U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

[X] ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT
    OF  1934 (FEE REQUIRED)

For the fiscal year ended                 May 31, 2001
                          -----------------------------------------
                                              OR
[ ]   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         0-1744
                       ------------------------

Ambassador Food Services Corporation
---------------------------------------
(Name of small business issuer in its charter)

Delaware                                     44-0656199
---------------------------------------------------------
(State or other jurisdiction of         (IRS Employer Identification No.)
 incorporation or organization)

5-30 54th Avenue Long Island City, New York 11101
-------------------------------------------------------
(Address of principal executive offices)     (Zip Code)

Issuer's telephone number: 718-361-2512
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock (Par Value $1)
                                (Title of Class)
Check  whether  the  Issuer  (1)  filed  all  reports  required  to be filed by
Section 13 or 15 (d) of the

Exchange  Act during the past 12 months (or for such  shorter  period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

      YES__X___ NO_____

Check if there is no disclosure  of  delinquent  filers in response to Item 405
of Regulation S-B contained in  this  form,  and  no  disclosure   will  be
contained,   to  the  best  of Registrant's knowledge, in definitive
proxy or information  statements  incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.  [X]

Issuer's revenues for its most recent fiscal year are $ 11,268,662

At November 8, 2001, there were 735,056 shares of the Registrant's common stock
outstanding. Based on the average of the highest bid and lowest asked prices
reported on the national over-the-counter market (NASDAQ Symbol AMBF), the
aggregate market value of the shares held by non-affiliates of the Registrant
was $ 257,375.

Exhibit Index is on page 37.

Transitional Small Business Disclosure Format:     YES      NO   X
                                                       ----     ----
                                       1
<PAGE>
                                     PART I


Item 1.    Description of Business

  (a) Business Development

      The Registrant (hereinafter "Company" or "Ambassador") is a Delaware
      corporation incorporated in 1963. It is engaged, through divisions and a
      subsidiary, in the food service and janitorial industries in New York and
      New Jersey.

      The principal business activity of the Company is the servicing of its
      customer accounts, which are primarily governmental, social service
      agencies, and not-for profit organizations through the use of cafeterias
      and prepared meals delivered from Company commissaries. On August 19,
      2000, the Company sold all operating assets of its Kansas City, Missouri
      location. On January 12, 2001, the Company sold all operating assets of
      its Des Moines, Iowa and Lawton, Oklahoma locations. As a result, the
      Company no longer services its customer accounts through the use of
      vending machines. The Company currently operates in the food service and
      janitorial industries in New York and New Jersey.

      In March 2001, the Company sold its corporate headquarters building in
      Kansas City and moved its principal executive offices to its New York
      location at 5-30 54th Avenue, Long Island City, New York 11101.

      On August 1, 1989, the name of the Company was changed from Automatique,
      Incorporated to Ambassador Food Services Corporation.

  (b) Business of Issuer

      (1)           Description of Business Done by the Registrant in its Food
                    Segment

      (i and ii)    During Fiscal 2001, the Company sold all of the assets of
                    its vending machine operations and a substantial portion of
                    its food service operations. Revenues for the disposed
                    operations were 47.1% and 61.8% of total revenues for
                    FY2001 and FY2000, respectively. The Company continues to
                    operate its food service operation in New York. Business
                    with local government social service agencies and
                    not-for-profit agencies is obtained through competitive
                    bidding and is serviced by producing meals in a central
                    commissary and delivering them to various designated points
                    for consumption.

        (iii)       No new products  have been  developed by this segment.  The
                    Company,  in  general,  markets  products  developed  by its
                    suppliers.  (iv) The  practice in the industry is to operate
                    under written  agreements with the locations  served. In the
                    market area where the Company is located,  it has  national,
                    regional,   and  local  competition,   some  of  which  have
                    substantially greater total sales and assets. Competition in
                    the  food  service  industry  normally  comes in the form of
                    pricing and in quality of service and product.

         (v)        Raw   materials,  consisting   of  packaged   products  and
                    commodities,  are purchased from manufacturers and purveyors
                    and are  warehoused or processed by the Company in the local
                    market.  There is an adequate  supply of raw materials  from
                    normal sources.

                                       2
<PAGE>



        (vi)        During the year ended May 31, 2001, this segment had one
                    customer whose sales were equal to 10 percent or more of
                    the Company's consolidated revenues.

        (vii)       The  distinctive  logo  associated  with the Company has
                    been registered under the laws of the United  States
                    relating  to trade names and trademarks.  The Company
                    regards  such  logo as  valuable  and will  maintain  the
                    registration in effect for continuing use in connection
                    with the Company's business.  In addition, the segment is
                    a party to the following labor agreements:


                    Bargaining Unit             Market        Expiration Date
                     United Service
                     Employees Union #377       New York         12/31/03

        (viii)      The Company does not have a material portion of its
                    business subject to renegotiation or termination at
                    the election of the Government.

        (ix)        The Company does not believe that existing or probable
                    government regulations have a material effect on its
                    operation.

  (b) (2)    Description  of Business Done by the  Registrant in its Janitorial
             Segment

        (i and ii)   The janitorial and maintenance service division of the
                     Company's business consists primarily of providing various
                     types of routine cleaning services as an added service for
                     existing food service customers.

        (iii)        No new products have been introduced by this segment.

        (iv)         The janitorial segment is limited to New York metropolitan
                     areas. Competition for janitorial contracts comes in the
                     form of pricing and quality of service. Competition in
                     general is from regional and local companies.

        (v)          The sources and  availability  of raw  materials for this
                     segment are adequate.


                                       3
<PAGE>

        (iv)         During fiscal 2001, this segment had no single customer
                     whose sales were equal to 10 percent or more of the
                     Company's consolidated revenues.

                     This segment is not  subject to  material fluctuations
                     in sales volume resulting from seasonality.

                     Sales in this segment are on open accounts receivable.
                     Inventory levels are not significant.

        (v)          This segment is operating without registered trademarks
                     or patents.  The segment is a party to a labor agreement
                     with the United Service Employees Union #377 in New York
                     that expires December 31, 2003.

        (vi)         The Company does not have a material portion of its
                     business subject to renegotiation or termination at the
                     election of the Government.

        (vii)        The Company does not believe that existing or probable
                     government regulations have a material effect on its
                     operations.


  (b) (1 and 2)

      (x) Through (xii) with Respect to the Registrant's Business in General

        (viii)       The Company has not incurred any expense for research and
                     development activities during any of its last two (2)
                     fiscal years.

        (ix)         Compliance with federal, state, and local laws and
                     regulations involving the protection of the environment
                     will not have a material effect.

        (x)          As of May 31, 2001, the Company and its subsidiary employed
                     approximately 86 persons.

Item 2.    Description of Properties

      The Company leases all real estate for office, warehouse, and commissary
      facilities. Annual rentals are approximately $187,640 less $31,800 of
      sublease income. The suitability of the leased properties is adequate;
      such properties are described below:

                                       4
<PAGE>


                                                        Size        Expiration
Location                        Type of Property      (Sq. Ft.)        Date


5-30 54th Ave., Long Island
City, NY                            Office/Whse         8,000           Mo/Mo
41-43 24th St., Long Island
City, NY                            Office/Whse         2,500           3/01
9100 Santa Fe Dr., Overland
Park, KS                            Restaurant-         1,800           2/04
                                    (Subleased)
162 Closter Dock Rd., Closter, NJ   Office/Whse         1,200           Mo/Mo
NJ

      The major portion of the physical properties used by the Company is made
      up of inventory and food service equipment. The Company owns most of the
      equipment used. Subsequent to May 31, 2001, the Company vacated the
      Closter, NJ facility in September 2001. The Company operates approximately
      23 vehicles in the conduct of its business. The annual rentals on all such
      leased real estate properties and equipment approximate $ 134,000.

Item 3.    Legal Proceedings

      None.

Item 4.    Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the fourth
      quarter of the fiscal year of the Company.



