (704) 322-2044
                       ---------------------------------
                          (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 revenues of $70,069 during its recent fiscal year ended
December 31, 1997. The aggregate market value of the voting stock held by non-
affiliates(*) of the Registrant based on the average bid and asked prices of
$.027 and $.029 respectively, of such common stock as of May 1, 1998 is
$560,000, based upon an average of $.028 multiplied by 200,212,560 shares of
common stock as of such date held by non-affiliates. As of May 1, 1998, the
Registrant had a total of 210,212,560 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 27.
                                                                                
<PAGE>
 
                                    PART I

ITEM 1.   DESCRIPTION OF BUSINESS                                             
                                                                                
Background-Prior to Fiscal 1997                                                 
-------------------------------                                                 
                                                                                
     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.

     During 1995 and 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
entered into several consulting agreements with unaffiliated third parties for
the purpose of assisting the Company in developing product lines, as well as
hopefully generating purchase orders for such products, with the view to making
the Company an operating company. See "Recent Business Developments and
Consulting Agreements" below.

     Recent Business Developments and Consulting Agreements                     
     ------------------------------------------------------                     
                                                                                
     The Company's business developments, during fiscal 1996 and through fiscal
1997, have principally resulted from the engagement by the Company in February,
1996, of Emerging Trends Linkages Corp., a New York corporation ("ETLC"), as
consultant. ETLC. The Company entered into an initial consulting agreement with
ETLC in February, 1996, for the purpose of seeking purchase orders from West
Africa for the distribution and sale of a variety of medical/pharmaceutical
products.

     Following execution of the initial February, 1996, consulting agreement
with ETLC, the Company received its first purchase orders from the Republic of
Guinea. These orders were for Human Serum Albumin (HSA) and cholera diagnostic
test kits. During fiscal 1996, the Company pursued efforts to source HSA from
manufacturers that had previously been involved in the distribution and sale of
HSA, including manufacturers in China and Argentina, among other sources.
However, HSA was and remains in short supply worldwide, and the Company has not
been able to fill the orders for HSA for that reason. In fact, the Company has
determined not to pursue efforts to market and sell HSA in West Africa because
of sourcing difficulty.

     Thereafter, in about August, 1996, the Company received requests from the
Republic of Guinea for generic pharmaceuticals and vitamin products, which were
followed by the Company's receipt of purchase orders for such products. The
Company and in May, 1997, the Company requested that ETLC begin efforts to
source the products that were subject to purchase orders from Guinea.

     The Company during 1997 and during the first quarter of fiscal 1998 has
continued to utilize the services of ETLC for, among other purposes, seeking the
supply of these medical related products from unaffiliated third parties in
order to fulfill purchase orders from the Republics of

                                       2

<PAGE>
 
Guinea and Mali that were generated by ETLC for the benefit of the Company and
to secure approvals and product registration for dengue fever diagnostic test
kits in Brazil. In addition, during the last quarter of fiscal 1997, the
Company and ETLC entered into a venture for the purpose of marketing
telecommunications products and services in West Africa, which efforts are
continuing. See the discussions below.

     During the last six months of fiscal 1996 and continuing through fiscal
1997 and the first quarter of fiscal 1998, the Company and ETLC have devoted
virtually all of their efforts and business time for the purpose of generating
purchase orders for a variety of medical and pharmaceutical products for the
Company, after first securing the requisite approvals for the registration,
distribution and sale of such products, and filling purchase orders as they are
generated. These efforts have principally involved the Republics of Guinea and
Mali in West Africa. During fiscal 1997 and through the first quarter of fiscal
1998, ETLC has also devoted its efforts for securing purchase orders and
approvals from the National Health Foundation of Brazil for the sale of dengue
fever diagnostic test kits.

     In connection with its efforts on behalf of the Company, which commenced
during fiscal 1996, ETLC generated the first purchase orders in the Company's
history, including purchase orders for HSA and cholera test kits, and
thereafter, for a wide variety of generic pharmaceuticals and vitamins. All
these orders were from the Central Pharmacy of the Republic of Guinea, which the
Company at that time believed that it could source and fill. The aggregate value
of the orders for HSA and test kits was approximately $200,000 and the order for
generics totaled approximately $750,000.

     However, the Company was unable to source and supply the HSA that was the
subject to the initial order from the Central Pharmacy of Guinea for the reason
that the suppliers of HSA that the Company sought to use either had continued
difficulty in manufacturing and assuring the quality of their HSA products or
had ceased manufacturing this product. Further, the Company also had difficulty
in sourcing the generic pharmaceuticals subject to the second Guinean order
because of the pricing parameters set forth in such order from the Central
Pharmacy of Guinea. At the time the order for generic pharmaceuticals was
received from Guinea in about September, 1996, the Company believed that it
could in fact source these products.

