<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)

[X]         ANNUAL REPORT PURSUANT T0 SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 1997

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

        For the transition period from ______________ to _______________.

                           Commission File No. 0-26232

                               CHINA PACIFIC, INC.
--------------------------------------------------------------------------------
                (Name of Registrant as Specified in Its Charter)


                 NEVADA                                87-0429945
    --------------------------------        --------------------------------
        (STATE OR JURISDICTION OF                   (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)              IDENTIFICATION NUMBER)

                  Rm. 2008 Sun Hung Kai Centre, 30 Harbour Road
                               Wanchai, Hong Kong
--------------------------------------------------------------------------------
               (Address of Principal Executive Offices) (ZIP CODE)

Registrant's Telephone Number, including Area Code: (852) 2802 3068

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:

                          Common Stock, $.001 par value
--------------------------------------------------------------------------------
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, 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-K or any
amendment to this Form 10-K. [X].

         As of June 10, 1998, 9,039,644 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 Nasdaq
Small-Cap Market, was approximately $3,965,648.

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>
PART I.........................................................................................................   3
         ITEM 1. DESCRIPTION OF BUSINESS.......................................................................   3
         ITEM 2. DESCRIPTION OF PROPERTIES.....................................................................  13
         ITEM 3. LEGAL PROCEEDINGS.............................................................................  14
         ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................  14
PART  II.......................................................................................................  14
         ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER  MATTERS........................  14
         ITEM 6. SELECTED FINANCIAL DATA.......................................................................  15
         ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........  16
         ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................  25
         ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..........  25
PART III.......................................................................................................  26
         ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................................  26
                  COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT................................................  27
         ITEM 11. EXECUTIVE COMPENSATION.......................................................................  28
         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................  28
         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................  29
PART IV........................................................................................................  31
         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..............................  31
         SIGNATURES............................................................................................  33
         FINANCIAL STATEMENTS..................................................................................  34
</TABLE>


                                       2
<PAGE>   3

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

         China Pacific, Inc. (the "Company") is a holding company which, through
its subsidiaries, is engaged in iron and steel production in the People's
Republic of China ("PRC"). The Company also holds options to develop and market
land surrounding Sun City ("Sun City"), a multi-phase all-purpose development
project in the PRC.

         The Company is a Nevada corporation which was incorporated in 1986 as
McMann Investments, Inc., a "blind pool blank check" company, for the purpose of
seeking and acquiring business ventures. On October 30, 1995, the Company
acquired, effective as of July 1, 1995, 100% of the outstanding stock of China
Pacific Steel Limited ("CPS"). CPS owns a sixty percent (60%) interest in
Chengdu Chengkang Iron and Steel Co. Limited ("Chengdu Steel"), a PRC steel
manufacturer.

         The Company acquired its interest in CPS (the "Chengdu Steel
Acquisition") from China Pacific Capital Limited ("CPCL") for total
consideration of approximately $15.1 million which was payable $568,655 in cash
at closing with the balance being payable in the form of a non-interest bearing
demand promissory note secured by the stock of CPS. CPCL was a wholly-owned
subsidiary of China Treasure Holding (B.V.I.) Ltd. ("China Treasure Holding")
which was an indirect controlling shareholder of the Company at the time of the
acquisition.

         Chengdu Steel was created in October of 1994 when Chengdu Iron and
Steel Plant ("CISP"), a state-owned PRC company controlled by the Department of
Metallurgy of the Chengdu Government, contributed its principal operating assets
to Chengdu Steel with substantially all remaining operating assets being leased
to Chengdu Steel in exchange for a 40% interest in Chengdu Steel plus lease
payments of approximately $1.8 million annually or of after tax net profits,
whichever is less, up to March 31, 1996, and at various rates thereafter as
discussed in later sections of this report. CPS contributed capital in the
amount of $14 million and production and marketing expertise in exchange for a
60% interest in Chengdu Steel.

         On May 18, 1994, the Company acquired 51% of the issued and outstanding
stock of China Treasure Construction (B.V.I.) Limited ("China Treasure
Construction") from the existing shareholders of China Treasure Construction in
exchange for the issuance of shares of the Company representing at the time 93%
of the issued and outstanding common stock of the Company (the "China Treasure
Exchange"). Thereafter, the Company terminated its prior operations, the
officers and directors of the Company resigned and the officers and directors of
China Treasure Construction were appointed in their stead, and the Company
changed its name to China Treasure, Inc.

         From the time of the Company's acquisition of China Treasure
Construction until December 29,1995, China Treasure Construction, through its
subsidiaries, was engaged in the development and marketing of the Regent on the
Park (a 500 unit master planned residential community), Star Place (a 5.5
million square foot all-weather shopping, entertainment and office complex) and
Sun Plaza (a 160,000 square foot office complex) phases of Sun City. Sun City
was conceived by the Huiyang City Government of Guangdong Province (the "Huiyang
City Government") as a comprehensive self-contained community, with supporting
infrastructure, to be developed with the goal of attracting high-technology
production companies and research and development enterprises. Sun City is
located approximately 62 miles north of Hong Kong.

         Following the Chengdu Steel Acquisition, management of the Company
determined that the Company would be best served by divesting its interests, and
the accompanying obligations, relating to the development of Sun City in order
to concentrate on its steel operations and the pursuit of other infrastructure
development opportunities within the PRC. To that end, on December 29, 1995, the
Company entered into an agreement with Open View Properties Ltd. ("Open View
Properties"), an entity controlled by the Huiyang City Government, pursuant to
which China Treasure Construction sold its entire interest in each of its
subsidiaries (the "Project Subsidiaries") involved in the development of Sun
City (the "Sun City Sale"). As consideration for the Company's interest in the
Sun City development, Open View Properties and its holding company delivered to 
China Treasure Construction 


                                       3
<PAGE>   4

two three year 8% promissory notes in the amount of $16.2 million (HK$125.4
million) representing a return of China Treasure Construction's original capital
contributions and loans to the Project Subsidiaries plus a fee for services to
be provided of $4.1 million (HK$32 million). The Company was also granted five
year options to (i) develop and market 3 million square meters of land
surrounding Sun City at a price of Rmb100 ($12) per square meter, and (ii)
repurchase its former interest in Sun City for HK$32,010,004, plus any amounts
injected into the Project Subsidiaries by Open View Properties and 10% interest
per annum on all such amounts.

         In conjunction with the Sun City Sale, Huiyang City Government's
interest in the Company was terminated, and Kiu Yin Investment Co. Ltd. ("Kiu
Yin Investment") and China Construction Bank, Guangdong Branch ("CCB") became 51
percent and 49 percent shareholders, respectively, of China Pacific Investment
Holdings Ltd. ("China Pacific Investment Holdings"), which in turn acquired 100%
ownership of the Company's direct parent, C.P. Investment (B.V.I.) Ltd. ("C.P.
Investment"). C.P. Investment currently owns 36.19 percent of the Company's
outstanding common stock.

         Also in conjunction with the Sun City Sale and a subsequent capital
contribution of $240,000 to China Treasure Construction, the Huiyang City
Government obtained a 50% interest in China Treasure Construction, and the
Company's interest in China Treasure Construction was reduced from 51% to 50%.
Following these transactions, China Treasure Construction's name was changed to
China Pacific Construction (B.V.I.) Limited ("CPCT"). The only assets held by
CPCT consist of the notes payable from Open View Properties delivered in
connection with the Sun City Sale, the five year options granted in connection
with the Sun City Sale and the cash contribution of the Huiyang City Government.

         As noted below in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, substantial doubt exists as to
whether Open View Properties and its related companies have sufficient cash
resources to complete the development of the Sun City project and repay certain
obligations to the Company and to CPCT. These obligations have a carrying value
of approximately Rmb92.7 million.

         In January of 1996, the Company changed its name from China Treasure,
Inc. to China Pacific, Inc.


                                       4
<PAGE>   5

SEGMENT INFORMATION

Analyses of sales, income (loss) and assets by major operations and geographical
areas are as follows:

<TABLE>
<CAPTION>
                                         1 9 9 5         1 9 9 6          1 9 97
                                        ---------       ---------        ---------
                                         USD'000         USD'000          USD'000
<S>                                     <C>             <C>              <C>    
Net sales of iron and steel
    Operations to
    Customers in PRC                       53,139         123,504          122,366
Sales of real estate
    Properties in Hong Kong                    --              --           14,111
Rental income derived in
    Hong Kong
    - related companies                        --              --               47
    - third parties                            --              --               98
                                         --------        --------         --------
                                           53,139         123,504          136,622
                                         ========        ========         ========
Income (Loss) from
    Operations-
    Iron and steel
       Operations in PRC                    5,097          10,984          (10,186)
    Investment in real
       Estate properties in
       Hong Kong and other businesses         127            (878)          (4,939)
Income from
    Discontinued
    Operations-
    Real estate
       Development and
       Sale in PRC                            844              --               --
                                         --------        --------         --------
                                            6,068          10,106          (15,125)
                                         ========        ========         ========
Identifiable assets as of
    December 31--
    PRC                                    83,744          95,640          112,023
    Hong Kong                              12,262          16,635           20,005
                                         --------        --------         --------
                                           96,006         112,275          132,028
                                         ========        ========         ========
</TABLE>

         Net sales during 1997 were approximately $136,622,000, which consisted
of net sales of iron and steel products to customers in the PRC of approximately
$122,366,000, sales of real estate properties in Hong Kong of approximately
$14,111,000 and rental income derived in Hong Kong from related companies and
third parties of $47,000 and $98,000, respectively.

         Loss from iron and steel operations in the PRC during 1997 totalled
$8,296,000 and loss from investment in real properties in Hong Kong in 1997
totalled $6,829,000. Identifiable assets as of December 31, 1997 in the PRC and
Hong Kong amounted to $112,023,000 and $20,005,000, respectively.


                                       5
<PAGE>   6

STEEL MANUFACTURING - CHENGDU STEEL

          Background. Chengdu Iron and Steel Plant ("CISP") was established in
1958 as a state-owned enterprise in Chengdu, PRC under the Department of
Metallurgy of the Chengdu government. Operations of CISP began with the
construction of a small steel manufacturing plant in 1958 and continued until
1964. In 1965, the existing manufacturing facilities were demolished and efforts
began to construct a new and larger manufacturing facility. As a result of the
"Cultural Revolution" in the PRC, CISP was idle from 1966 to 1976. In 1977 steel
manufacturing operations were reactivated by CISP and, between 1977 and 1989,
the facility was operated and various new production facilities were installed.
During 1990 and 1991, CISP undertook additional expansion and modernization with
the addition of a variety of major production facilities, including a new
sintering plant, blast furnace and finished goods warehouse.

         CISP's steel manufacturing plant (the "Plant") is located in
Qingbaijiang, approximately 32 kilometers from Chengdu. Chengdu is the capital
city of Sichuan Province and has a population in excess of 10 million. Sichuan
Province is the most densely populated province in the PRC with a population of
approximately 120 million. Based on government published statistics, the Plant
is the largest manufacturer of reinforced steel bars and steel wire in Sichuan
Province and, during 1996, the Plant was among the twenty largest state-owned
enterprises in the province.

The Joint Venture Agreement. In October of 1994, Team Steel, Inc. ("Team
Steel"), a wholly-owned subsidiary of Team International Holdings, Inc., ("Team
Holdings"), entered into an agreement with CISP to form a joint venture named
Chengdu Chengkang Iron and Steel Co. Limited ("Chengdu Steel"). Pursuant to such
agreement, CISP contributed certain principal operating assets of the Plant,
with an estimated value of Rmb80 million, to Chengdu Steel in exchange for a 40%
interest in Chengdu Steel. Additionally, CISP agreed to lease to Chengdu Steel
substantially all remaining assets relating to the operations of the Plant,
currently valued at approximately Rmb310 million, for approximately Rmb5.5
million annually or the net after tax profit of Chengdu Steel, whichever is
less, through March 31, 1996; at an annual rate of 6.5% based on the valuation
of assets actually leased for the period from April 1, 1996 to March 31, 1997;
and, at an annual rental charge to be mutually agreed by both CPS and CISP
commencing April 1, 1997, based on market rental rates, but not to exceed 8%
based on the valuation of the assets actually leased. However, because Chengdu
Steel was in a loss position in 1997, Chengdu Steel is not required to pay
rental on the leased assets. Team Steel contributed Rmb120 million (at an
exchange rate of US$100 = Rmb 852.96) to Chengdu Steel in exchange for a 60%
interest in Chengdu Steel. In conjunction with the formation of Chengdu Steel,
CISP guaranteed Team Steel that Chengdu Steel's after tax profits would be no
less than Rmb100 million in 1995 and Rmb150 million in 1996 with any shortages
in Team Steel's allocable portion of such profits being reallocated from CISP's
share of profits. Additionally, CISP guaranteed that Chengdu Steel, as a
sino-foreign joint venture, would be granted a profits tax concession exempting
Chengdu Steel from PRC profits tax for the first two years of profitable
operations and allowing a 50% reduction in profits tax for the following three
years. In addition, CPS has been given an option to participate in Chengdu
Steel's future expansion in the form of additional capital or loan injections.

         On October 27,1995, China Pacific Capital Limited ("CPCL") acquired
from Team Holdings 100% of the stock of Team Steel and assumed all of the
outstanding obligations and liabilities of Team Holdings for total consideration
of $15.1 million. Following its acquisition of Team Steel, CPCL changed the name
of Team Steel to China Pacific Steel Limited and, on October 30, 1995, sold its
entire interest in CPS to the Company for total consideration of approximately
$15.1 million. $568,655 of the purchase price of CPS was paid in cash by the
Company at the time of acquisition and the balance was evidenced by a
non-interest bearing promissory note in the amount of $14.5 million and secured
by the stock of CPS. CPCL is a wholly-owned subsidiary of China Treasure
Holding, which was an indirect controlling shareholder of the Company at the
time of the acquisition. As a result of the foregoing, the Company is presently
a 60% shareholder of Chengdu Steel.

         With the infusion of capital provided by the formation of the above
described joint venture, Chengdu Steel set out to expand its production capacity
and to modernize its facilities to facilitate future growth, meet the growing
demand for steel products to support infrastructure development in the PRC and
to increase profitability.


                                       6
<PAGE>   7
         As noted below in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, as of December 31, 1997 the
Company has an outstanding receivable from CISP of approximately Rmb365.4
million, and because the Company's independent accountant was not able to review
the financial records of CISP, it is uncertain whether CISP has the necessary
financial ability to repay such obligation to the Company.

         The Steel Plant. The Plant is an integrated facility occupying gross
floor area of 287,986 square meters on a site area of approximately 1,150,000
square meters. The Plant, in its current form, was built in 1965 and has been
periodically reconditioned, upgraded and expanded, with substantial portions of
the Plant being constructed between 1990 and 1994 and in 1996. The Plant
currently consists primarily of (a) a smelting factory utilizing four electric
arc furnaces each with a 10 ton capacity and having a total annual production
capacity of approximately 100,000 metric tons, (b) a 124 ton per hour output
sinter machine with sixteen mixture preparation/storage bins with capacities
ranging from 32 tons to 77 tons, (c) 100 cubic meter; 318 cubic meter and 335
cubic meter blast furnaces, (d) two 20 ton converter furnaces, (e) a cogging
mill with annual production capacity of approximately 380,000 tons, including a
60 ton per hour reheating furnace, (f) a rolling mill producing steel wire rods
in sizes ranging up to 6.5mm, (g) a rolling mill producing steel wire rods in
sizes over 6.5mm, (h) a rolling mill producing steel rebar, (i) a 50,000 cubic
meter coal gas container, (j) a 53,150KV electricity transformer substation, (k)
3 storage yards and 3 finished goods warehouses, (l) various gas storage units,
(m) various administrative buildings, (n) a system of roads, rail, cranes and
transportation belts, and (o) a continuous casting machine.

         The Plant's operations and workforce are supported by substantial
infrastructure development. Among the infrastructure improvements supporting the
Plant and its workforce are an extensive transportation network including
private roads and railway connecting to all main railway lines; a television
station serving employee households; a hospital serving both employees and the
public; security service; a hotel with conference facilities; and secondary and
primary schools.

         Manufacturing. Manufacturing at the Plant is conducted in two separate
production lines. Line I utilizes blast furnaces and converter furnaces to
manufacture steel products from iron ore. Ore of different shapes and sizes is
screened, separated and moved from the Plant's yard by means of conveyor belts
to a sintering plant. The sintering process begins with the ores being prepared
and mixed in storage bins. The raw sinter mix then enters sintering machines
which heat the raw materials to produce a coherent mass. Sintered ore is placed
in a blast furnace to produce liquid iron. The hot liquid iron is then
transferred by transfer cars to an oxygen steelmaking shop where the liquid iron
is transformed into ingot steel utilizing a converter furnace. Liquid steel from
the converter furnace is cast into 120 square meter billets in a continuous
casting machine.

         Line II of the Plant utilizes electric arc furnaces to smelt steel
scrap. Scrap is fed into the furnaces in the presence of oxygen which is
introduced to increase the temperature and accelerate the melting process. The
molten steel is then poured to produce ingot steel.

         Steel ingots from Line I and Line II are rolled in a cogging mill to
produce 90 square mm steel billets. The billets are moved to a rolling mill
where they are reheated and fed through a series of rollers which reduces their
size and shapes them into the finished rebar; steel wire or rod. The rebar
emerges from the rolling mill and is allowed to cool uniformly on a cooling bed
and is then cut to standard lengths. In the case of steel wire, the wire is cut
and rolled while hot on coiling machines.

          The Plant currently has raw material handling capacity of
approximately 1 million metric tons annually. The annual steel production
capacity of the Plant is approximately 600,000 metric tons annually, consisting
of a 450,000 metric ton capacity for Line I and a 150,000 metric ton capacity
for Line II. Until the addition of a new 335 ton blast furnace in July of 1996,
the iron production capacity of Line I was only 250,000 metric tons annually,
thus limiting the effective production capacity of Line I to 250,000 metric tons
of steel annually and the total steel production capacity of the Plant to
400,000 metric tons annually. With the addition of the new blast furnace during
1996, the iron production capacity of Line I has been increased to 450,000
metric tons annually increasing the effective total steel production capacity of
the Plant to 600,000 metric tons annually. In 1996, Chengdu Steel produced
approximately 401,555 metric tons of steel or steel related finished products as
compared to 382,000 metric tons produced in 1996. For the year 1995, Chengdu
Steel produced 370,000 metric tons.


                                       7
<PAGE>   8

         Products. Chengdu Steel's manufacturing currently focuses on the
production of reinforced steel bars and steel wires. Chengdu Steel's
manufactured steel products include reinforced bar, 6.5mm and 8.5mm steel wire,
6.5mm welding rod, spring steel (billets) and other steel products used
principally for construction of building and infrastructure projects.

         Rebar and the steel rods and wire produced by Chengdu Steel are
embedded in poured concrete and serve as structural reinforcements to increase
the strength of concrete. Reinforced concrete is used extensively in the PRC
(and throughout the world) as a principal construction material in highways,
bridges, sewage and water treatment plants, power plants, buildings of all
types, subways, tunnels, wharves, dams and other structures. During 1997 and
1996, rebar and steel wire comprised in excess of 97.1% and 97.3% of Chengdu
Steel's output of steel production, respectively.

         Raw Materials. The principal raw materials used by Chengdu Steel to
produce rebar and steel wire are iron ore and coke. In addition to iron ore and
coke, scrap steel is utilized as raw material for production of steel billets by
Chengdu Steel's electric furnaces. In 1997, Chengdu Steel used approximately
609,238 metric tons of iron ore, 353,410 metric tons of coke and 144,112 metric
tons of scrap steel, while in 1996, Chengdu Steel needed 506,800 metric tons of
iron ore, 387,000 metric tons of coke and 120,000 metric tons of scrap steel.

         Iron ore and coke are purchased from various suppliers with
approximately 80% of such raw materials being supplied from within Sichuan
Province, 10% of such materials being supplied from neighboring provinces and
the remaining 10% of such materials being supplied from overseas. Scrap steel is
purchased from numerous suppliers within Sichuan Province and neighboring
provinces. Because of the existing demand for steel products to support
infrastructure projects in the PRC, the market for raw materials is competitive
and its price is driven by market conditions. Shortages may occur periodically
resulting in increased prices and production costs. The Plant has a raw material
yard with a capacity of approximately 1 million tons of materials allowing
Chengdu Steel to maintain a supply of materials to partially insulate itself
against possible short-term price fluctuations or shortages.

         Chengdu Steel is not dependent upon any one supplier of raw materials
and believes that adequate supplies of such materials are and will be available
from multiple suppliers to meet Chengdu Steel's foreseeable needs.

         Chengdu Steel has obtained 90 day payment terms from approximately 30
percent of its suppliers, with the balance generally providing for payment on a
cash on delivery basis.

         In addition to hard materials used in the manufacturing process, the
Plant consumes large amounts of electricity, natural gas, coal, water and oxygen
in the manufacturing process. Electricity is generally supplied by government
owned power plants in Chengdu. The Plant also has a power sub-station to satisfy
its electricity requirements in the event of shortages in electricity supplied
by government owned power plants. Sufficient quantities are believed to be
available to meet Chengdu Steel's current and anticipated energy needs.

         Supplies of natural gas are sufficient to meet current operating
levels. With the expansion of operations during 1996, Chengdu Steel added a
natural gas recycling plant to recover natural gas from blast furnaces and
converters to support future natural gas requirements.

         Water and coal supplies are plentiful to support operations for the
foreseeable future.

         Expansion and Modernization. During 1996, Chengdu Steel constructed a
335m3 blast furnace to increase the iron production of Line I from 250,000
metric tons to 450,000 metric tons, added a continuous casting process for the
converter furnace to improve efficiency of steel production, and constructed a
natural gas recycling plant.

         Sales and Marketing. Chengdu Steel sells its products primarily to two
markets; the building materials market and the industrial market. The vast
majority of Chengdu Steel's sales are of products for use as building materials,
with the bulk of such products being used in infrastructure projects.


                                       8
<PAGE>   9
 All sales by Chengdu Steel are conducted from administrative offices located at
the Plant. During mid-1997, a new marketing office has been established at
Mianyang, which is now the second largest city in Sichuan province, to
strengthen the Company's marketing network. Approximately 25 percent of products
are sold to and distributed through wholesalers, with the balance being sold
directly to end-users. Approximately 95 percent of Chengdu Steel's sales have
historically been within Sichuan Province, with approximately 5 percent of
sales being to neighboring provinces and the balance to other parts of China.

