SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

                    For the Fiscal Year ended March 31, 1997

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

        For the transition period from ______________ to _______________.

                          Commission File No. 33-3276-D

                             CHINA CONTINENTAL, INC.
                  --------------------------------------------
                 (Name of small business issuer in its charter)

           Utah                                          87-0431063
-------------------------------               ----------------------------------
(State or other jurisdiction of                    (I.R.S. Employer 
 incorporation or organization)                    Identification Number)

  1801-1806 Hua Qin International Building, 340 Queen's Road Central, Hong Kong
 -------------------------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Include Area Code: 011-852-2542-2612

Securities Registered Pursuant to Section 12(b) of the Act:

        Title of Each Class            Name of Each Exchange on Which Registered
        -------------------            -----------------------------------------
                None                                    None

Securities Registered Pursuant to Section 12(g) of the Act:

                                      None
                                ----------------
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past twelve (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 ninety (90)
days. Yes  X   No
         -----   ------

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation S-B is not contained in this form, and will not 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]

     The issuer's revenues for its most recent fiscal year were US$34,758,634.
 
     As of March 31, 1997,  26,000,000  shares of common stock of the Registrant
were  outstanding.  As of such date,  the  aggregate  market value of the common
stock  held by  non-affiliates,  based  on the  closing  bid  price  on the NASD
Bulletin Board, was approximately $17,062,500.

                       DOCUMENTS INCORPORATED BY REFERENCE

     No annual reports to security holders, proxy or information statements,  or
prospectuses  filed  pursuant  to Rule 424(b) or (c) have been  incorporated  by
reference in this report.

     Transitional Small Business Disclosure Format: Yes    No  X
                                                       ----  -----


<PAGE>


                                TABLE OF CONTENTS

                                                                          Page
                                                                        --------

PART I

   ITEM 1.    DESCRIPTION OF BUSINESS..................................      3
   ITEM 2.    DESCRIPTION OF PROPERTIES................................      6
   ITEM 3.    LEGAL PROCEEDINGS........................................      6
   ITEM 4.    SUBMISSION OF MATTERS TO A VOTE
              OF SECURITY HOLDERS......................................      6

PART II

   ITEM 5.    MARKET FOR COMMON EQUITY AND
              RELATED STOCKHOLDER MATTERS..............................      6
   ITEM 6.    SELECTED FINANCIAL DATA..................................      7
   ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS......................      8
   ITEM 7A.   QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT
              MARKET RISK..............................................     12
   ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............     12

PART III

   ITEM 9.    CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE.....................................     12
   ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......     12
   ITEM 11.   EXECUTIVE COMPENSATION...................................     12
   ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT...............................................     14
   ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION......     14

PART IV

   ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTING
              ON FORM 8-K..............................................     14

              SIGNATURES...............................................     15

              INDEX TO FINANCIAL STATEMENTS............................    F-1



<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

     This Form 10-K contains  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The Company's actual results could differ  materially from
those set forth in the  forward-looking  statements.  Certain factors that might
cause such a difference are discussed in the section  entitled  "Certain Factors
Affecting Future Operating Results" beginning on page 11 of this Form 10-K.

The Company

     China Continental, Inc. (the "Company") designs, installs and sells plastic
production  lines on a turn-key basis and sells  machinery and equipment for the
manufacture of plastic  products.  The major portion of its sales are to plastic
manufacturers in the People's Republic of China ("PRC" or "China").  The Company
has completed over 60 turn-key projects  throughout the PRC varying in size from
US$300,000 to $5 million. Seven turn-key projects were completed during the year
ended March 31, 1997 at an average cost of US$4.5  million.  Typically  turn-key
projects  require four to eight  months to complete,  depending on both the size
and complexity. The installation and maintenance of production lines are handled
jointly by the original  equipment  manufacturers  and the Company.  The Company
became a US listed public company via a reverse acquisition in February 1995.

Market and Client Base

     During the 1990s, the Company began to market,  on a turn-key basis,  fully
automated  production  lines to plastic product  manufacturers.  The majority of
these turn-key projects were sold to companies in the PRC.

Business Segments

     The Company has two principal business segments:

     *    Sale of turn-key plastic production lines

     *    Sale of machinery and  equipment,  accessories,  spare parts,  and raw
          materials
 
Sale of Turn-Key Plastic Production Lines

     During the 1990s the Company began to market,  on a turn-key  basis,  fully
automated  production  lines to plastic product  manufacturers in the PRC. These
turn-key  projects  require the  provision  of  services  from the design of the
engineering configuration of the production lines to the supply and installation
of the  machinery  and  equipment.  The  Company has  completed  in excess of 60
turn-key  projects  throughout the PRC,  varying in cost from US$300,000 to US$5
million.

     A typical  turn-key  project  requires  four to eight  months to  complete,
depending on both its size and  complexity.  The design of a production  line is
based on job  specifications,  such as the particulars of the plastic  products,
the packaging format, the intended maximum production capacity and the layout of
the  factory  premises,  all of  which  are  obtained  from the  customers.  The
installation  and  maintenance  of production  lines are handled  jointly by the
original  equipment  manufacturers  and the  Company.  Test-runs of the turn-key
production lines are conducted by engineers of the Company to ensure quality and
the meeting of specified requirements. Turn-key projects generally have warranty
periods  ranging  from six  months  to one year  during  which all  repairs  and
maintenance are provided free of charge by the Company.

Sale of Machinery and Equipment, Accessories, Spare Parts, and Raw Materials

     The sale of machinery  and  equipment,  accessories,  spare parts,  and raw
materials  are  conducted  in  conjunction  with the sales of  turn-key  plastic
production lines.



                                       3
<PAGE>


Principal Suppliers

     The  Company  acquires  its  machinery  and plastic  materials  from Nippon
Polyurethane  Industry Co., Ltd.; Nihon Unipolymer Co., Ltd.; Tomen Corporation,
Janson Co., Ltd.; Vicson Iron Works, Co., Ltd.; Cheer Young Machinery Works Co.,
Ltd.; Mintop Development Limited; Wing Lee Hong; and K.S. Plastics, Inc.

Employees

     As of March 31, 1997, the Company employed a sales and administrative staff
of 15 persons in Hong Kong and a technical staff of  approximately 40 persons in
the PRC.

Competition

     The  market  for  turn-key  automated   production  lines  in  the  plastic
manufacturing industry is fragmented in the PRC. The Company believes that it is
a leading  designer,  installer  and  Marketer  of  automated  turn-key  plastic
production  lines  in  the  PRC  and  that  it  provides  buyers  with  superior
post-installation  technical,  engineering and quality control support. To date,
there has been limited price  competition in this market,  but price competition
is becoming a factor.

Economic Development in the People's Republic of China ("PRC" or "China")

     The  development  of  the  PRC's  economy  has  been  characterized  by the
adoption, since 1953, of Five Year Plans. Implementation of the plans is carried
out under  the  supervision  of the State  Planning  Commission,  which  reports
directly to the State Council. The ninth Five Year Plan for national, economical
and  social  development  for  1996-2000,  along with a ten year  program  which
extends to 2010, was adopted in 1996, by the Standing  Committee of the National
Peoples' Congress.

     China's gross  domestic  product for the first quarter of 1997 grew at 9.4%
when  compared  with the same  period of the  previous  year,  while the  second
quarter  grew at 9.6%.  The growth rate for all of 1997 will  approximate  1996,
which had a growth rate of 9.5%. Although this growth rate is 1% lower than 1995
and 2.2% lower than 1994, it is one of the highest growth rate in the world.  In
September 1997, at a conference in Kuala Lumpur held by a United Nations project
to link forecasting models, researchers announced their predictions for economic
growth in 1997 of 3.1% (2.9% for 1996),  within  which the  developed  countries
will grow at 2.4%, the developing countries at 6.0%, and Eastern Europe at 3.7%.
China, however, will have the highest growth rate at 9.5%.

     The total amount of investment in 1997 will reach RMB2,595  billion (US$313
billion), a nominal growth rate of 13% representing a real growth rate of 10.6%,
and the rate of investment will be approximately  34%. The 1998 total investment
is expected to be RMB2,965 billion (US$357 billion) a nominal growth rate of 14%
or a real growth rate of 10.9% with the rate of investment  remaining at 34%. On
the whole,  the nominal  growth rate will be lower than the average level of the
past several years.  However, due to the fall in inflation,  the real investment
growth rate will not fall  significantly.  The  situation  where the  investment
growth rate is higher than the GDP growth rate is expected to remain unchanged.

     On the whole,  China is expected to maintain a favorable  combination  of a
high growth economy with low inflation in 1998.

FUTURE PROSPECT OF THE COMPANY

     The Company has, for the past six years, been actively involved in the sale
of  turn-key   production  lines  and  the  sale  of  machinery  and  equipment,
accessories,  spare  parts,  and  raw  materials.  These  businesses  have  been
rewarding  to the  Company  because of their  high  profit  margins.  These high
margins have in turn attracted new competitors. The margin of profit compared to
previous years has narrowed.  Efforts are therefore  being made to develop other
markets and to implement tighter marketing controls.

  

                                       4
<PAGE>

     On  April  2,  1997,  the  Company  acquired  a  30%  interest  in  Megaway
Development Limited. The principle asset of Megaway Development Limited is a 51%
interest in Weifang Great Dragon  Chemical Fibre Company Limited whose principal
activity is the manufacture of polyester tyre cord fabrics,  and polyester/nylon
canvas.  Megaway  Development  Limited  was  acquired  in  exchange  for a trade
receivable from CFFTC in the amount of HK$65,031,120 (US$8,415,000).

     The Company has further  restructured its business in a manner that has the
potential  to  eventually  produce  significant  income and  growth.  The recent
uphcavel of nearly all of the Asian  economies has been a critical factor in the
Company's  decision  to  re-examine  its  business  policy  and to  formulate  a
corporate  discipline  that will focus on long term growth and  development.  To
this end,  the Company has entered  into a  livestock  and  biotechnology  joint
venture  (the  "Joint  Venture")  with Feng  Ning  Manchuria  Autonomous  Region
Agriculture  Company  Limited  and  China  Resources  Development  Bureau  in  a
livestock  development  project in the Feng Ning Manchuria  Autonomous County of
Northern Hebei Province in the PRC. On December 23, 1997, Sun's International, a
wholly owned  subsidiary  of the Company,  acquired a 56.5%  interest in Wealthy
Asia Limited for consideration in cash of  US$52,000,000.  On February 10, 1998,
Sun's  International  acquired  the  remaining  43.5%  interest in Wealthy  Asia
Limited for  consideration of 40,000,000  shares of stock in China  Continental,
Inc. The principal asset of Wealthy Asia Limited is a 51% interest in Changde Da
Feng Agriculture Co. Limited, a Sino Singapore joint venture incorporated in the
People's Republic of China. Changde Da Feng's principal asset is 20,000 hectares
or 49,400 acres of land.

     The Company's  new emphasis is to lead,  focus and manage a select group of
high growth emerging businesses within a specific industry,  particularly in the
provision of technologies in agricultural  genetics and farming in China, and to
generate  from these  businesses  the  potential for  significant  returns.  The
Company  intends to provide and promote such  technologies to local breeders and
growers in China.  The  Company  believes  significant  opportunities  exist for
growth  in  the  business  of  agricultural   genetics  and  farming  in  China,
particularly  in  those  areas  that  offer  potential  proprietary   technology
development and potential market dominance.

