SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

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


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

        For the transition period from April 1, 1997 to December 31, 1997

                          Commission File No. 33-3276-D

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

         Utah                                                87-0431063
---------------------------                        -----------------------------
(State or other jurisdiction                      (I.R.S.Employer Identification
of incorporation or organization)                  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     No  X
          ---    ---
     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$20,660,553.
 
     As of  December  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 $23,562,500.

                       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
                                                       ---   ---

                                       7
<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...................      9
       ITEM 7A.   QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT
                  MARKET RISK...........................................     14
       ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........     14
       ITEM 9.    CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE..................................     14

PART III

       ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....     15
       ITEM 11.   EXECUTIVE COMPENSATION................................     15
       ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT............................................     17
       ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION...     17

PART IV

       ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTINGS
                  ON FORM 8-K...........................................     18

                  SIGNATURES............................................     19

                  INDEX TO CONSOLIDATED 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 14 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 67 turn-key projects  throughout the PRC varying in size from
US$300,000  to $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.  In  addition,  the
Company  sells  machinery  and  equipment,  accessories,  spare  parts  and  raw
materials.

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 67
turn-key  projects  throughout the PRC,  varying in cost from US$300,000 to US$5
million.

     Typical turn-key project takes four to eight months to complete,  depending
on 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  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 the
engineers  of the  Company  to  ensure  quality  and the  meeting  of  specified
requirements.



                                       3
<PAGE>
                                                         

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.

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 December 31, 1997,  the Company  employed a sales and  administrative
staff of 14 persons located in Hong Kong and a technical staff of  approximately
35 persons located 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 1997  approximated  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  rates  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, had 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.

     Furthermore, the minister of the State Planning Commission, Mr. Zeng Peiyan
said on June 29,  1998 the  Mainland  could  achieve  its target of 8%  economic
growth this year despite the fall of the yen.

     Fixed assets investment growth this year would exceed 15%, up from 10.1 per
cent last year. In the first quarter,  fixed asset investment rose 10.3 per cent
and in the first five months of 1998, 12.7%. The central government has approved
72 large and  medium-sized  projects with 1.24  trillion yuan in investment  and
feasibility  studies are being  conducted for 308 others with investment of 4.46
trillion yuan.


                                       4
<PAGE>

                                           
     On the whole China should be able to maintain a favorable  combination of a
growing  economy with  relatively  low  inflation in 1998.  However,  because of
economic  difficulties  in other parts of Asia,  the Chinese  economy has slowed
significantly.

FUTURE PROSPECT OF THE COMPANY

     The  Company  has  been  actively  involved  in the  provisions  of sale of
turn-key production lines, sale of machinery and equipment,  accessories,  spare
parts and raw materials for the past six years. These particular businesses have
been very  rewarding  due to their  high  margins.  The high  margin has in turn
attracted  new  competitors.  Margin of profits  compared to previous  years are
getting  smaller.  Efforts are  therefore  being made to develop  other areas of
market and to implement tighter marketing controls.

     On  April  2,  1997,  the  Company  acquired  a  30%  interest  in  Megaway
Development Limited. The principle asset of Megaway Development Limited is a 60%
interest in Weifang Great Dragon  Chemical Fibre Company Limited whose principal
activity is the manufacture of polyester tire 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
upheaval  of  nearly  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 a 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 Land Resources  Development  Bureau in a
livestock  development  project  in 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
DaFeng Agriculture and Animal Husbandry Limited, a Sino-Singapore  joint venture
incorporated in the People's Republic of China. Changde DaFeng's principal asset
is 20,000 hectares or 49,400 acres of land.

     The  Company's  emphasis now is to lead,  focus and manage a selected  high
growth  emerging   businesses   within  a  specific   growing   industry  group,
particularly  in the provisions of  technologies  in  agricultural  genetics and
farming  in China,  and to  generate  from these  businesses  the  potential  of
significant   returns.   The  Company   intends  to  provide  and  promote  such
technologies  to the local  breeder  and  growers in China.  Also,  the  Company
intends to maximize its growth in cash available for distribution and to enhance
the value of its venture businesses through effective management,  operation and
development strategies.  The Company believes opportunities exist for its 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
agriculture and farming industry in China with the ability to make available the
latest  techniques  and know-how in agriculture  genetics and farming,  (ii) the
presence of dedicated management and staff with the expertise and know-how;  and
(iii) the unique location and  availability of a significant size of arable farm
land. In addition,  the Company has good support from its business  relationship
with the Chinese joint  venture  partners and the American  technology  partners
that ensures its position 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 goats
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 the fastest and most  economical way of propagating  superior
genetics from importing live animals.  Embryos can be sexed,  split and injected
with exogenous gene condom for  successful  incorporation  for the production of
beneficial   pharmaceutical  and  immunological   products  to  combat  diseases
including hepatitis, cancer and tuberculosis.


                                       5
<PAGE>


     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  human
beings;  and  (II) to  supply  the  ever  increasing  demand  for 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.  China,  as the largest  human
population in the world and the largest livestock  producer,  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.

     In addition, the project will entail marketing and distributing of American
agricultural genetics to contract breeders, municipal and provincial governments
under a vertical  integrated scheme that includes the purchase of offspring back
for  feeding and  slaughter  in the  Company's  contract  abattoir.  The Company
trained   technicians   will  serve  these   clienteles  in  the  provisions  of
insemination of semen and implantation of embryos to livestock, and will provide
services in the sale of Company's feed , feed additives,  minerals,  vitamin and
veterinary drugs and other supplementary products.

     In summary,  this  project will  propagate  breeding  livestock  and , when
practicable,  planting  seed  genetics  for  China's  ever  expanding  livestock
population  and  increasing  demand  for  food.  China,  despite  being the most
populous nation in the world and the largest  livestock  producer,  lacks in the
supply of  superior  livestock  and  planting  of seed  genetics  to sustain the
agriculture  industry.  The Company  believes that it has  identified a niche by
providing a program to enhance  agricultural  production that will significantly
improve the  standard of living,  and by  providing  badly  needed  agricultural
genetics  to support  the  increasing  demand of food in China.  With the strong
relationship  with the  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 of its growth and
its rewarding 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 - 3/31        1.0               0.250       1.875            0.75
Second Quarter - 6/30     1.062               0.562       2.875           0.625
Third Quarter - 9/30      2.562               0.562      1.0625          0.5625
Fourth Quarter - 12/31    1.625               0.875     2.59375          0.5625



                                       6
<PAGE>
                                                       

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

     As of August 5, 1998, the bid price of the common stock was $0.625.

Holders

     As of August 5, 1998,  there were  approximately  284 record  owners of the
Common Stock of the Company.

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
 (in thousand United States dollars, except per share 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 in the Index to Financial Statements on page
F-1 of this report.