         Chengdu Steel has engaged in little marketing by western standards. For
the most part, Chengdu Steel receives and fills orders from its customers. Rebar
manufactured to standard specifications and other finished products are
typically stored in warehouses located at the Plant. Such finished products are
shipped to customers by highway using a fleet of trucks owned by Chengdu Steel
or by rail from connections joining the Plant to the major rail routes in the
province and throughout the PRC. Customers also pick up orders at the Plant or
arrange for their own transportation of the steel products they purchase.

         Chengdu Steel has over 100 customers, which are primarily state-owned
construction companies, with no single customer accounting for more than 8% of
total sales during 1997. Chengdu Steel's principal customers are Sichuan
Yuangang Co., Ltd, Chengdu Yuha Property Development Co., Ltd., Zigong Welding
Rods Plant, Ching Material Storage & Transportation Co., and Sichuan Jinguang
Furnace Charge Products Supply Co., Ltd. Chengdu Steel has no long-term
contracts for the sale of its products. Cash sales accounted for approximately
60% of total sales during 1997, while 40% of 1997 sales were to raw material
suppliers of Chengdu Steel in exchange for iron ore, coke and other materials.
Chengdu Steel has made an allowance of $5.6 million for bad debts, or
approximately 4.8% of Chengdu Steel's 1997 net sales, due to the worsening of
the Asian economic crisis in the fourth quarter of 1997 and the appointment of a
new provisional General Manager of Chengdu Steel. As advised by the new
provisional General Manager of Chengdu Steel, a full provision has been made for
certain long-outstanding receivables in the amount of $5.6 million.

         With the lifting of price controls by the PRC in 1991, Chengdu Steel is
free to sell its products at market prices. Chengdu Steel's sales and marketing
department monitors market prices, competitors' positions, anticipated market
demand and Chengdu Steel's position with a view to maintaining competitive
pricing of its products. Where market conditions move materially, a pricing
determination committee will review Chengdu Steel' s pricing strategy and make
adjustments as appropriate.

         Market. The PRC's crude steel production reached 100 million tons in
1996, up by 6.8% year to year. Production volume in 1996 was the highest
worldwide, while Japan came second with total production of 98.77 million tons,
and the United States was third with 94.4 million tons. The PRC Ministry of
Metallurgy Industry (MMI) expects crude steel production to reach 110 million
tons in 2000.

         The MMI recently forecasted that the PRC would consume about 100
million tons of rolled steel in 1997, in line with the 1996 level. Of this,
28.32 million tons would likely be consumed by eight major sectors: railways,
light industry, oil, petrochemical, coal, machinery, shipbuilding and
agriculture. These eight sectors combined were expected by the MMI to consume
one-third of the country's total consumption. The construction sector, which is
the largest steel consumer, was expected to consume half the demand and the bulk
of this would be low-value-added steel products like rebars. However, with the
worsening of the Asian economic crisis since the fourth quarter of 1997, the
consumption of steel products in the PRC may be adversely affected.

         Competition. There are many domestic competitors of Chengdu Steel in
its primary markets. Chengdu Steel is, however, the largest manufacturer of
steel wire and steel rebar in Sichuan Province with an estimated 20% of such
combined market. Of twelve known manufacturers of rebar and steel wire in
Sichuan Province, four, including Chengdu Steel, are classified by the
Department of Metallurgy of Sichuan Province as major manufacturers. Chengdu
Steel is well-known within the domestic steel industry, has received numerous
national and provincial awards and has consistently been ranked high in quality
control by the Ministry of Metallurgical Industry. In 1996, Sichuan government
conveyed to Chengdu Steel the grand prize designation for brand name rebar
products.


                                       9
<PAGE>   10

         Chengdu Steel is also affected by foreign-produced steel that is
imported to the PRC. During certain periods when domestic steel prices
materially exceeded international steel prices, more foreign steel products were
imported into the PRC, legally or illegally, which caused a decline in domestic
steel product prices and an increase in stockpiled inventory at domestic steel
mills. Such imports typically adversely affect domestic steel producers.

         The potential admission of the PRC as a member of the World Trade
Organization ("WTO"), which on January 1, 1995 succeeded GATT as the
international arbiter of trade relations among GATT signatories, could lead to
increased foreign competition for Chengdu Steel. If the PRC becomes a member of
the WTO, the PRC government will likely be required to reduce import
restrictions and tariffs on steel and steel products. Reductions by the PRC of
the barriers to imports of foreign steel, either in anticipation of or upon
becoming a member of the WTO, would likely lead to increased competition in
Chengdu Steel's markets.

         While the prospects of increased foreign competition may ultimately
have a significant adverse impact on the domestic steel industry within the PRC,
the impact of such increased competition, should such arise, is expected to be
partially mitigated for Chengdu Steel and other producers within Sichuan
Province as a result of certain logistical problems associated with marketing
and delivering steel to Sichuan Province. Sichuan Province is an inland province
characterized by difficult mountainous terrain. The lack of ocean ports serving
the province and the prevailing terrain within the province significantly
increase the cost of transporting steel products into the province. Those
factors are expected to reduce the viability of competition from overseas
suppliers as well as steel suppliers in distant provinces.

         There was a slight reduction in the unit prices of the Company's
products due to keen competition in the steel market, from an average of $313
per ton in 1996 to $294 per ton during 1997. Management believes that Chengdu
Steel's relative size, its long history of operations within the PRC, its
affiliation with key PRC governmental entities and the projects within the PRC
will allow Chengdu Steel to compete successfully within the steel market. While
Chengdu Steel believes it is favorably positioned to compete within the PRC
steel market and to market all of its production on favorable terms, there are a
number of steel producers, including government controlled steel producers,
marketing their products within the PRC, or which may begin marketing their
products within the PRC, which have greater resources financially and otherwise
than Chengdu Steel.

         Research and Development . While Chengdu Steel undertakes continual
efforts to upgrade and expand its production plant, minimal expenses have been
incurred directly related to research and development activities. Feasibility
studies for the expansion and modernization of the Plant have historically been
sponsored and assisted by the Metallurgical Department of the State or
Provincial government for a nominal charge.

         Environmental Matters. Chengdu Steel's Plant is subject to
comprehensive laws and regulations for environmental protection as will be
construction activity associated with its proposed expansion. These include
principally the Environmental Protection Law of the People's Republic of China,
the Law on Prevention of Water Pollution, the Law on Prevention of Atmospheric
Pollution, the Law of Noise Pollution and the Regulations Regarding
Environmental Protection Involving Construction Projects.

         Chengdu Steel closely monitors its compliance with environmental
regulations and has implemented certain measures and installed certain
facilities, including a 50,000 m(3) collection tower to collect, purify and
recycle various gases produced in the steel manufacturing process, to assure
such compliance. Chengdu Steel believes that its manufacturing and other
operations are in compliance in all material respects with existing applicable
environmental laws.

OPERATING RISK

         Country risk. The Company's operations are conducted in the PRC and
Hong Kong. Accordingly, the Company's business, financial position and results
of operations may be influenced by the political, economic and legal
environments in the PRC and Hong Kong, and by the general state of the PRC and
Hong Kong economies.

         The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, 


                                       10
<PAGE>   11

among others, the political, economic and legal environments and foreign
currency exchange. The Group's results may be adversely affected by changes in
the political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.

         Effective from July 1, 1997, sovereignty over Hong Kong was transferred
from the United Kingdom to the PRC, and Hong Kong became a Special
Administrative Region of the PRC (an "SAR"). As provided in the Basic Law of the
Hong Kong SAR of the PRC, the Hong Kong SAR will have full economic autonomy and
its own legislative, legal and judicial systems for fifty years. The Group's
management does not believe that the transfer of sovereignty over Hong Kong has
had an adverse impact on the Company's financial and operating environment.
There can be no assurance, however, that changes in political or other
conditions will not result in such an adverse impact.

         Dependence on strategic relationship. A majority of the Company's
operations are conducted by Chengdu Steel, a Sino-foreign joint venture
established between the Company's subsidiary and CISP, a PRC state-owned
enterprise. Any deterioration of this strategic relationship and any adverse
changes in financial position of CISP, among other things, may have an adverse
effect on the operations of the Company.

         As noted below in item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Company has an outstanding
receivable of approximately Rmb365.4 million from CISP. As the Company's
auditors were not able to review CISP's financial statements, it is uncertain
whether CISP has the financial ability necessary to repay its obligations to the
Company or its subsidiaries.

         Furthermore, the Company and CISP experienced a deterioration in their
strategic relationship recently. Effective January 6, 1998, Mr. Liao Zicai's
services as a director of CISP were terminated and as a result he also ceased to
be the General Manager of Chengdu Steel. A provisional new General Manager has
been running Chengdu Steel since then. However, the changes in CISP and Chengdu
Steel's management, and disagreements between CISP and the Company regarding
Chengdu Steel's financial position, have delayed the flow of reliable financial
information from Chengdu Steel to the Company, which was necessary for the
preparation and audit of the Company's financial statements for the year ended
December 31, 1997. Although the new management of CISP and Chengdu Steel have
been cooperating with the Company and have provided the necessary financial
information to the Company's auditors for them to complete the Company's audit,
there can be no assurance these disagreements will not occur again in the
future, which may adversely affect the operation of the Company.


         Concentration of credit risk and major customers. The Company's credit
risk with respect to trade receivables is limited due to the large number of
customers comprising the Group's customer base. There were no customers which
represented a significant concentration of sales in 1995, 1996 or 1997, or of
trade accounts receivable as of December 31, 1996 and 1997. Ongoing credit
evaluations of each customer's financial condition are performed and, generally,
no collateral is required. The Company and its subsidiaries maintain reserves
for potential credit losses.

PROPERTY DEVELOPMENT - SUN CITY

As noted above, until December of 1995, the Company was engaged in property
development activities consisting of the preparation of the master plan for Sun
City and the development and marketing of the Regent on the Park, Star Place and
Sun Plaza phases of the Sun City development. With the Sun City Sale, the
Company no longer has a direct interest nor an active involvement in the Sun
City development, but has retained an option with respect to the development and
marketing of land surrounding Sun City as well as receiving an option to
reacquire its interest in Sun City. As of December 31, 1997, the Company and its
subsidiaries have (i) receivables of approximately Rmb33.7 million from Open
View Properties, the company responsible for developing Sun City, and (ii) an
investment of approximately Rmb59.0 million in CPCT, an associated company,
whose major assets are two promissory notes issued by Open View Properties and
Open View Properties' holding company. Both the receivables and the promissory
notes are due for settlement in December 1998. There is substantial doubt as to
whether Open View Properties has the necessary cash resources to complete the
development of Sun City and to repay its obligations to 


                                       11
<PAGE>   12

the Company and to CPCT. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.

         Overview. Following the Sun City Sale, Sun City is being developed by
various governmental bodies in Huiyang City; Guangdong Province, PRC.

         Sun City is located in Huiyang City in the southern part of Guangdong
Province. Sun City lies in the Pearl River Delta approximately 19 miles from the
neighboring city of Huizhou, a city of approximately 2.4 million persons, and
11.2 miles from the port city of Aotou on China's east coast and is
approximately 90 minutes from Hong Kong by hydrofoil, and one hour by car.

         The site of Sun City lies on approximately 2,400 acres of flat land in
a valley which is bisected by the Danshui River. A comprehensive master site
plan was developed with land being zoned 30% for high-tech nonpolluting
industries, 30% for residential development, 30% for commercial/retail space and
10% open "green" space. A comprehensive road system was also laid out to provide
for ease of access and high mobility while maintaining the privacy of
residential areas. Finally, support services and infrastructure improvements
such as water sewage and electrical service necessary to support such a
community have been planned and are presently under construction.

         Development of Sun City is being carried out in various phases as
necessary support services and infrastructure improvements are completed to
support each phase. The primary developments within Sun City will be Regent on
the Park, a luxury residential development, and Star Place, a multi-phase 5.5
million square foot all-weather shopping center containing office complexes,
high-end retail outlets and a variety of restaurants and entertainment
facilities. In addition to Regent on the Park and Star Place, Sun City will
include approximately 2,200 acres of industrial sites, science and research
areas, additional residential areas and recreational areas.

         The ultimate objective of Sun City is to provide a comprehensive
integrated environment in which executives can work and reside without
sacrificing the quality of either their work or living environments. Sun City is
expected to eventually attract approximately 50 high-tech industries to the city
and to support a population of 100,000 persons. Development of Sun City has been
suspended since 1995 due to a depressed real estate market in the Guangdong
Province of the PRC.

Sale of Company's Interest in Sun City. With the Company's determination to
pursue recurring infrastructure development opportunities in the PRC, the
Company's management determined to pursue the divestiture of its interest in Sun
City during the fourth quarter of 1995. As a result of such efforts, the Company
entered into an agreement effective December 29, 1995 pursuant to which the
Company agreed to transfer substantially all of its interests in Sun City in the
Sun City Sale to Open View Properties, an entity controlled by the Huiyang City
Government. Under the terms of the Sun City Sale, China Treasure Construction
transferred its entire interest in each of its Project Subsidiaries to Open View
Properties. In exchange for the transfer of such interest, Open View Properties
and its holding company delivered to the Company a series of three year 8%
promissory notes in the amount of $16.2 million (HK$125.4 million) representing
a return of China Treasure Construction's original capital contributions and
loans to the Project Subsidiaries plus a fee for services to be provided of $4.1
million (HK$32 million)

         The Company currently has receivables from Open View Properties of
approximately Rmb33.7 million, and an investment in its 50 percent owned
associated company, CPCT, of approximately Rmb59.0 million. CPCT's primary asset
is the three promissory notes described above. Both the receivables and the
promissory notes are due for settlement in December 1998. Because of the
suspension of development of Sun City and the relatively small size of Open View
Properties, Open View Properties' ability to complete the development of Sun
City and to repay its obligations to the Company and to CPCT by the due date is
uncertain. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations, for more information.

         Company's Continuing Interest in Sun City. Following the Sun City Sale,
the Company has no involvement or responsibility of any nature relating to the
future development or marketing of Sun City. However, in connection with the Sun
City Sale, the Company was granted a five year option to develop and market


                                       12
<PAGE>   13

approximately 3 million square meters of land surrounding Sun City at a price of
Rmb100 ($12) per square meter. Additionally, the Company was granted a five year
option to repurchase the Company's interest in Sun City for a price equal to
HK$32,010,004 plus any amounts injected into the Project Subsidiaries by Open
View Properties and 10% interest per annum on all such amounts.

         The Company's present operating plans are limited to pursuing
infrastructure development within the PRC and the Company has no present
interest in exercising either of its options to participate in the future
development of Sun City. However, the Company will evaluate the feasibility of
pursuing either or both of such options from time to time and, if the exercise
of such options and renewed involvement in the development of Sun City is deemed
to provide sufficient profit potential, may exercise either or both of such
options and resume its involvement in the development of Sun City.

         Competition. If the Company should elect to exercise either or both of
its options to renew its involvement in the development of Sun City, the Company
can expect to face intense competition from other developers, including
governmental entities and entities operating with government support, to attract
industry. While the nature of the Sun City development and the Huiyang City
Government support of such project are such that it is not expected that Sun
City will face direct competition, other developments within southeast Asia may
be undertaken which may be more attractive in terms of location, governmental
subsidies and other benefits offered to industry. However, the Company has no
obligation to renew its involvement in the Sun City project and will only renew
such involvement if it deems the opportunity to offer satisfactory profit
potential.

EMPLOYEES

         At June 10, 1998, the Company had approximately 7,000 employees,
including 13 executive officers, 193 employees engaged in administration and
6,794 employees engaged in steel manufacturing operations. The Company and its
subsidiaries are not parties to any traditional labor contracts. The Company has
not suffered any labor stoppages and believes that it has good relations with
its employees.

ITEM 2.  DESCRIPTION OF PROPERTIES

         The Company, at December 31, 1997, had interests in properties in the
PRC and in Hong Kong.

         Within the PRC, virtually all land is state-owned and the right to use
most land is allocated without charge to users. However, in recent years, the
government, through the State Bureau of Land Administration and its subordinate
departments, has permitted grants of land use rights for value.

         The Chengdu Steel Plant, described above, is located in Qingbaijiang
approximately 32 kilometers from Chengdu in Sichuan Province. See "Item 1.
Description of Business. Steel Manufacturing - Chengdu Steel - The Steel Plant."
CISP has the right, granted by the municipal government of Qingbaijiang county,
to use the land on which the Plant is located without time limit and at no
charge. Pursuant to the terms of the joint venture agreement by which Chengdu
Steel was formed, Chengdu Steel owns the principal manufacturing facilities
which constitute the Plant. Additional facilities supporting the operation of
the Plant are leased from CISP for approximately Rmb15.5 million annually or the
net after tax profit of Chengdu Steel, whichever is less, for the period up to
March 31, 1996, at an annual rate of 6.5% based on the valuation of assets
actually leased for the period from April 1, 1996 to March 31, 1997; and, at an
annual rental charge to be mutually agreed by both CPS and CISP commencing April
1, 1997, based on market rental rates, but not to exceed 8% based on the
valuation of the assets actually leased. However, because Chengdu Steel was in a
loss position in 1997, Chengdu Steel is not required to pay rental on the leased
assets.


                                       13
<PAGE>   14

         In addition to its interest in the Chengdu Steel Plant, the Company's
properties in the PRC include options relating to the development and marketing
of approximately 3 million square meters of land surrounding Sun City. See "Item
1. Description of Business. Property Development - Sun City - Company's
Continuing Interest in Sun City."

         The Company's properties in Hong Kong consist of its executive offices
which are located in 3,400 square feet of space at Room 2008, Sun Hung Kai
Centre, 30 Harbour Road, Wanchai, Hong Kong. Such offices are held pursuant to
leases from third parties which provide for aggregate monthly rents of
approximately $18,500 and expiring July of 1998.

         The Company held two residential properties in Hong Kong which were
acquired during the third quarter of 1997, with a carrying value of Rmb56.9
million, which included a provision for impairment loss of the two residential
properties amounting to Rmb17.4 million as a result of turmoil in the Hong Kong
property market in the last quarter of 1997.

         The Company believes that its properties are adequate to support its
current operations.

ITEM 3.  LEGAL PROCEEDINGS

         The Company's future operating results and financial position may be
affected by the following dispute. On or about March 5, 1997, a brokerage firm
filed a civil action against the Company in the United States District Court,
Southern District of New York. The complaint alleges breach of contract by the
Company in connection with a Selling Agreement allegedly entered into between
the Company and the brokerage firm, and involves securities of the Company that
were sold in private placements in 1995 and 1996. The brokerage firm is seeking
monetary damages and expenses in excess of $5,000,000, and an order compelling
the Company to issue approximately 1,141,000 common stock warrants under the
terms of the alleged Selling Agreement. The Company believes this claim is
without merit and plans to contest such claim vigorously. However, the Company
and its legal counsel are unable to predict the outcome of this dispute. If the
outcome is adverse, the Company's financial position and operating results could
be materially affected. No provision has been recorded in the financial
statements in connection with the aforesaid claim.

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

         No matters were submitted to a vote of the Company's stockholders
through the solicitation of proxies, or otherwise, during the fourth quarter of
the Company's fiscal year ended December 31, 1997.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol
"CHNAE." The Company's common stock commenced quotation on Nasdaq in June of
1995. Prior to the commencement of quotations on Nasdaq, the trading market in
the Company's common stock was sporadic. The following table sets forth the high
and low bid price per share for the Company's common stock for each quarterly
period during the last two fiscal years:


                                       14
<PAGE>   15

<TABLE>
<CAPTION>
                                            High (1)                    Low (1)
                                            --------                    -------
<S>            <C>                          <C>                         <C> 
1996 -         First Quarter                 8.125                      4.00
               Second Quarter                8.1875                     4.50
               Third Quarter                 6.8125                     3.9375
               Fourth Quarter                6.125                      3.21875
1997 -         First Quarter                 4.4375                     3.00
               Second Quarter                3.625                      2.0625
               Third Quarter                 3.75                       2.8125
               Fourth Quarter                3.125                      1.00
</TABLE>

(1)      The Company declared a one-for-four reverse stock split effective 
         July 9, 1996. All reported historical information has been adjusted 
         accordingly to reflect the impact of the reverse stock split.

         The quotations reflect inter-dealer prices without retail mark-up,
markdown or commission and may not represent actual transactions.

         At June 10, 1998, the bid price of the Common Stock was $ 0.6875.

         As of June 10, 1998, there were approximately 380 holders of record of
the Common Stock of the Company.

         The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.

         On June 10, 1998, the bid price of the Common Stock was $0.6875 and has
been below the minimum $1.00 per share Nasdaq requirement for continued listing
since May 20, 1998. However, in the event the Company's bid price remains below
$1.00 per share for thirty consecutive trading days, the Nasdaq panel reviewing
the Company's delisting action indicated that the Company would be granted a
ninety day grace period to achieve compliance with the bid price requirement,
pursuant to NASD Marketplace Rule 4310(c)(8)(B).

ITEM 6.  SELECTED FINANCIAL DATA

Historical Financial Information (USD'000)

<TABLE>
<CAPTION>
                                                      1997         1996         1995         1994         1993
                                                    --------     --------     --------     --------     --------
<S>                                                 <C>          <C>          <C>          <C>          <C>  
Net sales                                            136,622      123,504       53,139           --           --
Gross profit                                           2,947       17,815       12,116           --           --
Income/(Loss) from Continuing operations             (20,827)      14,900        9,356         (247)          (5)
Income/(Loss) from Discontinued operations                --           --        1,654       (1,603)      (1,231)
Minority Interest                                      5,702       (4,794)      (4,942)         786          606
Net income/(loss)                                    (15,125)      10,106        6,068       (1,064)        (630)
Net income/(loss) per share - (Basic)
- Continuing operations                                (1.68)        1.32         1.45        (0.01)          --
- Discontinued operations                                 --           --         0.23        (0.06)       (0.04)
Net income/(loss) per share (Fully Dilutive)
- Continuing operations                                (1.68)        1.12         1.37        (0.01)          --
- Discontinued operations                                 --           --         0.22        (0.06)       (0.04)
Working capital                                      (35,135)       7,303       12,050      (23,910)     (47,626)
Total assets                                         132,564      114,333       96,013       44,027       33,413
Long-term debt                                        20,324           --       10,979        9,633       10,992
Shareholders' equity                                  22,175       37,080       15,907        4,045        5,233
Weighted average number of common
Shares outstanding - (Basic)                           9,021        7,638        3,612        3,571        3,571
</TABLE>


                                       15
<PAGE>   16

The financial information in respect of 1997 and 1996 was mainly represented by
the full year results of Chengdu Steel's iron and steel operations in the PRC.
The figures in 1995 represented the second half-year iron and steel operations
in the PRC after the acquisition of Chengdu Steel by the Company in 1995 and the
results of the Company's investment in Sun City. See the description of the
acquisition set forth in Item 1, Description of Business--General Development of
Business and Steel Manufacturing--Chengdu Steel. In 1994 and 1993, the financial
information represented the Company's investment in Sun City. For a description
of the sale of the Sun City project to a third party in 1995, see the
description set forth in Item 1, Description of Business--General Development of
Business.