                                     PART II

Item 5.    Market for Common Equity and Related Stockholder Matters

  (a) Price Range of Common Stock

      The principal market in which the common stock of the Company is traded is
      the national over-the-counter market (NASDAQ symbol AMBF). The bid
      quotations for the Company's common stock for each quarter during fiscal
      years ended May 31, 2001 and June 1, 2000 are shown below:



                                  2001                       2000
                                   Bid                        Bid
                                Quotation                  Quotation
                                High    Low              High     Low
       First Quarter            $.35   $.29              $.875   $.3125
       Second Quarter          $.375   $.35             $.3125     $.25
       Third Quarter            $.37   $.27             $.3125     $.28
       Fourth Quarter           $.27   $.27              $.375     $.26


      The quotations above reflect interdealer prices without retail mark-up,
      mark-down, or commission and may not represent actual transactions.

                                       5
<PAGE>

  (b) Number of Equity Security Holders

      As of November 8, 2001 there were 680 record holders of the Company's
      common stock.

(c)   Dividends

      The Company has never paid cash dividends on its common stock. Payment of
      dividends will be within the discretion of the Company's Board of
      Directors and will depend, among other factors, on earnings, debt
      agreements, capital requirements, and the operating and financial
      condition of the Company.

    Item 6. Management's Discussion and Analysis of Financial Condition
            and Results of Operations

      2001 Results
      ------------

                    Several major events occurred during Fiscal 2001 which
          complicated a comparison analysis of the operating results for Fiscal
          2001 and Fiscal 2000. These events are as follows:

          o    In August  2000,  the Company  sold the assets of its Kansas City
               vending  machine and cafeteria  operation  resulting in a loss of
               $129,000 of which  $110,000 was  recognized  in FY2000 as a write
               down of carrying value of intangible assets. Because of declining
               sales in the  vending  operations,  intense  competition  and the
               capital intensive nature of the business,  management  decided to
               exit the vending service business.

          o    In January,  2001, the Company sold its remaining vending machine
               and cafeteria assets in Oklahoma and Iowa. The sale of the assets
               resulted in a gain of $1,052,000.

          o    In March, 2001, the Company sold its corporate office building in
               Kansas  City  realizing  a gain of $116,000 in the sale and moved
               its principal executive offices to its Long Island City, New York
               facility.  The  proceeds  from the sale of the  vending/cafeteria
               service  operations  and the office  building were used to reduce
               debt and pay trade creditors.

          o    In January  2001,  the Company  restructured  a  $1,400,000  note
               payable to an individual  investor.  The  restructure  included a
               reduction  of interest  from 12% of 10% per annum and a reduction
               of principal from  $1,400,000 to $1,050,000 with interest only to
               be paid the first six months.  A gain of $51,243 net of taxes was
               realized from the debt restructure.

      Sales for the food segment for Fiscal 2001 decreased by $5,547,205 or
      35.0% less than Fiscal 2000 because of the sale of the assets of the
      Missouri, Iowa and Oklahoma operations. Sales of the janitorial segment
      for Fiscal 2001 decreased by $319,382 or 24.3% less than Fiscal 2000 due
      to the loss of several customers to competition.

      Cost of food products sold increased from 49.5% of food sales for FY2000
      to 50.5% of food sales for FY2001. This increase in product cost was due
      primarily to an unfavorable change in sales mix in the vending operations.

      Operating costs increased from 37.4% of total sales in FY2000 to 41.4% of
      total sales in FY2001. Declining sales and increased labor and operating
      costs in the vending operations caused management to sell the vending and
      food operations in the Midwest.

                                       6
<PAGE>


      Selling and administrative expenses were slightly less in dollars spent in
      FY2001 compared to FY2000; however, due to the substantial decline in
      sales and the fixed nature of most of these costs the expense rose to
      20.2% of total sales for FY2001 compared to 13.7% of total sales for
      FY2000.

      Depreciation and amortization expense decreased by $195,015 or 39.5% less
      in FY2001 than in FY2000 because of the sale of assets in Missouri, Iowa
      and Oklahoma.

      The operating loss for FY2001 was $1,153,492 compared to income of $62,281
      for FY2000. The losses sustained in the vending and food operations in the
      Midwest prompted management to exit the vending business.

      Interest expense decreased by $96,355 or 31.6% less in FY2001 compared to
      FY2000 because the majority of the proceeds from the sale of assets was
      applied to debt.

      The Company realized a gain of $1,052,000 on the sale of the assets in
      Iowa and Oklahoma and a gain of $116,000 on the sale of its corporate
      office facility in Kansas City. An extraordinary gain net of taxes of
      $112,689 was realized on the settlement of vendor debt and the restructure
      of a long-term note payable.

      The net loss for FY2001 was $18,637. The loss for FY2000 was $179,859.

          Liquidity and Capital Resources
          -------------------------------
    The Company's working capital increased from a deficit of $1,148,951 in
    FY2000 to a surplus of $73,737 in FY2001. The holdback receivable of $
    507,899 resulting from the sale of the Iowa and Oklahoma assets was
    collected in August 2001. The proceeds from the asset sale reduced total
    liabilities approximately $2,660,000. The Company has very good
    relationships with all of its current vendors.

      On October 29, 2001, the Company restructured its note payable through a
      reduction of interest payable from 10% to 8% per annum effective December
      16, 2001. Payment of interest only, will commence on January 15, 2002 for
      a period of six months. Thereafter, payment consisting of principal and
      interest will be made in the amount of $16,267 monthly, with a final
      payment date of January 2007.

      The Company's credit line of $1,000,000 was extended to December 31, 2002
      and the minimum equity covenant of the loan was decreased from $550,000 to
      $300,000.

       Although the Company's financial position improved in Fiscal 2001 and
      cash flow will, in the opinion of management, be adequate to cover ongoing
      expenses, there is no guarantee of future performance. Actual results may
      differ materially because of competition, risks and uncertainties.


Item 7.    Financial Statements

      The response to this item is included as a separate section of this report
      commencing on page F-1

Item  8. Changes in and disagreements with accountants on accounting and
      financial disclosure.

      On July 13, 2001, the Company filed a current report on Form 8 - K, under
      Item 4, reporting the change in its certifying accountant from Grant
      Thornton, LLP to Withum Smith & Brown of New Brunswick, New Jersey.
      Response to this item is incorporated from that filing.

                                       7
<PAGE>

Item  9. Directors and Executive Officers of the Registrant; Compliance with 16
      (a) of the Exchange Act.

  (a), (b) The Executive Officers and Directors of the Company are as follows:

            Name                Age     Principal Occupation       Director
                                                                    Since
       Robert A. Laudicina (1)  60     President, Treasurer (2)      1986
       Arthur D. Stevens (1)    76     Chairman of the Board (3)     1963
       Ann W. Stevens           59     Real Estate Broker            1996
       John A. Makula (1)       52     Vice President/Secretary (4)  2000


     (1)  Member of Executive Committee of Board of Directors

     (2)  Mr. Laudicina was elected President in March 1998 and Treasurer in May
          1998. He served as Executive Vice President beginning in February 1989
          and Vice President prior to that time beginning in January 1982.

     (3)  Mr.  Stevens has been Chairman of the Board of Directors of Ambassador
          since February 15, 1963. He was also the first President and Treasurer
          of  Ambassador  beginning  on  April  19,  1963,  relinquishing  those
          positions  in April  1978 and  October  1969,  respectively.  He again
          assumed the position of President on January 1, 1987,  serving in that
          capacity through March 1998. He was Chief Executive Officer from April
          11, 1963 through May 1998 and Treasurer  from January 26, 1972 through
          May 1998.

     (4)  Mr.  Makula was  elected  Assistant  Secretary  on April 12,  2000 and
          elected Vice President, Secretary, Director in May 2000.



   (c)   Arthur D. Stevens,  Chairman,  and Ann W. Stevens,  Director,
         are husband and wife.  No other family  relationship  exists  between
         any of the executive officers and directors listed above.