     During the last fiscal quarter of fiscal 1996 and through the first six
months of fiscal 1997, the Company discovered that it could not source a
significant portion of the generic pharmaceutical order from Guinea because the
pricing from sources available to the Company, principally from US
manufacturers, could not meet the pricing structure that Guinea had previously
used from various European sources. As a result, the Company determined to
utilize ETLC, not just to secure orders, but also to source products from
manufacturers to fulfill these orders. Such determination, however, was not made
by the Company until February, 1997, 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 which has enabled the Company to generate and receive
purchase orders from the Republics of Guinea and Mali. the Company is continuing
to devote its efforts to pursue orders for generic pharmaceuticals/vitamins, and
for diagnostic test kits, among other products. However, the Company must be
able to source such products at pricing levels in order to meet the
                                                                                
                                       3

<PAGE>
 
  requirements for the orders received from and required by the developing
  countries in West Africa and elsewhere.

       The Company continued to pursue efforts with ETLC to fulfill the purchase
  orders for generic pharmaceuticals from the Central Pharmacy of the Republic
  of Guinea, but it was not until July, 1997, that the Company was able with the
  efforts of ETLC to source and commence shipment of the initial products
  subject to the purchase order for generic pharmaceuticals and vitamins to the
  Central Pharmacy of Guinea. The Company thereafter, during the last quarter of
  fiscal 1997, shipped additional generic pharmaceutical products to West Africa
  under purchase orders as discussed below. In addition, ETLC during 1997
  established a business representative in Brazil, where the Company has pursued
  the registration and approval of diagnostic test kits for dengue fever, also
  as discussed below, which the Company believes will lead to purchase orders
  during the second or third quarters of fiscal 1998.

       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
  Republics of Guinea and Mali, and the Company believes generics 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 in the supply of generic
  pharmaceuticals. With the continued efforts and contacts of ETLC during fiscal
  1997 and through the first quarter of fiscal 1998, the Company believes that
  it has now developed sources of supply of generics from manufacturers that
  will continue to offer the Company an opportunity to penetrate a previously
  "closed" market in West Africa. The Company has also expanded its product line
  of generic pharmaceutical products and diagnostic test kits, which the Company
  believes will permit it to increase its level of orders and its profitability
  during fiscal 1998. However, ADGI does not have the resources of many of its
  competitors and is a newcomer to the industry. Therefore, the Company will
  have to continue to rely upon its consultants in order to be able to
  successfully compete in West Africa as well as in Brazil, because of the
  expertise and relationships of its consultants and their respective
  representatives, described more fully below. See "Management's Discussion and
  Analysis of Financial Condition and Results of Operations".

       The Company, in August, 1997, following conferences and meetings with
  ETLC, and for the intended purpose of generating cash flow on a monthly basis,
  entered into a joint venture with ETLC for the purpose of marketing
  telecommunications services and products in West Africa, where it has existing
  pharmaceutical distribution business operations and representatives. The
  Company from call-back sales to international and domestic mining companies,
  financial institutions, oil companies and foreign embassies in Guinea and
  Mali, initially projected monthly revenues of from $200,000 to $400,000, after
  the start-up period of three to six months. The Company now believes that it
  will be approximately six months before it may expect to generate  

                                       4
<PAGE>
 
  revenues at that level. During the three month to six month period, the
  Company still believes that that it will generate $20,000 to $30,000 monthly
  from call-back, commencing during the third quarter of fiscal 1998.

       Further, in order to permit the Company and ETLC to properly develop the
  customer base and generate the projected revenues from call-back, ETLC agreed
  with the Company to install certain computer hardware and software, which is
  being installed in May, 1998. This has had the effect of extending the start-
  up period for call-back but will permit the Company to serve more customers,
  without interruption and line interference. To that end, the Company has
  authorized ETLC to complete the installation of such enhanced computer
  equipment in or about May, 1998, following which the Company believes that it
  will be able to meet the projections for call-back. Following the installation
  of this enhanced computer hardware and software, the Company also projects
  higher profit margins from the West African call-back revenues. Higher profit
  margins will permit far greater volume of usage and reduce fixed costs.

       Further, with this installation, the Company believes that it will
  fulfill its projections that it will have over 200 customers by the Summer,
  1998 and up to 400 customers by fiscal year end 1998, with usage of $500 to
  $1,000 per customer. During September, 1997, and to date, the Company has
  signed 50 to 100 customers for call-back service, but without installation of
  the computer equipment, it has not been able to generate adequate revenues
  from call-back because of local telephone interference from the PTTs. Since
  the inception of the Company's call-back service, it has generated only
  limited revenues due to the above referenced interference from PTTs.

       In addition, during fiscal 1997 and continuing during fiscal 1998 to
  date, the Company utilized the services of its other consultants, including
  Ashco International, Ltd., Higher Ground, Inc., and Corporate Seminar
  Advisors, Ltd., for the purpose of providing continuing services to the
  Company, as more fully described below, and specifically with regard to
  services intended to promote the Company, its expanding business lines, areas
  of development, and to evaluate the Company's potential acquisitions and joint
  ventures. See the discussion below with respect to the Company's joint venture
  and equity participation with Telephonetics Overseas Corporation, which was
  announced in March, 1998.