     The Company believes that a number of factors will enable it to achieve its
business  objectives,  including (i) the  opportunity  to lead the market in the
agricultural  and farming  industry in China with the ability to make  available
the latest techniques and know-how in agrogenetic  agriculture and farming; (ii)
the presence of dedicated  management  and staff with  expertise and know-how in
agrogenetic   agriculture  and  farming;  and  (iii)  the  unique  location  and
availability of a significant size of arable farm land. In addition, the Company
has  technical  support  from its  business  relationship  with its  Chinese and
American  partners  that will ensure its ability to exploit  existing and future
opportunities.

     The Joint  Venture  entails  the  import of  American  livestock  genetics,
through  International  Agriculture  Genetics,  Inc. ("IAG"), a company based in
Edmond,  Oklahoma,  in the form of dairy  cattle,  beef  cattle,  sheep and goat
embryos for implanting into local recipients.

     Superior   genetics  from  the  US  will  be  selected  and  collected  for
propagation in this project. Once the imported genetics have matured,  semen and
embryos will be collected  from  offspring  for  propagation  and  distribution.
Embryo transfer is considered the fastest and most economical way of propagating
superior  genetics.  Embryos can be sexed,  split and injected with an exogenous
gene  condom  for  successful  incorporation  in the  production  of  beneficial
pharmaceutical  and  immunological  products to combat  diseases such hepatitis,
cancer, and tuberculosis.

     The rationale  for this project is (I) to support the Chinese  Government's
Grain  Conservancy  Policy for the  development of  pasture-fed  animals such as
sheep,  goats and cattle so that they do not compete for grains with humans; and
(II) to supply the demand of red meat to a population of 1.4 billion people. The
total  production of meat in China is expected to increase to 58 million  metric
tons.  Although  China has the largest human  population in the world and is the
largest livestock  producer,  it still lacks in the supply of superior livestock
genetics.  This project will propagate  breeding livestock for China's expanding
livestock population and increasing demand for red meat.

     The  project  will  also  entail   marketing  and   distributing   American
agricultural   genetics  to  contract  breeders  and  municipal  and  provincial
governments  under a vertical  integrated  plan that includes the  repurchase of
offspring  forfeeding  and slaughter in the  Company's  contract  abattoir.  The
Company-trained  technicians  will serve these  clientele  in the  provision  of
insemination of semen and  implantation of embryos to livestock.  The technician
will also provide  services in the sale of the Company's  feed,  feed additives,
minerals, vitamins, veterinary drugs and other supplementary products.



                                       5
<PAGE>

     In summary,  this project  will  propagate  breeding  livestock  and,  when
practicable,  planting of seed  genetics  for China's  ever-expanding  livestock
population  and  increasing  demand  for  food.  China,  despite  being the most
populated nation in the world and the largest livestock producer,  is lacking in
the supply of superior  livestock  and planting of seed  genetics to sustain its
agriculture industry. The Company believes that it has identified a niche market
by   providing  a  program  to  enhance   agricultural   production   that  will
significantly   improve  the  standard  of  living  and  provide   badly  needed
agricultural  genetics to support the increasing  demand for food in China. With
its strong support from its Chinese and American partners, the Company will have
access to this development  opportunity and is well positioned to take advantage
of existing and future opportunities. The Company is confident in its growth and
prospects.

ITEM 2. DESCRIPTION OF PROPERTIES

     The Company's principal administrative,  marketing and technical facilities
are  located in Hong Kong at 1801- 1806,  Hua Qin  International  Building,  340
Queen's Road Central. These premises are owned by the Company.

ITEM 3. LEGAL PROCEEDINGS

     The  Company  is not  currently  subject  to  any  material  pending  legal
proceedings.

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

     None

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

     The Company's common stock trades on the OTC Electronic  Bulletin Board and
is quoted under the symbol "CHCL".  The following  table sets forth the high and
low bid  price  per  share for the  Company's  common  stock for each  quarterly
period.

                                 1997                         1996
                        ------------------------      ----------------------
                          High            Low           High          Low
                        ---------      ---------      --------      --------
First Quarter          $   2.875        $  0.625      $   1.25     $    1.00
Second Quarter            1.0625          0.5625          1.50          1.27
Third Quarter            2.59375          0.5625          2.50          1.50
Fourth Quarter             1.375           0.875         1.875          0.75


     The quotation  reflects the  inter-dealer  prices  without  retail  markup,
markdown or commissions and may not represent actual transactions.

     As of April 30, 1998, the bid price of the Common Stock was $0.96875.

Holders

     As of April 30, 1998,  there were  approximately  348 record  owners of the
Common Stock of the Company.



                                       6
<PAGE>


Dividends

     Since fiscal 1994,  the Company has not declared or paid any cash dividends
on its Common  Stock and does not expect to declare or pay any such  dividend in
the foreseeable future.

Sales of Unregistered Securities

     None

ITEM 6. SELECTED FINANCIAL DATA

     The  following  table sets  forth,  for the  periods  and dates  indicated,
selected  consolidated  financial  and  operating  data  for  the  Company.  The
financial  data was derived from the  consolidated  financial  statements of the
Company  and  should  be  read  in  conjunction   with  the  Company's   audited
consolidated  financial statements included in the Index to Financial Statements
on page  F-1 of this  report.  See  also  Item 7,  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations.

<TABLE>


                                                                     Year Ended March 31,
                                      -------------------------------------------------------------------------------
                                         1997              1996             1995*             1994            1993
                                      ----------        -----------      -----------       ----------      ----------
                                                             (in thousands, except per share data)
<S>                                    <C>             <C>                 <C>               <C>            <C>            
                                               
Income Statement Data:
   Sales                                $34,759            $38,348          $32,650           $26,623          $5,789
   Cost of Sales                         14,290             15,228           15,639            10,890           3,341
                                        -------            -------          --------          -------          -------
   Gross Profit                          20,469             23,120           17,011            15,733           2,448
   Depreciation                             (80)               (64)             (65)              (46)            (45)
   Selling & Administrative Expenses       (959)            (1,249)          (1,325)           (1,839)         (1,050)
   (Provision) Recovery for Doubtful
       Accounts                             289             (1,217)            (942)           (1,332)           (141)
   Financial Income (Expenses), net         (55)               (73)               2                58             (34)
   Other Income (Expenses), net            (595)            (2,518)             523              (71)              (9)
   Share of Losses of Associated
   Companies                                  -               (235)            (347)             (455)              -
   Reorganization Expenses                    -                  -           (1,603)                -               -
                                        -------            -------          --------           -------         -------
   Income Before Taxes                   19,069             17,764           13,254            12,048           1,169
   Income Taxes                           2,635              2,742            1,549             1,421             287
                                        -------            -------          --------           
   Net Income                            16,434             15,022           11,705            10,627             882
                                        -------            -------          --------           -------         -------
   Net Income Per Share                   0 .63              0 .58             0.45               .41             .03
                                        -------            -------          --------           -------         -------
   Dividends Per Share                        -                  -                -                38               -
                                        -------            -------          --------           -------         -------
   Weighted Average Shares               26,000             26,000           26,000            26,000          26,000
   Outstanding                          -------            -------          --------           -------         -------
Balance Sheet Data (At Period End)
   Working Capital (Deficit)            $55,784            $(8,048)         $19,910             $ 877         $(1,266)
   Total Assets                          73,282             53,773           33,343            17,529           6,086
   Long-term Liabilities                      0                 21              209               240             256
   Shareholders Equity                   57,516             40,713           25,691            12,383           3,035


</TABLE>

*    Fiscal 1995 results  include a  nonrecurring,  noncash  charge of $0.48 per
     share  ($12,500,000)  related to the reorganization  adjustments due to the
     reverse  merger in February 1995. The financial data is presented as if the
     reverse acquisition had been completed prior to April 1, 1991.



                                       7
<PAGE>



ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

1997 Versus 1996
----------------

Revenues

     Revenues  decreased by US$3,589,000 or 9.36% to US$34,759,000  for the year
ended March 31, 1997 from  US$38,348,000  for the prior year.  This  decrease is
principally  attributable to a 12.13%  reduction in sales of turn-key  projects.
Management intends to abandon the marketing and sale of small turn-key projects,
as this is a low margin business.  Management believes that the resources of the
Company can best be utilized by concentrating on the marketing and sale of large
turn-key  projects and  obtaining  economies of scale  thereon.  The decrease in
sales of turn- key projects was  partially  offset by a 25% increase in sales of
raw  materials.  The increase  reflects the strong demand for raw materials from
associated companies,  as such sales are considered a value-added service to the
customers of turn-key projects.

Cost of sales

     Cost of sales of turn-key projects includes the cost of machinery purchased
and the salaries and wages paid to engineers and consultants. For the year ended
March 31, 1997,  cost of sales as a percentage  of revenue on turn-key  projects
was 34.11%, as a percentage of revenue  virtually  unchanged from the 34.72% for
the prior year.

     Cost of sales of raw materials  increased by 26.5%, which corresponded with
the 25% increase in sale of raw materials to associated  companies.  However, in
total,  the  Company's  cost  of  sales  decreased  by  US$938,000  or  6.2%  to
US$14,290,000 for the year ended March 31, 1997 from US$15,228,000 for the prior
year. This reduction is attributable to larger rebates granted by suppliers.

Depreciation of Fixed Assets

     Depreciation  expense  increased by  US$16,000 or 25% to US$80,000  for the
year ended March 31, 1997 from  US$64,000  for the prior year.  The  increase in
depreciation  expense is the result of a change in accounting  policies  whereby
buildings  are  depreciated  over the  remaining  period of the 50 year lease as
opposed to the useful life of the building utilized in prior periods.

Selling and administrative expenses

     Selling and administrative expenses include salaries, commissions and other
direct  employment costs paid to the Company's sales  representatives  and other
professionals.  Selling and  administrative  expenses decreased by US$290,000 or
23.2% to US$959,000  for the year ended March 31, 1997 compared to  US$1,249,000
for the prior year.  This decrease was mainly due to  management's  streamlining
operational  procedures and increase  budgetary control.  Moreover,  the Company
minimized  its   commission   expenses  by  reducing   commissions  to  a  major
representative,  China Fujian  Foreign Trade Holdings  Limited.  The Company has
also reduced its auditing expense by approximately US$100,000.

Provision for doubtful debts and diminution in value of investment

     The  provision  for doubtful  debts and  diminution  in value of investment
decreased by US$1,506,000 or 120% to a recovery of US$289,000 for the year ended
March 31,  1997 from a  provision  of  US$1,217,000  for the  prior  year.  This
decrease is attributable  to a tightening of credit  procedures and the recovery
of US$290,000, which had previously been reserved.



                                       8
<PAGE>


Financial Income (Expense) Net

     Financial income (expense) is interest earned on cash and cash equivalents,
less interest expense.  Net financial expense decreased by US$18,000 or 24.7% to
US$(55,000)  for the year ended  March 31, 1997 from  US$(73,000)  for the prior
year.  This  decrease  is  attributable  to  tighter  controls  on cash  and the
curtailing of bank loans.

Other income/(expenses)

     Other  expenses  decreased by  US$1,923,000  or 76.4% to US$595,000 for the
year ended March 31, 1997 from US$2,518,000 for the prior year. This decrease is
principally  attributable  to a decrease of  US$1,228,000 in write-offs of short
term investments.

