<PAGE>

                                   FORM 10-K
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

(Mark One)

  [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
             THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
               For the Fiscal Year Ended December 31, 1997

                                      OR

  [ ]    TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
            SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
              For the transition period from            to

                        COMMISSION FILE NUMBER: 811-854

                              IIC INDUSTRIES INC.
            (Exact name of Registrant as specified in its charter)


         DELAWARE                                            13-5675984
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification No.)


                             420 LEXINGTON AVENUE
                           NEW YORK, NEW YORK 10170
         (Address of principal executive offices, including zip code)


      Registrant's telephone number, including area code: (212) 297-6132



       Securities registered pursuant to Section 12(b) of the Act: NONE


TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED

       N/A                                              N/A


          Securities registered pursuant to Section 12(g) of the Act:


                         COMMON STOCK, $0.25 PAR VALUE
                               (Title of Class)

<PAGE>



         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 90 days. Yes X No ----

         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 ]

         The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant as of March 31, 1998 was $16,053,267 based on
the average of bid and asked quotations for the Common Stock on that date, as
reported by the NASDAQ Automated Quotation System.

         The number of shares outstanding of the Registrant's Common Stock, as
of March 31, 1998: 5,693,472.

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

                     DOCUMENTS INCORPORATED BY REFERENCE:

                                      N/A
---------------------------------------------------------------




<PAGE>




                             IIC INDUSTRIES, INC.

                         1997 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
<S>       <C>      <C>                                                                                           <C>
Part I
          Item 1.  Business....................................................................................   1
          Item 2.  Properties..................................................................................  13
          Item 3.  Legal Proceedings...........................................................................  14
          Item 4.  Submission of Matters to a Vote of Security Holders.........................................  15

Part II
          Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.......................  16
          Item 6.  Selected Financial Data.....................................................................  17
          Item 7.  Management's Discussion and Analysis of Financial Condition and
                       Results of Operations...................................................................  18
          Item 8.  Financial Statements and Supplementary Data.................................................  29
          Item 9.  Changes in and Disagreements with Accountants on Accounting and
                       Financial Disclosure....................................................................  29

Part III
          Item 10.  Directors and Executive Officers of the Registrant.........................................  30
          Item 11.  Executive Compensation.....................................................................  31
          Item 12.  Security Ownership of Certain Beneficial Owners and Management.............................  32
          Item 13.  Certain Relationships and Related Transactions.............................................  34

Part IV
          Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8K............................  35
</TABLE>


<PAGE>


ITEM 1.   BUSINESS


HISTORY

      IIC Industries Inc. (the "Company") was incorporated pursuant to the
laws of the State of Delaware on October 14, 1958 under the name "Israel
Investors Corporation." The Company registered itself as a closed-end
"investment company" under the Investment Company Act of 1940, as amended (the
"Act"), in 1959. As an investment company, the Company made investments in
Israel or Israel related businesses. Pursuant to shareholder approval received
in 1982, the Company determined to cease its activity as an investment company
and to become an operating company with flexibility to enter into non-Israel
related businesses. This decision was prompted by conflicts of interests
caused by the fact that the Company's majority shareholder, Koor Industries
("Koor"), had substantial interests in a large number of businesses in Israel
and that the Act precludes certain affiliated transactions. In September 1989,
Koor sold its interest in the Company to CP Holdings Limited, a private United
Kingdom company. In anticipation of the Company's transition to an operating
company, substantially all of the Company's investments were converted into
short-term deposits and the Company's name was changed to IIC Industries Inc.
The Company filed an application on November 23, 1990, with the Securities and
Exchange Commission ("SEC") to deregister as an investment company registered
under the Act. On October 6, 1992, the SEC approved the deregistration
application and the Company was deregistered as an investment company.


GENERAL

         The Company is presently operated as a holding company with
subsidiaries in three principal operating geographic areas: (1) Investor RT, a
Hungarian holding company ("Investor"), which through its subsidiaries,
engages in a variety of commercial activities in Hungary; (2) The Israel
Tractors and Equipment Company Limited ("Israel Tractor"), an Israeli
corporation, which distributes tractors and related heavy machinery in Israel
and (3) Balton C.P. Limited, an English holding company with African
subsidiaries ("Balton") engaged in the trading business in several African
countries.

      The Company's holdings in Balton and Investor were acquired as part of
the Company's transition to an operating company and in connection with the
Company's deregistration application. The Company acquired 51% of Balton and
made certain loan advances to Balton in May 1991 for approximately $3.5
million in total acquisition costs (of which $1.5 million has been refunded).
In addition, in January 1992, the Company purchased a 60% interest (equivalent
to 70% after adjusting for treasury stock and unpaid shares) in Investor for
approximately $34 million, with an option to purchase an additional 20% for
$11.3 million. The option was never exercised, but in December 1994, in
settlement of various claims against the sellers, the Company acquired an
additional 23% interest for the sum of approximately $900,000. At December 31,
1997, the Company owned a 99% interest in Investor.


<PAGE>

      Through its subsidiaries, the Company is principally engaged in the
following lines of business: (1) the sales and service of vehicles; (2) the
export/import and processing/storage of agricultural products; (3) other
industries including retail and wholesale consumer products; (4) the
distribution of tractors and other heavy equipment; and (5) the sale of
agricultural, communications and electrical equipment. The first three of the
aforementioned lines of business are conducted through subsidiaries of
Investor, while the distribution of agricultural, communications and
electrical equipment is conducted through Balton and its subsidiaries. The
distribution of tractors and heavy equipment is conducted through Israel
Tractor.

         Between February 1995 and January 1996, Investor, through its 78%
owned subsidiary, Interag, has acquired a 29% equity interest in Danubius
Hotel & Spa RT ("Danubius Hotel") for a purchase price of approximately $19.5
million. See, below under "Investor-Interag." The Company itself purchased to
date an additional interest of 5.5% equity interest in Danubius Hotel for
approximately $4.2 million and an additional 7.8% of Interag for $1 million.

INVESTOR

               General
               -------

         Investor was founded by the Hungarian Trade Ministry in 1989 in order
to function as a quasi- owner of certain state owned trading companies. In
July 1990, it was converted into a company with share ownership.

         Investor is primarily a holding company with subsidiaries engaged in
a variety of activities in Hungary. Investor's principal subsidiaries are
Agrimpex RT ("Agrimpex"), in which Investor has a 63% interest, and Interag RT
("Interag"), in which Investor has a 78% interest. In addition, Investor has
minority investment positions in several Hungarian companies engaged in
various businesses including trading, financial services, banking and
consulting. In 1997, Interag continued the rationalization of certain
unprofitable operations.

      At December 31, 1997, Investor and its subsidiaries, and Danubius Hotel
employed a total of 7,049 persons.


               Agrimpex
               --------

         Agrimpex, a Hungarian company, imports and exports a wide variety of
agricultural products (excluding livestock) operating through a domestic and
foreign business network, including agents and commercial representatives in
various countries throughout the world. The main products traded include
cereals (wheat, corn and barley), vegetable oils, oil seeds, sugar, legumes
and proteins.

      With respect to export transactions, Agrimpex deals with a large number
of Hungarian domestic suppliers, including agricultural cooperatives,
individual farmers and other business organizations and is therefore not
dependent on any single supplier or small group of suppliers. Agrimpex trades
exports with parties located in the republics of the former Soviet Union,
Switzerland, Poland, Rumania, etc. With respect to imports, Agrimpex trades
principally with parties located in Brazil, Germany, Austria and East Asia.



                                      2
<PAGE>


      Agrimpex has a 50% interest in Harmashatarhegyi Udvarhaz (the other 50%
is owned by Interag), a company which operates a restaurant in Budapest, and a
48% interest in a transportation company, Agrovagon Kft., as well as minority
interests in other companies.

      In May 1993, Agrimpex, through its newly-formed wholly-owned subsidiary,
Agrimill RT ("Agrimill"), acquired the assets of a business engaged in the
processing of agricultural products.

      Agrimill's business included four flour mills, four compound feed
plants, a rice mill and extensive storage facilities in silos and warehouses.
Its main business involves the production and supply of flour which is sold
through retail outlets in the area and the sale of animal feed to local
farmers. In addition, Agrimill also assists Agrimpex in sourcing agricultural
products for export.

      In September 1995, Agrimpex, together with its wholly-owned subsidiary
Agrimill purchased 93.5% of Viktoria RT, a Company engaged in the processing
of agricultural products. Viktoria's business included flour mills, one
compound feed plant, one corn flaking plant,a port facility on the Danube and
extensive storage facilities in silos and warehouses. Its main business is in
the production of flour and animal feeds, which are sold on the local domestic
market.

      At the beginning of 1996, Agrimpex was reorganized, so that the company
itself became a holding company and the trading activity was transferred into
a newly formed and 100% owned company called Agrimpex Commodities Kft.
(Limited Liability Company). The objective was to establish a realistic
structure for the group in the view of the previous years investment policy
and to limit the exposure from the trading activity. In 1997 Agrimpex
Commodities suffered significant losses due to poor management in a time of
difficult market conditions. In January 1998, the Board of Agrimpex changed
the complete management of the company.

      In October 1996, Agrimpex entered into a joint venture with a 51%
ownership to improve its possibilities in getting goods for trade in the
northern part of Hungary. The new company, Agrimont supplies the farmers with
basic inputs for the production and is authorized to purchase the crop, which
is traded by Agrimpex afterwards. Agrimont had a difficult year in 1997 due to
unfavorable market conditions.

      At the beginning of 1997, it became apparent that the Managing Director
of Agrimill Rt and two of his Deputies were involved in irregular transactions
that has caused material loss to the Company. The nature of the irregular
activities was such that certain transactions were made between Agrimill Rt
and companies that were owned both directly and indirectly by the managers for
their own personal benefit. The full extent of the transactions is not yet
determined, while a full independent investigation is being carried out. The
three managers concerned have subsequently been relieved of all
responsibilities within the group. They paid back HUF 70 million
unconditionally and the court suspended any further claim until the criminal
case will be finished.

      The losses incurred due to these irregularities and difficult market
conditions led to a reorganization of Agrimill and Viktoria involving a
redundancy program and the rationalization of production facilities to improve
utilization and efficiency. Two flour mills and three compound feed plants
were mothballed. 


                                      3
<PAGE>

      In November 1997, the Danube port and a silo were contributed to a joint
venture, DP Invest, as contribution in kind with the result that the Company
acquired a 50% interest in DP Invest. (See details of this business in the
next section.)


               Interag
               -------

      Interag now operates as a holding company. Following a significant
reorganization in 1993, the operations of Interag and its subsidiaries are now
primarily involved in car dealerships, service and repair of vehicles and
property management. Interag is also involved in trading of food products
utilizing a cold storage facility and the distribution of power products. In
addition, Interag has certain small minority investments.

      The car business operates through several dealer points and service
operations, mainly in Budapest. Interag acts as a dealer for Suzuki, Daewoo
and Peugeot. The Lada dealership ceased in 1997.

      In February 1995, Interag concluded the purchase of a 17.3% interest in
Danubius Hotel and to date has increased its holdings to approximately 29% at
a total cost of approximately $19.5 million.

      Danubius Hotel, a company listed on the Budapest Stock Exchange, owned
and/or managed, ten major hotels comprising approximately 2,000 rooms. An
additional eleven hotels comprise the smaller Beta Hotels Chain. It owns the
Hilton Hotel in the historic old town of Budapest and two hotels, the Grand
and Thermal, on Margaret Island, a famous island on the River Danube in
Budapest. Hotel Gelbert, which was only managed by Danubius, was bought in
1996 and shareholding in another spa hotel, Helia, was increased so that full
control has been achieved as well.

      The Danubius Hotel chain, including several spa hotels, is the foremost
of its kind in Hungary and attracts many tourists from Western Europe and
further afield. Its occupancy rate of 65.7% in 1995 increased to 68.4% in
1996, and to 69.5% in 1997.

      The management of Interag was particularly attracted to this investment
by its strong asset base and because of its substantial income from foreign
currency.

      During 1996, negotiations were held with a view to Danubius acquiring a
controlling stake in the HungarHotels chain. After an official tender, an 85%
share was acquired by Danubius in beginning of 1997. The purchase price was
HUF 8.1 billion or equivalent to approximately $45 million. HungarHotels chain
consists of fourteen hotels, of which seven hotels are in Budapest. The
capacity consists of 1,105 rooms in 4-star hotels and 2,346 rooms in 3-star
hotels. During 1997, Danubius acquired an additional 14% of the shares so as
of today it owns nearly 100% of the shares.

      In 1997, Interag directly acquired a 50% ownership in a company, ATI
Depo which is involved in the public warehousing business. The Company
operates one freehold warehousing site and nine rented ones. The rented ones
belong to DP Invest, which has similar identical ownership structure (50%
Hungarian Investment & Development Bank, 50% Investor Group through Interag
and Agrimpex). DP Invest is a real estate holding company, whose holdings are
rented by ATI Depo.



                                      4
<PAGE>

      Because of a syndicate agreement with the co-owner, the Investor Group
exercises the management control over ATI Depo. The basic consideration of the
group management was to develop this warehouse network establishing new
logistic centers utilizing the locations of the warehouses all over the
country.



               Governmental Regulation
               -----------------------

      Hungary made all current account items convertible on January 1st, 1996
when the Foreign Exchange Law came into force. Accordingly, on January 2nd,
1996, the IMF acknowledged that Hungary was in compliance with Article VIII of
the Articles of Association.

      Many liberalization measures have already been adopted or their timing
has been accepted by the Hungarian Government. The underlying principle has
remained the same as at the time of the establishment of the foreign exchange
law: first, transactions with longer maturities, then-- when the relatively
significant interest differentials between Hungary and its partners have
decreased- transactions with shorter maturaties have been or will be
liberalized. Companies with foreign participation may keep their initial hard
currency share capital in the currency of the investment. Dividends, net of
withholding tax and consideration received on the sale of shares may be
repatriated in the original currency of investment without restrictions or the
need for approval. Businesses can convert Forints into another currency to
import goods provided sufficient Forint funds are available. Services rendered
within Hungary should be paid for in Forints and Hungarian companies may not
conduct trade among themselves in foreign currency.

      Hungarian companies which are not established in duty-free zones are
obliged to keep their books in local currency only. With the modification of
the foreign exchange law, a new foreign exchange accounting system was set up
commencing on April 1, 1995, in which companies can keep their foreign
exchange revenues from exports and from which they can transfer foreign
exchange for their rising costs. This system extends the previous entitlement
by which a Hungarian company with foreign participation or a wholly
foreign-owned Hungarian company may keep the cash portion of the foreign
partners' share capital in a separate convertible currency bank account. Money
in the convertible currency account can always be converted into local
currency.

      Restrictions are not imposed on foreign ownership of Hungarian
businesses. As a foreign owner of a Hungarian company, the Company is entitled
to receive dividends or refunds of its capital in a convertible currency,
without restrictions. As such, it may have such dividends or refunds converted
into United States currency by the Hungarian central bank, and then
repatriated. Dividends of Hungarian companies may only be paid from retained
earnings as determined in accordance with Hungarian statutory accounting
regulations. Such retained earnings are different from the Company's
consolidated retained earnings due to a number of differences in accounting
standards used.

      Foreigners may acquire real estate with the prior consent of the County
Public Administration Office. However, any registered company with foreign
participation may acquire real estate only to the extent it is needed for
undertaking the company's commercial activities.



                                      5
<PAGE>

      Any legal entity or private entrepreneur engaged in foreign trade
activity must notify the Ministry of Industry and Trade at the commencement of
such activity. Approximately 95% of products and services may be imported
freely into Hungary. Although in theory every product and service may be
exported and imported, certain strategic items require a special import or
export license, procured from the Ministry of Industry and Trade. In addition,
there are certain items, such as armaments, precious metals and their alloys,
cars, medicines, radioactive materials, cereals and some consumer goods that
may be imported and exported only by Hungarian companies with a license or an
ad hoc permission. The business of Investor is affected by this system in the
case of cars and cereals for which both Interag and Agrimpex, respectively,
have obtained the required licenses from the Hungarian government.

      Companies incorporated in Hungary are subject to a corporate income tax
on their worldwide profits. Foreign companies carrying out taxable activities
in Hungary are subject to corporate income tax on their net profits derived
from Hungarian sources. The corporate tax rate until the end of 1996 consisted
of two levels of taxation: an 18% rate on profits and a 23% rate on dividends
paid. The two level tax was a significant change from the rate that that had
previously existed until the end of 1994. However, because of the method of
taxation, the total corporate rate was 33.3%.

         For 1997, the 23% supplementary tax was abolished, and profits will
be subject to a linear tax levied at 18%. A typical dividend tax at 20% was
introduced, which is subject to the provisions of the double taxation
treaties.


         Dividend tax is not payable on:

                  o distributions to Hungarian resident companies- unless the
                  distribution is made in cash;

                  o dividends reinvested by foreign shareholders directly into
                  existing or new Hungarian companies;

                  o increase in share capital if the capital was increased
                  from 1995 or 1996 profits and the decision is made before
                  May 31st, 1997 and reported to the Court of Registration
                  before June 30th, 1997, and the increase is maintained for
                  three calendar years; or

                  o 1997 and 1998 dividends, if the source of the dividend
                  payment is pre-1995 profits. 
For 1998, the 1997 tax regulations are prolonged.






                                      6
<PAGE>

         Business Conditions in Hungary
         ------------------------------

         Investor conducts business primarily in Hungary and as such is
significantly affected by the general business and political conditions in
that country. Prior to the economic reforms which began in 1968, Hungary had a
socialist, centrally-planned economy based on physical output targets and
central administrative directives. In 1968, a new system of economic
management was initiated, aimed at developing a more market-oriented economy.
Fundamental economic reforms introduced in recent years include privatizing
state-owned enterprises, instituting external trade reforms, creating a
two-tier banking system, modernizing the infrastructure, developing a Western
European-style tax system and implementing laws on banking, accounting and
bankruptcy. The Government also has liberalized prices and wages, reduced
government subsidies and granted state-owned businesses greater freedom in
decision-making. In addition, customs-free zones have been established for
joint ventures between Hungarian enterprises and foreign companies.

         The Government's economic strategy with the implementation of the
stabilization program, introduced in March 1995, was to reach sustainable
economic growth, accompanied by an improving external and internal
equilibrium. In 1997, the positive results of the Government's package are
obvious, especially with respect to the external and internal balance and to
privatization.

         The current account at December 31, 1997 had a $981 million deficit
(2.1% of GDP), a reduction of $697 million from 1996. The account trade
deficit for 1997 was $1.734 billion, a reduction of $911 million from 1996.
The gross foreign currency debt amounted to $21.7 billion in 1997, as compared
to $25.87 billion in 1996.

         Privatization, one of the most important elements of the
transformation process, is nearing its completion. Foreign direct investment
was $2.1 billion in 1997 and $1.98 billion in 1996. In the last two years, the
strategic sectors of telecommunications and the energy sectors, were the main
areas of privatization. Bank privatization has started and has made important
steps, including the selling of the last large bank, the Commercial and Credit
Bank (KHB). The process of privatization should be completed by end of 1998.

         During 1997, the conditions of a balanced macroeconomic growth gained
momentum in Hungary's economy. In 1997, the GDP increased 4.0%. Industrial
production rose 11.2% in volume terms in 1997, with industrial output sales
rising 34.5%. Domestic sales declined 1.2% compared to the same period in
1996. The highest increase was registered in the engineering sector (77.9%
increase from 1996 to 1997). Industrial output increased 16.1% in 1997. Due to
large investment projects of the state and local governments, output of the
construction sector rose 9.8% in volume terms in 1997. The consumer prices
rose 18.3% in 1997 compared to 23.6 % in 1996.

         Regarding the outlook for the coming years, developments in the
economy conform expectations concerning the continuing improvement of the
domestic and external financial position of the country and the moderate but
steady increase in GDP. Economic activity is expected to increase in dynamism,
leading to a GDP growth rate of approximately 4.5% in 1998 and accelerating in
the years following.



                                      7
<PAGE>

         The annual average rate of inflation in 1998 is expected around 15%.
According to expectations, inflation can be reduced by as much as 4-5 % in
each of the next few years.


         Political Conditions in Hungary
         -------------------------------

         During the late 1980s, the political system in Hungary underwent
dramatic changes. In 1989 non-communist political parties were established and
initial steps were taken toward the first free elections in the country since
1947. On October 23, 1989, the country's name was changed from "The Hungarian
People's Republic" to the "Republic of Hungary" and a new constitution was
adopted. Under its new constitution, Hungary has instituted a multiparty
democratic government.

         The former opposition parties (socialists and liberals) won the
second free elections in June 1994. The coalition government is aware of the
short-term difficulties associated with the transformation of Hungary's
economy, such as lower GDP and high unemployment and is committed to
establishing a market economy and further integration of Hungary into the
Western European and international economies. In 1998, an election is
scheduled for May.

         Hungary is pursuing political as well as economic integration with
Western Europe, including membership in the European Community ("EC"). The
timing of Hungary's accession to full EC membership will depend on political
developments and the continued restructuring and development of Hungary's
economy, and will require the approval of all EC member nations. Hungary is
among the six countries with which the EC started detailed negotiations in
April 1998. Hungary will become a full member of NATO in 1998.