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

         As a result of the Chengdu Steel Acquisition, the Company's operating
results reflect its share of the steel operations of Chengdu Steel from the
effective date of the acquisition, July 1, 1995, to the end of 1995 and for all
of 1996 and 1997.

         The combined effect of the Sun City Sale and Chengdu Steel Acquisition
is reflected in the operating results of the Company with 1995 results
reflecting (i) Sun City related results, including the Sun City Sale, as
discontinued operations from January 1,1995 to December 29,1995, and (ii) the
Company's 60% interest in Chengdu Steel results from July 1, 1995 to December
31, 1995. Operating results for 1996 and 1997 consist of the Company's 60%
interest in Chengdu Steel results for the full year.

OVERVIEW

         The Company experienced a difficult year in 1997, with net income
declining from Rmb83.78 million in 1996 to a net loss of Rmb125.2 million in
1997, and net income per share declining from Rmb10.97 per share in 1996 to a
net loss per share of Rmb13.88 in 1997. The downturn in 1997 is attributable
both to the general economic conditions prevailing in Asia and to specific
management problems at CISP and Chengdu Steel which occurred in the fourth
quarter of 1997.

         The economic turmoil that has occurred in Asia has affected the Company
in several ways. First, a softening of demand and increased competition required
that the Company's joint venture with CISP reduce unit prices for steel (from
$313 per ton in 1996 to $294 per ton in 1997). Second, a decline in real estate
prices in Hong Kong and China had a negative impact on the Company's real
property investments, leading to a $2.1 million loss and to the receipt of no
income from an associated real estate company, CPCT, which in 1996 had
contributed $1.3 million to the Company. Third, increased inflation in Hong Kong
and China contributed to an increase in the Company's selling, general and
administrative expenses. Fourth, the Company's need to borrow (in the form of
its 9% convertible notes) and its need to service mortgage debt at increased
rates of interest resulted in higher net interest expense ($2.5 million in 1997
compared with $99,000 in 1996).

         The Company's joint venture with CISP also suffered from previously
disclosed management uncertainties. CISP removed the former manager of Chengdu
Steel in January 6, 1998 and for a period thereafter the joint venture was left
without adequate leadership. This resulted, among other things, in the delay in
preparing financial statements for Chengdu Steel and the Company. Chengdu
Steel's new management decided to write off $5.9 million for obsolete stock and
poor quality raw materials as of the end of 1997. This write off came on top of
scheduled maintenance on Chengdu Steel's two blast furnaces that increased SG&A
by $1.6 million. In addition, new management determined that an increase in the
allowance for doubtful accounts of $5.9 million was appropriate.

         As a result of the operating loss sustained by the Company in 1997, the
Company determined to write off goodwill in the amount of Rmb16.6 million.


                                       16
<PAGE>   17

         In addition to contributing to the poor performance of the Company in
1997 as compared with 1996, the general decline in Asian economic conditions has
caused some of the Company's financial assets to either decline in value, or at
least be of uncertain value.

         As of December 31, 1997, the Company had receivables totalling 
approximately Rmb33.7 million from Open View Properties and companies related to
Open View Properties, and an investment of approximately Rmb59 million in an
associated company, CPCT, the major assets of which are two promissory notes
issued by Open View Properties and its holding company. Both the receivables and
promissory note are due for settlement in 1998. As unaudited management accounts
of Open View Properties indicate that its net asset value is approximately
Rmb33.1 million as of December 31, 1997, it is unclear whether Open View
Properties and its related companies have the necessary cash resources to pay
their respective obligations to the Company and CPCT on the due dates, and hence
the Company's realization on the above mentioned receivables and its investment
in CPCT, with a carrying value of Rmb92.7 million, is uncertain. See Liquidity
and Capital Resources discussion below.

         As of December 31, 1997, the Company had outstanding receivables of
approximately Rmb365.4 million from CISP. Rmb211 million of this balance arises
from short term bank loans due in 1998 that were transferred from CISP into the
name of Chengdu Steel without authorization from Chengdu Steel. The remaining
Rmb154.4 million of receivables arises from loans by Chengdu Steel to CISP to
finance CISP's operations. The Company and its auditors are unable to determine
whether CISP has the necessary financial ability to repay its obligations to the
Company or its subsidiaries. It is unclear when, or whether, the bank loans will
be transferred back to CISP. If such short term bank loans are not transferred
back to CISP, and the Company is required to repay such loans during 1998, it is
unclear whether the Company will have the necessary cash resources to pay back
the loans. This is due to the substantial losses the Company incurred during
1997, and the fact that its current liabilities exceeded its current net assets
as of December 31, 1997 by approximately Rmb290.9 million. See Liquidity and
Capital Resources discussion below.

         The Company's operating loss, coupled with the uncertainties
surrounding the Open View Properties and CISP receivables has caused some
uncertainty as to whether the Company will be able to repay the 9% convertible
debentures when due. The arranger of this debenture issue is currently
attempting to negotiate changes to the terms of these notes with the holders to,
among other things, delay their maturity; however, there can be no assurance
that such negotiations will be successful. See Liquidity and Capital Resources
discussion below.

         The foregoing matters resulted in the inability of the Company's
auditors to express an opinion on the Company's financial statements for 1997.

         At December 31, 1997 the Company's current liabilities exceeded its
current assets by approximately Rmb290.9 million. The Company's unaudited
management accounts for the three months ended March 31, 1998 indicate that the
Company has continued incurring losses. These facts, together with the Company's
operating loss, its uncertain ability to realize on certain of its financial
assets and its obligation to repay the 9% convertible debentures in January
1999, will require the Company to restructure its indebtedness and/or raise
additional funds during 1998. While the Company is exploring ways to do each of
these, there can be no assurance that it will be able to do so. See Liquidity
and Capital Resources discussion below.

RESULTS OF OPERATIONS - FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996.

         Net Sales. Net sales during 1997 totalled $136.6 million compared to
net sales of $123.5 million during 1996. The slight increase in net sales was
attributable to the sales proceeds of the two Hong Kong properties sold during
1997 amounting to $14.1 million and increase in sales volume from 382,000 tons
in 1996 to 401,555 tons in 1997. However, this favorable condition was offset by
a reduction in the average unit prices of steel products the Company was able to
realize in 1997 due to keen competition in the steel market, from an average of
$313 per ton in 1996 to $294 per ton during 1997.

         Cost of Goods Sold. Cost of goods sold during 1997 totalled $133.7
million (97.8% of net sales) compared to $105.7 million (85.6% of net sales)
during 1996. The increase in cost of goods was due to the Asian economic turmoil
which worsened in late 1997 and due to a change in management in the Company's
60% owned joint venture subsidiary, Chengdu Steel, with the new provisional
General Manager of Chengdu Steel conservatively reviewing and reassessing the
assets and receivables and the results of operation of Chengdu Steel for the
fourth quarter of 1997, which resulted in (a) a 


                                       17
<PAGE>   18

write off of $5.9 million for obsolete stock and poor quality of raw materials
that contributed to an increase in the cost of goods sold, and (b) an increase 
in costs associated with an increase in production volume from 382,000 tons in 
1996 to 401,555 tons in 1997. Furthermore, the cost of goods sold was increased
by an addition of the cost of the two Hong Kong properties sold during 1997
amounting to $12.8 million.

         Gross Profit. Gross profit during 1997 totalled $2.9 million as
compared to $17.8 million of gross profit reported during 1996. The reduction of
gross profit in 1997 was attributable to (a) a write off of $5.9 million for
obsolete stock and poor quality of raw materials that contributed to an increase
in the cost of goods sold, and (b) a reduction in the average price of steel
products of $313 per ton in 1996 to $294 per ton during 1997, but these factors
were partially relieved by the profits made on the two Hong Kong properties sold
during 1997, which amounted to $1.2 million.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses ('SG&A') during 1997 totalled $17.5 million (12.8% of
net sales) as compared to $7.8 million (6.3% of net sales) during 1996. The
increase in SG&A was attributable to (a) a provision of $5.6 million as of
December 31, 1997 for doubtful accounts receivable, (b) generally higher
inflation in Hong Kong and the PRC in 1997 as compared to 1996, and (c)
scheduled heavy and routine maintenance on the Company's two twenty-year old
blast furnaces, which increased the Company's SG&A by $1.6 million.

         Net Interest Income (Expenses). There was an increase in net interest
expense from $99,000 in 1996 to $2.5 million in 1997, which was attributable to
$1.3 million in interest payable on the 9% convertible notes and to mortgage
interest payable to bank mortgagees on four pieces of real property in Hong
Kong, two of which have been sold during 1997.

         Net Other Income (Expenses). The Company incurred an "Other Income"
loss of $2.1 million during 1997 due primarily to diminution in the value of the
two remaining real properties located in Hong Kong and purchased by the Company
during the year for investment purposes. The diminution in value was caused by a
substantial general decline in the value of Hong Kong real estate due to turmoil
in various Asian financial markets which affected Hong Kong in the fourth
quarter of 1997, aggravated by high interest costs in Hong Kong. The amount of
diminution was determined by independent appraisers.

         Income From an Associated Company. The Company had no income during 
1997 from an associated company, CPCT, compared to interest income of $1.3
million during 1996. Due to the substantial diminution in real property values
in Hong Kong in the last quarter of 1997, which affected Southern China--Huiyang
City where the Sun City Project was situated, the Company obtained an updated
valuation of such project. After a review of the updated appraisal which showed
a substantial decrease in the appraised value from over Rmb632 million to
Rmb493.2 million, despite accruals of $975,000 interest income in the first
three quarters of 1997, no interest income was recognized from CPCT during the
year. CPCT's major assets are two promissory notes, together with accrued
interest, for Rmb156 million issued by Open View Properties and its holding
company. Open View Properties is responsible for the development of the Sun City
project, which development has been suspended since 1995. Because of the
substantial decrease in the appraised value of the Sun City project and the
suspension of the project's development, the ability of Open View Properties to
pay the promissory notes, which are due in December 1998, is uncertain.

         Goodwill. There was a write-off of goodwill as of December 31, 1997
(instead of amortizing it over 40 years) amounting to Rmb16.6 million, due to
the Company's substantial operating losses for the year.

         Operation Differential Subsidies. The Company received Operation
Differential Subsidies of $3.406 million in 1996 payable to the Company's
subsidiary, CPS, based on estimated 1996 earnings of Chengdu Steel, pursuant to
a letter of guarantee from CISP to CPS whereby CISP guaranteed after tax profits
of Chengdu Steel of not less than Rmb150 million (approximately $18 million)
during 1996. The Company did not receive such subsidies during the year ended
December 31, 1997.

         Income Taxes. The Company's income tax provision for 1997 totalled
$153,000 as compared to $219,000 during 1996. The provision for income taxes
made in 1997 was mainly attributed by the provision made for the two properties
sold in 1997 that amounted to $149,000 during the year ended December 31, 1997.


                                       18
<PAGE>   19

         As a condition of the acquisition of its interest in Chengdu Steel, the
Company received from CISP a guarantee that Chengdu Steel, as a sino-foreign
joint venture, would be granted a profits tax concession exempting Chengdu Steel
from PRC profits tax for the first two years of profitable operations and
allowing a 50% reduction in profits tax for the following three years. Such tax
exemption was granted as required.

         Income/(Loss) from Discontinued Operations. There was no income from
discontinued operations during 1997 and 1996 as compared to $1.7 million during
1995.

         Minority Interests. Minority interest represents the allocable share of
income or loss attributable to the 40 percent share of Chengdu Steel not owned
by the Company during 1997 and 1996.

         Net Income/(Loss). Net loss during 1997 totalled $15.1 million as
compared to net profit of $10.1 million during 1996. The net losses were caused
mainly by an increase in interest expenses, the write down of goodwill, a
provision for diminution in value of two Hong Kong properties, elimination of
interest income from Open View Properties, and a provision for doubtful debts
and obsolete stock, as more fully described above.

RESULTS OF OPERATIONS - FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

         As a result of the Sun City Sale, operating results discussed below
have been restated in 1995 to reflect substantially all of the expenditures
associated with the Sun City project as discontinued operations. Further, actual
results reported during 1995 relate primarily to the operations of Chengdu Steel
for the six month period from July 1,1995 to December 31, 1995. Certain pro
forma information is provided to reflect the pro forma results of Chengdu Steel
for the full year ended December 31, 1995 as if the various transactions
relating to the formation of Chengdu Steel had taken place at the beginning of
such period.

         Net Sales. Net sales during 1996 totalled $123.5 million compared to
net sales of $53.1 million during 1995. The increase in net sales was
attributable to the Company's acquisition of a 60% interest in Chengdu Steel
which was effective as of July 1, 1995. On a pro forma basis, net sales of
Chengdu Steel for the full year ended December 31, 1995 totalled $108.9 million.
The increase in pro forma net sales was attributable to increased production
capacity relating to the installation of a new blast furnace late in the second
quarter of 1996, which was partially offset by temporary disruption in
operations during the installation of the new blast furnace. Sales of steel
products during 1996 totalled approximately 382,000 tons as compared to 364,020
tons sold during 1995.

         Cost of Goods Sold and Gross Profit. Cost of goods sold during 1996
totalled $105.7 million (85.6% of net sales) compared to $41 million (77.2% of
net sales) during 1995. The increase in cost of goods sold was attributable to
the Company's acquisition of a 60% interest in Chengdu Steel which was effective
as of July 1, 1995. On a pro forma basis, cost of goods sold for the full year
ended December 31, 1995 totalled $89.2 million (81.9% of pro forma net sales).
The increase in pro forma cost of goods sold was attributable to an overall
increase in direct costs of 10% during 1996, for items such as coke, iron ore
and transportation, as compared to 1995.

         Gross profits during 1996 totalled $17.8 million as compared to $12.1
million of gross profits reported during 1995 and pro forma gross profits during
1995 of $19.7 million. The decrease in pro forma gross profits during 1996 was
attributable to the increase in direct expenses of 10% overall as compared to
1995, and a temporary disruption in operations during the installation of the
new blast furnace.

         Selling, General and Administrative Expenses. SG&A during 1996 totalled
$7.8 million (6.3% of net sales) as compared to $3.8 million (7.1% of net sales)
during 1995. The increase in SG&A was attributable to an increased level of
corporate activities relating to operation of Chengdu Steel for the full year
during 1996.

         On a pro forma basis, SG&A increased 16.4% from $6.7 million (6.1% of
net sales) for the full year ended 1995. The increase in SG&A, on a pro forma
basis, was attributable to increased inflation and an increase in sales volume.


                                       19
<PAGE>   20
         Net Interest Income (Expense), Net Other Income (Expense), and Income
From an Associated Company. Because of certain differences in presentation
between 1995 and 1996, the sum of these three categories can be compared more
meaningfully than any single category. The total of net interest income, net
other income, and the Company's share of income from an associated company,
CPCT, in 1996 was $1,700,000, compared to a total of $1,225,300 during 1995. The
1996 figure includes the Company's $1.3 million allocable share of the income
from CPCT, which has been 50% owned by the Company since December 31, 1995, and
interest received on the promissory notes obtained by the Company in connection
with the Sun City Sale. The 1995 total of $1,225,300 also includes the Company's
allocable share of income from CPCT; which was a 51% owned subsidiary of the
Company until December 31, 1995, interest receivable and gain on the assets sold
in the Sun City Sale. See Item 1, Description of Business, Property Development
- Sun City, Sale of Company's Interest.

         Operation Differential Subsidies. The Company received Operation
Differential Subsidies of $3.406 million in 1996 payable to the Company's
subsidiary, CPS, based on estimated 1996 earnings of Chengdu Steel, pursuant to
a letter of guarantee from CISP to CPS whereby CISP guarantees after tax profits
of Chengdu Steel of not less than RMB150 million (approximately $18 million)
during 1996. The Company did not receive such subsidies during 1995.

         Income Taxes. The Company's income tax provision for 1996 totalled
$219,000 as compared to $228,000 during 1995.

         On a pro forma basis, income tax expense of Chengdu Steel totalled
$219,000 during 1996, compared to $228,000 during 1995.

         As a condition of the acquisition of its interest in Chengdu Steel, the
Company received from CISP a guarantee that Chengdu Steel, as a sino-foreign
joint venture, would be granted a profits tax concession exempting Chengdu Steel
from PRC profits tax for the first two years of profitable operations and
allowing a 50% reduction in profits tax for the following three years. Such tax
exemption was granted as required.

         Income/(Loss) from Discontinued Operations. Income from discontinued
operations during 1996 totalled $0 as compared $1.7 million during 1995.

         Minority Interests. Minority interest represents the allocable share of
income or loss attributable to the 40% share of Chengdu Steel not owned by the
Company during 1996 and the second half of 1995 and the 49% interest in China
Treasure Construction not owned by the Company during 1996 and 1995.

         Net Income/(Loss). Net income during 1996 totalled $10.1 million as
compared to $6.1 million during 1995. Pro forma net income for the full year
ended December 31, 1995, including results attributable to Chengdu Steel for the
first six months of 1995, totalled $8.9 million.

LIQUIDITY AND CAPITAL RESOURCES

         CERTAIN ASSETS AND LIABILITIES OF THE COMPANY

         Due to the factors described above and various other difficulties, the
Company's independent accountants have determined that there is substantial
doubt about (a) the value of certain of the Company's assets, and (b) the
Company's ability to meet certain of its own debt obligations. A description of
these issues follows.

         As of December 31, 1997, the Company had receivables totalling
approximately Rmb33.7 million from Open View Properties and companies related to
Open View Properties, and an investment of approximately Rmb59 million in an
associated company, CPCT, the major assets of which are two promissory notes
issued by Open View Properties and its holding company. Both the receivables and
promissory notes are due for settlement in December 1998. As noted above under
Item 1, Description of Business, Open View Properties and its subsidiaries are
engaged in the development of the Sun City project. However, development of this
project has been suspended since 1995. Unaudited management accounts of Open
View Properties indicate that its net asset value is approximately Rmb33.1
million as of December 31, 1997, after stating the valuation of the Sun City
development properties that assumes the project will be completed and salable.
Though 


                                       20
<PAGE>   21

Open View Properties has issued a letter of intent to the Company that it
intends to begin developing Sun City in the near future, when Open View
Properties will recommence development of the Sun City project is uncertain.
Consequently, it is unclear whether Open View Properties and its related
companies have the necessary cash resources to pay their respective obligations
to the Company and CPCT on the due date, and the Company's realization on the
above mentioned receivables and its investment in CPCT, with a carrying value of
Rmb92.7 million, is uncertain.

         As of December 31, 1997, the Company had outstanding receivables of
approximately Rmb365.4 million from CISP, the Chinese joint venture partner of
Chengdu Steel. Rmb211 million of this balance arises from short term bank loans
maturing in less than a year that were transferred from CISP into the name of
Chengdu Steel without authorization from Chengdu Steel. The loans, on a
revolving basis, are due within 1998, so must be recognized in the Company's
1997 financial statements. The remainder of the Rmb365.4 million receivables,
about Rmb154.4 million, arise from loans by Chengdu Steel to CISP to finance
CISP's operations. As the Company's auditors were not able to review CISP's
financial statements, the Company and its auditor are thus unable to determine
whether CISP has the financial ability necessary to repay its obligations to the
Company or its subsidiaries. Chengdu Steel and CISP have entered into an
agreement recognizing that CISP, and not Chengdu Steel, is responsible for
repayment of the Rmb211 million bank loans, but it is unclear when, or whether,
the bank loans will be transferred back to CISP. As a condition to request a
transfer of the loans back to CISP, CISP has to obtain the permission from the
relevant Chinese governmental authorities to use its real property as collateral
for the loans. CISP has made an application for such use of its real property to
the relevant Chinese governmental authorities and is awaiting their approval.

         If such short term bank loans are not transferred back to CISP and the
Company is required to repay such loans during 1998, it is unclear whether the
Company will have the necessary cash resources to pay back the loans. This is
due to the substantial losses the Company incurred during 1997, and the fact
that its current liabilities exceeded its current net assets as of December 31,
1997 by approximately Rmb290.9 million.

         As of December 31, 1997, the Company has outstanding liabilities under
convertible notes of approximately $15 million, which are convertible at the
option of the noteholders at any time between May 15, 1997 and January 15, 1999
into the common stock of the Company at minimum conversion price of $4.00 per
share, or are repayable by the Company on January 15, 1999. Because the shares
of the Company's common stock have been trading below the required $4.00 minimum
conversion price for some time, it is uncertain whether the noteholders will
convert the notes into common stock. If the holders of the convertible notes
choose not to convert and require repayment of the notes, it is uncertain
whether the Company will have the necessary cash resources to pay the obligation
on the due date.

         LIQUIDITY

         At December 31, 1997, the Company had a working capital deficit of $35
million and a cash balance of $6 million, of which $4 million cash was pledged
as collateral in respect of bank loans borrowed by CISP, as compared to a
working capital surplus of $7.3 million and a cash balance of $7.4 million at
December 31, 1996. The change in working capital and cash balances was
attributable to a combination of (i) the acquisition of various fixed assets,
properties, inventories and other expenditures to commence and heavy repairs of
the blast furnace; (ii) negative cash flows from operations, and (iii) the
receipt of $14.2 million of net proceeds from the sales of two properties sold
during 1997.

         As a result of the Sun City Sale and the Chengdu Steel Acquisition, the
financial obligations of the Company consist primarily of the obligations of its
60% owned subsidiary, Chengdu Steel.

         At December 31, 1997, the primary obligations of the Company consisted
of $48.4 million as compared to $7.2 million in 1996. The primary obligations of
the Company in 1997 consisted of (a) short-term bank loans amounting to $25.5
million, (b) $15 million of 9% convertible notes due January 1999, (c) long-term
bank loans and various loans from unaffiliated third parties in the amount of
$5.2 million and $2.7 million respectively. Maturities on long-team debt total
$2.8 million during 1998. The short-term bank loans were originally owned by
CISP, yet were transferred without authorization in the name of Chengdu Steel.
Our management has made an agreement with CISP (i) recognizing that CISP, and
not Chengdu Steel, is responsible for repayment of two Rmb211 million in bank
loans, (ii) recognizing that the loans were used for purposes that benefited
CISP, and which were 


                                       21
<PAGE>   22

not related to and did not benefit Chengdu Steel's business activities, and
(iii) that CISP will reimburse Chengdu Steel for all interest and costs it
incurs in connection with the short term loans. However, it is not clear when,
or whether, the short term loans will be transferred back into the name of CISP.