<TABLE>

                                                  Nine             Year           Year           Year            Year
                                                 Months           Ended          Ended           Ended          Ended
                                                 Ended          March 31,      March 31,       March 31,      March 31,
                                             Dec. 31, 1997         1997           1996           1995            1994
                                             -------------     -----------     ---------       ---------      ---------
<S>                                          <C>                 <C>            <C>            <C>            <C>    

Income Statement Data:
Sales                                           $20,661         $34,759         38,348         $32,650         $26,623
                                                                                                        
Cost of Sales                                    (8,336)         14,290         15,228          15,639          10,890
                                                --------        --------       --------        --------        --------
Gross Profit                                     12,325          20,469         23,120          17,011          15,733
Depreciation of fixed assets                        (57)            (80)           (64)            (65)            (46)
Selling and administrative expenses                (511)           (959)        (1,249)         (1,325)         (1,839)
(Provision) Recovery for doubtful                                                                                      
accounts                                              0             289         (1,217)           (942)         (1,332)
Financial Income (Expenses), net                    (57)            (55)           (73)              2              58
Other Income (Expenses) net                       2,919            (595)        (2,518)            523             (71)
Share of gains (losses) of associated
companies                                           144                          (235)           (347)            (455)
Reorganization expenses                               0               0             0          (1,603)               0
                                                --------        --------      --------        --------         --------
Income before income taxes                       14,763          19,069        17,764          13,254           12,048
Income taxes                                      1,290           2,635         2,742           1,549            1,421
                                                --------        --------      --------        --------         --------
Net income                                       13,473          16,434        15,022          11,705           10,627
                                                ========        ========      ========        ========         ========
Net income per share                               0.52            0.63          0.58            0.45              .41
                                                ========        ========      ========        ========         ========
Dividend per share                                    0               0             0               0              .38
                                                ========        ========      ========        ========         ========
Weighted average shares outstanding              26,000          26,000        26,000          26,000           26,000
Balance Sheet Data (At Period End)              ========        ========      ========        ========         ========

</TABLE>



                                       7
<PAGE>
<TABLE>

<S>                                          <C>                 <C>            <C>            <C>            <C>   
Working capital (deficit)                       (26,324)         55,784        (8,048)         19,910            877
Total Assets                                     88,435          73,282        53,773          33,343         17,529
Long-term Liabilities                                 0               0            21             209            240
Stockholders Equity                              70,840          57,516        40,713          25,291         12,383

</TABLE>

     The  Company  has  changed  its  financial  year end date to  December  and
accordingly 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 in the Index to Financial Statements on page
F-1 of this  report.  See also Item 7,  Management  Discussion  and  Analysis of
Financial Condition and Results of Operation.


                                               Nine months ended December 31
                                             1997           1996          1995
                                            ------         ------        ------
Income Statement Data

Sales                                       $20,661        $31,296       $32,091

Cost of Sales                               (8,336)       (14,583)      (15,739)

Gross Profit                                12,325         16,713        16,352

Depreciation of fixed assets                   (57)           (64)          (66)

Selling and administrative expenses           (511)        (1,689)       (1,159)

Financial Income (Expenses), net               (57)           (22)            21

Other Income (Expenses) net                  2,919             20            14

Share of gains (losses) of associated
companies                                      144           (57)          (72)

Income before income taxes                  14,763         14,901        15,090

Income taxes                                (1,290)        (1,242)       (1,248)

Net income                                  13,473         13,659        13,842

Net income per share                          0.52           0.53          0.53

Dividend per share

Weighted average shares outstanding         26,000         26,000        26,000

Balance Sheet Data (At Period End)

Working capital (deficit)                  (26,324)         35,372      (10,240)

Total Assets                               218,212         67,593        53,773

Long-term Liabilities                       88,392             20            20

Stockholders Equity                         70,840         54,372        40,713


                                       8
<PAGE>

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

RESULTS OF OPERATIONS

Nine months ended December 31,1997 versus Nine months ended December 31,1996

Revenues

     Revenues  decreased by US$10,635,000  or 34% to US$20,661,000  for the nine
months ended  December 31, 1997 from  US$31,296,000  for the prior period.  This
decrease  is  principally  attributable  to an  increase  in sales of turn-  key
projects and sales of raw  materials.  Management  is shifting the emphasis from
small scale to large scale  projects as it 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  increase
reflects the strong demand for the Company's services and 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 cost of machinery purchased and
the salaries and wages paid to engineers  and  consultants.  For the nine months
ended  December 31, 1997,  cost of sales as a percentage  of revenue on turn-key
projects was 35.88%, as a percentage of revenue  representing a decrease of 8.4%
from 44.28% for the prior year. The decrease can mainly be  attributable  to the
devaluation  of  most  Asian  currencies  and  a  larger  rebate  obtained  from
suppliers.

     Cost of sales of raw materials  increased by 8% which  correspond  with the
increase in the sale of raw materials to associated companies.

Depreciation of fixed assets

     Depreciation  expense  decreased by US$7,000 or 10.9% to US$57,000  for the
period ended December 31, 1997 from US$64,000 for the prior period. The decrease
in depreciation  expense is due to the fact that some of the fixed assets of the
Company had already been fully depreciated.

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$1,179,000 or
69.8%  to  US$510,000  for the  period  ended  December  31,  1997  compared  to
US$1,689,000 for the prior period.  This decrease was mainly due to management's
streamlining  of  operational   procedures  and  increased   budgetary  control.
Moreover,  the delay in the completion of two of the turn-key projects accounted
also for the decrease in the selling expenses.

Financial income (expense) net

     Financial income (expense) is interest earned on cash and cash equivalents,
less interest  expense.  Net financial expense increased by US$35,000 or 159% to
US$(57,000)  for the period  ended  December 31, 1997 from  US$(22,000)  for the
prior period.  This increase is attributable to an increase on the interest rate
and an increase in borrowing.

Other income/(expenses)

     Other income increased by US$2,899,000 to US$2,919,000 for the period ended
December 31, 1997 from US$20,000 for the prior period.  This increase can mainly
be  accounted  for by the gain on  disposals  of Gain Whole  Limited and Megaway
Development Limited.


                                       9
<PAGE>
                                                     
Share of gains (losses) of associated companies

     Other than  Weifang  Great  Dragon  Chemical  Fibre  Company  Limited,  the
associated  Companies of the Company are  principally  operated on an break even
basis. The Company has no further obligation to support the associated companies
and the losses  sustained  by them.  During the year ended March 31,  1997,  the
Company incurred  additional  diminution in value from the remaining interest in
associated  companies  which reduced their  carrying value to zero. The share of
profit of the associated companies represented the Company's share of the profit
of Weifang Great Dragon Chemical Fibre Company Limited for the nine months ended
December 31, 1997 which totalled US$144,000.

Income taxes

     Income taxes for the nine months ended December 31, 1997 were  US$1,290,000
or 8.7% of pretax  income.  This  compares with  US$1,242,000  or 8.3% of pretax
income for the prior  period.  The provision for income tax for the period ended
December  31, 1996 has been under  accrued by  US$1,248,000  and  therefore  the
adjusted amount should be US$2,490,000 representing 16.7% of the pre-tax income.
The  decrease in income tax for the current  period  under  review is due to the
fact that certain income is capital gain and is not subject to income tax.

Net income

     Net  income  decreased  by  US$186,000  or  1.4%  to   US$13,473,000   from
US$13,659,000  for the nine months ended  December 31,  1996.  This  decrease is
attributable  to a decline in gross profit which was  partially  offset by lower
expenses.

Year ended March 31, 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 sale
of  turnkey  projects  was  partially  offset by a 25%  increase  in sale 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 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 34.72% for the
prior year.

     Cost of sales of raw materials  increased by 26.5% which  corresponded with
the 25% increase in the sale of raw materials to associated companies.  However,
in  total,  the  Company's  cost  of sale  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 to 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.




                                       10
<PAGE>

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 increased budgetary control.  Moreover,  the Company
minimized its commission  expenses by reducing  commissions to a major customer,
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 procedure and the recovery of
US$290,000, which had previously been reserved.

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 the 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  of the  Company are  principally  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   diminution  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.  This decrease is attributable to the overaccrual of 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.

Year ended March 31, 1996 versus 1995
-------------------------------------
Revenues

     Revenues  increased by US$5,698,000 or 17.45% to US$38,348,000 for the year
ended  March 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.



                                       11
<PAGE>


     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.

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.