ISRAEL TRACTOR

         General
         -------

         Israel Tractor is a corporation organized under the laws of the state
of Israel. It is engaged in the sale of tractors and other heavy equipment
such as construction equipment, diesel engines and trucks, and spare parts for
such equipment. Israel Tractor is the exclusive dealer in Israel for
Caterpillar and Bobcat tractors and Navistar trucks and is also a dealer for
Ingersoll Rand equipment. Israel Tractor also services the machinery it sells.
Israel Tractor believes that it has good relationships with all of its
suppliers.

         Israel Tractor serves a large number of customers in Israel,
approximately 55% of whom are in the construction business and 18% of whom are
in the mining business. For the year ended December 31, 1997, approximately
71% of the total sales was Caterpillar tractors, 11% was Navistar trucks, and
Bobcat and Ingersol-Rand equipment was 9% each. Israel Tractor faces
competition from other distributors of tractors and other heavy equipment, as
most manufacturers of such equipment operate in Israel through dealers.

         Israel Tractor's current agreement with Caterpillar was entered into
in April 1992. The agreement may be terminated without cause, which may occur
upon six months notice by either party, 


                                      8
<PAGE>

or for cause by Caterpillar upon the occurrence of certain events (such as 
bankruptcy, insolvency, cessation of business by the dealer, or default on 
financing agreements with Caterpillar). Israel Tractor's current agreement with
Navistar is on an annual basis commencing in January 1997 and expiring in 
December 1997. This agreement may be terminated prior to expiration by mutual 
consent of the parties, upon 60 days' written notice by either party, or for 
cause by Navistar upon the occurrence of certain events (such as default in the
payment of obligations to Navistar, insolvency or change of corporate control or
management of the dealer).

         At December, 1997, Israel Tractor employed 330 persons.

         Political and Economic Conditions in Israel
         -------------------------------------------

         As a corporation organized and operated in Israel, Israel Tractor is
subject to certain general business conditions applicable to Israeli
businesses. The principal offices and workshop facilities of Israel Tractor
are located in Israel and are directly affected by economic, political and
military conditions in that country.

         Since its war of independence in 1948, Israel has sought peace with
its Arab neighbors. A breakthrough took place due to the courageous step taken
in 1977 by the late President of Egypt, Anwar Sadat, who agreed to negotiate
directly with and recognize Israel. The talks led to the Camp David Agreement
in 1978 and to the signing of a peace agreement with Egypt in 1979. The second
step occurred after the Gulf War with the collapse of the Soviet Union
communist regime, and the setting up of a new political order, which lead to
bilateral talks between Israel, Syria and Jordan and the Palestinians.

         The following is the time line of major events and agreements:

         October 30, 1991              Opening of the Madrid peace 
                                       conference between Israel and the 
                                       Palestinians, Jordan, Syria and 
                                       Lebanon

         September 13, 1993            Declaration of Principles between 
                                       Israel and the PLO in Washington

         May 4, 1994                   The Cairo agreement on "Gaza Strip 
                                       and Jericho First"

         July 15, 1994                 Israel-Jordan Declaration, in 
                                       Washington

         August 29, 1994               Early empowerment to the Palestinians

         October 16, 1994              Peace Treaty between Israel and Jordan

         On September 9th, 1993, after almost two years of talks since the
Madrid Conference, a breakthrough was achieved between Israel and the PLO,
representing the Palestinians. Yasser Arafat, Chairman of the PLO, sent a
letter to Prime Minister Rabin in which he declared the following:

         o        Recognition of Israel's existence and its right to live in 
                  peace and security;
         o        Acceptance of United Nations resolutions 242 and 338;
         o        Commitment to solve the conflict by peaceful means;



                                      9
<PAGE>

         o        Cessation of all types of terror;
         o        Assumption of responsibility over all factions of the PLO;
         o        Confirmation that those articles of the Palestinian Charter 
                  calling for the destruction of Israel and denying its right to
                  exist would no longer be valid; and 
         o        Obligation to submit to the Palestinian National Council an 
                  approval of the need for changes in the Palestinian Charter.

         Due to the above, Israel agreed to recognize the PLO as the
Palestinian representative to the peace talks.

         In September 1993, Israel and the Palestinians signed a Declaration
of Principles which dealt with matters relating to the transfer of power to
the Palestinians.

         The Gaza Strip and Jericho agreement of May 4, 1994 involves various
topics relating to the Gaza Strip area and sixty-five square kilometers of the
Jericho area. The civilian administration in the Gaza Strip and Jericho will
be disbanded and its responsibilities passed on to the Palestinian
authorities, in twenty-five sectors of which the major ones are education,
tourism, agriculture, water, transportation, electricity, health, finances,
commerce. Early in 1997, an additional agreement was signed regarding the
Hebron area and the civilian administration was transferred to the PLO.
However, in recent months, little process has been made in the peace process.

         Economic relations between the State of Israel and the Palestinian
Authority have been agreed upon within the scope of the Paris Agreement,
signed in April 1994. This agreement applies initially to the Gaza Strip and
Jericho and later on will apply to the entire West Bank for the interim
period.

         Both sides agreed on the establishment of a Joint Economic Committee
to supervise the implementation of the agreement. The fact that there is no
physical border between Israel and the Territories, and a situation of near
free movement, led to an agreement establishing a relationship between the
parties on this point.

         The dramatic developments in the political sphere, with the signing
of the Accord of Principle between Israel and the PLO in September 1993 and
the Peace Treaty with Jordan in October 1994, are opening new doors and
opportunities for business and economic activity. The changing political
relations are already spilling-over, transforming Israel's economic relations
both with its immediate neighbors and with the rest of the world.

         The performance of the Israeli economy for the first half of the 90's
has been exceptionally good, culminating in a GDP growth rate of 6.5% in 1994,
putting it first among OECD countries. The second half of the decade is
expected to show a vigorous though slightly slower growth accompanied by
reduced inflation. The Government debt as a percentage of GDP has been cut in
half, from close to 180% to 88% in 1994, and the foreign debt as a percentage
of GDP has been cut by two thirds from close to 80% to below 25% in 1994.

         Two important elements stand behind such a development. The ongoing
peace process between Israel and its neighbors (see above) and the large wave
of immigration that shook the economy into action in 1990. Since 1990, some
600,000 new immigrants have arrived, mostly from the former Soviet Union (CIS)
increasing the population of Israel by an additional 12% and the labor market
by 


                                      10
<PAGE>

even more due to the immigrant's high participation rate. The exceptionally
high level of skills and education of this wave of immigrants with double the
proportion of university post-graduates than that of the established
population, has made the Israeli labor force one of the most highly skilled in
the world. Two thirds of the immigrants arrived during the first two years,
1990-91, after which the flow decelerated to a constant stream of
approximately 75,000 new immigrants a year, thus easing the problem of
economic integration for Israel. The impact on the Israeli economy has been to
propel it to a fast track both with a one time jump and with long term
effects.

         The immediate impact was felt in the residential construction sector
which became a locomotive for the economy for almost three years. Housing
starts, doubled in 1990 and doubled again in 1991, thus quadrupling its number
compared to the eighties level. Later, the strain put on an already
deteriorating infrastructure brought about a dramatic expansion in activity
which saw a 26% rise in expenditures in 1992, followed by a further rise of
34% in 1993 and 20% in 1994. This activity includes road construction, water
and sewage works, electric and telecommunication facilities, among others.
This has had a beneficial effect on the trade of Israel Tractor.

         1997 was a year of contrasting economic developments. A particularly
favourable development was the rise of only 7% in the consumer price index,
the lowest since the 3.9% increase recorded in 1969. In addition, the current
account deficit fell by some two billion dollars, from $5.3 billion in 1996 to
$3.5 billion in 1997, a reasonable level of 3.5% of GDP. On the other hand,
the year was notable for a serious slowdown in the GDP growth rate, to only
2.1% in 1997 compared with 4.5% in 1996 and an annual average of 6% during the
years 1992 to 1995. This slowdown was accompanied by a large rise in the
unemployment rate to an average of 7.8% in 1997, compared with 6.7% in 1996.

         These developments were heavily affected by the policy of severe
monetary restraint as reflected by an average real interest rate of 5.3% and
7% in 1996 and 1997, respectively. Fiscal constraint also increased, resulting
in an aggregate budget deficit of only 2.4% of GDP in 1997 compared with 3.6%
in 1996. These trends are expected to intensify in 1998. The policy of very
strict monetary and fiscal constraint will continue, in order to hold down
inflation at a lower level of 5-7% in 1998, with the possibility of declaring
a target of 2-3% by the year 2000.

         The government's economic policy is based on the priority of reducing
inflation to Western European levels (currently 1% to 2%). Under this policy
concept, the achievement of this objective will make it possible to
subsequently reach a higher pace of growth. Targeting these low levels of
inflation will lead to a persistently severe policy of monetary and fiscal
constraint during the coming years. This will prevent growth in infrastructure
investment, and the exchange rate adjustment necessary for remedying the
appreciation of the shekel.

         As a result of the above, the Israeli economy in 1997 was in a
slowdown. the high interest rates, reduction in the budget and the standstill
in the peace negotiations, reduced investments in fixed assets from 8.8% in
1996 to 5.9% in 1997. Government construction decreased from 3.4% in 1996 to
1.8% in 1997 and as a result, there was a considerable drop in infrastructure
work, housing construction, consumption and tourism.




                                      11
<PAGE>

         BALTON

         General
         -------

         Balton is a management and holding company serving its African
subsidiaries which operate in Nigeria, Zambia, Ghana, Kenya, Tanzania, Uganda
and Cote D'Invoire. These subsidiaries are located in and organized under the
laws of the jurisdiction where they operate. The subsidiary in Cote D'Invoire
was first registered in 1997 and commenced trading on April 7th, 1997. Balton
manages the financial and commercial activities of its subsidiaries and acts
as a trading house for its subsidiaries and customers in other African
countries maintaining contact with suppliers, manufacturers, shipping
companies, and banks.

         The primary subsidiaries of Balton are Amiran Zambia Ltd. ("Amiran
Zambia"), Dizengoff Ghana Ltd. ("Dizengoff Ghana"), Amiran Kenya Ltd. ("Amiran
Kenya"), Balton Tanzania, Ltd; previously, Tanzania Transcontinental Trading
Co. Ltd. ("Balton Tanzania") Balton BV-DWA Nigeria Ltd. ("Balton (Nigeria)"),
Balton (U) Ltd. Uganda ("Balton Uganda") and Balton SNES ("Balton Cote
D'Ivoire").

         The principal products traded by Balton and its subsidiaries are
agri-chemicals and agricultural implements, radio communication,
telecommunications, air conditioning and electrical equipment. Balton has
dealership concessions with Motorola Communications and Radius Equipment which
it holds on behalf of its subsidiaries in Nigeria, Ghana, Kenya and Uganda.
The current distribution agreements with Motorola Communications are for a
one-year period expiring in December 1997, renewable for successive one-year
periods and may be terminated by either party upon 60 days' written notice. In
addition, Balton Nigeria is involved in the installation of water supply
equipment and Balton Tanzania is involved in the manufacture of animal
foodstuffs.

         During the first quarter of 1994, Balton Nigeria commenced
preliminary work for the construction and installation of a water treatment
plant and related facilities in Katsina, Nigeria, pursuant to a contract with
the Nigerian Ministry. Work on this contract continued during 1995 and 1996
but at a slower pace than specified by the contract agreement due to
insufficient funding from the client. A substantial portion of the work has
been subcontracted. By November 1996, the original period for completion of
the total contract expired and the work completed amounted to approximately
20% of the total contract. The Nigerian Ministry has agreed that the company
complete the project at a remaining, revised, contract price of $76 million.
Completion of this project is subject to the political and economic risks
associated with doing business in Nigeria, and is dependent upon the Nigerian
Ministry's ability to fund the contract. See Note D of Notes to Consolidated
Financial Statements.

         Roughly 50% of the goods supplied by Balton are from Israeli
suppliers, although virtually all irrigation and air conditioning equipment is
from Israel. Balton's other sources of supply come from a diverse group of
suppliers worldwide. The bulk of Balton's customers are located in the African
countries where it conducts business. The Company's business is not dependent
on a single customer or small group of customers. Approximately 30% of sales
by Balton's subsidiaries are for cash, with the balance on credit terms with
an average of 90 days.

         At March 31, 1998, Balton and its subsidiaries and associated
companies, employed a total of approximately 630 persons.



                                      12
<PAGE>

         Economic and Political Conditions in Africa
         -------------------------------------------

         The economic and political climate of the African countries may
directly affect the transaction of business by Balton and its African
subsidiaries. In particular, the currencies of the African countries where
Balton transacts business have been subject to significant devaluation against
the United States dollar. During 1997, there were significant devaluations in
Kenya and Ghana and foreign currency exchange losses have been incurred in the
year. See Note N of Notes to Consolidated Financial Statements. In addition,
business activity in certain countries is subject to significant foreign
exchange regulation as well as price verification.

         In addition, the economies of individual African countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resources, self-sufficiency and balance of payments position. In
particular, there were high rates of inflation during 1997 in the African
countries where Balton transacts business. Further, the economies of African
countries generally are heavily dependent upon international trade and,
accordingly, may be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist
measures imposed or negotiated by the countries with which they trade. These
economies also may be adversely affected by economic conditions in the
countries with which they trade.

         With respect to any African country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries
or the value of the Company's investments in those countries.






FINANCIAL INFORMATION ABOUT INDUSTRY AND GEOGRAPHIC SEGMENTS

         For disclosure regarding the Company's business segments and
geographic areas, see Note P of Notes to Consolidated Financial Statements
filed under Item 8 of this Annual Report on Form 10-K (the "Report").

 ITEM 2.   PROPERTIES


         Israel Tractor operates from substantial workshop facilities in three
locations in Israel which are adequate for its purposes: it owns the freehold
on one piece of land in Holon on which is situated a building and leases two
pieces of property - one property located in Kiriat Bialik under a lease from
the Israel Land Administration which expires in 2023; the second property in
Beersheba pursuant to a lease with the Israel Land Administration whose term
is 49 years and expires in 2028.




                                      13
<PAGE>

         Investor currently operates from an office building (located in
Budapest) ,which is owned by Interag. Investor and Interag use 384 square
meters of office space which is adequate for their current needs and the
remaining part of the building (over 2500 square meters) is being rented to
subsidiaries of Danubius, HungarHotels and Agrimpex. Interag continues to own
or lease several properties which, following the reorganization of Interag are
now utilized, principally by third parties, for retail operations. The other
office building (total square meters of 2,900) comprising the former
headquarters is being refurbished and sublet.

         Completion of the sale of certain properties to Shell under the
agreement of 1993 was completed in March 1997, by the sale of the remaining
three sites.

         Agrimpex leases office space in Budapest. Its Agrimill subsidiary
owns a head office in Bekescsaba, 18 sites in Bekes County and one in
Budapest, which include 4 flour mills, 1 rice mill, 4 compound feed plants,
and 9 silo or warehouse facilities. Agrimill's facilities in the aggregate are
situated on 496,600 square meters of land and include 113,900 square meters in
building space.

         Viktoria operates from a head office in Kecskemet, and owns twelve
sites in Bacs-Kiscun County, which includes four flour mills, one compound
feed plant, one corn flaking plant and substantial silos and warehousing
facilities.

         ATI Depo and DP Invest lease office space in Budapest. Warehousing
sites owned and used by them are located in Budapest, Gyor, Szabadbattyan,
Pecs, Miskolc, Bala and Szajol.


         Balton leases office and warehouse space in the African countries
where it operates. Balton leases 6 properties under long term leases (i.e. for
terms of ten years or more) in various locations in Nigeria (ranging in space
from 240 square meters to 4,100 square meters). Also, Balton leases four
properties in Nairobi, Kenya under annual leases; an office and warehouses in
Accra, Ghana pursuant to a long term lease; two locations for office, factory
and warehouse space in Lusaka, Zambia, pursuant to long term leases; an
warehouse and factory in Dar es Salaam, Tanzania pursuant to leases with the
Government, and an office and warehouse in Kampala, Uganda under an annual
lease.

         Balton is currently developing its own site in Nairobi, Kenya and on
completion of the development will vacate all four leasehold properties. It
has purchased a property in Kampala, Uganda, which is presently undergoing
refurbishment and upon completion it will vacate the present leasehold
properties. Also, it is presently finalizing ownership title to the office and
warehouse space it utilizes in the Cote D'Ivoire.

 ITEM 3.   LEGAL PROCEEDINGS

None.




                                      14
<PAGE>

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

         The Company's 1997 annual meeting of stockholders was held on October
30,1997. At that meeting, the following proposals were submitted to the
Company's stockholders: (1) election of the Company's current Board of
Directors and (2) ratification of Grant Thornton LLP as independent
accountants of the Company for the fiscal year ended December 31, 1997.

         At the meeting, the Company's nominees for directors were elected.
For Bernard Schreier 1,285,079 shares were voted for and 2,395 shares were
voted against; for Gideon Schreier 1,285,079 shares were voted for and 2,395
shares were voted against; for Michael Wreschner 1,285,577 shares were voted
for and 1,897 shares were voted against; for Leonard Goldfine 1,285,577 shares
were voted for and 1,897 shares were voted against; for Wilfred Wyler,
1,285,559 shares were voted for and 1,915 were voted against; and for Alfred
Simon 1,285,577 shares were voted for and 1,897 shares were voted against. The
appointment of Grant Thornton LLP as the Company's independent accountants for
the fiscal year ended December 31, 1996 was approved with 1,284,804 shares
were voted for, and 1,428 shares being voted against.

         A special meeting of stockholders was held on March 3, 1998. At that
meeting, the Company's stockholders voted an amendment to the Company's
Certificate of Incorporation to increase the authorized Common Stock of the
Company from 1,800,000 shares to 7,200,00 shares and change the par value per
share from One Dollar to Twenty-Five Cents. The shareholders voted 1,066,632
shares for, and 642 shares voted against. As a result, the Company effected a
4-for-1 stock split, which was distributed on March 16, 1998 to shareholders
on record at the close of business on March 3rd, 1998.


















                                      15
<PAGE>


                                    PART II


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

         The Company's Common Stock is quoted on the NASDAQ SmallCap Market
(Symbol: IICR). The following tables set forth, for the periods indicated, the
high and low bid price of the Common Stock as reported by NASDAQ. These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.



PERIOD                           High                        LOW
------                           ----                        ---

1996
----

1st quarter                      $10 1/4                     $8 1/2

2nd quarter                      $9 1/4                      $8 1/2

3rd quarter                      $9                          $8 3/4

4th quarter                      $10                         $9



1997
----

1st quarter                      $9 3/4                      $9

2nd quarter                      $11 3/4                     $9 3/4

3rd quarter                      $11                         $10 3/4

4th quarter                      $11 1/4                     $10 1/4



1998
----

1st quarter                      $11 3/4                     $10 1/2




         As of March 31, 1998, there were 1550 record holders of the Company's
Common Stock.

         The Company's policy has been to conserve cash for future operating
and capital expenditures and accordingly, the Company does not plan to declare
dividends in the foreseeable future. No dividend payments were made in 1995,
1996 or 1997.

         On March 3rd, 1998, the Company's Board of Directors declared a
4-for-1 stock split, which was distributed on March 16, 1998 to shareholders
on record at the close of business on March 3rd, 1998. The above share prices
have been retroactively restated to reflect the stock split.



                                      16
<PAGE>




 ITEM 6.  SELECTED FINANCIAL DATA

         The following table sets forth certain consolidated financial data
for the Company as at and for the years ended December 31, 1997, 1996, 1995,
1994 and 1993 which should be read in conjunction with the Consolidated
Financial Statements (including the notes thereto) and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Report.