Share of losses of associated companies

     The associated  companies are primarily operated on a break-even basis. The
Company has no further  obligation to support the  associated  companies and the
losses  sustained  by  them.  During  1997,  the  Company  incurred   additional
diminutions in value from the remaining  interest in associated  companies which
reduced their carrying value to zero.  Therefore,  no share of  post-acquisition
losses was provided for the year ended March 31, 1997.

Income taxes

     Income taxes for the year ended March 31, 1997 were  US$2,635,000  or 13.8%
of pretax income.  This compares with US$2,742,000 or 15.4% of pretax income for
the prior year. The decrease is  attributable  to the  overaccrual of the tax on
Hong Kong profits tax for the prior period.

Net income

     Net income increased by US$1,412,000 or 9.4% to US$16,434,000  for the year
ended  March 31,  1997 from  US$15,022,000  for the prior  year.  This  increase
resulted from lower costs which were partially offset by lower revenues.

1996 versus 1995
----------------

Revenues

     Revenues  increased by US$5,698,000 or 17.45% to US$38,348,000 for the year
ended  December 31, 1996 from  US$32,650,000  for the prior year.  This increase
resulted from strong demand for both the Company's  products and services.  Sale
of  turn-key  projects  grew  by  35.11%,   reflecting  an  improving   economic
environment  in the People's  Republic of China (the "PRC") and strong demand by
manufacturers in the PRC to modernize their production facilities.

     Sale of raw materials decreased by 26.43% as management concentrated on the
sale of turn-key  projects  which produce  higher  margins.  It is the Company's
objective to generate  approximately  94% of its total  revenue from the sale of
turn-key  projects  and  the  remaining  6% of  revenues  from  the  sale of raw
materials. As of March 31, 1996, the Company has ceased selling steel.

Cost of sales

     Cost of sales of turn-key projects includes cost of machinery purchased and
the  salaries  and wages paid to  engineers  and  consultants.  Cost of sales of
turn-key projects was 34.72% as a percentage of revenue for the year ended March
31, 1996 or virtually unchanged from the 34.15% for the prior year.

     Cost of sales  (including  raw materials  sales) as a percentage of revenue
decreased  approximately 8% principally due to the decrease in the cost of sales
of raw materials and steel.



                                       9
<PAGE>


Depreciation of fixed assets

     Depreciation  expenses  decreased by US$1,000 or 1.5% to US$64,000  for the
year ended March 31, 1996 from US$65,000 for the prior year.

Selling and administrative expenses

     Selling and administrative expenses include salaries, commissions and other
direct  employment costs paid to the Company's sales  representatives  and other
professionals.  Selling and  administrative  expenses  decreased by US$76,000 or
6.1% to US$1,249,000 for the year ended March 31, 1996 from US$1,325,000 for the
prior year. This decrease  resulted from the efforts of management in streamling
operational  procedures  and  increasing  budgetary  control.  In addition,  the
Company reduced its commission expenses to a major representative,  China Fujian
Foreign Trade Holdings Limited.

Provision for doubtful debts and diminution in value of investment

     The  provision  for doubtful  debts and  diminution  in value of investment
increased by  US$275,000 or 29.2% to  US$1,217,000  for the year ended March 31,
1996 from US$942,000 for the prior year. This increase resulted from the Company
writing off all receivables  which had been  outstanding for one year or longer,
and a lump sum provision of  approximately  US$2,200,000 to reduce the remaining
receivables to net realizable value.

Financial Income (Expense) net

     Financial income (expense) is interest earned on cash and cash equivalents,
less  interest  expense.   Net  financial  expense  increased  by  US$75,000  to
(US$73,000)  for the year ended March 31, 1996 from US$2,000 for the prior year.
This increased  expense is  attributable to a decrease in interest earned as the
Company's cash was expended to finance its increased sales.

Other income/(expenses)

     Non-operating  income for the year ended March 31, 1996 consisted of a gain
on the disposal of short term investments of approximately US$2,348,000 compared
to US$360,000 for the prior year.

Share of losses of associated companies

     The share of losses of  associated  companies  decreased by  US$112,000  or
32.3% to US$235,000  for the year ended March 31, 1996 from  US$347,000  for the
prior  year.  This  decrease  is  principally  the result of a  redefinition  of
investment  strategy  and the  disposal of  interests  in most of the  Company's
associated companies.

Reorganization Expense

     For  the  year  ended  March  31,  1995,  the  Company  booked  a  loss  of
US$1,603,000  from its  reverse  merger  representing  the  losses  of the shell
company prior to the merger.  There was no  reorganization  expense for the year
ended March 31, 1996.

Income taxes

     Income taxes for the year ended March 31, 1996 were  US$2,742,000  or 15.4%
of pre-tax  income.  This compares with  US$1,549,000 or 11.7% of pre-tax income
for the prior  year.  This  increase  in  percentage  resulted  because a larger
percentage  of the  Company's  income was earned in Hong Kong which has a higher
effective tax rate than the PRC.

Net Income

     Net income increased by US$3,317,000 or 28.3% to US$15,022,000 for the year
ended  March 31,  1996 from  US$11,705,000  for the prior  year.  This  decrease
resulted from increased  revenues and the fact that there was no  reorganization
expense for the year ended December 31, 1996.



                                       10
<PAGE>


Liquidity and Capital Resources

     At March 31,  1997,  the  Company  had  working  capital of  US$55,784,000,
including a cash balance of  US$21,131,000.  This compares to a working  capital
deficit of US$8,048,000 and a cash balance of US$963,000 at March 31, 1996.

     Net cash provided by operating  activities  increased to US$20,131,000 from
US$414,000 used in operating activities for the prior year. The cash provided by
operating  activities  consisted  principally of  US$16,434,000 of net income, a
reduction in accounts due from  directors,  an increase in accounts  payable and
accrued liabilities, and an increase in income tax payable. These were partially
offset by an increase in accounts receivable.

     Net cash used in investing  activities  totaled US$2,000 for the year ended
March 31, 1997 compared to US$832,000  provided by investing  activities for the
prior year. In both years the Company had nominal purchases of fixed assets, but
in the prior year the Company had a net reduction of fixed bank deposits.

     Net cash provided by financing  activities  totaled  US$30,220 for the year
ended March 31,  1997.  Net cash  provided  by  investing  activities  consisted
principally of net borrowings  which were partially  offset by repayment of bank
loans and  repayment  of bank  overdrafts.  For the prior year the  Company  had
nominal cash provided by financing  activities as loan  repayments  approximated
borrowings.

     The Company's business has historically not been capital intensive. In most
years  internally   generated  funds  were  sufficient  to  fund  the  Company's
operations  and finance its growth.  While the cash  generated from earnings and
available lines of credit has historically provided sufficient liquidity to meet
ordinary capital  requirements,  the Company's  purchase of Wealthy Asia Limited
for US$52,000,000 and 40,000,000 shares has substantially depleted the Company's
cash reserves.  Accordingly,  the Company anticipates seeking additional debt or
equity financing during the next twelve months to cover its capital requirements
for its new agricultural genetics joint venture.

Impact of Inflation

     Inflation  has not been a major  factor  in the  Company's  business  since
inception. There can be no assurance that this trend will continue.  However, it
is anticipated that any increase in costs to the Company can be passed on to its
customers in the form of higher prices.

Certain Factors Affecting Certain Future Operating Results

a.   Revised Corporate Business

     In the past, the Company has been actively involved in the sale of turn-key
production  lines,  machinery and  equipment,  accessories,  spare parts and raw
materials.  The Company is now moving  away from this line of business  into the
provision of technology in agricultural  genetics and farming in China.  Because
of the Company's inexperience with this industry,  there is no guaranty that its
future  results  will  equal  those  of the  past or that  the  Company  will be
profitable in this industry.

b.   Dependence on Strategic Relationship

     The  Company  plans to conduct its future  operations  in the PRC with Feng
Ning Manchuria Autonomous Region Agriculture Company Limited and China Resources
Development Bureau. Any deterioration of this strategic  relationship could have
an  adverse  effect on the  future  operations  and  financial  position  of the
Company.

c.   Country Risk

     Substantially all of the Company's  operations are conducted in the PRC and
accordingly,  the Company is subject to special  considerations  and significant
risks not typically  associated  with  companies  operating in North America and
Western Europe. These include the risks associated with the political,  economic
and  legal  environments  and  foreign  currency  exchange,  among  others.  The
Company's  results  may be  affected  by,  among  other  things,  changes in the
political and social  conditions  in the PRC and changes in government  policies
with  respect  to  laws  and  regulations,   anti-inflation  measures,  currency
conversion  and  remittance  abroad and rates and methods of  taxation.  The PRC
government has implemented  economic reform policies in recent years,  and these
reforms  may be refined or changed  by the  government  at any time.  It is also
possible that a change in the PRC  leadership  could lead to changes in economic
policy.  In  addition,  a  substantial  portion  of the  Company's  revenues  is
denominated in renminbi,  which must be converted into other  currencies  before
remittance  outside  the PRC.  Both the  conversion  of the  renminbi  and other
foreign  currencies and remittance of foreign currencies abroad require approval
of the PRC government.



                                       11
<PAGE>

 
ITEM 7A. QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT MARKET RISK

     Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company are annexed to this Report as pages
F-2 through F-25. An index to such materials appears on page F-1.

                                    PART III

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     On December 22, 1997, the Company's  board of directors  selected  Blackman
Kallick Bartelstein LLP of Chicago,  Illinois,  as its certified accountants for
the year ended March 31, 1997 replacing  Ernst & Young of Hong Kong.  During the
preceding  two  years  and  the  subsequent   interim  periods  preceding  their
dismissal,  the Company had no disagreements  with the prior  accountants on any
matter of accounting  principles or practice,  financial statement disclosure or
auditing scope or procedure nor were there any qualifications on their opinions.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth the names and ages of the executive officers
of the Company and the position held by each.


        Name           Age                Title
--------------------  ------   -----------------------------------
Harry H.H. Ho           47     Chairman of the Board and Chief Executive Officer
Ji Jun Wu               59     Vice-Chairman of the Board
Jui Ping Ng             50     Director
Kim Young Soh           49     Director
Dr. Thian hor Teh       52     Vice-President and Director
Dr. Y Joseph Mo         50     Director
Lin Tao Ge              36     Director
Chan Kwai Chiu          39     Director
Eric Ng                 37     Secretary/Treasurer Chief Financial Officer and
                               Director



                                       12
<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

     The following table sets forth compensation paid or to be paid for services
rendered  during  the last  three  fiscal  years  by the  Company  to its  chief
executive  officer and the one remaining most highly paid executive  officer who
earn more than $100,000 for the three fiscal years ended March 31, 1997.


   Name of Individual            Year        Salary        Bonus        Other
--------------------------     ---------  ------------  ----------- ------------
Chan Kwai Chiu                   1995       130,680       10,880
                                 1996       143,000       11,900
                                 1997       155,870       12,990        129,366
Wong Yuen Ki                     1995       116,160        9,680
                                 1996       127,000       10,600
                                 1997       138,000       11,500        155,819

     No cash  compensation  was paid or  accrued  by the  Company  in  excess of
$100,000  for  any  other  executive  officer.  The  Company  does  not  provide
retirement,  pension, profit sharing or similar benefit programs or plans to its
officers.  The Company does not pay fees or other  compensation to its directors
for attending meetings or special assignments.

