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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   Form 10-KSB
                 ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended May 31, 1997
                       Commission file number 33-67658-NY

                           ROYAL CANADIAN FOODS CORP.
                 (Name of small business issuer in its charter)

             Delaware                                  13-3729739
 (State or other Jurisdiction of             (I.R.S. Employer Identification
  incorporation or organization)                          No.)

1004 Second Avenue, New York, NY                   10022
(Address of principal executive offices)        (Zip Code)

                    Issuer's telephone number: (212) 980-4131

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

                    Securities registered under Section 12(g)
                            of the Exchange Act: NONE

     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                 No X
             ---                 --

     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]

                           State issuer's revenues for
                     its most recent fiscal year: $3,326,285


     State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $3,687,523 as of March 20, 1998.


                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

         State the number of shares outstanding of each of the issuer's
          classes of common equity, as of the latest practicable date:

                        2,993,915 shares of Common Stock

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.

     Transitional Small Business Disclosure Format:

          Yes                 No X
             ---                 --

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                             PART I


Item 1.   Description of Business.

Background

          Royal Canadian Foods Corp., a Delaware corporation (the "Company"),
is engaged in the business of establishing and operating moderately priced
restaurants under the names "Royal Canadian Pancake House Restaurant" (the
"Pancake Restaurants") and "Royal Canadian Womlett(R) House" (the "Womlett
Restaurants") (the Pancake Restaurants and Womlett Restaurants are collectively
referred to herein as the "Restaurants"). The Company was formed in August 1993
as a holding company for its subsidiaries which own and operate Restaurants,
the first of which commenced operations in 1989.

          The Company owns and operates three Pancake Restaurants in New York,
NY. Each Restaurant has a 75 to 80 person seating capacity. See "Item 2 - 
Description of Property".

          The Company owns what is effectively a controlling interest in a 104
seat Pancake Restaurant located in the South Beach community of Miami Beach,
Florida, operated by the Company and originally developed under a joint venture
arrangement. See "Item 1 - Description of Business - Joint Venture".

          The Company owns and operates one Womlett Restaurant also in the
South Beach community of Miami Beach, Florida, which seats approximately 60
people. It recently signed a lease for a second Pancake Restaurant location in
the Coconut Grove community of Miami, Florida, for which it requires additional
funds to open and operate. See "Item 2 - Description of Property".

          The Company completed an initial public offering of 250,000 shares of
its Common Stock in November 1993 (the "Initial Public Offering"). The offering
price was $5.00 per share and the amount raised, net of underwriting and other
offering expenses, was $1,012,170.

          The Company has entered into a Letter of Intent with an underwriter
to conduct a new public offering of 1,200,000 shares

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of the Company's Common Stock for gross proceeds of approximately $6,000,000
(the "Offering"). The Offering had been delayed but the Company anticipates the
completion of the Offering by the end of the 1998 calendar year. However, no
assurance can be given as to the successful completion of the Offering. See
"Item 1 - Description of Business - Proposed Public Offering".

          The Company has created a line of frozen pancakes for supermarket
distribution. The Company has developed the formulae for the pancakes, designed
the packaging, created marketing and public relations strategies, and developed

manufacturing set-ups and distributional networks. The implementation of this
line of business has been halted due to insufficient financing. See "Item 1 - 
Description of Business - Proposed Wholesale Distribution," "Item 6 - 
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 4 and 21A to the Consolidated Financial Statements.

          The ultimate implementation of this line of business will require
$1,500,000 of additional financing, anticipated to be provided from the
proceeds of the Company's second public offering, although there can be no
assurance of the successful completion of such offering. The Company incurred
research and development expenses of $627,778 and $34,480 in fiscal 1997 and
1996, respectively. At May 31, 1997, certain equipment and other assets
relating to this line of business and aggregating $120,550 are reported as
non-operating on the Company's consolidated balance sheet. Additional
expenditures approximating $141,300 were made subsequent to May 31, 1997. The
magnitude of the expenditures incurred in connection with the Company's attempt
to develop a wholesale line of business, coupled with the lack of any revenues
therefrom have contributed significantly to the Company's severe cash shortage.

          The Company's cash shortage has been further exacerbated by its
restaurant development expenditures in Florida. The Miami Beach Pancake
Restaurant required a substantial additional investment during its first year
of operations, which was a new market for the Company. Furthermore, the
construction of the Womlett Restaurant required capital investments of
approximately $291,000 in the Company's 1997 fiscal year and an additional
capital investments of approximately $209,000 from June 1997 through January
1998. The

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Company will be required to make additional capital investment, currently
estimated to be $250,000, to fund the opening and initial operation of its
Coconut Grove Pancake Restaurant.

          As a result of these expenditures and due to insufficient financing
and cash flow from operations, the Company became seriously delinquent on its
payroll taxes, sales taxes and rent tax obligations as well as its rental
payments under its various Restaurant leases. At May 31, 1997, the Company had
various delinquent tax liabilities aggregating $629,898. At such date,
delinquent rental payments were $35,513. At February 28, 1998, such delinquent
tax liabilities were approximately $630,000. At such date substantially all
rent arrearages had been paid. At certain times the various delinquencies have
resulted in landlords bringing litigation and/or eviction proceedings and
taxing authorities pursuing their various remedies including placing liens on
the Company's bank accounts and closing the subject Restaurant. See "Item 3 -
Legal Proceedings" and Notes 5, 12A and 20 to the Consolidated Financial
Statements.

          Certain of the Company's financing alternatives, notably the sale of
Common Stock under Regulation S of the Securities Act of 1933, require that the
Company be current on its reporting requirements under the Securities Exchange
Act of 1934. The Company was approximately six and one-half months late in

filing its annual report on Form 10-KSB for its fiscal year ended May 31, 1997,
and has not yet filed its quarterly reports on Form 10-QSB for the quarterly
periods ended August 31, 1997 and November 30, 1997. The Company's reporting
delinquencies have in the past and may in the future restrict the type of
equity financing available to it. The Company has utilized various types of
financing including sales of Common Stock under Regulation S during the last
quarter of fiscal 1996 and in fiscal 1997 and thereafter through September 8,
1997, although the Company does not anticipate that it will be relying on this
form of financing in the future due to an amendment to Regulation S which will
take effect in April 1998. The Company has also availed itself of various
unsecured loans from certain parties, some of whom are affiliated with the
underwriter of the Company's proposed Offering. See "Item 1 - Description of
Business - Other Financing", "Item 6 - Management's Discussion and Analysis of

                                4

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Financial Condition and Results of Operations" and Notes 8A, 9, 10, 13, 18, 19
and 20B to the Consolidated Financial Statements.


Menus

          Pancake Restaurants. The Pancake Restaurants feature 53 varieties of
Canadian style pancakes using proprietary recipes. They are exceptional in
their size (approximately 12 3/4 inches across) and gourmet quality. The
Pancake Restaurants also serve waffles, French toast, French Canadian crepes,
omelettes, Canadian bacon, salads, sandwiches, soups, hamburgers and a full
entree menu with Canadian salmon steak, fish and other items to appeal to a
broad customer base.

          All food portions are large, consistent with the Company's concept of
projecting the warm and generous image of a Canadian pancake house. However,
prices are moderate, which gives customers a sense of value when dining at the
Restaurant.

          Womlett Restaurants. The Womlett Restaurants concept is that of a
1950's gourmet diner. It features a variety of breakfast fares, burgers
(including turkey and vegetarian burgers), frittate (a flat omlette with whole
eggs or egg whites only), salads, homemade soups, desserts and bread, and a
lengthy list of sweet and savory Womletts (also available with egg whites) such
as bacon cheddar, spinach feta cheese and baked apples. The Womlett is a food
item invented by the Company and consists of an omelette dome baked onto a
waffle base. While the quality of the food at the Womlett Restaurant is high,
the prices are economical, currently ranging between $2.99 and $6.50.

Operational Procedures

          The Company purchases its supplies directly from vendors, who deliver
the supplies directly to the Restaurants. Presently there are no plans to
change the distribution process. Management will review the acquisition and
distribution of its supplies as its business grows, and will make modifications
when it feels that greater efficiencies can be achieved.


          The Company has standardized the preparation,
presentation and service of food, and the dress and conduct of

                                5

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restaurant employees. As a result, customers have a comfortable dining
experience with high quality food and service.

Restaurant Locations

          Factors considered in Restaurant site selection include demographics
of the surrounding area, traffic patterns, access, visibility, leasing rates
and opening costs, which can vary significantly depending on the condition of a
proposed site.

          The Company presently estimates that the cost of construction for
each new Restaurant, exclusive of lease and operating costs, will be between
$250,000 to $350,000, depending on the condition of the premises. The Company
estimates that the cost of construction for the Coconut Grove Pancake
Restaurant will be approximately $250,000.

          The opening of any additional Restaurants would have to be financed
from a combination of available cash flow, public or private equity financing,
the availability of any of which is not assured. At present, the Company's cash
flow is not sufficient to fund the opening of new Restaurants. The Company has
entered into a Letter of Intent for a new public offering of its Common Stock.
See "Item 1 - Description of Business - Proposed Public Offering", "Item 6 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 8B and 21B to the Consolidated Financial Statements.

          The present financial condition of the Company prevents it from being
able to project how many more Restaurants, if any, it may develop and open in
the next twelve month period or thereafter. Until it receives significant
additional financing, the Company will focus on the construction of its Coconut
Grove Pancake Restaurant.

          The Company opened its first Restaurant in October 1989 at 145 Hudson
Street, New York, N.Y. The Company closed this Restaurant on November 30, 1993
due principally to declining sales and to an overall decrease in business in
the Restaurant's remote neighborhood.


Marketing

                                6

<PAGE>

          The Company has marketed the Restaurants in a number of ways.

Advertisements have been placed in local publications both in Miami Beach and
New York. Examples of publications where advertising has appeared include in
New York: Via New York Guide, The Resident Publications in all New York City
neighborhoods and The New York Post, and in Miami Beach: The Miami Sun Post,
Gourmet Magazine, Nuevo Herald and Miami Herald.

          A radio campaign has been conducted both in Miami Beach and New York
in the commuter traffic broadcast reports.

          The Company attempts to take advantage of promotional opportunities
which are available locally. One of the New York Pancake Restaurants received a
favorable mention by Sylvestor Stallone on The David Letterman Show aired on
August 7, 1997. Sheldon Golumbia, the President of the Company, is endeavoring
to arrange a guest appearance on The David Letterman Show, which is taped in
New York City, on behalf of the Restaurants.

          In the Miami Beach market the Restaurants have been featured on all
of the major television networks and editorials in The Miami Herald and The
Nuevo Herald, The Sun Post, Fashion
Spectrum and Gourmet Magazine.

          The Miami Beach Pancake House has hosted various events for the
Jackie Gleason Theater and for Fashion Spectrum Magazine in conjunction with
all of the major modeling agencies with a presence in Miami Beach, such as the
Ford Modeling Agency.

          The Company is involved in various charitable activities to feed the
homeless both in the New York and the Miami Beach areas. In Miami Beach, the
Pancake Restaurant provides support to the Camillus House, a multi-purpose
center providing assistance to the homeless in downtown Miami Beach, with
contributions of food and hosting of special events at the Restaurant. The
Miami Beach Pancake Restaurant has also hosted a number of fund raising events
at its Restaurant sponsored by players of the Miami Heat basketball team.

          In 1991 the Company's President and two of its chefs
flew to Saudi Arabia during the Gulf War to make pancakes for the
U.S. troops.  National and local television stations have
broadcasted reports on the Restaurants and its promotional

                                7

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events. Articles about the Restaurants have appeared in The New York Times, The
Wall Street Journal, Women's Wear Daily, San Francisco Examiner and other
publications. The Company has been mentioned favorably in Forbes, and has twice
received the Forbes food award. In addition, the Company was featured on
Midday, a major Canadian television talk show, and the Restaurants have
received radio and newspaper publicity in Canada. Several articles have
appeared in the Japanese press as well.

          The Company also markets its Restaurants by means of discounting its
meals to customers of certain credit card companies. In exchange for lump sum
payments received in advance from such companies, the Company sells its meals

at a net discount of 50% to such companies. The customer pays 75% of the menu
prices and the Company records a promotional charge for the 25% difference
which is earned by the credit card companies. In addition to enhancing cash
flow, this gives the Restaurants greater exposure to the public. See Notes 1G
and 6 to the Consolidated Financial Statements.

Competition

          The restaurant business is highly competitive and is affected by,
among other things, demographic changes in a particular area, changes in eating
habits and preferences, local, regional and national economic conditions,
population trends and traffic patterns. The principal bases of competition in
the industry are the quality and prices of the food products served. Restaurant
location, quality and speed of service, advertising, name identification and
attractiveness of facilities are also important. The acquisition of sites is
highly competitive as well, with the Company often competing with other
restaurants and retail businesses for suitable sites for the development of new
Restaurants. There is no assurance that companies which are larger and/or
better capitalized than the Company will not present the Company with
substantial competition that will significantly affect the Company's future
prospects.

Intellectual Property Rights

          The Company has registered the service marks "Royal
Canadian Pancake House" and "Pancakes Make People Happy" with the
United States Patent and Trademark Office.  The Company also has

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registered these marks in Japan. The Company is not aware of any infringing
uses that could materially affect its business or any prior claim to these
service marks that would prevent the Company from using or licensing the use
thereof for restaurants in any area of the United States.

          The Company's management believes that its registered service marks
help to promote the Restaurants and maintain its goodwill. Management also
believes that, since the Restaurants are selling food with Canadian themes, the
"Royal Canadian Pancake House" service mark identifies the food with that
country.

          The Company's name, "Royal Canadian Foods Corp.", is not intended to
signify any affiliation with any Canadian entity or any official sanctioning
body or authority in Canada.