<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                             1997           1996            1995           1994           1993
-----------------------                              ----           ----            ----           ----           ----

(In thousands, except  per share data)

<S>                                                <C>            <C>             <C>            <C>            <C>     
Statement of Income Data:
Net sales......................................... $239,617       $275,820        $280,921       $245,185       $250,820
Gross profit......................................   48,388         65,227          60,946         51,512         54,890
Selling, general and administrative expenses......   44,461         49,083          43,401         37,978         53,543
Operating income..................................    3,927         16,144          17,545         13,534          1,347
Other income
 Interest income..................................    2,186          2,285           3,624          6,729          8,068
 Dividend income..................................       13             22             254            149            612
 Equity in earnings (loss) of affiliates..........    4,156          4,230           3,823            (28)           433
 Foreign currency gain (loss).....................   (2,453)          (263)           (385)         1,330         (2,459)
 Gain on sale of non-current assets...............    2,486          2,230           1,373          1,632         12,876
 Interest expense.................................   (4,753)        (4,100)         (4,764)        (4,705)        (3,842)
Rental income.....................................    1,585          1,710           1,249          1,356          1,059
Nonrecurring gain-................................                                                  6,746
settlement of warranty claim
 Other- net.......................................   (1,342)        (1,566)         (1,199)           573          1,058
 Income before minority interest and income taxes     5,805         20,692          21,520         27,316         19,152
Net income........................................    5,373         12,711          11,641         16,141          6,218
Basic net  income per  common  share..............    $0.94          $2.23           $2.04          $2.84          $1.09
Basic average number of common shares outstanding     5,693          5,693           5,693          5,693          5,693
</TABLE>



<TABLE>
<CAPTION>
AT DECEMBER 31,                                     1997             1996           1995          1994           1993
--------------                                      ----             ----           ----          ----           ----

(In thousands)

<S>                                                <C>             <C>            <C>            <C>            <C>    
Balance Sheet Data:
Working capital.............................       $50,822         $47,464        $49,416        $67,576        $39,391
Total assets................................       176,042         203,556        175,449        175,949        203,351
Short-term debt,  including current maturities of
 long term debt.............................        25,151          35,838         17,046         21,539         24,198
Long-term debt, excluding current maturities         1,508           2,160          2,528          2,179          2,291
Total liabilities...........................        88,897          95,032         70,979         73,936        103,416
Minority interest in subsidiaries                   15,149          20,494         22,171         24,643         35,427
Stockholders' equity........................        87,145          88,030         82,299         77,370         64,508
</TABLE>


                                      17
<PAGE>


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

RESULTS OF OPERATIONS

         Substantially all of the Company's revenues are derived from foreign
operations. As such, its income is significantly affected by fluctuations in
currency exchange rates and by currency controls. Most of the countries where
the Company operates such as Hungary and several African countries do not have
freely convertible currencies and their currencies have been subject to
devaluations in recent years. In particular, during 1997, the income from the
Company's Hungarian and African subsidiaries was significantly reduced by
losses arising from foreign exchange transactions due to significant currency
devaluations against the U.S. dollar. The Hungarian currency which is not
freely convertible and which floats against a basket of two currencies (the
U.S. dollar and the European Currency Unit) underwent devaluations against the
U.S. dollar at the rate of 24 % during 1997. Since the beginning of 1998, the
Hungarian currency has been further devalued by approximately 4 % against the
U.S. Dollar. Since the functional currency for Investor is the Forint, these
devaluations have resulted in certain currency translation adjustments
directly impacting stockholders' equity. See Notes A(8) and N of Notes to
Consolidated Financial Statements filed under Item 8 of this Report.

         The Company may be subject to tax in some or all of the foreign
countries in which it has operations. However, foreign taxes imposed on the
Company's income may qualify as a foreign income tax and therefore be eligible
for credit against the Company's United States income tax liability subject to
certain limitations set out in the Internal Revenue Code of 1986, as amended
(or alternatively, for deduction against income in determining such
liability). The limitations set out in the Code include, among others,
computation rules under which foreign tax credits allowable with respect to
specific classes of income cannot exceed the United States federal income
taxes otherwise payable with respect to each class of income. Foreign income
taxes exceeding the credit limitation for the year of payment or accrual can
be carried back for two taxable years and forward for five taxable years, in
order to reduce United States federal income taxes, subject to the credit
limitations applicable in each of such years. Other restrictions on the
foreign tax credit include a prohibition on the use of the credit to reduce
liability for the United States corporate alternative minimum taxes by more
than 90%.

         The Company has three principal areas of operation with respect to
its subsidiaries:

         (a)      Investor and its subsidiaries in Hungary
         (b)      Israel Tractor in Israel
         (c)      Balton and its subsidiaries in Nigeria, Ghana, Zambia,
                  Tanzania, Kenya, Uganda and the Cote D'Ivoire.




                                      18
<PAGE>


         The Company has five principal business segments:

         (a)      vehicle sales and service
         (b)      export/import and processing/storage of agricultural products
         (c)      the distribution of tractors and other heavy equipment
         (d)      the sale of agricultural, communications and electrical 
                  equipment
         (e)      other industries including retail and wholesale consumer 
                  products and Hungarian corporate.


1997 Compared to 1996
---------------------

                  The table below sets forth for 1997 and 1996 certain
information with respect to the results of operations of the Company and its
principal subsidiaries.


<TABLE>                            
<CAPTION>                          
                                                                                                                               
1997                                 Net Sales                    Gross Profit               Income before          
----                                 ---------                    ------------              Income Taxes and        
                                                                                           Minority Interests       
                                                                                           ------------------
                                 Amount            %           Amount           %          Amount          %        
                                 ------            -           ------           -          ------          -        
                                                                                                                    
                              (In millions)                 (In millions)               (In millions)               
<S>                                    <C>          <C>              <C>         <C>             <C>        <C>     
IIC Industries Inc.                        --         --                --         --            $0.6       10.3    
(parent company)                                                                                                    
                                                                                                                    
Israel Tractors &                       $67.7       28.2             $19.1       39.6             2.4       41.4    
Equipment Co. (Israel)                                                                                              
                                                                                                                    
Balton CP Group (Africa)                 51.0       21.3              14.8       30.6             1.7       29.3    
                                                                                                                    
Investor RT Group (Hungary)             120.9       50.5              14.4       29.8             1.1       19.0    
                                        -----       ----              ----       ----             ---       ----    
                                                                                                                    
                                       $239.6        100             $48.3        100            $5.8        100    
                                       ======        ===             =====        ===            ====        ===    
</TABLE>                          

                    (RESTUBBED TABLE CONTINUED FROM ABOVE)


<TABLE>                       
<CAPTION>                     
                              
1997                               Net Income (Loss)            
----                               -----------------            
                                                                
                                                                
                                  Amount            %           
                                  ------            -           
                                                                
                              (In millions)                     
<S>                                      <C>          <C>       
IIC Industries Inc.                      $0.4          7.4      
(parent company)                                                
                                                                
Israel Tractors &                         1.7         31.5      
Equipment Co. (Israel)                                          
                                                                
Balton CP Group (Africa)                  0.6         11.1      
                                                                
Investor RT Group (Hungary)               2.7         50.0      
                                          ---         ----      
                                                                
                                         $5.4          100      
                                         ====          ===      
</TABLE>                      


<PAGE>



<TABLE>                            
<CAPTION>                          
    1996                            Net Sales                     Gross Profit                Income before         
    ----                            ---------                     ------------               Income Taxes and       
                                                                                             Minority Interests     
                                                                                             ------------------     
                                                                                                                    
                                                                                                                    
                                 Amount            %            Amount            %          Amount         %       
                                 ------            -            ------            -          ------         -       
                                                                                                                    
                              (In millions)                  (In millions)                (In millions)             
<S>                                   <C>           <C>                <C>         <C>           <C>         <C>    
IIC Industries Inc.                        --         --                  --         --           $0.9        4.4   
(parent company)                                                                                                    
                                                                                                                    
Israel Tractors &                       $81.8       29.6               $24.2       37.1            6.3       30.4   
Equipment Co. (Israel)                                                                                              
                                                                                                                    
Balton CP Group (Africa)                 57.3       20.8                18.4       28.2            8.9       43.0   
                                                                                                                    
Investor RT Group (Hungary)             136.7       49.6                22.6       34.7            4.6       22.2   
                                        -----       ----                ----       ----            ---       ----   
                                                                                                                    
                                       $275.8        100               $65.2        100          $20.7        100   
                                       ======        ===               =====        ===          =====        ===   
</TABLE>                           

                    (RESTUBBED TABLE CONTINUED FROM ABOVE)


<TABLE>                       
<CAPTION>                     
    1996                      Net Income (Loss)            
    ----                      -----------------            
                                                           
                                                           
                                                           
                                                           
                                  Amount          %        
                                  ------          -        
                                                           
                              (In millions)                
<S>                                    <C>         <C>     
IIC Industries Inc.                     $0.8        6.3    
(parent company)                                           
                                                           
Israel Tractors &                        4.8       37.8    
Equipment Co. (Israel)                                     
                                                           
Balton CP Group (Africa)                 2.9       22.8    
                                                           
Investor RT Group (Hungary)              4.2       33.1    
                                         ---       ----    
                                                           
                                       $12.7        100    
                                       =====        ===    
</TABLE>                      




                                      19
<PAGE>





         The table below sets forth for 1997 and 1996 certain information with
respect to the results of operations of the Company and its five principal
business segments.

<TABLE>
<CAPTION>
                                      1997                                                  1996

                                                       Operating                                            Operating
                 Net sales        Gross Profit        Income (Loss)     Net Sales         Gross Profit    Income (Loss)
                 ---------        ------------        -------------     ---------         ------------    -------------

                 Amount      %     Amount     %          Amount        Amount      %      Amount      %        Amount
             (In millions)     (In millions)         (In millions)  (In millions)     (In millions)         (In millions)
-----------------------------------------------------------------------------------------------------------------------

<S>               <C>      <C>      <C>      <C>        <C>            <C>        <C>      <C>        <C>       <C>   
Vehicle           $11.9    5.0      $1.5     3.1        $(0.1)         $12.0      4.4      $1.7       2.6       $(0.2)
sales and
distribution
(Investor)
Export and        107.1   44.7      12.6    26.1         (0.5)         121.6     44.1      20.0      30.7         2.3
import of
agricultural
products
(Investor)
Other               1.9    0.8       0.3     0.6         (2.2)           3.1      1.1       0.9       1.4        (2.2)
Industries
(Investor)
Tractors           67.7   28.2      19.1    39.6          2.3           81.8     29.7      24.2      37.1         6.6
and heavy
equipment
(Israel
Tractor)
Agricultural,      51.0   21.3      14.8    30.6          4.4           57.3     20.7      18.4      28.2         9.6
communications
and
electrical
equipment
(Balton)
                ------     ---    -----      ---        ----         ------       ---    -----        ---      -----
                 $239.6    100     $48.3     100         $3.9         $275.8      100     $65.2       100       $16.1
                 ======    ===     =====     ===         ====         ======      ===     =====       ===       =====
</TABLE>





1996 Compared to 1995
---------------------

         The table below sets forth for 1996 and 1995 certain information with
respect to the results of operations of the Company and its principal
subsidiaries.


<TABLE>
<CAPTION>
1996                          Net Sales              Gross Profit           Income before      Net Income (Loss)
----                          ---------              ------------        Minority Interests    -----------------
                                                                          and Income Taxes
                                                                         ------------------

                           Amount         %         Amount         %       Amount       %       Amount       %
                        (In millions)            (In millions)         (In millions)         (In millions)
<S>                          <C>       <C>             <C>      <C>        <C>       <C>         <C>      <C>
IIC Industries Inc.              --      --               --      --        $0.9      4.4         $0.8     6.3
(parent company)

Israel Tractors &             $81.8    29.6            $24.2    37.1         6.3     30.4          4.8    37.8
Equipment Co.
(Israel)

Balton CP Group                57.3    20.8             18.4    28.2         8.9     43.0          2.9    22.8
(Africa)

Investor RT Group             136.7    49.6             22.6    34.7         4.6     22.2          4.2    33.1
(Hungary)                     -----    ----             ----    ----         ---     ----          ---    ----

                             $275.8     100            $65.2     100       $20.7      100        $12.7     100
                             ======     ===            =====     ===       =====      ===        =====     ===
</TABLE>



                                      20
<PAGE>


<TABLE>
<CAPTION>
1995                          Net Sales              Gross Profit           Income before         Net Income
----                          ---------              ------------        Minority Interests       ----------
                                                                          and Income Taxes
                                                                         ------------------ 

                           Amount         %         Amount         %       Amount       %       Amount       %
                        (In millions)            (In millions)          (In millions)        (In millions)

<S>                            <C>        <C>             <C>      <C>         <C>      <C>        <C>      <C>
IIC Industries Inc.                 --      --               --      --        $0.3      1.4       $(0.1)   (0.8)
(parent company)

Israel Tractors &                $91.4    32.5            $24.5    40.2         8.8     40.9          6.0    51.7
Equipment Co.
(Israel)

Balton CP Group                   43.2    15.4             11.6    19.0         3.2     14.9          1.0     8.6
(Africa)

Investor RT Group                146.3    52.1             24.9    40.8         9.2     42.8          4.7    40.5
                                 -----    ----             ----    ----         ---     ----          ---    ----
(Hungary)

                               $ 280.9   100.0           $ 61.0   100.0      $ 21.5    100.0       $ 11.6   100.0
                                 =====   =====             ====   =====      ======    =====       ======   =====
</TABLE>




         The table below sets forth for 1996 and 1995 certain information with
respect to the results of operations of the Company and its five principal
business segments.


<TABLE>
<CAPTION>
                                      1996                                                   1995
                                                       Operating                                            Operating
                 Net sales        Gross Profit       Income (Loss)         Net Sales        Gross Profit  Income (Loss)
                 ---------        ------------       -------------         ---------        ------------  -------------


               Amount      %     Amount     %          Amount        Amount      %      Amount     %
                                                                                                          Amount
           (In millions)     (In millions)          (In millions) (In millions)      (In millions)      (In millions)
-----------------------------------------------------------------------------------------------------------------------
<S>               <C>      <C>      <C>      <C>         <C>           <C>        <C>      <C>      <C>     <C>   
Vehicle           $12.0    4.4      $1.7     2.6         $(0.2)        $10.0      3.6      $2.0     3.3     $(0.2)
sales and
distribution
(Investor)
Export and        121.6   44.1      20.0    30.7           2.3         122.8     43.7      20.6    33.7       6.4
import of
agricultural
products
(Investor)
Other               3.1    1.1       0.9     1.4          (2.2)         13.5      4.8       2.3     3.8      (3.4)
Industries
(Investor)
Tractors           81.8   29.7      24.2    37.1           6.6          91.4     32.5      24.5    40.2       9.8
and heavy
equipment
(Israel
Tractor)
Agricultural,      57.3   20.7      18.4    28.2           9.6          43.2     15.4      11.6    19.0       4.9
communications
and
electrical
equipment
(Balton)
               ------      ---   ------      ---        ----         ------     ---       -----     ---
                                                                                                         ---
                 $275.8    100     $65.2     100         $16.1        $280.9    100       $61.0     100     $17.5
                 ======    ===     =====     ===         =====        ======    ===       =====     ===     =====
</TABLE>








                                      21
<PAGE>


         1997 COMPARED TO 1996
         
         Net Sales. Net sales on a consolidated basis in 1997 decreased by
$36.2 million as compared to 1996. This decrease was mainly attributable to a
reduction in demand for the Company's products

         Gross Profit. Gross Profit on a consolidated basis in 1997 decreased
by approximately $16.8 million, or approximately 25.8%, to $48.4 million, or
approximately 20.2% of net sales, from approximately $65.2 million, or
approximately 23.6% of net sales, in 1996. This decrease was mainly
attributable to depressed market conditions, and reductions of margins in the
Investor group, primarily in the agricultural sector. Furthermore, the legacy
of the irregular activities of the previous management of Agrimill, who were
removed from their posts in February 1997 contributed to the decrease.
Agrimill operates in the agricultural sector of the Investor group. (See Note
M to the Notes of the 1997 Consolidated Financial Statements.)

         Operating income. Operating income on a consolidated basis in 1997
decreased by approximately $12.2 million, to approximately $3.9 million, or
approximately 1.6% of net sales, from approximately $16.1 million, or
approximately 5.9% of net sales in 1996. This decrease was principally due to
the reasons stated in the Gross Profits section.

         Interest income. Interest income increased in 1997 by approximately
$100 thousand, or approximately 4.3%, to approximately $2.2 million.

         Equity in earnings of affiliates Equity in earnings of affiliates
decreased in 1997 by $74 thousand primarily due to the Danubius investment.

         Foreign currency gains and losses. There was a foreign currency net
loss in 1997 of $2.5 million compared to a loss in 1996 of $0.3 million. This
increase was primarily attributable to devaluations of local currency in
Africa and Hungary.

 In addition, the foreign translation adjustment loss (see stockholders'
equity calculation) increased from approximately $25.8 million in 1996 to
approximately $32.1 million in 1997 due primarily to the weakness of the
Hungarian Forint.

         Gain on sale of non-current assets. Gain on sale of non-current
assets in 1997 increased by approximately $256 thousand, to approximately $2.5
million. This increase was primarily due to the sale of the remaining parcels
of land to Shell in Hungary.

         Interest expense. Interest expense in 1997 increased by approximately
$700 thousand. This increase is primarily due to an increase in bank loans in
Hungary.




                                      22
<PAGE>

         Income before income taxes, and minority interests. Income before
income taxes and minority interests in 1997 decreased by approximately $14.9
million, or approximately 71.9%, to approximately $5.8 million in 1997
(representing approximately 2.4% of net sales for that year) from
approximately $20.7 million in 1996 (representing approximately 7.5% of net
sales for that year).

         Minority interest. Minority interest in 1997 decreased by
approximately $4.0 million, due to losses in the Investor group.

         Income Taxes Income taxes in 1997 decreased by approximately $3.6
million, or approximately 71% to $1.5 million in 1997. This decrease was
primarily due to a reduction in Net Income.

         Net Income Net income for 1997 decreased by approximately $7.3
million from approximately $12.7 million in 1996 to approximately $5.4 million
in 1997. The decrease is due to adverse trading conditions in the countries of
operation.


         Investor
         --------

         The operations of three of the Company's segments are conducted in
Hungary through Investor. During 1997, Investor continued to rationalize
certain unprofitable operations. See Item 1. Business - Investor.

                  Vehicle Sales and Service Segment
                  ---------------------------------

         o        Net sales for 1997 decreased by approximately $153 thousand
                  or approximately 1.3%, as compared to 1996.

         o        Gross Profit for 1997 decreased by approximately $200
                  thousand to approximately $1.5 million (representing 12.6%
                  of net sales for such year) from approximately $1.7 million
                  in 1996 (representing 14% of net sales for such year).

         o        Operating losses were approximately $50 thousand in 1997 and
                  $200 thousand in 1996.

         The decrease in net sales arose from increased competition in the
motor trade business.

                  Export/Import and Processing/Storage of Agricultural Products 
                  -------------------------------------------------------------
                  Segment
                  -------
         o        Net sales for 1997 decreased by approximately $14.5 million,
                  or approximately 11.9%, as compared to 1996.

         o        Gross Profit for 1997 decreased by approximately $7.4
                  million, or approximately 37 % to approximately $12.6
                  million (representing 12% of net sales for such year) from
                  approximately $20 million in 1996 (representing 16% of net
                  sales for such year).



                                      23
<PAGE>

         o        Operating income for 1997 decreased by approximately $2.9
                  million, or approximately 123%, to approximately an
                  operating loss of $500 thousand from approximately $2.4
                  million in 1996.

     The decrease in net sales was primarily due to lower export activity and a
competitive domestic market.  The gross profit and operating income were 
adversely affected by  depressed market conditions in the domestic and export 
markets, a reduction of margins due to fierce competition, and the legacy of 
the irregular activities of the previous management of  Agrimill, who were 
removed from their posts in February 1997. (See Note M to the Notes of  the 
1997 Consolidated Financial Statements.)


                  Other Industries
                  ----------------

         o        Net sales for 1997 decreased by approximately $1.2 million,
                  or approximately 40%, as compared to 1996.

         o        Gross Profit for 1997 decreased by approximately $600
                  thousand, or approximately 67% to approximately $300
                  thousand (representing 16% of net sales for such year) from
                  approximately $900 thousand in 1996 (representing 29% of net
                  sales for such year).

         o        Operating loss for 1997 and 1996 was approximately $2.2
                  million.

      The decrease in net sales and gross profits, as well as the reduction in
operating loss, was due to the continued rationalization and disposal of
marginal businesses.



         Israel Tractor: Tractors and Heavy Equipment Segment
         ----------------------------------------------------

         o        Net sales for 1997 decreased by approximately $14.1 million,
                  or approximately 17.2% as compared to 1996, due to a
                  reduction in demand for the Company's products.


         o        Gross Profit for 1997 decreased by $5.1 million, or 21.1%,
                  to $19.1 million (representing 28.2% of net sales for such
                  year) from $24.2 million in 1996 (representing 29.6% of net
                  sales for such year). This decrease was due the reduction in
                  Sales.


         o        Operating income for 1997 decreased by $4.3 million to $2.3
                  million (representing 8.1% of net sales for such year) from
                  $6.6 million in 1996 (representing 3.4% of net sales for
                  such year) as a result of lower trading activity.



                                      24
<PAGE>


Balton: Agricultural, Communications and Electrical Equipment Segment
---------------------------------------------------------------------

         o        Net sales for 1997 decreased by $6.3 million, or
                  approximately 11%, as compared to 1996 principally due lower
                  demand for the Company's products.

         o        Gross Profit for 1997 decreased by $3.6 million, or
                  (approximately 20%), to $14.8 million (representing 29% of
                  net sales for such year) from $18.4 million in 1996
                  (representing 32% of net sales for such year). This decrease
                  was due the decrease in Sales.

         o        Operating income for 1997 decreased by $5.2 million to $4.4
                  million, (representing 8.6% of net sales for such year) from
                  $9.6 million in 1996. This decrease was due to the reduction
                  of sales and gross profit.


1996 COMPARED TO 1995

         Net Sales. Net sales on a consolidated basis in 1996 decreased by
$5.1 million as compared to 1995. This decrease was mainly attributable to a
reduction in demand for the Company's products

         Gross Profit. Gross Profit on a consolidated basis in 1996 increased
by approximately $4.3 million, or approximately 7.1%, to $65.2 million, or
approximately 23.6% of net sales, from approximately $61.0 million, or
approximately 21.7% of net sales, in 1995. This increase was primarily
attributable to improved margins achieved by the Balton group.