                                       12
<PAGE>
                                                
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  increase
resulted from increased  revenues and the fact that there was no  reorganization
expense for the year ended December 31, 1996.

Liquidity and capital resources

     At December  31,  1997,  the  Company  had a deficit in working  capital of
US$26,323,549, including a cash  balance of  US$17,808,000.  This  compares to a
working capital of US$35,372,000 and a cash balance of US$21,096,379 at December
31, 1996.

     Net cash provided by operating  activities  decreased to US$10,962,000 from
US$20,131,000 used in operating activities for the prior year. The cash provided
by operating activities consisted  principally of US$13,473,000 of net income, a
reduction in accounts due from related  parties and income taxes payable.  These
were  partially  offset by gains from short term  investments  and  interests in
related companies,  an increase in receivables and prepayments and a decrease in
accounts payable.

     Net cash used in investing  activities  totaled  US$15,035,000 for the nine
months ended December 31, 1997 compared to US$1,951 used in investing activities
for  the  prior  year.  In the  current  period,  the  Company  had  substantial
expenditures for the agricultural  property of US$52,000,000 which was partially
offset by proceeds from the sale of short term investments of US$36,946,000.

     Net cash provided by financing  activities  totaled US$804,000 for the nine
months  ended  December  31, 1997.  Net cash  provided by  financing  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  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 ventures.

Impact of inflation

     To date,  the  Company  has not  experienced  any  significant  effect from
inflation.  The  Company's  major  expenses  have been the cost of  purchase  of
machinery,  salaries and related  costs  incurred  principally  for the turn-key
projects.  The Company  generally  has been able to meet  increases  in costs by
raising prices of its products.


                                       13
<PAGE>


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  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 the 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 method 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 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 are  denominated in
Reminbi, which must be converted into other currencies before remittance outside
the PRC. Both the  conversion of the Reminbi and other  foreign  currencies  and
remittance of foreign currencies abroad require approval of the PRC government.

ITEM 7A. QUANTITATIVE AND QUALIFICATION DISCLOSURE 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-6. An index to such materials appear on page F-1.

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

     Not applicable.


                                       14
<PAGE>


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

  Name              Age                    Title
-----------       -------             ----------------
Harry H.H. Ho        48        Chairman of the Board and Chief Executive Officer
Ji Jun Wu            60        Vice-Chairman of the Board
Kim Young Soh        50        Director
Dr. Thian Hor Teh    53        Vice-President and Director
Dr. Y. Joseph Mo     51        Director
Lin Tao Ge           37        Director
Chan Kwai Chiu       40        Director
Eric Ng              38        Secretary/Treasurer/ Chief Financial Officer and 
                               Director

ITEM 11. EXECUTIVE COMPENSATION

     The  following  table  sets forth all  compensation  paid or to be paid for
services  rendered  during the last three  fiscal  periods 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  periods  ended  December 31,
1997.
 
   Name of Individual         Year         Salary          Bonus         Others
  --------------------       ------       --------        -------       --------

 Chan Kwai Chiu               1996        143,000         11,900 
 
                              1997        155,870         12,990         129,366
 
                       Apr. 1,1997 to
                      Dec.31, 1997        116,900          9,742

 Wong Yuen Ki                 1996        127,000         10,600
 
                              1997        138,000         11,500         155,819
 
                       Apr. 1,1997 to
                      Dec.31, 1997        103,500          8,625

     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.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The Company's executive officers are as follows:

     Mr.  Harry H. H. Ho,  is the  Chairman  and the  Managing  Director  of the
Company.  He holds a degree in business  studies from the Nanyang  University of
Singapore  and a  master  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 set up Megaway
Group which activities  include food,  shipping and financing  services.  In the
same year, he established Hua Tuo Guan in Singapore to offer franchise  services
in Chinese  medical and health food.  Since 1990's,  Mr. Ho has been involved in
China Trade and has been involved in takeovers and  restructuring of a number of
Chinese enterprises.


                                       15
<PAGE>


     Mr. Ji Jun Wu, is the Vice-  Managing  Director  of the  Company and is the
President  of  China  operation  of  Megaway  Group.  He has  over 40  years  of
commercial experience.  Since the establishing of the open economy by the PRC in
1980's  he has  been  instrumental  in the  establishment  of over  ten  foreign
investments  and joint  ventures in the PRC,  which  include such  international
companies as Motorola,  NEC, IBM, AT&T,  Samsung and Yamaha and he has served as
an official Chinese representative. Because of his work and achievements, he was
honored by the City of Houston, Texas, USA as its honorable citizen.

     Mr. Kim Young SOH is a non executive  director of the Company.  He holds an
honor degree in system and engineering from Nanyang  University of Singapore and
a master degree in system 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 in Singapore,  engaging in property development,  building construction,
tourism industry, and electronic components and general investments.

     Dr. Thian hor TEH, is the technical director of 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 of outstanding  achievements  for his
research works.

     Dr. Y Joseph MO, is a non  executive  director of the  Company.  He holds a
doctorate in industrial and physical  pharmacy from Purdue University in the US.
Prior to joining the  Company,  he held senior  executive  and  directorship  in
various international  companies such as NexMed Inc., Greenwich  Pharmaceuticals
Inc., Johnson & Johnson, Rorer Pharmaceuticals,  Smith Kline Pharmaceuticals and
Beecham Products.

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

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

     Mr.  Eric Ng,  joined the  Company in 1992 as Chief  Financial  Officer and
Secretary of the Company and is  responsible  for the financing  strategy of the
Company. Prior to joining the Company he was a manager at KPMG Peat Marwick Hong
Kong,  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  experience
in auditing, finance and administration.



                                       16
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of December 31, 1997 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 more than five
percent of the Company's Common Stock.

                                         
                                      Amount and Nature of
Name and Address (1)                  Beneficial Ownership
of Beneficial Owner                   Shares                 Percentage of Class
-------------------                  ----------------------  -------------------
Chan Kwai Chiu                              9,100,000               35%
Charter Score Development Limited           1,300,000                5%
Dynasty Asia Worldwide Limited  (2)         2,600,000               10%
Land Cheer Investment Limited   (2)         2,600,000               10%
                                            ---------              ----
All officers and directors 
as a group (one)                           14,300,000               55%
                                           ==========              ====

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

(2)  Beneficially owned by Chan Kwai Chiu

ITEM.13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     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,           April 1, 1997 to
                              1996                 1997         December 31,1997
                             ------               ------        ----------------

Sales to joint ventures:
         Raw materials    US$2,038,214        US$2,548,484        US$1,594,473

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

     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.  There was no cash movement  involved in
this transaction. Cathay was purchased 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.

     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.



                                       17
<PAGE>


     Based on a review  of the fair  market  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.

     On April 2, 1997, the Group acquired a 30% interest in Megaway  Development
Limited,  a company  owned by Mr.  Harry Ho. Mr. Ho has become the  chairman and
chief  executive  officer  of  the  Company.  The  principal  asset  of  Megaway
Development  Limited is a 60% interest in Weifang  Great Dragon  Chemical  Fibre
Company  Limited whose  principal  activity is the manufacture of polyester tire
cord  fabrics,  and  polyester/nylon  canvas.  Megaway  Development  Limited was
acquired in exchange for a trade  receivable  from China (Fujian)  Foreign Trade
Centre Holdings Company ("CFFTC") in the amount of HK$65,031,120.

     On June 21,  1996,  Sun's  International  obtained a 100%  interest in Gain
Whole Limited for a consideration of US$20,000,000 (HK$154,600,000) as a partial
settlement  for the same amount of the debt due from CFFTC,  a major customer of
the Group.  The  principal  asset of Gain Whole  Limited  was a  certificate  of
deposit  for an  amount of  US$20,000,000  (HK$154,600,000)  with an  authorized
financial  institution  in the  People's  Republic  of China  (the  "PRC").  The
certificate  of deposit was valued at cost,  which  approximated  market and was
classified as a short-term  investment in the accompanying  consolidated balance
sheet as of March 31, 1997.