       In connection with the initial February, 1996 consulting agreement
  between the Company and ETLC, as noted above, ETLC agreed to use its best
  efforts to secure approvals for product registration, and obtain purchase
  orders for the distribution and sale of HSA, which ADGI believed it could
  source as its principal product at that time, within West Africa. 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 to ETLC
  shares of the Company's common stock (the "Shares") and granted to ETLC a
  common stock purchase option (the "Option") to acquire additional Shares (the
  "Option Shares") for an adjusted price of $.18 per Option Share. The grant of
  the Option was deemed by the Company as ETLC's consideration and payment for
  the rights to market the Company's products, as such product line may be from
  time to time, within ETLC's territory in West Africa, which includes Guinea,
  Mali, Ivory Coast, Senegal, Burkina Faso, and Niger. This agreement was
  amended in to also provide for the sale by ETLC, on behalf of the Company, of
  diagnostic test kits for strep, cholera, syphilis and gonorrhea in the above
  referenced West African countries, in consideration for the issuance of
  additional Shares.

                                       5
<PAGE>
 
       The Company, in July, 1997, with the assistance of ETLC was able to
  ship an initial portion of generic pharmaceuticals subject to the overall
  order from the Central Pharmacy of the Republic of Guinea. However, because
  the Company's other consultants that it had utilized in 1995 and 1996, and
  excluding ETLC, Ashco, Higher Ground and Corporate Seminars, the Company was
  unsuccessful in sourcing products to fill the complete orders and be able to
  continue shipment of products pursuant to both purchase orders from the
  Central Pharmacy of the Republic of Guinea. As a result, during fiscal 1997,
  because the Company was unable to generate revenues from the purchase orders
  because it could not source the products at satisfactory pricing during fiscal
  1997. During 1997, the Company was not able to find manufacturing sources with
  prices comparable to those Guinea had previously obtained from certain Eastern
  European countries, which sources were able to deliver products at lower
  prices then were then available to the Company. With the assistance of ETLC
  and other ongoing and continuing consultants to the Company, the Company
  continued to seek out sources for generic pharmaceutical from several
  countries, including India, where quality generic pharmaceuticals could be
  obtained at highly competitive pricing.

       Further, the Company received during fiscal 1997 a commitment for
  pre-export financing from an institutional investment bank, based upon the
  initial orders for generics from the Central Pharmacy of Guinea, but to date
  has not used this commitment for pre-export financing. However, the Company
  received and utilized a $50,000 loan from certain private lenders to fund the
  purchase of products for the shipment made to Guinea as a portion of the
  initial order for generic pharmaceuticals. During fiscal 1997 and the first
  four months of fiscal 1998, the Company continues to believe that it will be
  able to secure advantageous pricing for the generic pharmaceutical products
  and continued to utilize ETLC and other consultants, including the private
  lenders referenced above, to develop better sourcing for these products. The
  Central Pharmacy of the Republic of Guinea, during the last quarter of fiscal
  1997, paid the Company $22,378 for the initial portion of the order delivered
  in July, 1997 and the Company during the first quarter of fiscal 1998 was paid
  an additional $7,600 by a representative of Guinea for the small loss
  experienced by the Company on this first order and shipment.

       Further, during fiscal 1997, in connection with the Company's
  receipt of the first of several generic pharmaceutical purchase orders from
  the Republic of Mali, the Company was issued an irrevocable letter of credit
  in the amount of approximately $70,000 from the Banque de Development du Mali,
  Bamako, Mali, through Natexis Banque, Paris, France. This letter of credit was
  payable to the Company for the initial purchase orders generated by ETLC for
  delivery to Mali on behalf of the Company under its agreements with the
  Company. At the Company's request, ETLC began to source the generic
  pharmaceutical products for this order, for generic pharmaceuticals, including
  Diclofinac, Furosemide, Paracetamol and Methyldopa, which products were
  sourced from manufacturers in Canada, India, Holland and Belgium,
  respectively, all of which products were shipped during the first four months
  of fiscal 1998. During April, 1998, the entire proceeds of this letter of
  credit were paid through Natexis Banque to and at the Company's direction.

       Following receipt of this initial order from PERGUE S.A.R.L. that
  was subject to the letter of credit, the Company received a further order for
  additional generic pharmaceuticals, including Amoyycillin, Paracetamol and
  Diclofinac. This order was generated as a result of a "shortage" in Mali for
  these products that PERGUE S.A.R.L filled through the Company, as a result of
  the Company's contacts with ETLC. This further order, which was intended to
  fill the Malian shortage, aggregated approximately $31,000, and was delivered
  by the Company to Bamako, Mali, and was sourced through a manufacturer in
  India, in late 1997.