     Mr. Harry H.H. Ho is the Chairman of the Board and Chief Executive Officer.
He holds a degree in business studies from Nanyang University of Singapore and a
masters degree in business administration from East Asia University of Macau. He
has over 10 years of commercial experience in international trade,  particularly
in food  products.  In 1989 he  established  Megaway  Group which  markets food,
shipping and financing  services.  In the same year, he established Hua Tuo Guan
in Singapore to offer franchise services in Chinese and health foods. Since 1990
Mr. Ho has been involved in China Trade and in takeovers and  restructuring of a
number of Chinese enterprises.

     Mr. Ji Jun Wu is the  Vice-Chairman  of the Board and the  President of the
China  operations  of  Megaway  Group.  He  has  over  40  years  of  commercial
experience.  Since the PRC's  establishment of the open economy in the 1980's he
has been instrumental in the  establishment of over ten foreign  investments and
joint ventures in the PRC, including such  international  companies as Motorola,
NEC, IBM, AT&T,  Samsung and Yamaha.  In addition,  he has served as an official
Chinese government representative.

     Mr. Jui Ping Ng, Director,  is currently the Executive  Chairman of several
Singapore  companies,  namely,  Pac Asia Holdings,  August - Kennedy  Consulting
Group Pte Limited,  and Horizon  Technologies  International Pte Limited. He was
previously the Chief of Army of the Republic of Singapore from 1990-1991 and the
Chief of Defense from 1991-1995.

     Mr. Kim Young  Soh,  Director,  holds an  honorary  degree in  systems  and
engineering from Nanyang University of Singapore and a masters degree in systems
and  engineering  from the  University  of  Singapore.  He has over ten years of
commercial experience, working with international companies such as Siemens, SGS
Thomson,   Deltron   Automatics   Systems   and   Texas   Instruments   National
Semiconductors.  In 1992 he  established  Right  Holdings  Limited,  a Singapore
company  involved  in  property  development,  building  construction,  tourism,
electronic components, and general investments.

     Dr.  Thian hor Teh,  Vice  President  and  Director  joined the  Company in
January 1998 and will be responsible for  developing,  researching and supplying
technologies in agricultural genetics. He established  International Agriculture
Genetics,  Inc. in 1995 and serves as its president and chief executive officer.
He has more than 20 years of  experience  in the  research  and  development  of
agricultural   genetics  and  has  received   several  honors  for   outstanding
achievements for his research works.

     Dr. Y Joseph Mo,  Director,  holds a doctorate in  industrial  and physical
pharmacy from Purdue  University.  Prior to joining the Company,  he held senior
executive and directorship positions in various international  companies such as
NexMed,  Inc.;  Greenwich  Pharmaceuticals,   Inc.;  Johnson  &  Johnson,  Rorer
Pharmaceuticals, Smith Kline Pharmaceuticals and Beechman Products.



                                       13
<PAGE>


     Mr. Lin Tao Ge, Director, is also the Managing Director of Xin Yi Tong, the
joint  distributor  of credit  cards for the  International  Commercial  Bank of
China,  which has over five million  members  throughout the major cities of the
PRC. He is also involved with Shandong  Universal  Biohealth  Limited, a company
with a  diversified  market in the PRC for the sale of biotech and  agricultural
related products.

     Mr.  Chan  Kwai  Chiu,  Director,  has over 16 years of  experience  in the
plastic  products  industry,  including  10 years of  experience  in the design,
installation  and management of plastic related  production  lines. He has high-
level  relationships  with government  planning  agencies  commissioned for free
enterprise projects in China at the provincial level and with the authorities of
"city" level planning agencies.

     Mr. Eric Ng,  Secretary/Treasurer,  Chief  Financial  Officer and Director,
joined the Company in 1992 and is responsible for the financial  strategy of the
Company. Prior to joining the Company he was a manager at KPMG Peat Marwick Hong
Kong and is a member of the Chartered Association of Certified Accountants and a
manager of Dynamic Holdings Limited (a listed company in Hong Kong).  During his
tenure  at  KPMG  Peat  Marwick,  he was  responsible  for  various  merger  and
acquisitions  of  listed  companies  in  Hong  Kong.  He has  over 10  years  of
experience in auditing, finance and administration.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of April 30, 1998 the number of shares of
the  Company's  Common  Stock  known to be held by the  Executive  Officers  and
Directors,  individually,  and as a group, and by beneficial owners of more than
five percent of the Company's Common Stock.

<TABLE>

                                                                  Amount and Nature of
                                               ---------------------------------------------------------
                                                Beneficial Ownership                                    
Name and Address (1)  of Beneficial Owner              Shares                      Percentage of Class
-------------------------------------------    -------------------------         -----------------------
<S>                                               <C>                           <C>    
Chan Kwai Chiu                                        9,100,000                           36.28%
Wong Yuen Ki                                          2,600,000                           10.37%
Dynasty Asia Worldwide Limited (2)                    2,600,000                           10.37%
Nanking International Limited                         2,600,000                           10.37%
Land Cheer Investment Limited (2)                     2,600,000                           10.37%
All officers and directors as a group (one)          14,300,000                           55.00%
                                              ==========================         ========================

</TABLE>


(1)  Address for all persons and  entities is  1801-1806  Hua Qin  International
     Building, 340 Queen's Road, Central Hong Kong.

(2)  Owned 100% by Chan Kwai Chiu.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION

     The Company's  amounts due from/(to)  directors and related companies owned
and/or  controlled by a director,  Chan Kwai Chiu, are unsecured,  interest-free
and are repayable on demand.

     In the normal course of business,  some of the companies are engaged in the
set-up of automatic production lines on a turn-key basis for its joint ventures.
Other than the above-mentioned transactions,  the companies also arrange for the
sale of raw  materials  to these joint  ventures.  Amounts of revenues  from the
sales of raw materials to these joint ventures are summarized as follows:


                                             Year Ended March 31,
                            ----------------------------------------------------
                               1995              1996                   1997
                            -----------      -------------          ------------
Sales to joint ventures:
         Raw materials     US$2,884,888       US$2,038,214          US$2,548,484

The unrealized  profits arising from these  transactions  were eliminated in the
consolidated  financial  statements to the extent of the Company's  interests in
these joint ventures.



                                       14
<PAGE>


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTING ON FORM 8-K

(a)  Exhibits

     Exhibit 27.1 Financial Data Schedule

(b)  Reports on Form 8-K

     None


                                   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.

                                       CHINA CONTINENTAL, INC.


                                       By:
                                          ----------------------------------
                                          Harry H.H. Ho
                                          Chairman of the Board and Chief 
                                          Executive Officer

Dated: May 14, 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.



   Signature                       Title                                Date
------------------               ----------                          ----------



----------------------        Chairman of the Board and Chief                  
Harry H.H. Ho                 Executive Officer                     May 14, 1998


----------------------                                                         
Ji Jun Wu                     Vice-Chairman of the Board            May 14, 1998


----------------------                                                         
Jui Ping Ng                   Director                              May 14, 1998


----------------------                                                         
Kim Young Soh                 Director                              May 14, 1998


----------------------                                                         
Dr. Thian hor Teh             Vice-President and Director           May 14, 1998


----------------------                                                         
Dr. Y Joseph Mo               Director                              May 14, 1998


----------------------                                                         
Lin Tao Ge                    Director                              May 14, 1998


----------------------                                                         
Chan Kwai Chiu                Director                              May 14, 1998


----------------------        Secretary/Treasurer Chief Financial   May 14, 1998
Eric Ng                       Officer and Director





                                       15
<PAGE>

 


                        Consolidated Financial Statements

                    CHINA CONTINENTAL, INC. AND SUBSIDIARIES

        March 31, 1996 and 1997 CHINA CONTINENTAL, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
                                                                          Pages
                                                                         -------

    Report of independent auditors                                         F-2

    Consolidated statements of income                                      F-3

    Consolidated statements of changes in shareholders' equity             F-4

    Consolidated balance sheets                                            F-5
 
    Consolidated statements of cash flows                           F-6 to F-7

   Notes to consolidated financial statements                       F-8 to F-25








                                      F - 1


<PAGE>


REPORT OF INDEPENDENT AUDITORS




To the Board of Directors and the Stockholders
China Continental, Inc.


We  have  audited  the   accompanying   consolidated   balance  sheet  of  China
Continental, Inc. (the "Company") and subsidiaries (collectively the "Group") as
of March 31, 1997, and the related consolidated statements of income, changes in
shareholders'  equity and cash flows for the year then  ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit. The financial statements of the Company for the years ended March 31,
1996 and 1995,  were audited by other  auditors  whose  report,  dated April 18,
1997, expressed an unqualified opinion on those financial statements.

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

In our opinion,  the consolidated  financial statements for the year ended March
31, 1997,  referred to above,  present  fairly,  in all material  respects,  the
consolidated  financial position of China Continental,  Inc. and subsidiaries as
of March 31, 1997, and the  consolidated  results of their  operations and their
cash  flows  for the year  then  ended in  conformity  with  generally  accepted
accounting principles in the United States of America.



                                   Blackman Kallick Bartelstein LLP




Chicago, Illinois
April 2, 1998

                                      F - 2


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended March 31, 1995, 1996 and 1997


<TABLE>

                                                                      Year ended March 31,
                                                  ----------------------------------------------------------
                                       Notes       1995             1996              1997             1997
                                                    HK$              HK$               HK$              US$
                                                  ------           -------           ------           ------
<S>                                    <C>      <C>            <C>                 <C>            <C>    

SALES
   Related parties                     21       22,300,181       15,755,398        19,699,783       2,548,484
   Others                                      232,367,091      283,360,453       248,984,457      32,210,150
                                              -------------    -------------     -------------    ------------
                                               254,667,272      299,115,851       268,684,240      34,758,634

COST OF SALES                                 (121,983,761)    (118,777,918)     (110,460,697)    (14,289,870)
                                              -------------    --------------                     ------------
-----------------
GROSS PROFIT                                   132,683,511      180,337,933       158,223,543      20,468,764
 
DEPRECIATION OF FIXED ASSETS                      (506,690)        (495,989)         (620,313)        (80,248)

SELLING AND ADMINISTRATIVE
 EXPENSES                                      (10,335,518)     ( 9,744,449)       (7,413,213)       (959,019)
(PROVISION) RECOVERY FOR
  DOUBTFUL DEBTS                                (7,346,635)      (9,489,774)        2,238,844         289,631

FINANCIAL INCOME/(EXPENSES),
 NET                                   4            15,249         (566,408)         (425,759)        (55,079)
 
OTHER INCOME/(EXPENSES),
NET                                    5         4,081,627      (19,642,756)       (4,597,305)       (594,735)

SHARE OF LOSSES OF ASSOCIATED
COMPANIES                              12       (2,708,969)     ( 1,835,000)                -               -

REORGANIZATION EXPENSES                6       (12,500,000)               -                 -               -
                                               ------------    -------------     -------------    ------------

INCOME BEFORE INCOME TAXES                     103,382,575      138,563,557        147,405,797     19,069,314

INCOME TAXES                           7       (12,080,000)     (21,393,062)       (20,372,118)    (2,635,462)
                                               ------------    -------------     --------------   ------------

NET INCOME                                      91,302,575      117,170,495        127,033,679     16,433,852
                                               ------------    -------------     --------------   ------------
EARNINGS PER SHARE                 3(j), 24           3.51             4.51               4.89            .63
                                               ------------    -------------     --------------   ------------
</TABLE>