         Operating income. Operating income on a consolidated basis in 1996
decreased by approximately $1.4 million, to approximately $16.1 million, or
approximately 5.9% of net sales, from approximately $17.5 million, or
approximately 6.2% of net sales in 1995. This decrease was principally due the
irregular transactions carried out by the management of Agrimill. (See Note M
of the Notes to the Consolidated Financial Statements)

         Interest income. Interest income decreased in 1996 by approximately
$1.3 million, or approximately 36.9%, to approximately $2.3 million due to the
investment of its cash by Interag in shares of Danubius.

         Equity in earnings of affiliates Equity in earnings of affiliates
increased in 1996 by $0.4 million primarily due to the Danubius investment.

         Foreign currency gains and losses. There was a foreign currency net
loss in 1996 of $0.3 million compared to a loss in 1995 of $0.4 million.

 However, the foreign translation adjustment loss (see stockholders' equity
calculation) increased from approximately $18.8 million in 1995 to
approximately $25.8 million in 1996 due primarily to the weakness of the
Hungarian Forint.



                                      25
<PAGE>

         Gain on sale of non-current assets. Gain on sale of non-current
assets in 1996 increased by approximately $0.9 million, to approximately $2.2
million. This increase was primarily due to the sale of the lands to Shell.

         Interest expense. Interest expense in 1996 decreased by approximately
$0.7 million, This decrease is primarily due to a reduction in bank loans for
most of the year.

         Income before income taxes, and minority interests. Income before
income taxes and minority interests in 1996 decreased by approximately $0.8
million, or approximately 3.8%, to approximately $20.7 million in 1996
(representing approximately 7.5% of net sales for that year) from
approximately $21.5 million in 1995 (representing approximately 7.7% of net
sales for that year).

         Minority interest. Minority interest in 1996 decreased by
approximately $1.7 million, or approximately 7.6% due to the substantial
reduction in the profits of Agrimill.

         Income Taxes Income taxes in 1996 decreased by approximately $0.6
million, or approximately 11% to $5.0 million in 1996. This decrease was
primarily due to the decrease in income tax rates in Hungary and Israel.

         Net Income Net income for 1996 increased by approximately $1.1
million from approximately $11.6 million in 1995 to approximately $12.7
million in 1996. The increase is due to higher net income in the Balton Group.
The increase is partially offset by lower income in Israel Tractor and the
Investor Group.


         Investor
         --------

         The operations of three of the Company's segments are conducted in
Hungary through Investor. During 1996, Investor continued to rationalize
certain unprofitable operations. See Item 1. Business - Investor.

                  Vehicle Sales and Service Segment
                  ---------------------------------

         o        Net sales for 1996 increased by approximately $2.0 million
                  or approximately 20%, as compared to 1995.

         o        Gross Profit for 1996 decreased by approximately $0.3
                  million to approximately $1.7 million (representing 14% of
                  net sales for such year) from approximately $2.0 million in
                  1995 (representing 20% of net sales for such year).

         o        Operating losses were approximately $0.2 million in 1996 and
                  1995.

         The increase in net sales arose from the introduction of new
dealerships, together with improved facilities. However, increased competition
and severe discounting throughout the motor trade affected gross margins.


                                      26
<PAGE>


                  Export/Import and Processing/Storage of Agricultural Products
                  -------------------------------------------------------------
                  Segment
                  -------

         o        Net sales for 1996 decreased by approximately $1.2 million,
                  or approximately 1%, as compared to 1995.

         o        Gross Profit for 1996 decreased by approximately $0.6
                  million, or approximately 3 % to approximately $20.0 million
                  (representing 16% of net sales for such year) from
                  approximately $20.6 million in 1995 (representing 17% of net
                  sales for such year).

         o        Operating income for 1996 decreased by approximately $4.1
                  million, or approximately 64%, to approximately $2.3 million
                  (representing 1.9% of net sales for such year) from
                  approximately $6.4 million in 1994 (representing 5.2% of net
                  sales for such year).

         The decrease in net sales was primarily due to lower trading
activities in commodities. The Gross Profit and Operating Income were
adversely affected by the need to make provisions in respect to the irregular
transactions carried out by the Managing Director and two of his Deputies at
Agrimill and Viktoria. The three managers concerned have been dismissed. (See
Note M of Notes to Consolidated Financial Statements).


                  Other Industries
                  ----------------

         o        Net sales for 1996 decreased by approximately $10.4 million,
                  or approximately 77%, as compared to 1995.

         o        Gross Profit for 1996 decreased by approximately $1.4
                  million, or approximately 61% to approximately $0.9 million
                  (representing 29% of net sales for such year) from
                  approximately $2.3 million in 1995 (representing 17% of net
                  sales for such year).

         o        Operating loss for 1996 was approximately $2.2 million
                  compared with an operating loss of approximately $3.4
                  million in 1995.

      The decrease in net sales and gross profits, as well as the reduction in
operating loss, was due to the continued rationalization and disposal of
marginal businesses.






         Israel Tractor: Tractors and Heavy Equipment Segment
         ----------------------------------------------------

         o        Net sales for 1996 decreased by approximately $9.6 million,
                  or approximately 10.5% as compared to 1995, due to a
                  reduction in demand for the Company's products.



                                      27
<PAGE>

         o        Gross Profit for 1996 decreased by $0.3 million, or 1.2%, to
                  $24.2 million (representing 29.6% of net sales for such
                  year) from $24.5 million in 1995 (representing 26.8% of net
                  sales for such year). This decrease was due the reduction in
                  Sales.

         o        Operating income for 1996 decreased by $3.2 million to $6.6
                  million (representing 8.1% of net sales for such year) from
                  $9.8 million in 1995 (representing 10.7% of net sales for
                  such year) as a result of lower trading activity.


         Balton: Agricultural, Communications and Electrical Equipment Segment
         ---------------------------------------------------------------------

         o        Net sales for 1996 increased by $14.1 million, or
                  approximately 33%, as compared to 1995 principally due
                  increased demand for the Company's products and the
                  consolidation of Dizengoff W.A. Nigeria, that was previously
                  accounted for under the equity method.

         o        Gross Profit for 1996 increased by $6.8 million, or
                  (approximately 59%), to $18.4 million (representing 32% of
                  net sales for such year) from $11.6 million in 1995
                  (representing 27% of net sales for such year). This increase
                  was due the increase in Sales.

         o        Operating income for 1996 increased by $4.7 million to $9.6
                  million, (representing 17% of net sales for such year) from
                  $4.9 million in 1995. This increase was due to higher
                  profits at certain of the African branches and the inclusion
                  of profit from the contract at Katsina, Nigeria.


LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations through funds generated
internally and through cash and cash equivalents available at the beginning of
1997. At December 31, 1997, IIC Industries Inc., the parent company (the
"Parent Company"), and its wholly-owned Israel Tractor subsidiary, had working
capital of $41.6 million, including cash and cash equivalents of $19.4
million. Cash of subsidiaries that are not wholly-owned (including the
Investor Group and the Balton Group) is generally not available for use by the
Parent Company or other subsidiaries (except to the extent paid to the Parent
Company as reimbursement for general overhead paid by the Parent Company or as
management fees) other than in the form of dividends, if and when declared.
Dividends to the Parent Company from its Israel Tractor subsidiary are subject
to a withholding tax of 15% to 25%. The Parent Company does not expect to
receive cash dividends or other distributions in the foreseeable future from
any of its subsidiaries.

         At December 31, 1997, Investor had outstanding short-term
indebtedness of approximately $18.3 million. At December 31, 1997, Agrimpex
and its subsidiaries, had credit lines of $48 million which are considered
adequate for the present purposes of the business. At December 31, 1997,
Israel Tractor had unused lines of short-term credit of $3.6 million.



                                      28
<PAGE>

         Due to the weakness of the Hungarian currency and the current low
rates of return on dollar deposits, the Company sought other investments.
Between February 1995 and January 1996, approximately 2.87 HUF billion
(approximately $25 million at exchange rates at the time of each purchase, and
approximately $19.5 million at the current exchange rate ) was spent for the
purchase of a 34.5% interest in Danubius Hotel. To date, the Company's
effective interest is approximately 30%. (See Item 1 - Recent Developments).

         The Investor Group made capital expenditures of approximately $1.2
million in 1997 for the purchase of property, vehicles and equipment from
internally generated funds. Israel Tractor made capital expenditures of
approximately $1.3 million in 1997 for the purchase of vehicles and equipment.
Such expenditures were made from internally generated funds.

INFLATION

         Inflation has been a persistent aspect of the Hungarian economy in
recent years, although the annual rate of inflation has been predictable and
has therefore been taken into account by the government and private
businesses. Inflation has contributed to the devaluation of the Hungarian
currency and has therefore had a result on Investor's financial condition. See
Note A(8) of Notes to Consolidated Financial Statements.

         Inflation in Israel was moderate in 1997 and therefore did not
significantly affect operations in that country. Furthermore, the devaluation
of the Israeli shekel against the U.S. Dollar in 1997 was 8.75 %.

         Significant rates of inflation persisted in the African countries
where Balton operates, triggering significant devaluations of certain local
currencies.


YEAR 2000 COMPLIANCE

         The Company has evaluated the impact of the Year 2000 issue on the
business and does not expect to incur significant costs with year 2000
compliance. The Company believes that all software and hardware requirements
to enable it to cope with year 2000 issue have been or are being currently
implemented. However, there can be no assurance that unanticipated costs may
arise in implementing these requirements.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements and required financial
statement schedules of the Company are located beginning on page F-1 of this
Report.

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

None.



                                      29
<PAGE>




                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The Directors and Executive Officers of the Company and certain
executive officers of its subsidiaries are as follows:

Name                    Age       Position with the Company
----                    ---       -------------------------

Bernard Schreier         79       Chairman of the Board, President and Director

Fortunee F. Cohen        70       Secretary

Michael M. Wreschner     53       Director, Assistant Secretary

Leonard Goldfine         81       Director

Wilfred Wyler            90       Director

Alfred L. Simon          57       Director

Jozsef Ferenc Polgar     55       Chief Executive Officer of Investor

Zvi Borowitsh            60       Managing Director of Israel Tractor

Moshe Gershi             46       General Manager of Balton


         Bernard Schreier has been the Chairman of the Board and a Director of
the Company since August 6, 1989, and has been President of the Company since
October 25, 1989. Mr. Schreier serves as Chairman of the Board and Managing
Director of the CP Holdings Limited group of companies and is a director of
Bank Leumi (UK) PLC. CP Holdings Limited is an affiliate which wholly owns a
majority stockholder of the Company.

         Fortunee F. Cohen has served as Secretary of the Company since
October 25, 1989. Prior to her appointment as Secretary, Ms. Cohen was the
director of Shareholder Relations of the Company.

         Michael M. Wreschner has been a Director of the Company since October
25, 1989 and an Assistant Secretary of the Company since November 1991. Mr.
Wreschner is an executive director of the CP Holdings Limited group of
companies. CP Holdings Limited is an affiliate which wholly owns a majority
stockholder of the Company.

         Leonard Goldfine, has been a Director of the Company since October 6,
1976 and served as Vice President of the Company from December 8, 1982 to
August 1985. In the past five years Mr. Goldfine has had the following
positions: Director of Development Corporation for Israel (Underwriter for
State of Israel bonds), Chairman of the Board and Director of Tensiodyne
Corporation (a scientific materials testing company) (1986-1989).



                                      30
<PAGE>

         Wilfred Wyler was elected as a Director of the Company on December 8,
1982 and is a senior partner in the certified public accounting firm of
Wilfred Wyler and Co.

         Alfred L. Simon has been a Director of the Company since September 4,
1990. He is currently a Managing Associate of American Capital Group (since
June, 1988). Prior to his current position he was Vice President of corporate
finance at Gruntal & Co., Incorporated (1985-1987).

         The following executive officers of the Company's subsidiaries
perform significant policy making functions for the Company:

         Jozsef Ferenc Polgar is the Chief Executive Officer of Investor and
Chairman of the Board of Interag. On March 31, 1994, Mr. Polgar was appointed
a Director of Agrimpex and subsequently elected by the Board as Chairman of
Agrimpex. Prior to his positions with Investor and its subsidiaries, Mr.
Polgar was the General Manager of trade development and finance at the
Hungarian Ministry of Trade (1975-1988) and head of the business department of
Prometheus company (1970-1975).

         Zvi Borowitsh has been the Managing Director of Israel Tractors since
July 1989. Mr. Borowitsh is also the Chairman of Israel Quarrying & Mining
Associations and an Assistant Professor of Earthmoving Technology and
Management at Haifa Technion.

         Moshe Gershi has been the General Manager of Balton since April 1991.
In his prior positions he served as General Manager (January 1991 to June
1991), Director of corporate finance (January 1989 to January 1991) and
Treasurer (January 1987 to December 1988) of Koor Trade Ltd. which, through
its wholly-owned subsidiary Koor USA, Inc., was the principal shareholder
(49.71%) of the Company's outstanding voting securities until July 25, 1989.

         All Directors of the Company are elected by the shareholders for a
one-year term and hold office until the next annual meeting of shareholders of
the Company or until their successors are elected and qualify. The Board of
Directors has appointed Messrs. Bernard Schreier, Wreschner and Goldfine to
serve on the Investment and Finance Committee of the Board of Directors.
Executive officers are appointed by the Company's Board of Directors for a
one-year term and hold office until their successors are chosen and qualify,
subject to earlier removal by the Board of Directors.


ITEM 11.  EXECUTIVE COMPENSATION

         Mr. Bernard Schreier was not given any compensation from the Company
for serving as Chairman of the Board and President in 1997. No executive
officer of the Company was paid compensation equal to or exceeding $100,000 in
1997.

         In November 1989, the Company entered into an agreement with CP
Holdings Limited ("CP Holdings") pursuant to which the Company pays CP
Holdings $4,000 per month in reimbursement of amounts paid by CP Holdings to
certain officers of the Company for time spent working for the Company. In
addition, the Company's subsidiaries paid CP Holdings an aggregate of $1.1
million in management fees for management services in 1997. CP Holdings
beneficially owns approximately 75% of the Company's Common Stock

         The Company has not granted restricted stock or options to purchase
Common Stock to its officers or employees.




                                      31
<PAGE>

Compensation of Directors
-------------------------

         All Directors of the Company receive a fee of $10,000 per annum plus
$500 for attendance at each meeting of the Board of Directors. All Directors
are reimbursed for all reasonable expenses incurred by them in acting as a
Director or as a member of any committee of the Board of Directors.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information, as of March 31,
1998, concerning the ownership of the Common Stock by (a) each of the
Company's current directors and nominees, (b) all current directors, officers
and significant employees of the Company as a group, and (c) each person who,
to the Company's knowledge, beneficially owned on that date more than 5% of
the outstanding Common Stock. Except as otherwise indicated, the stockholders
listed in the table have the sole voting and investment power with respect to
the shares indicated.





































                                      32
<PAGE>




<TABLE>
<CAPTION>
<S>                                                                     <C>                               <C>
========================================================================================================================
                                                                             Shares of
 Name and Address of                                                       Common Stock                   Percent
 Beneficial Owner                                                       Beneficially Owned                of Class

------------------------------------------------------------------------------------------------------------------------
 Bernard and Lilly Schreier                                                        4,210,004(1)              75.1%
 Heriots
 Stanmore Common
 Middlesex HA7 3HG England
------------------------------------------------------------------------------------------------------------------------
 The Estate of Gideon Schreier                                                     4,210,004(2)              75.1%
 Kensworth House
 The Lynch, Nr Kensworth
 S Beds LU6 3QZ, England
------------------------------------------------------------------------------------------------------------------------
 Michael M. Wreschner                                                              4,142,004(3)              73.9%
 10 Raleigh Close
 Hendon
 London NW4 2TA, England

------------------------------------------------------------------------------------------------------------------------
 Leonard Goldfine                                                                           800                  *
 1424 Melrose Avenue
 Melrose Park, PA 19027
------------------------------------------------------------------------------------------------------------------------
 Wilfred Wyler                                                                              -0-                 __
 333 Central Park West
 New York, New York  10025
------------------------------------------------------------------------------------------------------------------------
 Alfred L. Simon                                                                            -0-                  *
 334 West 87th Street, Apt 6A
 New York, New York  10024
------------------------------------------------------------------------------------------------------------------------
 Fortunee F. Cohen                                                                        96(4)                  *
 1967 East 1st Street
 Brooklyn, New York  11223
------------------------------------------------------------------------------------------------------------------------
 Kenyon Phillips Limited/                                                          4,142,004(5)              73.9%
 CP Holdings Limited
 CP House, Otterspool Way,
 Watford By-Pass,
 Watford WD2 8HG England
------------------------------------------------------------------------------------------------------------------------
 Jozsef Ferenc Polgar                                                                        76                  *
 1133 Budapest
 Ipoly,Utca 5/F
 Hungary
------------------------------------------------------------------------------------------------------------------------
 Moshe Gershi                                                                               -0-                 __
 65 The Vale
 London NW II
------------------------------------------------------------------------------------------------------------------------
 Zvi Borowitsh                                                                              -0-                 __
 8 Hamanor Street
 P.O.B. 214 Holon
 58101 Israel
------------------------------------------------------------------------------------------------------------------------
 All directors and officers as a                                                      4,210,976              74.0%
 group (7 persons)
========================================================================================================================
</TABLE>



                                      33
<PAGE>

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

(1)      Includes 4,142,004 shares of Common Stock beneficially owned by
         Kenyon Phillips Ltd ("Kenyon") and 68,000 shares of Common Stock
         beneficially owned by The Estate of Gideon Schreier.

(2)      Includes 68,000 shares of Common Stock for The Estate's account and
         4,142,004 shares of Common Stock beneficially owned by Kenyon.

(3)      Includes 4,142,004 shares of Common Stock beneficially owned by CP
         through its wholly owned subsidiary Kenyon. Mr. Wreschner is a
         director of CP.

(4)      Represents 96 shares of Common Stock beneficially owned by Fortunee
         F. Cohen, as custodian for Joyce Cohen and Elliott Cohen, who each
         own 48 shares of Common Stock.

(5)      Kenyon beneficially owns an aggregate of 4,142,004 shares of Common
         Stock of the Company, constituting 73.9% of the Company's outstanding
         voting securities. According to the Schedule 13D filed by Kenyon, it
         is owned and controlled by CP. The Company is also informed that 90%
         of CP's voting securities is owned, and CP is controlled, by Bernard
         and Lilly Schreier.


*        Represents beneficial ownership of less than 1% of the Common Stock
         of the Company.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Pursuant to an agreement with CP Holdings, the Company pays CP
Holdings $4,000 per month in reimbursement of amounts paid by CP Holdings to
certain officers of the Company for time spent working for the Company. In
addition, the Company's subsidiaries paid CP Holdings an aggregate of $1.1
million in management fees for management services in 1997.


                                      34
<PAGE>


                                    PART IV

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

IIC INDUSTRIES INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
(a)(1)  Financial Statements
        --------------------                                                                                   Page

Financial Statement Index
<S>                                                                                                            <C>
Report of Grant Thornton LLP....................................................................................F-1

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

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

Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995............................................................F-5

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

Notes to Financial Statements...................................................................................F-8


(a)(2)  Financial Statement Schedules
        -----------------------------

Schedule II - Valuation Allowance Accounts.....................................................................F-28

(b) Reports on Form 8-K: No reports on Form 8-K were filed during the period covered by this report.

(d) DANUBIUS  HOTEL & SPA, RT. AND SUBSIDIARIES

Report of Ernst & Young .......................................................................................F-31

Consolidated Balance Sheets at December 31, 1997 and December 31, 1996 ........................................F-32

Consolidated Statements of Income for the years ended December 31, 1997 and 1996...............................F-33

Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997 and 1996.................................................................F-34

Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996...........................F-35

Notes to Consolidated Financial Statements.....................................................................F-36
</TABLE>



<PAGE>

(c)  Exhibits

EXHIBIT NO.       DESCRIPTION
-----------       -----------

3.1               Articles of Incorporation of Registrant, as amended
                  (Incorporated by reference to Exhibit 1 filed with Amendment
                  No. 101 to Form N-2 filed with the Securities and Exchange
                  Commission (the "Commission") on April 29, 1980, filed with
                  Amendment No. 106 to Form N-2 filed with the Commission on
                  April 29, 1985, filed with Amendment No. 108 to Form N-2
                  filed with the Commission April 29, 1987 and to Amendment
                  No. 112 filed with the Commission on April 29, 1992)


3.2               By-Laws of Registrant (Incorporated by reference to Exhibit
                  2 filed with Amendment No. 101 to Form N-2 filed with the
                  Commission on April 29, 1980, filed with Amendment No. 106
                  to Form N-2 filed with the Commission on April 29, 1985,
                  filed with Amendment No. 108 to Form N-2 filed with the
                  Commission April 29, 1987 and to Amendment No. 112 filed
                  with the Commission on April 29, 1992)


10.1              Agreement dated May 2, 1991 by and between the Registrant,
                  Balton B.V., Koor Trade Limited and Balton C.P. Limited for
                  acquisition of 51% interest in Balton C.P. Limited
                  (Incorporated by reference to Exhibit 10.1 to the
                  Registrant's Annual Report on Form 10-K for the year ended
                  December 31, 1992)


10.2              Share Purchase Agreement dated January 28, 1992 by and
                  between the Registrant and the State Property Agency of the
                  Republic of Hungary for acquisition of 60% interest in
                  Investor Rt. (Incorporated by reference to Exhibit G to
                  Amendment No. 2 to Application for an Order pursuant to
                  Section 8(f) of the Investment Company Act of 1940 declaring
                  that IIC Industries, Inc. (formerly Israel Investors
                  Corporation) has ceased to be an Investment Company)


10.3              Agreements dated May 26, 1993 between Interag Kereskedelmi
                  Reszvenytarsag and Shell Overseas Holdings Limited
                  (Incorporated by reference to Exhibit 10.3 to the
                  Registrant's Annual Report on Form 10-K for the year ended
                  December 31, 1993)



10.4              Agreement dated May 26, 1993 between GMV of Bekes and
                  Agrimpex Rt. (Incorporated by reference to Exhibit 10.4 to
                  the Registrant's Annual Report on Form 10-K for the year
                  ended December 31, 1993)


10.5              Agreement dated December 9, 1994 between the Registrant and
                  the State Property Agency of the Republic of Hungary for the
                  acquisition of an additional 23% interest in Investor Rt.
                  (Incorporated by ...reference by Exhibit 10.5 to the
                  Registrant's Annual report on Form 10-K for the year ended
                  December 31, 1994)

21.1              List of Subsidiaries


27                Financial Data Schedule



<PAGE>

                                  SIGNATURES

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


Dated:  April 28, 1998                         IIC Industries Inc.