         Each Officer holds his office at the pleasure of the Board of
         Directors until the next annual meeting of the Directors and until
         his successor is duly elected and qualified.

                 The  Executive  Officers and  Directors  listed above were not
                 involved in or part of any legal proceedings, as is described
                 in Item 401(d).

Item 10.     Executive Compensation

(a),(b) The following table sets forth information as to the remuneration
        accrued by Ambassador Food Services Corporation and its subsidiary
        during the fiscal year ended May 31, 2001, for each Director and Officer
        whose aggregate remuneration for the year exceeded $100,000.


             Names of Individuals,         Fiscal       Base
           Number of Persons in Group       Year      Salary
         and Capacities in which Served

       Arthur D. Stevens                    2001       $0.00
       Chairman of the Board of             2000       $0.00
       Ambassador and Director of its       1999     $51,868
       subsidiary

       Robert A. Laudicina,                 2001    $176,706
       President and Treasurer              2000    $174,769
                                            1999    $166,905



                                       8
<PAGE>


d)    Stock Options

      Robert Laudicina, President and Treasurer hold options to purchase 25,000
      shares of Ambassador common stock at $1.37 exercisable anytime before June
      1, 2003, effective June 1, 1999.

      John Makula, Vice President and Secretary, hold options to purchase 25,000
      shares of Ambassador common stock at $1.37 exercisable anytime before June
      1, 2003, effective June 1, 1999.

g)    Consulting Agreement


      During fiscal year 1999, the Company entered into a consulting agreement
      with Arthur D. Stevens,  Chairman and former  President.  The agreement
      called for weekly payments totaling  $100,482  per year  beginning in May
      1999 through May 2009.

      Subsequent to June 3, 1999, Mr. Stevens agreed to defer the consulting
      agreement until January 2001 if equivalent payments were made on a
      certain note payable to him. At May 31, 2001 and June 1, 2000, amounts
      outstanding on the note were $0 and $47,395 respectively.




                                       9
<PAGE>


Item 11. Security Ownership of Certain Beneficial Owners and Management

  (a)    Security Ownership of Certain Beneficial Owners

         The following table sets forth, as of May 31, 2001, the information
         with respect to common stock ownership of each person known by the
         Company to own beneficially more than 5% of the shares of the
         Company's common stock, and of all Officers and Directors as a group.


                                                   Amount          Percent
                                                Beneficially         of
      Name and Address of Beneficial Owner(s)      Owned     Outstanding Shares

      Arthur D. Stevens
      1901 W. 69th Street
      Mission Hills, KS  66205                   191,444 (1)     26.0%

      Thomas G. Berlin
      800 Superior Avenue, Suite 2100
      Cleveland, Ohio 44114                      124,218 (3)     16.8%

      George T. Terris
      104 S. Warbler
      Sarasota, FL 34236                          54,000 (2)      7.3%

      George F. Crawford
      10110 Fontana Lane
      Overland Park, KS  66207                    51,761          7.0%




      (1)  Does not include 60,000 shares beneficially owned by Mr. Stevens'
           adult children, in which shares he disclaims any beneficial interest.

      (2)  Does not include 4,000 shares owned by Mr. Terris' immediate family,
           in which shares he disclaims any beneficial interest.

      (3)  Includes 12,800 shares owned by Mr. Berlin's wife.


                                       10

<PAGE>

  (b) Security Ownership of Management

                                                Shares of Stock
                                              Beneficially Owned
                                                 May 31, 2001
                                              Number          Percent
      Name                                 of Shares         of Stock
      Arthur D. Stevens
      1901 W. 69th Street
      Mission Hills, KS  66205               191,444 (1)        26.0%

      Robert A. Laudicina
      303 Cedar Court
      Norwood, NJ  07648                      51,265 (2)         6.7%

      John Makula
      5 Pittsford Way
      Nanuet, NY 10954                        34,750 (3)         4.6%

      Ann W. Stevens
      1901 W. 69th Street
      Mission Hills, KS 66205                  1,000             0.1%

      All Directors and Officers             278,459 (4)        35.5%
         as a Group (4 persons)


(1)      Does not include 60,000 shares beneficially owned by Mr. Stevens' adult
         children, in which shares he disclaims any beneficial interest.
         Additionally, does not include 200,000 shares, which may be issued in
         the event of conversion of certain debt under its conversion
         provisions, which are effective from April 30, 1998 to May 1, 2006.

(2)      Includes 12,500 shares, which Mr. Laudicina could purchase for $1.37
         per share under a stock option exercisable anytime before June 1, 2003.

(3)      Includes 12,500 shares, which Mr. Makula could purchase for $1.37 per
         share under a stock option exercisable anytime before June 1, 2003.

(4)      Includes 25,000 shares, which could be purchased by certain officers
         and directors under stock options.

  (c)    Changes in Control

         The Company knows of no contractual arrangements which may, at a
         subsequent date, result in a change in control of the Company.

                                       11

<PAGE>


Item 12. Certain Relationships and Related Transactions

  (a) Certain Business Relationships

      In connection with the issuance of the credit line, the Company's
      President entered into an agreement with the lender whereby the President
      has purchased and accepted from the lender a junior participation in the
      amount of $100,000 in the loans and advances made to the Company by the
      lender. The arrangement expires in December 2001.

Item 13. Exhibits and Reports on Form 8-K

  (a) Exhibit No.:

         3A  Articles of Incorporation of the Registrant                (1)

         3B  By-Laws of the Registrant                                  (1)

          6  1984 Incentive Stock Option Plan Dated January 31, 1984    (2)

         10  Material Contracts Agreement with Paul F. Leathers         (1)

         23  Subsidiary of the Registrant.                              (3)

         24  Sale of the remaining vending and cafeteria assets         (4)
             in Iowa and Oklahoma

         25  Change in certifying accountant                            (4)

      (1)    This exhibit was filed with Ambassador's 10-KSB for the fiscal year
             ended May 28, 1981. A copy of the Certificate of Amendment of
             Certificate of Incorporation changing the Company's name was
             filed as a supplement to said exhibit for the fiscal year ended
             June 1, 1989.

      (2)    This exhibit was filed with the Company's 10-KSB for the fiscal
             year ended May 31, 1984.

      (3)    Exhibit attached as part of filing.

      (4)    Exhibit attached as part of filing.

Exhibit No. 22

Subsidiary of the Registrant

Ambassador Food Services Corporation (a Delaware Corporation), the parent
Company, has the following subsidiary, which is included in the consolidated
financial statements.


                                       12
<PAGE>



Name of Subsidiary              State of Incorporation     % of Voting
------------------              ----------------------     Securities Owned
                                                        ----------------
Ambassador Fast Services, Inc.        New York                 100%
d/b/a Squire Maintenance
Services

Note: The Company will provide, on the written request of any stockholder, a
      copy of any exhibit to this Form 10-KSB at a rate of $.15 per page. The
      minimum fee is $5.00. Requests should be directed to Robert A. Laudicina,
      President, Ambassador Food Services Corporation, 5-30 54th Avenue, Long
      Island City, New York 11101.