                                       6
<PAGE>
 
       Additionally, in consideration for the services to the Company during the
  two year period from June 1995 through mid 1997, the Company issued to Ms.
  Judith Grossman, a consultant, Shares during late 1996 and in 1997 in
  consideration for continued consulting services to the Company at a time
  during which it had no cash flow to pay for such services. Further, the
  Company, in lieu of any cash compensation, issued to Jerrold Hinton, the
  Company's president, CEO and a director, and to Thomas J. Craft, Jr., Esq.,
  the Company's corporate secretary, corporate counsel and a director, and to
  persons who served as Mr. Craft's staff and consultants, Shares for providing
  continued services to the Company.
  
       The Company has also agreed to negotiate with Messrs. Hinton, and
  Craft, Ms. Grossman, ETLC, as well as with other persons and firms providing
  continuing services to the Company, including those persons who provided
  export financing and who brought the Indian pharmaceutical manufacturer to the
  Company and were instrumental in securing for the Company certain credit lines
  to pay for products used for export to West Africa, and persons who conducted
  education seminars and conferences for the Company, for the issuance of
  additional Shares and the grant of Options, in one or more registration
  statements on Form S-8 and/or Form S-1 under the Securities Act of 1933, as
  amended (the "Act"), in order to compensate such parties for continuing
  services performed and to be performed on behalf of the Company in developing
  its pharmaceutical products business, its diagnostic test kit business, its
  telecommunications business and other services necessary for the Company's
  operations prior to its generating any material cash flow from operations. The
  Company believes that during fiscal 1998, it will begin to generate a cash
  flow from operations that should permit it to commence paying certain persons
  in cash as well as in Shares rather than just in Shares. See the discussion
  below with respect to the agreement to acquire equity in Telephonetics
  Overseas Corporation of Florida for cash compensation.

       The Company firmly believes that it will be able, during fiscal 1998, to
  continue to supply generic drugs and vitamins at prices that shall permit the
  Company to generate a profit. Further, through the efforts of ETLC's
  representative in Brazil, the Company has recently received approvals for the
  registration and sale of dengue fever test kits to the National Health
  Foundation, State of Roraima, Brazil, and anticipates purchase orders
  nationally in Brazil for this diagnostic test kits. The Company believes that
  it will receive the initial purchase orders, following final human testing
  which has already commenced in Brazil, within approximately 30-60 days. The
  Company has been informed that the potential market for dengue fever
  diagnostic test kits in Brazil, nationally, is approximately 1 million test
  kits or more per year, with potential sales of $16 million, based upon current
  world pricing of such kits, which revenues the Company would share with the US
  manufacturer and the Brazilian distributor of such products.

       The Company in March 1998 entered into a joint venture with Telephonetics
  Overseas Corporations ("TOC") of Miami, FL. TOC is engaged in the business of
  providing state of the art telecommunications hardware and audio content for
  on-hold and website messaging and advertising. TOC also distributes Internet
  telephony equipment and services for sale in the domestic and foreign markets.
  Under the Company's joint venture agreement with TOC, the Company paid to TOC
  $50,000 with an obligation to pay an additional $100,000 to acquire a 9%
  interest in TOC with the right upon payment of additional cash consideration
  to acquire additional 9% interests for up to 45% total equity in TOC.
  Following its initial investment in TOC, initial orders were announced by TOC
  for the distribution and sale of TOC's telecommunications and Internet
  telephony products and services, pursuant to which TOC's distributor in Canada
  is required to sell a minimum of $400,000 in TOC's products and services
  during the next 12 months. The Company believes that its agreement with TOC
                                         7
<PAGE>
 
  and the products and services provided and to be provided by TOC will
  integrate well with the Company's call-back and telecommunications business in
  West Africa.

                                       8
<PAGE>
 
       Discontinued Project
       --------------------

            Registrant, during fiscal 1996, entered into purchase agreement with
  Imaging Systems Synergies Inc. ("ISS") with offices located at North Miami
  Beach, FL for the purpose of acquiring ISS, which purported to be an internet
  gateway provider and 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.

            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 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. See "Item 3. Legal Proceedings"
  below. The Company's action was moved to Dade County Superior Court and the
  Company cannot determine at this time whether it will prevail against ISS and
  if so, whether it will be successful in recovering any damages against ISS.
  The entire board of directors of ADGI agreed unanimously not to acquire ISS,
  and the Company generated no income from its involvement with ISS.

                                       9
<PAGE>

ITEM 2.   DESCRIPTION OF PROPERTY                                       
                                                                                
          The Company presently leases approximately 600 square feet of
executive office space at 110 North Center Street, Suite 202, Hickory, NC 28601,
for $570 per month. During the first six months of fiscal 1997, the Company
leased approximately 250 square feet of office space at 700 Canal Street, 3rd
Floor, Stamford, CT 06902 as its executive offices for $800 per month. In
addition, the Company has use of warehouse facilities at JFK International
Airport, New York City and utilizes as its investor relations and conference
room facilities office space at 45 Rockefeller Plaza, International Building-
Rockefeller Center, New York City, NY, at a cost of $2,000 per month, on a 
month-to-month basis. The condition of the Company's leased facilities in
Hickory, NC and New York City, NY is excellent, and are at advantageous terms
because of the Company's relationship with ETLC.