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

                                      F - 3


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


For the years ended March 31, 1995, 1996 and 1997

<TABLE>
                                                        Additional 
                                Note       Share        paid-in       Retained 
                                           capital      capital       earnings          Total 
                                           HK$           HK$          HK$                HK$
                                          ---------    -----------   -----------      ----------
<S>                            <C>       <C>           <C>           <C>             <C>    

Balance at April 1, 1994                  202,800       856,985      95,529,317       96,589,102
Net income                                      -             -      91,302,575       91,302,575
Reorganization expenses         6               -    12,500,000               -       12,500,000
                                        -----------  ------------   ------------     ------------
Balance at March 31, 1995                 202,800    13,356,985     186,831,892      200,391,677

Net income                                      -             -     117,170,495      117,170,495
                                        -----------  ------------   ------------     -------------
Balance at March 31, 1996                 202,800    13,356,985     304,002,387      317,562,172
Net income                                      -             -     127,033,679      127,033,679
                                        -----------  ------------   ------------     -------------
Balance at March 31, 1997                 202,800    13,356,985     431,036,066      444,595,851


</TABLE>


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



                                       F-4


<PAGE>




CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 1996 and 1997
<TABLE>

                                                  Notes            1996              1997         1997
                                                                    HK$               HK$          US$
                                                                -----------       ---------     ---------
<S>                                               <C>            <C>            <C>            <C>    

ASSETS

CURRENT ASSETS
Cash and bank balances                                          7,508,606       163,341,939    21,130,911
Trade receivables, net of provisions of
  HK$13,145,891 in 1996 and HK $8,602,321
  in 1997                                          8           10,478,028       100,777,180    13,037,151
Prepayments, deposits and other receivables,
  net of provisions of HK$7,157,636 in 1996
  and HK$4,898,213 in 1997                         9            3,074,749         3,382,296       437,555
Short term  investments, net of provisions of
  0 in 1996 and $17,000,000 in 1997                10                   -       267,600,000    34,618,370
Amounts due from directors                         21             773,115                 -             -
Amounts due from related companies                 21          17,095,831        17,983,640     2,326,473
                                                              ------------     -------------   ------------
TOTAL CURRENT ASSETS                                           38,930,329       553,085,055    71,550,460

FIXED ASSETS                                       11           4,699,452         4,094,219       529,653
INTERESTS IN ASSOCIATED COMPANIES                  12           5,825,859         2,292,154       296,527
FIXED BANK DEPOSIT                                                      -                 -             -
LONG TERM RECEIVABLE                                          248,798,243                 -             -
OTHER RECEIVABLE, net of provisions of
  HK$17,000,000 in 1996 and 0 in 1997              13         113,000,000                 -             -
OTHER ASSETS                                                    8,177,240         7,000,000       905,563
                                                              ------------     -------------    -----------

TOTAL ASSETS                                                  419,431,123       566,471,428    73,282,203
 
LIABILITIES AND STOCKHOLDERS'
  EQUITY

CURRENT LIABILITIES
Bank overdrafts                                    14            676,889                 -              -
Bank import loans                                  14          5,673,880         8,063,170      1,043,101
Bank loans                                         14          1,478,799                 -              -
Income taxes payable                                          45,823,523        64,279,294      8,315,562
Amounts due to directors                           21            516,956         6,042,857        781,741
Amounts due to related companies                   21          5,647,887         5,847,659        756,489
Accounts payable and accrued liabilities                      41,887,813        37,642,597      4,869,676
                                                             ------------      ------------    ------------
TOTAL CURRENT LIABILITIES                                    101,705,747       121,875,577     15,766,569

DEFERRED TAXATION                                   7            163,204                 -              -
                                                             -------------     ------------    ------------

TOTAL LIABILITIES                                            101,868,951       121,875,577     15,766,569

CONTINGENCIES AND
  COMMITMENTS                                      22

STOCKHOLDERS' EQUITY
Common stock, par value
  US$0.001 per share:  Authorized:
  1,000,000,000 shares; Issued and
  outstanding: 26,000,000 shares                   15            202,800           202,800          26,236
Additional paid-in capital                         15         13,356,985        13,356,985       1,727,941
Retained earnings                                            304,002,387       431,036,066      55,761,457
                                                           --------------      -------------   -------------

TOTAL STOCKHOLDERS'
  EQUITY                                                     317,562,172       444,595,851      57,515,634
                                                           --------------      -------------  --------------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                                       419,431,123       566,471,428      73,282,203
 

</TABLE>

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

                                      F - 5

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended March 31, 1995, 1996 and 1997

<TABLE>


                                                                     Year ended March 31,
                                                   ---------------------------------------------------------
                                                    1995             1996              1997            1997
                                                     HK$              HK$               HK$             US$
                                                   -------          -------           ------          -------
<S>                                               <C>               <C>              <C>              <C>  
CASH FLOWS FROM OPERATING
  ACTIVITIES:
Net income                                       91,302,575       117,170,495       127,033,679       16,433,852
Adjustments to reconcile net income to
 net cash provided by/(used in) operating
 activities:
  Reorganization expenses                        12,500,000                -                 -                 -
  Gains on disposal of fixed assets                (321,958)               -          (163,204)          (21,113)
  Depreciation                                      506,690          495,989           620,313            80,248
  Provision for doubtful debts and
   diminutions in values of
   investments and associated companies           7,346,635       30,414,857           869,710           112,511
  Share of losses of associated companies         2,708,969        1,835,000                 -                 -
  Gains on disposal of short term
   investments                                   (2,785,120)      (1,145,013)                -                 -
 Decrease/(increase) in assets:
 Trade receivables and long term receivable    (136,808,993)    (196,043,403)      (13,182,571)       (1,705,379)
 Prepayments and deposits                        (4,375,553)       5,682,771          (307,547)          (39,786)
 Amounts due from related companies             (14,574,550)         926,388          (887,809)         (114,852)
 Amounts due from/to directors                    8,292,681        1,473,073         9,988,570         1,292,182
 Amounts due from associated companies            9,362,537       (1,250,592)         (702,335)          (90,858)
 Increase/(decrease) in liabilities:
 Amounts due from joint venture companies        (3,686,067)        (241,427)                -                 -
 Amounts due to related companies                  (386,607)        (221,846)          199,772            25,844
 Accounts payable and accrued liabilities        16,032,848       16,600,556        13,690,462         1,771,082
 Income taxes payable                            11,765,325       21,077,767        18,455,771         2,387,551
                                               --------------   --------------    --------------    -------------
Net cash provided by/(used in)
 operating activities                            (3,120,588)      (3,225,385)      155,614,811        20,131,282
                                               --------------   --------------    --------------    -------------

</TABLE>

 

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

                                      F - 6


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the years ended March 31, 1995, 1996 and 1997

<TABLE>

                                                                       Year ended March 31,
                                                   ---------------------------------------------------------
                                                     1995             1996              1997           1997
                                                      HK$              HK$               HK$            US$
                                                   --------         -------           --------        -------     
<S>                                               <C>              <C>               <C>               <C>    
CASH FLOWS PROVIDED BY/(USED IN)
  INVESTING ACTIVITIES
  Purchase of fixed assets                       (1,309,038)        (1,900)           (15,080)         (1,951)
  Reduction/(addition) of fixed
  bank deposit                                   (6,494,181)     6,494,181                  -               -
  Dividend income reinvested in
  other assets                                     (618,240)             -                  -               -
  Purchase of other assets                         (254,744)             -                  -               -
  Proceeds from disposal of fixed assets            399,997              -                  -               -
  Proceeds from disposal of short term
  investments                                    16,000,000              -                  -               -
                                                -------------    ------------       ------------   -----------
Net cash provided by/(used in)
  investing activities                            7,723,794      6,492,281            (15,080)         (1,951)
                                                -------------    ------------       ------------   ------------
CASH FLOWS PROVIDED BY/(USED IN)
  FINANCING ACTIVITIES
  Dividends paid                                (10,000,000)             -                  -               -
  Net borrowings/(repayments) under
  bank import loans                               1,208,086        (94,137)         2,389,290         309,093
  Repayments of bank loans                         (210,914)      (222,403)        (1,478,799)       (191,306)
  Advances (repayments) of bank overdrafts          357,437        319,452           (676,889)        (87,567)
                                                -------------   -------------     --------------   ------------
Net cash provided by/(used in)
  financing activities                           (8,645,391)         2,912            233,602          30,220
                                                -------------   -------------     --------------   ------------
NET (DECREASE)/INCREASE IN
  CASH AND CASH EQUIVALENTS                      (4,042,185)     3,269,808        155,833,333      20,159,551

Cash and cash equivalents, at beginning
  of year                                         8,280,983      4,238,798          7,508,606         971,360
                                                -------------   -------------     --------------   ------------
Cash and cash equivalents, at end of year         4,238,798      7,508,606        163,341,939      21,130,911


SUPPLEMENTARY CASH FLOWS
  DISCLOSURES:
  Interest paid                                     374,115        930,130            469,392          60,723
  Income taxes paid                                 314,675        882,259          2,079,551         269,023


</TABLE>

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


                                      F - 7


<PAGE>

 CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND PRINCIPAL ACTIVITIES

     China Continental,  Inc. (the "Company") was incorporated under the laws of
     Utah, the United States of America and its principal activity is investment
     holding.

     On  February  21,  1995,  the  Company  acquired  all  of  the  issued  and
     outstanding  shares,  pursuant to the Reorganization as defined thereafter,
     of Sun's  International  Holdings Limited ("Sun's  International"),  by the
     issue of an  aggregate  of  22,750,000  shares of common  stock,  par value
     US$0.001   each,  of  the  Company  (the  "Reverse   Acquisition").   Sun's
     International was incorporated under the laws of the British Virgin Islands
     on January 19, 1994 and its principal activity is investment holding.  This
     transaction has been treated as a recapitalization  of Sun's  International
     as if  Sun's  International  is  the  acquirer.  The  historical  financial
     statements prior to February 21, 1995 are those of Sun's International.

     Concurrently, the Company changed its fiscal year end date to March 31.

     The consolidated  financial  statements include the accounts of the Company
     and its wholly owned subsidiaries,  Billion Pearl Investments Limited, High
     Glad  Industries  Limited,   Prime  Hill  Investment  Limited,  Prime  View
     Industrial Limited,  Danbury Inc., Winkler Holdings Inc., Cathay Mercantile
     (Overseas)   Limited   ("Cathay")  and  Gain  Whole  Limited   (hereinafter
     collectively together with the Company referred to as the "Group").

     Billion Pearl Investments Limited, High Glad Industries Limited, Prime Hill
     Investment  Limited and Prime View Industrial Limited are primarily engaged
     in the sale of automatic  production  lines on a turn-key  basis to various
     customers in the People's  Republic of China (the "PRC").  These  companies
     have also made  investments  in PRC  enterprises  through the  formation of
     joint ventures with various PRC parties.  Danbury Inc. and Winkler Holdings
     Inc. provide consulting and management services to the customers as well as
     to other group companies.  Cathay, through the formation of joint ventures,
     has  invested  in  property  development.  Gain Whole  Limited's  principal
     activity is the holding of a certificate of deposit.

     In the opinion of the Company's management,  the Reorganization constitutes
     a reorganization  under common control and subsequent to which the ultimate
     control of the Company's  subsidiaries  remains  substantially  the same as
     before the Reorganization.