Signatures


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


                             AMBASSADOR FOOD SERVICES CORPORATION
                             ------------------------------------
                                  (Registrant)


                             By                       Date
                                ------------------         ------------
                                Arthur D. Stevens
                                Chairman of the Board




                             By                       Date
                                ------------------         ------------
                                John A. Makula
                                Vice President and Secretary


                                       13

<PAGE>


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



                             Chairman of the Board               Date
------------------           -----------------------------           --------
Arthur D. Stevens            Title


                             President and Chief
                             Executive Officer/Director          Date
------------------           -----------------------------           --------
Robert A. Laudicina          Title


                             Director                             Date
------------------           --------------------                     -------
Ann W. Stevens               Title


                             Vice President/Secretary, Director   Date
------------------           ----------------------------------       --------
John A. Makula               Title




                                       14

<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                  CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
                          MAY 31, 2001 AND JUNE 1, 2000


                                                                Page
                                                                ----
Independent Auditors' Reports                                   F1-F2

Consolidated Balance Sheets                                     F3

Consolidated Statements of Operations
For the Years Ended May 31, 2001 and June 1, 2000               F4

Consolidated Statements of Changes in Stockholders' Deficit
For the Years Ended May 31, 2001 and June 1, 2000               F5

Consolidated Statements of Cash Flows
For the Years Ended May 31, 2001 and June 1, 2000               F6

Notes to Consolidated Financial Statements                      F7-F19


                                       15
<PAGE>


INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders,
Ambassador Food Services Corporation and Subsidiary:

We have audited the accompanying consolidated balance sheet of Ambassador Food
Services Corporation and Subsidiary as of May 31, 2001, and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ambassador Food
Services Corporation and Subsidiary as of May 31, 2001, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.


WithumSmith+Brown
New Brunswick, New Jersey


August 29, 2001, except for Note 18,
as to which the date is October 31, 2001




                                      F-1
<PAGE>



REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Ambassador Food Services Corporation and Subsidiary

We have audited the accompanying consolidated balance sheet of Ambassador Food
Services Corporation and Subsidiary as of June 1, 2000 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ambassador Food
Services Corporation and Subsidiary as of June 1, 2000 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.


GRANT THORNTON LLP


Kansas City, Missouri
August 21, 2000





                                       F-2

<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                          MAY 31, 2001 AND JUNE 1, 2000

    ASSETS                                           2001            2000
                                                     ----            ----
Current Assets:
  Cash                                              $ 20,240      $ 232,775
  Accounts receivable, net of allowance for
  doubtful accounts of $23,337 in 2001 and $32,500
  in 2000                                            720,585      1,199,560
  Holdback receivable                                507,899            --
  Inventories                                        124,906        537,655
  Prepaid expenses                                    11,828        109,494
  Current portion of note receivable                     --          28,473
                                                   ----------     ---------
    Total Current Assets                           1,385,458      2,107,957
Property and Equipment, Net                          175,033      1,611,249

Other Assets:
  Location contracts, net of accumulated
  amortization of $-0-in 2001 and
  $166,963 in 2000                                        --        147,477
  Note receivable, less current portion                   --        263,339
  Excess of purchase price over net assets
  acquired, net of accumulated amortization
  of $-0- in 2001 and $23,722 in 2000                     --          2,430
  Deferred expenses                                       --         45,829
  Deposits                                            33,016         68,617
  Other assets                                            --         25,628
                                                    --------      ---------
    Total Other Assets                                33,016        553,320
                                                    --------      ---------

    TOTAL ASSETS                                  $1,593,507      $4,272,526
                                                  ==========      ==========

    LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
  Line of credit agreement                          $236,529     $   770,969
  Accounts payable                                   462,639       1,549,304
  Accrued expenses                                   380,826         439,342
  Current maturities of long-term debt               231,727         497,293
                                                   ---------     -----------
   Total Current Liabilities                       1,311,721       3,256,908

Long-Term Liabilities:
  Projected benefit obligation                            --          89,641
  Subordinated note payable to stockholder                --          47,395
  Long-term debt, less current maturities            847,031       1,420,856
  Other liabilities                                   36,251          40,585
                                                   ---------     -----------
   Total Liabilities                               2,195,003       4,855,385

Stockholders' Deficit:
  Common stock, par value $1.00 per share;
  authorized 2,000,000 shares; issued and
  outstanding 1,009,230 shares                     1,009,230       1,009,230
  Additional paid-in capital                         718,291         718,291
  Accumulated deficit                             (1,999,506)     (1,980,869)
                                                  ----------     -----------
                                                    (271,985)       (253,348)
  Less treasury stock - 273,774 shares               329,511         329,511
                                                    --------     -----------
    Total Stockholders' Deficit                     (601,496)       (582,859)
                                                    --------     -----------

   TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT    $1,593,507      $4,272,526
                                                  ==========      ==========

The Notes to Consolidated Financial Statements are an integral part of these
statements.

                                       F-3


<PAGE>

               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED MAY 31, 2001 AND JUNE 1, 2000

                                                  2001          2000
                                                  ----          ----

Net Sales:
  Food                                        $10,275,776       $15,822,981
  Janitorial                                      992,886         1,312,268
                                              -----------       -----------
                                               11,268,662        17,135,249
Cost and Expenses:
  Cost of food products sold                    5,186,039         7,832,824
  Operating                                     4,667,144         6,402,466
  Selling and administrative                    2,270,654         2,344,346
  Depreciation and amortization                   298,317           493,332
                                              -----------        ----------
   Total Costs and Expenses                    12,422,154        17,072,968
                                               ----------        ----------

Operating Income (Loss)                        (1,153,492)           62,281

Other Income (Expense):
  Interest income                                  20,927            26,008
  Interest expense                               (208,042)         (304,397)
  Loss on collection of net receivables           (22,981)          (20,842)
  Gain on settlement of pension                     3,114            46,777
  Gain on sale of property and equipment          107,674            10,314
  Gain on sale of assets                        1,033,878              --
                                                ---------        ----------
   Total Other Income (Expense), Net              934,570          (242,140)
                                                ---------        ----------

Loss Before Income Tax Benefit
and Extraordinary Item                           (218,922)         (179,859)

Income Tax Benefit                                 87,596               --
                                                ---------        -----------

Loss Before Extraordinary Item                   (131,326)          (179,859)

Extraordinary Item - Gain on Extinguishment/
 Settlement
  of Debt, Less Income Taxes of $87,596           112,689                 --
                                                ---------        -----------

Net Loss                                        $ (18,637)        $ (179,859)
                                                =========        ===========

Basic and Diluted Income (Loss) Per
  Common Share:

Loss Before Extraordinary Item                  $    (.18)        $     (.24)

Extraordinary Item                                    .15                --
                                                ---------         ----------

Net Loss                                        $    (.03)        $     (.24)
                                                ==========        ==========

Weighted Average of Common
  Shares Outstanding                               735,536           735,536
                                                 =========        ==========



The Notes to Consolidated Financial Statements are an integral part of these
statements.

                                       F-4
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
                FOR THE YEARS ENDED MAY 31, 2001 AND JUNE 1, 2000



<TABLE>
<CAPTION>

                                           Common Stock
                                ----------------------------------
                                      Issued                 Treasury             Additional                            Total
                                ------------------       ----------------         Paid-in         Accumulated        Stockholders'
                                Shares      Amount       Shares       Amount        Capital           Deficit           Deficit
                                ------      ------       ------       ------      ----------       -----------       --------------
<S>                             <C>         <C>          <C>          <C>         <C>              <C>               <C>


Balance as of June 3, 1999     1,009,230    $1,009,230    273,674     $(329,455)  $718,291         $ (1,801,010)     $ (402,944)

Net Loss                              --            --         --            --         --             (179,859)       (179,859)

Purchase of Treasury Stock            --            --        100           (56)        --                   --             (56)
                               ---------     ---------   --------     ---------   --------         ------------      ----------

Balance as of June 1, 2000     1,009,230     1,009,230    273,774       (329,511)  718,291           (1,980,869)       (582,859)

Net Loss                              --            --         --             --        --              (18,637)        (18,637)
                               ---------     ---------    -------      ---------  --------          -----------       ---------

Balance as of May 31, 2001     1,009,230     $1,009,230   273,774      $(329,511) $718,291          $(1,999,506)      $(601,496)

                               =========     ==========   =======      =========  ========          ===========       =========

</TABLE>


The Notes to the Consolidated Financial Statements are an integral part of these
statements.