Government Regulation

          The Company is subject to various federal, state and local laws
affecting its business as well as a variety of regulatory provisions relating
to zoning of restaurant sites, sanitation, health and safety. Various federal
and state labor laws govern the Company's relationship with its employees,
including such matters as minimum wage requirements, overtime and other working

conditions. Environmental requirements have not had a material effect on the
operations of the Company. However, significant additional government-imposed
increases in minimum wages, paid leaves of absence, mandated health benefits or
increased tax reporting and tax payment requirements in respect of employees
who receive gratuities could have an adverse financial effect on the
Restaurants.

Joint Venture

          The Company entered into a joint venture with a third party to open a
Restaurant in Miami, Florida. A limited liability company, of which the Company
owns a contractual 50% interest, was formed to develop, own and operate the
Restaurant.

          The joint venture Restaurant is located at 1216
Washington Avenue, Miami Beach, Florida.  It opened in July 1996

                                9

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and seats 104 people.  The cost to develop, build and commence
operations of this Restaurant was approximately $250,000.

          The Company has funded a substantially larger portion of the overall
development and construction costs than its venture partner, and also has
defrayed almost all of the Restaurant's first year operating cash flow
shortfall. At May 31, 1997, the Company's cash investment was approximately
twice that of its joint-venturer. Moreover, such joint venturer's 50% share of
the joint venture's first year loss exceeds the joint-venturer's investment.
As a result of the Company's effective majority ownership, the accounts of the
joint-venture are fully consolidated with those of the Company. Further, due to
the joint-venturer's share of loss being in excess of its investment and the
lack of any legal obligation on the part of the joint-venturer to make any
additional investment, no minority interest is reflected on the Company's
consolidated balance sheet at May 31, 1997. See "Item 6 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 1B to the Consolidated Financial Statements.

Proposed Wholesale Distribution

          From approximately April 1996 through April 1997, the Company worked
on preparations to implement the wholesale distribution of its pancakes in
frozen form to supermarkets, initially in the New York Metropolitan market.

          After considering several possibilities, the Company decided on the
concept of three different versions of frozen pancakes: chocolate chip, apple
cinnamon and whole wheat with blueberries.

          The Company planned for each package to contain twelve silver dollar
pancakes, each about four inches in diameter, to be oven-baked and packed into
four separate vacuum sealed compartments. The pancakes are to be made of
natural ingredients and real fruit, organic grains and with no artificial
colorings or preservatives.


          The packaging features a nostalgic type box with antique family
photographs and Canadian farm scenes. The background is of a checkered table
cloth of which the color

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varies with each flavor. The back of the box features a letter to the consumer
from "the lady on the tractor" which represents the logo of the Company. The
box also illustrates all three versions of the pancakes.

          Each box is expected to have a retail price of $2.99 which the
Company believes will provide a competitive price and at the same time a higher
quality product for that price point.

          The Company has negotiated with a baking facility in Mexico for the
preparation and storage of its pancakes. Equipment required for customization
of production lines to the specific manufacturing needs of the Company's line
of frozen pancakes has been purchased and is on site at the baking facility's
premises.

          The Company has developed the formulae for the pancakes, conducted
the analyses of the formulae required by the Food and Drug Administration, and
secured multiple sources of raw material, including organic flours, fruit,
chocolate and other components of the product's formulae.

          Food brokers, which act as independent sales representatives, are to
be used to distribute the Company's product. Food brokers receive a commission
equal to 5% of sales for their services. Typically the supermarkets pick up a
shipment and charge for this service.

          The Company has developed a number of marketing techniques for the
distribution of its pancakes, as well as discount coupons and in-store
demonstrations of its product. The Company's plans include producing radio and
television advertisements as well as conducting extensive public relations
activities.

          The Company expects to encounter significant competition upon
launching its frozen pancake distribution business. There is intense
competition for shelving space in supermarkets from both large and small food
companies marketing their products. Supermarkets are very sensitive to whether
a particular product on their shelves produces a high sales volume and often
will quickly pull products that are not selling well. Assuming its successful
launch, of which there can be no

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assurance, this will be the first time that the Company has attempted the sale
of its pancakes in supermarkets and in frozen form and the Company cannot
accurately predict the future amount of supermarket sales that may result from

its efforts.

          The Company's wholesale operations will be subject to regulation by
various governmental agencies, including the United States Food and Drug
Administration. If the Company decides that the volume of business is
sufficient to make the pancakes in its own plant, it will be subject to various
environmental laws and regulation regarding air quality, waste management and
other related land use and production matters.

            The implementation of this line of business has been halted due to
insufficient financing. The Company estimates that the ultimate implementation
of this line of business will require $1,500,000 of additional financing,
anticipated to be provided from the proceeds of the Offering, although there
can be no assurance provided of the successful completion of such offering. See
"Item 1 - Description of Business - Proposed Public Offering." Moreover, other
financial obligations may result in there being insufficient funds to pursue
this line of business. There is no assurance that even if the Company receives
sufficient financing that it will receive any orders or if it does receive
orders, that they will be in sufficient amounts to make the wholesale
distribution of the Company's pancakes commercially viable. See "Item 6 - 
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 4 and 21A to the Consolidated Financial Statements.

          The Company incurred research and development expenses of $627,778
and $34,480 in fiscal 1997 and 1996, respectively. At May 31, 1997, certain
equipment and other assets relating to this line of business and aggregating
$120,550 are reported as non-operating on the Company's consolidated balance
sheet. Additional expenditures approximating $141,300 were made subsequent to
May 31, 1997. The magnitude of the expenditures incurred in connection with the
Company's attempt to develop a wholesale line of business, coupled with the
lack of any revenues therefrom have contributed significantly to the Company's
severe cash shortage.

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Proposed Public Offering

          The Company entered into a Letter of Intent dated March 25, 1996 with
Patterson Travis, Inc. (the "Underwriter") for the Underwriter to conduct a
"best efforts, all or none" public offering of 1,200,000 shares of the
Company's Common Stock for gross proceeds of approximately $6,000,000 (the
"Offering"), which was amended by a letter dated November 19, 1996, to be a
"firm commitment" underwriting with a 15% over-allotment option. While the
Company originally anticipated that the Offering would commence some time
shortly after the signing of the Letter of Intent, the Company now anticipates
that the Offering will occur prior to the end of the 1998 calendar year,
although there can be no assurance provided in this regard. The Company has
received a letter from the Underwriter dated February 19, 1998 affirming the
terms of the Letter of Intent.

          The Letter of Intent provides for the Underwriter to receive a
commission of 10% of the gross proceeds of the Offering and a non-accountable

expense reimbursement equal to 3% of the gross proceeds. In addition, the
Letter of Intent provides for the Underwriter to receive five year warrants
exercisable for 120,000 shares of Common Stock at an exercise price equal to
120% of the price of the Common Stock sold in the Offering, together with
related demand and piggyback registration rights. See "Item 6 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity", and Notes 8B and 21B to the Consolidated Financial Statements.

Other Financing

          In fiscal years 1997 and 1996 the Company sold a total of 244,075
shares and 50,000 shares, respectively, of its Common Stock at $2.00 per share
to overseas investors in offerings under Regulation S, promulgated under the
Securities Act of 1933. The Company also sold a total of 199,840 shares of its
Common Stock at $2.00 per share to overseas investors in offerings under
Regulation S from June 1, 1997 through January 31, 1998. Of such shares sold
subsequent to May 31, 1997, 99,880 were sold in exchange for an aggregate of
$199,760 of existing debt, borrowed in March, April and May of 1997, and due in
90, 60 and 30 days, respectively. The Company hopes to obtain additional
financing pursuant to private sales of its Common Stock although it

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presently does not have any such commitments. The Company does not anticipate
further sales of its Common Stock under Regulation S due to the change to the
Regulation S holding period before resale from 40 days to one year, which will
become effective in April 1998. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity", and
Notes 10, 13 and 19 to the Consolidated Financial Statements.

          The Company received loan proceeds of $469,760 and $275,000 in fiscal
1997 and 1996, respectively, exclusive of loan transactions with Sheldon
Golumbia, the Company's President and majority shareholder. Of the $469,760 of
loans received in fiscal 1997, $199,760 were converted to Common Stock pursuant
to a Regulation S sale on June 9, 1997. The remaining $270,000 was received
from an individual affiliate of the underwriter of the proposed Offering. Such
$270,000 of loans, initially due the earlier of December 31, 1997 or the date
the Company completed its second public offering, have been extended to
December 31, 1998. Subsequent to May 31, 1997, through March 11, 1998, in nine
different transactions, the same individual loaned the Company in the aggregate
an additional $355,000 which loans are also due December 31, 1998, with the
earlier prepayment requirement upon the completion of the Company's new public
offering still in effect. In addition, in four transactions between November
13, 1997 and February 23, 1998, the Company borrowed a total of $208,000 from a
third party. The loans from both of these parties are evidenced by
non-negotiable promissory notes. The $275,000 of loans received in fiscal 1996
were from another affiliate of the underwriter of the proposed Offering and are
contingent loans in that they are only repayable in the event of and from the
proceeds of a new public offering of the Company's Common Stock. See Notes 8A,
9, 10, 18A and 20B to the Consolidated Financial Statements.

          Sarah Golumbia, mother of Sheldon Golumbia, made $25,000 and $50,000

loans to the Company with interest at 9% per annum on June 23, 1997 and
February 10, 1998, respectively. The Company repaid the $25,000 loan on July
14, 1997 and repaid the $50,000 loan in two $25,000 payments, the first on
February 24, 1998 and the second on March 9, 1998.

          The Company is also indebted to Sheldon Golumbia for loans
aggregating $316,380 at May 31, 1997, inclusive of accrued

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interest at 9% per annum. The maturity date of such loans has been extended
periodically, the last of such extensions being made for $250,000 of the
principal balance to June 30, 1998. See Note 7B to the Consolidated Financial
Statements.


Accrued Liabilities

          As of February 28, 1998, the Company was delinquent on approximately
$630,000 of sales tax, payroll tax and rent tax liabilities, including
penalties and interest. Penalties and interest continue to accrue on delinquent
amounts. Sales tax and payroll tax delinquencies have resulted and could in the
future result in Restaurants being closed as a result of such delinquencies not
being brought current or because no arrangement has been made for an interim
installment payment agreement. See "Item 2 - Description of Property," "Item 6 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity", and Notes 5 and 20B to the Consolidated Financial
Statements.

          At May 31, 1997, the total amount of accrued but unpaid salaries
payable to Sheldon Golumbia, President, and Beatrice Puja, Vice President -
Operations, was $315,585 and $194,293, respectively. See "Item 10 - Executive
Compensation" and Note 7A to the Consolidated Financial Statements.

          The Company intends to pay off these tax delinquencies and salary
accruals in full out of the proceeds of the Offering, the successful completion
of which there can be no assurance. Until such time the Company has and will
continue to enter into installment agreements with the taxing authorities for
the taxes owed and accrue the salaries of Mr. Golumbia and Ms. Puja.

Employees

          As of March 19, 1998, the Company employed a total of 58 persons, of
which two were executive officers, and 48 were part-time restaurant personnel.


Item 2.   Description of Property.

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          The Company's operating subsidiaries each lease the premises for
their respective Restaurant location. The Company's subsidiaries have
frequently been involved in litigation, at times resulting in eviction warrants
being issued and in one case executed, due to their failure to timely pay the
rent on their respective leases. See "Item 3 - Legal Proceedings" and Notes 12A
and 20A to the Consolidated Financial Statements.

          The following table lists the Company's existing Restuarants, all of
which are operational except for the Coconut Grove Restaurant. The lease for
the Coconut Grove Restaurant was recently signed but such Restaurant will not
open until certain construction and renovation work is completed, for which the
Company presently does not have financing. See "Item 6 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity."


Location                       # Seats          Lease Expiration Date 
--------                       -------          --------------------- 

1004 Second Ave, NY, NY         75-80           December 31, 2001

2286 Broadway, NY, NY           75-80           June 30, 2005 

180 Third Ave, NY, NY           75-80           January 31, 2006 

1216 Washington Ave, Miami        104           December 31, 2001, with 
Beach, Fl(1)                                    two 5-year renewal
                                                options

1505 Washington Ave, Miami         60           March 31, 2007
Beach, Fl         

Commodore Plaza, Miami, Fl         70           February 28, 2003, with 
(Coconut Grove)                                 a 5-year renewal option 

(1)Joint Venture. See "Item 1 - Description of Business - Joint Venture."

All of the Restaurants operate or are to be operated as Pancake Restaurants
except the Restaurant in Miami Beach located at 1505 Washington Avenue, which
operates as a Womlett Restaurant.

Item 3.   Legal Proceedings.

          In July, 1996, a summary nonpayment proceeding was brought by the
landlord of the Third Avenue Restaurant seeking rent in arrears from January
through June 1996 in the amount of

                               16

<PAGE>

$44,572. It was settled by stipulation dated September 11, 1996. Thereafter,
the subsidiary made intermittent rent payments but was substantially current on
its rent obligations at the end of April 1997. In May 1997 the subsidiary again
became delinquent. Although sporadic rent payments were made subsequently,

eventually a warrant of eviction issued for this Restaurant was executed in
February 1998. One week later the warrant was vacated upon payment of all
outstanding rent arrears in the amount of approximately $50,000.

          In April, 1996, a summary nonpayment proceeding was brought by the
landlord of the Broadway Restaurant seeking rent in arrears from October 1994
through April 1996. It was settled through a stipulation dated June 19, 1996,
in which $55,883 of rent arrears was acknowledged and a further $7,000 was
disputed. In addition, the Company's operating subsidiary agreed to pay $637 in
legal fees of the landlord. Upon default on this stipulation by the operating
subsidiary, another stipulation was entered into on December 18, 1996, in which
$31,326 was acknowledged to be the rent in arrears. In addition, the legal fees
which the operating subsidiary agreed to pay were increased from $637 to
$2,169. After default on this stipulation by the operating subsidiary, another
stipulation dated April 15, 1997 was entered into in which a $21,858 judgment,
representing the rent arrears, was consented to by the operating subsidiary.
The operating subsidiary defaulted on this stipulation and on July 11, 1997,
another stipulation was entered into in which the operating subsidiary agreed
to pay a total of $23,966 in rent arrears plus $500 in landlord's legal fees.
Such arrears were paid and rent was brought current in July 1997.