                                      F - 8


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   BASIS OF PRESENTATION

     The consolidated financial statements of the Group have been prepared based
     on the historical  financial statements of the Company and its subsidiaries
     for the years presented in these financial statements and to give effect to
     the  Reverse  Acquisition  and the  Reorganization  as set out in note 1 to
     these consolidated  financial  statements as if the Reverse Acquisition and
     the Reorganization had been completed on April 1, 1993.

     The  consolidated  financial  statements  are prepared in  accordance  with
     generally  accepted  accounting  principles in the United States of America
     ("US  GAAP").  This  basis of  accounting  differs  from  that  used in the
     statutory  financial  statements of the subsidiaries in Hong Kong which are
     prepared in accordance with the accounting principles generally accepted in
     Hong Kong.

     The following  material  adjustments  were made to present the consolidated
     financial statements to conform with US GAAP:

-    reversal of the revaluation surplus, and the related depreciation,  arising
     from the revaluation of leasehold land and buildings.


3    . SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

     (a) Basis of consolidation 
        -------------------------

     The consolidated  financial  statements of the Company include the accounts
     of the Company and its  subsidiaries.  The results of the  subsidiaries for
     the  years  are  consolidated  as if the  Reorganization  and  the  Reverse
     Acquisition had been completed on April 1, 1993. All material  intercompany
     balances and transactions have been eliminated on consolidation.

     (b) Associated companies 
        -----------------------

     An associated company is a company, not being a subsidiary,  over which the
     Group is in a position to exercise significant influence.

     The Group's share of the  post-acquisition  results of associated companies
     is  included  in the  consolidated  statements  of income  under the equity
     method of  accounting.  The Group's  interests in associated  companies are
     stated in the consolidated balance sheets at cost plus the Group's share of
     the   associated   companies'   post-   acquisition   results  and  capital
     transactions,  less any provisions for other than temporary  diminutions in
     values.



                                      F - 9


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 1997

3.   SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)

     (c) Short term investments 
         -----------------------

     Short term  investments  are stated at the lower of cost and net realizable
     value.

     (d) Cash and cash equivalents
         ---------------------------

     The Group  considers cash and cash  equivalents to include cash on hand and
     demand  deposits  with banks with original term to maturity of three months
     or less at the date of acquisition.

     At March 31,  1996 and 1997,  cash and cash  equivalents  included  foreign
     currency  deposits  equivalent to HK$13,802  (US$1,769) and  HK$160,757,415
     (US$20,796,561), respectively.

     (e) Fixed assets and depreciation 
         ------------------------------

     Fixed assets are stated at cost less accumulated depreciation. Depreciation
     of fixed assets is calculated on the  straight-line  basis to write off the
     cost less estimated  residual value of each asset over its estimated useful
     life. The principal annual rates used for this purpose are as follows:

             Leasehold land and buildings         2.5%
             Furniture and fixtures                20%
             Office equipment                      20%
             Motor vehicles                        20%

     (f) Income taxes 
         -------------

     Income  taxes are  determined  under the  liability  method as  required by
     Statement of Financial  Accounting Standard No. 109, "Accounting for Income
     Taxes".

     (g) Foreign currency translation 
         -----------------------------

     Foreign  currency  transactions   denominated  in  foreign  currencies  are
     translated  into Hong Kong  dollars  ("HK$") at the  respective  applicable
     rates of exchange.  Monetary assets and liabilities  denominated in foreign
     currencies  are translated  into HK$ at the applicable  rate of exchange at
     the balance sheet date. The resulting exchange gains or losses are credited
     or charged to the statements of income.

     Translation of amounts from HK$ into United States dollars  ("US$") for the
     convenience  of the reader has been made at the single  rate of exchange on
     March 31, 1997 of US$ 1.00 : HK$7.73.  No  representation  is made that the
     HK$ amounts could have been, or could be,  converted  into US$ at that rate
     on March 31, 1997 or at any other date.

     The joint ventures maintain their books and accounting  records in Renminbi
     (the "RMB").  For the purpose of  accounting  for the Group's  attributable
     interests  in the net assets and  results  of the joint  ventures,  the RMB
     financial  statements of the associated  companies were translated into HK$
     using the  current  rate  method  whereby  all assets and  liabilities  are
     translated  into HK$ at the applicable  rate of exchange  prevailing at the
     balance  sheet  date as quoted by the  People's  Bank of China.  Income and
     expense  items  were  translated  at the  average  rates as  quoted  by the
     People's Bank of China.

 
                                      F-10


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)

     (g) Foreign currency translation (continued)
         ----------------------------------------

     Gains and losses  resulting from the changes in exchange rates from year to
     year were reported separately as a component of shareholders' equity.

     (h) Revenue recognition 
         --------------------

     Revenue from the sale of machinery  and  equipment is  recognized  when the
     machinery and equipment are delivered to the customer.

     Revenue from the sale of the production line on a turn-key basis,  which is
     normally completed within a period of eight to twelve months, is recognized
     in full  in the  year  when  the  installation  of the  production  line is
     completed.  The  installation of a production  line is considered  complete
     when all the significant costs have been incurred and all the machinery and
     equipment for the production line have been delivered and installed.

     Revenue for the provision of design,  training and consultancy  services is
     recognized when service is rendered.

     (i) Retirement benefits 
         --------------------

     The  Group   participates  in  a  defined   contribution   retirement  plan
     administered by an insurance  company (the  "Retirement  Plan").  All staff
     (except  for PRC staff and  directors  of the  Company)  covered  under the
     Retirement Plan are entitled to a monthly  pension,  borne by the insurance
     company,  upon their retirement equal to a fixed proportion of their ending
     salary  amount  as at  their  retirement.  The  Group is  required  to make
     contributions to the Retirement Plan at a rate of 5% of the salaries of its
     existing  staff,  and  is not  responsible  for  any  payments  beyond  the
     contributions to the Retirement Plan as noted above. The retirement benefit
     contributions  are  charged to the  statements  of income as  services  are
     provided.

     Contributions  made to the retirement plan during the years ended March 31,
     1995, 1996 and 1997 were HK$52,955, HK$26,306, and HK$32,375, respectively.

     (j) Earnings per share 
         -------------------

     Earnings  per share is based on the number of  26,000,000  shares of common
     stock outstanding as if the Reverse Acquisition had been completed at April
     1, 1993.

     (k) Dividends per share 
         --------------------

     Dividends  per  share  is  based  on  26,000,000  shares  of  common  stock
     outstanding  as if the Reverse  Acquisition  had been completed at April 1,
     1993.

     (l) Use of estimates 
         -----------------

     The preparation of consolidated  financial statements in conformity with US
     GAAP requires  management to make estimates and assumptions that affect the
     amounts reported in the consolidated  financial statements and accompanying
     notes. Actual results could differ from those estimates.

                                     F - 11


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)

     (m) New Accounting Pronouncements 
         ------------------------------

     In February 1997, the Financial  Accounting Standards Board ("FASB") issued
     SFAS No. 128,  "Earnings Per Share." SFAS No. 128  simplifies the standards
     for computing earnings per share and is effective for financial  statements
     for both interim and annual  periods  ending after  December 15, 1997.  The
     amount  reported as earnings  per share for the year ended March 31,  1997,
     would not be different  than that which would have been  reported for basic
     and diluted earnings per share in accordance with SFAS No. 128.

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
     Income."  SFAS No. 130  establishes  standards for reporting and display of
     comprehensive income and its components in the financial  statements.  SFAS
     No. 130 is effective for fiscal years  beginning  after  December 15, 1997.
     The  Company  is in  the  process  of  evaluating  the  specific  reporting
     requirements of SFAS No. 130; however, it believes the adoption of SFAS No.
     130 would  have had no  impact on the  Company's  consolidated  results  of
     operations, financial position or cash flows.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
     an Enterprise and Related  Information." SFAS No. 131 establishes standards
     for the way that  public  business  enterprises  report  information  about
     operating  segments in annual financial  statements and requires that those
     enterprises report selected information about operating segments in interim
     financial reports issued to shareholders. It also establishes standards for
     related  disclosures  about products and services,  geographic  areas,  and
     major  customers.  SFAS No. 131 is effective for financial  statements  for
     fiscal years  beginning  after  December  15,  1997.  The Company is in the
     process of evaluating the disclosure requirements of SFAS No. 131; however,
     it believes  that its adoption  will have no material  impact on its future
     disclosure requirements.






                                      F-12


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   FINANCIAL INCOME/(EXPENSES), NET

<TABLE>
                                                                       Year ended March 31,
                                                             ----------------------------------------
                                                               1995              1996          1997
                                                               HK$               HK$           HK$
                                                             -------           --------      --------
<S>                                                         <C>                 <C>          <C>

         Interest income                                     512,148           435,828        149,011
         Interest expenses                                  (374,115)         (930,130)      (469,392)
         Bank charges                                       (122,784)          (72,106)      (105,378)
                                                           -----------        ----------    ----------- 
                                                              15,249          (566,408)      (425,759)

</TABLE>


5.      OTHER INCOME/(EXPENSES), NET
 
<TABLE>

                                                                      Year Ended March 31,
                                                            -----------------------------------------
                                                               1995              1996          1997
                                                               HK$               HK$            HK$
                                                            --------           --------       -------
         <S>                                                <C>              <C>            <C>    

         Commission and miscellaneous income                 273,475           66,674        369,836
         Foreign exchange gains/(losses), net                 82,834           70,640        446,139
         Dividend income                                     618,240                -              -
         Associated companies written off                          -       (4,995,117)    (4,236,040)
         Short term investments written off                        -      (10,671,560)    (1,177,240)
         Other assets written off                                  -       (5,258,406)             -
         Gains on disposal of short term investments       2,785,120        1,145,013              -
         Gains on disposal of fixed assets                   321,958                -              -
                                                          ------------     ------------    -----------
                                                           4,081,627      (19,642,756)    (4,597,305)


</TABLE>

6.   REORGANIZATION EXPENSES

     In  conjunction  with  the  Reverse  Acquisition  in  1995  (See  Note  1),
     reorganization   expenses  were  incurred  which  reduced  net  income  and
     increased  paid-in capital by  HK$12,500,000.  This amount  represented the
     fair value of 12.5% of Sun's International  received by the existing common
     stock shareholders of the Company, prior to the Reverse Acquisition.




                                     F - 13


<PAGE>



CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   INCOME TAXES

     The companies in the Group operate in several jurisdictions and are subject
     to taxes in those  jurisdictions.  Details  of the  related  provision  for
     income taxes are as follows:
 
                                                  Year ended March 31,
                                           -------------------------------------
                                              1995           1996         1997
                                              HK$            HK$           HK$
                                            --------      --------      --------
   Income/(loss) before income taxes:
       Hong Kong                           (70,094)    (22,438,260)     507,446
       PRC                             103,452,669     161,001,817  146,898,351
                                      -------------   ------------  ------------
                                       103,382,575     138,563,557  147,405,797

     Income tax provision:
      Current:
       Hong Kong                        2,980,000       1,879,812      (169,634)
       PRC                              9,100,000      19,513,250    20,704,956
                                      ------------   -------------   -----------
                                       12,080,000      21,393,062     20,535,322

      Deferred                                  -               -      (163,204)
                                      ------------   ------------    -----------
                                       12,080,000      21,393,062    20,372,118


     It is management's intention to reinvest all the income attributable to the
     Company earned by its operations outside the United States. Accordingly, no
     United States  corporate income taxes have been provided in these financial
     statements.