                                       F-5


<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED MAY 31, 2001 AND JUNE 1, 2000


                                                        2001       2000
                                                        ----       ----
Cash Flows from Operating Activities:
  Net loss                                         $ (18,637)   $(179,859)
  Extraordinary item                                (200,285)          --
  Adjustments to reconcile net loss to net cash
    used in operating activities:
   Depreciation and amortization                     298,317      493,332
   Sale of assets                                 (1,033,878)          --
   Impairment of long-lived assets                        --      110,460
   Sale of property and equipment                   (107,674)     (10,314)
   Provision for bad debts                             9,163      (16,017)
   Loss on collection of net receivables              22,981       20,842
   Gain on settlement of pension                      (3,114)     (46,777)
   Changes in operating assets and liabilities,
    net of effects from assets sold:
    Accounts receivable                              469,812     (246,010)
    Inventories                                      101,776       30,019
    Prepaid expenses                                  97,666      (60,791)
    Accounts payable and accrued expenses            188,708     (558,592)
    Other liabilities                                 (4,335)          --
    Benefit obligations                             (130,377)          --
                                                   ---------    ---------
      Net Cash Used in Operating Activities         (309,877)    (463,707)

Cash Flows from Investing Activities:
  Purchase of property and equipment                (991,738)    (219,031)
  Proceeds from sale of property and equipment       295,038       10,314
  Proceeds from sale of assets                     1,793,113           --
  Collection of note receivable                      268,831       21,016
  Change in deposits and other assets                 62,663      (77,842)
                                                   ---------     --------
    Net Cash Provided by (Used in)
        Investing Activities                       1,427,907     (265,543)

Cash Flows from Financing Activities:
  Proceeds from issuance of long-term debt               --     1,086,150
  Principal payments on long-term debt              (748,730)    (594,795)
  Payments on subordinated note payable              (47,395)    (121,163)
  Purchase of treasury stock                              --          (56)
  Net (payments) proceeds under line of credit      (534,440)     353,479
                                                   ---------    ---------
    Net Cash Provided by (Used in)
        Financing Activities                      (1,330,565)     723,615
                                                  ----------    ---------

Net Decrease in Cash                                (212,535)      (5,635)

Cash at Beginning of Year                            232,775      238,410
                                                   ---------    ---------

Cash at End of Year                                $  20,240    $ 232,775
                                                   =========    =========




The Notes to the Consolidated Financial Statements are an integral part of these
statements.

                                       F-6

<PAGE>



              AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 -  Summary of Significant Accounting Policies:
-----------------------------------------------------
        Significant accounting policies followed by the Company and its
        subsidiary in the preparation of the accompanying consolidated financial
        statements are summarized below:

        Basis of Presentation
        The Company and its subsidiary conduct operations in New York and New
        Jersey in two operating segments: food (meal preparation and delivery,
        cafeteria and catering) and janitorial services. The Company had
        previously operated vending machine and cafeteria operations in its food
        segment, which were located in Missouri, Iowa and Oklahoma. The Company
        sold substantially all of its assets in these operations in August 2000
        and January 2001 (see Note 2).

        Principles of Consolidation
        The consolidated financial statements include the accounts of Ambassador
        Food Services Corporation and its wholly-owned subsidiary, Ambassador
        Fast Services, Inc. (hereinafter collectively known as the Company). All
        intercompany balances and transactions have been eliminated in
        consolidation.

        Reporting Periods
        The Company has a fiscal year (52 or 53 weeks) ending on the Thursday
        nearest May 31. Fiscal years 2001 and 2000 contained 52 weeks.

        Reclassifications
        Certain amounts from 2000 have been reclassified to conform to the 2001
        financial statement presentation.

        Use of Estimates
        The preparation of financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the amounts reported in the financial statements
        and accompanying notes. Actual results may differ from those estimates.

        Inventories
        Inventories are stated at the lower of cost (first-in, first-out) or
        market.

        Location Contracts and Excess of Purchase Price Over Net Assets Acquired
        Location contracts and excess of purchase price over net assets acquired
        arise form the purchase of various companies and are carried at cost.
        Location contracts represent the amount paid for customer vending
        relationships in existence at the time of acquisition. These
        relationships were generally cancelable by either party with limited
        notice. Such amounts are amortized on the straight-line method over 5 to
        40 years.

        The carrying value of intangible assets is periodically reviewed by the
        Company based on the estimated future operating income of each acquired
        entity on an undiscounted cash flow basis. Based upon its most recent
        analysis and subsequent sale of all the assets of the Kansas City
        location, the Company believes that no other material impairment of
        intangible assets existed at June 1, 2000.

        Amortization expenses for the years ended May 31, 2001 and June 1, 2000
        amounted to $9,322 and $15,980, respectively.




                                      F-7
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Summary of Significant Accounting Policies (Continued):

       Income Taxes
       Income taxes are accounted for under Statement of Financial Accounting
       Standards No. 109 Accounting for Income Taxes. Deferred income taxes
       reflect the net tax effects of temporary differences between the carrying
       amounts of assets and liabilities for financial reporting purposes and
       the amounts used for income tax purposes. Deferred tax balances are
       determined using tax rates expected to be in effect when the taxes will
       actually be paid or refunds received. A valuation allowance is recorded
       when the expected recognition of a deferred tax asset is considered to be
       unlikely.

       Financial Instruments and Concentration of Credit Risk
       Accounts Receivable
       -------------------
       Substantially all of the Company's accounts receivable are
       with customers located in New York and New Jersey. The Company grants
       credit to customers such as governmental social service agencies and
       other nonprofit organizations. Collateral is not required.

       As of May 31, 2001, two customers each represented approximately 16
       percent of total accounts receivable. One of these customers also
       represented 15 percent of total consolidated net sales for the year ended
       May 31, 2001.

       Short-Term Financial Instruments
       --------------------------------
       The carrying amount of short-term financial instruments, including cash
       and cash equivalents, trade accounts receivables and payables and certain
       accrued liabilities, approximates their fair value in the financial
       statements because of the short maturity of such instruments.

       Notes Payable and Long-Term Debt
       --------------------------------
       The carrying amount of the line of credit approximates its fair value
       because the currently effective rates reflect market rates. The carrying
       amount of fixed rate notes payable approximates its fair value based on
       the Company's estimated current incremental borrowing rate for similar
       obligations with similar terms.

       Stock Based Compensation
       The Company accounts for stock-based awards to certain employees,
       consultants and board members using the intrinsic value method in
       accordance with Accounting Principles Board Opinion No. 25, Accounting
       for Stock Issued to Employees. Stock options are generally granted with
       exercise prices equivalent to fair market value, and consequently, no
       compensation cost is recognized in the financial statements. When stock
       options are granted with exercise prices below fair market value,
       employee stock-related compensation expense is recognized accordingly.
       The Company provides additional pro forma disclosures as required under
       Statement of Financial Accounting Standards No. 123 Accounting for
       Stock-Based Compensation (see Note 16).

       Effects of Recent Accounting Pronouncements
       In June 1998, 1999, and 2000, the FASB issued SFAS No. 133, Accounting
       for Derivative Instruments and Hedging Activities, SFAS No. 137,
       Accounting for Derivative Instruments and Hedging Activities-Deferral of
       the Effective Date of FASB Statement No. 133, and SFAS No. 138,
       Accounting for Certain Derivative Instruments and Certain Hedging
       Activities, respectively. These statements require companies to record
       derivatives on the balance sheet as assts or liabilities, measured at
       fair value. Gains or losses resulting from changes in the values of those
       derivatives would be accounted for depending on the use of the derivative
       and whether it qualifies for hedge accounting. SFAS No. 133 will be
       effective as of June 1, 2001, the first day of fiscal year 2002. The
       adoption of these statements will have no significant impact on the
       Company's financial position or results of operations.

                                      F-8
<PAGE>



               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Summary of Significant Accounting Policies (Continued):

       Effects of Recent Accounting Pronouncements (Continued) In December 1999,
       the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
       Recognition in Financial Statements. SAB 101m provides guidance on the
       recognition, presentation, and disclosure of revenues in financial
       statements of all public registrants. In October 2000, the SEC issued a
       Frequently Asked Questions document related to SAB 101 which provides
       interpretive guidance. The Company adopted SAB 101 in fiscal year 2001,
       and the adoption of SAB 101 did not have a significant impact on the
       Company's financial position or results of operations.