ITEM 3.   LEGAL PROCEEDINGS                                               
                                                                                
          The Company has pending a cause of action against Imaging Systems
Synergies Inc. ("ISS") for damages, including recovery of the $100,000 in
interim capital advanced to ISS in connection with a planned acquisition that
was not completed. The venue for the Company's action, American Diversified
                                                       --------------------     
Group, Inc. v. Imaging Systems Synergies, Inc., et al., 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 believes that
this action is meritorious but cannot determine at this time whether it will
prevail against and be successful in recovering any damages from ISS. The entire
board of directors of ADGI agreed unanimously not to acquire ISS following its
due diligence in connection with this determination. The Company generated no
income from its involvement with 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 1997.                                                               
                                        
                                      10

<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 "NASDAQ Bulletin Board". As of April 15, 1998, 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.

                                 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
Quarter Ending June 30       $   5/16  $   1/4
Quarter Ending Sept. 30      $   7/16  $   1/4
Quarter Ending Dec. 31       $   5/16  $   1/8

                                 Bid Prices
                             -----------------
           1998                High      Low
-------------------------    --------  -------
 
Quarter Ending March 31      $   9/16  $  3/16
Period Ending May 15         $   5/16  $  3/16

     As of May 15, 1998, there were 1155 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.

                                      11

<PAGE>
 
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS

     Results of Operations
     ---------------------
                          
     The financial statements included herein for fiscal 1997 are unaudited. The
Company believes that the financial statements accurately reflect is financial
condition and statement of operations for the fiscal year. Further, the Company
intends to file a Form 10-KSB/A within approximately 30 days containing audited
financial statements for fiscal 1997 and does not believe that there will be a
material difference, if any, from the unaudited financial statements contained
herein. Further, the Form 10-KSB/A will have complete footnotes and comparative
financial statements (audited) to fiscal 1996.

     The Company during prior fiscal years through fiscal 1996, never had any
revenues whatsoever from operations. Further despite its receipt of initial
revenues and generating its initial sales and accounts receivable during fiscal
1997, the Company is still a development stage company. In fact, this is the
first Annual Report in the Company's operating history in which it is disclosing
in Item 6. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as compared to "Management's Plan of Operations", which
is reserved for issuers who are reporting no revenues. This is the result of the
fact that for the first fiscal year in the Company's history, it is reporting
initial sales revenues and accounts receivables.

     During the Company's fiscal year ended December 31, 1997, the Company
incurred a net loss of $3,408,323 ($0.0337 per Share) (unaudited) compared to a
loss of $4,279,670 ($0.079 per Share) for the prior fiscal year. The Company
reported sales revenues and accounts receivable of $70,069 for the fiscal year
ended December 31, 1997 (unaudited), which represented the initial shipments of
generic pharmaceuticals and limited telecommunication sales (which sales
commenced in the last two weeks of the third quarter of 1997) from West Africa.
This is compared to no sales revenues or accounts receivable for the prior
fiscal year. In fact, the Company has never before reported any sales or
accounts receivable for any fiscal period.

     The Company's net loss for the year ended December 31, 1997, was
principally the result of the lack of any significant sales revenues, the
continued expenses associated with continuing to operate and maintain its
offices and expenses associated with being a reporting company, which include
professional, accounting and printing/EDGAR preparation and filing fees, and the
non-cash expenses associated with the issuance of shares to its executive
officer, directors and consultants for continued services to the Company in lieu
of cash compensation during the period. Such non-cash compensation expensed
during the year ended December 31, 1997 was $3,309,500 (unaudited), compared to
$3,963,500 during the fiscal 1996. In order for the Company to pay its operating
expenses, including office rents, salaries to its non-executive employee during
the first six months of fiscal 1997, prior to the move of its corporate
headquarters, telephone expenses, accounting and bookkeeping fees, printing and
EDGAR preparation costs, publication costs, and other general and administrative
expenses, the Company was dependent upon the funds provided by non-interest
bearing loans from the Company's executive officer and directors, from a
consultant, as well as from the private placement of its securities to private
investors.

     The Company's net sales and accounts receivable, together with orders,
subject to shipment following the end of the fiscal year is presently
approximately $150,000 (to date). The

                                      12

<PAGE>
 
Company projects significant additional call-back revenues, following the
installation of new telecommunications hardware and software scheduled for May,
1998, at which time the projected call-back revenues are projected to be
approximately $20-30,000 per month during the 3-6 month call-back start-up
period. Following the start-up period, the Company has been informed by ETLC
that call-back should generate from $500 to $1,000 per month per customer, and
that the Company should reasonably expect to reach and maintain 200 or more
customers for this telecommunication service during the latter half of fiscal
1998.