          In December, 1997, another summary nonpayment proceeding was brought
by the landlord of the Broadway Restaurant, this time seeking rent in arrears
from August 1997 through January 1998. It was settled through a stipulation
dated January 14, 1998, in which the operating subsidiary consented to the
entry of a final judgment in the amount of $53,951, which included $1,000 of
legal fees. Rent was brought current in February 1998 with a payment of
approximately $61,000.

          In December, 1996, a summary nonpayment proceeding was brought by the
landlord of the Second Avenue Restaurant seeking rent in arrears from the
second half of the 1996 calendar year.

                               17

<PAGE>

It was settled through a stipulation dated January 29, 1997, in which the
operating subsidiary agreed to pay the $48,642 of rent arrears. A judgment of
$16,214 was entered on motion after the operating subsidiary's default, which
was subsequently satisfied by the operating subsidiary. A further judgment of
$29,782 consisting of April 1997 rent of $8,107 plus attorneys' fees of $21,675
was entered on June 27, 1997 after a hearing. The appeal of that decision is
pending and in August 1997 the operating subsidiary paid $25,000 to the
landlord without prejudice in exchange for a stay of the execution of the
warrant, which is also conditioned upon the operating subsidiary's timely
payment of monthly rent as it comes due.

          On March 4, 1998, the Second Avenue Restaurant was closed by the New
York State Sales Tax authorities due to $172,267 of New York State tax
delinquencies being outstanding. On March 11, 1998, the Second Avenue
Restaurant was reopened after the Company made a $75,000 payment to New York
State and entered into an installment agreement to pay the remaining taxes due.
The installment agreement provides for 36 monthly payments of $3,887 each in

payment of the remaining tax delinquencies outstanding, including additional
penalties and interest which will accrue thereon. See Notes 5, 16 and 20B to
the Consolidated Financial Statements.

          The Company is not a party to any other material legal proceeding.


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

          None.

                               18

<PAGE>

                             Part II

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

          The Company's Common Stock is currently quoted on the NASD Electronic
Bulletin Board. The following table sets forth the closing high and low bid
prices for the Company's Common Stock for the periods indicated as reported by
National Quotation Bureau, Inc. Such prices reflect inter-dealer prices,
without retail mark-up, markdown or commissions and may not represent actual
transactions.


Fiscal Year Ending May 31, 1998               High     Low
-------------------------------               ----     ---
1st Quarter                                   5.125    4.25
2nd Quarter                                   5.25     5.00
3rd Quarter                                   5.00     4.625




Fiscal Year Ended May 31, 1997                High     Low
------------------------------                ----     ---
1st Quarter                                    .50      .50
2nd Quarter                                   2.00      .50
3rd Quarter                                   3.25     2.125
4th Quarter                                   4.25     3.00




Fiscal Year Ended May 31, 1996                High     Low
------------------------------                ----     ---
1st Quarter                                    .75     .25
2nd Quarter                                    .25     .125
3rd Quarter                                   2.50     .25
4th Quarter                                   3.25     .50


                               19

<PAGE>

          On March 20, 1998, closing bid and asked prices for the Company's
Common Stock on the NASD Electronic Bulletin Board were $4.625 and $5.125,
respectively.

          The payment by the Company of dividends, if any, in the future rests
within the discretion of its Board of Directors and will depend, among other
things, upon the Company's earnings, its capital requirements and its financial
condition, as well as other relevant factors. The Company has not paid or
declared any dividends. Due to the Company's present financial status,
management does not contemplate or anticipate paying any dividends on its
Common Stock in the foreseeable future.

          There are approximately 34 holders of record of the Company's Common
Stock.

                               20

<PAGE>

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

Results of Operations

     Sales for the year ended May 31, 1997 ("fiscal 1997") increased by
$1,098,039, or 49.3%, to $3,326,285 from $2,228,246 for the year ended May 31,
1996 ("fiscal 1996"). At May 31, 1997 the Company was operating four
restaurants including its Florida joint-venture location, opened on July 28,
1996. Sales at the three New York restaurants, open throughout both years,
increased by 32.7% in the aggregate with individual sales gains of 17.3% to
$1,082,201 at Second Avenue, 29.9% to $1,071,350 at Broadway and 67.0% to
$803,087 at Third Avenue. The New York locations, particularly Third Avenue,
which marked its third year of operations, again benefited from improved
operations and increased name awareness and recognition by the public.
Renovations and improvements at all three New York restaurants also helped fuel
the sales gains. For its initial ten-month period, the Prairie joint-venture
had sales of $369,647, or approximately one-third of the Company's overall
sales increase. The Company's fifth restaurant opened in Miami Beach on January
16, 1998 and a site has also been acquired for a sixth. See Item 2-"Properties"
and Notes 3, 17B and 17D to the Consolidated Financial Statements.

     The Company's investment in the Prairie joint-venture has evolved into
what is effectively a controlling interest, as the Company's total capital
contribution was almost twice that of its venture partner. Such venture partner
has advised the Company that, contrary to the parties' initial intent, it would
not maintain its 50% equity share. An unequal investment is not prohibited by
the joint-venture agreement. As the remaining economically, if not legally,
financially responsible partner, the Company has consolidated Prairie's
financial statements with its own and its other subsidiaries. The
joint-venturer's interest was completely offset by its contractual 50% share of

Prairie's first year loss; as a result, no minority interest is reflected on
the Company's May 31, 1997 consolidated balance sheet. The total capital
contributed by the venture partner is shown as a minority interest credit on
the 1997 consolidated statement of operations, which year was Prairie's first.
Absent further capital contributions by the venture partner, which are not
expected, and until such time, if ever, that the venture partner's equity
account is restored to a positive balance, by the contractually specified 50%
share of Prairie's future earnings (if any), to the extent that Prairie has
future losses, they will be fully reflected in the Company's consolidated
financial statements, without any offset for minority-interest.

     Cost of sales increased by $353,513, or 48.2%, to $1,085,051 in fiscal
1997 from $731,538 in fiscal 1996. As a percentage of sales, such costs
decreased by 0.2% to 32.6% in 1997 from 32.8% in 1996. This decrease was
achieved despite Prairie's cost of sales being 36.3% as a percentage of sales
for its first year of operations. The improvement in the New York locations'
gross profit percentage reflects economies of scale associated with the
increased sales. Cost of sales during the last two years were not materially
affected by raw food price fluctuations.

                                  21

<PAGE>

     Restaurant labor increased by $268,710, or 58.4%, to $728,700 in fiscal
1997 from $459,990 in fiscal 1996. As a percentage of sales, labor costs
increased by 1.3% to 21.9% in 1997 from 20.6% in 1996. This increase is due to
Prairie's first year elevated labor level of 46.8%, expected to continue until
higher sales are achieved. For the New York locations, labor as a percentage of
sales decreased by 1.8%, chiefly due to the sales gains.

     Rent expense increased by $85,493, or 29.5%, to $374,934 in fiscal 1997
from $289,441 in fiscal 1996. The increase is primarily due to the addition of
the Prairie location. As a percentage of sales, rent expense overall declined
by 1.7% to 11.3% in 1997 from 13.0% in 1996, primarily reflecting the increased
sales. For the three New York restaurants, such percentage decreased by 3.5% to
9.5% in 1997. The Prairie joint-venture initially occupied its premises
pursuant to a lease under negotiation, which was not finalized until November
1, 1997. On March 25, 1997, the Company's seventh subsidiary signed a ten-year
lease for the premises of its Womlett House Restaurant. On December 30, 1997,
the Company's eighth subsidiary signed a lease for the Company's sixth
restaurant in Coconut Grove, Florida. Rent for such restaurant is not payable
until it opens for business; however, the Company can not now project such
opening date as it presently lacks the funds necessary to adapt, equip and
renovate the premises. The Company's subsidiaries have been the defendants in
various summary proceedings for unpaid rent brought by all three New York
landlords. See "Liquidity" and Item 2 - "Description of Property," Item 3 -
"Legal Proceedings" and Notes 11, 12, 16, 17A, 17B, 17D and 20A to the
Consolidated Financial Statements.

     Other occupancy and operating expenses increased by $124,177, or 18.3%, to
$802,028 in fiscal 1997 from $677,851 in fiscal 1996. Of such dollar increase,
almost one-half was due to the increased charges for depreciation and
amortization of restaurant equipment and leasehold improvements; in addition to

the new Florida joint-venture restaurant, renovations and improvements were
made to all three New York locations. Dollar increases substantially
proportionate to the sales increases occurred in most of the other accounts in
this category, reflecting their largely variable nature. Among the exceptions,
notable decreases were in utilities, due to more seasonable temperatures
throughout most of the year and also in repairs and maintenance costs, as a
result of a lessened need therefor, due to certain betterments and renewals
which were made. A smaller dollar decrease occurred in the New York City
Commercial Rent Tax, due to a statutory decrease in the effective rate. Also
noteworthy were rubbish removal charges, which although totally variable in
nature, were virtually unchanged in dollar amounts despite the large sales
gains, due to lower rates now generally available from the New York carting
industry. As a percentage of sales, other operating and occupancy expenses
decreased by 6.3% to 24.1% in 1997 from 30.4% in 1996. Salient elements of this
decrease were: Supplies: 3.0%, utilities: 1.7%, rubbish removal: 1.0%, repairs
and maintenance: 0.6%, uniforms and cleaning: 0.4%, and rent tax: 0.3%. The
only major increase occurred in depreciation and amortization, which rose by
0.6% of sales. Individually immaterial changes in other accounts resulted in a
net 0.1% increase as a percentage of sales.

                                  22

<PAGE>

     Selling expenses increased by $37,821, or 67.2%, to $94,107 in fiscal 1997
from $56,286 in fiscal 1996 while increasing as a percentage of sales by 0.3%
to 2.8% in 1997 from 2.5% in 1996. This increase is entirely attributable to
advertising in the Miami market. Advertising in the New York market declined by
0.5% of sales and charge card discounts and related selling costs decreased by
a combined 0.6% of sales. See Notes 1G and 6 to the Consolidated Financial
Statements.

     General and administrative expenses increased by $249,264, or 47.1%, to
$778,332 in fiscal 1997 from $529,068 in fiscal 1996. As a percentage of sales,
these expenses increased slightly by 0.4% to 24.1% from 23.7%. Officers'
compensation, the largest item in this category, was unchanged at $270,000 in
both years. However, due to the Company's severe cash shortage, $239,052 and
$163,712 of the contractual officers' salaries were not paid in fiscal 1997 and
1996, respectively. At May 31, 1997, the total unpaid officers' salaries
accrued as a current liability is $509,878. As a percentage of sales, these
salaries decreased by 4.0% to 8.1% in 1997 from 12.1% in 1996. See "Liquidity,"
Item 10-"Executive Compensation" and Note 7A to the Consolidated Financial
Statements.

     As noted above, all other general and administrative expenses rose by
$249,264 to $508,332 in fiscal 1997 from $259,068 in fiscal 1996, an increase
of 96.2%. Dollar increases generally in line with the sales gains and the
addition of Florida operations occurred in many accounts. Notable among the
exceptions to this pattern were professional fees, office expenses, travel and
penalties. Professional fees increased by almost $81,000 to approximately
$180,000 reflecting bookkeeping services and accounting fees related to the
Prairie joint-venture and legal fees in connection with (i) the formation of
new subsidiaries and the related negotiation of leases for new premises; (ii)
sales of common stock under Regulation "S"; and (iii) litigation with New York

landlords. Office expenses increased by almost $23,000 to approximately
$48,000, due in large part to those incurred by Prairie. Travel expenses
increased by almost $47,000 to approximately $99,000, due to the active
monitoring of Florida joint-venture operations as well as site selection,
development and related activities in the greater Miami area. Penalties
increased by more than $70,000 to approximately $96,000, including almost
$23,000 for Prairie, substantially all of which were imposed on delinquent
sales and payroll tax obligations. See "Liquidity," and Notes 5, 12, 16 and 20
to the Consolidated Financial Statements.

     As a percentage of sales, total expenses in this sub-category rose by 3.7%
to 15.3% in 1997 from 11.6% in 1996. Notable among the increases were:
Professional fees: 0.5% to 5.4%, office expenses: 0.4% to 1.5%, travel: 0.6% to
3.0%, and penalties, 1.7% to 2.9%. Other individually immaterial items netted
to a net 0.5% increase as a percentage of sales. Management realizes that the
Company's general and administrative burden remains rather high. As recently
opened and new restaurants contribute to increased sales, or if the Company
successfully enters the wholesale distribution business, neither of which
events is assured, management is hopeful such expenses will decline as a
percentage of sales; however the Company requires additional funds for both
endeavors. See "Liquidity".

                                  23

<PAGE>

     Furthermore, the incurring of penalties and professional fees associated
with tax and rent delinquencies is expected to decrease in the future assuming
the receipt of financing proceeds then applied in payment of such obligations.
See "Liquidity," and Notes 5, 12, 16 and 20 to the Consolidated Financial
Statements.

     Interest expense rose by $72,322, or 119%, to $133,028 in fiscal 1997 from
$60,706 in fiscal 1996. Of such increase, $35,750 relates to various financing
provided by certain affiliates of the underwriter of the Company's proposed
public offering as follows: $21,750 was accrued on $270,000 of new unsecured
loans from one party and $14,000 represents the increase in amounts accrued
over 1996 on $275,000 of contingently repayable loans advanced in fiscal 1996
by another party. The contingent loans, plus interest at 12%, are only
repayable if the Company completes a new public offering. However, such
interest expense, totalling $33,000 in 1997 and $19,000 in 1996, has been
recorded with an equivalent offset to additional paid-in capital. Interest of
$2,325 was also recorded on certain notes from two overseas lenders totalling
$199,760, which were converted in June 1997 to common shares of the Company
under Regulation "S". Interest accrued at 9% on the loan due to the Company's
principal stockholder decreased by $447 to $26,941 in 1997. The balance of the
increased interest expense, $34,694, is attributable to finance charges imposed
primarily on delinquent sales and payroll taxes, and to a lesser extent, on
certain of the Company's other past due obligations. See Notes 5, 7B, 8A, 9,
and 10 to the Consolidated Financial Statements.