     Under the current law of the British  Virgin  Islands,  any  dividends  the
     Group will  distribute  in the future,  and capital  gains arising from the
     Group's  investments  are not subject to income tax in the  British  Virgin
     Islands.

     Those companies  carrying on business in Hong Kong are subject to Hong Kong
     profits  tax on their  income  arising in or  derived  from Hong Kong after
     adjusting  for  income  and  expense  items  which  are not  assessable  or
     deductible  for profits tax  purposes.  As such,  current  income taxes are
     calculated  at a  statutory  tax rate of 16.5% on their  estimated  taxable
     income for the year.

     Companies with operations in the People's Republic of China (the "PRC") are
     also subject to PRC income tax for income on services rendered therein. The
     applicable  effective tax rate for income derived from services rendered in
     that jurisdiction is approximately 8.5%.

     At March 31, 1996 and 1997,  income tax payables  included foreign currency
     payables  equivalent to  HK$37,863,250  (US$4,854,263),  and  HK$61,325,206
     (US$7,933,403), respectively.



                                     F - 14


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   INCOME TAXES (continued)

     A  reconciliation  between the actual  income tax expense and income  taxes
     computed by applying the statutory Hong Kong tax rates to the income before
     income taxes is as follows:

<TABLE>

                                                                    Year ended March 31,
                                                          ----------------------------------------
                                                             1995           1996           1997
                                                             HK$             HK$             HK$
                                                          ---------      ---------        --------
<S>                                                      <C>             <C>            <C> 
Statutory Hong Kong tax rates                                 16.5%          16.5%           16.5%

Computed expected tax expense                           17,058,125     22,862,987      24,321,957
Decrease resulting from PRC tax
 at a lower composite tax rate                          (8,168,175)    (7,052,050)     (4,587,807)
Adjustments for expense items which are not
  deductible for profits tax purposes:
   Share of loss in and provisions for diminutions
   in values of associated companies                       446,980      1,126,969         326,135
   Provisions for diminutions in values
     of investments                                              -      2,628,444               -
   Other provisions                                        662,269      1,565,813               -
   Disposal of short term investments                            -       (188,927)              -
   Reorganization expenses                               2,062,500              -               -
Others                                                      18,301        449,826         311,833
                                                       ------------   -------------    -----------
                                                        12,080,000     21,393,062      20,372,118

</TABLE>


Deferred  taxes  mainly  represent  temporary  differences  on the  allowance of
doubtful debts,  elimination of unrealized profits and accelerated  depreciation
allowance.

 




                                     F - 15


<PAGE>


 
CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   INCOME TAXES (continued)

     Undistributed  earnings of the Company's non U.S.  subsidiaries amounted to
     HK$431,036,066 at March 31, 1997.  Because those earnings are considered to
     be indefinitely  invested,  no provision for United States corporate income
     taxes on those  earnings  has been  provided.  Upon  distribution  of those
     earnings  in the form of  dividends  or  otherwise,  the  Company  would be
     subject to United  States  corporate  income taxes.  Unrecognized  deferred
     United  States  corporate  income  tax in  respect  of these  undistributed
     earnings as at December 31, 1997 was approximately HK$147,000,000.

8.   TRADE RECEIVABLES, NET

                                                      As of  March 31,
                                                ------------------------------
                                                  1996                 1997
                                                   HK$                  HK$
                                                ----------          ----------

Trade receivables                               23,623,919         109,379,501
Less: Provision for doubtful debts             (13,145,891)         (8,602,321)
                                               -------------       -------------
 
Trade receivables, net                          10,478,028         100,777,180

Movements in provision for doubtful debts:
 Balance as at beginning of year                 6,813,753          13,145,891
 Doubtful debt expense (recovery)                6,332,138          (4,543,570)
                                               -------------       -------------

 Balance as at March 31                         13,145,891           8,602,321
                                               -------------       -------------

9.   PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES, NET

                                                          As of  March 31,
                                                   -----------------------------
                                                      1996               1997
                                                      HK$                HK$
                                                   ----------         ----------

Prepayments, deposits and other receivables        10,232,385         8,280,509
Less: Provision for doubtful debts                 (7,157,636)       (4,898,213)
                                                   ------------    -------------
Prepayments, deposits and other receivables, net    3,074,749         3,382,296


Movements in provision for doubtful debts:
  Balance as at beginning of year                   2,800,000         7,157,636
  Transfer from short term investments (Note 10)    1,200,000                 -
  Doubtful debt expense (recovery)                  3,157,636        (2,259,423)
                                                   ------------    -------------

  Balance as at March 31                            7,157,636         4,898,213

 
                                      F- 16


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  SHORT TERM INVESTMENTS

                                                         Year ended March 31,
                                                      --------------------------
                                                        1996              1997
                                                         HK$               HK$
                                                      --------          --------

Unlisted investments at cost (Notes 13 and 24)              -       284,600,000
Provisions for diminutions in values                        -       (17,000,000)
Amounts due from joint venture companies, net               -                 -
Provision for doubtful debts                                -                 -
                                                   ------------     ------------
                                                            -       267,600,000

Movements in provisions for diminutions in values:
 Balance at beginning of year                       4,899,000                 -
 Transfer from other receivables (Note 13)                  -        17,000,000
 Reversal of provision on disposal                 (4,899,000)                -
                                                   -------------    ------------
 Balance at March 31                                        -        17,000,000

Movements in provision for doubtful debts:
 Balance at beginning of year                       1,200,000                 -
 Transfer to prepayments, deposits and other
  receivables (Note 9)                             (1,200,000)                -
                                                   --------------   ------------
Balance at March 31                                         -                 -
        



                                      F-17


<PAGE>



CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  FIXED ASSETS

                                                              As of March 31,
                                                          ----------------------
                                                           1996          1997
                                                            HK$           HK$
                                                          -------       --------
Cost:
 Leasehold land and buildings                            4,485,631    4,485,631
 Furniture and fixtures                                    700,826      700,826
 Office equipment                                          570,813      585,893
 Motor vehicles                                          1,244,030    1,244,030
                                                       ------------ ------------
                                                         7,001,300    7,016,380

Less: accumulated depreciation                          (2,301,848)  (2,922,161)
                                                      ------------- ------------
Net book value                                           4,699,452    4,094,219


The land and buildings are located in Hong Kong and are held on lease terms over
50 years.  The land and buildings are pledged to the Company's  banker to secure
facilities (note 19).

12.  INTERESTS IN ASSOCIATED COMPANIES


                                                            As of  March 31,
                                                      --------------------------
                                                         1996           1997
                                                          HK$            HK$
                                                      ----------      ----------
Unlisted investments, at cost                         14,335,440     14,335,440
Share of post-acquisition losses                      (6,928,886)    (6,928,886)
Write off for diminutions in values                   (3,345,000)    (6,793,565)
Elimination of unrealized profits                       (612,989)      (612,989)
                                                      ------------  ------------
                                                       3,448,565              -
Due from associated companies, net                     2,377,294      2,292,154
                                                      ------------  ------------
                                                       5,825,859      2,292,154


Movement in provisions for diminutions in values:
   Balance at beginning of year                        5,561,918      3,345,000
   Reversal of provisions for diminutions in values
    on disposal                                       (2,216,918)             -
   Provisions for diminutions in value                         -      3,448,565
                                                      ------------  ------------
   Balance at March 31                                 3,345,000      6,793,565
 




                                      F-18


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  INTERESTS IN ASSOCIATED COMPANIES (continued)

The Group's share of the post-acquisition losses of associated companies for the
year ended March 31, 1996 was  HK$1,835,000.  During 1997, the Company  incurred
additional  diminutions  in  value  in the  remaining  interests  in  associated
companies  which  reduced the  carrying  value to zero.  Therefore,  no share of
post-acquisition  losses was  provided  for the year ended March 31,  1997.  The
amounts due from  associated  companies are deemed to be collectible as of March
31, 1997.

     Details  of the  associated  companies  at March 31,  1997 and 1996 were as
follows:


                               Country of
                              registration    Group's
                                   and        effective
    Name                       operations     holding   Principal activities
--------------               --------------  ---------  --------------------
                                                    %
Panyu Panyi Chemical Industry     PRC            30     Manufacturing and sale
& Commerce Co., Ltd.                                    of PU resin

Shan Dong Linyi Modern            PRC            35     Manufacturing and sale
Decorating Materials                                    of PVC floor tiles
Co., Ltd.

Zhengzhou ZZZ Prime Hill          PRC            20     Manufacturing and sale
Floppy Disk Co., Ltd.                                   of computer floppy disks

13.  OTHER RECEIVABLE

                                              1996                   1997
                                               HK$                    HK$
                                          -----------            ------------

Amounts due from a third party            130,000,000                   -
Provision for doubtful debts              (17,000,000)                  -
                                        ---------------          ------------
                                          113,000,000                   -

     Pursuant to a sales and purchase  agreement dated December 20, 1996,  Sun's
     International,  a  wholly-owned  subsidiary  of the Group,  acquired from a
     third party a 100% equity interest in Cathay Mercantile  (Overseas) Limited
     ("Cathay") for a consideration of HK$130 million. (Note 24)

     Cathay's principal activity was investment holding and Cathay,  through its
     65.055%  owned Hong Kong  incorporated  subsidiary,  Fast Pulse  Investment
     Limited,  held a 70% interest in a Sino-foreign  cooperative  joint venture
     engaging in property development in Beijing, the PRC.

     Based on a review of the fair value of the  interest  in Cathay,  primarily
     based on a valuation report on the land, the title of which was transferred
     to the joint venture,  performed by an independent  professional  valuer, a
     provision  in the amount of  HK$17,000,000  was made to reduce the carrying
     value of the other receivable to its estimated fair value of HK$113,000,000
     as of March 31, 1996. On December 23, 1997,  Sun's  International  sold the
     100%   interest   in   Cathay   for  a   consideration   of   approximately
     HK$123,435,000.  As of March 31,  1997,  the  estimated  fair  value of the
     interest in the property of  HK$113,000,000  was reclassified to short-term
     investments in the accompanying consolidated balance sheet.
 
                                     F - 19


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  BANK LOANS

                                                          As of  March 31,
                                                    ---------------------------
                                                       1996             1997
                                                       HK$              HK$
                                                    ---------         ---------
        Long term bank mortgage loans,
        denominated in HK$                         1,478,799                -
        Less: current portion                     (1,478,799)               -
                                                  ------------        ----------
              Long term portion                            -                -

     The import loans with banks carry  interest at 1% above the Hong Kong prime
     lending rate and the Hong Kong prime lending rate (weighted average of 9.5%
     and 8.5% per annum as of March 31, 1996 and 1997, respectively). The import
     loans are  usually  repaid in three to six months,  which is in  accordance
     with the terms of the agreement.

     The bank overdrafts  carry interest at 3% above the Hong Kong prime lending
     rate (weighted average of 11.5% per annum as of March 31, 1996 and 1997).

15.  SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL

     On  February  21,  1995,  the  Company  acquired  all  of  the  issued  and
     outstanding  shares of Sun's  International by the issue of an aggregate of
     22,750,000 shares of common stock, US$0.001 par value each, of the Company.