     On August 28,  1997,  Sun's  International  sold its 100%  interest in Gain
Whole  Limited  for  a  consideration  of a  100%  interest  in  Megaway  Resort
Development  Limited,  a company owned by Mr. Harry Ho and  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, the
Group  sold the 100%  interest  in  Megaway  Resort  Development  Limited  for a
consideration of US$21,000,000 (HK$162,288,000).

     On December  23, 1997,  Sun's  International  acquired a 56.5%  interest in
Wealthy Asia Limited (WAL) for US$52,000,000  (HK$403,364,486)  in cash from Mr.
Brian Ko. WAL had simultaneously  acquired 100% of Megaway  Agriculture Co. Ltd.
(Megaway)  from Mr.  Harry  Ho for  US$92,000,000  (HK$713,644,828), with a cash
payment of  US$72,800,000  which was settled on  December  31, 1997 and a verbal
agreement to remit the remainder at some future date.  The remainder was settled
on March 18, 1998 through the receipt of 9,900,000  newly issued shares of China
Continental, Inc. common stock.

     On February 10, 1998,  Sun's  International  acquired the  remaining  43.5%
interest in WAL from Mr. Brian Ko via the issuance of an  additional  40,000,000
shares of stock in China Continental, Inc. of which 9,900,000 shares were issued
directly to Megaway Resort Development Ltd., a company owned by Mr. Harry Ho and
incorporated in Western Samoa.

     The  principal  asset  of  Megaway  is a 51%  interest  in  Changde  Dafeng
Agriculture and Animal Husbandry Ltd. (Changde),  a Sino-Singapore joint venture
incorporated  in the  People's  Republic of China on  December 3, 1997.  Mr. Ho,
through  his prior  ownership  of Megaway,  was an  original  party to the joint
venture,  with the remaining 49% interest being held by entities associated with
the Chinese government. Changde has been established to run a breeding center to
propagate Boer goats and other livestock  breeds.  Changde's  principal asset is
20,000  hectares  or  49,900  acres  of  grassland  located   approximately  250
kilometers north of Beijing,  in the People's  Republic of China.  Based upon an
independent  appraisal  dated  July  30,  1998 by  American  Appraisal  Hongkong
Limited, the value of 100% of Changde is US$181,000,000 (HK$1,402,750,000) as of
December 31, 1997.

     During October 1997, the company  borrowed and in turn loaned  HK$9,984,864
to a company  owned by director,  Mr. Chan Kwai Chiu,  in  conjunction  with his
purchase of a personal residence.  The mortgage loan is secured by the residence
and other properties owned by Mr. Chan Kwai Chiu with the cost of HK$17,800,000.

     During the year  ended  March 31,  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  receivable   directly  by
directors.  The net activity of these transactions was posted to the amounts due
to directors in the accompanying consolidated balance sheets.


                                       18
<PAGE>


                                     PART IV

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

     (a)  Exhibits

          Exhibit 27.1 Financial Data Schedule.

     (b)  Report on Form 8-K

          None


                                       19
<PAGE>


                                   SIGNATURES

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

                                            CHINA CONTINENTAL, INC.

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

Dated:August 7, 1998

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

 Signatures                       Titles                                 Date
 ----------                       ------                                ------

/s/ Harry H.H. Ho            Chairman of the Board and Chief      August 7, 1998
---------------------        Executive Officer
Harry H.H. Ho                  
 
/s/ Ji Jun Wu                Vice-Chairman of the Board           August 7, 1998
---------------------    
Ji Jun Wu
 
/s/ Kim Young Soh            Director                             August 7, 1998
---------------------
Kim Young Soh

/s/ Dr. Thian Hor Teh        Vice-President and Director          August 7, 1998
----------------------
Dr. Thian Hor Teh

/s/ Dr. Y. Joseph Mo         Director                             August 7, 1998
----------------------
Dr. Y. Joseph Mo

/s/ Lin Tao Ge               Director                             August 7, 1998
----------------------
Lin Tao Ge

/s/ Chan Kwai Chiu           Director                             August 7, 1998
----------------------
Chan Kwai Chiu

/s/ Eric Ng                  Secretary/Treasurer/                 August 7, 1998
----------------------       Chief Financial Officer
Eric Ng                      and Director



                                       20
<PAGE>
                                                      
                                        

                        Consolidated Financial Statements

                    CHINA CONTINENTAL, INC. AND SUBSIDIARIES

                   Years Ended March 31, 1996 and 1997 and the
                       Nine Months Ended December 31, 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 stockholders' 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-26


<PAGE>

                                       F-1

REPORT OF INDEPENDENT AUDITORS



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



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

We conducted our audits 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  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the consolidated  financial statements for the year ended March
31, 1997 and the nine months ended December 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 December 31, 1997,
and the  consolidated  results of their  operations and their cash flows for the
year and nine months,  respectively,  then ended in  conformity  with  generally
accepted accounting principles in the United States of America.

As described in Note 12, the Company  entered into certain  transactions  during
1997 and 1998, ultimately with its current chairman and chief executive officer.
These  transactions  have  significantly  impacted the company's  business plan,
liquid  assets  and  common   stockholder   ownership   interests.   Appropriate
disclosures have been made and our opinion is not qualified in this respect.









Chicago, Illinois
May 29, 1998; except for the seventh through the tenth paragraphs of Note 12, as
to which the date is July 30, 1998

 

                                       F-2
<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended March 31, 1996 and 1997
and for the nine months ended December 31, 1997

<TABLE>
                                                      Year ended March 31,      Nine months ended December 31,
                                             Notes           1996             1997           1997           1997
                                                             HK$               HK$            HK$            US$
                                                          -----------      -----------    ----------      ----------
<S>                                          <C>       <C>                 <C>            <C>            <C>    
SALES
   Related parties                           19          15,755,398       19,699,783      12,357,168      1,594,473
   Others                                               283,360,453      248,984,457     147,762,121     19,066,080
                                                       -------------    --------------  -------------    -----------
                                                        299,115,851      268,684,240     160,119,289     20,660,553

COST OF SALES                                          (118,777,918)    (110,460,697)    (64,600,231)    (8,335,513)
                                                       -------------    --------------- -------------    -----------                
GROSS PROFIT                                            180,337,933      158,223,543      95,519,058     12,325,040
DEPRECIATION OF FIXED ASSETS                               (495,989)        (620,313)       (442,894)       (57,148)
 

SELLING AND ADMINISTRATIVE
 EXPENSES                                               ( 9,744,449)     (7,413,213)      (3,958,938)      (510,831)
(PROVISION) RECOVERY FOR
  DOUBTFUL DEBTS                                         (9,489,774)      2,238,844                -              -

FINANCIAL INCOME/(EXPENSES),
 NET                                         4             (566,408)       (425,759)        (442,851)       (57,142)
 
OTHER INCOME/(EXPENSES),
NET                                          5          (19,642,756)     (4,597,305)      22,625,018      2,919,357

SHARE OF (LOSSES) GAINS OF
ASSOCIATED COMPANIES                         11         ( 1,835,000)              -        1,113,459        143,672

                                                       --------------    ------------     ------------    ------------ 

INCOME BEFORE INCOME TAXES                              138,563,557      147,405,797     114,412,852     14,762,948

INCOME TAXES                                 6          (21,393,062)     (20,372,118)    (10,000,694)    (1,290,412)
                                                       --------------    -------------   -------------   ------------