     The Company's interest expense is expected to increase further in fiscal
1998 due to additional borrowings subsequent to May 31, 1997. Unsecured loans
totalling $355,000 were obtained in the months of June 1997 through March 1998

from the same individual affiliate of the underwriter who provided $270,000
of loans in fiscal 1997. A new unrelated lender provided $208,000 of unsecured
loans in the months of November 1997 through February 1998. All loans obtained
from these two lenders bear interest at 12%. Also in June 1997 and February
1998, $25,000 and $50,000, respectively, was borrowed from Sarah Golumbia,
mother of the Company's President and majority stockholder. These two loans,
which bore interest at 9%, were repaid shortly after they were made. To the
extent that proceeds from new issuances of common stock are used to reduce
interest-bearing debt, future interest expense will decrease; however, the
receipt of such proceeds is not assured. See "Liquidity," Item 1-"Business,
Proposed Public Offering," Item 3-"Legal Proceedings" and Notes 8B, 18, 19 and
20B to the Consolidated Financial Statements.

     Research and development expenses for the Company's wholesale division
increased by $593,298 to $627,778 in fiscal 1997 from $34,480 in fiscal 1996.
Further expenditures of $120,550 were classified as non-operating assets at May
31, 1997 and $141,300 more was added to such assets in the first quarter of
fiscal 1998. Shortly thereafter, despite an aggregate expenditure of $924,108
over six fiscal quarters through August 31, 1997, and just prior to starting
production of distribution-size shipments, the Company determined it did not
have sufficient funds available to produce expected reorder quantities and was
forced to suspend all activities related to this line of business.
                                  
                                       24

<PAGE>

     Machinery and equipment as well as related frozen food corrugated boxing
supplies costing a total of $261,850 are on site at the Company's contract
manufacturer in Mexico. The Company estimates it will require approximately
$1,500,000 to complete the introduction of the wholesale product line to the
market. The Company's proposed public offering is a possible source of such
financing; however there is no assurance that such offering will be completed.

     Moreover, even if such offering is completed, intervening circumstances
and/or other financial obligations may result in there being insufficient funds
available to warrant resuming implementation of the wholesale distribution
business. If the related activities were to be resumed, of which there can be
no assurance, significant revenues from the division would not be expected
before fiscal 1999. See "Liquidity", "Item 1-Business, Proposed Wholesale
Distribution" and Notes 4A, 16 and 21A to the Consolidated Financial
Statements.

     In fiscal 1997 and 1996, the Company recorded losses of $8,500 and
$11,875, respectively, related to the discontinuation of a second
joint-venture, formed to acquire a site for, develop, own and operate a Royal
Canadian Pancake or Womlett House Restaurant in Miami Beach, Florida. Such loss
reflects the Company's share of lease termination and related costs for a site
which was found to be unsuitable prior to commencing construction. See Note 14
to the Consolidated Financial Statements.

     Before reduction for the minority interest in fiscal 1997, the Company's
consolidated operations resulted in a loss of $1,306,173 compared to $622,989
in fiscal 1996. The minority interest credit of $125,773 in 1997 reduced that

year's net loss to $1,180,400, an increase of $557,411, or 89.5%, over the net
loss for 1996.

     The Company sustained taxable losses of approximately $1,072,000 and
$587,000 in fiscal 1997 and 1996, respectively. As in all years since its
inception, the Company incurred no current or deferred income tax expense in
either year. The Company adopted Financial Accounting Standard No. 109 to
account for income taxes in fiscal 1994; adoption of such standard has had no
effect on the Company's reported income tax expense since then and is not
expected to have any significant future effect. The Company has net operating
tax loss carryforwards totalling approximately $2,662,000, all attributable to
"C" Corporation losses at May 31, 1997, giving rise to a deferred tax asset of
$692,025; however, such asset is offset by an equivalent valuation allowance.
See Notes 1I and 15 to the Consolidated Financial Statements.

     Net loss per share based on the weighted average number of common shares
outstanding increased to $.44 in fiscal 1997 from $.25 in fiscal 1996.
Anti-dilutive underwriter's common stock purchase warrants were excluded from
the calculation. Such warrants expire October 7, 1998. Financial Accounting
Standard No. 128, "Earnings Per Share," required for interim and annual periods
ending after December 15, 1997 is not expected to have a material impact on the
Company's per share data.

                                  25

<PAGE>

Liquidity

     The Company's working capital deficit increased by $764,156 from
$1,000,679 at May 31, 1996 to $1,764,835 at May 31, 1997, reflecting
principally (i) the fiscal 1997 net loss of $1,180,400, net of non-cash charges
of $200,933 and (ii) capital expenditures of $692,599 including investments in
non-operating assets of $120,550 related to the wholesale division less the sum
of (iii) additions to equity capital of $488,150 and (iv) various borrowings
from third-parties of $469,750, including $270,000 from an affiliate of the
Company's investment banker, net of a reclassification to current of $50,000
from long-term debt due the Company's President and majority stockholder.
Subsequent to May 31, 1997, $199,760 of third party notes were converted to
common stock. See Notes 9, 10 and 13 to the Consolidated Financial Statements.

     The Company has experienced a severe cash shortage for most of its last
two fiscal years, which severe shortage has continued thereafter. Accrued
officers' salaries aggregate $509,878 at May 31, 1997. Summary non-payment
proceedings brought by all three New York landlords for rent arrearages have
resulted in warrants of eviction being issued in several cases and in one
instance executed. Sales and payroll tax delinquencies approximating $630,000
at May 31, 1997 and $705,000 at February 28, 1998 have resulted in tax liens
being issued as well as the temporary closing of one restaurant. See Item
3-"Legal Proceedings" and Notes 5, 7A, 12A, 16 and 20 to the Consolidated
Financial Statements. The Company's cash balance decreased by $5,526 from
$23,811 at May 31, 1996 to $18,285 at May 31, 1997.

     The Company's operating activities required $192,337. Salient non-cash

adjustments to the Company's net loss of $1,180,400 were: Accrued officers'
compensation of $239,052; depreciation of $129,419; aggregate interest of
$81,691 accrued on various stockholder and other loans as well as on the
contingently repayable financing; deferred rent expense of $20,475; and the
second joint-venture's loss of $8,500 on the lease termination settlement; less
deferred income of $3,052. The net change in assets and liabilities related to
operations provided $511,978.

     Investing activities required $701,099. Net capital expenditures were
$557,648, including $180,763 previously characterized as the Company's
investment in its first joint-venture - which investment has evolved into what
is effectively a majority interest, but reduced by $62,503 of financing
previously received but restricted to restaurant development expenditures.
Investments in non-operating assets related to the wholesale division required
$120,550. Other uses were $14,401 for security deposits and $8,500 for the
lease termination loss of the second joint-venture. Subsequent to May 31, 1997,
certain additional expenditures were made with respect to completion of the
Womlett House Restaurant and for the wholesale division. See Item 1-"Business,
Joint Venture, and Proposed Wholesale Distribution" and Notes 1B, 2, 3, 4, 8A,
14, 17D and 21A to the Consolidated Financial Statements.

                                  26

<PAGE>

     Financing activities provided $887,910, consisting of proceeds of $488,150
from common stock sold under Regulation S; proceeds of $270,000 of unsecured
loans from an individual affiliate of the Company's investment banker;
proceeds of $199,760 of unsecured notes from two overseas lenders, who
subsequently converted their notes to common stock; less loan repayments of
$70,000 made in June 1996 to the Company's President and principal stockholder.
The stockholder has periodically extended the maturity of a substantial portion
of the loans due him. As of May 31, 1997, the due date for $250,000 of the loan
principal was extended to June 30, 1998. Subsequent to May 31, 1997 and through
March 11, 1998, unsecured loans aggregating $355,000 and $208,000, were
received from the individual affiliate of the Company's investment banker and
an unrelated lender, respectively. All such loans mature December 31, 1998,
with mandatory prepayment upon the completion of the Company's proposed
offering. The due date for the $270,000 of loans advanced in fiscal 1997,
previously December 31, 1997, was extended by one year with the same prepayment
provision. Also subsequent to May 31, 1997, the Company availed itself of
certain short-term loans from Sarah Golumbia, mother of the Company's
President. See Item 1-"Business, Other Financing" and Item 12-"Certain
Relationships and Related Transactions" and Notes 8A, 9, 10, 13, 18, 19 and 20B
to the Consolidated Financial Statements.

     At May 31, 1997 the Company's financial condition reflected net working
capital and stockholders' equity deficiencies of $1,764,835 and $1,056,685,
respectively. After May 31, 1997 and through March 11, 1998, the Company
received additional financing totalling $563,000, excluding the conversion to
equity of $199,760 of existing notes and the advance, later repaid, of $75,000
of short-term related party loans. On March 11, 1998, $110,000 of loan proceeds
referred to above was received by the Company and $75,000 thereof was used to
make a required New York State Sales Tax payment in order to reopen the Second

Avenue Restaurant. See Note 20B to the Consolidated Financial Statements.

     The Company's continuing operating losses, its severe cash shortage and
working capital deficiencies and its tax delinquencies threaten the
continuation of the Company as a going concern. The Company's investment banker
has recently affirmed a letter of intent for a firm-commitment public offering
of 1,200,000 shares of its common stock at $5.00 per share, although there can
be no assurance of the successful completion thereof. See Notes 8B and 21B to
the Consolidated Financial Statements.

     Until such time as the Company completes the proposed offering, the
Company nevertheless requires adequate financing in order to continue as a
going concern. The Company has thus far been able to obtain periodic debt
and/or equity financing from various sources, including certain affiliates of
its investment banker. The Company envisions that future debt or equity
proceeds will be applied to reduce its various tax and other past due
obligations, provide working capital, finance completion of its committed
Florida site, and if possible, fund its entry into the wholesale distribution
business. Management believes that such course of action will promote the
long-term viability of the Company. Should the Company not be successful in
such endeavors, its continuation as a going concern would be gravely
jeopardized.
                                  27

<PAGE>

Item 7.   Consolidated Financial Statements.

          The consolidated financial statements of the Company, including the
notes thereto, together with the report of independent certified public
accountants, are presented at pages F-1 through F-21 which follow.

                               28

<PAGE>

                          Independent Auditors' Report
Board of Directors
Royal Canadian Foods Corp.
New York, New York

We have audited the accompanying consolidated balance sheet of Royal Canadian
Foods Corp. and Subsidiaries as of May 31, 1997 and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
years in the two-year period 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 audits. We did not audit the
financial statements of Prairie Foods, LLC, accounted for herein as a
majority-owned subsidiary, which statements reflect total assets of $208,829 at
May 31, 1997 and total revenues of $369,647 for the period from inception July
28, 1996 to May 31, 1997. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Prairie Foods, LLC, is based solely on the report of the
other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Royal Canadian Foods
Corp. and Subsidiaries as of May 31, 1997, and the consolidated results of
their operations and cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As specifically discussed in
Note 16 as well as other notes to the consolidated financial statements, the
Company has suffered recurring losses from operations, has a severe working
capital deficit and is in substantial arrears on various federal, state and
local taxes as well as other current obligations. Such tax delinquencies
subject the Company's premises to closure by tax authorities. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 16. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


Floral Park, New York                       /s/Poillucci and Kahan, P.C.
February 23, 1998                           Certified Public Accountants


                                      F-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and
Members of Prairie Foods, LLC
Miami Beach, Florida

We have audited the accompanying balance sheet of Prairie Foods, LLC (a
Delaware limited liability company) as of May 31, 1997 and the related
statements of operations, members' equity, and cash flows from inception July
28, 1996 to May 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe 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 financial position of Prairie Foods, LLC as of May
31, 1997, and the results of its operations and its cash flows from inception
July 28, 1996 to May 31, 1997 in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company incurred a significant operating net loss
from inception July 28, 1996 to May 31, 1997, and is in default on its federal,
state and local taxes and in arrears on accounts with certain vendor creditors.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans regarding those matters are
also described in Note C. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



                                              /s/Jordan Padial & Company, P.A.
                                              Certified Public Accountants
Coral Gables, Florida
December 27, 1997

                                      F-2

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheet
                                  May 31, 1997

                                     ASSETS

Current Assets:
  Cash                                          $   18,285
  Accounts receivable (Note 1C)                      2,274
  Inventory (Note 1D)                               17,751
  Prepaid expenses                                  25,000
                                                ----------
Total Current Assets                                       $   63,310

Property and Equipment, Net of Accumulated
  Depreciation of $272,515 (Notes 1E and 2)                 1,127,092

Construction in Progress and Related Costs
  (Notes 3 and 17D)                                           290,613

Security Deposits                                              96,420

Non-Operating Assets  (Notes 4A and 21A)                      120,550
                                                           ----------

Total Assets                                               $1,697,985
                                                           ==========
                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
  Sales, rent and payroll taxes payable
    (Notes 5 and 20B)                           $  769,882
  Accounts payable                                 248,312
  Accrued officers' salaries (Note 7A)             509,878
  Accrued expenses, other (Note 12)                193,431
  Loan payable, stockholder (Note 7B)               66,380
  Deferred income (Notes 1G and 6)                  36,129
  Deferred rent expense (Note 1F)                    4,133
                                                ----------
Total Current Liabilities                                  $1,828,145

Deferred Rent Expense (Note 1F)                               185,015
Loan Payable, Officer/Stockholder (Note 7B)                   250,000
Loans Payable, Other (Notes 9, 18 and 20B)                    291,750
Notes Payable, Subsequently Converted to
  Common Shares (Notes 10 and 19A)                            199,760
                                                           ----------