     The Company in late 1997 was issued and received a letter of credit for
approximately $70,000 from West Africa, to guarantee payment to the Company for
generic pharmaceuticals subject to an order for delivery to Mali. The Company
was sourcing the products for this order and endeavored to ship this order prior
to the end of the 1997 fiscal year. In fact, the products underlying this letter
of credit were shipped during the first four months of fiscal 1998 and thus
these sales will be reported in the Company's quarterly report on Form 10-QSB
for the first and second quarters of fiscal 1998. Furthermore, the Company has
sourced the remaining generic pharmaceutical products for its existing West
African orders from manufacturer/suppliers at costs that will also provide gross
profit margins that the Company estimates shall be approximately 20%.

     The Company has continuing orders for pharmaceutical products from West
Africa which will increase in size during successive quarters in fiscal 1998,
especially with respect to the Republic of Mali. Further, the Company projects
that its relationship with PERGUE S.A.R.L. will permit the Company to begin to
receive purchase orders for generic pharmaceuticals from other West African
countries, including Burkina Faso, Niger and perhaps Senegal and Ivory Coast.

     The Company during fiscal 1997 and the first five months of fiscal 1998 has
continued to increase its product lines to include a broad spectrum of generic
pharmaceuticals and diagnostic test kits, from which it projects gross sales
revenues of medical products to reach $1 million per month, perhaps by the end
of fiscal 1998. The Company is presently awaiting completion of the final stage
of testing and registration approvals from the National Health Foundation,
Brazil, for dengue fever test kits. The test kits have already been registered
and approved by the State of Roraima in Brazil, and initial orders are
anticipated shortly. With final approvals from Brazil for the entire country,
the Company could generate projected gross sales of up to $5 million annually.
The Company has been informed that at present dengue fever is becoming an
increasingly more serious disease in Brazil (and elsewhere in the world's
tropical climates) and the Company believes that it should be able to generate
orders for dengue fever test kits from West Africa as well as Brazil during
fiscal 1998 and thereafter.

     Generic pharmaceuticals are an extremely cost sensitive market, especially
in developing countries where the Company is doing business. This has led the
Company and its consultants to devote a significant period of time during fiscal
1997 to sourcing generic pharmaceuticals at competitive pricing. During and
immediately following the fiscal 1997, the Company, with the direct assistance
of its consultants, has developed sources for generic pharmaceuticals, at highly
competitive pricing, from foreign manufacturers. Further, and is continuing to
develop additional sources for products in order to fill present and anticipated
future purchase orders received from West Africa. The Company does not believe
that it is presently dependent upon any one source, nor does it believe that it
will become dependent upon any manufacturer of generic pharmaceutical products
or other products that it is presently marketing.

                                      13

<PAGE>
 
       The Company's ability to continue to ship the products that are the
  subject of the purchase orders from Guinea and Mali is essential to the
  Company's goal of generating increased levels of operating revenues from its
  pharmaceutical and medical products businesses in West Africa. The Company is
  presently outsourcing these generic pharmaceutical products from several third
  party manufacturers and distributors located in the United States, Canada,
  Mexico, South America, Europe, and India, which have provided quality generic
  pharmaceutical products at highly competitive prices necessary for the Company
  to profitably fulfill existing and future orders for such products from West
  Africa and elsewhere.

       Liquidity and Capital Resources
       -------------------------------

       The Company, at December 31, 1997, had current assets of approximately
  $65,000 exclusive of the $69,000 evidenced by the letter of credit issued in
  favor of the Company guaranteeing payment of orders paid to the Company during
  April, 1998 following shipment of the products during the first four months of
  fiscal 1998. This is compared to $5,000 at the end of the fiscal year ended
  December 31, 1996. To assist the Company in its cash flow requirements which
  are presently estimated at $15,000 per month, and pending receipt of payment
  of call-back telecommunication receivables of approximately $10,000 through
  fiscal 1997 and approximately $15,000 through the first four months of fiscal
  1998, the Company from during fiscal 1997, received approximately $150,000
  from the private placement of units, as described above. 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 unit private placement, at the price of $.04 per unit, was made with
  each unit consisting of one share and one common stock purchase option
  exercisable at $.08 per share. The Company has undertaken to register the
  shares and the shares underlying the options in a registration statement that
  the Company intends to file with the Securities and Exchange Commission as
  soon as possible during fiscal 1998. The Company continues to be dependent
  upon the willingness of the Company's executive officer, directors and each of
  its consultants to accept shares in lieu of cash compensation for continued
  services to the Company.

       Notwithstanding indications of interest from potential investors for
  additional subscriptions, there can be no assurance that additional
  subscriptions shall be received under the unit private placement. The trading
  price of shares of the Company's common stock during the past two months has
  been primarily in the range of $.025 to $.05, but during several days in
  March, 1998, the trading range increased to the level of $.05 to $.08 range.
  However, the trading price of the shares has again been in the range of $.025
  to $.04 per share during April and May, 1998. 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,
  whether or not the Company's shares continue to trade at the levels that
  prevailed during March, 1998.