NET INCOME                                              117,170,495      127,033,679     104,412,158     13,472,536
 
EARNINGS PER SHARE                    3(j), 12                 4.51             4.89            4.02            .52 


</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 STOCKHOLDERS' EQUITY


For the years ended March 31, 1996 and 1997
and for the nine months ended December 31, 1997

<TABLE>

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

Balance at April 1, 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
                                   
Net income                                     -                  -        104,412,158    104,412,158
                                       ----------       ------------       -----------    -----------
Balance at December 31, 1997             202,800         13,356,985        535,448,224    549,008,009
                                       ----------        -----------       -----------    -----------
</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, 1997 and December 31, 1997  
<TABLE>

                                                                March 31,              December 31,
                                                 Notes           1997              1997           1997
                                                                  HK$               HK$            US$
<S>                                             <C>         <C>                <C>            <C> 

ASSETS

CURRENT ASSETS
Cash and bank balances                                      163,341,939        138,010,916    17,807,860
Trade receivables, net of provisions of
  HK $8,602,321 at March 31, 1997
  and December 31, 1997                           7         100,777,180         36,420,762     4,699,453 
Prepayments, deposits and other
   receivables, net of provisions of
   HK$4,898,213 at March 31, 1997
   and December 31, 1997                          8           3,382,296          5,018,294       647,522
Short term  investments, net of
    provisions of
  $17,000,000 at March 31, 1997                   9         267,600,000                  -             -
Amounts due from related companies               19          17,983,640         34,111,911     4,401,537
Amounts due from directors                       19                   -         39,525,000     5,100,000
                                                            ------------     --------------   ------------
TOTAL CURRENT ASSETS                                        553,085,055        253,086,883     32,656,372

FIXED ASSETS                                     10           4,094,219          3,486,981        449,933
INTERESTS IN ASSOCIATED
  COMPANIES                                      11           2,292,154         69,053,638      8,910,147
LAND LEASE RIGHTS                                12                   -      1,358,514,000    175,292,130
OTHER ASSETS                                     20           7,000,000          7,000,000        903,225
                                                           -------------     --------------    ------------

TOTAL ASSETS                                                566,471,428      1,691,141,502    218,211,807
                                                           -------------     --------------   -------------
LIABILITIES AND STOCKHOLDERS'
  EQUITY

CURRENT LIABILITIES
Bank overdrafts                                  13                   -          3,814,245        492,161
Bank import loans                                13           8,063,170         10,478,535      1,352,069 
Secured bank loan                                13                   -          9,984,864      1,288,370
Income taxes payable                                         64,279,294         73,707,403      9,510,632
Amounts due to directors                         19           6,042,857          8,604,953      1,110,317
Amounts due to related parties                   19           5,847,659        315,483,063     40,707,492
Accounts payable and accrued liabilities                     37,642,597         35,021,320      4,518,880
                                                           -------------     --------------  -------------
TOTAL CURRENT LIABILITIES                                   121,875,577        457,094,383     58,979,921

MINORITY INTEREST                               12                    -        685,039,110     88,392,143

STOCKHOLDERS' EQUITY
Common stock, par value
  US$0.001 per share:  Authorized:
  1,000,000,000 shares; Issued and
  outstanding: 26,000,000 shares                               202,800            202,800         26,168
Additional paid-in capital                                  13,356,985         13,356,985       1,723,48
Retained earnings                                          431,036,066        535,448,224     69,090,093
                                                          --------------     -------------    -------------
 
TOTAL STOCKHOLDERS'
  EQUITY                                                   444,595,851        549,008,009     70,839,743
                                                          ---------------    --------------   -------------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                                     566,471,428      1,691,141,502    218,211,807
                                                          ---------------  ----------------  --------------

</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, 1996 and 1997
and the nine months ended December 31, 1997
<TABLE>

                                                              Year                               Nine months
                                                         ended March 31,                     ended December 31,
                                                     1996             1997                 1997            1997
                                                      HK$              HK$                  HK$             US$
<S>                                               <C>             <C>                 <C>             <C>   

CASH FLOWS FROM OPERATING
  ACTIVITIES:
Net income                                       117,170,495      127,033,679        104,412,158        13,472,536
Adjustments to reconcile net income to
 net cash (used in)/provided by operating
 activities:
Gains on disposal of fixed assets                          -         (163,204)          (350,800)          (45,265)
  Depreciation                                       495,989          620,313            442,894            57,148
  Provision for doubtful debts and
   diminutions in values of
   investments and associated companies           30,414,857          869,710                  -                 -
  Share of (losses) gains of associated
   companies                                       1,835,000                -         (1,113,459)         (143,672)
  Gains on disposal of short term
   investments                                    (1,145,013)               -        (18,731,775)       (2,417,003)
 (Increase)/decrease in assets:
 Trade receivables and long term receivable     (196,043,403)     (13,182,571)          (674,702)          (87,058)
 Prepayments and deposits                          5,682,771         (307,547)        (1,635,998)         (211,096) 
 Amounts due from related companies                  926,388         (887,809)        (6,143,407)         (792,698)
 Amounts due from associated companies            (1,250,592)        (702,335)          (616,905)          (79,601)
 (Decrease)/Increase in liabilities:
 Amounts due from joint venture companies           (241,427)               -                  -                 -
 Amounts due to directors                          1,473,073        9,988,570          2,562,096           330,593
 Amounts due to related parties                     (221,846)         199,772                  -                 -
 Accounts payable and accrued liabilities         16,600,556       13,690,462         (2,621,277)         (338,229)
 Income taxes payable                             21,077,767       18,455,771          9,428,109         1,216,530
                                                 --------------   -------------      --------------     -------------
Net cash (used in)/ provided by
 operating activities                             (3,225,385)     155,614,811         84,956,934        10,962,185
                                                 ---------------  -------------      -------------      ------------


</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, 1996 and 1997
and the nine months ended December 31, 1997

<TABLE>
                                                                                       Nine months
                                                  Year ended March 31,              ended December 31,
                                                 1996             1997              1997         1997
                                                  HK$              HK$               HK$          US$
<S>                                          <C>                 <C>              <C>            <C>   

CASH FLOWS PROVIDED BY/(USED IN)
  INVESTING ACTIVITIES
Purchase of land lease rights                        -               -        (403,364,486)   52,047,030
Purchase of fixed assets                        (1,900)        (15,080)            (14,856)       (1,917)
Reduction/(addition) of fixed
 bank deposit                                6,494,181               -                   -             -
Proceeds from disposal of fixed assets               -               -             530,000        68,387
Proceeds from disposal of short term
 investments                                         -               -         286,331,775    36,946,035
                                            -----------     -------------     -------------   ------------
Net cash provided by/(used in)
  investing activities                       6,492,281         (15,080)       (116,517,567)  (15,034,525)
                                           ------------     -------------     -------------   ------------
CASH FLOWS PROVIDED BY/(USED IN)
  FINANCING ACTIVITIES
Net (repayments)/borrowings under
  bank import loans                            (94,137)      2,389,290           2,415,365       311,660
Net(repayments)/borrowings of bank loans      (222,403)     (1,478,799)          3,814,245       492,161
Advances (repayments) of bank overdrafts       319,452        (676,889)                  -             -
                                           -------------    -------------     -------------   ------------
Net cash provided by
  financing activities                          2,912          233,602           6,229,610        803,821
                                           -------------    -------------     -------------   ------------
NET INCREASE/(DECREASE) IN
  CASH AND CASH EQUIVALENTS                 3,269,808      155,833,333         (25,331,023)    (3,268,519)

Cash and cash equivalents, at beginning
  of period                                 4,238,798        7,508,606         163,341,939     21,076,379
                                           -------------    --------------    -------------    -----------
Cash and cash equivalents, at end of period 7,508,606      163,341,939         138,010,916     17,807,860 
                                           ------------    ---------------    -------------    -----------

SUPPLEMENTARY CASH FLOWS
  DISCLOSURES:
  Interest paid                               930,130         469,392              488,704        63,059
                                           ------------    ---------------    --------------   --------------
  Income taxes paid                           882,259       2,079,551              572,585        73,882
                                           ------------    ---------------    --------------   --------------
</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 a 100%
     investment in Sun's International Holdings Limited (Suns's  International),
     a  holding   company  for   investments  in  operating   companies.   Sun's
     International  was  incorporated  under  the  laws  of the  British  Virgin
     Islands.