Total Liabilities                                           2,754,670

Commitments and Contingencies (Notes 3 through 12
  and 15 through 21)                                              -


Stockholders' Deficit (Notes 8, 10, 13, 16 and 19):
  Common stock, $.005 par value; 10,000,000
    shares authorized; 2,794,075 shares issued
    and outstanding (Notes 10 and 19)               13,970
  Additional paid-in capital (Note 8)            1,911,390
  Accumulated deficit (Note 16)                 (2,982,045)
                                                ----------
Total Stockholders' Deficit                                (1,056,685)
                                                           -----------

Total Liabilities and Stockholders' Deficit                $1,697,985
                                                           ===========

See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
                      Consolidated Statement of Operations
                       Years Ended May 31, 1997 and 1996


                                               1997          1996
                                               ----          ----

Sales                                      $ 3,326,285   $ 2,228,246
Cost of sales                                1,085,051       731,538
                                           -----------   -----------

Gross profit                                 2,241,234     1,496,708
                                           -----------   -----------

Operating expenses:
  Restaurant labor                             728,700       459,990
  Rent (Notes 1F, 11, 12, 17 and 20A)          374,934       289,441
  Other occupancy and operating expenses       802,028       677,851
  Selling expenses                              94,107        56,286
  General and administrative
    expenses (Note 7A)                         778,332       529,068
  Interest expense, net of interest income
    of $27 in 1996 (Notes 7B, 8A, 9 and 10)    133,028        60,706
  Research and development expenses (Notes
    1H, 4 and 21A)                             627,778        34,480
  Loss on discontinued joint venture
    (Note 14)                                    8,500        11,875
                                           -----------   -----------

Total expenses                               3,547,407     2,119,697
                                           -----------   -----------

Loss before minority interest               (1,306,173)     (622,989)

Minority interest (Note 1B)                    125,773          -
                                           -----------   -----------

Net loss (Notes 1I, 15 and 16)             $(1,180,400)  $  (622,989)
                                           ===========   ===========

Net loss per share (Note 1J)               $      (.44)  $      (.25)
                                           ===========   ===========

Weighted average number of shares
  outstanding (Note 1J)                      2,700,685     2,504,918
                                           ===========   ===========

See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
                Consolidated Statement of Stockholders' Deficit
                       Years Ended May 31, 1997 and 1996



                                         Additional    Accu-         Total
                        Common Stock      Paid-In     mulated    Stockholders'
                       Shares  Amount     Capital     Deficit       Deficit
                       ------  ------     -------     -------       -------

     Balances,
     June 1, 1995   2,500,000  $12,500  $  997,710  $(1,178,656) $  (168,446)

     Receipt of
     contingently
     repayable
     financing
     (Note 8A)           -        -        275,000         -         275,000

     Interest on
     contingently
     repayable
     financing
     (Note 8A)           -        -         19,000         -          19,000

     Sale of shares
     in Regulation
     "S" offering
     (Note 13)         50,000      250      99,750         -         100,000

     Net loss for
     the year ended
     May 31, 1996        -        -           -        (622,989)    (622,989)
                    ---------  -------  ----------  -----------  -----------

     Balances,
     May 31, 1996   2,550,000   12,750   1,391,460   (1,801,645)    (397,435)

     Interest on
     contingently
     repayable
     financing
     (Note 8A)           -        -         33,000         -          33,000

     Sale of shares
     in Regulation
     "S" offerings
     (Note 13)        244,075    1,220     486,930         -         488,150


     Net loss for
     the year ended
     May 31, 1997        -        -           -      (1,180,400)  (1,180,400)
                    ---------  -------  ----------  -----------  -----------

     Balances,
     May 31, 1997   2,794,075  $13,970  $1,911,390  $(2,982,045) $(1,056,685)
                    =========  =======  ==========  ===========  ===========



     See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
                      Consolidated Statement of Cash Flows
                       Years Ended May 31, 1997 and 1996

                                                1997         1996
                                                ----         ----
Cash Flows From Operating Activities:
  Net loss                                 $(1,180,400)  $  (622,989)
  Adjustments to reconcile to net cash pro-
   vided (required) by operating activities:
     Deferred income (applied) net              (3,052)        8,538
     Deferred rent expense                      20,475        27,100
     Depreciation                              129,419        72,851
     Officers' compensation accrued            239,052       163,712
     Interest accrued on loans                  48,691        27,388
     Interest accrued on contingently
      repayable financing                       33,000        19,000
     Loss on discontinued joint venture          8,500        11,875
     Changes in assets and liabilities:
       Accounts receivable                      (1,821)        9,119
       Inventory                                (4,370)       (2,448)
       Prepaid expenses                            277       (25,000)
       Sales, rent and payroll taxes payable   362,508       295,021
       Accounts payable                        116,608        66,626
       Accrued expenses, other                  38,776        42,337
                                           -----------   -----------
 Total adjustments                             988,063       716,119
                                           -----------   -----------
Net cash provided (required) by operating
 activities                                   (192,337)       93,130
                                           -----------   -----------

Cash Flows From Investing Activities:
  Capital expenditures, including $180,763
   previously characterized as investment
   in corporate joint venture in 1996         (620,151)     (480,936)
  Expenditure (receipt) of cash restricted
   to restaurant development expenditures       62,503       (62,503)
  Investment in non-operating assets          (120,550)         -
  Investment in discontinued joint venture      (8,500)      (11,875)
  Security deposits paid                       (14,401)      (14,202)
                                           -----------   -----------
Net cash required by investing activities     (701,099)     (569,516)
                                           -----------   -----------

Cash Flows From Financing Activities:
  Sale of common stock                         488,150       100,000
  Stockholder loan proceeds (repayments)       (70,000)      112,975
  Loan proceeds, other                         469,760       275,000
                                           -----------   -----------
Net cash provided by financing activities      887,910       487,975
                                           -----------   -----------


Net increase (decrease) in cash                 (5,526)       11,589
Cash, beginning of year                         23,811        12,222
                                           -----------   -----------

Cash, end of year                          $    18,285   $    23,811
                                           ===========   ===========

Additional Cash Flow Information:
Interest paid during the period            $    45,954   $    14,318
                                           ===========   ===========

Non-cash investing/financing activities:
Interest on contingently repayable debt
  added to additional paid-in capital      $    33,000   $    19,000
                                           ===========   ===========


See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A) Organization and Basis of Presentation:

Royal Canadian Foods Corp. was incorporated in Delaware in August, 1993. At May
31, 1997 the Company had seven subsidiaries, of which five were active. Of
these, three subsidiaries each own and operate a Royal Canadian Pancake House
Restaurant in New York City, the last of which opened in July 1994. (See Note
20). A fourth subsidiary, now inactive, had operated the Company's first
restaurant in New York from October 1989 until it closed in November 1993.

The Company's initial public offering was completed November 23, 1993, pursuant
to a registration statement filed with the Securities and Exchange Commission.
The Company sold 250,000 common shares at a price of $5.00 each and received
net proceeds of $1,012,170. (See Note 8C).

On October 16, 1995 and December 6, 1995, respectively, the Company
incorporated two new subsidiaries, each for the purpose of forming a corporate
joint-venture to develop a Royal Canadian Pancake House Restaurant in Miami
Beach, Florida. The joint ventures, Prairie Foods, LLC ("Prairie") and Canadian
Foods, LLC, ("Canadian") each a Delaware limited liability company, were both
formed with the same joint-venture party. The Prairie joint-venture restaurant
opened on July 28, 1996 on Washington Avenue in Miami Beach, Florida. (See Note
1B). The Canadian joint-venture undertook but subsequently abandoned
development of a second Royal Canadian Pancake House Restaurant in Miami Beach,
Florida.
(See Note 14).

On March 26, 1997, the Company incorporated its seventh subsidiary, Begare
Enterprises, Inc., which thereafter commenced development in Miami Beach,
Florida of a Royal Canadian Womlett House Restaurant, a restaurant very similar
to the Company's other restaurants. Such restaurant opened subsequent to May
31, 1997. (See Note 17D).

During the fourth quarter of fiscal 1996, the Company formed a wholesale
division and began various research and development activities in order to
establish a frozen pancake distribution business. The Company spent
considerable sums in this endeavor in fiscal 1997 and the succeeding quarter;
however subsequent to May 31, 1997, implementation of this line of business was
suspended due to insufficient financing. No revenues from this business have
yet been realized. (See Notes 1H, 4 and 21A).

Subsequent to May 31, 1997, the Company incorporated its eighth subsidiary,
Yoystra Enterprises, Inc., for the purpose of developing the Company's sixth
restaurant in Coconut Grove, Florida. (See Note 17B).

All of the Company's subsidiaries are wholly-owned and either formed by the
Company or acquired in exchange-of-stock transactions accounted for
retroactively as if they were poolings of interests. All intercompany balances

and transactions have been eliminated in consolidation. The Company's 50% legal
interest in Prairie has evolved into what is effectively a controlling interest
and accordingly, the accounts of Prairie are fully consolidated with those of
the Company and its other subsidiaries. (See Note 1B).

                                      F-7

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

B) Reporting of Joint-Venture Activities:

At May 31, 1996, the Company's 50% investment in Prairie was accounted for by
the equity method. At such date, the restaurant was under construction and had
not started operations. The amount previously reported of $180,763 represented
the Company's contribution to the cost of construction in progress. The
restaurant opened on July 27, 1996.

Effective as of the close of the Company's 1997 fiscal year, the Company
conclusively determined that its investment in Prairie was approximately twice
that of its joint-venture partner. Furthermore, such joint-venture partner
informed the Company that notwithstanding the intent of the parties, as
permitted by the agreement and applicable law, it would not make additional
cash investments to maintain its 50% ownership thereof.

The joint-venturer's 50% share of Prairie's first year loss is in excess of its
capital contribution. As the joint-venturer has no contractual or legal
obligation to make additional cash investments in the joint-venture, the
Company's investment has evolved into a majority interest. Accordingly, the
accounts of the joint-venture are fully consolidated in the accompanying
financial statements. As the joint-venturer's equity has been completely
absorbed by its share of Prairie's first year loss, no minority interest is
reported on the accompanying consolidated balance sheet at May 31, 1997. The
joint-venturer's entire investment is reflected as a minority interest credit
on the accompanying consolidated statement of operations.

The Company has recharacterized its investment in the joint-venture of $180,763
at May 31, 1996 as capital expenditures on the accompanying consolidated
statement of cash flows for the year then ended.

The Canadian joint-venture commenced development of a restaurant in Miami
Beach, Florida in fiscal 1996 but abandoned such activity due to construction
and building-code related difficulties. The Company's share of such losses are
reported as loss on discontinued joint-venture on the accompanying consolidated
statement of operations. Both the subsidiary and this joint venture are
presently inactive. (See Note 14).

C) Accounts Receivable:

Accounts receivable consist of bank or credit card company approved credit card

charges. A provision for uncollectibles is not needed.

D) Inventory:

Inventory, consisting of raw food and supplies, is stated at the lower of cost,
as determined by the first-in, first-out method, or market.

E) Property, Equipment and Depreciation:

Property and equipment are recorded at cost, which, for the two most recently
opened New York restaurants, includes the cost of rent incurred during
construction. (See Note 1F). Renewals and betterments are also capitalized.
Maintenance and repairs are charged to expense as incurred.

                                      F-8

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

E) Property, Equipment and Depreciation: (Continued)

Depreciation for financial accounting is provided by the straight-line method
over useful lives of ten years for restaurant equipment and five to fifteen and
one half years (the life of the lease) for leasehold improvements. For income
tax reporting purposes, a declining balance method over seven years is used for
certain equipment and a 31.5 year or 39.5 year period is used to amortize
improvements. When depreciable assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are eliminated from the accounts, and
the resulting gain or loss is reflected in operations.

F) Leases:

Rentals applicable to operating leases, which do not transfer ownership risks
and benefits, are charged to expense on the straight-line basis over the lease
term. The deferred rent liabilities reported on the accompanying balance sheet
represent rent charged to operations or capitalized during (and as a component
of) restaurant construction, but not yet payable to lessors.

G) Deferred Income:

The Company is a party to certain agreements with credit card companies; the
Company receives advance cash payments from such companies and in return agrees
to provide to customers using the credit cards restaurant meal values in
aggregate amounts equal to twice the cash advanced. Such customers receive a
discount of 25% from the credit card company when their bills are rendered. The
Company therefore records sales at 75% of their menu value and also records a
25% promotional charge representing the difference between the 50% net cash
they receive and the 75% sales value credited. (See Note 6).

H) Research and Development:


Research and development expenditures related to the formation of the Company's
wholesale division are expensed in accordance with Statement of Financial
Accounting Standards No. 2. (See Notes 4 and 21A).

I) Income Taxes:

The Company is subject to federal, state and city taxes on income. Due to
losses incurred since inception, neither the Company nor its subsidiaries have
incurred income taxes. The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109 ("SFAS 109"). Under such
standard, the Company's net operating loss carry-forwards aggregating
approximately $2,662,000 and $1,590,000 at May 31, 1997 and 1996, respectively,
give rise to deferred tax assets of approximately $692,000 and $413,000 at
those dates. However, such deferred tax assets are fully offset by valuation
allowances in equivalent amounts. Other temporary differences between financial
and income tax reporting are also given certain recognition under SFAS 109.
(See Note 15).

                                      F-9

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

J) Loss Per Share:

Loss per share is calculated by dividing each year's net loss by the weighted
average number of common shares outstanding for that year. Underwriter's common
stock purchase warrants, issued November 23, 1993, are anti-dilutive and are
accordingly excluded from common stock equivalents when computing loss per
share. Adoption of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," required for interim and annual periods ending after
December 15, 1997, is not expected to have a material impact on the Company's
per share data.