       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 for the move of
  the executive offices to Hickory, NC, professional/accounting fees, transfer
  agent and printing service fees, and certain other expenses, and based upon
  its present monthly operating expenses of $15,000, the Company will be able to
  operate for approximately four months if no additional revenues are generated
  from operations or any other sources. However, the Company is generating
  increased operating revenues during the first four months of fiscal 1998, as a
  result of additional shipments of generic pharmaceuticals to 

                                       14
<PAGE>
 
West Africa, and projects an increasing level of revenues from sales of call-
back service in West Africa during fiscal 1998.

     The Company's monthly operating expenses of approximately $15,000 do not
reflect any salary to Dr. Jerrold R. Hinton, the Company's sole executive
officer. The Company is accruing but 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 fiscal 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 and in lieu of any
cash compensation.

                                      15

<PAGE>
 
  ITEM 7.   FINANCIAL STATEMENTS

       The financial statements  for the fiscal year ended December 31, 1997
  (unaudited), are attached hereto. The Company intends to file Form 10-KSB/A
  within approximately 30 days, containing audited financial statements with
  comparative financial statements for fiscal 1996.

                                       16
<PAGE>
 
  ITEM 8.   CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL       DISCLOSURE.
 
       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. The Registrant's audit for fiscal 1996 was completed by
  Grant-Schwartz Associates, CPA's, which firm conducted the audit for fiscal
  1997 which are part of this Annual Report on Form 10-KSB.

       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.

                                       17
<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:
 
        Name                   Age   Title
        ----                   ---   -----
Jerrold R. Hinton              55    President, Chief Executive Officer, and
                                     a Director
 
Thomas J. Craft, Jr., Esq.     32    Secretary, Corporate Counsel and a Director
  
    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

                                      18

<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
       -------------                  ----------------

       Jerrold R. Hinton              Forms 4 and 5
       Thomas J. Craft, Jr.           Forms 4 and 5


ITEM 10.   EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                     Long Term Compensation
                                                                                     ----------------------

                                Annual Compensation                            Awards                     Payouts
                                ---------------------------------------------------------------------------------
<S>       <C>                  <C>     <C>             <C>       <C>          <C>           <C>           <C> 
(a)       (b)                  (c)     (d)             (e)       (f)          (g)           (h)           (i)
</TABLE> 

<TABLE>
 <CAPTION> 
                                               Other         Restricted  Securities                              All Other
Name and                                   Annual 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      1997         0            0                 0        0             0            0               0
 Jerrold Hinton
President, CEO      1996         0            0                 0        0             0            0               0

Jerrold Hinton
President, CEO      1995         0            0                 0        0             0            0               0
</TABLE>

(*)      Mr. Hinton has served as 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 1997 and 1996 in
consideration for his continued services to the Company, in lieu of cash
compensation.

         The Company has not had sufficient funds to pay its executive officers
or directors during fiscal 1997 and 1996. 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

                                       19

<PAGE>
 
agreement as amended, provides for the payment to Mr. Hinton of $100,000, which
salary has been accrued but unpaid during the past two years, and presently
provides for the issuance of 5 million Shares per year in 1998 and 1999, and the
grant of an option to purchase a total of 5 million Shares (the Option Shares"),
which Options are exercisable the lower of $1.00 per Share or 50% of the closing
bid price of the Shares during the ten business days prior to the notice by Mr.
Hinton of his election to exercise all or a portion of the Options. The payment
to Dr. Hinton of the cash salary portion of the Employment Agreement shall not
commence until the Company begins to generate sufficient revenues from
operations to permit payment of such cash compensation, of which there can be no
assurance. The Company, during fiscal 1997, issued to Dr. Hinton, its president
and chief executive officer a total of 15.5 million Shares and issued to Thomas
J. Craft, Jr., Esq., the Company's corporate secretary, securities counsel and a
director a total of 10 million Shares in registration statements on Form S-8.
These Shares were issued in consideration of the continued and valuable services
provided to the Company by such persons, neither of whom were paid any cash
compensation in 1997.

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

        As of May, 1998, 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             6,000,000                   2.9%
                              110 N. Center St.
                              Suite 202
                              Hickory, NC 28601
 
       Common Stock           Thomas J. Craft, Jr.          3,000,000                   1.5%
                              11000 Prosperity Farms Rd.
                              Palm Beach Gardens, FL
                              33440
</TABLE> 
       ______
       (1) Based upon 210,212,560 shares issued and outstanding at May 15, 1998.

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       During fiscal 1997, the Company had no transactions with related parties.

                                       20
<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 
                    (to be filed on Form 10-KSB/A)

          (b)    During fiscal 1997, the Company filed Reports on Form 8-K on
  January 21, 1997 and September 9, 1997, respectively. The Company has not
  filed any report on Form 8-K during the quarter ended March 31, 1998.
 