                                               By: /s/ Bernard Schreier
                                                  -----------------------------
                                                  Bernard Schreier, Chairman
                                                  of the Board and President
                                                  (Principal Executive Officer)


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


<TABLE>
<CAPTION>
SIGNATURE                                 TITLE                               DATE
---------                                 -----                               ----

<S>                              <C>                                       <C>
/s/ Bernard Schreier             Chairman of the Board,                    April 28, 1998
--------------------             President and Director
Bernard Schreier                 (Principal Executive Officer)


/s/ Michael M. Wreschner         Director                                  April 28, 1998
------------------------         (Principal Financial Officer
Michael M. Wreschner             and Chief Accounting Officer)


/s/ Leonard Goldfine             
--------------------             Director                                  April 28, 1998
Leonard Goldfine


/s/ Wilfred Wyler                
-----------------                Director                                  April 28, 1998
Wilfred Wyler


/s/ Alfred L. Simon
-------------------              Director                                  April 28, 1998
Alfred L. Simon
</TABLE>



                                      53

<PAGE>

                        REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS



Board of Directors
    IIC INDUSTRIES, INC.


We have audited the accompanying consolidated balance sheets of IIC Industries,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IIC Industries,
Inc. and Subsidiaries as of December 31, 1997 and 1996, the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

We have also audited Schedule II of IIC Industries, Inc. and Subsidiaries for
the years ended December 31, 1997, 1996 and 1995. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.






GRANT THORNTON LLP


New York, New York
April 28, 1998

                                      F-1


<PAGE>


                              IIC Industries, Inc.

                          CONSOLIDATED BALANCE SHEETS

                                  December 31,
                (dollar amounts in thousands, except share data)

<TABLE>
<CAPTION>
                                                              1997       1996
                                                            --------   --------
                                    ASSETS
<S>                                                         <C>        <C>     
CURRENT ASSETS
     Cash and cash equivalents                              $ 22,781   $ 17,211
     Accounts receivable, net of allowances for doubtful      37,487     43,400
         accounts of $3,043  in 1997 and $3,358 in 1996
     Inventories (Note E)                                     44,859     61,178
     Other current assets (Note O)                            10,484     10,843
                                                            --------   --------
            Total current assets                             115,611    132,632

RESTRICTED CASH (Note C)                                         211      8,356

PROPERTY AND EQUIPMENT, NET (Note F)                          29,585     33,630

INVESTMENTS IN AND ADVANCES TO                                28,361     26,525
     AFFILIATED COMPANIES (Note G)

OTHER ASSETS                                                   2,274      2,413
                                                            --------   --------

                                                            $176,042   $203,556
                                                            ========   ========
</TABLE>


       The accompanying notes are an integral part of these statements.


                                      F-2

<PAGE>


                              IIC Industries, Inc.

                    CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                  December 31,
                (dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
                                                              1997         1996
                                                           ---------    ---------
<S>                                                        <C>          <C>      
                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                      $  22,301    $  20,554
     Bank loans (Note H)                                      23,490       35,750
     Current maturities of long-term debt (Note I)             1,661           88
     Accrued expenses and other payables (Note O)             13,405       18,083
     Advances from customers (Note D)                          3,932       10,693
                                                           ---------    ---------

            Total current liabilities                         64,789       85,168

LONG-TERM DEBT, less current portion (Note I)                  1,508        2,160

DUE TO AFFILIATES (Note J)                                     1,692        1,850

OTHER LIABILITIES AND DEFERRED
     CREDITS (Note O)                                          5,759        5,854

MINORITY INTERESTS                                            15,149       20,494
                                                           ---------    ---------
                                                              88,897      115,526

COMMITMENTS AND CONTINGENCIES
     (Note M)

STOCKHOLDERS' EQUITY
     Common stock, $0.25 par value per share; authorized
         7,200,000 shares; issued 6,343,224 shares             1,586        1,586
     Additional paid-in capital                               22,941       22,941
     Retained earnings                                        97,426       92,053
     Foreign translation adjustment                          (32,083)     (25,825)
     Less treasury stock - at cost (649,752 shares)           (2,725)      (2,725)
                                                           ---------    ---------

                                                              87,145       88,030
                                                           ---------    ---------

                                                           $ 176,042    $ 203,556
                                                           =========    =========
</TABLE>


       The accompanying notes are an integral part of these statements.

                                      F-3

<PAGE>

                              IIC Industries, Inc.

                       CONSOLIDATED STATEMENTS OF INCOME

                            Years ended December 31,
         (dollar amounts in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                           1997           1996           1995
                                                        -----------    -----------    -----------
<S>                                                     <C>            <C>            <C>        
Net sales                                               $   239,617    $   275,820    $   280,921
Cost of sales                                               191,229        210,593        219,975
                                                        -----------    -----------    -----------

            Gross profit                                     48,388         65,227         60,946

Selling, general and administrative expenses                 44,461         49,083         43,401
                                                        -----------    -----------    -----------

            Operating income                                  3,927         16,144         17,545
                                                        -----------    -----------    -----------

Other income (expenses)
     Interest income                                          2,186          2,285          3,624
     Dividend income                                             13             22            254
     Equity in earnings (loss) of affiliates (Note G)         4,156          4,230          3,823
     Foreign currency (loss) gain (Note A-8)                 (2,453)          (263)          (385)
     Gain on sale of noncurrent assets (Note K)               2,486          2,230          1,373
     Interest expense                                        (4,753)        (4,100)        (4,764)
     Rental income                                            1,585          1,710          1,249
     Other, net                                              (1,342)        (1,566)        (1,199)
                                                        -----------    -----------    -----------

                                                              1,878          4,548          3,975
                                                        -----------    -----------    -----------

            Income before income taxes and
               minority interest                              5,805         20,692         21,520

Income taxes (Note O)                                        (1,519)        (5,046)        (5,655)
                                                        -----------    -----------    -----------

            Income before minority interests                  4,286         15,646         15,865

Minority interests                                            1,087         (2,935)        (4,224)
                                                        -----------    -----------    -----------

            NET INCOME                                  $     5,373    $    12,711    $    11,641
                                                        ===========    ===========    ===========

Basic net income per common share (Note A-10)           $      0.94    $      2.23    $      2.04
                                                        ===========    ===========    ===========

Basic average number of common shares
     outstanding                                          5,693,472      5,693,472      5,693,472
                                                        ===========    ===========    ===========

</TABLE>


       The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                              IIC Industries, Inc.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                 Years ended December 31, 1997, 1996 and 1995
               (dollar amounts in thousands, except share data)

<TABLE>
<CAPTION>
                                      Common stock       Additional                   Treasury stock      Foreign 
                                 ---------------------    paid-in     Retained     -------------------  translation
                                   Shares     Amount      capital     earnings      Shares      Amount   adjustment     Total
                                 ---------   ---------   ---------   ---------     --------    --------  ----------    -------- 
<S>                              <C>         <C>         <C>         <C>           <C>        <C>         <C>         <C>       
Balance at December 31, 1994     5,693,472   $   1,586   $  22,941   $  67,701     649,742    $ (2,725)   $(12,133)   $ 77,370  
                                                                                                                                
Net income                          11,641                                          11,641                                      
                                                                                                                                
Foreign translation adjustment                                                      (6,712)     (6,712)                         
                                 ---------   ---------   ---------   ---------    --------    --------    --------    --------  
                                                                                                                                
Balance at December 31, 1995     5,693,472       1,586      22,941      79,342     649,742      (2,725)    (18,845)     82,299  
                                                                                                                                
Net income                          12,711                                          12,711                                      
Foreign translation adjustment                                                      (6,980)     (6,980)                         
                                 ---------   ---------   ---------   ---------    --------    --------    --------    --------  
                                                                                                                                
Balance at December 31, 1996     5,693,472       1,586      22,941      92,053     649,742      (2,725)    (25,825)     88,030  
                                                                                                                                
Net income                           5,373                                           5,373                                      
Foreign translation adjustment                                                      (6,258)     (6,258)                         
                                 ---------   ---------   ---------   ---------    --------    --------    --------    --------  
                                                                                                                                
BALANCE AT DECEMBER 31, 1997     5,693,472   $   1,586   $  22,941   $  97,426     649,742      (2,725)   $(32,083)   $ 87,145  
                                 =========   =========   =========   =========    ========    ========    ========    ========  
                                                     


</TABLE>


        The accompanying notes are an integral part of this statement.

                                      F-5

<PAGE>

                              IIC Industries, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,
                         (dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                               1997        1996       1995
                                                                             --------    --------    --------
<S>                                                                          <C>         <C>         <C>     
Cash flows from operating activities
     Net income                                                              $  5,373    $ 12,711    $ 11,641
                                                                             --------    --------    --------
     Adjustments to reconcile net income to net cash
        provided by (used in) operating activities
            Depreciation                                                        3,555       3,253       3,161
            Amortization                                                           67          75         157
            Equity in (earnings) of affiliates, net
               of dividends                                                    (4,156)     (4,230)     (3,823)
            Minority interest                                                  (1,087)      2,935       4,224
            Gain on sale of noncurrent assets                                  (2,486)     (2,230)     (1,373)
            Foreign currency loss                                               2,453         263         385
            Changes in operating assets and liabilities, net of effects of
                 acquisition and dispositions of businesses:
                    Accounts receivable                                         3,122     (13,339)     (1,490)
                    Inventories                                                12,012     (20,880)     (3,785)
                    Advances to subcontractors                                  1,054         724
                    Other assets                                                   64        (188)     (1,322)
                    Accounts payable and accrued expenses                      (3,932)      7,772       5,179
                    Advances from customers                                    (7,018)      1,681      (2,268)
                                                                             --------    --------    --------

                  Total adjustments                                             2,594     (23,834)       (231)
                                                                             --------    --------    --------

                  Net cash provided by (used in)
                       operating activities                                     7,967     (11,123)     11,410
                                                                             --------    --------    --------

Cash flows from investing activities
     Purchase of subsidiaries, net of cash acquired                              (359)     (2,510)     (6,810)
     Purchase of property and equipment                                        (5,264)    (10,636)     (6,729)
     Purchase of  investments                                                  (3,730)     (1,713)    (31,352)
     Sale (purchase) of other assets                                              234          74        (118)
     Advances from (to) affiliates                                                158         (71)         22
     Proceeds on disposal of property and equipment                             2,733       3,178       2,834
     Proceeds on disposal of investments                                        2,549       1,558      11,049
     Restricted cash                                                            8,145      (2,637)      2,883
     Redemption of notes and loan receivable                                      389         196         194
                                                                             --------    --------    --------

                  Net cash provided by (used in)
                       investing activities                                     4,855     (12,561)    (28,027)
                                                                             --------    --------    --------
</TABLE>

                                      F-6



<PAGE>


                              IIC Industries, Inc.

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                            Years ended December 31,
                         (dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                            1997        1996        1995
                                                          --------    --------    --------
<S>                                                       <C>         <C>         <C>     
Cash flows from financing activities
     Issuance of long-term debt                           $    911    $    422    $  2,143
     Principal payments on long-term debt                     (100)       (381)     (1,567)
     Net receipts (payments) of short-term bank loans       (6,766)     23,074      (1,992)
                                                          --------    --------    --------

                  Net cash (used in) provided by
                       financing activities                 (5,955)     23,115      (1,416)
                                                          --------    --------    --------

                  Increase (decrease) in cash and cash
                     equivalents during the year before
                     effect of exchange rate on cash         6,867        (569)    (18,033)

Effect of exchange rate on cash                             (1,297)     (1,634)     (3,117)
                                                          --------    --------    --------

                  Increase (decrease) in cash and cash
                       equivalents during the year           5,570      (2,203)    (21,150)

Cash and cash equivalents at beginning of year              17,211      19,414      40,564
                                                          --------    --------    --------

Cash and cash equivalents at end of year                  $ 22,781    $ 17,211    $ 19,414
                                                          ========    ========    ========

Supplemental disclosures of cash flow information:
   Cash paid during the year for
        Interest                                          $  5,976    $  6,077    $  5,716
        Income taxes                                         3,457       3,225       6,021


</TABLE>


       The accompanying notes are an integral part of these statements.

                                      F-7

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1997, 1996 and 1995



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      1.    Nature of Business and Principles of Consolidation

            IIC Industries, Inc. and Subsidiaries ("IIC" or the "Company") is
            majority-owned by a corporation which is wholly-owned by CP
            Holdings Limited ("CP").

            The consolidated financial statements include the accounts of IIC
            and all material majority-owned subsidiaries, except where control
            does not rest with the Company. All material intercompany
            transactions and balances have been eliminated. IIC is a holding
            company with subsidiaries in three principal geographic areas: (1)
            Investor Rt. ("Investor"), a 98.7%-owned Hungarian holding company
            which engages in a variety of commercial activities in Hungary, (2)
            Israel Tractor, a wholly-owned Israeli corporation which
            distributes tractors and related heavy machinery in Israel, and (3)
            Balton C.P. Limited ("Balton"), a 51%-owned English holding company
            with African subsidiaries engaged in the trading business in
            several African countries.

            Investor's principal subsidiaries are Agrimpex RT ("Agrimpex" -
            63%-owned) and Interag RT ("Interag" - 78%-owned). Agrimpex
            primarily imports and exports a wide variety of agricultural
            products, excluding livestock. Interag is a diversified company
            whose principal activities consist of a 28.9% interest in Danubius
            (see Note G), and the operation of motor dealerships, vehicle
            service and repair centers and a cold storage facility

       2.   Cash and Cash Equivalents

            Cash and cash equivalents consist of cash and highly liquid
            investments with a maturity of three months or less when purchased.

       3.   Inventories

            Inventories are stated at the lower of cost (specific
            identification for heavy machinery or first-in, first-out) or
            market values.



                                      F-8

<PAGE>



                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE A (CONTINUED)

       4.   Property, Plant and Equipment

            Property, plant and equipment are stated at cost less accumulated
            depreciation. Depreciation is provided using the straight-line
            method at rates calculated to write off the cost of the asset over
            its expected economic useful life. The rates are as follows:
                                                       Annual
                                                     percentage
                                                     -----------
                   Buildings                            2 - 4  %
                   Machinery and equipment             10 - 50
                   Furniture and fixtures              10 - 20
                   Motor vehicles                      15 - 25

       5.   Investments

            Investments in affiliates (owned greater than 20% but not in excess
            of 50%) and noncontrolled subsidiaries are recorded under the
            equity method. Under such method, the investment is recorded at
            cost and adjusted by the Company's share of earnings or losses less
            distributions. Other investments are carried at cost, less
            provision for permanent diminution in value.

      6.    Long-Term Contracts

            Income on long-term contracts is measured by using the
            percentage-of-completion method of accounting, based on the costs
            incurred to date compared with total estimated costs. Income is
            recognized upon the attainment of specific contract milestones.
            Full provision is made for losses on all contracts in the year in
            which they are first foreseen.

      7.    Income Taxes

            The Company accounts for income taxes in accordance with the
            provisions of Statement of Financial Accounting Standards No. 109,
            "Accounting for Income Taxes." This statement requires the
            liability method of accounting for income taxes.

                                      F-9

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995

NOTE A (CONTINUED)

       8.   Foreign Currency Exchange

            Investor uses the local currency, the Hungarian forint, as its
            functional currency and translates all assets and liabilities at
            year-end exchange rates, all income and expense accounts at average
            rates and records adjustments resulting from the translation in a
            separate component of stockholders' equity. The translation
            adjustments for 1997, 1996 and 1995 were $6.3 million, $7.0
            million, and $6.7 million, respectively, which are reflected in
            stockholders' equity.

            Israel Tractor uses the U.S. dollar as the functional currency,
            since the dollar is the currency in which most of the significant
            business of Israel Tractor is conducted or to which it is linked.

            Balton uses the U.S. dollar as the functional currency, since most
            of the African subsidiaries operate in hyperinflationary economies.
            These subsidiaries translate monetary assets and liabilities at
            year-end exchange rates and nonmonetary assets and liabilities at
            historical rates. Income and expense accounts are translated at the
            rate of exchange prevailing at the date of transaction, except that
            depreciation is translated at historical rates. Gains and (losses)
            resulting from the translation of these entities are included in
            results of operations and are as follows: 1997 - $(291,000), 1996 -
            $179,000, and 1995 -$(634,000).

            Transactions arising in a foreign currency are translated into the
            functional currency at the rate of exchange effective at the date
            of the transaction and gains or (losses) are included in results of
            operations and are as follows: 1997 - $(2,162,000) , 1996 -
            $(442,000), and 1995 - $249,000.

      9.    Derivative Financial Instruments

            Gains or losses resulting from changes in the market value of
            transactions entered into as hedges are deferred until the hedged
            transaction occurs. For transactions which do not qualify as
            hedges, gains and losses are recognized in the results of
            operations.

     10.    Basic Net Income Per Share

            Basic net income per share has been computed by dividing net income
            by the weighted average number of common shares outstanding. The
            Company has no potentially dilutive securities and, accordingly,
            diluted income per common share is not presented. On March 3, 1998,
            the Board of Directors declared a four-to-one stock split, which
            was distributed on March 16, 1998 to shareholders on record at the
            close of business on March 3, 1998. In this report, all per share
            amounts and number of shares have been restated to reflect the
            stock split.

                                     F-10

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995

NOTE A (CONTINUED)

     11.    Use of Estimates

            In preparing financial statements in conformity with generally
            accepted accounting principles, management makes estimates and
            assumptions that affect the reported amount of assets and
            liabilities and disclosures of contingent assets and liabilities at
            the date of the financial statements, as well as the reported
            amounts of revenues and expenses during the reporting period.
            Actual results could affect those estimates.

     12.    Reclassification

            Certain amounts in the 1996 and 1995 financial statements have been
            reclassified to conform to the 1997 presentation.


NOTE B - ACQUISITION

            On September 7, 1995, Agrimpex , a 63%-owned subsidiary of
            Investor, directly and indirectly, through its wholly-owned
            subsidiary, Agrimill, Rt., acquired a 93.5% equity interest in
            Viktoria Rt. for approximately $6.6 million. Viktoria Rt. is
            involved in the milling of animal feed and flour.

            The acquisition was accounted for by the purchase method, and the
            excess ($3.4 million) of the fair value of the net assets acquired
            over the purchase price was allocated to reduce the value of the
            fixed assets acquired. The pro forma effect of this purchase on
            results of operations prior to acquisition is not material.


NOTE C - RESTRICTED CASH

            In 1997, restricted cash deposits are $211,000 which relate to
            compensating balances with respect to short-term borrowings.

            In 1996, restricted cash deposits are $8.4 million. The deposits
            are restricted as follows: $3.7 million to collateralize a
            repayment guarantee of the Katsina project (Note D); $3.3 million
            relating to compensating balances with respect to short-term
            borrowings; and $1.4 million relating to other guarantees.


                                     F-11

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE D - ADVANCES FROM CUSTOMERS

       In 1994, Balton B.V. - DWA (Nigeria) Ltd. ("BV-DWA"), a wholly-owned
      subsidiary of Balton, contracted with the Nigerian Ministry for the
      construction and installation of a water treatment plant and related
      facilities in Katsina, Nigeria. In 1996, the original contract period
      expired. During 1996 and 1995, the Company recognized revenues of $11.3
      million and $9.9 million, respectively, related to the project. Prior to
      1996, no profit was recognized since the project was in its early stages.
      The parties have agreed, in principle, that phase one of the project has
      been completed and that BV-DWA will continue the project, subject to the
      revised terms and conditions at a contract price of $76 million. During
      1997, the Company recognized revenue of $1.3 million related to the
      project. The revenue recognized is low compared to the previous years due
      to the extended negotiation period over the revised terms and conditions.
      No profit has been recognized in 1997.

       Unaffiliated entities have been subcontracted for the construction work.
      The original contract price was divided into a U.S. dollar element and a
      Nigerian naira element. Balton received $21.5 million and BV-DWA received
      $8.2 million from the Nigerian Ministry. The advance receipts to Balton
      and BV-DWA were made in order to facilitate payments to the
      subcontractors of $20.1 million. All of the receipts were covered by
      repayment guarantees to the Nigerian government in the event the contract
      was terminated, in which event, the amount of the repayment is subject to
      arbitration. Furthermore, all of the payments to the subcontractors were
      covered by repayment guarantees to Balton and BV-DWA.