K) Use of Estimates:

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

NOTE 2 - PROPERTY AND EQUIPMENT

This account consists of the following:

Leasehold improvements                               $1,087,969
Restaurant equipment                                    311,638

                                                     ----------
Total at cost                                         1,399,607
Less: Accumulated depreciation                          272,515
                                                     ----------
Property and equipment, net                          $1,127,092
                                                     ==========

NOTE 3 - CONSTRUCTION IN PROGRESS AND RELATED COSTS

The Company's seventh subsidiary has commenced construction of a Royal Canadian
Womlett House Restaurant at 1505 Washington Avenue in South Miami Beach,
Florida. At May 31, 1997 the costs attributable thereto
are as follows:

Leasehold improvements                                 $207,843
Restaurant equipment                                     17,850
                                                       --------
Total Construction in Progress                          225,693
                                                       --------
Leasehold                                                50,000
Other intangible costs                                   14,920
                                                       --------

Total Related Costs                                      64,920
                                                       --------
Total Construction in Progress and Related Costs       $290,613
                                                       ========

The Womlett House Restaurant opened subsequent to May 31, 1997. (See
Note 17D).

NOTE 4 - WHOLESALE DIVISION ACTIVITIES

A)  Non-Operating Assets:

During the fiscal years ended May 31, 1997 and 1996 the Company expended
$782,208 on costs and expenses related to the development of a frozen pancake
wholesale distribution line of business. Certain additional expenditures were
also incurred thereafter. (See Notes 4B and 21A).

                                      F-10

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 4 - WHOLESALE DIVISION ACTIVITIES (Continued)

A)  Non-Operating Assets (Continued):

Subsequent to May 31, 1997 however, due to insufficient financing the Company
was forced to suspend its research and development activities related to this
line of business, on which no revenues have been realized to date. Pending

resumption of this division's activities, various expenditures resulting in
productive equipment and certain related assets at May 31, 1997 are reported as
non-operating on the accompanying consolidated balance sheet as follows:

Machinery and equipment                                $ 70,550
Frozen food corrugated boxing supplies                   50,000
                                                       --------

Total                                                  $120,550
                                                       ========

B)  Research and Development Expenses:

Research and development expenditures charged to operations in fiscal 1997 and
1996 are as follows:
                                                 1997      1996
                                                 ----      ----
Product development and analysis              $174,166   $ 6,480
Packaging design and development               330,229    20,000
Shows, marketing and other                     123,383     8,000
                                              --------   -------
Total                                         $627,778   $34,480
                                              ========   =======

NOTE 5 - SALES, RENT AND PAYROLL TAXES PAYABLE

The components of this account, including payroll taxes accrued but not yet
payable as well as delinquent amounts due for other than the current quarter,
together with interest and penalties thereon at May 31, 1997 are as follows:
                                         Sales and   Payroll
                                        Rent Taxes    Taxes     Total
                                        ----------    -----     -----
Payroll taxes accrued but not yet
 payable, applicable to accrued but
 unpaid officers' salaries              $   -      $ 39,998   $ 39,998

Sales, rent and payroll taxes due for
 the quarters beginning March 1, 1997
 and April 1, 1997, respectively          72,884     27,102     99,986

Sales, rent and payroll taxes due for
 all periods ended before March 1,
 1997 and April 1, 1997, respectively    409,981    219,917    629,898
                                        --------   --------   --------

Total sales, rent and payroll taxes
 payable                                $482,865   $287,017   $769,882
                                        ========   ========   ========

The Company's operating subsidiaries have entered into deferred-payment
agreements with respect to its delinquent taxes. At various times, tax liens
have been filed against such subsidiaries. Pursuant to statute, remedies
available to tax authorities in connection with the collection of delinquent
sales and payroll taxes include closure of the Company's restaurants. (See Note

20B).
                                      F-11

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 6 - DEFERRED INCOME

Amounts advanced, applied and unapplied under deferred income agreements at May
31, 1997 are as follows:
                                         Fiscal     Fiscal
Contract inception date                   1997       1996      Total
                                         ------     ------     -----

Amounts advanced                         $79,000    $77,200   $156,200
Less: Amounts applied                     42,871     77,200    120,071
                                         -------    -------   --------

Amounts unapplied                        $36,129    $  -      $ 36,129
                                         =======    =======   ========


The Company is required to provide restaurant meal values equal to twice the
contract amount. When the customers settle their applicable credit card bills,
however, they pay 75% of menu prices. Accordingly, the satisfaction of this
obligation will be accounted for by recording net sales of $54,194 and a
promotional charge of $18,065. (See Note 1G).

NOTE 7 - RELATED PARTY TRANSACTIONS

A) Officers' Employment Agreements and Accrued Compensation:

The Company has five-year employment contracts with its two officers, expiring
November 1998, cancelable only for cause and automatically renewable for
one-year periods unless either party gives timely written notice of
non-renewal. The contracts provide for aggregate annual base salaries of
$270,000, are subject to annual cost-of-living increases and contemplate annual
performance bonuses as determined by the Board. They also provide for health
insurance and other benefits comparable to other personnel and include
non-competition and confidentiality covenants.

At May 31, 1997, $315,585 and $194,293 ($509,878 in the aggregate) of
contractual salary obligations accrued but not paid were owed to the Company's
president and other officer, respectively.

B) Officer/Stockholder Loan:

The Company is indebted to its president and principal stockholder on an
unsecured loan totaling $316,480 including accrued interest at May 31, 1997. A
repayment of $70,000 was made during the first month of fiscal 1997; loans
aggregating $112,975 were advanced during fiscal 1996. Loan proceeds generally
have been used to develop and equip the Company's restaurants and also for

working capital. Interest accrued at 9% per annum totalled $26,941 for fiscal
1997 and $27,388 for fiscal 1996.

The officer/stockholder has periodically extended the due date of the loan or a
substantial portion thereof. As of May 31, 1997, the maturity date of $250,000
of the loan was extended until June 30, 1998, subject to mandatory earlier
prepayment if the Company completes another public common stock offering prior
thereto. (See Note 8B). The balance of the loan, $66,480, is classified as a
current liability at May 31, 1997.

Subsequent to May 31, 1997, additional loans were made to the Company from a
member of the officer/stockholder's family. (See Note 18B).

                                      F-12

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 8 - CONTINGENT FINANCING AND RELATED MATTERS

A) Contingent Loan Payable:

In August 1995, the Company received a $300,000 financing commitment. The
financing was to be made available in two equal allotments each conditioned
upon the signing of a lease for new restaurant premises. The agreement provided
that once advanced, the funds had to be used to develop the applicable
restaurant; except, that a surplus left after the first restaurant opened could
be used to defray the costs of the second once premises therefor had been
secured; and that a surplus, if any, remaining after both restaurants had
opened could be retained by the Company. Repayments of advances and interest
thereon at 12% per year are required only if the Company completes another
public offering of common stock and only from the proceeds thereof. (See Note
8B). On August 11, 1995, the Company received the first $150,000 allotment. On
February 7, 1996, the Company received $100,000 under the second allotment. An
additional $25,000 was received on March 1, 1996. No further advances were
made. On August 30, 1996, the lender, an affiliate of the underwriter of the
Company's proposed public offering, waived certain restrictions on the
allocation and use of the amounts advanced. In October 1996, all limitations on
the use of the funds were eliminated; the amended agreement required only that
the Company use the funds in its operations.

Due to the contingent nature of the loan, all proceeds were credited to
additional paid-in capital. Interest cost at 12% is provided to reflect the
interest-bearing nature of the advance if the contingency triggering repayment
is met; the related credit is also added to paid-in capital. In the event that
repayment is required, the principal as well as the accumulated "interest" will
be deducted from such capital account.

B) Letter of Intent for New Offering:

In March 1996 the Company signed a letter of intent with an underwriter, which
proposed the sale by the Company of 1,200,000 common shares at a price per

share of $5 on a best-efforts, all or none basis. Such letter provides for a
10% underwriting fee, a 3% non-accountable expense allowance, underwriter's
warrants exercisable at 165% of the offering price and related registration
rights. Also the letter provides for damages payable by the Company to the
underwriter under certain circumstances.

On November 19, 1996, the Company's underwriter amended its letter of intent
for the Company's new offering to change from a best-efforts type to a
firm-commitment type underwriting, which provides that all shares will be sold
if one is sold. As amended, the letter grants the underwriter a 15%
over-allotment option, standard in such offerings, and also reduces the
exercise price of the underwriter's purchase warrants from 165% to 120% of the
public offering price. (See Notes 8A, 21B and 21C).

C) Common Stock Purchase Warrants and Related Registration Rights:

Upon completion of the Company's initial public offering on November 23, 1993,
the underwriter received warrants to purchase 25,000 shares of the Company's
common stock at $6.00 per share, exercisable until October 7, 1998. Until such
date, the underwriter also has one demand and one piggy-back registration right
for the warrants and/or underlying shares.

                                      F-13

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 9 - LOANS PAYABLE

At May 31, 1997, the Company owed $291,750, including $21,750 of accrued
interest at 12% per annum, to an affiliate of the underwriter of the Company's
proposed public offering. The loans, evidenced by four non-negotiable,
unsecured notes due December 31, 1997, were subsequently extended, but must be
prepaid upon consummation of a second public offering of the Company's common
stock. (See Notes 8B, 18A and 20B).

NOTE 10 - NOTES PAYABLE, SUBSEQUENTLY CONVERTED TO COMMON SHARES

On March 25, April 18, and May 13, 1997, the Company borrowed a total of
$178,000 and $21,760 from two individual overseas lenders, respectively. The
aggregate amounts borrowed on the above dates were $70,000, $69,980 and
$59,780, respectively. These notes bore interest at 12% per annum and were
payable 90, 60 and 30 days after issuance on the 23rd, 17th and 12th of June
1997, respectively. Subsequent to May 31, 1997, the notes were converted to
common stock of the Company. (See Note 19A).

NOTE 11 - MINIMUM OPERATING RENT COMMITMENTS

The Company has operating leases for each of its restaurant premises. In
addition to base rent, the Company pays its proportionate share of certain
utility charges and realty tax increases. The leases for the three New York
restaurants expire December 2001, June 2005, and January 2006, respectively;

none of these leases contain renewal provisions.

The Prairie joint-venture initially occupied its premises pursuant to a lease
in negotiation. Such lease was not finalized until subsequent to May 31, 1997.
Monthly amounts of $4,763 paid prior to the signing of the lease were accepted
in exchange for an occupancy retrospectively deemed to have been pursuant to a
verbal understanding. (See Note 17A).

On March 25, 1997, the Company's seventh subsidiary entered into a ten year
lease expiring March 31, 2007 for the premises of the Womlett House Restaurant,
opened subsequent to May 31, 1997. (See Note 17D). The Company may terminate
the lease after five years; however, exercise of this option is considered
unlikely in light of the economic penalty that would be incurred resulting from
the early abandonment of the premises. The lease provides for a two-month rent
holiday through May 31, 1997. Initial annual rent of $24,000 increases by four
percent cumulatively throughout the term of the lease beginning March 1, 1998.

The annual minimum rental commitments for the next five years and thereafter
through expiration of the three New York leases, the Miami joint-venture lease
as subsequently finalized, and the Womlett House lease are as follows:

               Year Ending May 31,              Amount
               -------------------              ------
                     1998                      $ 351,211
                     1999                        359,279
                     2000                        373,837
                     2001                        392,046
                     2002                        356,520
                   2003-2007                   1,242,949
                   2008-2012                     367,194
                                              ----------
                     Total                    $3,443,036
                                              ==========

                                  F-14

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 11 - MINIMUM OPERATING RENT COMMITMENTS (Continued)

Each of the New York restaurants has been the subject of rent litigation and
liens for New York State Sales Taxes. (See Notes 5, 12A and 20).

Subsequent to May 31, 1997, the Company entered into a lease for the Company's
sixth restaurant in Coconut Grove, Florida. (See Notes 17B).

Base rentals, contingent rentals and total rent expense for fiscal 1997 and
1996 are as follows:
                                  Base        Contingent   Total Rent
Fiscal Year Ended May 31,        Rentals       Rentals      Expense
-------------------------        -------       -------      -------


          1997                   $353,497      $21,437     $374,934
                                 ========      =======     ========
          1996                   $250,831      $38,610     $289,441
                                 ========      =======     ========

NOTE 12 - LITIGATION

A) Rent Litigation - New York Restaurants (See Note 21A):

At several times during the past two fiscal years the Company has been the
defendant in various summary proceedings brought for non-payment of rent by all
of the landlords of the Company's New York restaurants. Such rent arrears,
included in "Accrued expenses, other" on the accompanying consolidated balance
sheet, approximated $105,000 and $35,500 at May 31, 1996 and 1997,
respectively. At the latter date, approximately $29,300 of the delinquent rent
was attributable to the Broadway restaurant.

Historically, the Company has settled such actions prior to eviction by signing
stipulation agreements and paying initially agreed-upon amounts. However, the
Company often has failed to timely make further payments specified in the
stipulations or to timely pay subsequent monthly rent; accordingly summary
proceedings have been brought more than once in the last two years and
thereafter for the same restaurant. (See Note 20A).

B) Litigation - Discontinued Joint-Venture:

Litigation related to the Company's Canadian joint-venture was settled
in May 1996. (See Note 14).

NOTE 13 - CAPITAL STOCK TRANSACTIONS

On April 26, 1996, the Company sold 50,000 newly issued, unregistered common
shares under Regulation "S" of the Securities Act of 1933 to an overseas
investor at $2 per share for net proceeds of $100,000.

In four transactions between July 12 and August 6, 1996, the Company sold an
aggregate of 129,101 newly issued, unregistered common shares, all at a per
share price of $2. Net proceeds were $258,202. The shares, all sold under
Regulation "S", were purchased by two overseas investors.

Generally, shares sold to overseas investors under Regulation "S" may be resold
after forty days. However, the purchasers referred to above agreed to (i) not
resell any shares for a period of three months and (ii) a further restriction
on resale for one-half of their shares for an additional three months.