         As of December 31, 1997, the current accounts due from CISP to Chengdu
Steel amount to $44.1 million, which comprise (i) the short-term bank loans
recognized in Chengdu Steel in 1997 that amounted to $25.5 million and (ii) the
financing of CISP's operations by Chengdu Steel in 1997 that amounted to $18.6
million. In order to settle the balances due from CISP to Chengdu Steel, CISP
signed an agreement with Chengdu Steel to settle the balances in the coming two
years. The method of settlement will be in form of cash or by injection of
assets into Chengdu Steel.

         In addition to its various borrowings, the Company and its subsidiaries
are obligated under a number of leases covering its executive offices and
various operating assets leased by Chengdu Steel from CISP. Pursuant to the
terms of the Chengdu Steel Acquisition, CISP agreed to lease to Chengdu Steel
substantially all assets relating to the operations of the Plant, other than
those assets sold to Chengdu Steel, currently valued at approximately Rmb310
million, for approximately Rmb15.5 million annually or the net after tax profit
of Chengdu Steel, whichever is less, through March 31,1996; at an annual rate of
6.5% based on the valuation of assets actually leased for the period from April
1, 1996 to March 31, 1997; and, at an annual rental charge to be mutually agreed
by both CPS and CISP commencing April 1,1997, based on market rental rates, but
not to exceed 8% based on the valuation of the assets actually leased. However,
because Chengdu Steel was in a loss position in 1997, Chengdu Steel was not
required to pay rental on the leased assets.

         CAPITAL RESOURCES

         Historically the Company's operations have been funded by a combination
of periodic sales of common stock and convertible securities to fund specific
expansion plans, capital contributions from the Company's ultimate shareholders,
loans from shareholders and affiliates, bank loans, and deposits received from
advance sales of units at Sun City. During 1995, operations relating to Sun City
were funded principally by operating cash flows derived from sales at Sun City.
The Chengdu Steel Acquisition was funded through the payment of $0.6 million in
cash and a non-interest bearing note payable to an affiliated company controlled
by the Company's principal shareholder in the amount of $14.5 million. Such note
is repayable on demand and is secured by the stock of Chengdu Steel.

         During 1995, the Company issued common stock, convertible debentures
and convertible preferred stock raising approximately $5.6 million net of
offering costs. During 1996, the Company issued common stock, convertible
debentures and convertible preferred stock raising approximately $11.4 million
net of offering costs. These issuances during 1995 and 1996 have reduced the
percentage of the Company outstanding stock owned by C.P. Investment (B.V.I.)
Ltd. from 93 percent to 36.19 percent.

         During 1997, the Company completed the placement of $15 million of 9%
convertible notes due January 15, 1999 (the "Notes"). The Notes are convertible
into common stock of the Company at a conversion price equal to eighty percent
(80%) of the average closing bid price of the Company's common stock over the
five (5) trading-day period ending on the day prior to the date of written
notice from a holder of such conversion. The conversion price shall in no event
be less than $4.00 per share nor greater than $8.00 per share. No conversions
shall be permitted prior to May 15, 1997. The Notes shall be convertible at the
rate of 25% of the original amount of such Notes after May 15, 1997, 50% of the
original amount of the Notes after September 12, 1997, 75% of the original
amount of the Notes after January 10, 1998 and 100% of the original amount of
the Notes after May 10, 1998. As a result of the Note placement, the Company's
cash and working capital positions were improved by approximately $13.9 million
from the December 31, 1996 levels.

         As of December 31, 1997, the Company has outstanding liabilities under
the Notes of approximately $15 million. Because the shares of the Company's
common stock have been trading below the required $4.00 minimum conversion price
for some time, it is uncertain whether the noteholders will convert the Notes
into common stock. If the holders of the Notes choose not to convert and require
repayment of the Notes, it is uncertain whether the Company will have the
necessary cash resources to pay the obligation on the due date. This is in part


                                       22
<PAGE>   23
because of the substantial losses incurred by the Company as described above,
the low prices at which the shares of the Company are trading below the
conversion prices and the questionable value of the Company's receivables from
CISP and Open View Properties. The original arranger of the Notes is currently
negotiating with the noteholders to modify the repayment terms of the Notes,
although no agreement has yet been reached, and there can be no assurance that
any agreement will be reached.

         At December 31, 1997, no 10% convertible debentures and no shares of
either Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock or Series C Convertible Preferred Stock remained outstanding. A total of
$200,000 of 10% convertible debentures and $26,205 of related accrued interest
were converted during 1997 resulting in the issuance of approximately 83,260
shares of Common Stock. A total of 2,250 shares of Series A Preferred Stock
(being all of the outstanding Series A Preferred Shares), 1,680 shares of Series
B Preferred Stock (being all of the outstanding Series B Preferred Shares),
9,105 shares of Series C Preferred Stock (being all of the outstanding Series C
Preferred Shares), and $600,000 of convertible debentures and $20,316 of the
related accrued interest were converted during 1996 resulting in the issuance of
an aggregate of approximately 4,790,956 shares of common stock (after giving
effect to a 1-for-4 reverse stock split effective July 9, 1996).

         In addition, in 1996 the Company issued 195,750 shares of common stock
(after giving effect to the same reverse stock split), valued at $783,000, at an
average price of $3.99 per share to certain third party consultants for
consultancy services rendered by them in connection with the Chengdu Steel
Acquisition.

         The proceeds from the sale of securities during 1995 and 1996 were used
to fund the expansion and modernization of the Plant undertaken during 1996. The
proceeds of the sale of securities during 1997 were used to finance the
operations of Chengdu Steel and to invest in residential properties in Hong
Kong.

         Pursuant to the Sun City Sale, CPCT, which is 50% owned by the 
Company, holds a series of 8% promissory notes in the aggregate amount 
of $16.2 million which are due and payable in December of 1998. Because of 
the uncertain financial condition of Open View Properties and its holding 
Company, its is substantially uncertain whether the Company will realize 
payment upon these notes. See Item 1 - Description of Business, and 
Item 7 - Management's Discussion and Analysis of Financial Condition and 
Results of Operations - Fiscal Year 1997 Compared to Fiscal Year 1996.

         At December 31, 1997, the Company had outstanding 550,755 warrants 
which had been issued to various parties in connection with consulting services
and fund raising efforts. The warrants are exercisable at a price of $15.24 per
share and expire in September 2000. Also, during 1997, the placement agent for
the $15 million convertible note offering described above was granted a five
year warrant exercisable to acquire up to 300,000 shares of common stock at
$4.00 per share. The exercise of all presently outstanding warrants would
provide an additional $8.4 million of capital to the Company. There is no
assurance, however, that any of such warrants will be exercised, and such
exercise is currently unlikely because the price of the Company's common stock
has been below the minimum required level of $4.00 per share for some time.

         In 1995, the Company granted common stock options under an incentive
plan to purchase 125,000 shares of common stock at exercise prices ranging from
$9.60 to $16.00, to be exercised according to a predetermined schedule from 1996
to 2000. No such options have been exercised in 1995 and 1996.

         As discussed above, the Company is taking certain steps to address the 
uncertain value of its receivables from Open View Properties and CISP, and to
alleviate the doubt concerning the Company's ability to repay its debt
obligations to the banks holding the short term loans and to the Note holders.
However, given the Company's current situation, including a working capital
deficit of $35 million as of December 31, 1997 and incurring further losses
during the three months ended March 31, 1997, it will be necessary for the
Company to obtain additional financing. The Company's operations have been
funded in the past by a combination of periodic sales of common stock and
convertible securities to fund specific expansion plans, capital contributions
from the Company's ultimate shareholders, loans from shareholders and
affiliates, and bank loans. Although there can be no assurance that the Company
will be able to raise capital using these methods in the future, the Company's
management intends to explore such and other methods (such as asset injections
from third parties etc.) to raise additional capital. There can be no assurance
that the Company can be successful in raising capital from any of these or other
methods.


                                       23
<PAGE>   24

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

         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 include the following: potential shortage and price
increases in iron ore, scrap iron and other raw materials which result in
curtailment of steel operations or reduced operating margins; inflationary
forces and governmental responses thereto within the PRC which may result in
curtailment or delays in infrastructure construction projects which utilize the
Company's products which, in turn, may reduce or delay revenues of the Company;
other governmental factors peculiar to operation in the PRC relating to labor
cost and availability, raw material availability, access to credit and other key
operational and regulatory factors which may adversely affect the demand for the
Company's products and profitability; potential competition from existing steel
operators within the PRC, foreign steel operators which may enter the PRC market
and new competition within the PRC from operators controlled by or operating in
partnership with local, regional, or national governmental agencies; dependence
upon key personnel and the ability to attract and retain qualified management
and operations personnel to support existing operations and future growth and
modernization; the ability to access and implement modern steel manufacturing
technology in order to operate efficiently and profitably; potential conflicts
of interest associated with periodic loans between, sales among and transactions
with affiliated shareholders; the potential issuance of substantial numbers of
additional shares in connection with the conversion of outstanding convertible
securities and future issuance of similar securities without shareholder
approval which may result in substantial dilution to existing shareholders; and,
risks associated with the receipt of substantially all of the Company's revenues
in Renminbi and the ability to convert operating profits into other currencies
and expatriate such profits.

INFLATION AND EXCHANGE RATES

         The Company believes that inflation has had certain impacts on the
results of its operations, including increasing selling, general and
administrative expenses during 1997. High levels of inflation and exchange rate
fluctuations have characterized the PRC economy in recent years. However,
because the operations of Chengdu Steel are conducted exclusively within the
PRC, management believes that any price fluctuations attributable to inflation
or changes in exchange rates can be passed through to its customers. There can
be no assurance, however, that continued inflation and exchange rate
fluctuations will not adversely impact the Company in the future. In particular,
as the Company's revenues are primarily received in Renminbi, the Company's
ability to pay dividends and make other payments denominated in other currencies
may be adversely impacted by exchange rate fluctuations.


                                       24
<PAGE>   25

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                               CHINA PACIFIC, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                    PAGE
                                                                                                    ----
<S>                                                                                                 <C>
Report of Independent Public Accountants...........................................................  F-1

Consolidated Balance Sheets as of December 31, 1997 and 1996.......................................  F-2

Consolidated Statements of Operations for the years ended
     December 31, 1997, 1996 and 1995..............................................................  F-4

Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995..............................................................  F-6

Consolidated Statements of Changes in Shareholders' Equity for the years ended
     December 31, 1997, 1996 and 1995..............................................................  F-8

Notes to Consolidated Financial Statements.........................................................  F-11
</TABLE>

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

         Not applicable.


                                       25
<PAGE>   26

                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

INFORMATION REGARDING DIRECTORS

         The following table sets forth information with respect to each
director. The information to age, principal occupation and directorships held
has been furnished by each such director.

<TABLE>
<CAPTION>
                                                                                        Served as Director
Name and Age                        Principal Occupation(1)                             Continuously Since
------------                        -----------------------                             ------------------
<S>                                 <C>                                                 <C>
Mak Shiu Tong, Clement (45)         President, Chief Executive
                                    Officer and Chairman of the Board
                                    Of Directors
                                    (Principal Executive Officer)                              1993

Cheng Yuk Ching (44)                Vice President, Secretary and Director                     1994

Tong Tong Lin, Thomas (32)          Chief Financial Officer and Director                       1996
                                    (Principal Financial and Accounting Officer)

Zhang Guo Liang (53)                Director(2)                                                1996

Tan Jian Sheng (39)                 Director(3)                                                1996

Samuel Olenick (70)                 Director(4)                                                1997
</TABLE>

----------

(1)   Unless indicated otherwise in the table or in the section captioned
      "Information Regarding Executive Officers", the individuals named in the
      table have held their positions for more than five years.

(2)   From 1989 to 1992, Mr. Zhang served as Secretary General of the Xinhua
      News Agency, and has served as General Manager of Xinhua News Agency- Asia
      - Pacific Region since 1992.

(3)   From 1989 to 1994, Mr. Tan served as Department Head of the International
      Division of The China Construction Bank-Guangdong Branch, and has served
      as General Manager for the same company since 1994. China Construction
      Bank - Guangdong Branch indirectly beneficially owns 17.73 percent of the
      Company's common stock.

(4)   Mr. Olenick has served as a member of the independent audit committee of
      the Company. He is a certified public accountant in the United States of
      America. Mr. Olenick is a director and founder of Lok Tek Syringe Pty Ltd.
      in Australia since 1994, a company engaged in medical syringe design and
      manufacture.


                                       26
<PAGE>   27

INFORMATION REGARDING EXECUTIVE OFFICERS

         The following table sets forth the names, ages and offices of the
present executive officers of the Company. The periods during which such persons
have served in such capacities are indicated in the description of business
occupations of such persons below. Information with respect to non-employee
directors is set forth above.

<TABLE>
<S>                                         <C>
Mak Shiu Tong, Clement (45)                 President and Chief Executive Officer
Mo Kat Ling, Connie (36)                    Vice President
Cheng Yuk Ching (44)                        Vice President and Secretary
Tong Long Tin, Thomas (32)                  Chief Financial Officer
</TABLE>

         Officers and directors are selected on an annual basis. The present
terms for each director will expire at the next annual meeting of shareholders
or at such time as a successor is duly elected. Officers serve at the discretion
of the Board of Directors. See "Beneficial Ownership of Common Stock."

         There are no family relationships among any of the directors or
officers of the Company.

         The following is a biographical summary of the business experience of
the present executive officers of the Company.

         Mak Shiu Tong, Clement. Mr. Mak has served as President, Chief
Executive Officer and Chairman of the Board of the Company since the Company's
acquisition of China Pacific Construction (B.V.I.) Limited ("China Pacific
Construction") (formerly China Treasure Construction (B.V.I.) Limited) in May of
1994. Mr. Mak was a founder of China Pacific Construction and its affiliates and
has served as Chairman of China Pacific Construction since it inception in 1993.
Since 1979, Mr. Mak has served as Chairman, and was a founder, of Kiu Yin
Investment Co., Ltd. (formerly, Bondwell Electronics Limited), as electronics
manufacturer.

         Mo Kat Ling, Connie. Ms. Mo has served as Vice President of the Company
since the Company's acquisition of China Pacific Construction in May of 1994.
Ms. Mo previously served as Treasurer and a Director of the Company from May of
1994 until June of 1995. Previously, Ms. Mo served as Vice President, Treasurer
and a Director of Kiu Yin Investment Co., Ltd. from 1989 to 1995. In addition to
her duties as China Pacific's Vice President, Ms Mo was named as a Director of
Chengdu Steel on April 17, 1998, and is actively involved in the management of
the Chengdu Steel plant, including the marketing and finance functions.

         Cheng Yuk Ching. Ms. Cheng has served as Vice President, Secretary and
a Director of the Company since the Company's acquisition of China Pacific
Construction in May of 1994. Previously, Ms. Cheng served as Vice President,
Secretary and a Director of Kiu Yin Investment Co., Ltd. from 1984 to 1996.

         Tong Long Tin, Thomas. Mr. Tong has served as Financial Controller of
the Company since 1994 and as Chief Financial Officer and a Director of the
Company since 1996. Prior to joining the Company, Mr. Tong served as an audit
supervisor of Ho and Ho & Co., a certified public accounting firm in Hong Kong
from 1988 to 1994.

                  COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT

         Under the securities laws of the United States, the Company's
directors, its executive officers, and any persons holding more than ten percent
of the Company's Common Stock are required to report their initial ownership of
the Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose in this Report any
failure to file by these dates during 1997. All of the filing requirements were
satisfied on a timely basis in 1997. In making these disclosures, the Company
has relied solely on written statements of its directors, executive officers and
shareholders and copies of the reports that they filed with the Commission.


                                       27

<PAGE>   28

ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth information concerning cash and non-cash
compensation paid or accrued for services in all capacities to the Company
during the year ended December 31, 1997 of the Chief Executive Officer and each
of the next four most highly compensated executive officers of the Company whose
compensation exceeded $100,000 (the "named officers"). Except for the Chief
Executive Officer, the compensation of the Company's other executive officers
did not exceed $100,000.

<TABLE>
<CAPTION>
                                                                                     Long Term
                                                 Annual Compensation                Compensation
                                        -------------------------------------     ----------------
                                                    Other Annual
                                                    Compensation
Name and Principal Position       Year   Salary($)  or Bonus($)    Commission     Stock Options($)
---------------------------       ----   ---------  -------------  ----------     ----------------
<S>                               <C>      <C>      <C>            <C>            <C>
                                  1997     336,352        --          (1)                --
Mak Shiu Tong, Clement            1996     316,947        --          (1)                --
   President, Chief Executive     1995     194,069        --          (1)                --
   Officer and Chairman           1994     252,264        --          (1)                --
</TABLE>

----------

(1)  Although the officers receive certain perquisites such an auto allowance
     and Company-provided life insurance, the value of such perquisites did not
     exceed the lesser of $50,000 or 10% of the officer's salary and bonus.

COMPENSATION OF DIRECTORS

         The Company reimburses each director for all expenses of attending
board meetings. Otherwise, no compensation of any nature is paid to non-employee
directors, and no compensation is paid to employee directors for their service
as directors.

EMPLOYEE CONTRACTS

         The Company has no employment agreements with any of its employees and
has no arrangements of any nature which would result in payments to officers or
other persons as a result of any termination of employment or change in control
of the Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table is furnished as of June 10, 1998, to indicate
beneficial ownership of shares of the Company's Common Stock by (1) each
shareholder of the Company who is known by the Company to be a beneficial owner
of more than 5% of the Company's Common Stock, (2) each director, nominee for
director and executive officer of the Company, individually, and (3) all
officers and directors of the Company as a group. The information in the
following table was provided by such persons.

<TABLE>
<CAPTION>
                                                   Amount and Nature of
Name and Address of Beneficial Owners            Beneficial Ownership(1)(2)         Percent of Class
-------------------------------------------      --------------------------         ----------------
<S>                                              <C>                                <C>  
Mak Shiu Tong, Clement ....................          1,668,429(2)(4)                     18.5%
     Room 2008, Sun Hung Kai Centre
     30 Harbour Road
     Wanchai, Hong Kong.
</TABLE>


                                       28
<PAGE>   29

<TABLE>
<CAPTION>
                                                   Amount and Nature of
Name and Address of Beneficial Owners            Beneficial Ownership(1)(2)         Percent of Class
-------------------------------------------      --------------------------         ----------------
<S>                                              <C>                                <C>  
China Construction Bank-
Guangdong Branch
     No. 555, Dong Feng Dong Road
     Guangzhou, Guangdong Province, China            1,603,000(3)(4)                      17.7%

Cheng Yuk Ching                                            -0-                             0.0%

Tong Long Tin, Thomas                                      -0-                             0.0%

Tan Jian Sheng                                             -0-                             0.0%

Zhang Guo Liang                                            -0-                             0.0%

Samuel Olenick                                             -0-                             0.0%

All executive officers and directors as a group      1,668,429                            18.5%
     (7 persons)
</TABLE>

----------

(1)  The persons named in the table have sole voting and investment power with
     respect to all shares of common stock shown as beneficially owned by them,
     subject to community property laws, where applicable, and the information
     contained in the footnotes to the table.

(2)  All shares indicated as being held by Mr. Mak are held of record by C.P.
     Investment (B.V.I.) Ltd. ("C.P. Investment"), a wholly owned subsidiary of
     China Pacific Investment Holdings Ltd. ("China Pacific Investment
     Holdings"). China Pacific Investment Holdings is owned 51% by Kiu Yin
     Investment Co., Ltd., a company controlled by a discretionary trust
     established for the benefit of Mr. Mak's family.

(3)  All shares indicated as being held by The China Construction Bank-Guangdong
     Branch are held of record by C.P. Investment. China Pacific Investment
     Holdings, the parent of C.P. Investment, is owned 49% by Guangdong
     Construction (B.V.I.) Co., Ltd., which is, in turn, controlled by The China
     Construction Bank-Guangdong Branch.

(4)  In connection with the Company's disposal of its interest in the Sun City
     project, Mak Shiu Tong, Clement and The China Construction Bank-Guangdong
     Branch formed China Pacific Investment Holdings, which acquired all of the
     shares of C.P. Investment (formerly China Treasure Investment (B.V.I.)
     Limited) from China Treasure Holding (B.V.I.) Limited. As a result of such
     transactions, The China Construction Bank-Guangdong Branch increased its
     beneficial ownership in the Company by 797,143 shares and the beneficial
     ownership of a like member of shares through its ownership in China
     Treasure Holding (B.V.I.) Ltd, was terminated. See "Certain Relationships
     and Transactions."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        On December 29, 1995, the Company entered into an agreement with Open
View Properties, which is controlled by the People's Government of Huiyang City,
whereby the Company's then 51% owned subsidiary, CPCT, sold its entire interest
in each of its Project Subsidiaries and along therewith, its entire interest in
Sun City (the "Sun City Sale"). As consideration for the Company's interest in
the Sun City development, Open View Properties and its holding company delivered
a series of three year 8% promissory notes in the amount of $16.2 million,
representing a return of China Pacific Construction's original capital
contributions and loans to the Project Subsidiaries plus a fee for services to
be provided of $4.1 million. Additionally, the Company was granted a five year
option to develop and market 3 million square meters of land surrounding Sun
City at a price of Rmb100 ($12) per square meter


                                       29
<PAGE>   30

and a five year option to repurchase the Company's interest in Sun City at a
cost plus a 10% premium per year. In conjunction with the Sun City Sale, the
People's Government of Huiyang City obtained a 50 percent interest in CPCT, with
the Company owning the remaining 50 percent.

     As noted above in Item 1--Description of Business and in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, as of December 31, 1997 the Company had receivables from Open View
Properties and its holding company of approximately Rmb33.7 million and an 
investment of approximately Rmb59 million in CPCT, an associated company whose
primary asset consists of the two promissory notes described above. The 
promissory notes and receivables are due for settlement in December 1998, and 
it is unclear whether Open View Properties and its related companies have the 
cash resources necessary to pay these obligations to the Company and to CPCT 
on the due dates.