     Subsequent  to March 31,  1997,  the  Company  elected to change its fiscal
     year-end to December 31.

     The consolidated  financial  statements include the accounts of the Company
     and Sun's  International 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 (Disposed of in December,  1997;
     See Note 12), Gain Whole  Limited  (Disposed of in August,  1997;  See Note
     12),  Megaway  Resort  Development  Limited  (Acquired  and  disposed of in
     August,  1997,  and  December,  1997,  respectively;  See  Note 12) and its
     majority owned subsidiary,  Wealthy Asia Limited (56.5% owned and which had
     no operating activity for 1997) (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
     associated  companies  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.  Wealthy  Asia  Limited,  through  a
     wholly-owned  subsidiary,  owns 51% of a joint  venture,  known as  Changde
     Dafeng   Agriculture  and  Animal  Husbandry  Co.,  Ltd.,  which  has  been
     established  to run a  breeding  center to  propagate  Boer goats and other
     livestock breeds. See Note 12.


                                       F-8

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   BASIS OF PRESENTATION

     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 wholly and majority owned subsidiaries. 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

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, 1997 and December 31, 1997, cash and cash equivalents included
     foreign currency deposits equivalent to HK$160,757,415 (US$20,796,561), and
     HK$135,755,488 (US$17,516,837), 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           2.0%
                   Furniture and fixtures                  20%
                   Office equipment                        20%
                   Motor vehicles                          20%

     (f)  Land lease rights
          -----------------

     Land lease  rights in  mainland  China are stated at cost less  accumulated
     amortization.  Amortization  of land  lease  rights  is  calculated  on the
     straight-line  basis over the lesser of its  estimated  useful  life or the
     lease term. The principal annual rate used for this purpose is 2.5%.

     (g)  Income taxes
          ------------

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

     (h)  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$") for the
     convenience  of the reader has been made at the single  rate of exchange on
     December 31, 1997 of US$ 1.00 : HK$7.75. No representation is made that the
     HK$ amounts could have been, or could be,  converted  into US$ at that rate
     on December 31, 1997 or at any other date.


                                      F-10

<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)

     The associated  companies  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.

     (i)  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 design,  training and  consultancy  services is recognized when
     the service is rendered.

     (j)  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,
     1996 and 1997, and the nine months ended December 31, 1997, were HK$26,306,
     HK$32,375, and HK$47,504, respectively.

     (k)  Earnings per share
          ------------------

     Earnings  per  share is based on the  26,000,000  shares  of  common  stock
     outstanding during each year.

     (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 1997,  the  company  adopted  SFAS No.  128,  "Earnings  Per Share." All
     earnings per share  amounts for all periods have been  presented to conform
     to the SFAS No. 128 requirement.

     In June 1997, the Financial Accounting Standards Board ("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; and believes that the investment
     in the  joint  venture  known as Chang de  Dafeng  Agriculture  and  Animal
     Husbandry  Co., Ltd.  during the current period will cause it to modify its
     disclosure requirements.



                                      F-12

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   FINANCIAL INCOME/(EXPENSES), NET

                                            Year ended         Nine months ended
                                          March 31,             December 31,
                                            1996            1997           1997
                                             HK$             HK$            HK$

         Interest income                  435,828         149,011      114,219
         Interest expense                (930,130)       (469,392)    (488,704)
         Bank charges                     (72,106)       (105,378)     (68,366)
                                        -----------     -----------  ----------
                                         (566,408)       (425,759)    (442,851)


5.   OTHER INCOME/(EXPENSES), NET
 
                                         Year ended            Nine months ended
                                          March 31,              December 31,
                                            1996            1997           1997
                                             HK$            HK$             HK$

 Commission and miscellaneous income       66,674         369,836     3,736,733
 Foreign exchange gains/(losses), net      70,640         446,139      (194,290)
 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
     Cathay (Note 12)                           -               -    10,434,579
     Gain/Megaway (Note 12)                     -               -     7,688,000
     Other                              1,145,013               -       609,196
 Gains on disposal of fixed assets              -               -       350,800
                                       -----------   -------------   ----------
                                      (19,642,756)     (4,597,305)   22,625,018
                                      -----------    -------------   ----------

 
                                      F-13

<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   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:

<TABLE>

                                                     Year ended               Nine months ended
                                                      March 31,                  December 31,
                                               1996             1997                 1997
                                                HK$              HK$                  HK$
      <S>                                     <C>             <C>              <C>

      Income/(loss) before income taxes:
          Hong Kong                        (22,438,260)       507,446               177,843
          PRC                              161,001,817    146,898,351           114,235,009 
                                           ------------  ------------           -----------
                                           138,563,557    147,405,797           114,412,852
 
        Income tax provision:
         Current:
          Hong Kong                          1,879,812      (169,634)            (2,157,306)
          PRC                               19,513,250    20,704,956             12,158,000
                                           ------------  ------------           ------------
                                            21,393,062    20,535,322             10,000,694

         Deferred                                   -       (163,204)                     -
                                           ------------  ------------           ------------
                                            21,393,062    20,372,118             10,000,694

</TABLE>

     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, 1997 and  December  31,  1997,  income tax  payables  included
     foreign currency payables  equivalent to HK$61,325,206  (US$7,933,403)  and
     HK$73,483,206 (US$9,481,704), respectively.


                                      F-14

<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.   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               Nine months ended
                                                            March 31,                  December 31,
                                                              1996              1997               1997
                                                              HK$                HK$                HK$
<S>                                                    <C>                  <C>             <C>   

Statutory Hong Kong tax rates                                 16.5%              16.5%              16.5% 
Computed expected tax expense                           22,862,987         24,321,957         18,878,121
Decrease resulting from PRC tax
 at a lower composite tax rate                          (7,052,050)        (4,587,807)        (7,699,316)
Adjustments for expense items which are not
  deductible for profits tax purposes:
   Share of (gain) loss in and provisions for diminutions
   in values of associated companies                     1,126,969            326,135           (94,644)
   Provisions for diminutions in values
     of investments                                      2,628,444                  -                 -
   Other provisions                                      1,565,813                  -         2,154,306
   Disposal of short term investments                     (188,927)                 -        (3,090,743)
Others                                                     449,826            311,833          (147,030)
                                                         -----------       ------------     ------------
                                                         21,393,062        20,372,118        10,000,694
                                                         -----------       ------------     ------------
</TABLE>



                                      F-15

<PAGE>

 
CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   INCOME TAXES (continued)

Undistributed  earnings  of the  Company's  non-U.S.  subsidiaries  amounted  to
HK$535,448,224 at December 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$182,000,000.