                                       21
<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: May 15, 1998



       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

                                       22
<PAGE>
 
                        AMERICAN DIVERSIFIED GROUP, INC.
                       FORMERLY TERA WEST VENTURES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                              FINANCIAL STATEMENTS
                                  (UNAUDITED)
                               DECEMBER 31, 1997



                                                        Page
                                                        ----

Balance Sheet                                             1


Statements of Operations                                  2


Statements of Cash Flows                                  3


Notes To Financial Statements                             4

                                       1
<PAGE>
 
                        AMERICAN DIVERSIFIED GROUP, INC.
                        FORMERLY TERA WEST VENTURES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                  BALANCE SHEET
                                   (UNAUDITED)
                             AS OF DECEMBER 31, 1997

<TABLE> 
<CAPTION> 
ASSETS
------
<S>                                                    <C>            <C> 
                                                                   
Current Assets:                                                    
    Cash                                               $    11,069 
    Accounts Receivable                                     48,391 
    Inventories                                              5,000 
                                                       ----------- 
        Total Current Assets                                             64,460
                                                                   
Fixed Assets:                                                      
    Property and Equipment (Net of $13,298 Accum. 
        Depr.)                                                           20,453 
                                                                   
Other Assets:                                                      
    Deposits                                                   570 
    Miscellaneous Receivable (Net of $100,000                      
        Allowance)                                               - 
                                                       ----------- 
                                                                            570
                                                                      ---------
                                                                   
        TOTAL ASSETS                                                  $  85,483
                                                                      =========
                                                                   
                                                                   
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY                     
----------------------------------------------                     
                                                                   
Current Liabilities:                                               
    Accounts Payable and Accrued Expenses              $   180,624 
    Notes Payable to Related Parties                       155,521 
                                                       ----------- 
        Total Current Liabilities                                       336,145
                                                                   
Shareholders' (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; issued and                  
        outstanding 157,812,520 shares                     157,812 
    Additional Paid-In Capital                          16,902,169 
    Deferred Consulting Fees                              (758,276)
    Deficit Accumulated During Development Stage        (7,740,578)
    Deficit Accumulated Prior to Development Stage      (8,811,789)
                                                       -----------  
        Total Shareholders' (Deficit) Equity                           (250,662)
                                                                      ---------

        TOTAL LIABILITIES AND SHAREHOLDERS' 
            (DEFICIT) EQUITY                                          $  85,483
                                                                      =========
</TABLE> 

SEE NOTES TO FINANCIAL STATEMENTS

                                       2

<PAGE>
 
                        AMERICAN DIVERSIFIED GROUP, INC.
                        FORMERLY TERA WEST VENTURES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      FOR THE YEAR ENDED DECEMBER 31, 1997








Sales                                                               $70,769


Costs of Sales                                                       63,943
                                                               -------------


Gross Profit                                                          6,826


General and Administrative Expenses                               3,415,149
                                                               -------------


Net Loss                                                        ($3,408,323)
                                                               =============



Net Loss Per Share                                                 ($0.0337)
                                                               =============


Average Number of Shares Outstanding                            101,112,695
                                                               =============








SEE NOTES TO FINANCIAL STATEMENTS



                                       3
<PAGE>
 
                        AMERICAN DIVERSIFIED GROUP, INC.
                        FORMERLY TERA WEST VENTURES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                      FOR THE YEAR ENDED DECEMBER 31, 1997


Cash Flows From Operating Activities:
  Net Loss                                                    ($3,408,323)
  Depreciation                                                      6,324
  General and Administrative Expenses Paid by Stock             3,158,974
  Increase in Accounts Receivable                                 (48,391)
  Increase in Accounts Payable and Accrued Expenses               112,130
                                                             -------------
    Net Cash Used By Operating Activities                        (179,286)
                                                             -------------


Cash Flows From Investing Activities:
  Acquisition of Property and Equipment                            (9,135)
                                                             -------------
    Net Cash Flows From Investing Activities                       (9,135)
                                                             -------------


Cash Flows From Financing Activities:
  Sales of Common Stock                                           173,500
  Proceeds from Notes Payable to Related Parties                   55,000
  Payments on Notes Payable to Related Parties                    (25,000)
  Cash Overdraft                                                   (4,010)
                                                             -------------
    Net Cash Flows From Financing Activities                      199,490
                                                             -------------


Net Decrease In Cash                                               11,069


Cash, Beginning                                                    -
                                                             -------------


Cash, Ending                                                      $11,069
                                                             =============



Non-Cash Transactions:
----------------------

Issued 91,100,000 shares of common stock for services of $3,309,500.



SEE NOTES TO FINANCIAL STATEMENTS

                                       4
<PAGE>
 
                        AMERICAN DIVERSIFIED GROUP, INC.
                       FORMERLY TERA WEST VENTURES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)
                               DECEMBER 31, 1997



NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited financial statements reflect all adjustments, which,
in the opinion of management, are necessary for a fair presentation of the
financial position and the results of operations for the interim period
presented.  All adjustments are of a normal recurring nature.

Certain financial information and footnote disclosures which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles, but which are not required for interim reporting
purposes, have been condensed or omitted.  The accompanying financial statements
should be read in conjunction with the financial statements and notes thereto as
of December 31, 1996 contained in the Company's Form 10-KSB.


NOTE 2 - EARNINGS (LOSS) PER SHARE

Per share information is computed based on the weighted average number of shares
outstanding during the period.

                                       5