                                      F-15

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 13 - CAPITAL STOCK TRANSACTIONS (Continued)


On January 9 and January 30, 1997, the Company sold an aggregate of 114,974
newly issued, unregistered common shares, all at a per share price of $2. Net
proceeds were $229,948. The shares, all sold under Regulation "S", were
purchased by one overseas investor. However at the time these shares were sold,
the Company was not current on its periodic reporting requirements under the
Securities Exchange Act of 1934; therefore, these shares were issued subject to
a one-year resale restriction.

Subsequent to May 31, 1997, certain existing debt of the Company was converted
to common stock and additional shares were also sold, all under Regulation "S".
(See Notes 10 and 19).

NOTE 14 - LOSS ON DISCONTINUED JOINT VENTURE

The Canadian joint-venture entered into a lease for premises on Lincoln Road,
Miami Beach, Florida. Canadian paid a $8,750 security deposit and hired a
contractor to prepare detailed design plans for the construction of the
restaurant. Prior to starting construction, Canadian learned of certain
misrepresentations the landlord made as to the extent of certain improvements
being made by the City of Miami Beach to the area's infra- structure: They
would extend the construction period for the restaurant; increase the cost and
more important, the delay would mean this location could not open in time for
the 1996-1997 winter season. Also, late in 1995, after Hurricane Andrew, the
City enacted substantial changes to its building codes, which would further
increase the construction cost and delay the opening. The parties were unable
to reach an accommodation regarding these matters. When rent became due under
the lease, the landlord brought an action to enforce payment. On May 14, 1996,
the parties settled the litigation and terminated the lease. Canadian
surrendered the $8,750 security deposit. Since the contractor's plans were
specific to the Lincoln Road premises, their cost of $15,000 was also written
off. The Company's share of this loss in fiscal 1996 was $11,875. In fiscal
1997 the Company recognized an additional loss of $8,500 related to the
abandonment of this project. At May 31, 1997 the Company has no further
obligation thereunder either to the landlord or the joint-venturer and the
Canadian joint-venture remains inactive.

NOTE 15 - INCOME TAXES

The Company sustained taxable losses of approximately $1,072,000 in 1997
and $587,000 in 1996.  The Company and its subsidiaries have incurred no
income tax since inception.  Approximately $2,662,000 of tax loss carry-
forwards may be offset against future years' taxable income, expiring as
follows: 2005: $77,000; 2006: $33,000; 2007: $2,000; 2008: $93,000;
2009: $322,000; 2010: $476,000; 2011: $587,000; 2012: $1,072,000.

At May 31, 1997 and 1996, the Company had no deferred tax liabilities and the
following deferred tax assets:
                                                   1997       1996
                                                   ----       ----
Net operating loss carryforward                  $692,025   $413,480
Deferred rent, net of amounts capitalized          34,285     27,177
Property and equipment depreciation differences    28,604     10,427
Corporate joint-venture investments                 3,074      3,087

                                                 --------   --------
Total                                            $757,988   $454,171
                                                 ========   ========

                                      F-16

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 15 - INCOME TAXES (Continued)

The above deferred tax assets were completely offset by equivalent valuation
allowances, which increased by $303,817 and $167,018 during the fiscal years
ended May 31, 1997 and 1996, respectively.

NOTE 16 - GOING CONCERN

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As set forth on such financial
statements, the Company sustained net losses of $1,180,400 in fiscal 1997 and
$622,989 in fiscal 1996. Also as of May 31, 1997, the Company has net working
capital and stockholders' equity deficiencies of $1,764,835 and $1,056,685,
respectively. In addition, the Company's New York landlords have all brought
summary non-payment proceedings against the Company's subsidiaries; warrants of
eviction have been issued on several occasions and one warrant, issued
subsequent to May 31, 1997 was executed. (See Note 20A). Further, payroll tax
and sales tax liens have been filed with respect to each operating subsidiary
and the restaurants are also subject to closure by applicable taxing
authorities. Subsequent to May 31, 1997, one New York restaurant was
temporarily closed due to the Company's failure to stay current on a
deferred-payment arrangement. (See Note 20B). All of these conditions raise
substantial doubt about the Company's ability to continue as a going concern.

Since the inception of the Company, management has concentrated on developing
the restaurants, creating name recognition and attracting a loyal patron base.
Significant operating losses during the period of such development were
expected. However, the extent and duration of such losses have each been far
greater than anticipated. Management believes that the Company has achieved a
valuable name recognition and a certain level of customer acceptance.
Management also believes that profitable restaurant operations can be attained
by increasing volume at existing locations while nonetheless controlling costs
and successfully developing new restaurants. Management has been hampered in
implementing its expansion plans by longer than expected construction periods,
higher than anticipated costs and insufficient capital. Moreover, while sales
at the New York restaurants have increased, operating margins are still
significantly below hoped-for levels.

In the last quarter of fiscal 1996, the Company began development of a
wholesale division. Research and development activities related thereto were
conducted throughout fiscal 1997. However, during the subsequent fiscal
quarter, management was forced to suspend activities related to this new line
of business due to insufficient financing. (See Note 21A). Management believes

that the name recognition gained by its restaurants as well as favorable
responses to early market testings of its wholesale product augur well for its
successful entry into wholesale distribution, assuming adequate financing can
be obtained. (See Note 21B).

The Company has signed a letter of intent for a second public offering of its
shares. Management believes that if successful, the proceeds thereof will be
sufficient to pay outstanding current liabilities, including significant sales
and payroll tax delinquencies and provide needed working capital; finance the
expansion of restaurant operations and complete the entry into the wholesale
distribution business.

                                      F-17

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 16 - GOING CONCERN (Continued)

There is no assurance that such goals will be achieved, nor is there any
assurance that if sufficient financing is obtained that the Company's future
operations will be profitable. Moreover, given the Company's current financial
condition, completion of the proposed public offering or securing adequate
alternative financing is essential if the Company is to remain viable. Lastly,
the Company's ability to obtain financing has been in the past, and is at
present impeded by its failure to remain current on its periodic reporting
requirements to the Securities and Exchange Commission. Although management
believes that it will soon become and thereafter remain current on its
reporting obligations, there can be no assurances given in this regard. (See
Note 21C).

The continuation of the Company as a going concern is dependent upon the
successful completion of its financing and expansion plans. Management is
hopeful that it will be successful in these endeavors, although no assurances
in this regard can be given. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the classification and amounts of liabilities that
might be necessary if the Company is unable to continue in existence.

NOTE 17 - SUBSEQUENT EVENTS: FLORIDA RESTAURANTS

A) Finalization of Lease for Prairie Joint-Venture Restaurant:

On November 1, 1997, the lease for the Prairie joint-venture's premises,
previously occupied pursuant to a verbal understanding, was signed by the
parties. Such lease provides for an initial term of four years, commencing
January 1, 1998 and expiring December 31, 2001. The lease, which may be
extended for two terms of five years each, requires initial annual rent of
$48,451, payable monthly, together with Florida rent tax thereon. Base rent
increases by 4% per year cumulatively over all terms of the lease. Due to the
economic penalty that would be incurred if the restaurant's leasehold
improvements were abandoned before the expiration of the renewal terms, the

Company expects that both renewal options will be exercised, assuming the
Company's continuation through such periods. (See Note 14). Total base rent,
together with rent tax thereon, payable over all terms of the lease through
December 31, 2012 is $977,214. Such amount is included in the minimum annual
lease commitments reported at May 31, 1997. (See Note 11).

B) Formation of New Subsidiary; Related Agreement of Lease:

On December 30, 1997, the Company's new subsidiary, Yoystra Enterprises, Inc.
was incorporated in Florida. This subsidiary, the Company's eighth, was formed
to develop, own and operate a Royal Canadian Pancake House Restaurant in
Coconut Grove, Florida. On the same date, the subsidiary entered into a lease
agreement for the premises of the new restaurant. Construction costs for this
location, the Company's sixth, are estimated at $250,000. The lease allows for
immediate occupancy by the Company to adapt the premises for use as a
restaurant; however, due to the present lack of financing, such work has not
begun. At present the source of such financing is not committed. (See Notes 8B,
16 and 21B).

                                      F-18

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 17 - SUBSEQUENT EVENTS: FLORIDA RESTAURANTS (Continued)

B) Formation of New Subsidiary; Related Agreement of Lease (Continued):

The lease for the Coconut Grove premises has an initial five-year term,
expiring February 28, 2003, with one five-year renewal option. The lease
requires payment of rent commencing on the date the restaurant opens for
business at the rate of $5,000 per month, together with applicable Florida rent
tax. Base rent increases by 10% on March 1, 2001 and every third year
thereafter throughout the initial and renewal term if extended. Assuming the
continuation of the Company through such renewal date, election of the renewal
option is expected based on the economic penalty that would be incurred if the
leasehold improvements were surrendered earlier. (See Note 16). Rent due under
the lease, assuming an opening of June 1, 1998, aggregates $699,490 as follows:
1999: $63,900; 2000: $63,900; 2001: $64,965; 2002: $70,290; 2003-2008;
$436,435. Such amounts are not reflected in the minimum annual rental
commitments reported at May 31, 1997. (See Note 11).

C) Litigation - Prairie Joint Venture:

Prairie is the defendant, along with two of its officers, in a complaint filed
to recover the cost of certain goods sold to the joint-venture in July 1996.
The amount sought is less than $15,000 and the Company does not expect that any
material liability will result from this matter.

D) Opening of Womlett House Restaurant (Unaudited):

On January 16, 1998, the Company's fifth restaurant, a Royal Canadian Womlett

House, opened at 1505 Washington Avenue, Miami Beach, Florida. The restaurant's
aggregate development and construction costs were approximately $500,000, of
which approximately three-fifths had been incurred and are reported on the
accompanying consolidated balance sheet at May 31, 1997. (See Note 3).

NOTE 18 - SUBSEQUENT EVENTS: LOANS PAYABLE, OTHER

A) Loans Payable:

In eight separate transactions from June 19 through October 14, 1997, the
Company borrowed an aggregate of $245,000 from the same party who had loaned it
a total of $270,000 during fiscal 1996. The new loans bear interest at 12% per
annum and are evidenced by non-negotiable notes due December 31, 1998. These
loans must be prepaid upon the completion of a new public offering of the
Company's common stock. The lender, an affiliate of the underwriter of the
Company's proposed public offering, also extended the maturity of the loans
made during fiscal 1997 to the same due date; accordingly all loans from such
party, including accrued interest, are due December 31, 1998. (See Notes 8A,
8B, 20B and 21B).

In four separate transactions from November 13, 1997 thru February 23, 1998,
the Company borrowed a total of $208,000 from a third party. Such loans are
evidenced by non-negotiable notes bearing interest at 12% per year and are due
December 31, 1998, subject to mandatory prepayment upon the consummation of a
new public offering of the Company's common stock.
(See Notes 8B and 21B).

                                      F-19

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Continued)

NOTE 18 - SUBSEQUENT EVENTS: LOANS PAYABLE, OTHER (Continued)

B) Related Party Loans (Unaudited):

On June 23, 1997 and February 10, 1998, the Company borrowed $25,000 and
$50,000, respectively, from a family member of the Company's president and
majority shareholder. Such loans, both of which were repaid shortly after they
were made, bore interest at 9% per annum.

NOTE 19 - SUBSEQUENT EVENTS: CAPITAL STOCK TRANSACTIONS

A) Conversion of Notes Payable:

On June 9, 1997, the two holders of an aggregate of $199,760 of the Company's
notes agreed to convert such loans to common stock of the Company at the rate
of $2.00 per share. A total of 99,880 shares were issued, pursuant to
Regulation "S" of the Securities and Exchange Commission, promulgated under the
Securities Act of 1933. (See Note 10).

B) Additional Sales of Common Stock under Regulation "S"


On August 8, August 19, and September 8, 1997, the Company sold 49,980, 24,990
and 24,990 shares of the company's common stock to one overseas investor, all
at a price of $2.00 per share, and received, net proceeds, in the aggregate, of
$199,920. All 99,960 shares were sold pursuant to Regulation "S", as
promulgated under the Securities Act of 1933.

NOTE 20 - SUBSEQUENT EVENTS: NEW YORK RESTAURANTS (Unaudited)

A) Landlord Litigation:

Subsequent to May 31, 1997, landlord litigation continued in varying degrees
for the New York locations. At various times, stipulation agreements were
signed for all three New York restaurants. Warrants of eviction were issued for
the Second and Third Avenue restaurants and one warrant applicable to the
latter was executed. Upon payment by the Company of stipulated amounts,
applicable warrants were vacated. As of February 28, 1998, the Company has paid
substantially all of its rent arrearages, utilizing various loan and equity
proceeds.

B) Temporary Sales Tax Related Restaurant Closure:

On March 4, 1998, the Company's Second Avenue restaurant was closed by the
Sales Tax Division of the New York State Department of Taxation and Finance due
to the Company's failure to pay an agreed-upon amount so as to remain current
on its deferred payment arrangement.

On March 11, 1998, the Second Avenue restaurant was reopened upon the Company
paying $75,000 against its sales tax liability and entering into a new 36-month
installment agreement for the remaining balance of approximately $100,000.
After making such payment, delinquent sales, rent and payroll taxes owed by the
Company were approximately $630,000. The payment was funded from the proceeds
of a $110,000 loan, borrowed from the same lender who had advanced a total of
$515,000 in twelve previous transactions in fiscal 1997 and 1998. (See Note
18A).

                                      F-20

<PAGE>

                  ROYAL CANADIAN FOODS CORP. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (Concluded)

NOTE 21 - SUBSEQUENT EVENTS: OTHER

A) Wholesale Division/Research and Development Activities (Unaudited):

During the quarter ended August 31, 1997, the Company's research and
development activities for its new wholesale division consisted of the
expenditure of an additional $141,300 on corrugated boxes and related supplies.
Prior to commencing production of distribution-size shipments, the Company
determined it did not have sufficient financing to produce expected re-order
quantities and was forced to suspend all activities related to this line of
business. The Company estimates that it will require approximately $1,500,000

to complete the introduction of this wholesale product line to the market. The
Company anticipates that the source of such financing will be the proposed new
offering of its common stock. Assuming such proposed offering is consummated,
of which there can be no assurance, significant revenues from the wholesale
division are not expected prior to fiscal 1999. (See Notes 4 and 16).