7.   TRADE RECEIVABLES, NET

<TABLE>


                                                  As of  March 31,         As of December 31,
                                                       1997                      1997
                                                        HK$                      HK$
<S>                                               <C>                        <C>    

Trade receivables                                  109,379,50                 45,023,083
Less: Provision for doubtful debts                 (8,602,321)                (8,602,321)
                                                  --------------             --------------
 
Trade receivables, net                            100,777,180                 36,420,762

Movements in provision for doubtful debts:
 Balance as at beginning of year                   13,145,891                  8,602,321
 Doubtful debt recovery                            (4,543,570)                         - 
                                                  ---------------            ---------------

 Balance as at March 31 and December 31             8,602,321                   8,602,321


8.   PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES, NET

                                                   As of  March 31,          As of December 31,
                                                        1997                       1997
                                                         HK$                       HK$

Prepayments, deposits and other receivables         8,280,509                   9,916,507
Less: Provision for doubtful debts                 (4,898,213)                 (4,898,213)
                                                  --------------              -------------
Prepayments, deposits and other receivables, net    3,382,296                   5,018,294


Movements in provision for doubtful debts:
  Balance as at beginning of year                   7,157,636                   4,898,213
  Doubtful debt recovery                           (2,259,423)                          -
                                                  --------------              --------------

  Balance as at March 31 and December 31            4,898,213                   4,898,213

 

</TABLE>

                                      F-16

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.   SHORT TERM INVESTMENTS

<TABLE>
  
                                                        Year ended       Nine months ended
                                                         March 31,          December 31,
                                                          1997                1997
                                                          HK$                 HK$
<S>                                                  <C>                <C>    

Unlisted investments at cost (Notes 12 and 22)       284,600,000                  -
Provisions for diminutions in values                 (17,000,000)                 -
                                                    -------------       --------------
                                                     267,600,000                  -

Movements in provisions for diminutions in values:
 Balance at beginning of year                                  -         17,000,000
 Transfer from other receivables (Note 12)            17,000,000                  -
 Reversal of provision on disposal                             -        (17,000,000)
                                                    -------------       ---------------
 Balance at March 31 and December 31                  17,000,000                  -
                                                    -------------       ---------------
</TABLE>


                                      F-17

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.  FIXED ASSETS

<TABLE>


                                                            As of March 31,   As of December 31,
                                                                 1997                 1997
                                                                  HK$                  HK$
<S>                                                         <C>                 <C>   
 Leasehold land and buildings, located in Hong Kong (1)        4,485631            4,239,231  
 Furniture and fixtures                                         700,826              700,826
 Office equipment                                               585,893              600,749
 Motor vehicles                                               1,244,030            1,244,030
                                                           --------------       --------------
                                                              7,016,380            6,784,836

Less: accumulated depreciation                               (2,922,161)          (3,297,855)
                                                           ---------------      --------------
Net book value                                                4,094,219             3,486,981


    (1) Pledged to the Company's banker to secure facilities (See Note 17).

11.  INTERESTS IN ASSOCIATED COMPANIES

                                                           As of  March 31,   As of December 31,
                                                                1997                1997
                                                                 HK$                 HK$

Unlisted investments, at cost                                14,335,440           79,366,560
Share of post-acquisition gains (losses)/net                 (6,928,886)          (5,815,427)
Write off for diminutions in values                          (6,793,565)          (7,406,554)
Elimination of unrealized profits                              (612,989)                   -
                                                            ---------------     ---------------
                                                                      -           66,144,579
Due from associated companies, net                            2,292,154            2,909,059 
                                                            ----------------    ----------------
                                                              2,292,154           69,053,638


Movement in provisions for diminutions in values:
   Balance at beginning of year                               3,345,000            6,793,565 
Provisions for diminutions in value                           3,448,565              612,989
                                                            ----------------    -------------
   Balance at March 31 and December 31                        6,793,565            7,406,554
                                                                             
</TABLE>



                                      F-18

<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  INTERESTS IN ASSOCIATED COMPANIES (continued)

     During the year ended  March 31,  1997,  the  Company  incurred  additional
     diminutions  in value in the remaining  interests in  associated  companies
     which reduced the carrying  value to zero.  Therefore,  no further share of
     post-acquisition  losses has been provided for during the nine months ended
     December  31,  1997.  The Group's  share of the  post-acquisition  gains of
     associated  companies  for the nine  months  ended  December  31,  1997 was
     HK$1,113,459.  The amounts due from  associated  companies are deemed to be
     collectible as of December 31, 1997.

     Details of the associated companies at December 31, 1997 were as follows:

<TABLE>

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

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

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

Megaway Development
Limited (Acquired in April, 1997;       Western                        Holding company for company
See Note 12)                            Samoa             30           manufacturing polyester products

</TABLE>


12.  ACQUISITIONS AND DISPOSITIONS

     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.  There  was no  cash
     movement involved in this transaction.  Cathay was purchased 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.

     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


12.  ACQUISITIONS AND DISPOSITIONS (continued)

     On April 2, 1997, the Group acquired a 30% interest in Megaway  Development
     Limited,  a company  owned by Mr.  Harry Ho. Mr. Ho has become the chairman
     and chief executive officer of the Company.  The principal asset of Megaway
     Development  Limited is a 60%  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
     China  (Fujian)  Foreign  Trade Centre  Holdings  Company  ("CFFTC") in the
     amount of HK$65,031,120.

     On June 21,  1996,  Sun's  International  obtained a 100%  interest in Gain
     Whole Limited for a consideration  of US$20,000,000  (HK$154,600,000)  as a
     partial  settlement for the same amount of the debt due from CFFTC, a major
     customer  of the Group.  The  principal  asset of Gain Whole  Limited was a
     certificate of deposit for an amount of US$20,000,000 (HK$154,600,000) with
     an authorized financial  institution in the People's Republic of China (the
     "PRC").  The certificate of deposit was valued at cost, which  approximated
     market and was  classified as a short-term  investment in the  accompanying
     consolidated balance sheet as of March 31, 1997.

     On August 28,  1997,  Sun's  International  sold its 100%  interest in Gain
     Whole  Limited for a  consideration  of a 100%  interest in Megaway  Resort
     Development  Limited,  a company owned by Mr. Harry Ho and  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,  the Group  sold the 100%  interest  in  Megaway  Resort
     Development Limited for a consideration of US$21,000,000 (HK$162,288,000).

     On December  23, 1997,  Sun's  International  acquired a 56.5%  interest in
     Wealthy Asia Limited (WAL) for US$52,000,000  (HK$403,364,486) in cash from
     Mr. Brian Ko. WAL had simultaneously  acquired 100% of Megaway  Agriculture
     Co. Ltd.  (Megaway) from Mr. Harry Ho for  US$92,000,000  (HK$713,644,828),
     with a cash payment of US$72,800,000 which was settled on December 31, 1997
     and a verbal  agreement to remit the  remainder  at some future  date.  The
     remainder  was settled on March 18, 1998  through the receipt of  9,900,000
     newly issued shares of China Continental, Inc. common stock.

     The following amounts represent the initial recording of this transaction:

                                                           Asset (Liability) HK$
                                                           ---------------------
                 Land lease rights                             1,358,514,000
                 Due from Harry Ho                             39,525,000
                 Due to Brian Ko                               (309,635,404)
                 Minority Interest                             (685,039,110)
                                                               -------------
                 Cash Paid                                     (403,364,486)
                                                               -------------

     On February 10, 1998,  Sun's  International  acquired the  remaining  43.5%
     interest  in WAL  from  Mr.  Brian  Ko via the  issuance  of an  additional
     40,000,000  shares of stock in China  Continental,  Inc. of which 9,900,000
     shares were issued directly to Megaway Resort  Development  Ltd., a company
     owned by Mr. Harry Ho and incorporated in Western Samoa.