       In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
       No 141 addresses the initial recognition and measurement of goodwill and
       other intangible assets acquired in a business combination. SFAS No 141
       is applicable to business combinations beginning July 1, 2001. The
       adoption of this statement will have no significant impact on the
       Company's financial position or results of operations.

       In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
       Assets. SFAS No. 142 addresses the recognition and the measurement of
       goodwill and other intangible assets subsequent to and measurement of
       intangible assets acquired outside of a business combination whether
       acquired individually or with a group of other assets. Goodwill and
       intangible assets previously recorded, in the Company's financial
       statements, will be affected by the provisions of SFAS No. 142. This
       statement provides that intangible assets with finite useful lives be
       amortized and that intangible assets with indefinite lives and goodwill
       will not be amortized, but will rather be tested at least annually for
       impairment. SFAS No. 142 will be effective for the Company's fiscal year
       2003, however management is assessing the impact that SFAS No. 142 will
       have on the Company's financial position and results of operations and
       investigating the possibility of early adoption, as allowed by the
       statement, in the first quarter of fiscal 2002.

       Property and Equipment
       Property and equipment are stated at cost. Depreciation is provided in
       amounts sufficient to relate the cost of depreciable assets to operations
       over their estimated useful lives on the straight-line method. The
       estimated lives used in determining depreciation are as follows:


              Description                               Years
              -----------                               -----
       Vending Equipment                                  4-8
       Cafeteria and Commissary Equipment                3-10
       Building and Leasehold Improvements               3-22
       Vehicles and Other                                3-10

       Income (Loss) Per Common Share
       Income (loss) per common share is computed using the weighted average of
       common shares outstanding during the period. Certain options were
       outstanding during the reporting periods but were not considered in the
       net loss per share calculation, as the effect is antidilutive.




                                      F-9
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2 - Sale of Assets:
-----------------------
       During the fiscal year ended May 31, 2001, the Company sold substantially
       all of its assets in the Missouri, Iowa and Oklahoma vending machine and
       cafeteria operations. The Company has not discontinued its remaining food
       operations located in New York. Revenues for the disposed operations were
       47.1 percent and 61.8 percent of total revenues for 2001 and 2000,
       respectively. The total net adjusted selling price amounted to $3,621,772
       in the form of cash, direct payments to vendors and a holdback
       receivable. The sale resulted in a net gain of $1,033,878, which is
       included in other income.

       The following is a summary of assets sold as of the "Dates of Sale"
       (August 2000 for Missouri and January 2001 for Iowa and Oklahoma) and
       June 1, 2000:

                                        Dates of Sale     June 1, 2000
                                        -------------     ------------
        Cash Change Funds                 $ 140,345         $ 214,558
        Accounts Receivable                      --           163,530
        Prepaid Expenses                         --            23,683
        Inventory                           310,973           400,482
        Equipment and Vehicles, Net       1,951,596         1,240,656
        Location Contracts                  138,155           147,477
        Other Assets                         46,825            57,098
                                          ---------         ---------

        Total Assets                      $2,587,894        $2,247,484
                                          ==========        ==========

        In connection with the sale of the Iowa and Oklahoma vending machine and
        cafeteria operation assets, the Company recorded a $507,899 holdback
        receivable that is to be paid to the Company by the purchaser contingent
        upon the purchaser retaining certain contracts with customers.

        In its third quarter Form 10QSB filed with the Securities and Exchanges
        Commission on July 20, 2001, the Company recognized a gain on disposal
        of discontinued operations which included $150,000 ($200,000 net of a
        $50,000 holdback reserve) of a holdback from the sale of the Iowa and
        Oklahoma vending machine and cafeteria operation assets, due in equal
        installments of $100,000 each on July 12, 2003 and 2004. In management's
        opinion, this gain was realizable since the assessment was that
        collection of the holdback net of the established reserve would be
        imminent. In addition, management classified the sale as a disposal of
        discontinued operations. Subsequent to the third quarter filing,
        management concluded that the sale constituted a sale of a portion of
        its food segment business. In addition, although management of the
        Company continues to be confident that the net holdback will be
        collected, it concluded that based on certain terms of the Asset
        Purchase Agreement, the $150,000 holdback should be considered a gain
        contingency and not be recorded in the financial statements until
        received. Accordingly, the Company has reversed the effect of the
        portion of the gain in the amount of $150,000 in its fourth quarter
        ended May 31, 2001 financial statements. Therefore, this $150,000 is not
        included in the $507,899 holdback receivable.

                                      F-10
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 3 - Property and Equipment:
------------------------------
       Property and equipment consists of the following:
                                                     2001          2000
                                                     ----          ----
       Vending Equipment                             $    --   $4,920,500
       Cafeteria and Commissary Equipment            386,254    1,116,833
       Building and Leasehold Improvements            17,342      761,037
       Vehicles                                      165,578      154,666
       Other                                         280,691      854,324
                                                     -------    ---------
                                                     849,865    7,807,360
       Less Accumulated Depreciation                 674,832    6,196,111
                                                     -------    ---------

       Property and Equipment, Net                   $175,033   $1,611,249
                                                     ========   ==========

       Depreciation of property and equipment for the years ended May 31, 2001
       and June 1, 2000 amounted to $288,995 and $477,352, respectively.

Note 4 - Note Receivable:
       Note receivable consisted of the following:
                                                     2001          2000
                                                     ----          ----
       Note   receivable   from  BVI,   due  in
       monthly    installments    of   $12,300,
       including   interest   at  8.5   percent
       through April 2001                           $   --      $ 291,812

       Less Current Portion                             --         28,473
                                                    -------     ---------

       Long-Term Portion                            $    --     $ 263,339
                                                    =======     =========


       The note was fully paid during the year ended May 31, 2001, net of a
       $22,981 discount.

Note 5 - Current Liabilities:
----------------------------
       Accrued expenses consisted of the following:
                                                     2001          2000
                                                     ----          ----

       Legal and Other Professional Fees             $20,199     $ 4,925
       Vacation Pay                                   30,752      63,328
       Taxes                                          15,560      47,880
       Salaries                                       59,835     149,616
       Current Portion of Benefit Obligation              --      43,850
       Medical Insurance                              44,980      73,472
       Reserve for Pension Withdrawal Liability       90,000          --
       Reserve for Settlements                        30,000          --
       Non-Compete Clause Liability                   36,504          --
       Accrued Sales Tax Costs                        20,596      29,612
       Other                                          32,400      26,659
                                                     -------      ------
        Total Accrued Expenses                       $380,826   $439,342
                                                     ========   ========


                                      F-11
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6 - Line of Credit Agreement:
--------------------------------
       In December 1999, the Company entered into a line of credit agreement
       with a lender, which provides for maximum borrowings of $1,000,000,
       limited to 80 percent of eligible accounts receivable. Interest is
       payable monthly at prime (7 percent at May 31, 2001) plus 4 percent. The
       amount is collateralized by a first priority perfected security interest
       in all the Company's assets excluding real estate and equipment, for
       which the lender has a second priority perfected security interest. The
       agreement, which expires in December 2001, contains a restrictive
       covenant that the Company was not in compliance with as of May 31, 2001.
       The lender has issued a waiver of the default as of May 31, 2001 through
       October 31, 2001.

       The balance of the credit line was $236,529 and $770,969 as of May 31,
       2001 and June 1, 2000, respectively.