       Of the original advances, $7.0 million was received for the U.S. dollar
      element and $400 thousand at current rates of exchange for the Nigerian
      naira element at the end of phase one of the project. Of these amounts,
      $5.7 million and $300 thousand, respectively, are held by the
      subcontractor. These remaining advances are not covered by repayment
      guarantees to the Nigerian Ministry.


NOTE E - INVENTORIES

      Inventories at December 31 are as follows (in thousands):

                                             1997         1996
                                            -------      -------
            Raw material                    $ 5,826      $23,127
            Work in progress                    519          452
            Finished goods                   38,514       37,599
                                            -------      -------
                                            $44,859      $61,178
                                            =======      =======


                                     F-12

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE F - PROPERTY AND EQUIPMENT

      Property and equipment at December 31 consist of the following (in
      thousands):

                                                      1997       1996
                                                    --------    --------
Land                                                $  5,728    $  1,584
Buildings                                             18,732      22,276
Machinery and equipment                                4,802       5,447
Automotive                                             9,782      10,352
Furniture and fixtures                                 6,480       5,693
Construction in progress                                 210       2,697
                                                    --------    --------

                                                      45,734      48,049
Less allowances for depreciation and amortization    (16,149)    (14,419)
                                                    --------    --------

                                                    $ 29,585    $ 33,630
                                                    ========    ========


NOTE G - INVESTMENTS IN AND ADVANCES TO
         AFFILIATED COMPANIES

      Significant investments in and advances to affiliated companies at
      December 31 are (in thousands):

                                       % owned in
                                       1997 and 1996    1997      1996
                                       -------------   -------   -------
Danubius Hotel & Spa Rt. ("Danubius")   30 and 30      $24,378   $24,918 
DP Invest Kft ("DP")                    50 and 0         1,981           
ATI Depo Rt ("ATI")                     50 and 0         1,268           
Harmashatarhegy Udvarhaz ("HU")         100 and 50                   514 
Agrovagon Kft. ("Agro")                 48 and 48          150       538 
Other                                                      584       555 
                                                       -------   ------- 
                                                       $28,361   $26,525 
                                                       =======   ======= 

      During 1997, Investor acquired a 50% interest in DP and ATI, which are
      public warehousing facilities by contributing certain facilities and
      other assets to DP and ATI. HU operates a restaurant in Budapest. During
      1997, Interag acquired the remaining 50% share and HU is now consolidated
      within these financial statements. Agro is a rail car operator in
      Hungary, primarily serving agricultural cooperatives.


                                     F-13


<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE G (CONTINUED)

      Danubius ("Danubius"), a publicly quoted company on the Budapest Stock
      Exchange, owns a number of hotels in Hungary and specializes in spa
      facilities. At December 31, 1997, the quoted market value of the
      Company's effective investment in Danubius was approximately $73 million.

      The following is summarized financial information of Danubius (in
      thousands) which was prepared in accordance with international accounting
      standards. There were no significant differences between international
      accounting standards and generally accepted accounting standards in the
      United States.

                                            December 31,
                                        -------------------
                                          1997      1996
                                        --------   --------
Current assets                          $ 30,767   $ 34,559
Noncurrent assets                        150,850    116,683
Current liabilities                       19,440     10,428
Noncurrent liabilities                    50,409     26,462
Stockholders' equity                     111,768    114,352


                                      Year ended December 31,
                                      -----------------------
                                         1997         1996
                                        --------   --------
Sales                                   $111,633   $ 71,951
Net income                                15,173     14,295
Company's share of equity in earnings      4,053      4,104


NOTE H - SHORT-TERM DEBT

      The Company's short-term debt consists of notes payable to banks,
      primarily Hungarian banks, with a weighted average interest rate of
      approximately 20% and 24% in 1997 and 1996, respectively. Unused lines of
      credit totaled $37.8 million in 1997 and $33.1 million in 1996. The debt
      is collateralized by inventory, buildings and machinery.


                                      F-14



<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE I - LONG-TERM DEBT

Long-term debt at December 31 is as follows (in thousands):

                                                                 1997     1996
                                                                -------  -------
Israeli bank debt of 203 million Japanese yen 
     payable in 1998,
     interest of LIBOR + 0.5%,
     guaranteed by IIC                                           $1,556   $1,715

Hungarian bank debt for the purchase of fixed assets,
     interest of 20% - 21%                                        1,220      303

Hungarian State Municipalities loan for the purchase
     of eight properties; interest rate of 20%                      120      199

Other                                                               273       31
                                                                 ------   ------

                                                                  3,169    2,248
Less current maturities                                           1,661       88
                                                                 ------   ------

                                                                 $1,508   $2,160
                                                                 ======   ======


      The aggregate loan maturities are as follows: 1998 - $1,661,000; 1999 -
      $159,000; 2000 -$1,095,000; 2001 - $115,000; 2002 - $115,000; and
      thereafter - $24,000.


NOTE J - DUE TO AFFILIATES

      At December 31, 1997 and 1996, amounts due to affiliates consist of
      management fees and expense reimbursements of $93,000 and $121,000,
      respectively, payable to CP; management fees of $256,000 and $386,000 in
      1997 and 1996, respectively, payable to CP affiliates; and a loan due to
      a shareholder of Balton of $1,343,000. The loan has an interest rate of
      1% above the twelve-month LIBOR rate.


NOTE K - GAIN ON SALE OF NONCURRENT ASSETS

      During 1997 and 1996, Interag completed the sale of several parcels of
      land to Shell es Interag. The sales resulted in gains of approximately
      $1.8 million in 1997 and $1.5 million in 1996.

                                     F-15

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE L - RELATED PARTY TRANSACTIONS

      Related party transactions include purchases and sales of goods,
      providing management services and purchases and sales of agricultural
      commodities among subsidiary companies. All significant intercompany
      transactions and balances have been eliminated.

      The Company incurred management fees and other expenses payable to CP in
      the amount of $ 1.1 million during 1997, $1.2 million during 1996 and
      $994,000 during 1995, net of expense reimbursements.

      During 1997 and 1996, Israel Tractor purchased machinery and equipment,
      which at the request of the supplier, was channeled through CP. For the
      rendering of this service, CP received a fee of 2% of the purchases, or
      approximately $292,000 and $425,000, respectively. The fee was used to
      cover administration, financing, and dealings with the major supplier.


NOTE M - COMMITMENTS AND CONTINGENCIES

      Lease Commitments

      The Company is a party to a number of lease agreements, the majority of
      which involve buildings or office space and are cancelable by either
      party with notice of up to one year. Rent expense is $207,000 in 1997,
      $461,000 in 1996 and $599,000 in 1995. There are no significant
      noncancelable lease commitments.

      Contingent Liabilities

      The Company has given a guarantee to the bankers of Balton, amounting to
      $1.6 million. The guarantee is in respect of various outstanding letters
      of credit, given by the bankers of certain of Balton's creditors. The
      Company has also agreed to indemnify a co-guarantor for any losses
      accumulating to $510,000.

      Investor and certain of its subsidiaries are potentially liable with
      respect to certain guarantees of debt and other financial instruments of
      other related and nonrelated companies to the extent of approximately
      $281,000.

                                     F-16


<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE M (CONTINUED)

      Litigation

      The Company is a party to litigation in the ordinary course of business.
      None of this litigation is expected to have a material adverse effect on
      the consolidated results of operations or financial position of the
      Company.

      At the beginning of 1997, it became apparent that in 1996 the Managing
      Director of Agrimill Rt. and two of his Deputies were involved in
      irregular transactions that have caused material loss to the Company. The
      nature of the irregular activities was such that certain transactions
      were made between Agrimill Rt. and companies that were owned directly and
      indirectly by the managers for their own personal benefit. The three
      managers concerned have subsequently been relieved of all
      responsibilities within the group. They repaid a sum of approximately
      $350,000 to Agrimill Rt. Legal action is being pursued against these
      managers in order to recover damages for the losses incurred. However, no
      assurances can be made regarding future recoveries from the litigation at
      this time.


NOTE N - FINANCIAL INSTRUMENTS AND CONCENTRATION
         OF CREDIT RISK

      Substantially all of the Company's revenues are derived from foreign
      operations. Most of the countries where the Company operates, such as
      Hungary and several African countries, do not have freely convertible
      currencies and their currencies have been subject to devaluations in
      recent years. The Hungarian currency has undergone devaluations against
      the U.S. dollar at a rate of 24% in 1997 and 21% in 1996. The African
      countries in which it conducts business have also undergone major
      currency devaluations.

      As a foreign owner of a Hungarian company, the Company is entitled to
      receive its dividends or return of its capital in the original currency
      of investment without restrictions.

      Dividends of Hungarian companies may be paid only from retained earnings
      as determined in accordance with Hungarian statutory accounting
      regulations. Such retained earnings are different from the Company's
      retained earnings included in the Company's consolidated financial
      statements, due to a number of differences in the accounting standards
      used.

                                     F-17

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE N (CONTINUED)

      The Company's policy is not to distribute any earnings for any of its
      subsidiaries. These earnings are to be permanently reinvested in the
      applicable subsidiaries.

      Derivative financial instruments are utilized by the Company to reduce
      foreign exchange risk and price risk relating to its heavy equipment
      distribution and agricultural commodity business. The Company does not
      hold or issue derivative financial instruments for trading purposes.

      Israel Tractor enters into foreign currency forward contracts and call
      option contracts to reduce the impact of fluctuations of certain
      currencies against the U.S. dollar. Gains and losses resulting from such
      transactions are reflected in the results of operations. These contracts
      reduce exposure to currency movements resulting primarily from
      nondollar-denominated trade receivables and the Israeli tax effects of
      dollar-denominated trade purchases.

      At December 31, 1997, Israel Tractor had foreign currency forward
      contracts, with notional values of $2 million, to purchase and sell
      Israeli shekels. All of the contracts matured in January 1998.

      Agrimpex engages in the commodities futures market to lock in prices in
      its agricultural business and decrease volatility related to fluctuations
      in spot market prices.

      Current pricing models were used to estimate the fair values of foreign
      currency forward contracts, call options and commodity contracts. The
      counterparties to these contracts are creditworthy multinational
      commercial banks or other financial institutions, which are recognized
      market makers.

      Based on borrowing rates currently available to the Company for bank
      loans with similar terms and maturities, the fair value of the Company's
      short-term and long-term debt approximates the carrying value.

      The carrying value of financial instruments potentially subject to
      valuation risk except as noted above (principally consisting of cash,
      accounts receivable and accounts payable) approximates fair market value.


                                     F-18

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE O - INCOME TAXES

An analysis of the components of income tax expense is as follows (in
     thousands):

                                1997      1996      1995
                              -------    -------   -------
Current income tax expense
     Federal                  $    23    $    33   $   225
     State                          9         20        63
     Foreign                    1,930      3,704     5,725
                              -------    -------   -------

                                1,962      3,757     6,013

Deferred income tax expense
     Foreign                     (443)     1,289      (358)
                              -------    -------   -------

Income tax expense            $ 1,519    $ 5,046   $ 5,655
                              =======    =======   =======

      The foreign portion of income before taxes was $4.8 million in 1997,
      $20.6 million in 1996 and $21.9 million in 1995.

      Taxes on income of foreign consolidated subsidiaries and affiliates are
      provided at the rates applicable to their respective foreign tax
      jurisdictions.

                                     F-19

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE O (CONTINUED)

      The deferred income tax balance sheet accounts result from temporary
      differences between the amount of assets and liabilities recognized for
      financial reporting and tax purposes. The components of the deferred
      income tax assets and liabilities, which are included in current assets
      and accrued expenses, are shown in the following table (in thousands):

                                                   1997       1996        1995
                                                  -------    -------    --------
Deferred tax assets
     Impairment of investments                    $    46    $   111    $   144
     Reserves for guarantees and loss contracts       241        535        161
     Bad debt and inventory reserves                  474        825        693
     Net operating loss carryforwards               1,225        537      1,369
     Vacation pay                                     338        385        379
     Other                                              9         37        228
                                                  -------    -------    -------

                                                    2,333      2,430      2,974

Valuation allowance                                (1,158)      (834)    (2,000)
                                                  -------    -------    -------

         Deferred tax assets                        1,175      1,596        974

Deferred tax liabilities
     Deferred income on sales and services         (1,392)    (2,207)      (382)
     Other                                            (37)       (86)
                                                  -------    -------    -------

Net deferred tax (liabilities) assets             $  (254)   $  (697)   $   592
                                                  =======    =======    =======

      A valuation allowance has been established due to the uncertainty of
      whether the Company will generate sufficient taxable earnings in Hungary
      to fully realize the deferred tax asset.

                                     F-20


<PAGE>



                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE O (CONTINUED)

      Included in other liabilities and deferred credits are deferred tax
      credits of approximately $4.4 million which represent the liability for
      taxes due upon repatriation of foreign earnings of previous years prior
      to deregistration as an investment company.

      The Company has available for income tax purposes net operating losses
      aggregating approximately $4.1 million expiring in the years ending 1997
      to 2000.

      A reconciliation of the difference between the Company's consolidated
      effective income tax and the tax at the Federal statutory rate is shown
      in the following table (in thousands):

                                               1997      1996       1995
                                             -------    -------    -------
Income tax at U.S. Federal statutory rate    $ 2,481    $ 7,263    $ 7,964
Effect of different foreign tax rates           (549)      (942)    (1,612)
State and local tax, net of Federal effect         6         13         40
Change in valuation allowance                    324
Dividends received exclusion (Hungary)                     (784)      (246)
Nondeductible losses of subsidiaries             147        110        386
Currency exchange                                175       (716)      (613)
Equity in earnings of affiliate                 (785)                 (597)
Miscellaneous items                             (280)       102        333
                                             -------    -------    -------

Income tax expense                           $ 1,519    $ 5,046    $ 5,655
                                             =======    =======    =======

      No provision has been made for U.S. or additional foreign taxes on the
      current undistributed earnings of foreign subsidiaries because such
      earnings are expected to be reinvested indefinitely in the subsidiaries'
      operations. It is not practicable to estimate the amount of additional
      tax that might be payable on these foreign earnings in the event of
      distribution or sale; however, under existing law, foreign tax credits
      would be available to reduce U.S. taxes payable.

      The corporate tax rate in Hungary for 1997 is 18%. In 1996 and 1995, the
      tax rate was made up of two levels of taxation: an 18% rate on profits
      and a 23% rate on dividends paid. The two-level tax is a significant
      change from that which existed in 1994 of 36%.


                                     F-21

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE P - INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION

       The Company's operations have been classified into five business
      segments: Sale and distribution of motor vehicles, export and import of
      agricultural products, distribution of tractors and heavy equipment,
      trading of agricultural, communications and electrical equipment and
      other industries, which includes wholesale and retail consumer and
      corporate expenses.

       The Company's subsidiary Israel Tractor, which distributes tractors and
      heavy equipment has obtained the franchises to sell machines and spare
      parts manufactured by four suppliers, which represent a significant
      portion of Israel Tractor's revenues. According to the terms of the
      agreements, the franchises may be terminated by an advance notice of 60 -
      90 days, in accordance with the usual practice with other companies.
<TABLE>
<CAPTION>
                                                  Export                    Agricultural,
                                                   and         Tractors       communi-
                                                import of         and       cations, and                           
                                      Motor    agricultural      heavy       electrical    Other                   
                                    vehicles      products     equipment      equipment  industries  Consolidated  
                                    ---------    ---------     ----------     ---------  ----------  ------------  
                                                         (amounts in thousands)

<S>                                 <C>          <C>            <C>           <C>         <C>          <C>         
1997                                                                                                               
Revenue                                                                                                            
  Sales to unaffiliated customers   $  11,851    $ 107,169      $  67,754     $  50,980   $   1,863    $ 239,617   
                                    =========    =========      =========     =========   =========    =========   
                                                                                                                   
Operating income (loss)             $     (49)   $    (534)     $   2,302     $   4,382   $  (2,174)   $   3,927   
                                    =========    =========      =========     =========   =========    =========   
                                                                                                                   
Equity income                                                                             $   4,156    $   4,156   
Depreciation and                                                                                                   
   amortization                     $     103    $   1,349      $   1,118     $     506   $     546    $   3,622   
Capital expenditures                      252          446          1,252         2,866         448        5,264   
                                                                                                                   
Identifiable assets at                                                                                             
   December 31, 1997                $   3,441    $  42,091      $  50,387     $  41,321   $     745    $ 137,985   
                                    =========    =========      =========     =========   =========    =========   
                                                                           
</TABLE>


                                     F-22


<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995


NOTE P (CONTINUED)
<TABLE>
<CAPTION>
                                                  Export                Agricultural,
                                                    and      Tractors      communi-
                                                 import of      and      cations, and
                                      Motor     agricultural   heavy      electrical     Other
                                     vehicles     products    equipment   equipment    industries  Consolidated
                                    ----------  ------------  ---------  ------------- ----------  ------------
                                                           (amounts in thousands)
<S>                                 <C>          <C>          <C>         <C>           <C>          <C>       
1996
   Revenue
     Sales to unaffiliated 
      customers                     $  12,004    $ 121,631    $  81,824   $  57,276     $   3,085    $ 275,820 
                                    =========    =========    =========   =========     =========    ========= 
                                                                                                               
   Operating income (loss)          $    (214)   $   2,352    $   6,613   $   9,599     $  (2,206)   $  16,144 
                                    =========    =========    =========   =========     =========    ========= 
                                                                                                               
   Equity income                                              $      59   $     (21)    $   4,192    $   4,230 
   Depreciation and                                                                                            
      amortization                  $     119    $   1,371    $     959   $     384     $     495    $   3,328 
   Capital expenditures                   402        2,930        3,037       1,357         2,910       10,636 
                                                                                                               
   Identifiable assets at                                                                                      
      December 31, 1996             $   3,971    $  64,518    $  50,178   $  42,471     $   7,201    $ 168,339 
                                    =========    =========    =========   =========     =========    ========= 
                                                                                                               
                                                                                                               
1995                                                                                                           
   Revenue                                                                                                     
     Sales to unaffiliated                                                                                     
      customers                     $  10,017    $ 122,810    $  91,418   $  43,162     $  13,514    $ 280,921 
                                    =========    =========    =========   =========     =========    ========= 
                                                                                                               
   Operating income (loss)          $    (221)   $   6,481    $   9,799   $   4,868     $  (3,382)   $  17,545 
                                    =========    =========    =========   =========     =========    ========= 
                                                                                                               
   Equity income                                              $      18   $      (5)    $   3,810    $   3,823 
   Depreciation and                                                                                            
      amortization                  $     176    $   1,325    $     821   $     249     $     747    $   3,318 
   Capital expenditures                   891        1,111        2,015         769         1,943        6,729 
                                                                                                               
   Identifiable assets at                                                                                      
      December 31, 1995             $   5,048    $  57,280    $  47,465   $  24,822     $  16,063    $ 150,678 
                                    =========    =========    =========   =========     =========    ========= 
                                                                                       
</TABLE>

      (a) See Note M regarding the settlement of claim with the former officers
      and directors.


                                     F-23

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE P (CONTINUED)

      The Company has three principal areas of operation with respect to its
      subsidiaries: Investor and its subsidiaries in Hungary; Israel Tractor in
      Israel; and Balton and its subsidiaries in Nigeria, Ghana, Zambia,
      Tanzania, Uganda, Kenya and Cote D'Ivoire.
<TABLE>
<CAPTION>
                                                                                  England
                                            Hungary       Israel       Africa     and other  Consolidated
                                           ---------    ---------    ---------    ---------    ---------
                                                           (amounts in thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>      
1997
   Revenue
      Sales to unaffiliated customers      $ 120,883    $  67,754    $  19,531    $  31,449    $ 239,617
      Transfers between geographic areas                                31,449      (31,449)
                                           ---------    ---------    ---------    ---------    ---------

                                           $ 120,883    $  67,754    $  50,980    $    --      $ 239,617
                                           =========    =========    =========    =========    =========

   Operating income (loss)                 $  (2,306)   $   2,302    $   4,382    $    (451)   $   3,927
                                           =========    =========    =========    =========    =========

   Equity income                           $   4,156    $   4,156
   Depreciation and amortization               1,998    $   1,118    $     454    $      52        3,622
   Capital expenditures                        1,146        1,252        2,866                     5,264

   Identifiable assets at December 31,
     1997                                  $  46,277    $  50,387    $  16,556    $  24,765    $ 137,985
                                           =========    =========    =========    =========    =========

1996
   Revenue
      Sales to unaffiliated customers      $ 136,720    $  81,824    $  23,051    $  34,225    $ 275,820
      Transfers between geographic areas                                34,225      (34,225)
                                           ---------    ---------    ---------    ---------    ---------

                                           $ 136,720    $  81,824    $  57,276    $    --      $ 275,820
                                           =========    =========    =========    =========    =========

   Operating income (loss)                 $     357    $   6,613    $   9,174                 $  16,144
                                           =========    =========    =========                 =========

   Equity income                           $   4,192    $      59    $     (21)                $   4,230
   Depreciation and amortization               1,985          959          288    $      96        3,328
   Capital expenditures                        6,242        3,037        1,357                    10,636

   Identifiable assets at December 31, 
    1996                                   $  75,690    $  50,178    $  12,445    $  30,026    $ 168,339
                                           =========    =========    =========    =========    =========
</TABLE>


                                     F-24



<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



NOTE P (CONTINUED)

<TABLE>
<CAPTION>
                                                                              England
                                            Hungary    Israel      Africa     and other  Consolidated
                                           ---------  ---------   ---------   ---------  -----------
                                                           (amounts in thousands)
<S>                                       <C>         <C>         <C>         <C>        <C>      
1995
   Revenue
      Sales to unaffiliated customers      $146,341   $ 91,418    $ 15,490    $ 27,672    $280,921   
      Transfers between geographic areas                            27,672    (27,672)               
                                           --------   --------    --------    --------    --------   
                                                                                                     
                                           $146,341   $ 91,418    $ 43,162    $   --      $280,921   
                                           ========   ========    ========    ========    ========   
                                                                                                     
   Operating income (loss)                 $  2,878   $  9,799    $  4,868                $ 17,545   
                                           ========   ========    ========                ========   
                                                                                                     
   Equity income                           $  3,656   $     18    $     (5)   $    154    $  3,823   
   Depreciation and amortization              2,249        821         213          35       3,318   
   Capital expenditures                       3,945      2,015         769                   6,729   
                                                                                                     
   Identifiable assets at December 31,                                                               
    1995                                   $ 78,391   $ 47,465    $ 13,673    $ 11,149    $150,678   
                                           ========   ========    ========    ========    ========   
</TABLE>


      Operating income for each segment includes gross profit less selling,
      general and administrative expenses.