     During 1995, China Treasure Holding (an affiliate of the Company since the
date of the Sun City Sale because Mr. Clement Mak, the CEO, director and 18.5%
shareholder of the Company, holds an indirect ownership interest of 51% in China
Treasure Holding) loaned $12 million to the Company's subsidiary, CPS, in the
form of a non-interest bearing promissory note which is secured by the stock of
CPS. China Treasure Holding also loaned $1.3 million to the Company and its
subsidiaries at a commercial interest rate of 9 percent per annum. The current
balance remaining on these two loans is $5.9 million. As of December 31, 1997,
C.P. Investment, which has record ownership of 36.19 percent of the Company's
shares, had outstanding a non-interest bearing loan of $163,000 to the Company.

     C.P. Investment held 3,271,429 shares of common stock of the Company as of
December 31, 1997. C.P. Investment is wholly owned by China Pacific Investment
Holdings, which is 51 percent owned by Kiu Yin Investment Co., Ltd., a company
controlled by a discretionary trust established for the benefit of the family of
Clement Mak, the Company's Chairman and President, and 49 percent owned by
Guangdong Construction (B.V.I.) Co., Ltd., which is wholly owned by The China
Construction Bank-Guangdong Branch.


                                       30

<PAGE>   31

                                     PART IV

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

(a)(1) FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                        Page
                                                                                        ----
<S>                                                                                     <C>
Report of Independent Public Accountants..............................................   F-1
Consolidated Balance Sheets...........................................................   F-2
Consolidated Statements of Operations.................................................   F-4
Statement of Cash Flows...............................................................   F-6
Consolidated Statements of Changes in Shareholders' Equity............................   F-8
Notes to Consolidated Financial Statements............................................   F-11
</TABLE>

(a)(2) FINANCIAL STATEMENT SCHEDULES

<TABLE>
<S>                                                                                     <C>
Segment Information...................................................................   5
Historical Financial Information .....................................................  15
</TABLE>

(a)(3) EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number                         Description of Exhibit
-------                        ----------------------
<S>      <C>
 2.1     Acquisition Agreement dated October 30,1995 between China Treasure
         Capital Limited and China Pacific Ltd. (1)

 3.1     Articles of Incorporation, as amended to date (2)

 3.2     Bylaws, as amended to date (3)

 4.1     Certificate of Designation for Series A Convertible Preferred Shares(4)

 4.2     Certificate of Designation for Series B Convertible Preferred Shares(4)

 4.3     Certificate of Designation for Series C Convertible Preferred Shares(4)

 4.4     Form of 10% Convertible Debentures(4)

 4.5     Form of Warrant dated January 15, 1997(7)

10.1     Joint Venture Agreement dated October 25, 1994 between Chengdu Iron and
         Steel Plant and Team Steel, Inc. re: formation of Chengdu Chengkang
         Iron and Steel Corporation(1)

10.2     Cancellation Agreement dated October 15, 1995 between China Pacific,
         Inc. and Team International Holdings, Inc.(1)

10.3     Leasing Agreement for fixed assets between Chengdu Iron and Steel Plant
         and Team Steel, Inc.(1)

10.4     Letters of Guarantee from Chengdu Iron and Steel Plant(1)

10.5     Summary of Agreement dated December 29, 1995 between China Treasure
         Construction (B.V.I.) Limited, Open View Properties Limited and Hui
         Yang The People Prefecture Investment Ltd. re: sale of China Treasure
         Property Consultant, China Treasure Property Management and China
         Treasure Enterprise Ltd.(S)

10.6     Memorandum dated December 29,1995 between China Treasure Construction
         (B.V.I.) Limited and Open View Properties Ltd. re: service fee(5)

10.7     Loan Agreement dated December 29, 1995 between China Treasure
         Construction (B.V.I.) Limited and Open View Properties Ltd. re:
         assumption of HK$93,347,466 of indebtedness of subsidiaries by Open
         View Properties Limited(5)

10.8     Agreement dated December 29, 1995 between Hui yan The People Prefecture
         Investment Limited, China Treasure Enterprise limited, China Treasure
         Construction (B.V.I.) Limited and Open View Properties Limited re:
         assumption of HK$93,347,466 of indebtedness by Hui yan The People
         Prefecture Investment Limited(5)
</TABLE>


                                       31

<PAGE>   32

<TABLE>
<S>      <C>
10.9     Share Mortgage dated December 29,1995 between Hui Yan The People
         Prefecture Investment Limited and China Treasure Construction (B.V.I.)
         Limited re: pledge of collateral to secure obligations owed to China
         Treasure Construction (B.V.I.) Limited (5)

10.10    Share Mortgage dated December 29, 1995 between Hui Yan The People
         Prefecture Investment Limited and China Treasure, Inc. re: pledge of
         collateral to secure obligations owed to China Treasure, Inc.(5)

10.11    Deed of Guarantee dated December 29,1995 from Hui Yan The People
         Prefecture Investment Limited to China Treasure Construction (B.V.I.)
         Limited guaranteeing payment of service fee(5)

10.12    Form of 9% Convertible Note(7)

16.1     Letter from H.J. Swart & Co., P.A. relating to change of independent
         accountants(6)

21.1     Subsidiaries of Registrant

27.1     Financial Data Schedules
</TABLE>

----------

++       Compensatory plan or management agreement.

(1)      Incorporated by reference to the respective exhibits filed with the
         Company's Current Report on Form 8-K dated October 30,1995.

(2)      Incorporated by reference to the respective exhibits filed with the
         Company's Current Report on Form 8-K dated January 25, 1996; and
         Registration Statement on Form 8-A declared effective June 15, 1995.

(3)      Incorporated by reference to the respective exhibits filed with the
         Company's Registration Statement on Form 8-A declared effective June
         15, 1995.

(4)      Incorporated by reference to the respective exhibits filed with the
         Company's Annual Report on Form 10-KSB for the year ended December 31,
         1995.

(5)      Incorporated by reference to the respective exhibits filed with the
         Company's Current Report on Form 8-K dated December 29,1995.

(6)      Incorporated by reference to the respective exhibits filed with the
         Company's Current Report on Form 8-K dated February 1, 1995

(7)      Incorporated by reference to the respective exhibits filed with the
         Company's Current Report on Form 8-K dated January 15, 1997.

(8)      Incorporated by reference to the respective exhibits filed with the
         Company's Annual Report on Form 10-KSB for the year ended December 31,
         1996.

(b)      REPORTS ON FORM 8-K

None


                                       32

<PAGE>   33

                                   SIGNATURES

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

                                       CHINA PACIFIC, INC.

                                       By:/s/ Mak Shiu Tong, Clement
                                          --------------------------------------
                                          Mak Shiu Tong, Clement
                                          President

Dated: June 15, 1998

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


<TABLE>
<CAPTION>
            Signature                                Title                               Date
            ---------                                -----                               ----
<S>                                   <C>                                            <C>
/s/ Mak Shiu Tong, Clement            President, Chief Executive Officer             June 15, 1998
----------------------------------    and Chairman of the Board of Directors
Mak Shiu Tong, Clement                (Principal Executive Officer)

/s/ Cheng Yuk Ching                   Vice President, Secretary and Director         June 15, 1998
----------------------------------
Cheng Yuk Ching

/s/ Tong Long Tin, Thomas             Chief Financial Officer (Principal             June  15, 1998
----------------------------------    Financial and Accounting Officer)
Tong Long Tin, Thomas

/s/ Tan Jian Seng                     Director                                       June  15, 1998
----------------------------------
Tan Jian Sheng

/s/ Zhang Guo Liang                   Director                                       June  15, 1998
----------------------------------
Zhang Guo Liang

/s/ Samuel Olenick                    Director                                       June  15, 1998
----------------------------------
Samuel Olenick
</TABLE>


                                       33
<PAGE>   34

                              FINANCIAL STATEMENTS



                                       34
<PAGE>   35

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

                               CHINA PACIFIC, INC.

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

                        CONSOLIDATED FINANCIAL STATEMENTS
                      AS OF DECEMBER 31, 1996 AND 1997 AND
                FOR YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
                         TOGETHER WITH AUDITORS' REPORT

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



















   Approved by the Board of Directors of China Pacific, Inc. on June 15, 1998
<PAGE>   36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of China Pacific, Inc.:

Year ended December 31, 1997

We were engaged to audit the accompanying consolidated balance sheets of China
Pacific, Inc. (a company incorporated in the State of Nevada, United States of
America; "the Company") and Subsidiaries ("the Group") as of December 31, 1997,
and the related consolidated statements of operations, cash flows and changes in
shareholders' equity for the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management.

As further discussed in Notes 1, 8, 11 and 12 to the accompanying financial
statements, as of December 31, 1997, the Group had receivables totalling
approximately Rmb33.7 million from Open View Properties Limited ("OVP") and
companies relating to OVP, and an investment of approximately Rmb59.0 million in
an associated company (China Pacific Construction (B.V.I.) Limited), the major
assets of which are promissory notes issued by OVP and its holding company. The
receivables and the promissory notes are due for settlement in December 1998.
OVP and its subsidiaries are engaged in the development of residential and
commercial properties in Sun City, Huiyang County, Guangdong Province, the
People's Republic of China. However, the development of the Sun City project has
been suspended since 1995. The unaudited management accounts of OVP indicate
that OVP had a net asset value of approximately Rmb33.1 million as of December
31, 1997, after stating the Sun City development properties at a valuation of
approximately Rmb493.2 million based on a valuation performed by a firm of
independent qualified valuers on the assumption that the development properties
would be completed and saleable. We were unable to obtain sufficient competent
evidential matter to determine whether OVP and its holding and related companies
have the necessary cash resources to complete the Sun City project and repay
their obligations to the Group and China Pacific Construction (B.V.I.) Limited
on the due date and, consequently, realization of the Group's above-mentioned
receivables and investment in associated company with a total carrying value of
approximately Rmb92.7 million is uncertain.

As further discussed in Notes 1 and 7 to the accompanying financial statements,
as of December 31, 1997, the Group had an outstanding receivable of
approximately Rmb365.4 million from Chengdu Iron and Steel Plant ("CISP"), the
Chinese joint venture partner of the Group's Sino-foreign joint venture in the
PRC - Chengdu Chengkang Iron and Steel Company Limited. We were unable to review
any financial information of CISP to ascertain whether CISP has the necessary
financial ability to repay the Group.


                                      -1-
<PAGE>   37
As further discussed in Note 25 to the accompanying financial statements, a
brokerage firm filed a civil action against the Company in a United States
District Court seeking monetary damages and expenses in excess of US$5.0 million
(equivalent to approximately Rmb41,450,000) and/or an order compelling the
Company to issue warrants to subscribe to 1,141,000 shares (after considering
the one-for-four reverse stock split) of common stock of the Company. Although
the Company believes this claim is without merit, as of the date of this report,
the Company and its legal counsel are unable to predict the outcome of this
dispute. No provision has been recorded in the accompanying financial statements
in connection with the aforesaid claim.

As further discussed in Note 18 to the accompanying financial statements, as of
December 31, 1997, the Company had outstanding liabilities under convertible
notes of approximately US$15.0 million (equivalent to approximately Rmb124.3
million), which are convertible at the option of the note holders according to a
pre-determined schedule during the period between May 15, 1997 and January 15,
1999 into common stock of the Company, or repayable by the Company on January
15, 1999. As shares of common stock of the Company have been trading below the
minimum conversion price of US$4.00 per share for a substantial period of time,
it is uncertain whether the holders of the convertible notes would convert the
notes into common stock of the Company. If the holders of the convertible notes
choose not to convert and require repayment from the Company, it is uncertain
whether the Company will have the necessary cash resources to repay this
obligation on the due date of January 15, 1999.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 16 to the
accompanying financial statements, as of December 31, 1997, the principal
operating subsidiary of the Group (Chengdu Chengkang Iron and Steel Company
Limited) had short-term bank loans of approximately Rmb211.1 million, which are
due for repayment within twelve months. It is uncertain whether the Group will
have the necessary cash resources to repay these short-term bank loans on the
due dates. In addition, as shown in the accompanying financial statements, the
Group incurred significant losses during the year ended December 31, 1997, and
as of that date the Group's current liabilities exceeded its current assets by
approximately Rmb290.9 million. The unaudited management accounts of the Group
for the three months ended March 31, 1998 indicate that the Group has continued
incurring losses. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

Because of (i) the lack of sufficient competent evidential matter to evaluate
the realization of receivables and investment with an aggregated carrying value
of approximately Rmb458.1 million as discussed in the second and third
paragraphs above, and (ii) the significance of the matter discussed in the
preceding five paragraphs, we are unable to express, and we do not express an
opinion on the financial position of China Pacific, Inc. and Subsidiaries as of
December 31, 1997 and the results of their operations and their cash flows for
the year ended December 31, 1997.


                                      -2-
<PAGE>   38

Years ended December 31, 1995 and 1996

We have also audited the accompanying consolidated balance sheets of China
Pacific, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the years ended December 31, 1995 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We 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 audits 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 present fairly, in all
material respects, the financial position of China Pacific, Inc. and
Subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1995 and 1996, in conformity
with generally accepted accounting principles in the United States of America.

As further discussed in Note 25 to the accompanying financial statements, a
brokerage firm filed a civil action against the Company in a United States
District Court seeking monetary damages and expenses in excess of US$5.0 million
(equivalent to approximately Rmb41,450,000) and/or an order compelling the
Company to issue warrants to subscribe to 1,141,000 shares (after considering
the one-for-four reverse stock split) of common stock of the Company. Although
the Company believes this claim is without merit, as of the date of this report,
the Company and its legal counsel are unable to predict the outcome of this
dispute. No provision has been recorded in the accompanying financial statements
in connection with the aforesaid claim.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 16 to
the accompanying financial statements, as of December 31, 1997, the principal
operating subsidiary of the Group (chengdu Chengkang Iron and Steel Company
Limited) had short-term bank loans of approximately Rmb211.1 million, which are
due for repayment within twelve months. It is uncertain whether the Group will
have the necessary cash resources to repay these short-term bank loans on the
due dates. In addition, as shown in the accompanying financial statements, the
Group incurred significant losses during the year ended December 31, 1997, and
as of that date the Group's current liabilities exceeded its current assets by
approximately Rmb290.9 million. The unaudited management accounts of the Group
for the three months ended March 31, 1998 indicate that the Group has continued
incurring losses. These factors, among others, raise substantial doubts about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result for the outcome of this
uncertainty.

ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong


Hong Kong,
June 15, 1998.


                                      -3-
<PAGE>   39

                      CHINA PACIFIC, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
                                                     Note          1996                     1997
                                                     ----        -------         ---------------------------
                                                                 Rmb'000         Rmb'000             US$'000
<S>                                                  <C>        <C>              <C>                 <C>  
ASSETS

Current assets:
   Cash and bank deposits                                         61,293            16,582             2,003
   Restricted bank deposits                             5             --            33,284             4,020
   Accounts receivable, net                             6        112,003            51,487             6,218
   Due from related companies                          27          2,031             1,449               175
   Due from CISP, current portion                       7         13,000                --                --
   Prepayments, deposits and other current              8         45,062            15,485             1,870
     assets
   Loans receivable                                     9             --             3,000               362
   Inventories, net                                    10        316,919           228,853            27,639
   Deferred debt costs                                4.d             --             4,440               536
                                                                 -------         ---------           -------
         Total current assets                                    550,308           354,580            42,823

Due from CISP, long-term portion                        7         38,191           365,435            44,135
Investment in an associated company                    11         58,988            58,988             7,124
Investments and note receivable                        12         33,997            36,098             4,360
Deferred value-added tax recoverable                   13         35,054             4,663               563
Property, machinery, equipment and capital
   leases, net                                         14        214,220           220,943            26,684
Investment properties                                  15             --            56,919             6,875
Goodwill, net                                         4.b         17,064                --                --
                                                                 -------         ---------           -------
         Total assets                                            947,822         1,097,626           132,564
                                                                 =======         =========           =======
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Short-term borrowings                               16         49,716           211,110            25,496
   Long-term debt, current portion                     18         10,603            22,858             2,761
   Capital lease obligations, current portion          19            777               630                76
   Accounts payable                                              164,159           129,125            15,595
   Deposits from customers                                       132,792           172,595            20,845
   Accrued liabilities                                 17        101,399            88,323            10,667
   Taxation payable                                                   --             1,233               149
   Value-added tax payable                                        22,452            18,027             2,177
   Due to related companies                            27          9,363             1,592               192
                                                                 -------         ---------           -------
         Total current liabilities                               491,261           645,493            77,958

Long-term debt, non-current portion                    18             --           166,767            20,141
Capital lease obligations, non-current                 19          1,708             1,516               183
   portion
                                                                 -------         ---------           -------
         Total liabilities                                       492,969           813,776            98,282
                                                                 -------         ---------           -------
Minority interests                                               147,455           100,245            12,107
                                                                 -------         ---------           -------
Shareholders' equity:
   Common stock, par value US$0.001;
     authorized 25,000,000 shares;
     outstanding 8,956,384 shares in 1996              20             74                75                 9
     and 9,039,644 shares in 1997
   Treasury stock, 27,500 shares in 1996 
       and 1997                                        20         (1,420)           (1,420)             (171)
   Additional paid-in capital                          20        189,423           191,036            23,072
   Dedicated capital                                              23,245            23,245             2,807
   Retained earnings (Accumulated deficit)                        92,235           (33,001)           (3,985)
   Cumulative translation adjustments                              3,841             3,670               443
                                                                 -------         ---------           -------
         Total shareholders' equity                              307,398           183,605            22,175
                                                                 -------         ---------           -------
         Total liabilities, minority
           interests and shareholders' equity                    947,822         1,097,626           132,564
                                                                 =======         =========           =======
</TABLE>

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


                                      -4-
<PAGE>   40



                      CHINA PACIFIC, INC. AND SUBSIDIARIES

                      CONSOLIDATED BALANCE SHEETS (Cont'd)
                        AS OF DECEMBER 31, 1996 AND 1997


----------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on April 30, 1998 of
US$1.00=Rmb8.28. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.


                                      -5-
<PAGE>   41

                      CHINA PACIFIC, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
                                        Note           1995           1996                   1997
                                                     --------       --------      -------------------------- 
                                                      Rmb'000        Rmb'000         Rmb'000         US$'000
<S>                                     <C>          <C>           <C>             <C>               <C>    
Net sales                                28           442,088      1,023,846       1,131,227         136,622
Cost of goods sold                                   (341,289)      (876,162)     (1,106,833)       (133,675)
                                                     --------      ---------      ----------        --------
       Gross profit                                   100,799        147,684          24,394           2,947

Selling, general and administrative
   expenses                                           (31,223)       (64,679)       (144,838)        (17,493)
Interest income                          31                34          3,634           4,121             498
Interest expense                         31            (1,423)          (818)        (21,075)         (2,545)
Other income (expenses), net                           11,547            257         (17,161)         (2,073)
Write-off of goodwill                   4.b                --             --         (16,624)         (2,008)
Operation differential subsidies          1                --         28,236              --
Share of income of an associated
   company                               11                --         11,023              --              --
                                                     --------      ---------      ----------        --------
       Income (Loss) from
         continuing operations
         before income taxes                           79,734        125,337        (171,183)        (20,674)

Provision for income taxes                             (1,897)        (1,816)         (1,263)           (153)
                                                     --------      ---------      ----------        --------
       Income (Loss) from
         continuing operations                         77,837        123,521        (172,446)        (20,827)

Discontinued operations:
   Income from operations of the
     discontinued Sun City
     Subsidiaries (less Nil amount
     of applicable income taxes)                       13,760             --              --              --
                                                     --------      ---------      ----------        --------
       Income (Loss) before
         minority interests                            91,597        123,521        (172,446)        (20,827)

Minority interests                                    (41,115)       (39,739)         47,210           5,702
                                                     --------      ---------      ----------        --------
       Net income (loss)                 28            50,482         83,782        (125,236)        (15,125)
                                                     ========      =========      ==========        ========

Basic earnings per common share:
   Income (Loss) from continuing
     operations                                      Rmb12.03       Rmb10.97       Rmb(13.88)       US$(1.68)
   Income  from discontinued
     operations                                          1.94             --              --              --
                                                     --------      ---------      ----------        --------
       Net income (loss)                             Rmb13.97       Rmb10.97       Rmb(13.88)       US$(1.68)
                                                     ========      =========      ==========        ========
   Weighted average number of
     shares outstanding used in
     basic calculation                                  3,612          7,638           9,021           9,021
                                                     ========      =========      ==========        ========
Diluted earnings per common share:
   Income (Loss) from continuing
     operations                                      Rmb11.41        RMB9.29       RMB(13.88)       US$(1.68)
   Income  from discontinued
     operations                                          1.84             --              --              --
                                                     --------      ---------      ----------        --------
       Net income (loss)                             Rmb13.25        Rmb9.29       Rmb(13.88)       US$(1.68)
                                                     ========      =========      ==========        ========
   Weighted average number of
     shares outstanding used in
     diluted calculation                                3,816          9,023           9,021           9,021
                                                     ========      =========      ==========        ========
</TABLE>

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


                                      -6-
<PAGE>   42



                      CHINA PACIFIC, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF OPERATIONS (Cont'd)
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997


----------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on April 30, 1998 of
US$1.00=Rmb8.28. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.