Note 7 - Long-Term Debt:
-----------------------
       Long-term debt consists of the following:
                                                         2001           2000
                                                         ----           ----

       Notes payable - equipment, payable in
       monthly installments of approximately $25,500,
       including interest at 8 percent in 2001,
       and rates ranging from 9 percent to 19.3
       percent in 2000, due through October 2002,
       collateralized by equipment                      $ 45,107     $ 411,230


       Notes  payable  to  vendors,  payable
       in varied monthly  installments,
       including  interest at 8 percent, due
       through August 2001                                 2,271        11,479

       Notes  payable to  stockholders  at 10  percent,
       payable in monthly  installments of $5,681,  due
       through December 2000.                                --         45,915

       Note payable to Bassman Vending, Inc. (BVI)
       payable in monthly installments of $5,150,
       including interest at 8.5 percent, due through
       March 2001, collateralized by certain location
       contracts and equipment.                              --         49,525

       Note payable to an individual at 12 percent,
       payable in monthly installments of interest
       only through October 2000. The note was
       restructured on January 15, 2001, reducing the
       original note amount of $1,400,000 to $1,050,000
       plus interest at 10 percent per annum. Interest
       only to be paid the first six months, and a
       $250,000 payment was paid in February 2001.
       Thereafter, principal plus interest in the
       amount of $17,102 to be paid monthly through
       June 30, 2005 with a final payment of
       $9,056 on July 15, 2006, collateralized by a
       security interest in all commissary equipment
       and a subordinated interest in accounts
       receivable (A)                                   1,031,380     1,400,000
                                                        ---------     ---------


       Total Long-term Debt                             1,078,758     1,918,149

       Less Current Maturities                            231,727       497,293
                                                       ----------    ----------
       Long-Term Portion                               $  847,031    $1,420,856
                                                       ==========    ==========


                                      F-12
<PAGE>

               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 7 - Long-Term Debt (Continued):
-----------------------------------
       Aggregate annual principal payments applicable to long-term debt due
       subsequent to May 31, 2001 are as follows:

                   Year                         Amount
                   ----                         ------

                   2002                        $231,727
                   2003                         205,218
                   2004                         205,218
                   2005                         205,218
                   2006                         205,218
                   Thereafter                    26,159
                                               --------
                    Total                    $1,078,758
                                             ==========

       (A)In accordance with generally accepted accounting principles, the
          effective interest rate on the debt from the restructure date has been
          reduced to zero because the future interest expense of $259,339 has
          been added to the principal amount of $1,050,000.

Note 8 - Related Party Transactions:
-----------------------------------
       The Company previously borrowed $250,000 from a stockholder. The note
       which had a balance outstanding of $47,395 as of June 1, 2000, accrued
       interest at 10 percent, payable quarterly, was fully repaid to the
       stockholder as of May 31, 2001.

       The Company had notes payable to two officers, which at June 1, 2000
       totaled $45,915. The notes were fully repaid to the officers during the
       fiscal year ended May 31, 2001.

       During 2000, the Company forgave a note receivable in the amount of
       $20,842 due from the Company's President.

       During fiscal year 1999, the Company entered into a consulting agreement
       with a stockholder. The agreement originally requiring payments of
       $100,482 per annum, was informally amended in April 2001 to a total per
       annum consulting fee of $91,000. The consulting agreement terminates in
       May 2009.

       In connection with the issuance of the credit line (see Note 6), the
       Company's President entered into an agreement with the lender whereby the
       President has purchased and accepted from the lender a junior
       participation in the amount of $100,000 in the loans and advances made to
       the Company by the lender. The arrangement expires in December 2001. See
       also Note 17.

Note 9 - Extraordinary Items:
----------------------------
       Gain from Restructure of Debt
       -----------------------------
       On January 15, 2001, a note payable to an individual was restructured
       through reduction of the original principal amount due of $1,400,000, to
       $1,050,000 and a reduction of interest from 12 percent to 10 percent per
       annum. Per terms of the new agreement, payments are to be made as
       stipulated in Note 7 to the financial statements. The aggregate gain from
       restructure amounted to $51,243, net of applicable income taxes of
       $39,418. See also Note 17.



                                      F-13
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 9 - Extraordinary Items (Continued):
---------------------------------------

      Gain From Settlement with Vendors
      ---------------------------------
      In connection with the sale of assets of the Iowa and Oklahoma vending
      machine and cafeteria operations (see Note 2), the Company settled amounts
      due and outstanding to certain vendors. The transaction resulted in a gain
      of $61,446, net of applicable income taxes of $48,178.

      Collectively, the gains from extinguishment/settlement of debt of
      $112,689, net of applicable income taxes of $87,596, have been reflected
      in the statement of operations for the year ended May 31, 2001.

Note 10 - Leases:
----------------
       Future minimum lease payments under all non-cancelable operating leases,
       as of May 31, 2001 are as follows:

       Fiscal year         Real
         Ending           Estate       Equipment    Total       Sublease
       -----------       --------    ------------   ------      -------

            2002          $155,840     $ 12,804    $168,644     $31,800
            2003           113,458       12,054    125,512       31,800
            2004           113,360        6,280    119,640       31,800
            2005           102,238        1,256    103,494        5,300
            2006            86,940        --        86,940           --
                          --------     --------    -------     --------
                          $571,836     $ 32,394    $604,230    $100,700
                          ========     ========    ========    ========

       Net rental expense charged to operations (rented expense net of sublease
       rental income of $31,800 in 2001 and 2000) was $344,864 in 2001 and
       $493,715 in 2000.

Note 11 - Employee Benefit Plans:
--------------------------------
       The Company had a nonqualified defined-benefit pension plan covering two
       former officers and two key employees of the Company.

       On January 1, 2000, the Company implemented a settlement of the plan for
       the two key employees covered under the plan. The two key employees
       relieved the Company of any obligation for past and future pension
       benefits. A gain on settlement of $46,777 was recorded in the June 2000
       consolidated financial statements. On April 10, 2001, the Company settled
       its pension liability with the remaining two former officers and paid
       $105,000 as a final settlement amount. A gain on settlement of $3,114 has
       been included in the May 31, 2001 consolidated financial statements. The
       following sets forth the computation of settlement gains:
                                                          2001         2000
                                                          ----         ----

       Projected benefit obligations beginning of
       year                                             $92,988      $142,484
       Service cost                                       7,112         6,073
       Interest cost                                      8,014         6,614
                                                        -------      --------
       Projected benefit obligation at settlement
       date                                             108,114       155,171
       Unrecognized prior service asset at
       settlement date                                 (105,000)     (108,394)
                                                       ---------     --------

       Gain on pension settlement                       $ 3,114      $ 46,777
                                                        =======      ========



                                      F-14
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 11 - Employee Benefit Plans (Continued):
--------------------------------------------
       The following table sets forth the change in benefit obligation in the
       Company's consolidated financial statements:
                                                          2001         2000
                                                          ----         ----

       Projected benefit obligation, beginning
        of year                                        $133,491     $318,891

       Service cost                                          --        6,073
       Interest cost                                         --       18,174
       Benefits paid                                    (25,377)    ( 54,476)
       Settlement of projected benefit obligation      (108,114)    (155,171)
                                                     -----------    --------

       Projected benefit obligation, end of year     $       --     $133,491
                                                     ===========    ========


       Net accrued pension cost is included in the accompanying consolidated
       financial statements as follows:

                                                          2001         2000
                                                          ----         ----

       Current portion included in accrued expenses   $     --       $ 43,850
       Long-term portion of obligation                      --         89,641
                                                     -----------     --------

                                                     $       --      $133,491
                                                     ===========     ========


       The weighted-average discount rate used was 8.0 percent in determining
       the actuarial present value of the projected benefit obligation in 2000.

       Net periodic pension cost for 2001 and 2000 consisted of the following
       components:

                                                           2001        2000
                                                           ----        ----

       Service cost-benefits earned during the
        period$                                              --      $  6,073
       Interest cost on projected benefit obligation         --        18,174
                                                       --------      --------

       Net periodic pension cost                     $      --       $ 24,247
                                                     ===========     ========


       The Company contributed $31,359 and $51,600 in fiscal years 2001 and
       2000, respectively, to several multi-employer pension plans for employees
       covered by collective bargaining agreements. These plans were not
       administered by the Company, and contributions were determined in
       accordance with provisions of negotiated labor contracts. During the
       fiscal year ended May 31, 2001, the Company terminated these plans.