      Identifiable assets for each segment include all assets of the businesses
      in the related segments, except for investments in affiliated companies
      which are not part of the relevant segments, and non-investment-related
      assets of the holding company, which are considered corporate assets not
      related to operations of any of the segments.

                                     F-25


<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



 NOTE Q - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
                                      December 31   September 30    June 30      March 31
                                      -----------   ------------    -------      --------
                                        (amounts in thousands, except per share amounts)
<S>                                    <C>            <C>           <C>           <C>       
Fiscal 1997 quarters ended:
   Net sales                           $ 61,035       $ 58,161      $ 59,980      $ 60,441  
   Gross profit                          11,678         12,102        12,521        12,087  
   Income before income taxes and          (965)         3,114         2,870           786  
      minority interest                                                                     
   Net income (loss)                       (754)         3,493         2,337           297  
                                                                                            
   Net income (loss) per share         $  (0.13)      $   0.61      $   0.41      $   0.05  
                                       ========       ========      ========      ========  
                                                                                            
                                                                                            
                                                                                            
Fiscal 1996 quarters ended:                                                                 
   Net sales                           $ 78,849       $ 69,761      $ 67,712      $ 59,498  
   Gross profit                          17,262         17,835        16,172        13,958  
   Income before income taxes and         4,557          5,836         7,721         2,578  
      minority interest                                                                     
   Net income                             2,935          3,644         4,378         1,754  
                                                                                            
   Net income per share                $   0.51       $   0.64      $   0.77      $   0.31  
                                       ========       ========      ========      ========  
                                                                                            
                                                                                            
 Fiscal 1995 quarters ended:                                                                
   Net sales                           $ 71,435       $ 71,287      $ 71,369      $ 66,830  
   Gross profit                          12,902         14,919        16,649        16,476  
   Income before income taxes and                                                           
      minority interest                   5,559          4,241         6,381         5,339  
   Net income                             3,705          2,970         2,630         2,336  
                                                                                            
   Net income per share                $   0.65       $   0.52      $   0.46      $   0.41  
                                       ========       ========      ========      ========  
                                                                                  
</TABLE>

      During the fourth quarter of 1997 and 1996, Investor incurred inventory
      write-downs of approximately $1.5 million and $3.5 million, respectively,
      as a result of decreases in the market value of soya, wheat and other
      commodities.

                                     F-26

<PAGE>


                     IIC Industries, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1997, 1996 and 1995



 NOTE R - NEW ACCOUNTING PRONOUNCEMENTS

      The Financial Accounting Standards Board ("FASB") issued several new
      pronouncements in 1997, including SFAS No. 130, "Reporting Comprehensive
      Income," and SFAS No. 131, "Disclosure About Segments of an Enterprise
      and Related Information." SFAS No. 130 states that all items that are
      required to be recognized under accounting standards as components of
      comprehensive income be reported in a financial statement that is
      displayed with the same prominence as other financial statements. SFAS
      No. 131 requires disclosures regarding segments of an enterprise and
      related information that reflect the different types of business
      activities in which the enterprise engages and the different economic
      environments in which it operates. The adoption of these standards during
      the Company's fiscal year ended December 31, 1998 is not expected to have
      a material effect on the Company's financial statements.



                                     F-27


<PAGE>



                     IIC Industries, Inc. and Subsidiaries

                   SCHEDULE II - VALUATION ALLOWANCE ACCOUNTS
                 Years ended December 31, 1997, 1996 and 1995
                             (amounts in thousands)
<TABLE>
<CAPTION>

            Column A                                 Column B       Column C                    Column D                Column E
            --------                                 --------       --------      -----------------------------------   --------
                                                    Balance at     Charged to           Deduction -     Deduction -    Balance at
                                                     beginning      costs and        foreign currency    credit to       end of
         Description                                  of year       expenses            translation       reversal        year
         -----------                                -----------    -----------     ------------------   -------------  ----------
<S>                                                 <C>              <C>              <C>                  <C>         <C>     
1997
     Doubtful accounts                              $  3,358         $   260          $   (370)            $ (205)     $  3,043
     Inventory reserves                                4,000                                               (2,272)        1,728
     Investments                                       2,722             882               (54)              (600)        2,950
     Loan provisions                                     422                                                  (95)          327
     Customer credits and discounts                      340               9                                                349
     Warranty                                            479                                                  (84)          395
                                                    --------       ---------        ----------           ---------    ---------

                                                     $11,321          $1,151          $   (424)           $(3,256)     $  8,792
                                                      ======           =====           ========            =======      =======

1996
     Doubtful accounts                              $  3,058          $1,048            $ (265)          $   (483)     $  3,358
     Inventory reserves                                  744           3,866              (394)              (216)        4,000
     Investments                                       3,847                              (617)              (508)        2,722
     Loan provisions                                   2,895                              (148)            (2,325)          422
     Customer credits and discounts                      378                                                  (38)          340
     Warranty                                            456              34                (7)                (4)          479
                                                     -------         -------        -----------         ----------     --------

                                                     $11,378          $4,948          $ (1,431)           $(3,574)      $11,321
                                                      ======           =====           =======             ======        ======

1995
     Doubtful accounts                              $  2,311          $1,728           $  (249)           $  (732)     $  3,058
     Inventory reserves                                  812             347               (33)              (382)          744
     Investments                                       3,964             775              (742)              (150)        3,847
     Loan provisions                                   2,833             284              (222)                           2,895
     Customer credits and discounts                      399                                                  (21)          378
     Warranty                                             75             447               (11)               (55)          456
                                                    --------          ------          --------           --------      --------

                                                     $10,394          $3,581           $(1,257)           $(1,340)      $11,378
                                                      ======           =====            ======             ======        ======
</TABLE>

                            F-28

<PAGE>
















                                    DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES

                                                AUDITED CONSOLIDATED
                                                FINANCIAL STATEMENTS

                                                 December 31, 1997
                                       with Report of Independent Auditors



<PAGE>






                  CONTENT



                  Report of Independent Auditors

                  Consolidated Balance Sheet

                  Consolidated Statement of Income

                  Consolidated Statement of Changes in Shareholders' Equity

                  Consolidated Statement of Cash Flows

                  Notes to Consolidated Financial Statements
















                                      30
<PAGE>











                        Report of Independent Auditors



To the Shareholders and Board of Directors
Danubius Hotel and Spa Rt.


We have audited the accompanying consolidated balance sheet of Danubius Hotel
and Spa Rt. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements give a true and fair view of the
consolidated financial position of Danubius Hotel and Spa Rt. and Subsidiaries
at December 31, 1997, and of the consolidated results of their operations and
their cash flows for the year then ended in accordance with International
Accounting Standards.





Ernst & Young
Budapest, Hungary
March 13, 1998.




                                      31
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All amounts in HUF 000,000's)

<TABLE>
<CAPTION>
                                                                        At December 31,

                                                          Notes        1997           1996
                                                         -------      ------         -------
ASSETS
Current Assets:
<S>                                                         <C>       <C>             <C>
   Cash and bank                                                       3,204          3,306
   Accounts receivable                                      4          1,611            899
   Inventory                                                5            357            179
   Other current assets                                     6          1,126          1,323
Total current assets                                                   6,298          5,707
                                                                      ------         ------
Non-current Assets:
  Property, plant and equipment                             7         30,676         19,053
  Other non-current assets                                  8            203            216
                                                                      ------         ------
Total non-current assets                                              30,879         19,269
Total assets                                                          37,177         24,976
                                                                      ======         ======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Trade accounts payable                                                934            458
   Advance payments from guests                                           64             43
   Other payable and accruals                               9          1,264            580
   Current portion of long-term debt                       10          1,718             16
Total current liabilities                                             ------         ------
                                                                       3,980          1,097

Long Term Liabilities
     Long-term debt                                        10          7,204          4,357
     Negative goodwill                                     11          3,023             --
     Deferred customs duties                                              --             13
Total long term liabilities                                           ------         ------
                                                                      10,227          4,370

                                                                      ------         ------
Total liabilities                                                     14,207          5,467

Minority interest                                          12             91            625

Shareholders' Equity:
   Share capital                                           14          8,000          8,000
   Capital reserve                                                     7,329          6,253
   Retained earnings                                                   7,550          4,631
                                                                      ------         ------
Total shareholders' equity                                            22,879         18,884
                                                                      ------         ------
Total liabilities and shareholders' equity                            37,177         24,976
                                                                      ======         ======
</TABLE>
   See accompanying notes to consolidated financial statements 



                                      32
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(All amounts in HUF 000,000's)

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,

                                                                Note            1997                1996
                                                               ------          -------            --------
<S>                                                              <C>            <C>                <C>   
Net sales                                                                       20,224             10,771
Cost of sales                                                                  (10,675)            (5,310)
                                                                               -------            --------

Gross profit                                                                     9,549              5,461

Selling, general and administration                                             (6,259)            (3,219)
Amortisation of negative goodwill                                11                124                 --
                                                                               -------            --------

Operating income                                                                 3,414              2,242

Other income (expense):
   Interest income                                                                 406                243
   Gain on securities                                                              370                259
   Profit (loss) on sale of fixed assets                                             2                (26)
   Interest expense                                                               (432)              (244)
   Foreign exchange loss on loans                                                 (828)              --
   Other income (expense) net                                                       20                170
                                                                               -------            --------
     Total other income (expense)                                                 (462)               402
Income before minority interest and income taxes                               -------            --------

                                                                                 2,952              2,644

Minority interest                                                12               (241)               (56)
                                                                               -------            --------
Income before income taxes                                                       2,711              2,588

Income taxes                                                     13               (473)              (448)
Extraordinary income net of income tax                           15                681                 --
                                                                               -------            --------

Net income                                                                       2,919              2,140
                                                                               =======            ========
</TABLE>


See accompanying notes to consolidated financial statements.




                                      33
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(All amounts in HUF 000,000's)


<TABLE>
<CAPTION>
                                              Share                Capital              Retained
                                   Note      Capital               Reserve              Earnings                   Total
                                           -----------           -----------          ------------               ---------

<S>                                <C>        <C>                   <C>                  <C>                      <C>   
January 1, 1996                               8,000                 6,253                2,495                    16,748

Net income                                        -                     -                2,140                     2,140

Other                                             -                     -                  (4)                       (4)
                                           -----------           -----------          ------------               ---------

December 31, 1996                             8,000                 6,253                4,631                    18,884

Net income                                        -                     -                2,919                     2,919

Capital contribution                 15           -                 1,076                    -                     1,076

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

December 31, 1997                             8,000                 7,329                7,550                    22,879
                                           ===========           ===========          ============               =========
</TABLE>

See accompanying notes to consolidated financial statements.




                                      34
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(All amounts in HUF 000,000's)

<TABLE>
<CAPTION>
                                                                                      Year ended December 31,

                                                                            Note        1997                     1996
                                                                                    ------------             ------------
<S>                                                                         <C>          <C>                       <C>  
Cash flows from operating activities:
Net income before extraordinary income                                                    2,238                     2,140
Adjustments for:
Depreciation and amortisation                                                             1,122                       635
Unrealised foreign exchange loss on loans                                                   762         -
Provision for write down of investments                                                      36         -
Loss on sale of fixed assets                                                                (2)                        26
Minority interest in income                                                                 241                        56
Other                                                                                         -                       (4)
Changes in assets and liabilities:
   Accounts receivable and other current assets                                           (310)                   (1,065)
   Inventory                                                                                 12                      (27)
   Accounts payable and accruals                                                            138                       150
                                                                                    ------------             ------------
                                                                                          4,237                     1,911
Cash flow from extraordinary income (net of tax)                             15             446                         -
                                                                                    ------------             ------------
Net cash flow provided by (used in) operations                                            4,683                     1,911
                                                                                    ------------             ------------

Cash flows from investing activities:
Purchase of property, plant and equipment                                               (1,813)                   (2,549)
Cash acquired on purchase of Hungar Hotels                                                  533                        75
Cash paid on acquisition of subsidiaries                                                (8,033)                     (525)
Increase in other non-current assets                                                       (70)                     (121)
Proceeds on sale of property, plant and equipment                                            24                         5
                                                                                    ------------             ------------
Net cash flow provided by (used in) investing                                           (9,359)                   (3,115)
                                                                                    ------------             ------------

Cash flows from financing activities:
Net increase (decrease) in long-term debt                                                 3,763                     2,765
Capital contribution                                                                        811                         -
Dividends paid                                                                                -                         -
                                                                                    ------------             ------------
Net cash flow provided by (used in) financing                                             4,574                     2,765
                                                                                    ------------             ------------

Increase (decrease) in cash                                                               (102)                     1,561
Cash at beginning of year                                                                 3,306                     1,745
                                                                                    ------------             ------------
Cash at end of year                                                                       3,204                     3,306
                                                                                    ============             ============

Supplemental disclosure of other items:
Net interest received during the year                                                        53                       132
Net income taxes (paid) during the year                                                   (823)                     (427)
</TABLE>

   See accompanying notes to consolidated financial statements.




                                      35
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)




1.     GENERAL

       Danubius Hotel and Spa Rt. ("Danubius" or "the Company") is a company
       limited by shares incorporated under the laws of the Republic of
       Hungary. The Company and its subsidiaries provide hospitality services
       in Hungary, with an emphasis on 4 and 5 star spa-hotels.

       Danubius operated as a self-administered State enterprise (Danubius
       Hotel and Spa Company) controlled by an Enterprise Council until July
       31, 1991. Effective July 31, 1991, Danubius was transformed into a
       company limited by shares and ownership was passed to the State
       Property Agency ("SPA"). In November 1992, a portion of Danubius'
       outstanding shares was publicly sold and such shares were listed for
       trading on the Budapest Stock Exchange.


2.     SIGNIFICANT ACCOUNTING POLICIES

       ACCOUNTING CONVENTION

       Danubius Hotel and Spa Rt. and its subsidiaries maintain their official
       accounting records and prepare their financial statements for domestic
       purposes in accordance with the accounting regulations of Hungary. The
       accompanying financial statements have been prepared in accordance with
       International Accounting Standards and, as a consequence, reflect
       adjustments not recorded in the Hungarian statutory records.

       The accompanying financial statements are prepared under the historical
       cost convention. In connection with the transformation of the state
       enterprise into a limited liability company at July 31, 1991 the
       Company valued certain non-current assets to their estimated market
       values based on independent valuations. These amounts became the
       accounting and tax bases.

       BASIS OF CONSOLIDATION

       The consolidated financial statements include the financial statements
       of Danubius Hotel and Spa Rt. and its significant subsidiaries after
       elimination of all material inter-company transactions and balances.


                                      36
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)




              BASIS OF CONSOLIDATION (CONTINUED)


              The Company's principal subsidiary undertakings at December 31,
1997 are as follows:

<TABLE>
<CAPTION>
                                                                   Country                    Proportion of
                                                                   -------                   Shares Held at
Name                               Principal Activity         of Incorporation                 31 December
----                               ------------------        -----------------                 -----------
                                                                                          1997               1996
                                                                                          ----               ----
<S>                                 <C>                           <C>                     <C>                <C>
Hungaria Szalloda Rt.               Hotel/Restaurant              Hungary                  99%                 -
                                        operator

Hotel Helia Rt.                     Hotel/Restaurant              Hungary                  99%                73%
                                        operator

Hotel Hullam Kozos                  Hotel/Restaurant              Hungary                  53%                53%
 Vallalat                               operator

Danubius Beta                       Hotel/Restaurant              Hungary                 100%               100%
 Hotels Kft.                            operator

Hotelreservierung und              Hotel Reservation              Germany                 100%               100%
 Reiseservice fur                       operator
 Ungarn GmbH
</TABLE>



CASH AND CASH EQUIVALENTS

Cash equivalents are liquid investments with original maturities of three 
months or less.

INVENTORY

Inventory is stated at the lower of cost or net realisable value after making 
allowance for any obsolete or slow moving items. Cost is determined by the 
weighted average method. Consumable items and materials are written off as 
incurred.

PROPERTY, PLANT AND EQUIPMENT

Valuation Process

Property, plant and equipment and other assets were included at July 31, 1991 
at amounts determined by valuation.


                                      37
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)




       This valuation was performed as part of the process of transforming
       the Company to an Rt. The valuation of assets was performed by
       an independent valuer. The following methodologies were used in
       the valuation for the various categories of assets:

       o      The sales comparison approach was applied to the valuation of
              land.

       o      The depreciated replacement cost approach was applied to the
              valuation of buildings and structure.

       Assets of Hungar Hotels, a subsidiary were revalued by an independent
       valuer as at January 1, 1996.

       Depreciation

       Property, plant and equipment are stated at cost less accumulated
       depreciation. Depreciation is provided using the straight-line method.
       The rates used by the Company are 2.5% for buildings, 2.5% to 6% for
       building and leasehold improvements and 12-25% for machinery and
       equipment.

       Where the Group has the legal right to use a certain property the value
       of these rights is amortised over either the term in which the Group
       holds the rights, or six years where this term is undefined except for
       land handling rights on Margaret Island which are being amortised over
       100 years.

       Refurbishment

       Significant refurbishment costs are capitalised and depreciated in
       accordance with the policy for buildings.

       Management have been unable to identify the cost of assets replaced
       during refurbishment projects as the cost is included in the hotel
       valuation performed in 1991. The written down cost of these assets has
       not been removed from the fixed asset register. These fixed assets were
       mainly purchased prior to transformation into a company limited by
       shares and are carried at July 31, 1991 valuation. These replaced
       assets will continue to be depreciated in accordance with Company
       policy.

       The expected period of major refurbishments is 20 years.

       INVESTMENTS

       Investments in which the Company has greater than 20% ownership but
       less than 50% (associated companies) are accounted for under the equity
       method. Other investments are carried at cost, less provision for any
       permanent diminution in value.


                                      38
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)






       GOODWILL

       Negative goodwill arising on acquisition of subsidiaries is shown as
       deferred income and amortised over 20 years on a straight line basis.

       INCOME TAXES

       The Company uses the liability method in accounting for income taxes.
       Deferred tax assets and liabilities are determined using the tax rate
       for the period in which those amounts are expected to be received or
       paid.

       FOREIGN CURRENCY TRANSLATION

       Transactions arising in foreign currency are translated into Forints at
       the rate of exchange prevailing at the date of the transaction. Assets
       and liabilities denominated in foreign currencies at the balance sheet
       date are translated into Forints at the year end rates of exchange set
       by the National Bank of Hungary. The resulting foreign currency
       exchange gains and losses are recognised in the statement of income.

       REVENUE RECOGNITION

       Revenue is recognised on the basis of completed guest nights net of
       VAT.

       PENSION SCHEMES

       The Company operates a defined contribution pension scheme for
       employees. Pension costs are charged against profit in the period in
       which the contributions are payable. The assets of the fund are held in
       a separate trustee administered fund.

       FAIR VALUE OF FINANCIAL INSTRUMENTS

       The carrying values of financial instruments approximate fair values
       due to either the short term duration or the proximity of interest
       rates of the various instruments to market rates.


3.     RECLASSIFICATION OF PRIOR YEAR

       Certain amounts in the 1996 financial statements have been reclassified
       to conform with the 1997 presentation.