                                      -7-
<PAGE>   43

                      CHINA PACIFIC, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
                                                     1995           1996                  1997
                                                   --------       --------       -----------------------
                                                   Rmb'000        Rmb'000        Rmb'000         US$'000
<S>                                                <C>            <C>            <C>             <C>     
Cash flows from operating activities:
Net income (loss)                                    50,482         83,782       (125,236)       (15,125)
Adjustments to reconcile net income (loss)
   to net cash provided by operating
   activities -
   Share of income of an associated company              --         (9,204)            --             --
   Depreciation of property, machinery and
     equipment                                        5,491         11,275         16,012          1,934
   Depreciation of investment properties                 --             --            965            116
   Impairment loss on investment properties              --             --         17,374          2,098
   Net loss (gain) on disposals of property,
     machinery and equipment                            591            240           (606)           (73)
   Net gain on disposals of investment properties        --             --        (10,261)        (1,239)
   Amortization of goodwill                             225            440            440             53
   Write-off of goodwill                                 --             --         16,624          2,008
   Amortization of deferred debt costs                   --             --          4,440            536
   Minority interests                                41,115         39,739        (47,210)        (5,702)
(Increase) Decrease in operating assets -
   Accounts receivable, net                         (69,251)        30,701         60,516          7,309
   Deposits receivable                               14,817             --             --             --
   Prepayments, deposits and other current
     assets                                          (5,974)       (17,795)        29,577          3,572
   Inventories, net                                (108,685)       (44,681)        88,066         10,636
   Deferred value added tax recoverable                  --          6,127         30,391          3,670
Increase (Decrease) in operating liabilities -
   Accounts payable                                 149,369         13,287        (35,034)        (4,231)
   Deposits from customers                           93,719         39,073         39,803          4,807
   Accrued liabilities                              (15,583)        44,275        (13,076)        (1,579)
   Taxation payable                                      --             --          1,233            149
   Value-added tax payable                           15,790          6,662         (4,425)          (534)
                                                   --------       --------       --------       --------
       Net cash provided by operating 
         activities                                 172,106        203,921         69,593          8,405
                                                   --------       --------       --------       --------
Cash flows from investing activities:
   Proceeds from disposal of subsidiary                  83             --             --             --
   Increase in investments and note
     receivable                                          --            907         (2,101)          (254)
   Acquisition of subsidiary                          2,055             --             --             --
   Acquisition of investments                        (5,250)            --             --             --
   Acquisition of property, machinery and
     equipment                                      (15,158)      (133,071)       (23,046)        (2,783)
   Acquisition of investment properties                  --             --       (181,099)       (21,872)
   Proceeds from disposals of property,
     machinery and equipment                             --            804          2,685            324
   Proceeds from disposals of investment
     properties                                          --             --        116,840         14,111
   Acquisition of development properties, net      (122,304)            --             --             --
   Increase in loans receivable                          --             --         (3,000)          (362)
   Effect of cumulative translation
     adjustments                                      4,858           (791)          (171)           (21)
                                                   --------       --------       --------       --------
       Net cash used in investing activities       (135,716)      (132,151)       (89,892)       (10,857)
                                                   --------       --------       --------       --------
</TABLE>

                                                               (To be continued)


                                      -8-
<PAGE>   44


                      CHINA PACIFIC, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
                                                    1995           1996                   1997
                                                  ---------      ---------       ----------------------
                                                   Rmb'000        Rmb'000        Rmb'000        US$'000
<S>                                               <C>            <C>             <C>            <C>  
Cash flows from financing activities:
   Proceeds from issuance of convertible
     debentures and convertible notes                6,655             --        124,290         15,011
   Proceeds from issuance of common and
     preferred stock                                40,948         93,726          1,614            195
   Acquisition of treasury stock                        --         (1,420)            --             --
   Increase (Decrease) in short-term borrowings     77,313        (54,119)       161,394         19,492
   Repayment of capital element of capital
     lease obligations                                 (50)        (1,216)        (2,845)          (344)
   (Decrease) Increase in long-term debt           (64,601)      (112,208)        54,732          6,610
   Payment of deferred debt costs                       --             --         (8,880)        (1,072)
   Loan from an intermediate holding company       (73,311)            --             --             --
   Loan from ultimate holding company              104,826             --             --             --
   Due from CISP                                        --        (51,191)      (314,244)       (37,952)
   Due from related companies                           --         (2,031)           582             70
   Due to related companies                         (7,072)         9,363         (7,771)          (938)
   Other payables                                       --        (13,602)            --             --
                                                  --------       --------       --------       --------
       Net cash provided by (used in)
         financing activities                       84,708       (132,698)         8,872          1,072
                                                  --------       --------       --------       --------
Net increase (decrease) in cash                    121,098        (60,928)       (11,427)        (1,380)

Cash and bank deposits, as of beginning
   of year                                           1,123        122,221         61,293          7,403
                                                  --------       --------       --------       --------
Cash and bank deposits, as of end of year          122,221         61,293         49,866          6,023
                                                  ========       ========       ========       ========
</TABLE>

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

----------

Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1997 of
US$1.00=Rmb8.28. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.


                                      -9-
<PAGE>   45

                      CHINA PACIFIC, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
                                                                                   Series B                      Series C
                                                                                 convertible                     convertible
                                                     Series A                   and redeemable                 and redeemable 
                                             convertible preferred stock        preferred stock                preferred stock
                                             ---------------------------     -----------------------       -----------------------
                                               Number of                     Number of                     Number of   
                                                shares         Amount         shares         Amount         shares         Amount
                                             -------------   -----------     --------       --------       --------       --------
                                                                Rmb                           Rmb                           Rmb     
<S>                                          <C>               <C>           <C>            <C>            <C>             <C> 
Balance as of January 1, 1995                        --             --             --             --             --             -- 

Net income                                           --             --             --             --             --             -- 

Sale of common stock                                 --             --             --             --             --             -- 

Sale of preferred stock                           5,905             45            650              5             --             -- 

Costs of common stock and preferred stock            --             --             --             --             --             -- 
   sales

Conversion of preferred stock into common        (3,655)           (28)            --             --             --             -- 
   stock

Transfer to dedicated capital                        --             --             --             --             --             -- 

Translation adjustments                              --             --             --             --             --             -- 
                                               --------       --------       --------       --------       --------       --------

Balance as of December 31, 1995                   2,250             17            650              5             --             -- 

Net income                                           --             --             --             --             --             -- 

Sale of common stock                                 --             --             --             --             --             -- 

Sale of preferred stock                              --             --          1,030              9          9,105             76

Costs of common stock and preferred stock            --             --             --             --             --             -- 
   sales

Conversion of preferred stock into common        (2,250)           (17)        (1,680)           (14)        (9,105)           (76)
   stock

Conversion of convertible debenture into
   common stock                                      --             --             --             --             --             -- 

Treasury stock                                       --             --             --             --             --             -- 

Reverse stock split                                  --             --             --             --             --             -- 

Transfer to dedicated capital                        --             --             --             --             --             -- 

Translation adjustments                              --             --             --             --             --             -- 
                                               --------       --------       --------       --------       --------       --------

Balance as of December 31, 1996                      --             --             --             --             --             -- 

Net loss                                             --             --             --             --             --             -- 

Conversion of convertible debenture into
   common stock                                      --             --             --             --             --             -- 

Translation adjustments                              --             --             --             --             --             -- 
                                               --------       --------       --------       --------       --------       --------

Balance as of December 31, 1997                      --             --             --             --             --             -- 
                                               ========       ========       ========       ========       ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                                       Common stock                          Treasury stock
                                                               ----------------------------         -----------------------------
                                                                Number of                            Number of
                                                                 shares*           Amount             shares*            Amount
                                                               ----------        ----------         ----------         ----------
                                                                Rmb'000                               Rmb'000      
<S>                                                            <C>               <C>                <C>                <C>
Balance as of January 1, 1995                                   3,571,429               119                 --                 -- 

Net income                                                             --                --                 --                 -- 

Sale of common stock                                               38,750                 1                 --                 -- 

Sale of preferred stock                                                --                --                 --                 -- 

Costs of common stock and preferred stock                              --                --                 --                 -- 
   sales

Conversion of preferred stock into common                         555,249                19                 --                 -- 
   stock

Transfer to dedicated capital                                          --                --                 --                 -- 

Translation adjustments                                                --                --                 --                 -- 
                                                               ----------        ----------         ----------         ----------
Balance as of December 31, 1995                                 4,165,428               139                 --                 -- 

Net income                                                             --                --                 --                 -- 

Sale of common stock                                              795,641                27                 --                 -- 

Sale of preferred stock                                                --                --                 --                 -- 

Costs of common stock and preferred stock                              --                --                 --                 -- 
   sales

Conversion of preferred stock into common                       3,833,286               124                 --                 -- 
   stock

Conversion of convertible debenture into
   common stock                                                   162,029                 5                 --                 -- 

Treasury stock                                                         --                --            (27,500)            (1,420)

Reverse stock split                                                    --              (221)                --                 -- 

Transfer to dedicated capital                                          --                --                 --                 -- 

Translation adjustments                                                --                --                 --                 -- 
                                                               ----------        ----------         ----------         ----------
Balance as of December 31, 1996                                 8,956,384                74            (27,500)            (1,420)

Net loss                                                               --                --                 --                 -- 

Conversion of convertible debenture into
   common stock                                                    83,260                 1                 --                 -- 

Translation adjustments                                                --                --                 --                 -- 
                                                               ----------        ----------         ----------         ----------
Balance as of December 31, 1997                                 9,039,644                75            (27,500)            (1,420)
                                                               ==========        ==========         ==========         ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                        Retained
                                                                  Additional                            earnings        Cumulative
                                                                   paid-in           Dedicated        (Accumulated      translation
                                                                   capital            capital           deficit)        adjustments
                                                                  ----------         ---------        -------------     -----------
                                                                    Rmb'000            Rmb'000           Rmb'000          Rmb'000
<S>                                                               <C>                <C>               <C>              <C>
Balance as of January 1, 1995                                        54,709                 --           (18,784)          (2,388)

Net income                                                               --                 --            50,482               --

Sale of common stock                                                  3,602                 --                --               --

Sale of preferred stock                                              54,534                 --                --               --

Costs of common stock and preferred stock sales                     (17,213)                --                --               --

Conversion of preferred stock into common stock                         --                 --                --               --
   

Transfer to dedicated capital                                            --              7,804            (7,804)              --

Translation adjustments                                                  --                 --                --            7,244
                                                                   --------           --------          --------         --------
Balance as of December 31, 1995                                      95,632              7,804            23,894            4,856

Net income                                                               --                 --            83,782               --

Sale of common stock                                                 17,429                 --                --               --

Sale of preferred stock                                              83,977                 --                --               --

Costs of common stock and preferred stock                           (12,874)                --                --               --
   sales

Conversion of preferred stock into common                              (124)                --                --               --
   stock

Conversion of convertible debenture into
   common stock                                                       5,162                 --                --               --

Treasury stock                                                           --                 --                --               --

Reverse stock split                                                     221                 --                --               --

Transfer to dedicated capital                                            --             15,441           (15,441)              --

Translation adjustments                                                  --                 --                --           (1,015)
                                                                   --------           --------          --------         --------
Balance as of December 31, 1996                                     189,423             23,245            92,235            3,841

Net loss                                                                 --                 --          (125,236)              --

Conversion of convertible debenture into
   common stock                                                       1,613                 --                --               --

Translation adjustments                                                  --                 --                --             (171)
                                                                   --------           --------          --------         --------
Balance as of December 31, 1997                                     191,036             23,245           (33,001)           3,670
                                                                   ========           ========          ========         ========
</TABLE>

*  Adjusted for the one-for-four reverse stock split.

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


                                      -10-
<PAGE>   46

                      CHINA PACIFIC, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       ORGANIZATION AND PRINCIPAL ACTIVITIES

China Pacific, Inc. ("the Company") was incorporated in the State of Nevada,
United States of America on February 4, 1986 under the name of McMann
Investments, Inc. It changed its name from McMann Investments, Inc. to Bulls on
the Run Productions Corporation with effect from 1988, from Bulls on the Run
Productions Corporation to China Treasure, Inc. with effect from May 18, 1994,
and from China Treasure, Inc. to China Pacific, Inc., the present one, with
effect from December 11, 1995.

All references in these financial statements to number of share, share prices
and per share amounts have been adjusted to reflect a one-for-four reverse stock
split effected in 1996 (see Note 20).

Major shareholders

As of December 31, 1997, 3,271,429 shares of common stock of the Company were
owned by C. P. Investment (B.V.I.) Limited ("CPI"; a company incorporated in the
British Virgin Islands). CPI is wholly owned by China Pacific Investment
Holdings Limited ("CPIH"; a company incorporated in the British Virgin Islands),
which is owned as to 51% by Kiu Yin Investment Co., Ltd. (a company incorporated
in Hong Kong), which is controlled by a discretionary trust established for the
benefit of the family of Clement Mak, the Company's chairman, president and
chief executive officer, and 49% by Guangdong Construction (B.V.I.) Company
Limited (a company incorporated in the British Virgin Islands), which is wholly
owned by the Guangdong Branch of The China Construction Bank.

The Sun City operations

On May 18, 1994, the Company acquired from CPI a 51% equity interest in China
Pacific Construction (B.V.I.) Limited ("CPCT"; a company incorporated in the
British Virgin Islands) by issuing to CPI 3,321,429 shares of common stock of
the Company. CPCT and its subsidiaries were engaged in the development of
residential and commercial properties in Sun City, Huiyang County, Guangdong
Province, the People's Republic of China ("the PRC").


                                      -11-
<PAGE>   47

1.       ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)

The Sun City operations (Cont'd)

On December 29, 1995, CPCT, then a 51% owned subsidiary of the Company, entered
into an agreement with Open View Properties Limited ("OVP") to sell to OVP its
entire equity interests in and advances to three wholly-owned subsidiaries,
namely, China Treasure Property Management Company, China Treasure Property
Consultant Company Limited and China Treasure Enterprise Limited (collectively
referred to as "the Sun City Subsidiaries"). As consideration, an immediate
holding company of OVP (Hui Yan The Peoples's Prefecture Investment Limited)
delivered to CPCT a three-year 8% promissory note due on December 28, 1998 of
Rmb100.1 million. The promissory note is collaterized by the common stock of
OVP. In addition, CPCT agreed to provide consultancy service to OVP for a period
from December 29, 1995 to December 28, 1998 for approximately Rmb34.3 million.
In return, OVP delivered to CPCT a three-year 8% promissory note due on December
28, 1998 of approximately Rmb34.3 million. This promissory note is also
collaterized by the common stock of OVP and a corporate guarantee provided by
OVP's immediate holding company. OVP is controlled by The People's Government of
Huiyang County which, until completion of this transaction, had an indirect
minority interest in the Company. The Sun City Subsidiaries are engaged in the
development of residential and commercial properties in Sun City, Huiyang
County, Guangdong Province, the PRC.

In connection with the disposal of the Sun City Subsidiaries, CPCT was granted a
five-year option expiring in December 2000 to develop and market 3 million
square meters of land surrounding Sun City at a minimum price of Rmb100 per
square meter, and another five-year option expiring in December 2000 to
repurchase CPCT's interest in the Sun City Subsidiaries for Rmb33.3 million plus
any related affiliated company debt and any amounts injected into the Sun City
Subsidiaries by OVP, and a 10% premium per annum on all such amounts. CPCT has
not allocated a value to these options, and has deferred recognition of the gain
on disposal of the Sun City Subsidiaries of approximately Rmb6.1 million (net of
minority interests) until the repurchase option expires.

The operating results of the Sun City Subsidiaries have been accounted for as
discontinued operations for the year ended December 31, 1995. Revenue of the Sun
City Subsidiaries for the year ended December 31, 1995 was approximately
Rmb82,485,000.

Following the disposal of the Sun City Subsidiaries, on December 29, 1995, the
Group's interest in CPCT was diluted from 51% (a subsidiary) to 50% (an
associated company).


                                      -12-
<PAGE>   48

1.       ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)

The Sun City operations (Cont'd)

As of December 31, 1997, the Group's financial interests relating to OVP and its
holding and related companies include its 50% investment in CPCT with a book
value of approximately Rmb58,988,000, a note receivable and related accrued
interest from a subsidiary of OVP amounting to approximately Rmb30,848,000 due
in December 1998, and other receivables from companies relating to OVP amounting
to approximately Rmb2,834,000. The unaudited management accounts of OVP indicate
that OVP had a net asset value of approximately Rmb33.1 million, after stating
the Sun City development properties at a valuation of approximately Rmb493.2
million based on a valuation performed by a firm of independent qualified
valuers on the assumption that the development properties would be completed and
saleable. It is uncertain whether OVP and its holding and related companies have
the necessary cash resources to complete the Sun City project and repay their
obligations to the Group and CPCT on the due date and, consequently, realization
of the Group's above-mentioned receivables and investment in associated company
with a total carrying value of approximately Rmb92,670,000 is uncertain. In view
of this uncertainty, the Group did not record its equity share of income of CPCT
amounting to approximately Rmb9.2 million during the year ended December 31,
1997.

The iron and steel operations

Under an agreement dated October 30, 1995, the Company acquired from China
Treasure Capital Limited ("CTC"), a company owned by Kiu Yin Investment Co.
Ltd., a 100% interest in China Pacific Steel, Limited ("CPS"; a company
incorporated in the British Virgin Islands and formerly known as Team Steel,
Inc.) for a consideration of approximately Rmb125.5 million, including Rmb5.0
million in cash and Rmb120.5 million in the form of a non-interest bearing
demand promissory note secured by the stock of CPS. The Company repaid
approximately Rmb20.7million, Rmb50.1million and Rmb49.7million of the
promissory note during the years ended December 31, 1995, 1996 and 1997,
respectively.

CPS entered into a joint venture agreement dated October 25, 1994 and subsequent
supplemental agreements with Chengdu Iron and Steel Plant ("CISP"; a state-owned
enterprise established in the PRC directly under the Department of Metallurgy of
Chengdu Government) to establish a Sino-foreign equity joint venture in the PRC
- Chengdu Chengkang Iron and Steel Company Limited ("CCIS") for a period of 50
years from 1994 to 2044. The principal activities of CCIS are the manufacturing
of iron, steel wires, reinforced steel bars, and related iron and steel
products, which were previously undertaken by CISP. CCIS's manufacturing plant
is located in Chengdu, Sichuan Province, the PRC, and it primarily sells to
customers in the PRC.

Pursuant to the aforesaid agreements, CPS was required to contribute into CCIS
cash of approximately Rmb120.0 million as its capital contribution for a 60%
equity interest in CCIS, while CISP was required to contribute into CCIS part of
its production plant, including buildings, machinery and equipment, with a
valuation of Rmb80.0 million as its capital contribution for a 40% equity
interest in CCIS. The aforesaid capital contributions were completed on December
28, 1995.


                                      -13-
<PAGE>   49

1.       ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)

The iron and steel operations (Cont'd)

In connection with the establishment of CCIS, CISP delivered a guarantee to CPS
that the net income after tax of CCIS as determined under generally accepted
accounting principles in the United States of America would not be less than
Rmb100.0 million in 1995 and Rmb150.0 million in 1996. In 1996, the net income
of CCIS as determined under generally accepted accounting principles in the
United States of America amounted to approximately Rmb102.9 million.
Accordingly, the Company was entitled to recover from CISP an amount of
approximately Rmb28.2 million, representing its 60% share of the shortfall.

Pursuant to the aforesaid agreements, CISP agreed to lease to CCIS certain
buildings, machinery and equipment with an estimated valuation of approximately
Rmb360.0 million at an annual rate of 5% per annum based on the valuation of
assets actually leased or the net income of CCIS, whichever is lower, during the
period from October 25, 1994 to March 31, 1996; at an annual rate of 6.5% based
on the valuation of assets actually leased during the period from April 1, 1996
to March 31, 1997; and at an annual rental charge to be mutually agreed by CPS
and CISP starting from April 1, 1997, which will be based on market rentals and
will not exceed 8% based on the valuation of assets actually leased. However, if
CCIS is in a loss position, CCIS is not required to pay rental on the leased
assets. Rental paid/payable to CISP during the years ended December 31, 1995,
1996 and 1997 amounted to approximately Rmb11.7 million, Rmb23.4 million and
Nil, respectively. In addition, in connection with the transfer of operations,
CCIS acquired certain operating assets of CISP, including trade receivables and
inventories, and assumed certain operating liabilities of CISP outstanding as of
July 1, 1995. CCIS was given an option to transfer the operating assets back to
CISP if the assets were not realized in cash by April 30, 1997. CCIS did not
exercise this option.

In addition, CPS has been given an option to participate in CCIS's future
business expansion plan in the form of additional capital or loan injections.

The other key provisions of the joint venture agreement and subsequent
supplemental agreements include:

-   the profit and loss sharing ratio is the same as the percentage of equity
    interest.

-   the Board of Directors of CCIS consists of ten members, with six designated
    by CPS and four designated by CISP.

As of December 31, 1997, the Group had an outstanding receivable of
approximately Rmb365.4 million from CISP (see Note 7). The Group has no access
to any financial information of CISP and, accordingly is uncertain whether CISP
has the necessary financial ability to repay the Group.


                                      -14-
<PAGE>   50

1.       ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)

The real estate properties investment operations

In 1997, the Company established wholly-owned subsidiaries - Expert Fame Limited
(a company incorporated in Hong Kong) and Powerich Property Limited (a company
incorporated in Hong Kong) to engage in the investment in real estate properties
in Hong Kong.

2.       SUBSIDIARIES

Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1997 were as
follows:

<TABLE>
<CAPTION>
                                                                          Percentage of equity
Name                                     Place of incorporation               interest held
----                                     ----------------------           --------------------
<S>                                      <C>                              <C>
Allrich Holdings Limited                 Hong Kong                               100%

China Pacific Capital Limited            The British Virgin                      100%
                                            Islands

China Pacific Management Limited         The British Virgin                      100%
                                            Islands

China Pacific Corporation Limited        Hong Kong                               100%

China Pacific Steel, Limited             The British Virgin                      100%
                                            Islands

Chengdu Chengkang Iron and Steel         The People's Republic of                 60%
    Company Limited (PRC)                   China

Chengdu Chengkang Iron & Steel           The British Virgin                       60%
    (BVI) Limited                           Islands

Chi Kiu Enterprises Limited              Hong Kong                               100%

Expert Fame Limited                      Hong Kong                               100%

Layfayette Services Limited              The British Virgin                      100%
                                            Islands

Powerich Property Limited                Hong Kong                               100%
</TABLE>


                                      -15-
<PAGE>   51

3.       BASIS OF PRESENTATION

The acquisition of CPCT by the Company on May 18, 1994 (see Note 1) was treated
as a reverse acquisition since CPCT became the continuing entity as a result of
the recapitalization and restructuring. The historical consolidated financial
statements of the Company prior to May 18, 1994 are those of CPCT and the
historical shareholders' equity account of the Company prior to May 18, 1994 has
been retroactively restated to reflect the issuance of 3,321,429 shares of
common stock.

The acquisition of CPS (including CPS's 60% interest in CCIS) by the Company in
1995 (see Note 1) were accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed were recorded at their
estimated fair values at the date of acquisition, and the operations of CPS
(including CPS's 60% interest in CCIS) are included in the consolidated
financial statements of the Company from the date of acquisition.

4.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.       Basis of consolidation

         The consolidated financial statements include the accounts of the
         Company and its majority-owned subsidiaries. All material intra-group
         balances and transactions have been eliminated on consolidation. The
         Company's investments in associated companies owned 20% to 50% are
         accounted for using the equity method.

b.       Goodwill

         Goodwill, being the excess of cost over fair value of the net assets of
         CPS (including CPS's 60% interest in CCIS) acquired, was amortized on a
         straight-line basis over forty years. The amortization recorded for the
         years ended December 31, 1995, 1996 and 1997 was approximately
         Rmb225,000, Rmb440,000 and Rmb440,000, respectively. The Company
         management assessed the remaining life of the goodwill and decided to
         write off the unamortized amount of approximately Rmb16,624,000 during
         the year ended December 31, 1997 after taking into consideration the
         substantial operating loss of CCIS during the year ended December 31,
         1997.

c.       Inventories

         Inventories are stated at the lower of cost, on a first-in first-out
         basis, and market value. Costs of work-in-process and finished goods
         are composed of direct materials, direct labor and an attributable
         portion of production overheads.