     The  additional  paid-in  capital  account  represents  the  reorganization
     expenses (note 6) and the surplus arising from the differences  between the
     nominal  value  of  the  Company's   shares  exchanged  under  the  Reverse
     Acquisition and the paid up value of the shares of Sun's International.

     The shares of the Company  issued on March 24, 1995 pursuant to the Reverse
     Acquisition  were  treated  as if they had been in  issue  for all  periods
     presented.




                                      F-20


<PAGE>



CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.  CONCENTRATION OF CREDIT RISKS

     Financial   instruments   which   potentially   subject   the  Group  to  a
     concentration  of credit risk principally  consist of cash deposits,  trade
     receivables,  long  term  receivable  and  the  amounts  due  from  related
     companies.

     (i)  Cash deposits

     The Group places its cash deposits with an international bank.

     (ii) Trade receivables and long term receivable

     As of March 31, 1997 and 1996,  approximately 71% and 95% respectively,  of
     the trade receivable and long term receivable  balances were due from China
     (Fujian)  Foreign  Trade  Center  Holdings  Company,  a Chinese  Government
     controlled company.

     (iii) Amounts due from related companies

     At  March  31,  1997,  approximately  37% and 31% of the  amounts  due from
     related  companies  were due from New Skyland  Industrial  Ltd. and Billion
     Pearl International Limited, respectively.

     The Group does not have the policy of requiring collateral.

17.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of financial instruments are set out as follows:

     (i)  Cash deposits

     The cash deposits are stated at cost which approximates market value.

     (ii) Trade  receivables,  other  receivables  and amounts due from  related
          companies

     Trade  receivables,  other  receivables  and the amounts  due from  related
     companies are stated at their book value less provision for doubtful debts,
     which approximates the fair value.

     (iii) Bank import loans

     The carrying  amount of short term bank loans  approximates  the fair value
     because of the short maturity of these instruments.

     (iv) Accounts payable and amounts due to related companies

     Accounts  payable and amounts due to related  companies are stated at their
     book value which approximates their fair value.

 



                                     F - 21


<PAGE>

 
CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.  CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

     The Group's operating assets and primary source of income and cash flow are
     located in the PRC, and may be adversely affected by significant political,
     economic and social  uncertainties in the PRC.  Although the PRC government
     has been  pursuing  economic  reform  policies  for the past 19  years,  no
     assurance can be given that the PRC government will continue to pursue such
     policies or that such policies may not be significantly altered, especially
     in the event of a change in leadership,  social or political  disruption or
     unforeseen circumstances affecting the PRC's political, economic and social
     conditions.  There is no  guarantee  that the PRC  government's  pursuit of
     economic reforms will be consistent or effective.

     Currently, a large proportion of the Group's revenue comes from the sale of
     automatic  production  lines on a turn-key  basis with companies in the PRC
     (See Note 23). As such, those revenues are vulnerable to an increase in the
     level of competition  from overseas and domestic  suppliers and a change in
     the supply and demand relationship with those customers.

19.  BANKING FACILITIES

     The  Group  had  banking  facilities  of  approximately  HK$12,000,000  for
     mortgages,  overdrafts and trade finance. Unused facilities as of March 31,
     1997 amounted to approximately HK$3,937,000.

     The banking facilities of the Group were secured by:

     i.   mortgages  over the Group's  leasehold  land and buildings  with a net
          book value of approximately HK$3,526,000.

     ii.  lien on a third party's bank deposits totaling HK$5,000,000.

     iii. Personal guarantee by director, Chan Kwai Chiu, up to HK$20,000,000.

20.  FOREIGN CURRENCY EXCHANGE

     The Group has  substantial  transactions  with  customers  and  significant
     investments in associated  joint ventures in the PRC. Both of the customers
     in the PRC may settle their debts and their associated companies distribute
     their  dividends  outside the PRC. The  remittances  are subject to control
     because RMB is not freely convertible into foreign  currencies.  The amount
     of debts due from  customers  in the PRC  subject  to control  amounted  to
     HK$100,767,720 and HK$248,000,000 in 1997 and 1996, respectively.

     On January 1, 1994, the PRC government introduced a single rate of exchange
     as  quoted  daily by the  People's  Bank of China  (the  "Unified  Exchange
     Rate").

     The quotation of the exchange rates does not imply free  convertibility  of
     RMB into  Hong  Kong  dollars  or other  foreign  currencies.  All  foreign
     exchange  transactions  continue to take place  either  through the Bank of
     China or other banks  authorized to buy and sell foreign  currencies at the
     exchange  rates quoted by the People's  Bank of China.  Approval of foreign
     currency  payments  by the Bank of China  or  other  institutions  requires
     submitting a payment  application  form together with suppliers'  invoices,
     shipping documents and signed contracts.




                                      F-22


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21.  RELATED PARTY BALANCES AND TRANSACTIONS

     The Group's  amounts due from/(to)  directors and related  companies  owned
     and/or   controlled  by  a  director,   Chan  Kwai  Chiu,   are  unsecured,
     interest-free and are repayable on demand.

     In the normal  course of business,  some of the  companies in the Group are
     engaged in the set-up of automatic production lines on a turn-key basis for
     its  joint  ventures.  Other  than the  above-mentioned  transactions,  the
     companies  also  arrange  for the  sale of raw  materials  to  these  joint
     ventures.  Amounts of  revenues  from the sales of raw  materials  to these
     joint ventures are summarized as follows:
 
                                              Year ended March 31,
                                   -------------------------------------------
                                      1995            1996             1997
                                      HK$             HK$              HK$
                                   ---------       ---------        ----------
      Sales to joint ventures:
        Raw materials           22,300,181        15,755,398       19,699,783

     The unrealized  profits arising from these  transactions were eliminated in
     the  consolidated  financial  statements  to  the  extent  of  the  Group's
     interests in these joint ventures.

22.  CONTINGENCIES AND COMMITMENTS

     As at March 31, 1997, the Group has the following  capital  commitments and
     contingencies:

     The  Group had  contracts  with a related  company  in the PRC to  purchase
     office premises to be developed by the related  company for  HK$23,700,000.
     As at March 31, 1997,  HK$7,000,000,  which was grouped under other assets,
     had been  paid as a  deposit  for the  purchase  with the  remainder  being
     payable upon receipt of the title certificates for the office premises.




                                      F-23


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23.  SEGMENTED FINANCIAL INFORMATION

     Substantially all of the Group's activities consist of assembling and sales
     of  production  lines on a turn-key  basis.  Substantially  all the Group's
     sales are made to customers in the PRC.

<TABLE>

        Sales by major customers                                                                       Accounts
                                                      Sales                                           Receivable
                                                    ------------------------------------------------------------
                                                                         Year ended March 31 
                                                    ------------------------------------------------------------ 
                                                        1995           1996            1997             1997
                                                        HK$            HK$             HK$              HK$
                                                    ----------      ----------      ---------         --------
          <S>                                     <C>                 <C>            <C>            <C>           
         China (Fujian) Foreign Trade
          Centre Holdings Company ("CFFTC")       209,707,272      277,682,496     30,842,448        71,625,432
          Kin Heng Xin Investment &
          Development Company Limited                       -                -    128,292,528                 -
          Shenzhen San Gao Enterprises
          Company Limited                                   -                -     88,531,968        29,142,288
          Others                                   44,960,000       21,433,355     21,017,296             9,460
                                                 --------------  --------------- --------------    -------------
                                                  254,667,272      299,115,851    268,684,240       100,777,180
 
</TABLE>

     The outstanding  balance receivable from CFFTC arising from the above sales
     amounted to HK$248,798,243 as of March 31, 1996.

24.  NON-CASH TRANSACTIONS

     As noted in note 13, Sun's International,  a wholly-owned subsidiary of the
     Group,  acquired from a third party a 100% equity  interest in Cathay for a
     consideration  of HK$130  million,  which was  satisfied by netting off the
     other  receivable,  long term  receivable,  amount due from a director  and
     amount  due  from  a  related  company  of  HK$56,572,640,   HK$68,333,334,
     HK$4,280,000  and  HK$814,026,  respectively.  There  was no cash  movement
     involved in this transaction.

     On June 21, 1996 the Group  obtained a 100%  interest in Gain Whole Limited
     for  a  consideration  of  US$20  million  (HK$154.6  million)  as  partial
     settlement for the same amount of the debt due from China (Fujian)  Foreign
     Trade Centre Holdings Company, a major customer of the Group. The principal
     asset of Gain Whole  Limited is a  certificate  of deposit for an amount of
     US$20 million (HK$154.6 million) with an authorized  financial  institution
     in the People's  Republic of China (the "PRC").  The certificate of deposit
     is  valued at cost,  which  approximates  market  and was  classified  as a
     short-term investment in the accompanying  consolidated balance sheet as of
     March 31, 1997.

     During 1997,  HK$17,935,678 of trade accounts payable were paid directly by
     directors  on behalf of the Company  and  HK$21,625,232  of trade  accounts
     receivable were received  directly by directors.  The net activity of these
     transactions was posted to the amounts due to directors in the accompanying
     consolidated balance sheets.



 
                                      F-24


<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

25.  SUBSEQUENT EVENTS

     Subsequent to March 31, 1997 the following events took place:

     (a) On  April 2,  1997,  the  Group  acquired  a 30%  interest  in  Megaway
     Development  Limited. The principle asset of Megaway Development Limited is
     a 51% interest in Weifang Great Dragon Chemical Fibre Company Limited whose
     principal  activity is the manufacture of polyester tyre cord fabrics,  and
     polyester/nylon   canvas.  Megaway  Development  Limited  was  acquired  in
     exchange for a trade  receivable from CFFTC in the amount of  HK$65,031,120
     (US$8,415,000).

     (b) On August 28, 1997, Sun's  International sold the 100% interest in Gain
     Whole  Limited (See Note 24),  for a  consideration  of a 100%  interest in
     Megaway Resort Development  Limited, a company  incorporated in the British
     Virgin Islands.  The principal asset of Megaway Resort Development  Limited
     is a 75%  interest in Da Yu Edible Oil Co.  Ltd.,  a Sino  Singapore  joint
     venture  incorporated  in the  People's  Republic of China.  On December 3,
     1997,  Sun's  International  sold the 100%  interest  in  Megaway's  Resort
     Development Limited for a consideration of US$21,000,000.

     (c) On December 23, 1997, Sun's International  acquired a 56.5% interest in
     Wealthy  Asia  Limited  for  consideration  in  cash of  US$52,000,000.  On
     February  10,  1998,  Sun's  International  acquired  the  remaining  43.5%
     interest in Wealthy Asia Limited for  consideration of 40,000,000 shares of
     stock in China  Continental,  Inc.  The  principal  asset of  Wealthy  Asia
     Limited is a 51% interest in Changde Da Feng  Agriculture  Co.  Limited,  a
     Sino  Singapore  joint  venture  incorporated  in the People's  Republic of
     China. Changde Da Feng's principal asset is 20,000 hectares or 49,400 acres
     of land.





                                      F-25
 

<PAGE>





                         CONSENT OF INDEPENDENT AUDITORS


As  independent  accountants,  we hereby  consent to the use of our report dated
April  2,  1998,  and  to  all  references  to  our  Firm  including  in  or  by
incorporation  by  reference  made a part of the  Annual  Report on Form 10-K of
China Continental, Inc. for the year ended March 31, 1997.


 
                                            BLACKMAN KALLICK BARTELSTEIN, LLP



Chicago, Illinois
May 12, 1998