                                      39
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)






4.       ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                                                     1997                     1996
                                                                           ---------------------    ---------------------

         <S>                                                                              <C>                       <C>
         Trade receivable                                                                   977                       433
         Receivable from non consolidated affiliates                                        279                        21
         Prepayments and accrued income                                                     389                       286
         Income taxes recoverable                                                            29                        20
         Other receivable                                                                   291                       179
         Provision for doubtful receivable                                                 (354)                      (40)
                                                                           =====================    ======================
                                                                                          1,611                       899
                                                                           =====================    ======================


    5.   INVENTORY

                                                                                     1997                     1996
                                                                           ---------------------    ----------------------

         Food and beverages                                                                 201                        85
         Materials                                                                          156                        94
                                                                           ---------------------    ----------------------
                                                                                            357                       179
                                                                           =====================    ======================


    6.   OTHER CURRENT ASSETS

                                                                                     1997                      1996
                                                                           ---------------------    ----------------------

         Compensation coupon                                                                  -                       557
         Short-term state securities                                                      1,126                       766
                                                                                          1,126                     1,323
                                                                           =====================     =====================
</TABLE>





                                      40
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)





    7.        PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                     Furniture 
                                                   Buildings         Fittings            Capital
                                                 and Improve           and             projects in
                                Land                ments            Equipment           progress               Total
                           ---------------    ---------------     ---------------     --------------     ---------------
<S>                                 <C>               <C>                  <C>                  <C>              <C>   
Cost/Valuation:
January 1, 1997                     2,971             15,900               2,289                307              21,467
Additions                               -              1,259                 697                  -               1,956
Acquisition                         1,922              8,481               1,111                188              11,702
Cost of disposals                       -                  -                (82)               (88)               (170)
                           ---------------    ---------------     ---------------     --------------     ---------------
December 31, 1997                   4,893             25,640               4,015                407              34,955
                           ===============    ===============     ===============     ==============     ===============

Depreciation:
January 1, 1997                         -              1,000               1,414                  -               2,414
Charge for year                         -                684                 562                  -               1,246
Acquisitions                            -                247                 446                  -                 693
Relating to disposals                   -                  -                (74)                  -                (74)
                           ---------------    ---------------     ---------------     --------------     ---------------
December 31, 1997                       -              1,931               2,348                  -               4,279
                           ===============    ===============     ===============     ==============     ===============

Net book value:

December 31, 1996                   2,971             14,900                 875                307              19,053
                           ===============    ===============     ===============     ==============     ===============

December 31, 1997                   4,893             23,709               1,667                407              30,676
                           ===============    ===============     ===============     ==============     ===============
</TABLE>


The values of land and buildings occupied by the Company were determined with
reference to a professional appraisal at April 30, 1991, on an open market
existing use basis. Land and Buildings occupied by subsidiary companies are
shown at cost except for Hungar Hotels where land and buildings are revalued
by an independent valuer at January 1, 1997.

Effective August 1, 1991, ownership of land and buildings was passed to
Danubius, except for the land on which the Margaret Island hotels are located.
This land is not subject to "handling rights" or private ownership. The
operation of the two hotels on Margaret Island is authorised by license from
the XIII. Municipality of Budapest. Included in buildings there is HUF 538
million relating to the usage right of real estate on Margaret Island.



                                      41
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)





8.       OTHER NON-CURRENT ASSETS

<TABLE>
<CAPTION>
                                                                                   1997                      1996
                                                                           ---------------------     ---------------------
         <S>                                                                     <C>                        <C>
         Investment in non consolidated subsidiaries                                      137                       98
         Loans given to employees                                                          24                       17
         Deferred acquisition costs of Hungar Hotels                                        -                       91
         Other investments, unquoted                                                       42                       10
                                                                           ---------------------     ---------------------
                                                                                          203                      216
                                                                           =====================     =====================
</TABLE>


         The book value of the unconsolidated subsidiaries are:

<TABLE>
<CAPTION>
         Name                                Principal activity                    1997                      1996
                                                                           ---------------------     ---------------------
         <S>                                 <C>                                <C>        <C>         <C>          <C>
                                                                                             %                        %
         Kastelykert Kft.                    Hotel                               43        100           43         100
         Solar Kemping                       Hotel                               19        100           55          50
         Hungaria Hotel and 
         Restaurant Reisen GmbH              Travel agency                        3        100            -           -
         Egeszseg-Szepseg Kft.               Health club                         34        100            -           -
         Danube Travel                       Travel agency                       38         50            -           -
                                                                           ---------                 -------
                                                                                137                      98
                                                                           =========                 =======
</TABLE>


    9.   OTHER PAYABLE AND ACCRUALS

<TABLE>
<CAPTION>
                                                                                   1997                      1996
                                                                           ---------------------     ---------------------

         <S>                                                                                <C>                        <C>
         Payroll                                                                            200                        72
         Social security                                                                    192                        78
         Taxes payable                                                                      248                       135
         Provisions                                                                          90                         -
         Accrued expense                                                                    320                       202
         Other payable                                                                      214                        93
                                                                           ---------------------     ---------------------
                                                                                          1,264                       580
                                                                           =====================     =====================
</TABLE>



                                      42
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)






10.    LONG TERM DEBT

<TABLE>
<CAPTION>
                                                                  1997                      1996
                                                          ---------------------     ---------------------


         <S>                                                         <C>                    <C>
         1 year                                                      1,718                     16
         1 to 2 years                                                  870                    280
         2 to 5 years                                                6,013                  3,495
         over 5 years                                                  321                    582
                                                          ---------------------     ---------------------
         Total long term debt                                        8,922                  4,373
         Amounts maturing in less than one year                     (1,718)                   (16)
                                                          ---------------------     ---------------------
                                                                     7,204                  4,357
                                                          =====================     =====================
</TABLE>

       Loans include the followings:

       o   DEM 15 million long term loan with an interest rate of 6-month
           FIBOR + 1.25% secured by a mortgage on the Hotel Helia.
       o   DEM 25 million long term loan with an interest rate of 6-month
           LIBOR + a margin of 0.75% to 0.95%, secured by mortgages on Thermal
           Hotel Buk and Thermal Hotel Sarvar.
       o   DEM 12.5 million short term loan with an interest rate of 3-month
           FIBOR + 0.75% secured by a mortgage on the Budapest Hilton Hotel.
           The loan was paid back on January 6, 1998.
       o   DEM 25 million long term loan with an interest rate of 3-month
           LIBOR + 0.95% secured by a mortgage on the Budapest Hilton Hotel.


11.    NEGATIVE GOODWILL

       Negative goodwill arisen on the following acquisitions:

<TABLE>
<CAPTION>
                                                            1997                       1996
                                                    ---------------------     ---------------------
       <S>                                                     <C>                       <C> 
       Hungar Hotels                                           2,993                     -
       Hotel Helia                                               154                     -
       Amortisation of negative goodwill                        (124)                    -
                                                    ---------------------     ---------------------
                                                               3,023                     -
                                                    =====================     =====================
</TABLE>

      The negative goodwill is being amortised over a period of 20 years 
      by reference to the estimated average useful life of the assets
      underlying the negative goodwill.


                                      43
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)






    12.       MINORITY  INTEREST

<TABLE>
<CAPTION>
                                                           1997                      1996
                                                 ---------------------     ---------------------

                <S>                                         <C>                      <C>
              Hungar Hotels                                   27                        -
              Hotel Helia                                      1                      563
              Hullam Kft.                                     63                       62
                                                              91                      625
                                                 =====================     =====================
</TABLE>

              Minority interest represents the minority shareholders'
              proportionate share of the equity of subsidiaries.

<TABLE>
<CAPTION>
                                                                                    1997                      1996
                                                                           ---------------------     ---------------------

             <S>                                                                     <C>                       <C>
             Opening balance                                                          625                       60
             Minority interest relating to subsidiary acquired 
                  during the year                                                   1,753                      509
             Income attributable to minority shareholders                             241                       56
             Share in subsidiary acquired from minority 
                  shareholders                                                     (2,528)                       -
                                                                           ---------------------     ---------------------
                                                                                       91                      625
                                                                           =====================     =====================
</TABLE>


    13.       INCOME TAXES

              The effective income tax rate varied from the statutory income
              tax rate due to the following items:

<TABLE>
<CAPTION>
                                                                                   1997                      1996
                                                                           ---------------------     ---------------------
              <S>                                                                   <C>                       <C>
              Income before tax and minority interest                               2,952                     2,644
                                                                           =====================    ======================

              Tax at statutory rate of 18%                                            531                       476
              Effect of IAS adjustments                                               (58)                       (8)
              Other differences, net                                                    -                       (20)
                                                                           ---------------------     ---------------------
              Income tax expense                                                      473                       448
                                                                           =====================    ======================
</TABLE>


                                                       44
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)





14.    SHARE CAPITAL

       Registered share capital at December 31, 1997 consists of 8 million
       (1996: 8 million) authorised and issued ordinary shares, each of par
       value HUF 1,000.

       The share capital of Danubius was issued effective with the
       transformation of Danubius Hotel and Spa Company into a company limited
       by shares on July 31, 1991. The transformation of share capital has
       been accounted for as a transfer of the Accumulated Funds balance and
       Revaluation Reserve at December 31, 1990 into Share Capital and Capital
       Surplus accounts.

       Under the terms of Danubius' Articles of Association, the Company may
       also issue shares to employees from time to time as part of the
       Company's compensation arrangements.


15.    CAPITAL CONTRIBUTION

       In accordance with the Hungarian Privatisation Act of 1989 which allow
       20% of the proceeds of certain shares sold by APV Rt. to be paid to the
       Company as a capital contribution the Company received HUF 1,076
       million in 1997. The Company became entitled to the contribution based
       on agreements made with APV Rt. in 1997 relating to shares sold in
       1992, 1993 and 1994. The Company is required to issue shares to the
       employees from this amount.

       In addition to the capital contribution the Company received HUF 831
       million late payment interest determined by reference to the date of
       the shares sold by APV Rt. As this amount did not derive from the
       ordinary activities of the Company the amount has been shown as an
       extraordinary income net of income tax of HUF 150.

       Of the total amount of HUF 1,907 million, HUF 1,407 was received after
       deducting HUF 500 million owed to APV Rt., as more fully described in
       note 20.


16.    COMMITMENTS

       a) The acquisition of Hungar Hotels required HUF 2 billion to be spent
       on refurbishment of that hotel chain. (See note 19.) In 1997 the total
       capital expenditure was HUF 822 million and a further HUF 550 million
       committed. The Group also made commitments to spend HUF 45 million
       (1996: HUF 201 million) on refurbishment and renovations of hotel
       buildings and facilities during 1998.


                                      45
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)






       COMMITMENTS (CONTINUED)

       b) On October 7, 1997 the Company entered into an agreement to
       acquire Danube Travel, a travel agency incorporated in London
       for GBP 230,000 and also to provide GBP 150,000 loan to Danube
       Travel. In 1997 GBP 115,000 was transferred and shown as other
       non current assets. The remainder has subsequently been paid.


17.    CONTINGENT LIABILITY

       a) The Company was reviewed by the tax and the social security
       authority during 1997. The authorities claimed net HUF 76
       million tax and social security including penalties (and
       including HUF 17 million VAT may be recovered). The Company has
       challenged the findings of the review and has made a provision
       of HUF 24 million.

       b) On April 1, 1995 a decision was taken to close down the
       operations of Hungaria Hotel und Restaurant GmbH (Munich
       Office), a subsidiary of Hungar Hotels. Hungar Hotels had
       guaranteed a total of approximately HUF 200 million in rental
       payments of Munich Office. HUF 250 million payments were made
       including guarantee payments and loan repayments on behalf of
       Munich Office which is shown as receivable by the Company. HUF
       14 million had been collected and HUF 236 had been provided for
       as at December 31, 1997. Management expects to finalise the
       liquidation procedures in 1998.


18.    RELATED PARTY TRANSACTIONS

       The related parties of the Company are:
       The Investor group, the ultimate parent company of Danubius in
       Hungary and Hungarian Hotels Sales Office, an unconsolidated
       subsidiary.

       Significant related party transactions are: Danubius operates
       the Hungarian Hotels Sales Office inc. in Los Angeles. This
       company arranges tourism in Hungary and books guests into
       Danubius Hotels as well as other Hungarian Hotels. This company
       is funded by retained commissions on bookings on an arms length
       basis and from funds transferred from Danubius. During 1997 HUF
       10 million (1996: HUF 10 million) of costs were included in
       normal marketing costs in the books of Danubius.
       During 1997 HUF 61 million (1996: HUF 45 million) was paid to
       Investor group and HUF 24 million to CP Holding for management
       services and HUF 55 million rental fee to Investor group.



                                      46
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)






19.    ACQUISITION OF HOTEL HELIA RT.

       On February 6, 1996 the Company entered into an agreement with
       OKHB to purchase 59.82% of the shares in Hotel Helia Rt. for HUF
       1.1 billion, bringing the Company's total holdings in Hotel
       Helia Rt. to 73.36%.

       Resulting from this share purchase, the Company commenced
       operating the Hotel Helia from January 1, 1996. A formal
       operating agreement was negotiated during the year. As a result,
       the Company commenced consolidating Hotel Helia Rt. into its
       consolidated financial statements.

       On February 6, 1996 the Company signed a contract with
       municipalities for the option to purchase 447 million shares in
       the Hotel Helia which represented 26.57% of the Helia. The
       option period was 18 months with a purchase price of HUF 489
       million and 6% annual price increase applying from February 6,
       1996. The Company exercised the option and paid the purchase
       price on August 4, 1997.


20.    ACQUISITION OF HUNGAR HOTELS

       On January 6, 1997, the Company acquired from APV Rt. 85% of the
       shares of Hungaria Szalloda Rt. ("Hungar Hotels"), a company
       incorporated under the laws of Hungary and operating in the
       hotel industry, with a commitment to purchase the remaining 15%
       of the shares if they are not acquired by employees of Hungar
       Hotels within 300 days. The shares acquired have a nominal value
       of HUF 4.7 billion.

       Under the purchase agreement, the significant undertakings of
       the Company were as follows:

       o    50% of the shares must be offered to the public on the 
            Budapest Stock Exchange within one year of the closing date;
            and
       o    within three years of the closing date, a minimum of HUF 2 
            billion including 100% of the 1996 profit must be spent on 
            refurbishment on hotels owned by Hungar Hotels.

       On October 4, 1997 the Company agreed, as part of a complex agreement
with the APV Rt., to amend the contract such that there is no longer an
obligation for a public offering of 50% of the acquired shares. A purchase
price differential of HUF 500 million was paid by the Company in respect of
this. The agreement also included a property swap between APV Rt. and Hungar
Hotels, the implementation of which was deferred into 1998.


                                      47
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)





       ACQUISITION OF HUNGAR HOTELS (CONTINUED)

       The acquisition was made as follows:
<TABLE>
<CAPTION>
                                                             HUF 000,000
                                                            -------------
         <S>                                                    <C>    
         Cost of investment
           Cash and tender bonds                                   7,000
           Compensation coupons                                      572
           Tax on gain on compensation coupons                       190
           Acquisition costs incurred                                 91
                                                        ---------------------
         Total purchase price                                      7,853


         Less: book value of net assets acquired                  11,726
         Fair value adjustments                                      (41)
         Plus: minority interest therein                           1,753
                                                        ---------------------

         Negative goodwill                                         2,079
                                                        =====================
</TABLE>

         The redemption value of the compensation coupons as per the purchase
         contract was HUF 1,625 million. These were purchased by the Company
         on the open market at a cost of HUF 572 million. The difference
         between the redemption value and the purchase cost of HUF 1,053
         million was subject to corporation tax at the statutory rate of 18%.
         The tax on the gain on compensation coupons has been included as part
         of the cost of investment.

         On September 24, 1997 the Company acquired further 14.78% of the
         shares from the employee consortium. The cost of investment was HUF
         813 million which resulted in an additional HUF 914 million negative
         goodwill.


21.      SUMMARY FINANCIAL INFORMATION OF ACQUISITIONS

         Summary financial information for significant subsidiaries acquired
         during 1997:

<TABLE>
<CAPTION>
         Acquisition Balance sheet                         Hungar Hotels
         <S>                                                 <C>
         Total Current Assets                                 1,500
         Total Fixed Assets                                  11,053
         Total Liabilities                                     (827)
                                                       ---------------------
         Net Assets                                          11,726

                                                       =====================
</TABLE>


                                      48
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)





         Income Statement
          Included from -                                January 1,



         Net Sales                                           8,209
         Pro forma Operating profit                          1,162
         Net profit                                          1,074


22.      TAXATION
         Dividends are only available for payment from retained earnings
         calculated according to the Hungarian Accounting Law. The following
         retained earnings are available for payment of dividends:

<TABLE>
<CAPTION>
                                                                       December 31,            December 31,
                                                                          1997                      1996
                                                                  ---------------------    ----------------------
         <S>                                                           <C>                     <C>
         Hungarian Accounting Law retained earnings                            8,072                     4,592
                                                                  =====================    ======================
</TABLE>

         In certain cases, before dividends can be paid from Hungarian
         Accounting Law retained earnings, withholding tax of up to 20% must
         be paid. The rate of tax payable is dependent on the residency of the
         shareholder which may reduce this rate of tax.


23.      LEGAL MATTERS

         Prior to May 1995 Hotel Gellert was managed by the Company based on a
         verbal agreement with APV Rt. as the ownership right of the hotel was
         not clear. On May 15, 1995 the court decided that the ownership right
         of the hotel was due to the Company. As the result of that the
         Company paid HUF 1,419 million to APV Rt. The Land Registration
         Office was unable to complete the registration of the legal ownership
         right as the Gellert hotel and Gellert spa is built on the same land
         as the spa owned by Budapest Gyogyfurdoi es Hevizei Rt. (Budapest
         Spa). Budapest Spa is challenging the validity of the contract
         between the Company and APV Rt. at the court as a prepurchase right
         of Budapest Spa relating to Gellert hotel was not taken into
         consideration.

24.      PENSION SCHEME
         The pension scheme is available for all employees after half year
         employment. The contribution expense was HUF 121 million (1996: 56
         million) and charged against profit for the year in which the
         contribution is payable. The contribution is paid on 5% of the salary
         by the Group. The assets of the fund are held in a separate trustee
         administered funds.



                                      49
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)






25.    FINANCIAL INSTRUMENTS

       Currency risk
       -------------

       The Company's sales prices are primarily quoted in Deutschmarks or US
       dollars and income received in hard currencies or Hungarian forints.

       The Group has DEM 77.5 million loans outstanding at year end. See note
       10.

       Management believes that its sales revenue is substantially protected
       against the effects of forint devaluation against hard currencies and
       has not therefore regularly entered into foreign currency hedging
       contracts or other derivative products.

       Interest rate risk
       ------------------

       Interest rates on loans are listed in note 10. Management did not enter
       into any interest rate hedging contract as management believes the
       contracted interest rates are favourable for the Company.

       Credit risk
       -----------

       Financial assets which may be subject to credit risk consist of short
       term investment, cash in bank and trade receivable. Short term
       investments are government securities, cash is held at major Hungarian
       banks and the provision for doubtful receivables reflects credit risk
       on trade receivables. The Company has no significant concentrations of
       credit risk.


26.    BUSINESSES MANAGED FOR APV RT.

       The ownership of the following businesses were retained by APV Rt. on
       the transformation of Hungar Hotels and as at December 31, 1997 are
       still being managed by Hungar Hotels in return for management fee:

       Gambrius restaurant                      Savaria Hotel
       Nador Hotel (closed)                     Alba Regia Hotel (sold in 1998)
       Claudius Hotel                           Hungaria Hotel

       The sales income amounting to HUF 749 million and cost of sales of the
       managed business units are not included in the accompanying financial
       statements. Any losses are charged to APV Rt. and profits paid to APV
       Rt. for the operation of these business units.




                                      50
<PAGE>



DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in HUF 000,000's, unless otherwise noted)





27.       RECONCILIATION OF TOTAL SHAREHOLDERS' EQUITY AND NET INCOME FROM THE 
          CONSOLIDATED HUNGARIAN STATUTORY FINANCIAL STATEMENTS TO THE 
          ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                   1997                         1996
                                                                              ----------------             ---------------
          <S>                                                                          <C>                          <C>   
          Total Shareholders' Equity and Minority Interest 
            per Statutory Financial Statements                                         23,481                       19,463
          Net gain on compensation coupons                                              (863)                           -
          Amortisation of negative goodwill                                               124                           -
          Accelerated depreciation at Hungar Hotels                                      (55)                           -
          Foreign exchange differences                                                     86                         (32)
          Provisions                                                                     (32)                           -
          Reversed stock provision at Hungar Hotels                                        60                           -
          Capitalised acquisition costs                                                   145                           91
          Other items net                                                                  24                         (13)
                                                                              ----------------             ---------------
          Total Shareholders' Equity and Minority Interest 
            per Accompanying Financial Statements                                      22,970                       19,509
          Less: Minority Interest                                                        (91)                        (625)
                                                                              ----------------             ---------------
          Total Shareholders' Equity per Accompanying 
            Financial Statements                                                       22,879                       18,884
                                                                              ================             ===============


          Total net income per Hungarian Statutory 
            Financial Statements                                                        3,480                        2,093

          Acquisition costs                                                                55                           91
          Foreign exchange differences                                                    118                         (32)
          Direct reserves postings for donations                                            -                         (16)
          Net gain on compensation coupons                                              (863)                          -
          Amortisation of negative goodwill                                               124                          -
          Provisions                                                                     (32)                          -
          Accelerated depreciation at Hungar Hotels                                      (55)                          -
          Reversed stock provision at Hungar Hotels                                        60                          -
          Other, net                                                                       35                            4
                                                                              ----------------             ---------------

                                                                                        (558)                           47
                                                                              ----------------             ---------------
          Total net income per Accompanying Financial Statements
                                                                                        2,922                        2,140
                                                                              ================             ================
</TABLE>



                                      51