                                      -16-
<PAGE>   52

4.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Cont'd)

d.       Convertible notes

         Convertible notes are stated at the amount of the consideration
         received on the issue of the notes. Direct issuance costs (including
         issuance commissions) are recorded as deferred debt costs and amortized
         on straight-line basis over the term of the notes. If the notes are
         redeemed or converted before the expiration date (January 15, 1999),
         the unamortized debt costs will be charged to the statement of income
         upon redemption or credited to additional paid-in capital upon
         conversion. The amortization recorded during the year ended December
         31, 1997 was approximately Rmb4,440,000.

e.       Property, machinery, equipment and capital lease

         Property, machinery, equipment and capital lease are recorded at cost.
         Depreciation for financial reporting purposes is provided using the
         straight-line method over the estimated useful lives of the assets
         after taking into account the estimated residual value. The estimated
         useful lives are as follows: buildings and plant - 12 to 30 years,
         machinery and equipment - 5 to 12 years, motor vehicles - 5 years, and
         furniture and office equipment - 5 years. Gains or losses on disposals
         are reflected in current operations. All ordinary repair and
         maintenance costs are expensed as incurred.

         Construction-in-progress represents buildings, machinery and equipment
         under construction. This includes costs of construction and interest
         charges arising from borrowings used to finance these assets during the
         period of construction. Interest capitalized during the years ended
         December 31, 1995, 1996 and 1997 was approximately Rmb7,845,000, Nil
         and Nil, respectively.

         The Company recognizes an impairment loss on property, machinery and
         equipment when evidence, such as the sum of expected future cash flows
         (undiscounted and without interest charges) indicates that future
         operations will not produce sufficient revenue to cover the related
         future costs, including depreciation, of a particular asset, and when
         the carrying amount of the asset cannot be realized through sale.
         Measurement of impairment loss is based on the fair value of individual
         asset. The Company's management has determined that there is no
         impairment loss on the property, machinery and equipment of CCIS, after
         taking into consideration the substantial operating losses of CCIS
         during the year ended December 31, 1997.


                                      -17-
<PAGE>   53

4.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Cont'd)

f.       Investment properties

         Investment properties are interest in leasehold land and buildings held
         for their long-term investment potential. Investment properties are
         included in the balance sheet at cost. Depreciation for financial
         reporting purposes is provided using the straight-line method over the
         properties estimated useful lives of 30 years. Gains or losses on 
         disposals are reflected in current operations. All ordinary repair and 
         maintenance costs are expensed as incurred.

         The Company recognizes an impairment loss on investment property when
         evidence, such as the sum of expected future cash flows (undiscounted
         and without interest charges) indicates that future operations will not
         produce sufficient revenue to cover the related future costs, including
         depreciation, of a particular property, and when the carrying amount of
         the property cannot be realized through sale. Measurement of impairment
         loss is based on the fair value of individual property. Impairment loss
         recorded during the year ended December 31, 1997 was approximately
         Rmb17,374,000.

g.       Sales

         Sales represent (i) the invoiced value of goods (excluding valued added
         tax) supplied to customers, net of sales returns and allowances, which
         is recognized upon delivery of goods and passage of title to customers;
         and (ii) rental income from letting of real estate properties under
         operating leases, which is recognized on a time-proportion basis over
         the respective periods of the leases.

         All of the Group's sales made in the PRC are subject to PRC value added
         tax at a rate of 17% ("output VAT"). Such output VAT is payable after
         offsetting value added tax paid by the Group on purchases ("input
         VAT").

h.       Income taxes

         Income tax is provided under the provisions of Statement of Financial
         Accounting Standards No. 109, which requires recognition of deferred
         tax assets and liabilities for the expected future tax consequences of
         events that have been included in the financial statements or tax
         returns. Deferred income taxes are provided using the liability method.
         Under the liability method, deferred income taxes are recognized for
         all significant temporary differences between the tax and financial
         statement bases of assets and liabilities. Income taxes are not accrued
         for unremitted earnings of international operations that have been, or
         are intended to be, reinvested indefinitely.


                                      -18-
<PAGE>   54

4.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Cont'd)

i.       Operating leases

         Operating leases represent those leases under which substantially all
         the risks and rewards of ownership of the leased assets remain with the
         lessors. Rental payments under operating leases are charged to expense
         on a straight-line basis over the period of the relevant leases.

j.       Foreign currency translation

         The Company considers Renminbi ("Rmb") as its functional currency as
         most of the Group's business activities are based in Renminbi.

         The translation of the financial statements of group companies into
         Renminbi is performed for balance sheet accounts using the closing
         exchange rate in effect at the balance sheet date and for revenue and
         expense accounts using an average exchange rate during each reporting
         period. Gains or losses resulting from translation are included in
         shareholders' equity separately as cumulative translation adjustments.
         Aggregated net gains (losses) from foreign currency transactions
         included in the results of operations for the years ended December 31,
         1995, 1996 and 1997 were approximately Rmb275,000, Rmb2,000 and
         Rmb(527,000), respectively.

k.       Earnings (loss) per common share

         Basic earnings (loss) per common share is computed in accordance with
         Statement of Financial Accounting Standards No. 128 by dividing net
         income (loss) for each year by the weighted average number of shares of
         common stock outstanding. Diluted earnings (loss) per common share
         reflects the dilution that would have resulted from the conversion of
         convertible debentures and convertible preferred stock, and exercise of
         warrants and options based on the average market price of common stock
         during the years. For the years ended December 31, 1995 and 1996,
         diluted earnings per common share is computed by dividing net income
         for each year plus convertible debenture interest (net of tax) by the
         weighted average number of shares of common stock outstanding and all
         dilutive securities during the years arising from conversion of
         convertible debentures and convertible preferred stock, and exercise of
         warrants and options based on the market price of common stock. For the
         year ended December 31, 1997, exercise of warrants and convertible
         debentures would have been anti-dilutive and, accordingly, was not
         considered in the computation of dilutive earnings (loss) per common
         share. All earnings per common share data has been restated in
         accordance with Statement of Financial Accounting Standards No. 128.


                                      -19-
<PAGE>   55

4.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Cont'd)

l.       Use of estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles in the United States of America requires
         management to make estimates and assumptions that affect certain
         reported amounts and disclosures. Accordingly, actual results could
         differ from those estimates.

m.       Fair value of financial instruments

         All financial instruments of the Group are carried at cost, which
         approximate fair values.

5.       RESTRICTED BANK DEPOSITS

As of December 31, 1997, bank deposits of approximately Rmb33,284,000 was
pledged as collateral in respect of bank loans borrowed by CISP and was
classified as restricted bank deposits.

6.       ACCOUNTS RECEIVABLE

Accounts receivable comprised:

<TABLE>
<CAPTION>
                                              1996                       1997
                                            ---------        ---------------------------
                                             Rmb'000          Rmb'000           US$'000
<S>                                         <C>               <C>              <C>   
Trade receivables                             119,448           98,088           11,846
Less: Allowance for doubtful accounts          (7,445)         (46,601)          (5,628)
                                             --------         --------         --------
Accounts receivable, net                      112,003           51,487            6,218
                                             ========         ========         ========
</TABLE>

7.       DUE FROM CISP

Due from CISP comprised:

<TABLE>
<CAPTION>
                                              1996                     1997
                                            ---------        ------------------------
                                             Rmb'000          Rmb'000         US$'000
<S>                                         <C>              <C>              <C>   
Current portion                                13,000              --              --
Long-term portion                              38,191         365,435          44,135
                                             --------        --------        --------
                                               51,191         365,435          44,135
                                             ========        ========        ========
</TABLE>


                                      -20-
<PAGE>   56

7.       DUE FROM CISP  (Cont'd)

The amount due from CISP primarily arose from advances made by CCIS to CISP and
its related companies, expenses paid by CCIS on behalf of CISP and its related
companies and assumption by CCIS of certain bank loans of CISP and its related
companies, after netting off rental expenses payable by CCIS to CISP (see Note
1). It is unsecured and non-interest bearing. The Company's Directors expect
that the outstanding amount due from CISP will be settled by CISP through
transfer by CISP to CCIS of buildings and plant, machinery and equipment, or
transfer by CCIS to CISP of a certain amount of its bank loans. However, the
Group has no access to any financial information of CISP and, accordingly, is
uncertain whether CISP has the necessary financial ability to repay to the
Group.

8.       PREPAYMENTS, DEPOSITS AND OTHER CURRENT ASSETS

Prepayments, deposits and other current assets comprised:

<TABLE>
<CAPTION>
                                                 1996                   1997
                                               --------        ------------------------
                                                Rmb'000         Rmb'000         US$'000
<S>                                            <C>             <C>             <C>  
Deposits for purchases of raw materials          22,743           5,515             666
Deposits for construction-in-progress            12,827              --              --
Prepaid insurance and utilities                   5,532           7,136             862
Advances to employees                             1,374              --              --
Due from companies related to OVP                 2,586           2,834             342
                                               --------        --------        --------
                                                 45,062          15,485           1,870
                                               ========        ========        ========
</TABLE>

9.       LOANS RECEIVABLE

Loans receivable represented advances to independent third parties, which are
unsecured, non-interest bearing and without pre-determined repayment terms.


                                      -21-
<PAGE>   57

10.      INVENTORIES

Inventories comprised:

<TABLE>
<CAPTION>
                                         1996                      1997
                                       ---------         -------------------------
                                        Rmb'000          Rmb'000           US$'000
<S>                                     <C>              <C>               <C>   
Raw materials                            246,172          178,122           21,512
Work-in-process                           69,985           39,863            4,815
Finished goods                             8,699           18,805            2,271
                                        --------         --------         --------
                                         324,856          236,790           28,598
Less: Allowance for obsolete and
        slow-moving items                 (7,937)          (7,937)            (959)
                                        --------         --------         --------
Inventories, net                         316,919          228,853           27,639
                                        ========         ========         ========
</TABLE>

11.      INVESTMENT IN AN ASSOCIATED COMPANY

As of December 31, 1996 and 1997, the Company had a 50% equity interest in China
Pacific Construction (B.V.I.) Limited ("CPCT"; a company incorporated in the
British Virgin Islands) (see Note 1). The major assets of CPCT are three-year 8%
promissory notes due on December 28, 1998 together with accrued interests with
an aggregate amount of Rmb156.0 million issued by OVP and its immediate holding
company in connection with the disposal of the Sun City Subsidiaries and the
consultancy services provided by CPCT to OVP (see Note 1). These promissory
notes are collaterized by the common stock of OVP. During the years ended
December 31, 1996 and 1997, the major revenue of CPCT was consultancy fees of
approximately Rmb11,466,000 and Rmb11,434,000, respectively, earned from OVP
following the disposal of the Sun City Subsidiaries, and interest income of
approximately Rmb10,927,000 and Rmb10,749,000, respectively, accrued from the
aforementioned promissory note. It is uncertain whether OVP and its holding
company have necessary cash resources to repay their obligations to CPCT on the
due date and, consequently, realization of the Group's investment in the
associated company is uncertain. In view of this uncertainty, the Group did not
record its equity share of income of CPCT amounting to approximately Rmb9.2
million during the year ended December 31, 1997.


                                      -22-
<PAGE>   58

12.      INVESTMENTS AND NOTE RECEIVABLE

Investments and note receivable comprised:

<TABLE>
<CAPTION>
                                           1996                    1997
                                         --------        ------------------------
                                          Rmb'000        Rmb'000          US$'000
<S>                                      <C>             <C>             <C>
PRC Government debentures                   5,546           5,250             634
Note receivable
    - face value                           25,244          25,244           3,049
    - accrued interest                      3,207           5,604             677
                                         --------        --------        --------
                                           33,997          36,098           4,360
                                         ========        ========        ========
</TABLE>

The PRC Government debentures are issued by the Power Bureau of Qingbaijiang
District, Chengdu, Sichuan Province, the PRC and Chengdu Ministry of Finance.
The debentures are non-interest bearing and will mature from 1998 to 2002.

The note receivable from China Treasure Enterprises Limited, a subsidiary of OVP
(see Note 1), due on December 28, 1998, bears interest at 8% per annum and is
collateralized by the common stock of OVP and a corporate guarantee provided by
OVP's immediate holding company, a company controlled by The People's Government
of Huiyang City, which had an indirect minority interest in the Company. It is
uncertain whether China Treasure Enterprises Limited has the necessary cash
resources to repay its obligations to the Company on the due date and,
consequently, realization of the Company's note receivable is uncertain.

13.      DEFERRED VALUE-ADDED TAX RECOVERABLE

Deferred value-added tax ("VAT") recoverable arose from a change in the PRC tax
regulations effected January 1, 1994. Pursuant to a directive issued by the PRC
State Tax Bureau, the amount of deferred VAT recoverable outstanding at January
1, 1994 can be utilized to offset net VAT payable over a period of five years
with the exact amount of annual utilization to be determined by individual local
tax bureaus. The amount utilized in the years ended December 31, 1995, 1996 and
1997 was approximately Rmb6,864,000, Rmb6,127,000 and Rmb30,391,000,
respectively.


                                      -23-
<PAGE>   59

14.      PROPERTY, MACHINERY, EQUIPMENT AND CAPITAL LEASES

Property, machinery, equipment and capital leases comprised:

<TABLE>
<CAPTION>
                                        1996                     1997
                                      --------         -------------------------
                                       Rmb'000         Rmb'000           US$'000
<S>                                   <C>              <C>              <C>   
Buildings and plant                    146,758          146,758           17,724
Machinery and equipment                 39,455           77,219            9,326
Motor vehicles                           4,227            3,417              413
Furniture and office equipment           1,182            1,362              164
                                      --------         --------         --------
                                       191,622          228,756           27,627

Less: Accumulated depreciation         (15,166)         (30,398)          (3,671)
                                      --------         --------         --------
                                       176,456          198,358           23,956
Construction-in-progress:
    Machinery and equipment             37,764           22,585            2,728
                                      --------         --------         --------
                                       214,220          220,943           26,684
                                      ========         ========         ========
</TABLE>

As of December 31, 1996 and 1997, certain motor vehicles and office equipment
with a net book value of approximately Rmb2,700,000 and Rmb2,415,000,
respectively, were held under capital leases. The total amount of obligations
under these capital leases as of December 31, 1996 and 1997 was approximately
Rmb2,485,000 and Rmb2,146,000 respectively.

As of December 31, 1996 and 1997, buildings and plant with a net book value of
approximately Rmb141,870,000 and Rmb134,532,000, respectively, were situated in
the PRC on land to which the Group has no formal land use right.

15.      INVESTMENT PROPERTIES

Investment properties comprised:

<TABLE>
<CAPTION>
                                              1996                    1997
                                            --------        -------------------------
                                            Rmb'000         Rmb'000           US$'000
<S>                                         <C>             <C>             <C>   
Investment properties                             --          75,258            9,089
Less:  Accumulated depreciation                   --            (965)            (116)
       Provision for impairment loss              --         (17,374)          (2,098)
                                            --------        --------         --------
                                                  --          56,919            6,875
                                            ========        ========         ========
</TABLE>

The investment properties are situated in Hong Kong and are held under leases
expiring in 2060. They were mortgaged as collateral for the Group's banking
facilities (see Note 23).

                                      -24-
<PAGE>   60
16.      SHORT-TERM BORROWINGS

Short-term borrowings comprised:

<TABLE>
<CAPTION>
                                          1996                    1997
                                         --------        ------------------------
                                         Rmb'000         Rmb'000          US$'000
<S>                                      <C>             <C>             <C>   
Short-term bank loans                          --         211,110          25,496
Demand promissory note                     49,716              --              --
                                         --------        --------        --------
                                           49,716         211,110          25,496
                                         ========        ========        ========
</TABLE>

Short-term bank loans are denominated in Renminbi and bear interest at
commercial bank lending rates in the PRC, which ranged from 9.48% to 11.28% as
of December 31, 1997. They are secured by a corporate guarantee given by an
independent third party. These short-term bank loans were borrowed by CCIS and
are due for repayment within twelve months. It is uncertain whether the Group
will have the necessary cash resources to repay these short-term bank loans on
the due dates.

The demand promissory note was issued to CTC for the acquisition of CPS (see
Note 1), and was non-interest bearing and secured by the stock of CPS.

17.      ACCRUED LIABILITIES

Accrued liabilities comprised:

<TABLE>
<CAPTION>
                                           1996                   1997
                                         --------        ------------------------
                                         Rmb'000         Rmb'000          US$'000
<S>                                      <C>             <C>             <C>   

Accruals for operating expenses
    - Staff wages and bonus                12,137           3,875             468
    - Staff welfare and incentive          11,044           6,783             819
    - Utilities                            42,005          41,801           5,049
    - Transportation                        6,134             358              43
    - Others                               25,081          35,506           4,288
Accrual for construction costs              4,998              --              --
                                         --------        --------        --------
                                          101,399          88,323          10,667
                                         ========        ========        ========
</TABLE>


                                      -25-
<PAGE>   61

18.      LONG-TERM DEBT

Long-term debt comprised:

<TABLE>
<CAPTION>
                                               1996                     1997
                                             --------         -------------------------
                                             Rmb'000          Rmb'000          US$'000
<S>                                          <C>              <C>              <C>   
10% convertible debentures due
   November 1997                                1,657               --               --
9% convertible notes due January 1999              --          124,290           15,011
Bank loans                                         --           43,146            5,211
Other long-term debt                            8,946           22,189            2,680
                                             --------         --------         --------
                                               10,603          189,625           22,902

Less: Current maturities                      (10,603)         (22,858)          (2,761)
                                             --------         --------         --------
                                                   --          166,767           20,141
                                             ========         ========         ========
</TABLE>

In 1995, the Company issued US$800,000 (equivalent to approximately
Rmb6,655,000) of 10% convertible debentures due November 1997. The debentures
were convertible into common stock of the Company at a conversion price equal to
the lesser of 100% of the average closing market price of the Company's common
stock for three days immediately preceding the issuance of the debentures, which
was approximately US$18.72, or 80% of the average closing market price of the
Company's common stock for three days immediately preceding the conversion of
the debentures. In 1996, approximately Rmb4,998,000 of the 10% convertible
debentures together with approximately Rmb169,000 of accrued interest were
converted into 162,029 shares of common stock of the Company at an average
conversion price of approximately US$3.85 each (equivalent to approximately
Rmb31.89 each). In 1997, approximately Rmb1,657,000 of the 10% convertible
debentures together with approximately Rmb216,000 of accrued interest were
converted into 83,260 shares of common stock of the Company at an average
conversion price of approximately US$2.72 each (equivalent to approximately
Rmb22.5 each).

In January 1997, the Company issued US$15,000,000 (equivalent to approximately
Rmb124,290,000) of 9% convertible notes to certain unrelated third parties. The
notes are due on January 15, 1999, and are convertible according to a
pre-determined schedule during the period between May 15, 1997 and January 15,
1999 into common stock of the Company at a conversion price equal to 80% of the
average closing market price of the Company's common stock for five days
immediately preceeding the date of notice from note holders of such conversion,
with the conversion price subject to a minimum amount of US$4.00 per share and a
maximum amount of US$8.00 per share. Based on the pre-determined schedule, 25%
of the amount of the notes is convertible after May 15, 1997, 50% of the amount
of the notes is convertible after September 12, 1997, 75% of the amount of the
notes is convertible after January 10, 1998, and 100% of the amount of the notes
is convertible after May 10, 1998. There was no conversion during the year ended
December 31, 1997. As consideration for the sales of the 9% convertible notes,
the Company paid placement commissions of US$1,050,000 (equivalent to
approximately Rmb8,705,000), representing 7% of the proceeds of the convertible
notes, and issued to the placing agent five-year warrants (expiring January
2002) to acquire up to 300,000 shares of common stock of the Company at US$4.00
per share. Management believes that the exercise price of the warrants issued
exceeded the fair market value of the Company's common stock on the date of
issuance of the warrants. As shares of common stock of the Company have been
trading below the minimum conversion price of US$4.00 per share for a
substantial period of time, it is uncertain whether the holders of the
convertible notes would convert the notes into common stock of the Company. If
the holders of the convertible notes choose not to convert and require repayment
from the Company, it is uncertain whether the Company will have necessary cash
resources to repay this obligation on the due date of January 15, 1999.


                                      -26-
<PAGE>   62

18.      LONG-TERM DEBT  (Cont'd)

The long-term bank loans are denominated in Hong Kong dollars and bear interest
at the Hong Kong prime lending rate plus 0.5% to 0.75% per annum. These bank
loans are secured by mortgages over certain of the Group's investment properties
with net book value of Rmb56,919,000 as of December 31, 1997.

Other long-term debt includes various loans from customers and employees, which
are unsecured, non-interest bearing and without pre-determined repayment terms.

19.      CAPITAL LEASE OBLIGATIONS

Future minimum lease payments under capital leases, together with the present
value of the minimum lease payments are:

<TABLE>
<CAPTION>
                                                        1996                 1997
                                                      --------        --------------------
                                                      Rmb'000         Rmb'000      US$'000
<S>                                                   <C>             <C>           <C>   
Payable during the following period
    - Within one year                                     948            769             93
    - Over one year but not exceeding two years
                                                          912            765             92
    - Over two years but not exceeding three
        years                                             906            765             92
    - Over three years but not exceeding four
        years                                             269            319             39
                                                       ------         ------         ------
Total minimum lease payments                            3,035          2,618            316

Less: Amount representing interest                       (550)          (472)           (57)
                                                       ------         ------         ------
Present value of minimum lease payments                 2,485          2,146            259

Less: Current portion                                    (777)          (630)           (76)
                                                       ------         ------         ------
Non-current portion                                     1,708          1,516            183
                                                       ======         ======         ======
</TABLE>


                                      -27-
<PAGE>   63

20.      CAPITAL STOCK AND WARRANTS

Common stock

In 1995, the Company sold 38,750 shares of common stock, par value US$0.001
each, for cash of approximately US$433,000 (equivalent to approximately
Rmb3,603,000), at an average price of approximately US$11.17 per share (after
adjusting for the one-for-four reverse stock split). In 1996, the Company sold
599,891 shares of common stock, par value US$0.001 each, for cash of
approximately US$1,325,000 (equivalent to approximately Rmb10,975,000), at an
average price of approximately US$2.21 per share. Also, the Company issued
195,750 shares of common stock, par value US$0.001 each, valued at US$783,000
(equivalent to approximately Rmb6,481,000), at an average price of approximately
US$3.99 per share to certain third party consultants for consultancy services
rendered by them in connection with the acquisition of CPS.