       The Multi-employer Pension Plan Amendments Act of 1980 (the Act)
       significantly increased the pension responsibilities of participating
       employers. Under the provisions of the Act, if the plans terminate or the
       Company withdraws, the Company could be subject to a substantial
       withdrawal liability. As of May 31, 2001, the Company became subject to a
       pension plan withdrawal liability for termination of the plans.
       Consequently, $90,000 has been reserved and is included in accrued
       expenses in the accompanying May 31, 2001 consolidated financial
       statements.


                                      F-15
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 12 - Income Taxes:
----------------------
       Deferred income taxes consisted of the following:


                                                2001               2000
                                                ----               ----

       Deferred tax liability               $  63,221           $192,896
       Deferred tax asset                    (773,166)          (957,841)

       Less valuation allowance               709,945            764,945
                                            ---------           --------

       Net Deferred Income Taxes            $      --           $     --
                                            =========           ========

       The approximate tax effect of each temporary difference giving rise to
       the deferred tax liability and asset was as follows:

                                                2001               2000
                                                ----               ----
       Amortization of location contracts   $  3,729            $  6,432
       Accelerated depreciation               59,492             186,464
                                            --------            --------
       Deferred tax liability               $ 63,221            $192,896
                                            ========            ========

       Accrued costs                        $(27,460)           $(20,935)
       Pension costs                              --             (53,396)
       Vacation accrual                      (12,301)            (25,331)
       Allowance for bad debts                (9,335)            (13,000)
       Other                                 (15,830)            (32,314)
       Net operating loss carryforwards     (575,981)           (631,055)
       AMT credit carryforward              (106,504)           (106,504)
       Investment tax credit carryforward    (25,755)            (75,306)
                                            --------            --------
       Deferred tax asset                  $(773,166)          $(957,841)
                                           =========           =========

       The valuation allowance was established to reduce the deferred tax asset
       to zero. The reduction is necessary because of prior operating losses and
       uncertainty about the Company's ability to utilize tax credit and net
       operating loss carryforwards before they expire. The valuation allowance
       decreased by $145,223 and increased by $45,268 in fiscal years 2001 and
       2000, respectively.

       The income tax benefit reflected in the consolidated statements of
       operations differs from the amounts computed at federal statutory income
       tax rates. The principal differences are as follows:

                                                2001              2000
                                                ----              ----

       Federal income tax benefit computed
       at statutory rate                    $ (74,433)        $ (61,152)
       State income tax benefit               (13,135)          (10,792)
       Tax effect of nondeductible expenses     5,204             8,857
       Increase (decrease) in valuation
       allowance                              (55,000)           45,268
       Expiration of investment tax credit
       carryforward                            49,551            25,168
       Other, net                                 217            (7,349)
                                               -------          -------
                                              $(87,596)        $     --
                                              ========         =========

       The Company had available at May 31, 2001, investment tax credit
       carryforwards of $25,755, which expire in 2002.

       In addition, the Company had net operating loss carryforwards available
       at May 31, 2001 which amounted to $1,118,164 and expire from 2008 through
       2020.

                                      F-16
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 13 - Supplemental Disclosures of Cash Flow Information:
-----------------------------------------------------------

                                                 2001             2000
                                                 ----             ----
        Cash paid during the year for:
         Income taxes                       $      --           $    --
         Interest                             $207,635          $305,215

        Supporting Schedule of Non-Cash Investing and Financing Activities:
         Sale of assets (see Note 2):
         Inventory                                   $  310,973
         Equipment and vehicles                       1,951,596
         Location contracts                             138,155
         Other assets                                    46,825
         Gain on sale of assets                       1,033,878
                                                      ---------
                                                      3,481,427

        Less Direct payments to vendors for accounts
        payable                                      (1,180,415)
              Holdback receivable assumed              (507,899)
                                                     ----------

             Cash Proceeds Received                  $1,793,113
                                                     ==========

        Also, the Company had certain transactions that resulted in the
        forgiveness of debt (see Note 9).

Note 14 - Operating Expenses:
----------------------------
        Operating expenses in the accompanying consolidated statements of
        operations consisted of the following:

                                                 2001             2000
                                                 ----             ----

        Payroll and related costs          $3,206,144           $4,964,013
        Equipment rental costs                133,696              260,396
        Other                               1,327,304            1,178,057
                                           ----------           ----------
                                           $4,667,144           $6,402,466
                                          ===========           ==========

Note 15 - Self-Insurance Liabilities:
------------------------------------
        Prior to January 12, 2001, the Company was partially self-insured for
        health claims for its employees and their eligible dependents. Under the
        plan, the Company is liable for claims up to $25,000 per participant per
        plan year. The Company has accrued estimated claims of $44,980 and
        $73,472 as of May 31, 2001 and June 1, 2000, respectively.

                                      F-17
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 - Collective Bargaining Agreement:
-----------------------------------------
        Substantially all of the Company's nonmanagement employees are covered
        by collective bargaining agreements. The agreement with the food and
        janitorial workers is scheduled to expire in December 2003. If the
        Company and the United Service Employees Union #377 representing such
        workers are unable to agree on a new contract prior to expiration of the
        current contract, a work stoppage may occur that could adversely affect
        results of operations.

Note 17 - Common Stock Options:
------------------------------
        The Company previously granted $100,000 options to certain of it's
        officers, directors and key employees. All options vested as of June 1,
        2000.

        The Company accounts for stock options in accordance with APB Opinion
        No. 25 and related interpretations. Accordingly, no compensation expense
        has been recorded for the years ended May 31, 2001 and June 1, 2000.
        However, the Company has computed, for pro-forma disclosure purposes,
        the value of all options using the Black-Scholes option-pricing model.
        The following weighted average assumptions were used in this
        calculation:

                                          Weighted Average
                                             Assumptions
                                          ----------------
            Expected dividend yield             0%
            Risk-free interest rate            5.18%
            Assumed forfeiture                  0%
            Expected holding period           4 years

        The following summarizes the activity in the Company's stock option
        plan:


                                                                      Weighted
                                                                      Average
                                     Number of shares                 Exercise
                                 -----------------------              Price
                                 Outstanding      Exercisable        Per Share
                                 --------------   ------------       ----------
        Outstanding June 3, 1999     50,000            50,000         $ 1.37
        Granted                      50,000            50,000           1.37
                                    -------        ----------        ----------
        Outstanding, June 1, 2000   100,000           100,000           1.37
        Granted                          --                --             --
        Exercised                        --                --             --
                                    --------       ----------        ----------
        Outstanding, May 31, 2001   100,000           100,000        $  1.37
                                    =======        ==========        ==========

        Had compensation cost for the plan been determined based on the fair
        value of the options at the grant date, the Company's net loss would
        have increased by approximately $31,250 in 2000, resulting in a net loss
        for the year ended June 1, 2000 in the amount of $211,109. Net loss per
        share would have been $0.29 for the year ended June 1, 2000.

        The following table summarizes information about options outstanding at
        May 31, 2001:


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

$ 1.37     100,000       2 years        $  1.37       100,000       $  1.37


                                      F-18
<PAGE>


               AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 18 - Subsequent Events:
---------------------------
        Effective October 31, 2001, in connection with the Company's line of
        credit agreement (see Note 6), the lending institution extended the line
        of credit until December 2002. In addition, the lending institution
        reduced the Tangible Net Worth covenant from $550,000 to $300,000. All
        other terms and conditions remain the same.

        As of October 29, 2001, the note payable to an individual (see Note 7)
        was restructured through a reduction of interest payable from 10 percent
        to 8 percent per annum which will become effective December 16, 2001.
        Payment of interest only, will commence on January 15, 2002 for a period
        of six months. Thereafter, payment consisting of principal and interest
        will be made in the amount of $16,267 monthly, with a final payment date
        of January 2007.