                                      F-20

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  ACQUISITIONS AND DISPOSITIONS (continued)


     The  principal  asset  of  Megaway  is a 51%  interest  in  Changde  Dafeng
     Agriculture and Animal Husbandry Ltd.  (Changde),  a  Sino-Singapore  joint
     venture incorporated in the People's Republic of China on December 3, 1997.
     Mr. Ho,  through his prior  ownership of Megaway,  was an original party to
     the joint  venture,  with the remaining 49% interest being held by entities
     associated with the Chinese government. Changde has been established to run
     a  breeding  center to  propagate  Boer goats and other  livestock  breeds.
     Changde's  principal  asset is 20,000 hectares or 49,400 acres of grassland
     located  approximately  250  kilometers  north of Beijing,  in the People's
     Republic of China. Based upon an independent  appraisal dated July 30, 1998
     by American  Appraisal  Hongkong  Limited,  the value of 100% of Changde is
     US$181,000,000 (HK$1,402,750,000) as of December 31, 1997.

     Had the 40,000,000  shares of common stock been outstanding  throughout the
     periods  presented,  earnings per share would have been HK$1.92 and HK$1.58
     for the year ended March 31, 1997 and the nine months  ended  December  31,
     1997, respectively.


13.  BANK LOANS

     The import loans with banks carry  interest at 1% above the Hong Kong prime
     lending rate  (weighted  average of 8.5% and 8.9% per annum as of March 31,
     1997 and  December 31,  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% and 11.9% per annum as of March 31,  1997
     and December 31, 1997, respectively).

     During October 1997, the company  borrowed and in turn loaned  HK$9,984,864
     to a company owned by director, Mr. Chan Kwai Chiu, in conjunction with his
     purchase  of a  personal  residence.  The  mortgage  loan is secured by the
     residence and other  properties  owned by Mr. Chan Kwai Chiu with a cost of
     HK$17,800,000.



                                      F-21


<PAGE>

CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  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 and to directors
     and related companies.

     (i)  Cash deposits

     The Group places its cash deposits with an international bank.

     (ii) Trade receivables

     As of March 31, 1997 and  December  31,  1997,  approximately  71% and 18%,
     respectively,  of the trade receivable  balance was due from China (Fujian)
     Foreign Trade Center  Holdings  Company,  a Chinese  Government  controlled
     company.

     (iii) Amounts due from related companies (See Note 19)

     At December  31,  1997,  approximately  34%, 24% and 21% of the amounts due
     from related companies were due from New Skyland  Industrial Ltd.,  Billion
     Pearl   International   Limited   and  New  Skyland   International   Ltd.,
     respectively.

     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.

     (iv) Amounts due from and to directors (See Notes 12 and 19)

15.  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 directors
          and related companies

     Trade  receivables,  other  receivables  and the amounts  due from  related
     companies and  directors 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 and directors


                                      F-22

<PAGE>

 
CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D

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


16.  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 20  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 21). 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.

17.  BANKING FACILITIES

     The  Group  had  banking  facilities  of  approximately  HK$25,000,000  for
     mortgages,  overdrafts and trade finance.  Unused facilities as of December
     31, 1997 amounted to approximately HK$1,000,000.

     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$3,130,000.

     ii.  lien on a subsidiary's fixed deposits totaling HK$2,000,000.

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

     iv.  mortgages  over  properties  held by  director,  Chan Kwai Chiu,  with
          purchase cost of approximately $17,800,000.

18.  FOREIGN CURRENCY EXCHANGE

     The Group has  substantial  transactions  with  customers  and  significant
     investments in associated  companies in the PRC. Both the customers and the
     associated  companies may settle their debts and 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$35,191,812 at March 31, 1997 and December 31, 1997, 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").



                                      F-23

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D

     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.

19.  ADDITIONAL 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. See also Note 13.

     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 associated companies. Other than the above-mentioned transactions,  the
     companies  also arrange for the sale of raw  materials to these  associated
     companies.  Amounts of revenues  from the sales of raw  materials  to these
     associated companies are summarized as follows:
 
                                                              Nine months ended
                                      Year ended March 31,       December 31,
                                             1996           1997            1997
                                              HK$            HK$             HK$

     Sales to associated companies:
       Raw materials                    15,755,398     19,699,783     12,357,168

     Any unrealized  profits arising from these  transactions were eliminated in
     the  consolidated  financial  statements  to  the  extent  of  the  Group's
     interests in these associated companies.

20.  CONTINGENCIES AND COMMITMENTS

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


     The Group had contracts with a related company  controlled by Mr. Chan Kwai
     Chiu in the PRC to purchase  office premises to be developed by the related
     company for HK$21,700,000.  At December 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-24

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D

21.  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                                 Sales                                     Accounts
                                                                                   Nine months ended       Receivable    
                                                         Year ended March 31,         December 31,        December 31, 
                                                        1996             1997            1997                 1997 
                                                        HK$               HK$             HK$                 HK$
<S>                                               <C>                 <C>                 <C>                 <C>    

         China (Fujian) Foreign Trade
          Centre Holdings Company ("CFFTC")        277,682,496      30,842,448                 -          6,594,312
          Kin Heng Xin Investment &
              Development Company Limited                   -      128,292,528        85,870,000                  -
          Shenzhen San Gao Enterprises
              Company Limited (Shenzhen)                    -       88,531,968        59,566,500         28,597,500
          Others                                   21,433,355       21,017,296        14,682,789          1,228,950
                                                 ---------------  --------------- ----------------     --------------
                                                  299,115,851      268,684,240       160,119,289         36,420,762
                                                                     
</TABLE>

     The outstanding balance receivable from CFFTC and Shenzhen arising from the
     above sales amounted to HK$71,625,432 and HK$29,142,288,  respectively,  as
     of March 31, 1997.

22.  ADDITIONAL NON-CASH TRANSACTIONS

     During the year  ended  March 31,  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-2

<PAGE>


CHINA CONTINENTAL, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D


23.  SELECTED FINANCIAL DATA (unaudited)

     A summary of selected information for 1997 and 1996 is as follows:

<TABLE>
 
                                                       Nine months ended                        Nine months ended  
                                                       December 31, 1996                         December 31,1997          
                                                     HK$               US$                     HK$              US$
<S>                                               <C>              <C>                  <C>                 <C>   

         Sales                                    242,544,000      31,296,000            160,119,289       20,660,553
      Cost of Sales                              (113,018,250)    (14,583,000)           (64,600,231)      (8,335,514)
                                                  ------------    ------------           -----------       -----------
      Gross Profit                                129,525,750      16,713,000             95,519,058       12,325,040

      Depreciation of Fixed Assets                   (496,000)        (64,000)              (442,894)         (57,148)
      Selling and Administrative Expenses         (13,089,750)     (1,689,000)            (3,958,938)        (510,831)
      Financial Income/(Expenses), Net               (170,500)        (22,000)              (442,851)         (57,142)
      Other Income/(Expenses), Net                    155,000          20,000             22,625,018        2,919,357
      Shares of (Losses) Gains of Associated
          Companies                                  (441,750)        (57,000)             1,113,459          143,672   
                                                    ----------     -----------           -----------       -----------
      Income Before Income Taxes                  115,482,750      14,901,000            113,299,393       14,762,948
      Income Taxes                                 (9,625,500)     (1,242,000)           (10,000,694)      (1,290,412)
                                                  ------------     -----------           ------------      -----------
      Net Income                                  105,857,250      13,659,000            104,412,158       13,472,536
                                                  ------------     -----------           ------------      -----------
         Earnings Per Share                              4.07           0.53                    4.02             0.52
                                                  ------------     -----------           -------------     -----------

</TABLE>

                                      F-26