On July 9, 1996, the Company effected a one-for-four reverse stock split, under
which the then outstanding 35,760,398 shares of common stock with a par value of
US$0.001 each became 8,940,109 shares of common stock with a par value of
US$0.001 each. In this connection, an amount of approximately US$27,000
(equivalent to approximately Rmb221,000) was transferred from the common stock
account to additional paid-in capital. Also, the number of authorized shares of
common stock of the Company was reduced from 100,000,000 to 25,000,000. All
references in these financial statements to number of shares, share prices and
per share amounts of common stock have been adjusted retroactively for this
one-for-four reverse stock split.

In May 1996, the Company repurchased 27,500 shares of common stock in the open
market for approximately US$171,000 (equivalent to approximately Rmb1,420,000),
representing an average price of US$6.22 per share.

Series A convertible preferred stock

In 1995, the Company sold 5,905 shares of Series A convertible preferred stock,
par value US$0.001 each, for US$5,905,000 (equivalent to approximately
Rmb49,129,000). In 1995, 3,655 shares of series A preferred stock were converted
into 555,249 shares of common stock of the Company at an average conversion
price of US$6.58 per share. In 1996, the remaining 2,250 shares of Series A
preferred stock were converted into 559,167 shares of common stock of the
Company at an average conversion price of US$4.02 per share.

Series B convertible and redeemable preferred stock

The Company sold 650 shares of Series B convertible and redeemable preferred
stock, par value US$0.001 each, for US$650,000 (equivalent to approximately
Rmb5,408,000) in 1995 and 1,030 shares of Series B convertible and redeemable
preferred stock, par value US$0.001 each, for US$1,030,000 (equivalent to
approximately Rmb8,534,000) in 1996. In 1996, all of the 1,680 shares of Series
B convertible and redeemable preferred stock were converted into 544,961 shares
of common stock of the Company at an average conversion price of US$3.08 per
share.


                                      -28-
<PAGE>   64

20.      CAPITAL STOCK AND WARRANTS  (Cont'd)

Series C convertible and redeemable preferred stock

In 1996, the Company sold 9,105 shares of Series C convertible and redeemable
preferred stock, par value US$0.001 each, for US$9,105,000 (equivalent to
approximately Rmb75,443,000). In 1996, all of the 9,105 shares of Series C
convertible and redeemable preferred stock were converted into 2,729,158 shares
of common stock of the Company at an average conversion price of US$3.34 per
share.

Warrants

In 1995, the Company issued 550,755 warrants to a third party for investment
banking services at a conversion basis of 4 warrants for 1 share of common stock
of the Company at an exercise price of US$15.24 per share. The warrants will
expire in September 2000. No warrants have been exercised.

In 1997, in connection with the sale of the 9% convertible notes (see Note 18),
the Company issued five-year warrants to subscribe for up to 300,000 shares of
common stock of the Company at an exercise price of US$4.00 per share. The
warrants will expire in January 2002. No warrants were exercised in 1997.

The Company's management believes that the exercise prices of the warrants
issued exceeded the fair market value of the Company's common stock on the dates
of issuance of the warrants.

Options

In 1995, the Company granted common stock options to an independent third party
to purchase 125,000 shares of common stock of the Company at exercise prices
ranging from US$9.60 to US$16.00 to be exercised according to a pre-determined
schedule from 1996 to 2000. The Company's management believes that the exercise
prices of the options exceeded the fair market value of the Company's common
stock on the date of grant. No options were exercised in 1996 and 1997. During
the year ended December 31, 1997, options to purchase 25,000 shares of common
stock at US$11.20 expired. As of December 31, 1997, there were outstanding
options to purchase 75,000 shares of common stock of the Company at exercise
prices ranging from US$12.80 to US$16.00.


                                      -29-
<PAGE>   65

21.      INCOME TAXES

The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
British Virgin Islands subsidiaries are incorporated under the International
Business Companies Act of the British Virgin Islands and, accordingly, are
exempted from payment of the British Virgin Islands income taxes. The Hong Kong
subsidiaries are subject to Hong Kong profits tax at a rate of 16.5%. The joint
venture enterprise established in the PRC (Chengdu Chengkang Iron and Steel
Company Limited; "CCIS") is subject to PRC income taxes at a rate of 33% (30%
state income tax and 3% local income tax). However, CCIS is exempted from state
income tax and local income tax for two years starting from the first year of
profitable operations (years ended December 31, 1995 and 1996), followed by 50%
reduction in state income tax for the next three years (years ended December 31,
1997, 1998 and 1999).

If the tax concession for CCIS did not exist, the Group's provision for income
tax would have been increased by approximately Rmb24,471,000, Rmb33,970,000 and
Nil (note: CCIS incurred a loss during the year ended December 31, 1997) for the
years ended December 31, 1995, 1996 and 1997, respectively. Basic earnings per
common share would have been decreased by approximately Rmb6.77, Rmb4.45 and Nil
for the years ended December 31, 1995, 1996 and 1997, respectively. Diluted
earnings per common share would have been decreased by approximately Rmb6.41,
Rmb3.76 and Nil for the years ended December 31, 1995, 1996 and 1997,
respectively.

The Company does not provide for income taxes on the undistributed earnings of
its international subsidiaries because the earnings are reinvested and, in the
opinion of management, will continue to be reinvested in the foreseeable future.

The reconciliation of the United States federal income tax rate to the effective
income tax rate based on income (loss) from continuing operations before income
taxes stated in the consolidated statements of operations is as follows:

<TABLE>
<CAPTION>
                                                             Years ended December 31,
                                                      --------------------------------------
                                                       1995            1996            1997
                                                      ------          ------          ------
<S>                                                   <C>             <C>             <C>  
United States federal income tax rate                   35.0%           35.0%           35.0%
Weighted average effect of different tax rates
    in foreign jurisdictions                            (1.9%)          (6.5%)           4.1%
Tax loss not recognized                                   --              --           (39.8)%
Effect of tax holiday for CCIS                         (30.7%)         (27.1%)            --
                                                      ------          ------          ------
Effective income tax rate                                2.4%            1.4%           (0.7%)
                                                      ======          ======          ======
</TABLE>


                                      -30-
<PAGE>   66

22.      DISTRIBUTION OF PROFIT

At present, the majority of the Group's income is contributed by its 60% owned
joint venture enterprise in the PRC - Chengdu Chengkang Iron and Steel Company
Limited ("CCIS").

Income of CCIS as determined under generally accepted accounting principles in
the PRC is distributable to investors after transfer to (i) contributory
dedicated capital as required under PRC government regulations and the company's
articles of association, and (ii) discretionary dedicated capital as determined
by the company's board of directors. Contributory dedicated capital is a form of
legal reserve fund. Discretionary dedicated capital includes a general reserve
fund, an enterprise expansion fund and a staff welfare and employee incentive
bonus fund. Contributory and discretionary dedicated capital is not
distributable in the form of dividends. In CCIS's financial statements prepared
under generally accepted accounting principles in the United States of America,
amounts designated for payments of staff welfare and employee incentive bonus
have been charged to income and the related provisions are reflected as accrued
liabilities in the balance sheets.

The income of CCIS available for distribution to its shareholders is based on
the income reported in its statutory accounts prepared under generally accepted
accounting principles in the PRC.

23.      BANKING FACILITIES AND PLEDGES OF ASSETS

As of December 31, 1997, the Group had banking facilities for overdrafts, loans
and trade financing of approximately Rmb292,984,000. These facilities were
secured by:

(i)      mortgages over the Group's investment properties situated in Hong Kong
         with a net book value of approximately Rmb56,919,000 as of December 31,
         1997;

(ii)     personal guarantees provided by Clement Mak, the Company's chairman,
         president and chief executive officer; and

(iii)    a corporate guarantee given by an independent third party.


                                      -31-
<PAGE>   67

24.      COMMITMENTS

The Group has agreed to lease from CISP certain operating assets (see Note 1).
In addition, the Group has various operating lease agreements for office
premises which extend through November 1998. Rental expenses for the years ended
December 31, 1995, 1996 and 1997 were approximately Rmb1,506,000, Rmb1,911,000
and Rmb1,847,000, respectively. Future minimum payments (other than those
payable to CISP) as of December 31, 1996 and December 31, 1997 are Rmb3,336,000
and Rmb1,647,000, respectively.

25.      OUTSTANDING LITIGATION

In March 1997, a brokerage firm filed a civil action against the Company in a
United States District Court. The complaint alleges breach of contract by the
Company in connection with a selling agreement allegedly entered into between
the Company and the brokerage firm, and involves securities of the Company that
were sold in private placements in 1995 and 1996. The brokerage firm is seeking
monetary damages and expenses in excess of US$5,000,000 (equivalent to
approximately Rmb41,450,000) and/or an order compelling the Company to issue
warrants to subscribe to 1,141,000 shares of common stock of the Company under
the alleged selling agreement. The Company believes this claim is without merit
and plans to contest such claim vigorously. However, the Company and its legal
counsel are unable to predict the outcome of this dispute. If the outcome is
adverse, the Company's financial position and operating results could be
materially affected. No provision has been recorded in the financial statements
in connection with the aforesaid claim.

26.      RETIREMENT PLAN

As stipulated by PRC regulations, CCIS maintains a defined contribution
retirement plan for all its employees starting from January 1, 1996. All retired
employees of CCIS are entitled to an annual pension equal to their basic annual
salary at retirement. CCIS contributes to a state sponsored retirement plan
approximately 21% of the basic salary of its employees and has no further
obligations for the actual pension payments or post-retirement benefits beyond
the annual contributions. The state sponsored retirement plan is responsible for
the entire pension obligations payable to retired employees. The contributions
made during the years ended December 31, 1996 and 1997 amounted to approximately
Rmb13,110,000 and Rmb12,875,000, respectively.


                                      -32-
<PAGE>   68

27.      RELATED PARTY TRANSACTIONS

Name and relationship of related parties:

<TABLE>
<CAPTION>
Name of related parties                                  Existing relationship with the Company
---------------------------------------------------      -------------------------------------------------
<S>                                                      <C>
China Pacific Investment Holdings Limited                Intermediate holding company (see Note 1)

Kiu Yin Investment Co. Ltd.                              Intermediate holding company, which is owned by a
                                                             discretionary trust established for the
                                                             benefit of the family of Clement Mak, the
                                                             Company's chairman, president and chief
                                                             executive officer (see Note 1)

Changdu Iron and Steel Plant ("CISP")                    Chinese joint venture partner of CCIS

CCT Telecom Holdings Limited                             Common directors

China Treasure Telecom (H.K.) Limited                    Common directors

China Treasure Holding (B.V.I.) Limited                  Common directors

China Treasure (Huiyang) Industrial Enterprise Ltd.      Common directors

CP Investment Limited                                    Common directors

China Pacific Capital Limited                            Common directors

Guangdong                                                Construction (HK)
                                                           Limited Owned by the Guangdong
                                                           Branch of The China Construction Bank
                                                           (see Note 1)

Kingswall Company Limited                                Common directors

China Pacific Construction (B.V.I.) Limited              Associated company
</TABLE>

Summary of related party transactions:

<TABLE>
<CAPTION>
                                                     1996                  1997
                                                   --------        --------------------
                                                   Rmb'000         Rmb'000      US$'000
<S>                                                <C>             <C>          <C>   
Due from related companies
    - Kingswall Company Limited                          --             3            --
    - Kiu Yin Investment Co. Ltd.                         1            --            --
    - CCT Telecom Holdings Limited                      360           601            73
    - China Treasure Telecom (H.K.) Limited
                                                          1             1            --
    - China Treasure Holding (B.V.I.) Limited
                                                      1,238           195            24
    - Guangdong Construction (H.K.) Limited
                                                         99            99            12
    - China Pacific Construction (B.V.I.)
        Limited                                         332           356            43
    - CP Investment Limited                              --           193            23
    - China Treasure (Huiyang) Industrial
        Enterprise Ltd.                                  --             1            --
                                                     ------        ------        ------
                                                      2,031         1,449           175
                                                     ======        ======        ======
</TABLE>


                                      -33-
<PAGE>   69

27.      RELATED PARTY TRANSACTIONS  (Cont'd)

<TABLE>
<CAPTION>
                                                         1996                    1997
                                                       --------        ------------------------
                                                       Rmb'000         Rmb'000         US$'000
<S>                                                    <C>             <C>             <C>   
Due to related companies
    - China Pacific Investment
         Holdings Limited                                 4,445              50               6
    - CP Investment Limited                               4,918           1,542             186
                                                       --------        --------        --------
                                                          9,363           1,592             192
                                                       ========        ========        ========

Due from CISP                                            51,191         365,435          44,135

Accounts receivable from companies
    related to CISP                                       5,377           4,682             565

Accounts payable to companies related to CISP
                                                          8,710           4,112             497

Deposits from customers related to CISP                   8,567           7,639             923

Demand promissory note payable to China
    Treasure Capital Limited in connection with
    the acquisition of CPS (see Note 1)                  49,716              --              --
                                                       ========        ========        ========
</TABLE>

All outstanding balances with related companies are unsecured, non-interest
bearing and without pre-determined repayment terms, except for balances with
China Treasure Holding (B.V.I.) Limited which bear interest at 9% per annum and
the demand promissory note payable to China Treasure Capital Limited was secured
by the stock of China Pacific Steel Limited, a 100% owned subsidiary.

<TABLE>
<CAPTION>
                                            1995             1996                   1997
                                          --------         --------        ------------------------
                                          Rmb'000          Rmb'000         Rmb'000         US$'000
<S>                                       <C>              <C>             <C>             <C>   
Sales to companies related to CISP         114,276          103,574          99,867          12,061

Purchases from companies related
    to CISP                                 15,120           12,900          11,560           1,396

Rental expenses paid/payable to
    CISP in respect of lease of
    buildings, machinery and
    equipment                               11,714           23,400              --              --

Interest expenses paid to China
    Treasure Holding (B.V.I.)                8,606              627              --              --
    Limited
Less: Capitalized in the cost of
        development properties              (7,845)              --              --              --
                                          --------         --------        --------        --------
                                               761              627              --              --
                                          --------         --------        --------        --------

Rental income from CCT Telecom
    Holdings Limited                            --               --             386              47

Acquisition of buildings and
    construction-in-progress from
    CISP                                        --          131,631              --              --
                                          ========         ========        ========        ========
</TABLE>

As of December 31, 1997, the Group's bank deposits of approximately
Rmb33,284,000 was pledged as collateral in respect of bank loans borrowed by
CISP (see Note 5).


                                      -34-
<PAGE>   70

28.      SEGMENT INFORMATION

Analyses of sales, income (loss) and assets by major operations and geographical
areas are as follows:

<TABLE>
<CAPTION>
                                            1995          1996                  1997
                                         ----------    ----------     -------------------------
                                           Rmb'000       Rmb'000        Rmb'000        US$'000
<S>                                      <C>           <C>            <C>            <C>    
Net sales of iron and steel
    operations to customers
    in PRC                                  442,088     1,023,846      1,013,191        122,366

Sales of investment properties
    in Hong Kong                                 --            --        116,840         14,111

Rental income derived in
    Hong Kong
    - related companies
          (Note 27)                              --            --            386             47
    - third parties                              --            --            810             98
                                         ----------    ----------     ----------     ----------
                                            442,088     1,023,846      1,131,227        136,622
                                         ==========    ==========     ==========     ==========
Income (Loss) from
    operations-
    Iron and steel operations
       in PRC                                42,404        91,061        (84,340)       (10,186)
    Investment in real estate
       properties in
       Hong Kong                                 --            --        (27,799)        (3,357)

Other businesses and head
       office expenses in  
       Hong Kong                              1,060        (7,279)       (13,097)        (1,532)
Income (Loss) from
    discontinued operations-
    Real estate development
       and sale in PRC                        7,018            --             --             --
                                         ----------    ----------     ----------     ----------
                                             50,482        83,782       (125,236)       (15,125)
                                         ==========    ==========     ==========     ==========
Identifiable assets as of
    December 31 -
    PRC                                                   792,855        927,551        112,023
    Hong Kong                                             137,903        165,635         20,005
                                                       ----------     ----------     ----------
                                                          930,758      1,093,186        132,028
                                                       ==========     ==========     ==========
</TABLE>


                                      -35-
<PAGE>   71

29.      SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

a.       Cash paid for interest and income taxes comprised:

<TABLE>
<CAPTION>
                     1995          1996                 1997
                    -------       -------       ----------------------
                    Rmb'000       Rmb'000       Rmb'000        US$'000
<S>                 <C>           <C>           <C>            <C>  
Interest paid           662           191        21,075         2,545
                     ======        ======        ======        ======
Income taxes             --            --            --            --
                     ======        ======        ======        ======
</TABLE>

b.       Supplemental disclosure of investing activities:

         During the year ended December 31, 1997, the Group entered into capital
         lease arrangements in respect of newly acquired assets with a capital
         value of approximately Rmb2,506,000.

30.      OPERATING RISK

a.       Country risk

         The Group's operations are conducted in the PRC and Hong Kong.
         Accordingly, the Group's business, financial position and results of
         operations may be influenced by the political, economic and legal
         environments in the PRC and Hong Kong, and by the general state of the
         PRC and Hong Kong economies.

         The Group's operations in the PRC are subject to special considerations
         and significant risks not typically associated with companies in North
         America and Western Europe. These include risks associated with, among
         others, the political, economic and legal environments and foreign
         currency exchange. The Group's results may be adversely affected by
         changes in the political and social conditions in the PRC, and by
         changes in governmental policies with respect to laws and regulations,
         anti-inflationary measures, currency conversion and remittance abroad,
         and rates and methods of taxation, among other things.

         Effective from July 1, 1997, sovereignty over Hong Kong was transferred
         from the United Kingdom to the PRC, and Hong Kong became a Special
         Administrative Region of the PRC (an "SAR"). As provided in the Basic
         Law of the Hong Kong SAR of the PRC, the Hong Kong SAR will have full
         economic autonomy and its own legislative, legal and judicial systems
         for fifty years. The Group's management does not believe that the
         transfer of sovereignty over Hong Kong has had an adverse impact on the
         Company's financial and operating environment. There can be no
         assurance, however, that changes in political or other conditions will
         not result in such an adverse impact.


                                      -36-
<PAGE>   72

30.      OPERATING RISK  (Cont'd)

b.       Dependence on strategic relationship

         A majority of the Group's operations are conducted by CCIS, a
         Sino-foreign joint venture established between the Group and Chengdu
         Iron and Steel Plant ("CISP"), a PRC state-owned enterprise (see Note
         1). Any deterioration of this strategic relationship and any adverse
         changes in financial position of CISP, among other things, may have an
         adverse effect on the operations of the Group

c.       Concentration of credit risk and major customers

         The Group's concentration of credit risk with respect to trade
         receivables is limited due to the large number of customers comprising
         the Group's customer base. There were no customers which represented a
         significant concentration of sales in 1995, 1996 and 1997 or trade
         accounts receivable as of December 31, 1996 and 1997. Ongoing credit
         evaluations of each customer's financial condition are performed and,
         generally, no collateral is required. The Group maintains reserves for
         potential credit losses.

d.       Matters relating to CCIS

         The buildings of CCIS with a book carrying value of approximately
         Rmb146,758,000 were located on land in the PRC to which the Group has
         no formal land use right. Also, CCIS has not prepared any audited
         financial statements under generally accepted accounting principles in
         the PRC.

e.       Going concern

         The financial statements have been prepared assuming that the Company
         will continue as a going concern. As discussed in Notes 16 and 18 to
         the accompanying financial statements, as of December 31, 1997, the
         Group had short-term bank loans of approximately Rmb211.1 million,
         which are due for repayment within twelve months, and liabilities under
         convertible notes of approximately US$15.0 million (equivalent to
         approximately Rmb124.3 million) which are due for repayment on January
         15, 1999 if the holders of the notes choose not to convert the notes
         and require the Company for repayment. It is uncertain whether the
         Group will have the necessary cash resources to repay these liabilities
         on the due dates. In addition, the Group incurred significant losses
         during the year ended December 

                                      -37-
<PAGE>   73
31, 1997, and as of that date the Group's current liabilities exceeded its
current assets by approximately Rmb270.9 million. The unaudited management
accounts of the Group for the three months ended March 31, 1998 indicate that
the Group has continued incurring losses. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.


31.      OTHER SUPPLEMENTAL INFORMATION

The following items were included in the consolidated statements of operations:

<TABLE>
<CAPTION>
                                                1995             1996                     1997
                                              --------         --------         -------------------------
                                              Rmb'000          Rmb'000          Rmb'000           US$'000
<S>                                           <C>              <C>              <C>               <C>
Interest expense
    - 10% convertible debentures                   662              182               36                4
    - 9% convertible notes                          --               --           10,720            1,295
    - Bank loans                                    --               --            9,973            1,204
    - Capital leases                                --                9              346               42
    - A related company                          8,606              627               --               --
Less: Capitalized as property, plant
        and equipment                           (7,845)              --               --               --
                                              --------         --------         --------         --------
                                                 1,423              818           21,075            2,545
                                              --------         --------         --------         --------
Operating lease rentals for
    - rented premises                            1,506            1,911            1,847              223
    - buildings, machinery and
        equipment (CISP)                        11,714           23,400               --               --

Repairs and maintenance                          5,051            7,518           22,511            2,719

Depreciation
    - Owned assets                               5,314           10,565           16,605            2,005
    - Assets held under capital leases             177              710              372               45

Provision for/Write-off of
   bad and doubtful trade receivables               --            7,445           39,156            4,729

Provision for /Write-off of
   slow-moving and obsolete inventories          7,937               --           49,000            5,918

Advertising                                        294            1,167              845              102

Interest (income)                                  (34)          (3,634)          (4,121)            (498)

Net loss (gain) on disposals of
   property, machinery and equipment               591              240             (606)             (73)

Net (gain) on disposals of investment
   properties                                       --               --          (10,261)          (1,239)

Impairment loss on investment properties            --               --           17,374            2,098

Net foreign exchange (gain) loss                  (275)              (2)             527               64  
                                              ========         ========         ========         ========
</TABLE>


                                      -38-