B) Affirmed Letter of Intent for New Public Offering:

On February 19, 1998, the Company's underwriter re-affirmed to the Company in
writing its intention of proceeding with a second public offering of the
Company's common shares, despite the passage of time since November 19, 1996
when the first letter of intent dated March 25, 1996 was amended to reflect a
firm commitment type offering. There is no assurance that such offering will be
completed; also the Company must be current on its reporting obligations under
the Securities Exchange Act of 1934 in order to proceed with the related
registration statement under the Securities Act of 1933. (See Note 21C).

C) Delinquent Filing of Exchange Act Reports (Unaudited):

On or about March 22, 1998, the Company completed preparation of its Annual
Report on Form 10-KSB for the year ended May 31, 1997, which report was then
readied for electronic transmission to the Securities and Exchange Commission.
Such report was approximately six and one-half months late. At such date, the
Company was also delinquent with respect to two reports on Form 10-QSB for the
quarterly periods ended August 31, 1997 and November 30, 1997. Timely filing of
periodic reports specified by the Securities Exchange Act of 1934 is required
by law; moreover, the Company's ability to obtain equity financing is impeded
during periods when it is not in compliance with such requirements. (See Note
16).

                                      F-21

<PAGE>

Item 8.   Changes In and Disagreements With Accountants
          on Accounting and Financial Disclosure.

          None.


                            Part III


Item 9.   Directors, Executive Officers, Promoters and
          Control Persons; Compliance With Section 16(a)
          of the Exchange Act.

          The executive officers and directors of the Company are set forth
below. Each director serves for a period of one year and until his successor is
elected and qualified. Officers are appointed and serve at the discretion of
the Board of Directors.

           Name               Age       Position

Sheldon Golumbia              47        President, Treasurer and
                                         Director
Beatrice Puja                 44        Vice President-Operations
                                        Secretary and Director

          Sheldon Golumbia has been President, Treasurer and a Director of the
Company since its inception in August 1993, president and sole director of the
Hudson Street, Second Avenue, Broadway and Third Avenue subsidiaries since
their inceptions in 1989, 1992, 1993 and 1994, respectively.

          Beatrice Puja has been Vice President-Operations since the completion
of the Initial Public Offering in November 1993. She rendered managerial
services to the Company as a consultant on a full-time basis for approximately
60 days prior to the completion of the Initial Public Offering and the
commencement of her employment agreement. She has been Secretary and a Director
of the Company since its inception in August 1993. She has been the secretary
of the Company's subsidiaries since their inceptions and had, from time to
time, rendered limited consulting services to the Company and its subsidiaries
since 1989. From 1989 until becoming a full-time employee of the Company, Ms.
Puja did not engage in any other business activity.

                                       29

<PAGE>

          The By-laws of the Company provide for indemnification of officers
and directors to the fullest extent permitted by Delaware law.

Item 10.  Executive Compensation.

          The following table sets forth the cash compensation paid by the
Company for each of its last three fiscal years ended May 31, to the individual

acting as its chief executive officer and its other executive officer.


Name and Principal          
Position                    Fiscal Year      Salary(1)
------------------          -----------      -------

Sheldon Golumbia                1997         $13,524(2)
President and                   1996         $48,775(3)
Treasurer                       1995         $72,116(4)

Beatrice Puja                   1997         $17,424(2)
Vice President-                 1996         $57,513(3)
Operations                      1995         $90,770(4)


(1) Represents cash compensation. The Company paid no other type of
compensation to either officer and has no other type or form of compensation
plans. 
(2) Of the total salaries payable to Mr. Golumbia and Ms. Puja pursuant
to their employment agreements for the 1997 fiscal year, $136,476 and $102,576,
respectively, have been accrued and not paid, and are not reflected in the
amounts set forth in the above table. At May 31, 1997, the total amount of
accrued but unpaid salaries payable to Mr. Golumbia and Ms. Puja was $315,585
and $194,293, respectively. 
(3) Of the total salaries payable to Mr. Golumbiaand Ms. Puja pursuant to their
employemnt agreement for the 1996 fiscal year,$101,225 and $62,487, 
respectively, have been accrued and not paid, and are not reflected in the 
amounts set forth in the above table. 
(4) Of the total salaries payable to Mr. Golumbia and Ms. Puja pursuant to 
their employment agreements for the 1995 fiscal year, $77,884 and $29,230, 
respectively, were accrued and have not been paid, and are not reflected in 
the amounts set forth in the above table.

                                       30

<PAGE>

          Directors are not paid any fee for their services as directors, but
are reimbursed for their reasonable travel expenses incurred in attending
meetings of the Board.

          Prior to the completion of the Initial Public Offering, neither the
Company nor its subsidiaries had paid any compensation to its officers.
However, the Company did impute compensation for Sheldon Golumbia and Beatrice
Puja aggregating $150,000 and $5,000, respectively, for all fiscal years thru
May 31, 1993. Salary also was imputed for fiscal 1994 up to the date of the
closing of the Initial Public Offering in the amounts of $36,000 and $1,000 for
Mr. Golumbia and Ms. Puja, respectively. In addition, Ms. Puja was paid $25,000
after completion of the Initial Public Offering for consulting services she
rendered on a full-time basis for approximately 60 days prior thereto in
connection with the closing of the Hudson Street Restaurant and opening of the
Broadway Restaurant.


          The Company entered into five-year employment agreements with Sheldon
Golumbia and Beatrice Puja, for initial annual salaries of $150,000 and
$120,000, respectively, which commenced upon the completion of the Initial
Public Offering in November 1993 and are automatically renewed at the end of
the employment term for additional one year periods, unless either party gives
written notice of non-renewal to the other at least 60 days prior to the end of
the then existing period. These salaries are subject to cost-of-living
adjustments and bonuses based upon performance, such bonuses to be determined
each year by the Company's Board of Directors. The employment agreements also
contain confidentiality and non-competition provisions.

          The Company does not have any employee compensation plans in effect
at the present time, but will consider the adoption thereof if and when it
believes they would be appropriate to foster the development and growth of the
Company.


Item 11.  Security Ownership of Certain Beneficial
          Owners and Management.

                               31

<PAGE>

          The following table sets forth as of February 28, 1997, certain
information regarding the number and percentage of shares of Common Stock
beneficially owned by each person known by the Company to own more than five
percent of its outstanding Common Stock, each officer and director of the
Company, and all officers and directors as a group. All persons listed below
have sole voting and investment power with respect to their shares of Common
Stock.

     Name and Address         Number of
  of Beneficial Owner          Shares        % Ownership
  -------------------          ------        -----------

Sheldon Golumbia              2,137,500        71.4%
Royal Canadian Foods Corp.
1004 Second Avenue
New York, New York 10022

Beatrice Puja                   100,000         3.3%
Royal Canadian Foods Corp.
1004 Second Avenue
New York, New York 10022

Officers and Directors as
 a group (2 persons)          2,237,500        74.7%


Item 12.  Certain Relationships and Related Transactions.

          From time to time, Sheldon Golumbia, President, Director and
principal shareholder of the Company, has made loans to the Company,

principally for the purpose of funding construction costs of the Restaurants
and to a lesser degree for working capital purposes. In fiscal 1997, $70,000 of
loans were repaid. The amounts of principal advanced during the 1996 and 1995
fiscal years were $112,975 and $89,009. In addition, interest at 9% per annum
was accrued in fiscal 1997, 1996 and 1995 in the amounts of $26,941, $27,388
and $12,770, respectively. At May 31, 1997, the aggregate amount of principal
and accrued interest outstanding was $315,380.

          Mr. Golumbia has periodically extended the maturity date of a
substantial portion of the loan and at times has increased the loan amount
subject to such extended maturity. As

                                       32

<PAGE>

of May 31, 1997, he extended the due date for $250,000 of the loan until June
30, 1998, subject to mandatory earlier prepayment if the Company completes
another public offering of its Common Stock prior thereto. See "Item 6 - 
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 7B to the Consolidated Financial Statements.

          Mr. Golumbia also has guaranteed the payment of any amounts due under
the Broadway Lease at the time the Company vacates the subject premises.

          Sarah Golumbia, mother of Sheldon Golumbia, made $25,000 and $50,000
loans to the Company with interest at 9% per annum on June 23, 1997 and
February 10, 1998, respectively. The Company repaid the $25,000 loan on July
14, 1997 and repaid the $50,000 loan in two $25,000 payments, the first on
February 24, 1998 and the second on March 9, 1998.

                               33

<PAGE>

Item 13.  Exhibits and Reports on Form 8-K.

a.  Exhibits

Exhibit No.                   Description
-----------                   -----------

    3.1             Articles of Incorporation(1)
    3.2             By-Laws(1)
   10.1             Hudson Street Lease(1)
   10.2             Second Avenue Lease(1)
   10.3             Broadway Lease(1)
   10.4             Third Avenue Lease(2)
   10.5             Promissory Note(1)
   10.6             Letter Agreement Regarding Loans(1)
   10.7             Employment Agreement of Sheldon Golumbia(1)
   10.8             Employment Agreement of Beatrice Puja(1)
   10.9             Note Extension(3)
   10.10            Note Extension dated August 22, 1995(4)

   10.11            $300,000 Loan Agreement(4)
   10.12            $150,000 Promissory Note(4)
   10.13            Note Extension Dated as of May 31, 1996(5)
   10.14            Modification of $300,000 Loan Agreement(5)
   10.15            Limited Liability Agreement of Prairie Foods,
                    LLC(5)
   10.16            Prairie Foods Pancake Restaurant Lease(6)
   10.17            Miami Beach Womlett Restaurant Lease(6)
   10.18            Coconut Grove, Florida Pancake Restaurant
                    Lease(6)
   10.19            $100,000 Promissory Note dated February 7,
                    1996(6)
   10.20            $25,000 Promissory Note dated March 1, 1996(6)
   10.21            Second Modification of $300,000 Loan
                    Agreement(6)
   10.22            Second Note Extension dated as of May 31,
                    1997(6)
   10.23            $50,000 Promissory Note dated June 5, 1996(6)
   10.24            $50,000 Promissory Note dated June 26, 1998(6)
   10.25            $100,000 Promissory Note dated September 16,
                    1996(6)
   10.26            $70,000 Promissory Note dated March 13, 1997(6)
   10.27            Extension Agreement for $270,000 of loans
                    (evidenced by Notes contained in Exhibits
                    10.23, 10.24, 10.25 and 10.26)(6)

                                       34

<PAGE>

   10.28            $30,000 Promissory Note dated June 19, 1997(6)
   10.29            $25,000 Promissory Note dated July 14, 1997(6)
   10.30            $50,000 Promissory Note dated September 4,
                    1997(6)
   10.31            $20,000 Promissory Note dated September 8,
                    1997(6)
   10.32            $20,000 Promissory Note dated September 12,
                    1997(6)
   10.33            $20,000 Promissory Note dated September 17,
                    1997(6)
   10.34            $50,000 Promissory Note dated September 22,
                    1997(6)
   10.35            $30,000 Promissory Note dated October 14,
                    1997(6)
   10.36            $110,000 Promissory Note dated March 11,
                    1998(6)
   10.37            $70,000 Promissory Note dated March 25, 1997(6)
   10.38            $48,220 Promissory Note dated April 18, 1997(6)
   10.39            $59,780 Promissory Note dated May 13, 1997(6)
   10.40            $178,000 Loan to Equity Conversion Agreement
                    dated June 9, 1997(6)
   10.41            $21,760 Promissory Note dated April 18, 1997(6)
   10.42            $21,760 Loan to Equity Conversion Agreement
                    dated June 9, 1997(6)

   10.43            $38,000 Promissory Note dated November 13,
                    1997(6)
   10.44            $50,000 Promissory Note dated December 19,
                    1997(6)
   10.45            $20,000 Promissory Note dated January 26,
                    1998(6)
   10.46            $100,000 Promissory Note dated February 23,
                    1998(6)
   21               List of Subsidiaries(6)

-----------------
(1) Incorporated by reference from an Exhibit of the same Exhibit number to
Registrant's Registration Statement No. 33-67658-NY on Form SB-2.

(2) Incorporated by reference from Exhibit 10 of a Current Report filed on Form
8-K dated February 7, 1994.

                                       35

<PAGE>

(3) Incorporated by reference from an Exhibit of the same Exhibit number to
Registrant's Annual Report on Form 10-KSB for the year ended May 31, 1994.

(4) Incorporated by reference from an Exhibit of the same Exhibit number to
Registrant's Annual Report on Form 10-KSB for the year ended May 31, 1995.

(5) Incorporated by reference from an Exhibit of the same Exhibit number to
Registrant's Annual Report on Form 10-KSB for the year ended May 31, 1996.

(6) Filed herewith.

b. Reports on Form 8-K for the Quarter ended May 31, 1997

          None.

                                       36

<PAGE>

                                   SIGNATURES

          In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                              Royal Canadian Foods Corp.



                              By: /s/ Sheldon Golumbia
                                  Sheldon Golumbia, President
                                  March 23, 1998


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

SIGNATURES                    TITLE                       DATE
----------                    -----                       ----

 /s/ Sheldon Golumbia   President, Treasurer,         March 23, 1998
  Sheldon Golumbia      Principal Executive
                        Officer, Principal
                        Financial Officer,
                        Principal Accounting
                        Officer and Director



 /s/ Beatrice Puja      Vice President-Operations,    March 23, 1998
  Beatrice Puja         Secretary and Director



             Supplemental Information to be Furnished With Reports
              Filed Pursuant to Section 15(d) of the Exchange Act
                            By Non-reporting Issuers

                                       37

<PAGE>

          The issuer has not and will not be sending proxy materials to its
security holders. The Company will send a copy of this Annual Report to
its security holders upon request.

                                       38